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MOODY'S ASSIGNS INITIAL Aa3 RATING TO CITY OF SPRINGBORO'S (OH) $2.1 MILLION SEWER SYSTEM MORTGAGE REVENUE REFUNDING BONDS, SERIES 2011

25 Aug 2011

Springboro (City of) OH Sewer Enterprise
Water/Sewer
OH

Moody's Rating

ISSUE

RATING

Sewer System Mortgage Revenue Refunding Bonds

Aa3

  Sale Amount

$2,050,000

  Expected Sale Date

08/30/11

  Rating Description

Revenue

 

Opinion

NEW YORK, Aug 25, 2011 -- Moody's Investors Service has assigned an initial Aa3 rating to the City of Springboro's (OH) $2.1 million Sewer System Mortgage Revenue Refunding Bonds, Series 2011.

SUMMARY RATING RATIONALE

Debt service on the bonds is secured by a combination of net operating revenues of the city's sewer system and the city's 0.5% capital improvements income tax. Proceeds of the bonds will be used to refund outstanding sewer revenue bonds, Series 1997. Assignment of the Aa3 rating reflects the system's stable and diverse customer base, stable financial operations with sound coverage levels, satisfactory legal covenants that include a fully funded debt service reserve fund, and manageable debt ratio.

STRENGTHS

- Stable and diverse service area near Dayton metropolitan region

- Healthy system liquidity and sound financial ratios, including debt service coverage

- Annual rate increases stipulated by city ordinance

CHALLENGES

- Inclusion of economically-sensitive income tax revenues as bond security

- Relatively limited service area compared to similarly-rated systems

DETAILED CREDIT SUMMARY

MODESTLY-SIZED SERVICE AREA NEAR DAYTON METROPOLITAN REGION

The system's customer base is expected to remain stable over the near term, given recent and expected population growth, as well as the diverse nature of the customer profile. Located along I-75, the city is approximately 15 miles south of Dayton (general obligation rated Aa2/stable outlook) and 40 miles north of Cincinnati (Aa1/stable outlook). The city's moderately-sized tax base of $1.4 million has grown at an average annual rate of 1% over the past five years. Concurrent with tax base expansion, the city has also experienced significant growth in population, which increased 40.6% to 17,409 people between the 2000 and 2010 census periods. Over the long term, the city is expected to exhibit moderate growth due to a location that enables it to capture ongoing suburban expansion from both the Dayton and Cincinnati metropolitan areas.

In addition to serving the city, the Springboro sewer system also provides service to portions of surrounding communities outside of the corporate limits. Over the past five years, the system's total number of customers has fluctuated between 7,000 and 7,100. The system saw a decline in customers in 2010 to a total of 6,878, which was likely due to the national economic slowdown and its impact on residential markets over the past couple years. With housing markets stabilizing, officials report that the system is again servicing close to 7,000 customers in 2011. The decline in customers had a limited impact on revenue as the city charges a base monthly fee as part of its billing structure, somewhat mitigating the loss of revenue associated with reduced usage. Favorably, the system's customer base is diverse, with the top ten customers accounting for a modest 5% of billed revenues in 2010. Daily flow of the system averaged approximately 1.5 million gallons in 2010, compared to a capacity of 6 million gallons. The city is not currently subject to any EPA mandates.

HEALTHY FINANCIAL OPERATIONS; SOUND DEBT SERVICE COVERAGE

The system's financial operations are expected to remain healthy over the near term given current liquidity, sound debt service coverage, and regular increases in sewer rates. In fiscal 2008, the system's net working capital totaled $3.75 million, or a strong 222.8% of operating and maintenance (O&M) expenditures. In fiscal 2009, the city transferred funds out of the sewer system to assist with financing municipal building improvements. As a result, net working capital declined to $3 million and remained at that amount at the close of fiscal 2010. Despite the decline, we note that net working capital at the close of fiscal 2010 remained a healthy 172.2% of O&M in that same year. Officials report that unrestricted cash reserves totaled $1.7 million in fiscal 2010 and are expected to decline to $1.4 million in fiscal 2011. The decline is primarily due to the use of available cash to support debt service in 2011 as the city's rate increase was not effective until April. Looking ahead, officials expect to maintain cash reserves of $1.4 million, or 80% of fiscal 2010 O&M, through 2012 and to gradually increase the system's cash balance over the longer term.

All of the system's outstanding revenue debt, including the current bonds, is secured by senior liens on both net operating revenues of the system and revenue generated by the city's 0.5% capital improvements income tax. In 1988, city residents elected to increase the city's income tax from 1% to 1.5%, with the additional revenue dedicated to financing capital improvements and associated debt service. Per ordinance, sewer system revenue debt has a senior lien on the revenue generated by the additional income tax, followed by the city's outstanding water system revenue debt. Total income tax collections declined modestly in 2008 and 2009, but rebounded in 2010, during which the city collected approximately $9.7 million. Of that amount, $3.2 million was available and dedicated to capital improvements and debt service. Combined with net sewer revenues, the $3.2 million of income tax revenue provided 2.54 times debt service coverage on outstanding sewer revenue bonds. Total revenues also provided maximum annual debt service coverage ($1.64 million in fiscal 2017) of 2.5 times. While the entire revenue generated by the 0.5% income tax is available for sewer revenue debt service, the city transferred only $600,000 to the sewer fund in fiscal 2010. An additional $460,000 was transferred to the city's water fund, with the remainder of the revenue subsequently used to finance other city capital improvements. Over the near term, the city expects to use approximately $500,000 of income tax revenue to support annual debt service in each of the two utility funds.

While the city expects to continue to transfer income tax revenue to the utility funds, recent and expected rate increases should gradually reduce the dependence of the two funds on that revenue source. By ordinance, both sewer and water rates increase annually based on the three-year average national inflationary rate. For fiscal years 2011 through 2013, the city has implemented additional rate increases of 20%, 15%, and 15%, respectively, for sewer service. While the 2012 and 2013 rate increases will be effective January 1 of each respective year, the rate increase in 2011 was not effective until April. Similar rate increases have been implemented for the city's water system. Beyond 2013, rates will again increase based on the three-year inflationary average. Combined net sewer revenues and dedicated income tax revenues are expected to provide 2.77 times debt service coverage in fiscal 2011. Despite the inclusion of economically-sensitive income tax revenues as security on the bonds, strong coverage levels and regular rate increases that should result in a reduced dependence on income tax revenue enhance the system's overall credit quality.

MANAGEABLE DEBT RATIO; NO ADDITIONAL NEAR-TERM BORROWING

The sewer system's debt ratio is expected to remain manageable given that the city has no specific plans to issue additional debt over the near term. The system's debt ratio at the close of fiscal 2010 was 43.2%, which is slightly above the median ratio of similarly-rated systems. Post-sale, the system will have $17.1 million of revenue debt outstanding, all issued on parity. Amortization of the system's debt is slightly below average with 52% of outstanding revenue bond principal expected to be repaid within ten years. Officials report no specific plans to issue additional debt over the near term. All debt issued for the sewer enterprise is fixed rate and is not hedged by any derivatives.

SATISFACTORY FINANCIAL COVENANTS

The legal provisions for the current bonds are satisfactory and provide adequate security for bondholders. The current bonds are paid from a senior lien on both the net revenues of the city's sewer system and the city's 0.5% capital improvement income tax revenues. The rate covenant calls for combined revenues that provide at least 1.25 times annual debt service coverage on the bonds. The resolution provides for an adequate additional bonds test of 1.25 times maximum annual debt service. A debt service reserve will be fully funded with proceeds of the current bonds equal to the lesser of maximum annual debt service, 10% of the original principal amount of the bonds, or 125% of average annual debt service on the bonds. A similarly structured debt service reserve fund was established with prior issuances of revenue bonds.

WHAT COULD CHANGE THE RATING - UP

- Improvement in already healthy financial ratios (debt service coverage and net working capital)

- Significant growth and further diversification of customer base

WHAT COULD CHANGE THE RATING - DOWN

- Significant reduction in annual debt service coverage

- Significant declines in liquidity and financial ratios

KEY STATISTICS

System: Sewer collection and treatment (closed loop)

2010 number of customers: 6,878

Fiscal 2010 net working capital: $3 million (172.2% of O&M)

Fiscal 2010 unrestricted cash: $1.7 million (97% of O&M)

Fiscal 2010 operating ratio: 66.3%

Fiscal 2010 senior lien debt service coverage: 2.54 times

Maximum annual debt service coverage (payable in 2017 and based on FY10 net revenues): 2.5 times

Fiscal 2010 debt ratio: 43.2%

Principal amortization of outstanding revenue debt (10 years): 52.2%

Post-sale senior lien revenue debt outstanding: $17.1 million

PRINCIPAL METHODOLOGY USED

The principal methodology used in this rating was Analytical Framework For Water And Sewer System Ratings published in August 1999. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Information sources used to prepare the rating are the following: parties involved in the ratings, parties not involved in the ratings, and public information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Analysts

Matthew Butler
Analyst
Public Finance Group
Moody's Investors Service

Emily Robare
Backup Analyst
Public Finance Group
Moody's Investors Service

Henrietta Chang
Senior Credit Officer
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
USA

MOODY'S ASSIGNS INITIAL Aa3 RATING TO CITY OF SPRINGBORO'S (OH) $2.1 MILLION SEWER SYSTEM MORTGAGE REVENUE REFUNDING BONDS, SERIES 2011
No Related Data.
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