Dec 4 - Fitch affirms the ratings on the following revenue bonds of the City of Canal Winchester (the city): Approximately $4 million sanitary sewer system first mortgage revenue refunding bonds, series 2004 at 'A+'. The Rating Outlook is Stable. SECURITY The bonds are secured by the pledge of the net revenues of the city's wastewater collection and treatment system. The bonds are additionally secured by a first lien mortgage on the assets of the system and a cash-funded debt service reserve fund. KEY RATING DRIVERS DEPENDENCE ON CONNECTION FEES: Debt service coverage remains good at 1.7x on an all-in basis; however, coverage excluding connection fees registers at a weak 1.0x. STRONG LIQUIDITY; AMPLE RESERVES: Consistently strong levels of liquidity, with cash on hand equivalent to approximately five years of operating expenses in fiscal 2011. INHERENT REVENUE VOLATILITY: The city's rate structure is solely comprised of volumetric charges creating more inherent volatility, highlighting the importance of maintenance of ample financial cushion. SHIFT TO GAAP ACCOUNTING: Fitch views as a credit positive the city's shift in reporting to a GAAP basis, from cash, for fiscal 2011, creating more transparency in financial statements. DECLINING DEBT BURDEN: Debt per capita is just over $550, falling below the 'A' median level of $728. Fitch expects debt levels to decline given the system's limited capital needs and rapid amortization of outstanding debt. STABLE SERVICE AREA: The system services an affluent, rapidly growing residential customer base situated southeast of the state capital of Columbus. WHAT COULD TRIGGER RATING ACTION DETERIORATION OF FINANCIAL POSITION: Failure to generate at least sum sufficient debt service coverage from recurring revenues would be viewed negatively. CREDIT PROFILE The retail sewer utility serves a population of 9,500, including the city itself, the nearby village of Lithopolis, and parts of the City of Pickerington. The system's treatment facility was upgraded in 1998 to its present day capacity of 2.5 million gallons daily (mgd), which is designed to serve a population of 25,000. RELIANCE ON CONNECTION FEES Connection fees, which once comprised a large portion of the utility's total revenue, declined sharply in 2008 due to the economic downturn. Historically, management controlled system costs while consistently implementing rate increases averaging 2% a year since 2006. Operating costs increased in 2011 due to rising utility and chemical costs. As a result, financial performance declined slightly in 2011, but debt service coverage was sound at 1.7x on an all in basis. However, coverage excluding connection fees registered a weak 1.0x. Fitch is concerned with the system's reliance on one time connection fee revenue to support operations. Fitch anticipates stable financial performance over the short term, given that the city has adopted an ordinance that continues to increase rates by an average of 2% annually thru 2014. Fitch notes that prior to 2011 the city utilized cash-basis accounting in the presentation of its annual financial statements, which Fitch considers a credit weakness, as it does not allow for fiscal transparency. The city changes its accounting presentation starting in 2011 when it changed its designation from a village to a city, in accordance with state statute. AFFORDABLE RATES, AMPLE RESERVES Rates remain very affordable at 0.4% of MHI despite the recent rate increases. However the absence of a base rate component results in the system being dependent on volume demand. The utility established a rate stabilization fund in 2004 to temper the size of rate adjustments. The rate stabilization fund was funded over time and has now reached a balance of $1.4 million (over 100% of fiscal 2011 operating revenues). Management plans to use these funds in lieu of more significant rate adjustments and to continue to invest in the quality of the infrastructure. DECREASING DEBT PROFILE The system is reportedly in compliance with all regulatory requirements, and capital needs are considered flexible. The system's 2012 - 2017 capital improvement plan (CIP) totals approximately $3.5 million, which Fitch considers manageable for a system this size. The system maintains a sewer connection fee fund and plans to utilize the fund to finance the CIP plan in addition to state revolving loan proceeds of $1.1 million approved in 2011. Debt ratios grew slightly in 2011 with the addition of $1 million in state revolving loans. Debt to net plant is high at 76%, but adequate for the rating level and debt per capita ratio of over $550 is on par with the 'A' rating category. Amortization is rapid with principal payout at 68% in 10 years, and 100% in 20 years. With no further debt anticipated, debt levels should decline. SOUND ECONOMIC BASE Canal Winchester is located 12 miles southeast of downtown Columbus (GOs rated 'AAA' with a Stable Outlook by Fitch). The village's population has grown rapidly, averaging over 4% growth annually since 2005 to an estimate of over 7,100 in 2010. Wealth levels are above average, as 2010 median household income (MHI) for the village was 159% and 145% of the state and nation, respectively. Unemployment in Franklin county, at 5.8% in September 2012, remains below Ohio's 6.5% and the national rate of 7.6% in the same period.