Fitch Rates Canal Winchester, Ohio's $5.7MM Sewer Revs 'A-'.

CHICAGO -- Fitch Ratings assigns an 'A-' rating to the Village of Canal Winchester, Ohio's $5.7 million sanitary sewer system first-mortgage revenue refunding bonds, series 2004. The bonds are scheduled for negotiated sale on or about Nov. 18, 2004 through Butler Wick & Co., Inc. Net revenues of the sewer system secure the bonds. The Rating Outlook is Stable. Proceeds will refinance the village's series 1999 sanitary sewer system first-mortgage bonds.

The 'A-' rating reflects a growing customer base, spurred by residential expansion in the Columbus, OH, area; a largely gravity-fed sewage system charging competitive rates and compliant with environmental regulations; and a limited capital plan. Bolstered by growing connection-fee revenue, historical debt service coverage averaged 1.8 times (x) in the last five years. Although capital charges have enhanced operating revenues, user charges alone are sufficient to meet debt service. Using only about one-quarter of its capacity, the system's future capital needs are manageable.

Located 12 miles southeast of downtown Columbus, the Village of Canal Winchester's estimated 2004 population of 5,600 experienced 6% average growth since 1990. Wealth levels are above average, as 2000 per capita money income for the village was 106%; 116%, and 113% of Franklin County, Ohio, and U.S. figures, respectively. Unemployment in the county, at 4.9% in September 2004, remains below Ohio's 5.7% and the national rate of 5.1% in the same period.

Canal Winchester's sewer utility serves a population of 6,600, including the village itself, the nearby village of Lithopolis, and parts of the City of Pickerington. Billed usage has grown 6.7% annually since 1997. As system demand grew, the utility expanded its treatment plant in 1999, increasing capacity from 0.45 million gallons per day (MGD) to 2.5 MGD. Current capacity is projected to be sufficient through at least 2011.

While the utility is currently fully compliant with all quality standards, three violations of its permit occurred in the past five years. Addressed promptly, the problems related mostly to alarm system and data malfunctions. In addition, a compliance evaluation found the system's older trunk sewer line caused infiltration/inflow problems during heavy rain. Management corrected the problem and sealed the line, but plans to replace the trunk sewer in the next two years.

The utility's rapid customer growth translated into solid financial condition, evidenced by growth in sewer charges of 10% annually since 1999. Connection fees comprise a large part of the utility's operating revenue, but the utility projects debt service coverage excluding impact fees of an average 1.2x. Including connection fees, which contributed 64% of operating revenues in 2003 and have grown about 17% per year on average since 1997, coverage increases to over 3x between 2005 and 2009. The utility established a rate stabilization fund in 2004, with a maximum balance of $1 million, to temper the size of rate adjustments. Management plans to use these funds beginning in 2005 to keep rates steady yet continue to invest in the quality of the infrastructure.

Due to the system's surplus capacity and adequate regulatory compliance, Fitch expects little debt issuance in the next several years beyond a small note issue to finance trunk sewer line replacement in 2005. The utility will finance routine sewer line improvements internally through excess connection fee revenue and rate stabilization fund transfers.