Fitch Rates Winston-Salem, North Carolina's $135.4MM Water Sewer Revs 'AA'

Business Wire, Nov 8, 2002

Business Editors

NEW YORK--(BUSINESS WIRE)--Nov. 8, 2002

Fitch Ratings has assigned an 'AA' long-term rating to Winston Salem, North Carolina's approximately $28,300,000 water and sewer system revenue bonds, Series 2002A, $37,255,000 variable rate demand water and sewer system revenue bonds, series 2000B, and $69,860,000 variable rate water and sewer system refunding revenue bonds, series 2000C, are scheduled to be sold on November 21 Series A bonds will be sold through negotiation with Salomon Smith Barney, Inc., Banc of America Securities LLC, and Jackson Securities Inc. Series B bonds will be sold through negotiation with Salomon Smith Barney, on Dec. 3, and Series C bonds will be sold through negotiation with Banc of America Securities LLC on Dec. 3. Fitch affirms its 'AA' rating on approximately $102 million in outstanding parity bonds.

By closing, Fitch expects to issue short-term ratings on the series B and C bonds based on standby bond purchase agreements provided by Dexia Credit Local, whose short-term obligations Fitch rates 'F1 '. For the series B and C bonds, the city expects to enter into an floating-to-fixed interest rate swap agreement with Salomon Brothers Holding Company LLC, a wholly owned subsidiary of Salomon Smith Barney Holdings, Inc., rated 'AA /F1 ' by Fitch. The parent company has provided a guarantee for required payments to the city under the swap agreement. The agreement is for the term of the bonds, with cancellation at Salomon Brothers' option in 2011.

The 'AA' rating is based on the strong service area, sound financial operations, ample water supply and treatment facilities, and large cash balances. Rates are very low even with recent sizable increases to replace investment income excluded from pledged revenues with a change in legal provisions in 2001. The change was prompted by sizable investment losses in fiscal 2001. The fiscal 2002 loss was significantly smaller, and officials expect that a shift to a more conservative portfolio will result in the elimination of losses in the current fiscal year and modest gains in future years. However, the city's ability to invest up to one-half of its portfolio in equities increases the potential for future earnings volatility. Legal provisions are sound.

Winston-Salem's combined utility system generated $42.8 million in operating revenues in fiscal 2002. The system has an estimated 100,606 billed water accounts and 72,066 sewer accounts. Water supply is sufficient for the foreseeable future, and facility and infrastructure expansion have kept up with the region's moderate growth. Despite the current drought the city has implemented only voluntary water restrictions.

The Winston-Salem/Forsyth County Utility Commission (the utility commission), under which the city and county consolidated their systems in 1976, has interlocal agreements to provide water and sewer services to several other communities both within and outside Forsyth County. The system also serves most of the unincorporated area of Forsyth.

Forsyth County (whose general obligations Fitch rates 'AAA') is an economic center located in northwestern North Carolina. The county's population has increased about 15% over the last decade to reach a 2001 population of 310,187. Winston-Salem (whose general obligations Fitch rates 'AAA') accounts for 60% of the population base and is the area's principal commercial, retail, and service center. The local economy is feeling the effects of the economic slowdown. Unemployment rates in September, 2002 have moderated from earlier this year but are still higher than those of a year ago. City, county, and state rates in September were 6.7%, 5.1%, and 5.8%, respectively. The city's rate has been above 7% in most months this year, and the county's has been near 6%. Given the economy's resilience following the contraction of the tobacco industry, Fitch expects that moderate economic growth, largely in the health care and biotechnology industries, should offset job losses in other sectors. Wealth levels are above average.

In the five fiscal years ended fiscal 2000, investment income ranged from 10%-17% of revenues, allowing the city to keep rates extremely low. In fiscal 2001, realized and unrealized losses from equity investments were $11 million, and overall investments yielded a loss of $6.1 million, or 17% of revenues. Coverage excluding the losses was satisfactory and above revised legal requirements. Investments experienced modest losses in fiscal 2002. Projections assume no investment income in fiscal 2003 and modest gains thereafter. Coverage from net revenues is projected to be satisfactory but below average for the rating category, assuming sizable rate increases in line with the last two years.

Series 2002A and B proceeds will fund completion of a new water treatment plant in the northwest corner of Forsyth County, replacement of a finished water pump, water distribution improvements and wastewater treatment and collection projects. Debt levels after this issuance will be about 50% of net plant. The city anticipates issuing $55.5 million in additional parity debt in fiscal 2005, which will raise the debt burden only moderately. Cash on hand is strong at 255 days.