Fitch Rates Charlotte, North Carolina's $100MM Water & Sewer Revs 'AAA'.

NEW YORK -- Fitch Ratings assigns an 'AAA' rating to Charlotte, North Carolina's (the city) approximately $100 million water and sewer system revenue bonds, series 2006A. The bonds are scheduled to sell during the week of July 17 through negotiation with Banc of America Securities LLC and Wachovia Securities. The city also expects to issue approximately $300 million variable rate water and sewer system revenue bonds series 2006B in July. Fitch will assign a rating to those bonds, incorporating long-and short-term considerations (the latter based on a liquidity facility to be provided by DEPFA Bank plc, New York Branch) closer to their closing. Fitch also affirms the 'AAA' rating on the city's $499 billion in outstanding parity bonds. The Rating Outlook is Stable.

The 'AAA' rating on the utilities' revenue bonds reflects the very strong and growing Mecklenburg County service area as well as the utilities' well-managed and well-maintained facilities, strong planning, ample water supply for current and projected needs, strong financial condition with sizable reserves, and very moderate rates that should remain competitive after upcoming reasonable increases. The 'AAA' rating and Stable Outlook also take into account the system's significant future debt needs which will keep overall debt service coverage levels (including subordinate debt service) satisfactory but somewhat slim for the rating.

The City of Charlotte's water and sewer utilities serve all of Mecklenburg County, with an estimated 2005 population of 796,372. Growth in the city and county has resumed its strong pace in the last couple of years, and prospects for continued economic expansion are good. The number of water and sewer customers has each grown an average of more than 3% annually over the past five years. Wealth levels are high, job growth has been healthy, and unemployment is showing signs of returning to below average levels. The average county unemployment rate in 2005 was 4.9%, compared with 5.2% for the state and 5.1% for the U.S.

In fiscal 2005, the water system served 223,559 customers. Commercial customers use about one-half of the water volume, but no customer provides more than 0.3% of revenues. Raw water supply from Duke Energy Company reservoirs on the Catawba River, is plentiful and well-protected. Facilities are in good condition and can be expanded to accommodate expected growth. The sewer system provided service to 196,906 customers in fiscal 2005. Sanitary sewer treatment is provided by five advanced treatment plants, all of which have national pollution discharge elimination system permits. All plants are staffed continuously and are well maintained.

The utilities are undergoing a large capital improvement plan (CIP) that will require an estimated $792 million in debt over the next five years, including projects approved in prior CIPs. planned projects primarily will fund growth-related needs, including planned annexations, and have been scaled back slightly. Although debt needs remain high, the city has increased the pay-as-you-go funding component of its capital plan from 7% to about 13%. Still, the system's leverage will continue to increase, and debt service coverage, which has been strong historically, will decline. Debt service on outstanding parity bonds and commercial paper notes plus those to be issued over the next five years is well covered from projected net revenues. Coverage through fiscal 2011 is expected to be at least 1.9 times (x), assuming full implementation of the CIP and including a moderate level of capacity charges. Excluding capacity charges, which grow to about 9% of gross revenues in fiscal 2011, coverage will be in the range of 1.6-2.3x during the projection period. Including general obligation (GO) bonds and other subordinate debt, coverage is thin at 1.1x-1.2x, (1.0-1.1x excluding capacity charges).

Utility rates are below average compared with those of other local systems and similarly sized utilities throughout the Southeast. The average residential customer bill in fiscal 2007 will be $43.40 assuming 1,000 cubic feet of water usage. Rate increases to sustain debt service coverage for bonds to support the large, growth-related CIP are expected to average 6% annually through fiscal 2011, including a 6.4% increase implemented in fiscal 2007. Rates should remain quite competitive, as several nearby systems are also experiencing sizable rate hikes. In addition to these rate increases, the city will be increasing capacity charges to better reflect the cost of providing service.

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