Fitch Rates High Point, NC Combined Enterprise System Revs 'AA'.

NEW YORK -- Fitch Ratings assigns an 'AA' rating to approximately $40.3 million City of High Point, North Carolina Combined Enterprise System revenue bonds, series 2004. The bonds will sell through negotiations led by Citigroup on or around Oct. 27 and mature 2007-2031. Fitch also assigns an initial 'AA' rating to the city's outstanding $110.6 million in general obligation debt, including $73.9 million issued to fund combined enterprise system needs.

The combined enterprise system's (the system) rating reflects the system's solid financial performance; strong debt service coverage; ample water supply and water and wastewater treatment capacity; extensive wastewater capital needs, including reducing high inflow/infiltration (I&I) levels; and above-average water and sewer rates, as well as the city's general government credit characteristics. Legal provisions are satisfactory.

The city's general obligation bonds rating is based on the area's growing and diversified economy, strong and consistence reserve levels, and low debt levels. Despite the economic growth, unemployment rates are higher than the MSA, state, and national averages.

High Point is located in the growing Piedmont Triad region, less than 20 miles southeast of Winston-Salem. The city's population grew a rapid 24% in the 1990s and is estimated to have grown another 7% since 2000 to 91,543 in 2003. Though textile and furniture manufacturers continue to leave the area, a diverse set of employers have invested and expanded operations, including some of the city's largest employers: Bank of America; High Point Regional Hospital; and Thomas Built Buses (a subsidiary of DaimlerChrysler). The city is home to the International Home Furnishings Market, which is held twice a year and draws nearly 160,000 people. In addition, Fed-Ex's completion of its national hub in the Piedmont Triad Region some time after 2008 is expected to spur commercial and industrial development. However, the city's unemployment rate of 7.5% in 2003 was higher than MSA, state, and national averages of 6.2%, 6.5%, and 6.3%, respectively. The city's unemployment has improved in 2004, dropping to 6.3% in August 2004 from 7.6% in August 2003.

The combined enterprise system, comprising the water and sewer systems, had operating revenues equal to $30.5 million in fiscal 2004 (unaudited). Since the series 2004 bonds are the first revenue bond issuance of the system, revenue bond debt service coverage is very strong, with net revenues covering maximum annual debt service 5.3 times (x). Even with future parity debt issuances, revenue bond debt service is expected to remain strong due to the large amount of general obligation debt, payable from system revenues on a subordinate basis, which amortizes through 2023. In addition, the city plans to fund a substantial amount of future capital needs with operating revenues. Overall coverage, including debt service on general obligation bonds issued for system needs, is expected to be around 2.0x through fiscal 2009.

The existing water supply is sufficient through 2015, and the city has secured capacity at the new Randleman Dam project to meet future demands. The Randleman Dam, which is substantially built, is a joint project with six other governmental entities and will include a new water treatment plant some time after 2010. In return for paying 21% of the costs, the city will receive 10 million gallons a day (mgd), increasing the city's safe water supply by 45%. The system has ample water and wastewater treatment capacity. The city has been working to upgrade and expand its two wastewater treatment plants (WWTPs) after entering into a Clean Water Act lawsuit settlement in 1996. The Eastside WWTP will have met all settlement requirements soon, and the Westside plant will meet the requirements once it is expanded in 2008. The city is also actively addressing the system's high I&I levels, which increase sewer peak flows to more than double the average daily flows.

To meets its current and future capital and operating needs, water and sewer rates rose rapidly during the past four years and are now higher than those of neighboring systems and state averages. Proposed future rate increases are more moderate. The system's capital improvement plan though fiscal 2009 is a high $145 million, 28% of which the city plans to pay with operating revenues and the rest through debt financings in fiscal years 2006 and 2008.