Fitch Rates Winston-Salem, NC $59.920MM 2007A Water & Sewer Rev and Rfdg Bonds 'AA'.

NEW YORK -- Fitch Ratings assigns a rating of 'AA' to the $59,920,000 City of Winston-Salem, North Carolina (the city) water and sewer system revenue and refunding bonds, series 2007A. The bonds are scheduled to price on May 2, 2007. Citigroup Global Markets Inc. and Wachovia Bank, National Association are the underwriters. DEC Associates is the financial advisor. In addition, Fitch affirms the 'AA' rating on the city's $312 million in outstanding bonds. The Outlook is Stable.

The 'AA' rating reflects Winston-Salem's sound fiscal performance, outstanding management, and financial flexibility, supported by large cash balances, competitive low rates even after upcoming increases, water supply sufficient for the foreseeable future, and a service area with a strong economy. The rating also incorporates debt service coverage that remains weak for the rating category and the maintenance of an investment policy that includes equity investments, which exposes the city to potential volatility in investment earnings. However, careful financial management and informal limitations mitigate the possibility of potential equity losses. After excluding investment income, consistent with the provisions of the bond indenture, net revenues are projected to provide a low 1.1 times (x) coverage of debt service in fiscal years 2007 and 2008. Including investment income, the 1.8x coverage projected in fiscal 2011 is more consistent with the rating category.

The utility is a combination of Winston-Salem and Forsyth County's water and sewer systems. The system generated $55.4 million in operating revenues in fiscal 2006 and has an estimated 107,886 billed water accounts and 80,642 sewer accounts. Water supply is plentiful, and facility and infrastructure improvements have kept up with the region's moderate growth. Forsyth County is a major economic center in northwestern North Carolina and its principal commercial, retail, and service anchor is Winston-Salem (both the city's and county's general obligation bonds are rated 'AAA', with a Stable Outlook by Fitch). Increased economic diversification has offset the decline in textile and apparel manufacturing. Long-term economic prospects are enhanced by the ongoing development of Piedmont Triad Research Park, a technology center incorporating academia, government, and private companies, and the creation of the adjacent Brookstown Project, a baseball stadium/mixed use development.

Rates, which are below average when compared to similar municipalities', are expected to remain competitive, even after upcoming increases of 9% in fiscal 2008 and 7% in fiscal years 2009-2011. The system continues to maintain a strong financial position, ending fiscal 2006 with $86 million in liquid assets, equal to 876 days of cash on hand. September 2006 marked the end of litigation surrounding a 2004 annexation; while the residents of the annexed area were already water customers, the city has budgeted for increased sewer hook-ups over the next five years. The system has ample water supply and water treatment capacity for all of its service area. The bonds will be used for construction or renovation of the system's physical structures as well as system extensions.

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