Sept 28 - Fitch Ratings takes the following action on Winston-Salem, North
Carolina (the city):
--Approximately $500 million water and sewer system revenue bonds affirmed at
The Rating Outlook is Stable.
The bonds are secured by a senior lien pledge of the net revenues of the water
and sewer system (the system). Revenues include rates, rentals, fees and other
income associated with the ownership and operation of the system, but
specifically excludes investment income.
KEY RATING DRIVERS
SOLID FINANCIAL FLEXIBILITY: The system's strong balance sheet resources and
affordable rates provides significant flexibility to meet rising debt carrying
charges, while helping to offset the historically below average debt service
STRONG SYSTEM CAPACITY: Sound long-term capital planning has provided abundant
water supply and ample water and sewer treatment capacity. As a result,
near-term capital needs are manageable and will focus on system repair and
REGIONAL ECONOMIC CENTER: The system is part of the growing 12-county
Piedmont-Triad region of North Carolina. The city has become a regional hub for
health care, higher education, and biotechnology, having diversified from its
traditional concentration in manufacturing.
ABOVE AVERAGE DEBT BURDEN: The system has over $500 million in debt outstanding.
Debt ratios are above average compared to similarly-rated systems, and slow
amortization coupled with the expectation for additional bonds will keep the
debt burden high for the foreseeable future.
WHAT COULD TRIGGER A RATING ACTION
SIGNIFICANT DECLINE in LIQUIDITY: Maintaining strong liquidity levels is key to
guarding against a somewhat aggressive investment portfolio, and helps offset
the historical and projected below average debt service coverage margins.
SIGNIFICANT INCREASE IN DEBT: Rates are expected to rise over the next five
years to meet the already high debt carrying charges and expected issuance of
additional bonds. Fitch believes an appreciably higher debt burden could lead to
even higher rates than currently forecasted (leading to lower rate
affordability), while putting further stress on financial performance.
REGIONAL SERVICE PROVIDER WITH SOLID ECONOMIC UNDERPINNINGS
The system has transitioned into a regional water and sewer provider, serving
the city, several nearby incorporated towns and villages, and most of the
unincorporated areas of Forsyth County. Retail service is provided to a growing
and mostly residential retail customer base of roughly 123,000 water and 94,000
sewer accounts. The system's largest 10 users are relatively diverse and
accounted for 11% of total revenue in fiscal 2011. The system also provides
wholesale service to several nearby public utilities.
Forsyth County is a major economic center for northwestern North Carolina, and
its principal commercial, retail, and service anchor is Winston-Salem (both the
city's and the county's general obligation bonds are rated 'AAA', Outlook Stable
by Fitch). Growth in healthcare and higher education has helped diversify the
economy, although manufacturing still plays an important role in the employment
base. The unemployment rate for the Winston-Salem metropolitan statistical area
remains somewhat elevated at 9.4% as of July 2012.
STRONG CAPITAL PLANNING AND ASSET MANAGEMENT ARE CREDIT STRENGTHS
The system benefits from an abundant water supply from both the Yadkin River and
Salem Lake, although the Yadkin River alone is capable of supplying all of the
area's needs for the foreseeable future. Treatment capacity is also strong. The
city owns and operates three water treatment plants that have a combined rated
capacity to treat up to 91 million gallons per day (mgd). Annual water demand in
2011 of 37 mgd leaves the system with significant excess treatment capacity.
Sanitary sewer treatment is provided by two wastewater treatment plants, with
combined capacity of 51 mgd. Average flows totalled almost 31 mgd in 2011, or
roughly 60% of total capacity.
FINANCIAL FLEXIBILTY REMAINS STRONG
The system's financial position remains strong with notably high cash balances
offsetting below average debt service coverage. Pledged revenues, which exclude
investment income but incorporate growth-related conveyance fees, covered annual
debt service (ADS) on senior lien obligations by 1.5 times (x) in fiscal 2011,
and all-in ADS by slightly less than 1.5x. Including the 12% of liquid assets
permitted by the bond indenture, all-in debt service coverage rises to a solid
While ADS coverage is low for the rating, the system's exceptionally strong cash
position provides ample cushion. With over 950 days of cash on hand, the system
ended fiscal 2011 with very strong liquidity that is well in excess of its
prudent reserve policy requiring one year of operating expenses on hand. The
system's strong liquidity position partially mitigates Fitch's continued concern
regarding an above average equity portfolio and the below average projected debt
Fiscal 2012 results are preliminary and unaudited, but show a decline in debt
service coverage despite a rate increase due to ascending ADS. Financial
projections provided by the city include annual rate increases ranging between
7%-9%, which is similar to previous forecasts, and all-in ADS coverage of
1.2x-1.4x through fiscal 2017.
Significant growth in customer accounts over the years has helped keep user
charges low. Even after boosting water rates by 37% and sewer rates by 47% from
fiscal 2008 through fiscal 2012, the average monthly combined bill of $48 for
6,000 gallons is less than other regional providers and amounts to an affordable
1.4% of median household income.
CAPITAL NEEDS ARE MODERATE, DEBT TO REMAIN ELEVATED
As growth in the service area has slowed in recent years, the system's long-term
capital needs have begun to moderate. The system's six-year capital improvement
plan (CIP) totals $262 million and focuses primarily on upgrades to its
treatment facilities and pump stations and the overall repair and rehabilitation
of system assets. Funding sources include existing 2010 bond proceeds and
additional bonds of approximately $140 million. Pay-go sources are expected to
be roughly $10 million annually, or about 23% of total resources.
Fitch expects the system's elevated debt levels to remain high for the
foreseeable future given the slow pay-out of existing bonds (just 38% retired in
10 years) and anticipated issuances in 2015 and 2017. Outstanding debt measured
on a per capita basis totals approximately $1,500, and equals about 75% of the
value of system assets. Fitch believes the system's exposure to hedged variable
rate debt (equal to about 27% of total debt outstanding) is manageable despite a
large negative swap valuation of $31 million as of June 30, 2012, given sizeable
Liquidity support for all three series of variable rate demand bonds (series
2002B, 2002C, and 2007B) is provided by a single bank - BB&T (long-term Issuer
Default Rating of 'A+' and Stable Outlook by Fitch). The liquidity facilities
expire in March 2015, and while the city was successful in securing the
liquidity support after all three previous facilities were set to expire in
2012, dependence on a single entity for liquidity presents a moderate level of
risk if the bank's credit quality deteriorates.