Fitch Affirms Athens-Clarke County Unified Govt, GA's Water & Sewer Revs at 'AA+'; Outlook Stable

AUSTIN--()--Fitch Ratings takes the following rating action on Athens-Clarke County Unified Government, Georgia (ACC) bonds:

--$217.1 million water and sewerage revenue bonds, series 2008 affirmed at 'AA+'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by net revenues of the water and wastewater system (the system).

SENSITIVITY/RATING DRIVERS

STRONG LIQUIDITY, STABLE COVERAGE: ACC has maintained high cash balances for many years, averaging over 1000 days of cash on hand (DCOH) over the past seven. Coverage levels weakened as predicted due to rising debt service costs, but actual results have consistently outperformed forecasts.

HIGHLY LEVERAGED SYSTEM: The system is highly leveraged after debt funding capital expansion projects. Capital plans are very manageable and do not include future borrowings, which will result in declining debt levels.

AFFORDABLE RATES: The combined monthly bill remains affordable when compared to surrounding communities; however, rates have reached Fitch's affordability threshold of 2% of median household income (MHI).

STABLE SERVICE AREA: ACC has an established service area anchored by the presence of the University of Georgia which provides flexibility and stability.

WHAT COULD TRIGGER A RATING ACTION

DETERIORATION OF FINANCIAL POSITION: Further deterioration of debt service coverage (DSC) could result in negative rating action and declining reserves could limit financial flexibility.

CREDIT PROFILE

Athens-Clarke County, a unified government since 1991, is located approximately 65 miles northeast of Atlanta, GA and is anchored by the University of Georgia. The water and sewer systems serve about 95% and 55%, respectively, of the county's population, which totaled approximately 118,700 in 2012. County unemployment rates at 6.5% are well below state (8.5%) and national (7.5%) levels as of October 2012.

STRONG FINANCIAL FLEXIBILITY

Financial performance is sound, generating solid operating margins, strong liquidity and stable coverage levels. The system ended fiscal 2012 with $35 million of unrestricted cash, equating to a robust 702 DCOH, well above the 'AAA' median level of 420 days. The system's strong liquidity profile provides significant financial flexibility, which helps mitigate the below average expected DSC.

The series 2008 bond issuance left the system highly leveraged. Consequently, as expected, combined DSC on all system debt declined precipitously to 1.4 times (x) in fiscal 2010, slightly below the system's policy-imposed minimum coverage level of 1.5x. Fiscal years 2011 and 2012 posted similarly weak results for the rating category of 1.6x and 1.4x, respectively.

COVERAGE FORECAST TO TREND UPWARD

Management provided forecasts, which appear reasonable, show combined DSC dropping to a low of 1.3x in fiscal 2013; slightly higher than previously projected. Officials do not expect to issue additional system debt and anticipate building debt service coverage levels back up to the 1.5x threshold by fiscal 2015 by implementing annual rate increases of about 7%. DSC is forecast to continue its upward trend, reaching 2.0x in 2018. Fitch views positively management's conservative budgeting, which has resulted in actual results registering higher than projected figures.

CONSISTENT RATE ADJUSTMENTS PROVIDE STABLE FINANCES

ACC's governing body maintains sole rating-setting authority and has consistently implemented rate increases ranging from 5% to 8% for the past 10 years. Rate adjustments are presented and accepted in five-year packages then approved annually as part of the budget approval process. Continuing this pattern, rate adjustments of 5% to 7% have been accepted through 2016. Fitch views positively the consistent implementation of rate increases to preserve financial margins.

The average monthly combined water and sewer bill is relatively low when compared to surrounding communities at $55 for fiscal 2012. However area wealth levels as represented by median household income are also low at 69% of the state and 65% of the national levels. This combination results in user charges at the upper end of Fitch's affordability threshold of 2% MHI although below average wealth levels reflect the high student population associated with the University of Georgia.

MAINTENANCE FOCUSED CAPITAL NEEDS

Capital Improvement Projects (CIP) for the 2013 to 2018 period total $66 million and are primarily focused on rehabilitation of sewer collection lines. The CIP is expected to be entirely funded from pay-go as no additional debt or loan issuances are planned. The system's debt burden is high with debt per capita of $1,949, well above the 'AA' median of $485. Debt as a percent of net plant is more moderate at 51% and aligns well with the 'AA' median level of 49%. Given the system's plan to cash fund future capital needs, debt levels will decline.

EXPANDED TREATMENT CAPACITY AND AMPLE WATER SUPPLY

The system's primary water supply is derived from both the North Oconee and the Middle Oconee Rivers. As one of four member governments in the Upper Oconee Basin Water Authority (the authority), the system has access to an additional 25.5 million gallons daily (mgd) from the Bear Creek Reservoir, leaving the system with an abundant water supply. The terms of the water supply agreement, which does not expire until 2046, requires that the county pay the authority 44% of the authority's annual expenditures (net of any debt service obligations) for the reservoir only, which equals its equity share in the authority.

The system recently completed a major expansion of the wastewater system, funded by the series 2008 bonds, which increased capacity by 50%. Of the system's three wastewater treatment facilities, two were replaced with larger facilities, and one was expanded and improved, bringing total system capacity to 28 mgd from 18 mgd. This is more than adequate to treat the average system demand in fiscal 2012 of 8.9 mgd. For water and wastewater facilities, all regulatory permits are current, and treatment capacity is sufficient for the foreseeable future.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

In addition to the sources of information identified in Fitch's U.S. Municipal Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.

Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated June 12, 2012;
--'Water and Sewer Revenue Bond Rating Guidelines', dated Aug. 3, 2012;
--'2013 Water and Sewer Medians', dated Dec. 5, 2012;
--'2013 Outlook: Water and Sewer Sector', dated Dec. 5, 2012.

Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015
U.S. Water and Sewer Revenue Bond Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684901
2013 Water and Sewer Medians
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695756
2013 Outlook: Water and Sewer Sector
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695755

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