Fitch Rates Athens-Clarke County, Georgia's $221.5MM Water & Sewer Revs 'AA'

Business Wire, Sept 3, 2008

NEW YORK -- Fitch Ratings has assigned an 'AA' rating to Athens-Clarke County, GA's (ACC) approximately $221.5 million water and sewerage revenue bonds, series 2008. The bonds are scheduled to price Sept. 18, 2008 through negotiated sale. A portion of the bond proceeds, approximately $24 million, will be used to refund the balance of ACC's outstanding parity debt while the balance will be used finance various wastewater expansion and improvement projects. The Rating Outlook is Stable.

The 'AA' rating reflects primarily Athens-Clarke County's (the county) water and sewer system's (the system) sound financial management and proactive capital planning efforts, both of which have led to significant cash reserves and ample water supply and overall treatment capacity. Also incorporated into the rating are the system's very manageable capital needs, low rate structure, and stable service area anchored by the presence of the University of Georgia. The system's credit strengths are tempered by the current financing, which is expected to leave the system highly leveraged and with a narrow margin of debt service coverage for the foreseeable future. However, Fitch believes these challenges are somewhat mitigated by the system's substantial financial flexibility and the multi-year capital plan, which does not call for additional future parity debt.

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 University). The water and sewer systems serve about 95% and 55%, respectively, of the county's population, which totaled 114,063 in 2007. Unlike the Atlanta metro region, growth in customer accounts has been moderate, increasing by about 1.5% annually. Concern exists regarding customer concentration as the top three customers, which consist of the University and two poultry producing plants, represent about 24% and 30% of water and sewer revenues, respectively. Fitch's concern however, is somewhat mitigated by the stability of the University and the recent expansion that the poultry plants reportedly have undergone. Resident wealth levels rank below the average of state and national figures, and unemployment rates, both in the city of Athens and county-wide, are also low comparatively, though each has experienced a sharp spike through the first half of 2008 climbing to 5.5% and 5.2%, respectively.

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. Of the system's three wastewater treatment facilities, one will be replaced with the construction of a larger facility, and the remaining two will be expanded and improved over the next several years. The majority of the current financing will be used to finance the projects, which will increase the wastewater system's overall treatment capacity to 28 mgd. For water and wastewater, all regulatory permits are current, and treatment capacity is sufficient for the foreseeable future.

Financial operations are sound, generating good liquidity and solid operating margins. According to unaudited results, the system reportedly ended fiscal 2008 with $70.3 million in unrestricted cash, equating to more than 1,400 days of cash on hand. Historical debt service coverage is also strong, typically ranging between 2.3 times (x) to a high 2.9x from fiscal years 2005 through 2007. The system has historically experienced a low debt burden as capital needs have been primarily funded on a pay-as-you-go basis. However, following the current issuance, outstanding debt will equal more than 120% of system assets, leaving the system highly leveraged. Consequently, debt service coverage is projected to decline precipitously to 1.4x in fiscal 2010, below the system's policy-imposed minimum coverage level of 1.5x.

Officials do not expect to issue additional senior-lien debt and anticipate building debt service coverage levels back up to the 1.5x threshold by fiscal 2014 by implementing moderate annual rate increases of about 6.5%. Favorably, ACC maintains sole rating-setting authority, and the average monthly combined water and sewer bill is moderate compared to other regional utility providers.

The system's 2009-2013 capital improvement plan (CIP) is manageable, totaling $240 million, and capital needs measured over the next ten years are projected at about $341 million. With the exception of routine maintenance projects for the water system, the five-year CIP is almost entirely focused on expansion and improvement projects for the wastewater system, almost all of which are expected to be funded with the current offering. The system is expected to draw down its cash position to about $50 million by fiscal 2010 as reserves are used to fund the implementation of an automatic meter reading system and a $10 million construction contingency is moved into the system's capital projects fund. Additional capital funding will be derived from state revolving fund loans.