OREANDA-NEWS. Fitch Ratings assigns an 'AA+' rating to the following Athens-Clarke County Unified Government, Georgia (ACC) bonds:

--Approximately \$209.5 million water and sewerage revenue refunding bonds, series 2015.

The bonds will be sold via negotiated sale the week of May 4, 2015. Proceeds will be used to fully refund the outstanding series 2008 bonds and provide \$15 million to finance system improvements. A debt service reserve will not be funded with the issuance.

Also, Fitch affirms the 'AA+' rating on the following ACC bonds:

-- \$202 million water and sewerage revenue bonds, series 2008 (pre-refunding).

The Rating Outlook is Stable.

SECURITY

The bonds are payable from net revenues of the water and wastewater system.

KEY RATING DRIVERS

IMPROVING COVERAGE/ROBUST LIQUIDITY: Total debt service coverage (DSC) showed modest improvement in fiscal 2014, growing to 1.6x after declining to a low of 1.4x due to rising debt service costs. Actual results typically outperform management forecasts, and consistently robust cash balances somewhat offset the system's weaker DSC levels.

HIGHLY LEVERAGED SYSTEM: The system is highly leveraged due to recent upgrades to the wastewater system. Future capital needs are focused on system repair and renewal and do not include future debt financing, which will result in declining debt levels over time.

REGULAR RATE INCREASES: The combined monthly bill is currently affordable when compared to surrounding communities and relative to median household income (MHI). However, the next round of regular rate increases is expected to push average bills above Fitch's affordability threshold of 2% of MHI income, which is low partly due to a large student population.

STABLE SERVICE AREA: Despite weaker area wealth levels, ACC has an established service area anchored by the University of Georgia (the university), which provides stability.

RATING SENSITIVITIES

DETERIORATION OF FINANCIAL POSITION: Fitch expects system DSC levels will continue to improve, per management forecasts, ultimately reaching levels that are more commensurate with the 'AA+' rating levels. Failure to achieve and exceed management forecasts and to maintain healthy cash levels, either from unexpected capital needs or insufficient rate flexibility, could negatively pressure the rating.

CREDIT PROFILE
Athens-Clarke County, a unified government since 1991, is located approximately 65 miles northeast of Atlanta and is anchored by the University of Georgia, which has enrolment of more than 34,000 students and an annual budget of over \$1 billion The water and sewer systems serve about 95% and 75%, respectively, of the county's population, which totaled approximately 122,000 in 2014. The system's top 10 system users make up a significant 26% of fiscal 2014 operating revenues, with the university and Pilgrim's Pride (poultry processing plant) making up about 19% combined. Concern over system concentration is mitigated by the stability of the university.

The February 2015 unemployment rate of 6% is largely on par with the nation's 5.8% and state's 6.4% averages. Area unemployment remained relatively stable through the economic downturn, with unemployment never exceeding 7.9% (2011). Wealth levels are well below average at 67% and 62% of the state and the nation, respectively. However, much like the largest system users, the largest employers in the service area are very stable. The top 10 employers employ about 30% of the civilian labor force and represent the higher education, local governments, and health care sectors. Fitch gives weight to the stability of area employers and top system users, mitigating the weaker wealth levels.

ROBUST CASH BALANCES/IMPROVING COVERAGE

Financial performance is sound, generating solid operating margins, strong liquidity and stable coverage levels. The system ended fiscal 2014 with \$48 million of unrestricted cash, equating to a robust 967 DCOH, well above the 'AAA' median level of 481 days. The system's strong liquidity provides significant financial flexibility, which helps mitigate the below-average DSC.

The series 2008 bond issuance left the system highly leveraged. As expected, total DSC on all system debt declined precipitously from earlier levels, ranging from 1.4x to 1.6x from fiscal years 2010 to 2014. While the reduced coverage is not in line with Fitch's rating category medians, phased-in rate adjustments planned for over the next two-years should improve coverage levels.

Management forecasts, which appear reasonable and include modest annual rate increases of 3% (water) and 6% (sewer) through fiscal 2019, show senior lien DSC climbing to 2x and all-in DSC increasing to 1.8x by fiscal 2018. Officials do not expect additional system debt during this forecast period and anticipate compliance with the 1.5x minimum DSC policy. Fitch views positively management's conservative budgeting and continued rate adjustments, which have consistently resulted in actual results bettering projections.

CONSISTENT RATE ADJUSTMENTS
ACC's governing body maintains sole rate 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 six -year packages, then approved annually as part of the budget process. While slightly lower, rate adjustments of 3% to 6% are proposed through fiscal 2019. Taking into account these planned increases, system user rates will reach Fitch's affordability threshold by fiscal 2016, potentially straining future rate-raising flexibility.

GROWING CAPITAL PLAN
The Capital Improvement Plan (CIP) for fiscal 2015 to 2019 totals approximately \$67 million, a 20% increase over the 2014-2018 plan. Projects are primarily focused on rehabilitation of sewer collection lines and water line expansions. While no additional debt is planned to finance the CIP, Fitch is concerned with the material increases each year in the size of the plan, which admittedly includes some 'wish list' type projects. Escalation of capital spending beyond management's current expectations or failure to fund the plan through available resources could pressure the rating.

The system's debt burden is high, with debt per capita of \$1,837 (well above Fitch's 'AA' median of \$521). Debt as a percentage of net plant is more moderate at 49% and aligns well with the 'AA' median of 50%. Given the plan to cash-fund future capital needs, debt levels should decline. The recent system expansion and capital investment has resulted in a much improved age of plant of 11 years, compared to the Fitch median age of 14 years.

CURRENT OFFERING UPDATES COVENANTS
The current offering will fully refund the outstanding series 2008 bonds, provide \$15 million in capital funding (through release of the original 2008 debt service reserve), and also modify bond covenants. The refunding will provide for level debt service savings of approximately \$1.1 million annually and will not extend maturities past the original 2038 final maturity date. Updated bond covenants include an increase in the rate covenant to 1.25x from 1.1x and establishment of a rate stabilization fund. A debt service reserve fund will be elective on a series-by-series basis going forward. Fitch views favorably the strengthening of the rate covenant to the higher 1.25x and creation of a rate stabilization fund.

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 system has access to an additional 25.5 million gallons daily (mgd) from the Bear Creek Reservoir, leaving the system with an ample 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, increasing total system capacity to 28 mgd from 18 mgd. This amount is more than adequate to treat the average system demand in fiscal 2014 of 12 mgd. For water and wastewater facilities, all regulatory permits are current, and treatment capacity is sufficient for the foreseeable future.