OREANDA-NEWS. Fitch Ratings assigns an 'AA-' to the following DeKalb County, Georgia (the county) revenue bonds:

--Approximately $75 million water and sewerage revenue refunding bonds (second resolution), series 2015.

The bonds are expected to sell via negotiation the week of Nov. 9. Proceeds will be used to refund the county's series 2006A (senior lien) water and sewer revenue bonds maturing 2017-2035 for interest savings, and pay issuance costs.

In addition, Fitch affirms its 'AA-' rating on the following outstanding obligations:

--$129.3 million water and sewerage revenue refunding bonds (second resolution), series 2013.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a subordinate lien pledge of the net revenues of the county's water and sewer system (the system), after the payment of debt service on outstanding senior lien bonds. The senior lien is closed. The series 2015 bonds will not carry a debt service reserve.

KEY RATING DRIVERS

SOLID FINANCIAL METRICS: Financial performance has improved over the past few years due in large measure to the county's decision to implement significant rate increases. Debt service coverage (DSC) on all bonds of 2.2x is solid, and liquidity has reached a very strong 781 days cash on hand in fiscal 2014.

STABLE, DIVERSE ECONOMY: The county is located adjacent to the city of Atlanta and is part of a large and deep regional employment base. A highly educated county labor force combine with the employment breadth and growth prospects of the Atlanta metropolitan area to form an expectation for stable to positive economic growth over the long term. County income measures exceed the state but have declined over the last three years. The customer base is diverse yet mostly residential.

HIGH USER CHARGES: Large annual rate increases from 2008 to 2014 were necessary to prepare for the implementation of a massive capital program. Rates have increased nearly 60% over the past five years, rising to 2.9% of median household income (MHI), well above Fitch's affordability threshold. While instrumental in maintaining its improved financial footing, continued rate raising flexibility may be pressured going forward.

LARGE CAPITAL PROGRAM; INCREASING DEBT: Capital needs total $950 million over the next five years and include capital costs related to a 2011 consent decree to reduce sewer spills. Roughly half of the capital program is expected to be funded with additional bonds, driving pro forma debt ratios much higher over the next five years.

SOLID CAPACITY; REGIONAL LITIGATION CONCERNS: The system has plenty of capacity to meet the service area's long-term needs. Fitch is concerned however over ongoing litigation that continues to challenge the region's rights/access to water supply.

RATING SENSITIVITIES

STABLE FINANCES; SUCCESSFUL CIP IMPLEMENTATION: Rating stability is contingent on successful and timely implementation of the large capital program while maintaining a stable financial profile. Costs significantly in excess of the proposed $1.3 billion capital program identified could pressure the rating.

WATER RIGHTS LITIGATION: An unfavorable ruling or settlement with regards to the latest water rights litigation could significantly curtail the entire region's access to water, and rating pressure would likely result as the county works toward securing additional sources.

CREDIT PROFILE

DeKalb County (rated 'AA-' with a Stable Outlook by Fitch) is one of Georgia's largest counties, located immediately east of the City of Atlanta with an estimated population of approximately 722,161 in 2014.

VERY SOLID ECONOMIC UNDERPINNINGS

The county has a diverse economic base benefiting from its proximity to Atlanta. The city is home to the state capital and anchor of the Atlanta-Sandy Springs-Roswell metropolitan statistical area (MSA). The MSA exhibits a healthy level of economic diversity, and a transportation network that features rapid rail, a network of interstate highways, and air travel via the Hartsfield-Jackson Atlanta International Airport.

DeKalb County's August 2015 unemployment rate of 6% is on par with the state but slightly exceeds that of the MSA (5.7%) as has generally been the case over the last decade. The area economy features a very well educated labor force and average income indicators.

RATE INCREASES DRIVE STRENGTHENED FINANCIAL PROFILE

The system's financial performance has improved over the past several years from very weak results prior to fiscal 2009. Multi-year rate packages that more than doubled rates from fiscal 2008-2014 resulted in rapid revenue growth and stronger financial metrics, positioning the system for implementation of a massive capital improvement plan (CIP) beginning in 2011 and expected to require substantial additional leveraging.

Audited results from 2011-2014 produced a minimum of 1.8x DSC each of those years and doubled liquidity over the same time period. Free cash to depreciation, which measures surplus cash flow available for system renewal, was above 100% in three of the past four years. For fiscal 2014, the system generated 2.2x all-in DSC and had $260 million in unrestricted cash and investments, or solid 781 days cash on hand. Current projections for fiscal 2015 reflect similar results.

Management's operating projections for 2016-2020 show DSC for all bonds (senior and subordinate) ranging from a high 2x in 2016 to a low 1.5x in 2020. Results are lower in the later part of the forecast due to an expected rise in debt service from new issuances beginning in fiscal 2017. The forecast's assumptions appear reasonable and include annual 4% rate increases beginning in 2018, a slight decrease in water sold, revenue increases from modest growth in connections, and annual increases in operating expenses. Liquidity may decline with pay-as-you-go capital spending anticipated to average roughly $45 million annually, but is expected to stay strong. Management targets a minimum 1.5x all-in debt service coverage in its forecasts.

HIGH CHARGES TO STABILIZE

Fiscal 2014 was the last year in the multi-year rate package that more than tripled the rates from $39 for combined water and sewer service in fiscal 2007 to $123 for the average residential customer using 8,000 gallons. This rate is equivalent to 2.9% of MHI, well above Fitch's 2.0% affordability threshold. Nevertheless, other service providers in the region, including the city of Atlanta and Gwinnett County, have comparable to even higher rates. The county rates are expected to remain stable until 2018, at which time management projects smaller more manageable 4% annual rate increases will be necessary to keep pace with growing debt service costs and maintain healthy financial metrics.

ALREADY HIGH DEBT BURDEN TO RISE

The system's debt burden is considered high and is expected to continue growing over the next five fiscal years. For fiscal 2014 debt to net plant at 70% was well over the 50% 'AA' category median. Outstanding debt per customer was $2,584 in fiscal 2014, well over the $1,934 'AA' category median. Future debt plans over the next five years totals $566 million to be issued in two installments slated for 2017 and 2019. Projected debt per customer levels rise to $3,768, including the planned new issuances. The high pro forma debt burden likely limits the rating at its current level.

SIGNIFICANT CAPITAL NEEDS INCLUDING CONSENT DECREE REQUIREMENTS

The county embarked on a comprehensive $1.3 billion CIP beginning in 2010 - expected to be completed in 2021. The CIP is expected to be funded with 73% debt and 27% pay-go. The 2016-2020 CIP totals $950 million or an average of $190 annually. Major projects associated with the CIP include an upgrade and expansion of the larger of the two county-owned wastewater treatment facilities at an approximate cost of $378 million; upgrade and expansion of the county's water treatment plant ($38 million); repair and replacement of the water distribution network (pipes) totaling $179 million; upgrades and repairs to the sewer collection system totaling $600 million; and $90 million for capital projects associated with county ownership in the city of Atlanta's R.W. Clayton wastewater treatment plant. Of the CIP costs, roughly $350 million is attributable to projects related to a 2011 consent decree.

AMPLE INFRASTRUCTURE CAPACITY, WATER RIGHTS LITIGATION

The county provides potable water to approximately 190,000 mostly residential retail customers. Raw water is supplied by the Chattahoochee River (the river), a significant water source for the entire metropolitan region.

The county is permitted to withdraw a maximum of 140 million gallons per day (mgd) from the river, which remains well in excess of average daily demand of 68 mgd. Current water supply and treatment capacity at the county's 128 mgd Scott Chandler Water Treatment Plant is sufficient for the foreseeable future. Emergency supply is provided by interconnections with the city of Atlanta, and Clayton and Gwinnett counties.

The river is part of the Apalachicola-Chattahoochee-Flint River Basin (the basin), which has been the subject of a decades-long dispute over water rights between Georgia, Florida and Alabama. Most recently, the U.S. Supreme Court (the court) agreed in Nov. 2014 to hear a case brought by Florida relating to equitable apportionment of the waters of the basin as well as an injunction capping Georgia's overall withdrawal at 1992 levels; the case has yet to be heard by the court. Curtailment of water rights from the river has the ability to impact available river withdrawals by the system.

The county provides sewer collection, treatment and disposal services to approximately 163,000 mostly residential wastewater customers through two county-owned treatment facilities with a combined capacity to treat 56 mgd and capacity rights in the city of Atlanta's 120 mgd R.M. Clayton wastewater treatment plant. Average flows of roughly 58 mgd are sufficiently below the county's treatment capacity, including the 50 mgd of capacity at the Clayton plant.