NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'AAA' rating on the following Cobb County, Georgia (the county) bonds:
--$169.5 million water and sewer revenue bonds, series 2009 and 2013.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by a first lien on and pledge of net revenues of the county's water and sewer system (the system).
KEY RATING DRIVERS
STRONG OPERATING MARGINS: Consistently strong operating margins provide very healthy debt service coverage and adequate liquidity.
LOW DEBT BURDEN: The system's prudent practice of funding the majority of capital needs on a pay-as-you-go basis has resulted in low debt levels and minimal leveraging, leaving the system with a substantial amount of flexibility.
SOLID FINANCIAL MANAGEMENT AND CUSTOMER BASE: The system benefits from strong financial management, exceptional capital planning efforts, a diverse customer base, and a stable service area marked by above average income levels.
AMPLE RATE FLEXIBILITY: Water and sewer rates are low and should remain so for the foreseeable future.
RATING SENSITIVITIES
INCREASED WHOLESALE PROVIDER COSTS: The rating is susceptible to operating cost pressure from its wholesale water provider, the Cobb County-Marietta Water Authority (the authority). The Stable Outlook reflects Fitch's expectation that a shift in fundamental credit characteristics due to wholesale cost pressures is highly unlikely.
TRI-STATE WATER WARS: A reduction in the county's water supply allocation and/or permitted wastewater discharges could have a negative impact on the system's operating and financial flexibility.
CREDIT PROFILE
THE SYSTEM AND ITS CUSTOMERS
The county's water system provides transmission and distribution service to approximately 178,000 retail accounts throughout unincorporated portions of the county. Potable water is purchased from the authority pursuant to a 30-year water supply agreement signed in 2002. (Fitch rates the authority's revenue bonds 'AAA' with a Stable Outlook.) The authority's wholesale rates are low, and treatment capacity is ample.
Through long-term retail boundary and wholesale treatment agreements, the county provides wastewater treatment to about 152,000 retail customers, five local municipalities, and smaller portions of two neighboring counties. The system operates four treatment facilities, which on a combined basis provide ample treatment capacity.
SOLID FINANCIAL PROFILE
System financial management is strong, as evidenced by consistently high debt coverage margins, healthy liquidity levels, and a substantial amount of operating flexibility. Pledged revenues covered senior lien annual debt service (ADS) by a strong 4.2x (3.3x net of transfers out) in fiscal 2014. On an all-in basis, including ADS for subordinate Georgia Environmental Finance Authority loans, debt service coverage (DSC) was 2.6x (2.1x net of transfers out). Issuer-provided financial projections appear reasonable and show senior lien DSC of no less than 3.4x and all-in DSC of no less than 2.2x through fiscal 2019.
The system's prudent practice of funding the majority of its capital needs on a pay-as-you-go basis has resulted in low debt levels and minimal leveraging, though as a consequence unrestricted cash balances are typically lower than other similarly rated utility systems. Nonetheless, fiscal 2014 ended with a still good 275 days' worth of cash on hand. Liquidity levels should remain within historical norms over the forecast period.
AMPLE RATE SETTING FLEXIBILITY
The average customer consumes around 5,000 gallons per month (gpm) of water and is charged for sewer services based on the same volume. The bill associated with the typical customer charge was approximately $52 in fiscal 2014, unchanged since fiscal 2012. This amount equates to roughly 1% of median household income (MHI), well below Fitch's 2% of MHI affordability threshold. Even when charges are applied to the national water and sewer flows of 7,500 and 6,000 gpm, respectively, monthly charges of closer to $68 are a still very affordable 1.4% of MHI.
Management has indicated that rates will not be raised through at least fiscal 2018, at which point only moderate increases are contemplated. Reasonable financial projections during this time that assume 1% annual customer growth still project strong financial results absent rate increases.
DECLINING DEBT, STABILIZED CAPITAL SPENDING
The fiscal years 2015-2019 capital improvement plan (CIP) totals a manageable $263 million, and with the completion of the county's major South Cobb Tunnel project the CIP now focuses primarily on system rehabilitation and repair. Capital funding is expected to come entirely from pay-go amounts from existing reserves and excess operating revenues. Outstanding debt is less than one-fourth of system assets, and debt per customer is below-average at $1,004. Given the county has no planned borrowings, leverage ratios are anticipated to further decline and be at nearly half the levels of comparably rated 'AAA' credits in five years.
WATER WARS
The authority's sources of water are derived from the Chattahoochee River and the Allatoona Lake. The Chattahoochee River is downstream from Lake Lanier (the lake), a reservoir that is a critical water supply source for the Atlanta region and has been at the center of a decades-long interstate conflict over water supply management between the states of Georgia, Florida and Alabama. In 2011, the 11th U.S. Circuit Court of Appeals overturned a 2009 federal court ruling to halt the withdrawal of water from the lake beginning in July 2012 unless a political resolution was reached between the three states.
The courts turned the issue back to the U.S. Army Corps of Engineers (the Corps), and the Corps is now working with a consultant on an environmental impact study to determine how the four dams on the Chattahoochee River will be operated and how water supply will be allocated. The timeline is still unclear as to when the study will be complete.
The county continues to coordinate with the authority on these issues and actively manages a water efficiency program. Fitch will continue to monitor the matter and focus on the county's ability to withstand any reduction in water allocation and/or reduction in permitted wastewater flows into the Chattahoochee River and what impact these reductions could have on the operational and financial profiles of the system.
STRONG SERVICE TERRITORY
As part of the Atlanta metropolitan statistical area (MSA), the county's economy has diversified significantly over the years, leading to above-average wealth levels, historically good employment indicators and moderate population growth. With the county reportedly close to build-out, Fitch believes the expected growth rate of about 1% annually is manageable and that the service area in general is stable.
Similar to regional and national trends, the county's unemployment rate of 6.4% in March 2015 is lower than the prior year, and the figure is also below the MSA (7.0%), state (7.2%), and national (6.2%) averages for the month. County wealth levels have trended 30%-33% higher than the state average and 20%-26% higher than national average over the past four years.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. Water and Sewer Revenue Bond Rating Criteria (pub. 31 Jul 2013)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985806
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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