Fitch Affirms Cobb County-Marietta Water Authority, GA's Water Revs at 'AAA'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'AAA' rating on the following Cobb County-Marietta Water Authority, Georgia's (the authority) bonds:

--$44.6 million water revenue refunding bonds, series 2015.

In addition, Fitch affirms the following ratings:

--$33.9 million water revenue bonds, series 2009.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a first lien on and pledge of net revenues of the water system (the system).

KEY RATING DRIVERS

EXCEPTIONAL FINANCIAL PROFILE: The authority's financial profile is projected to remain very strong with well above average debt service coverage, liquidity and cash flow margins.

LOW DEBT BURDEN: Debt levels are projected to remain very low given that no additional debt issuances are planned.

AMPLE RATE FLEXIBILITY DESPITE RATE INCREASES: A multi-year rate program was approved that includes automatic annual rate increases through fiscal 2019. Notwithstanding the rate hikes, charges are projected to remain very affordable relative to median household income (MHI).

EXCELLENT MANAGEMENT: The system benefits from strong financial management and sound capital planning efforts.

WHOLESALE SUPPLIER TO SOLID RETAIL BASE: CCMWA is the wholesale water supplier to over 880,000 people primarily in Cobb and Paulding counties. Cobb County (the county) represents about 70% of the authority's water sales and is rated 'AAA' by Fitch.

RATING SENSITIVITIES

TRI-STATE WATER WARS: A reduction in the county's water supply allocation could have a negative impact on the system's operating and financial flexibility.

CREDIT PROFILE

SOLID SYSTEM OPERATIONS

The authority owns and operates a water supply, treatment, and transmission system that consists of a raw water supply with two primary sources of surface water: the Chattahoochee River (a part of the Apalachicola-Chattahoochee-Flint, ACF Basin) and Allatoona Lake (fed by the Etowah River in the Alabama-Coosa-Tallapoosa, ACT Basin). The system serves 12 wholesale customers located primarily in Cobb and Paulding counties. The authority's service territory spans approximately 345 square miles and serves approximately 880,000 people.

CONTINUED STRONG FINANCIAL PERFORMANCE EXPECTED

The system's financial profile is exceptional as evidenced by very high liquidity, debt service coverage, and cash flow margins. Senior and all-in annual debt service coverage (ADS) have been exceptionally strong; in fiscal 2014 senior lien coverage was 8.7x and on an all-in basis, including debt service for subordinate lien Georgia Environmental Finance Authority (GEFA) loans, was a healthy 5.8x.

Coverage is more than double the Fitch 'AAA' medians of 4.3x and 2.8x, respectively. Liquidity, as quantified by days cash on hand (DCOH), was also very strong and exceeded 2,400 days in fiscal 2014. Strong cash flows have regularly exceeded depreciation by more than 2.0x since 2010, well in excess of Fitch's medians nationwide.

Financial projections provided by the authority show coverage and liquidity remaining solid over the next five years. As the GEFA loans are refinanced by the current bond issue to be on parity with the existing senior lien debt, all of the authority's debt will constitute a senior lien pledge of net system revenues. All-in DSC is projected to range between 6x to 8x through fiscal 2019, and DCOH is expected to remain above 1,000 days operating cash despite the authority's use of internal funds for capital spending.

LOW AND DECLINING DEBT LOAD

The authority's fiscal 2015-2019 capital improvement program (CIP) totals a very manageable $290.8 million and is currently expected to be entirely cash funded. The majority of CIP spending is designated for routine rehabilitation and repair. The authority's largest non-routine capital project accounts for 29% of the five year CIP and will increase water supply transmission to the southwest quadrant of the service territory. The second largest project comprises about 18% of the CIP and is for the complete replacement of the original structure of the system's largest water treatment plant, the Quarles plant, in order to provide greater plant efficiency and reliability.

Outstanding debt as of fiscal 2014 equated to 23% of system assets, and debt per capita was $100, both of which are well in line with the 'AAA' medians. Amortization of existing debt is fairly rapid, with 76% retiring in 20 years ('AAA' median is 82%). The current refunding will not extend the maturity dates of the exiting loans. Given that the authority has no planned borrowings, leverage ratios are anticipated to decline in five years.

AFFORDABLE RATES

The authority's wholesale rates are among the lowest in the region and represent about 0.4% of MHI. Over the next five years, the authority's board-approved rates will automatically increase by 4% annually. Since rates are currently very affordable, the rate hikes are expected to only marginally increase the cost of service in relation to MHI through fiscal 2019.

WATER WARS

One of the authority's raw water supply sources, the Chattahoochee River, is downstream from and fed by Lake Lanier (the lake), which is a critical water source for the entire Atlanta region. The lake is a large reservoir that was constructed by the United States Army Corps of Engineers (the Corps), who remains the lake's operator to this day. The lake is at the center of a decades-long interstate conflict over water supply management and allocation 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 Lake Lanier beginning in July 2012 unless a political resolution was reached between the three states.

The courts turned the issue back to the Corps, who is currently developing a new comprehensive water control plan for the entire ACF Basin, and in that process is weighing options for how the reservoir will continued to be operated for water supply. The Corps expects to complete its updated water control plan in 2017.

The authority actively manages a water efficiency program that could be ramped up should the Corps' decision be unfavorable. Fitch will continue to monitor the matter and focus on the authority's ability to withstand any reduction in water allocation from the Chattahoochee River and Lake Lanier, and what impact these reductions could have on the operational and financial profiles of the system.

STRONG SERVICE AREA

Cobb County, which comprises the majority of the authority's service area, is a part of the greater diverse Atlanta metropolitan statistical area (MSA) economy. Greater economic diversification has led to above-average wealth levels, historically good employment indicators and moderate population growth in recent years. Cobb County, which is approximately 85% built-out, expects to experience the majority of future growth in its southern and western portions, since the eastern section (closest to Atlanta) is almost entirely developed.

The county's unemployment rate continues to improve and was a low 5.3% in March 2015, below that of the MSA (5.9%), state (6.2%), and national average (5.6%) during that 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=985956

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Eva Rippeteau
Associate Director
+1-212-908-9105
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Andrew DeStefano
Director
+1-212-908-0284
or
Committee Chairperson
Jessalynn K. Moro
Managing Director
+1-212-908-0608
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Eva Rippeteau
Associate Director
+1-212-908-9105
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Andrew DeStefano
Director
+1-212-908-0284
or
Committee Chairperson
Jessalynn K. Moro
Managing Director
+1-212-908-0608
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com