Fitch Ratings assigns an 'A+' rating to the following Atlanta, GA revenue bonds:
--Approximately $1.25 billion water and wastewater revenue refunding bonds, series 2015.
The 2015 bonds will price via negotiation on February 24. Proceeds of the series 2015 bonds will refund outstanding parity bonds (series 2001A, 2004 and 2009A), fund a debt service reserve fund and pay costs of issuance. The refunding bonds will be structured to provide level savings and will not extend bond maturity.
In addition, Fitch affirms the city's outstanding revenue bonds, including a portion which will be refunded by the 2015 bonds:
--$2.75 billion in outstanding water and wastewater system revenue bonds at 'A+'.
The Rating Outlook is revised to Positive from Stable.
SECURITY
Bonds are payable from a first lien on net revenues of the combined water and wastewater system.
KEY RATING DRIVERS
POSITIVE OUTLOOK: The revision to Positive from Stable reflects potential over the next two years for Atlanta's Department of Watershed Management (the department, or DWM) to gain greater long-term certainty regarding its sales tax revenues, which would result in upward rating movement.
LARGE RETAIL SERVICE AREA: DWM provides water and wastewater services to the city of Atlanta (the city) and a few surrounding communities. Atlanta is the state capital and the economic engine of the southeastern United States. Water supplies and treatment capacity are well positioned to meet demand.
POSITIVE FINANCIAL TRENDS: Financial metrics improved in recent years due to a series of sizeable rate increases, improved sales tax revenues, extension of regulatory-driven capital projects, good cost controls and relatively stable sales. Fitch expects the strength in financial margins to continue at or near current levels.
HIGH COMBINED RATES: Atlanta's water and wastewater combined rates are high at 3.9% of median household income (MHI) due to substantial rate increases put in place during the last decade to fund regulatory capital spending. Rate flexibility is limited.
HIGH DEBT LEVELS: The system is very highly leveraged. While the 2012 extension of a federal consent decree deadline from 2014 to 2027 reduced the department's reliance on debt issuance for capital projects in the near term, Fitch does not expect debt levels to recede quickly.
RATING SENSITIVITIES
LONG-TERM REVENUE SECURITY: The Positive Outlook reflects Fitch's opinion that securing long-term revenue certainty, most likely to occur through an extension of the municipal option sales tax (MOST) beyond 2020 (which accounted for 21% of total revenues in fiscal 2014) could result in upward rating movement.
CREDIT SUMMARY
DWM experienced a period of credit pressure during the 2000's, when the department had to finance substantial levels of required capital repairs dictated by a 1999 consent decree. A series of double-digit rate increases were implemented to pay for the needed capital projects which brought DWM's water and wastewater rates to among the highest in the country.
Having reached the practical limit on additional rate increases, the city received legislative authority in 2004 to levy a 1% MOST to provide additional revenues for system capital needs. Voters must approve the tax levy for four-year periods, which has occurred three times (most recently in 2012) with strong support. The legislative authority to levy the tax expires in 2020. The Positive Outlook reflects Fitch's expectation that long-term extension of MOST revenues could provide greater credit certainty to an important component of DWM's revenue mix and result in positive rating action.
FIVE YEARS OF IMPROVED FINANCIAL RESULTS
The consent decree extension, a series of annual rate increases totaling 65% during fiscals 2009-2012, management stability, prudent cost controls and revenues in excess of budget assumptions all contributed to increased financial margins and cash reserves in the past five years. Net operating revenues, including revenue derived from the MOST, resulted in Fitch calculated all-in debt service (including Georgia Environmental Finance Authority [GEFA] subordinate loans) of a healthy 1.6x in fiscal 2014. All-in coverage without the MOST revenues would have been 1.1x. If franchise fees paid to the city are included, coverage in fiscal 2014 was 1.5x. In addition, cash reserves have increased to $651 million at the end of fiscal 2014 (over 1,000 days of operations).
DWM provided an independent feasibility study in connection with the issuance of the series 2015 bonds. The study provides additional disclosure regarding operational and financial aspects of the system. The financial forecast in the study shows a potential decline in debt service coverage. However, Fitch believes that the forecast assumptions are conservative and that actual results are likely to be in line with 2014 levels.
Fitch's Positive Outlook takes into account the fact that potential debt service coverage levels could be below average for the 'AA' rating category (Fitch's 2015 median for all-in debt service coverage was 2.1x). This concern is mitigated by DWM being able to fund 85% of its capital needs over the next five years from revenues and reserves, strong cash reserves even following the expected use of some reserves for capital spending, and management's stated intent to deleverage the system.
REAUTHORIZATION OF MOST IS RISK TO FINANCIAL PERFORMANCE
Fitch views the primary risk to financial performance to be the loss of MOST revenues. The $124 million in MOST revenues provided 21% of total revenues in fiscal 2014. The MOST will require voter approval in early 2016 for collection to provide revenues to the DWM in fiscals 2017-2020. Fitch believes that assumption of voter approval in 2016 is a reasonable assumption for the financial forecast due to past levels of strong voter support.
However, to provide long-term financial security to bondholders, DWM will need to secure additional legislative approval to continue to levy the existing sales past 2020 or replace the revenue stream to preserve financial margins. Fitch believes that the original purpose of the sales tax (to fund capital projects associated with the 1999 consent decree) remains intact, since debt borrowed to fund many of those projects will continue to be paid by DWM and ratepayers well past 2020. The city and DWM expect to request additional legislative approval for the MOST prior to 2020. The Positive Outlook reflects Fitch's opinion that securing long-term reauthorization for the MOST would likely result in sufficient revenue stability to move the rating upward.
HIGH DEBT BURDEN AND LIMITED RATE FLEXIBILITY
Debt levels are very high at $13,365 per customer relative to Fitch's median of $1,836 per customer. DWM's leverage position is high on multiple measures, including debt-to-net plant of 67% and all-in debt service as a percentage of total revenues of 41%, which is a constraint of the system's overall financial flexibility. Although no additional revenue bonds are planned over the next five years, Fitch expects the city's utility system will remain highly leveraged for the foreseeable future given the slow scheduled pay-out of existing debt.
The high debt burden remains a credit concern in light of the system's limited rate flexibility; Atlanta's water and wastewater rates are some of the highest among municipally owned utility systems in the U.S. The average monthly retail bill totals slightly more than $150, equal to 4% of MHI. Fitch considers monthly water and wastewater rates in excess of 2% of MHI as high. Despite the limited rate flexibility, DWM does not expect any additional rate increases in its five-year forecast.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 3, 2013);
--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 31, 2013);
--'2015 Water and Sewer Medians' (Dec. 12, 2014);
--'2015 Outlook: Water and Sewer' (Dec. 12, 2014).
Applicable Criteria and Related Research:
2015 Outlook: Water and Sewer Sector
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=818410
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
2015 Water and Sewer Medians
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=818409
U.S. Water and Sewer Revenue Bond Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=974695
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