Fitch Ratings affirms the 'AA+' rating on the following Athens-Clarke County Unified Government, Georgia (ACC) bonds:

--$208.7 million water and sewerage revenue bonds series 2008.

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 continue to outperform management forecasts and somewhat offsetting the system's weaker DSC levels for the rating are ACC's consistently robust cash balances averaging over 800 days of cash on hand (DCOH) over the past four year.

HIGHLY LEVERAGED SYSTEM: The system is highly leveraged after debt funding capital expansion projects for 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.

GROWING CAPITAL COSTS: Continued escalation of planned capital projects is expected beyond the current five-year CIP and could strain the system's financial flexibility...

DIMINISHING RATE FLEXIBILITY: The combined monthly bill remains affordable when compared to surrounding communities and relative to median household income (MHI); however, rates are expected to exceed Fitch's affordability threshold of 2% of MHI income (MHI) in the coming two year cycle due to well below average median household income levels.

STABLE SERVICE AREA: Despite weaker area wealth levels, ACC has an established service area anchored by the presence of 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 of the 'AA+' rating levels and that the system will continue to post robust cash levels. Failure to achieve and exceed management forecasts, either from unexpected capital needs or insufficient rate relief, could negatively pressure the rating.

CREDIT PROFILE

Athens-Clarke County, a unified government since 1991, is located approximately 65 miles northeast of Atlanta, GA and is anchored by the university. The water and sewer systems serve about 95% and 55%, respectively, of the county's population, which totaled approximately 122,000 in 2014. The system's top ten 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 top users.

The November 2014 unemployment rate of 5.4% is largely on par with the nation's 5.5% and slightly better than the state's 6.7%. The area unemployment remained relatively stable through the economic downturn, with unemployment never exceeding 7.6% (2010). Area 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 ten employers employ about 30% of the civilian labor force and are made up of industries like higher education, local governments, and health care. Fitch factors in the stability of area employer and top system users, despite 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 profile provides significant financial flexibility, which helps mitigate the below average expected DSC.

The series 2008 bond issuance left the system highly leveraged. Consequently, as expected, total DSC on all system debt declined precipitously, ranging from 1.4x to 1.6x from fiscal years 2010 to 2014. While the reduced coverage levels are not in line with Fitch's rating category medians, actual financial performance consistently exceeds management's projections and phased in rate adjustments planned of over the next two year period should result in improving coverage levels.

Management forecasts, which appear reasonable, show total DSC growing from 1.6x to 2x from fiscal 2015 to 2020. Officials do not expect to issue additional system debt and anticipate keeping debt service coverage levels at the 1.5x policy threshold with the implementation of annual water rate increases of 5% and sewer rate increases of 8% through 2016. Fitch views positively management's conservative budgeting, which has resulted in actual results registering higher than projected figures.

CONSISTANT RATE ADJUSTMENTS PROVIDE STABLE FINANCES

ACC's governing body maintains sole rating-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 five-year packages then approved annually as part of the budget approval process. Continuing this pattern, rate adjustments of 5% to 8% have been accepted through 2016. Taking into account planned rate hikes, system user rates will reach Fitch's affordability threshold by 2016, potentially straining future rate raising flexibility. Fitch views positively the consistent implementation of rate increases to preserve financial margins.

GROWING CAPITAL PLAN

Capital Improvement Projects (CIP) for the 2015 to 2019 period total $70 million a 20% increase over the 2014 to 2018 CIP. Projects are primarily focused on rehabilitation of sewer collection lines and water line expansion. While no additional debt is planned to finance the CIP, Fitch is concerned with the material increases each year in the size of the five-year CIP, which reflects large needs beyond the current forecast. . The CIP is expected to be entirely funded from pay-go as no additional debt or loan issuances are planned. Escalation of capital spending beyond management's current expectations or failure to fund the plan through rate revenues, could pressure the rating.

The system's debt burden is high with debt per capita of $1,851, well above Fitch's 'AA' median of $521. Debt as a percent of net plant is more moderate at 41% and aligns well with the 'AA' median level of 50%. Given the system's 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.

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, bringing total system capacity to 28 mgd from 18 mgd. This 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.