Fitch Ratings has upgraded the following revenue bonds issued by Athens-Clarke County Unified Government, GA (ACC) to 'AAA' from 'AA+': 

--Approximately $170 million water and sewerage revenue bonds, series 2015.

Additionally, Fitch has assessed the Standalone Credit Profile (SCP) of the water and sewer system (the system) at 'aaa'. The SCP represents the credit profile of the system on a stand-alone basis irrespective of its relationship with and the credit quality of ACC.

The upgrade of ACC's bond rating to 'AAA' from 'AA+' reflects the system's exceptionally low leverage, which has generally declined over the past five-plus years despite increased capital spending and a recent rate reduction. Leverage, measured as net adjusted debt to adjusted funds available for debt service (FADS) finished at 2.5x in fiscal 2022, down from 3.4x in fiscal 2018. Fitch expects leverage to remain at or below 3.0x throughout Fitch's forward-looking scenario, supported by the resumption of annual incremental rate adjustments through at least fiscal 2027.

The rating also considers ACC's strong revenue defensibility characterized by its independent ability to raise rates and favorable service-area characteristics. ACC's very strong operating risk profile features a very low operating cost burden that has not exceeded $5,000 per million gallons (mg) and a very favorable life cycle ratio of 30%, which is supported by sound capital investment.

CREDIT PROFILE

ACC, a unified government since 1991, is located approximately 65 miles northeast of Atlanta and is anchored by the University of Georgia, the county's largest employer. The water and sewer systems serve about 33% and 23% of the county's population, respectively.

The system owns and operates one water treatment plant (WTP) and three water reclamation facilities (WRF). Water supply, derived from both the North Oconee and Middle Oconee Rivers, is robust and expected to be sufficient through at least 2040. The 36 million gallons per day (mgd) J.G. Beacham Drinking WTP has ample capacity above average daily demand of around 13 mgd. The three WRFs, which include North Oconee, Middle Oconee and Cedar Creek, carry a total of combined treatment capacity of 28 mgd, which is in excess of average daily demand of around 12 mgd. Permitted capacity is believed to be sufficient beyond 2035. ACC is also a member of the Upper Oconee Basin Water Authority, with joint ownership in the Bear Creek Reservoir from which the utility receives raw water.

Fitch considers the system a related entity to the unified government of ACC for rating purposes, given its oversight of the system, including the authority to establish rates and direct operations. The unified government's credit quality does not currently constrain the bond rating. However, as a related entity, the issue ratings could become constrained by a material decline in the general credit quality of the county.

KEY RATING DRIVERS

Revenue Defensibility 'a'

Favorable Service Area Characteristics, Limited Rate Flexibility

The revenue defensibility assessment reflects ACC's favorable service area characteristics as a university center despite weaker service-area income levels in comparison to the national median. Rates are elevated; however, this is also due in part to the concentration of university students and somewhat mitigated by actual usage below Fitch's standard assumption.

Operating Risks 'aa'

Very Low Operating Cost Burden, Ample Capital Investment

The very strong operating risk assessment considers the system's very low operating cost burden and moderate investment needs. The system's projected five-year capital improvement plan (CIP) should keep the life cycle ratio well below 45%.

Financial Profile 'aaa'

Exceptionally Strong Financial Profile

Leverage for fiscal 2022 decreased slightly from fiscal 2021 levels, to 2.5x from 3.0x, due to lower than anticipated capital spending and slightly higher revenues, and remains very low. Moving forward, leverage is expected to remain below 4.0x over Fitch's forward scenario, which extends through 2027. The liquidity profile, characterized by healthy cash balances and coverage of full obligations (COFO) above 1.0x, is considered neutral to the assessment.

Asymmetric Additive Risk Considerations

No asymmetric additive risk considerations affected this rating determination.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

--The rating is at the highest level on Fitch's scale and cannot be upgraded.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

--Weakening in leverage to above 4.0x on a sustained basis in Fitch's base and stress-case scenarios assuming maintenance of the current revenue defensibility and operating risk assessments;

--Deterioration in service area characteristics or rate flexibility that ultimately lowers the revenue defensibility assessment;

--Deterioration in Athens-Clarke County's credit quality could constrain the rating.

Best/Worst Case Rating Scenario

International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

SECURITY

Outstanding revenue bonds are payable from net revenues of the water and wastewater system.

Revenue Defensibility

The system's revenue defensibility is considered strong, and is assessed at 'a'. All revenues are derived from monopolistic business lines in a service area with favorable demographic trends. Unemployment and customer growth are considered midrange, with median household income considered weaker, mainly due to the large student population within the service area.

The system has an independent legal ability to increase service rates without external approval. The average residential bill (assuming monthly usage of 7,500 gallons of water and 6,000 gallons of sewer) is considered affordable for around 70% of the population. Reported water usage is considerably lower, however, as the service area includes a substantial portion of single-person households and university students.

In fiscal 2021, in light of COVID-19 considerations, the base residential rate was reduced by 50%, while volumetric rates were held flat from fiscal 2020 levels through fiscal-years 2021 and 2022. The system resumed rate adjustments in fiscal 2023 by adopting an 8% increase to water and an 11% increase to wastewater rates. Additional annual water and sewer rate increases through fiscal 2027 are anticipated to be 4% and 6%, respectively.

Top-10 customer concentration has declined as a percentage of operating revenues, from a high of 26% in fiscal 2019 to 22% as of fiscal 2022, with 5% of revenues coming from Pilgrim's Pride (poultry processing). There is also diversity among the top 10 customers, including healthcare, education, manufacturing, along with poultry processing and the university.

Operating Risks

The system's operating risk profile is considered very strong, assessed at 'aa', and considers the very low operating cost burden with moderate investment needs. The operating cost burden registered a very low $4,408 per million gallons (mg) in fiscal 2022, and has averaged $3,952/mg over the past five years. The system's life cycle ratio registered a moderate 30% in fiscal 2022, and is supported by sound annual capital investment featuring a five-year average capex-to-depreciation ratio of 130%.

The system's updated fiscal 2023-2027 CIP totals around $176 million. While slightly lower than the prior CIP, it is still larger than historical actual capex spending levels. The capital program addresses repair and rehabilitation projects, including biosolids work and phosphorous improvements at the three WRFs. Repairs and rehabilitation of sewer lines remains the largest capital investment item, with around $90 million included in the system's five-year plan. The CIP is anticipated to be fully funded through cash.

Financial Profile

The financial profile is exceptionally strong, and is assessed at 'aaa', with Fitch-calculated leverage measuring at 2.5x in fiscal 2022. In fiscal 2021, leverage increased incrementally to 3.0x, showing a reversal of a five-year decline, as the system managed an elevated capital phase along with slightly lower revenues due to the aforementioned reduction of rates. The system's liquidity profile is considered neutral to the assessment, having been stable over the past five years, with COFO of 2.3x and 1,332 current days cash in fiscal 2022.

Fitch Analytical Stress Test (FAST)

The FAST considers the potential trend of key ratios in a base case and a stress case. The stress case is designed to impose capital cost increases of 10% above expected levels and evaluate potential variability in projected key ratios.

Management's 2023-2024 budget and 2023-2027 CIP formed the basis of Fitch's scenario analysis. However, Fitch smoothed operating revenues to increase at 4% annually to conservatively capture planned/implemented rate increases. Operating expenses of 3.5% are included for fiscals 2025 - 2027, which are based are on historical averages. Full execution of the latest CIP is anticipated in Fitch's FAST. Fitch also included a historical average of net transfers, which are held constant over the forward scenario.

Taking these factors into account, leverage is anticipated to increase over the forward scenario, but should not exceed 4.0x, and is expected to remain at levels commensurate with the overall assessment. In the base case, leverage peaks at 2.7x by fiscal 2026, and declines slightly thereafter to 2.6x by fiscal 2027. In the stress case, leverage peaks at 3.0x by fiscal 2027. Both of these levels are supportive of the current rating. The liquidity profile is expected to remain neutral to the assessment, with COFO of at least 2.2x and sound days cash.

Asymmetric Additive Risk Considerations

No asymmetric additive risk conditions affected this rating determination.