NEW YORK - Moody's Investors Service said it has assigned a Aa3 rating to the Douglasville-Douglas County Water and Sewer Authority, Ga.'s
$28.6 million water and sewerage revenue refunding bonds, series 2009.
Concurrently, Moody's has downgraded to Aa3 from Aa2 the rating on $169 million of post-refunding parity bonds.
The bonds are secured solely by a first lien on net revenues of the water, sewer and stormwater system.
The downgrade to Aa3 is based on the deterioration of debt service coverage ratios and overall financial flexibility following a significant decline in development-related revenues, an increase in debt service obligations, and the multi-year impact of water restrictions, all of which have lead to weakened liquidity.
The Aa3 rating also considers the system's stable customer base in the Metro-Atlanta region experiencing a significantly slowed growth rate, adequate water and sewer capacity, and an average debt burden that reflects a commitment to pay-as-you-go financing. Bond proceeds will refund Series 1998 bonds for an estimated net present value savings of 5% of refunded principal without extension of the maturity structure.
Satisfactory legal covenants include a 1.1 times annual debt service rate covenant and an additional bonds test of 1.1 times coverage of maximum annual debt service (MADS). The current issue will not be secured by a cash-funded debt service reserve fund but will benefit from outstanding reserve surety policies issued for parity debt.
Moody's believes that the authority's financial position will remain stable at the recently weakened level, despite recent decreases in tap fees, due to planned annual rate increases and proactive financial management and long-term planning.
Due to rapid growth in tap fees, incorporation of stormwater net revenues, and a series of annual rate increases in anticipation of future borrowing, annual debt service coverage grew steadily to a strong 4.1 times (including junior lien debt service) in fiscal 2006 from 2.75 times in fiscal 2002.
The full phase-in of the debt service for previously issued bonds steadily increased debt service obligations to $11 million by fiscal 2009, which has almost doubled from $5.9 million in fiscal 2006.
Reflective of significant increases in debt service payments, coverage of annual debt service by net revenues weakened to a still-satisfactory 1.7 times (1.53 times, excluding tap fees) by fiscal 2009, down from a strong 4.1 times coverage in fiscal 2006 (2.27 times excluding tap fees).
Compounding the challenges of increasing debt service obligations, the system faced additional fiscal pressures related to declining tap fees and water revenues given water restrictions in response to the severe regional drought.
Although management projected in its five-year capital and operating plan in 2007 that tap fees would continue to decrease through fiscal 2009 to $4.9 million before resuming slow 3.8% annual growth, downturn in this revenue stream has been more severe than initially projected.
The system's total tap fees grew steadily from fiscal 2004 through 2006, to a significant $10.7 million in fiscal 2006 (up by 31% from prior year), but an economic recession and downturn in the housing market led to dramatic drop in construction activity, leading to a moderate 8.7% decline in fiscal 2007 to $9.8 million, before falling a considerable 65% to $3.4 million in fiscal 2008 and another 43% to $2 million in fiscal 2009.
Favorably, in fiscal 2003, the authority adopted a resolution allowing management to increase rates annually up to CPI plus 5% with no board approval required. Annual rate increases have ranged from 2% to 10.5% with the next scheduled rate increase of 6.5% to become effective on December 1, 2009.
The system has substantial net working capital with fiscal 2009 levels at almost three years' operating and maintenance expenses (O&M). However, most of the funds are restricted for capital purposes, with unrestricted reserves at a more limited $7 million, or 37% of O&M, which remains below the median for similarly-rated entities.
While the authority does not maintain a formal policy for net working capital, management targets a $8 million to $10 million operating reserve. The authority's sound management practices also include budgeting for a maximum 60% operating ratio, which has been maintained with the exception of fiscal 2008, driven by water usage restrictions and excessive purchased water costs related to the drought. The authority's satisfactory financial history is supported by sophisticated financial models for capital and operations.
Located approximately 25 minutes west of Atlanta (G.O. rated A1/negative outlook) along Interstate 20, the authority is mostly coterminous with Douglas County (G.O. rated Aa2), a commuter base in northwest Georgia that has experienced strong population and tax base growth over the last decade.
Excluding the cities of Villa Rica (G.O. rated A3) and Austell, which are mostly located outside county lines, the authority's water and sewer customer bases have experienced 2.8% and 5.8% five-year average annual growth, respectively, reaching 41,617 and 17,550 in 2009.
Notably, growth rates have decelerated in recent years reflective of the recession and housing market downturn, evidenced by a modest 0.6% and 1.1% growth in water and sewer customers in fiscal 2009, compared to 6% and 13% increases experienced during the recent peak in fiscal 2006.
Assuming the current rate of growth, management is projecting a minimal 1% overall growth in the customer base by 2012. Approximately 93% of customers are residential, and the top 10 customers make up 8.9% of revenues. Growth has been driven by development in residential, retail and manufacturing/distribution sectors, as well as a 38.8% increase in the countywide population since 2000 to 127,932 in 2008.
Most of the county's residential growth has been concentrated in the lower-range, single-family housing sector ("starter homes"), and as a result, average per capita personal income in the county (as measured by the U.S. Bureau of Economic Analysis) has declined relative to the state as the population has increased and remains below Georgia and national averages.
Moody's expects that with completion of the current five-year capital program, the system will have adequate capacity to meet the demands of ongoing customer growth over the next 15 to 20 years. The water system derives the bulk of its supply from two local reservoirs (Dog River and Bear Creek), which provide a combined permitted capacity of 29 million gallons per day (MGD). The smaller reservoir, Bear Creek (permitted at 6 MGD), is primarily reserved for emergency water supply.
Current treatment capacity at the Bear Creek Water Treatment Plant (WTP) is permitted at 16.4 MGD and is expected to be increased to 23 MGD by fourth quarter of 2011. Although the system can meet average water demand (10.7 MGD in fiscal 2009), additional water is purchased from nearby systems to meet peak demand (16.4 MGD in fiscal 2009).
With the completion of the capital projects and expansion to 23 MGD supply and treatment, officials expect to meet demand until 2020. In fiscal 2008, the amount of purchased water increased to an unprecedented 835 MG from 24 MG in fiscal 2006, indicative of severe drought conditions.
The system has approximately 11.8 MG of storage capacity, 110% of one day's use, which will be supplemented by the construction of an additional 2 MG tank in 2011. Water loss ranges from 8% to 22%, and is believed to average around 13%, reflective of the relatively young infrastructure.
Wastewater is currently treated at six plants across the county, with a current treatment capacity of 10.14 MGD. The current capital program will close two plants upon completion of expansion programs, resulting in a doubling of combined capacity to 20.5 MGD. Fiscal 2009 average daily usage of 5.6 MGD falls within permitted levels.
Effluent is discharged to the Chattahoochee River and various smaller streams, and sludge is treated to Class B levels and hauled to a landfill. Inflow and infiltration has improved to 18%, down from a range of 19% to 29%, reflective of the ongoing capital investment in infrastructure.
As of 2003, the authority acquired the stormwater systems across the entire county and has implemented fees to fully cover capital and operating costs. Additional future stormwater improvements will be funded with current stormwater revenues. All systems are in compliance with all material state and federal regulations and are not subject to any consent orders at this time.
Moody's believes that the Douglasville system's debt burden will remain manageable given no additional borrowing plans in the medium term. Principal payout is slow with just 29% of principal retired within 10 years but is in line with the useful life of the financed assets. The $88 million five-year CIP (FY10 to FY14) for the three systems is primarily funded with previously issued bonds, grants, and current revenues and tap fees ($33 million). All outstanding debt is fixed rate and the authority is not party to any derivative agreements.
