Fitch Ratings affirms the 'AA-' rating on the following obligations issued by DeKalb County, Georgia (the county): 

--$96.1 million water and sewerage revenue refunding bonds (second resolution), series 2013;

--$62.8 million water and sewerage revenue refunding bonds (second resolution), series 2015. 

Additionally, Fitch has assessed the county's sewer and surface water utility system's (the system) Stand-alone Credit Profile (SCP) at 'aa-'. 

The Rating Outlook is Negative.

ANALYTICAL CONCLUSION 

The 'aa-' SCP and 'AA-' bond rating reflect the system's moderate leverage ratio in the context of a very strong business risk profile. In fiscal 2019, leverage, defined as net adjusted debt-to-adjusted funds available for debt service (FADS), improved to 6.5x from 7x in fiscal 2018. However, leverage is projected to increase annually over the next five years, estimated to reach at around 9.4x by fiscal 2024 due primarily to an increased capital improvement program (CIP) and associated new debt related to consent decree compliance measures. Leverage approaches the upper end of the 'aa' leverage subassessment range (10x) and based on the rate of longer-term capex levels may continue to rise thereafter. 

The system maintains very strong revenue defensibility, which is supported by its low rates and large service area adjacent to the city of Atlanta (the city) with very favorable demand characteristics and demographic trends. The system's very low operating risks include a very low operating cost burden and moderate life cycle ratio that is supported by robust capex. The CIP sustains heightened levels of annual capital spending, approximately 40% of which are regulatory-driven. 

Coronavirus Considerations

The ongoing coronavirus pandemic and related government containment measures worldwide create an uncertain global environment for the water and sewer sector. While the system's performance data, through most recently available data, do not indicate impairment, material changes in revenue and cost profile are occurring across the sector. Fitch's ratings are forward-looking in nature. Consequently, Fitch will monitor developments in the sector resulting from the pandemic relating to severity and duration and incorporate revised expectations for future performance and assessment of key risks as appropriate. 

CREDIT PROFILE

DeKalb County is one of Georgia's largest counties, located immediately east of the city within the Atlanta-Sandy Springs-Roswell, GA metropolitan statistical area (MSA) with an estimated population of approximately 760,000 in 2019. The area economy is very diverse and particularly well-represented by the professional and business services sector and trade and transportation, leveraging the resources of a well-trained and educated workforce and vast network of transportation assets anchored by the Hartsfield-Jackson International Airport.

The system's service area comprises almost the entire 268 square miles of the county with the exception of a small number of residents of the city that are located in the county. Most development in this built-out service area is related to infill projects. The system provides retail service to 197,702 metered water and 170,294 metered sewer connections. The system is mostly residential and there is minimal customer concentration. The 10 largest customers have comprised less than 10% of total system revenues in each of the last five years. 

KEY RATING DRIVERS

Revenue Defensibility 'aa' 

Midrange Service Area; Affordable Rates

The system is a monopolistic provider of water and sewer services in an area with midrange growth, income, and unemployment characteristics. The cost of service should remain affordable for the majority of the district's customers even with planned rate increases.

Operating Risks 'aa'

Very Low Operating Cost Burden and Life Cycle Ratio. 

The overall operating cost burden of about $5,400 per million gallons (mg) of water and sewer treated is very low and should remain relatively stable. Similarly, heightened near-term expected capital investment should maintain a favorable life-cycle ratio. 

Financial Profile 'aa'

Debt-funded Capital Spending to Result in Increased Leverage. 

Additional borrowings, including a Water Infrastructure Finance and Innovation Act (WIFIA) loan, additional revenue bonds and state revolving fund (SRF) loans will increase leverage from approximately 6.5x to the upper end of the 'aa' assessment range.

ASYMMETRIC ADDITIVE RISK CONSIDERATIONS 

No asymmetric additive risk considerations affected this rating determination.

RATING SENSITIVITIES 

Factors that could, individually or collectively, lead to a positive rating action/upgrade/stabilization of the rating:

--Maintenance and peaking of leverage below 10x over the forward look in the context of 'aa' revenue defensibility and operating risks assessments.

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

--Sustained leverage nearing or above 10x over the forward five-year period, in the context of an 'aa' revenue defensibility assessment;

--A reduction in the rate flexibility subassessment to 'a' would likely lead to a revision in the revenue defensibility assessment and reduce the leverage range for the current rating level. 

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 

The bonds are payable from a subordinate lien pledge of the net revenues of the county's water and sewer system (the system), after the payment of debt service on outstanding senior lien bonds. The senior lien is closed. The WIFIA loans are supported by the net revenues of the system as well as the full faith and credit of the county's tax levy.

REVENUE DEFENSIBILITY 

Revenue defensibility is assessed at 'aa'. The system serves as a monopoly provider with the county having independent rate-raising authority. Residential charges are considered affordable for the majority of the population (or just under 80%), with monthly charges based on Fitch's standard 7,500 gallons per month (gpm) of water consumption and 6,000 gpm of sewer flows equating to around $99. Actual in-county consumption rates are substantially lower than this level and thus point to even broader affordability levels. The county has a solid history of implementing rate increases, as large annual rate increases were implemented from 2008 to 2014 to support the increase in future capital spending. Additional increases will be required to fund ongoing capital needs. Fitch will monitor these rate increases as they impact affordability levels going forward.

The county has a diverse economic base, additionally benefiting from its proximity to Atlanta. The Atlanta-Sandy Springs-Roswell MSA has experienced population and job growth at a favorable pace relative to the state and U.S. and ranks ninth largest among all U.S. metropolitan areas by both measures. The county is the headquarters for the Centers for Disease Control (CDC), the only federal agency based outside of Washington, D.C., as well as the Yerkes Primate Center, Emory University and Agnes Scott College. The county is also home to Georgia's second busiest airport, the DeKalb Peachtree Airport. Demand characteristics throughout the service area are midrange as unemployment and household income levels track closely with national averages, albeit marginally worse. Customer growth is mostly stable.

OPERATING RISKS 

The system's operating risks are assessed at 'aa' which takes into consideration a very low operating cost burden with moderate life cycle investment needs supported by adequate capital investment. The system's operating cost burden has averaged $5,265 per mg of flows over the last five years, below the $6,500 per mg threshold for the current 'aa' subassessment. The capital planning and management subassessment of 'aa' reflects a life cycle ratio of 27% as of fiscal 2019. Capital spending as a percent of depreciation has been relatively high, averaging over 380% of depreciation since fiscal 2015.

The county's fiscal 2020-2024 CIP totals $1.2 billion, which is expected to be funded with around 66% new debt and 34% pay-go, impact fees (derived from developers as they connect to the system) and existing proceeds. Debt sources include a mix of revenue bonds but primarily low-interest loans from Georgia's SRF and the Environmental Protection Agency's WIFIA program.

Of the CIP costs, roughly 40% is attributable to projects related to a 2011 consent decree that mandates system improvements to reduce the incidences of sanitary sewer overflows. Management projects to spend around $1.97 billion on capital investments over the next 10 years, with the bulk scheduled for the near-term fiscal 2020 - 2024 CIP. Other projects include an upgrade and expansion of the larger of the two county-owned wastewater treatment facilities, the upgrade and expansion of the county's water treatment plant, repair and replacement of the water distribution network (pipes), upgrades and repairs to the sewer collection system, and capital projects associated with county ownership in the city of Atlanta's R.W. Clayton wastewater treatment plant. 

FINANCIAL PROFILE

The financial profile is assessed at 'aa'. Fitch's calculated leverage is currently low at 6.5x for fiscal 2019 and has been less than 7x since fiscal 2015. However, as a result of planned debt issuances to support the CIP, leverage is expected to increase over the forward look, approaching the upper end of 'aa' leverage subassessment threshold. The liquidity profile is neutral to the rating with coverage of full obligations at 1.4x and a liquidity cushion of 400 days at the close of fiscal 2019. Fitch calculated all-in debt service coverage for the year was 1.3x.

Fitch Analytical Stress Test (FAST)

The FAST base case was informed by the system's operating projections, which included moderate expected annual rate increases beginning in fiscal 2022 along with $950 million in additional borrowings. The base case results point to leverage rising steadily to 8.7x by fiscal 2024. The FAST stress case, which layers an additional 10% in capital spending on the base case, also shows a steady increase in leverage throughout the forward look, peaking at 9.4x in fiscal 2024. Capital spending is expected to remain elevated through at least fiscal 2026, after which Fitch expects leverage would decline somewhat.

Fitch also applied a sensitized stress case related to the effects of the coronavirus, which included a 4% revenue decline from the base case assumption in fiscal 2021 followed by a three-year recovery period. This sensitized stress case resulted in marginally higher leverage, with leverage peaking in fiscal 2024 at 9.6x. Should leverage rise above 10.0x without an expectation of moderating to below this level in the forward five years, negative rating action could result.