OREANDA-NEWS. Fitch Ratings has assigned an 'AA-' rating to the following bonds issued by the City of Clarksville, TN (the city):

---Approximately $90.8 million water, sewer and gas revenue refunding bonds, series 2016.
Bond proceeds will refinance $80 million in interim construction loans into long-term debt, refund outstanding series 2007 bonds for savings and pay costs of issuance. The city is using approximately $11 million in cash on hand to defease outstanding debt as part of this transaction. Bonds are expected to price on June 7, 2016 via negotiated sale.

In addition, Fitch affirms the following ratings:

--$151.9 million (pre-refunding) senior lien water, sewer and gas revenue and refunding bonds, series 2002, 2007, 2011, and 2013 at 'AA-';
--$8.9 million subordinate lien water, sewer and gas revenue refunding bonds, series 2013 at 'A+'.

The Rating Outlook for all bonds is Stable.

SECURITY
Senior lien bonds are payable from a first lien on net revenues of the city's water, sewer and gas systems (the system). Subordinate lien bonds are payable from a subordinate lien on net system revenues after payment of senior bonds.

KEY RATING DRIVERS
COMBINED PLEDGE PRIMARILY WATER/SEWER: The water and sewer systems provide the majority of revenues for bondholders. The natural gas fund is healthy but accounts for only 4% of outstanding debt. This is expected to increase modestly to 9% with a $15 million bond issue in fiscal 2017 to fund a gas pipeline extension.

INCREASED DEBT LEVELS: Following extensive damage to the wastewater treatment plant from an extreme flood event in 2010, the city incurred substantial costs related to repairs. As a result, the city's combined utility debt levels increased from $180 million in fiscal 2010 to $279 million at the end of fiscal 2015. The Federal Emergency Management Agency (FEMA) has paid or agreed to pay for approximately $30 million in project costs and the city continues to pursue additional reimbursement.

SEWER RATE INCREASES IMPLEMENTED: The city raised sewer rates 9.5% each year in fiscals 2014-2016 with a final 9.5% increase approved in fiscal 2017 to finance the flood-related debt. Management's financial forecast conservatively does not include any additional sewer rate increases beyond 2017. A gas rate study is in progress and no water rate adjustments are anticipated.

HEALTHY FINANCIAL MARGINS: Clarksville's financial margins are healthy with all-in coverage of senior and subordinate obligations averaging 1.8x before transfers. All-in debt service coverage (DSC) is projected to remain at or above this level, although an additional gas system debt issuance is not included in the financial forecast.

FORT CAMPBELL SIGNIFICANCE: Fort Campbell is the largest employer in Tennessee and Kentucky and plays a vital role in the regional employment and economic picture. However, the base is not a direct customer of the three utility systems.

RATING SENSITIVITIES

STRONGER FINANCIAL MARGINS: The financial forecast provided by management indicates all-in DSC could strengthen with limited additional debt needs. If financial metrics continue to strengthen, upward rating movement could result in the medium term.

CREDIT PROFILE

Located 50 miles northwest of Nashville, Clarksville (general obligation debt rated 'AA'/Stable) is the county seat of Montgomery County. The city continues to experience strong population growth, in part driven by the expansion at Fort Campbell, which includes more than 30,000 military personnel and 53,000 family members in the region.

The water, sewer, and gas systems serve approximately 62,026, 53,806, and 25,588 customers, respectively, primarily in the city and portions of Montgomery County. The system has ample treatment capacity to absorb continued moderate growth in the customer base. The water and sewer systems have experienced 3% average annual customer growth over the past five years.

Fort Campbell is not a customer of the water or wastewater system. The base previously was the largest natural gas customer until 2012 when it began purchasing its own natural gas. It is still a transportation customer of the city, which covers related system infrastructure costs. The margin the city made on the natural gas commodity sales to the base was minimal, so financial performance of the natural gas utility was not impacted.

PARTIAL FEMA FUNDING OF FLOOD RELATED DAMAGE

In May 2010, the city's sole wastewater treatment facility and related lift stations were submerged in an extreme flood event by the Cumberland River. The city estimates that the total cost of recovery was around $130 million. Clarksville applied to FEMA for reimbursement of a share of the costs to replace the wastewater treatment plant.

Initially, FEMA indicated to the city that it would fund the typical 75% of repair costs. However, FEMA notified the city in May 2011 that it would not fund the repairs and cited an unwritten internal policy. The city appealed FEMA's decision. To date, FEMA re-obligated $30 million to the city and the city continues to pursue appeals.

Capital spending for the wastewater system addressed the damage sustained in the flood, but also addressed permit violations that prompted the assignment of a consent order by the Tennessee Department of Environment and Conservation (TDEC) in 2012. The 2012 order replaced a 2004 order that dealt with similar violations.

Once the wastewater treatment plant expansion is complete, the dry weather treatment capacity will be 25 million gallons per day (MGD) and short-term wet weather treatment will be 75 MGD. The capacity will be sufficient to handle the storm water inflows that occur a few times during the year as a result of the combined sewer and stormwater system.

DEBT LEVELS ABOVE AVERAGE

Debt levels will include approximately $215 million in senior lien revenue bonds and $48.5 million in subordinate lien obligations after the 2016 issuance. Debt levels are above average for the rating but amortization is rapid with 56% of principal repaid in 10 years.

Planned capital spending of $78 million over the next five years is significantly less than capital spending the five years prior ($182 million). The decline reflects the near completion of the wastewater treatment plant improvements. The largest future component of the capital plan is the construction of a new gas interconnection pipeline.

The 12-inch pipeline will be 23 miles long and provide a second interconnection for the city system, which will provide redundancy and competition in natural gas transportation pricing. The cost of the pipeline is estimated at around $30 million. The city anticipates issuing $15 million in bonds in 2017 and funding the remaining costs from cash reserves. The FERC permit has been received and the city is in the process of securing easements for the pipeline route. The construction is anticipated to take between six and nine months.

HEALTHY FINANCIAL MARGINS

Combined system DSC of senior utility revenue bonds net of transfers to the general fund in lieu of taxes was 2.3x in fiscals 2014 and 2015. All-in DSC was 1.6x in fiscal 2015 and 1.5x in fiscal 2015 after transfers. This is slightly below Fitch's sector medians for the 'AA' category of 2.4x for senior lien coverage after transfers and 1.8x median for all-in DSC.

Liquidity improved in recent years to $49.7 million at the end of fiscal 2015, or 387 DCOH, and is expected to remain at or above these levels going forward. Management intends to use $11 million in this transaction to defease outstanding debt but the city expects to receive a similar amount from FEMA prior to calendar 2016 year-end. If receipt of the FEMA funds is delayed, the city's cash levels will remain healthy.

Updated DSC projections are in a similar range to historical financials although the difference between senior and all-in DSC will become more modest with the maturity of the subordinate lien revenue bonds in fiscal 2019. Senior lien revenue bond DSC after transfers is projected at no less than 2.3x and all-in DSC after transfers at 1.7x. Assumptions include the final approved sewer rate increase in fiscal 2017 as well as the debt service savings generated by the 2016 bond issuance.

The financial forecast does not include the anticipated $15 million bond issuance in fiscal 2017 to fund approximately 50% of the gas pipeline cost. The city is conducting a gas rate study in 2016, which will consider additional rates that may be needed to finance the gas pipeline, as well as overall gas rate structure.