Fitch Rates District of Columbia Water & Sewer Auth's Sub Lien Revs 'AA-'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'AA-' rating to the following District of Columbia Water and Sewer Authority (DC Water or the authority) revenue bonds:

--Approximately $200 million public utility subordinate lien revenue bonds, series 2012A;

--$50 million public utility subordinate lien multimodal revenue bonds, subseries 2012B-1 (SIFMA Index Rate Period);

--$50 million public utility subordinate lien multimodal revenue bonds, subseries 2012B-2 (SIFMA Index Rate Period);

--$170 million public utility subordinate lien revenue refunding bonds, series 2012C.

The series 2012A and series 2012C bonds are scheduled for negotiated sale the week of March 12. The subseries B1-2 bonds, which will bear interest at a floating rate based on a fixed spread, established at pricing, to the SIFMA index rate, are also expected to sell through negotiation the week of March 12. Proceeds of the new money bonds will provide funds for the authority's ongoing capital program. The refunding bonds will refund outstanding parity bonds for cost savings with no extension of maturity. The series 2012A bonds will not have a debt service reserve fund.

In addition, Fitch affirms the following ratings:

--$515 million in outstanding public utility senior lien revenue bonds at 'AA';

--$989 million public utility subordinate lien revenue bonds at 'AA-'. .

The Rating Outlook is Stable.

SECURITY

Series 2012A, 2012B1-2 and 2012C and outstanding parity bonds are secured by a subordinate lien on net revenues of the authority. Outstanding public utility senior lien revenue bonds are secured by a senior lien on net revenues of the authority.

KEY RATING DRIVERS

STRONG MANAGEMENT: The authority's operations and capital program are guided by strong financial management that ensures regulatory compliance and healthy financial performance.

REGIONAL PROVIDER OF AN ESSENTIAL SERVICE: DC Water provides an essential service to a large service territory that boasts a diverse and affluent customer base.

LARGE CAPITAL PROGRAM: The authority's sizeable capital program will rely significantly on debt issuance over the next several years, resulting in a material increase in debt levels that could pressure the rating over time.

RATE FLEXIBILITY: Affordable user charges and management's ability to raise rates independent of outside approval provides needed flexibility to contend with mounting debt service obligations.

STABLE FINANCIAL PERFORMANCE: The authority continues to generate strong coverage of senior lien debt service while maintaining satisfactory reserves and adequate coverage of subordinate lien obligations. Acceptable operating results for the given rating category are expected over the medium term based on the authority's financial forecast.

ABUNDANT CAPACITY: The combined system benefits from an abundant water supply and ample water and sewer treatment capacity.

CREDIT PROFILE

SOUNDS FINANCIAL RESULTS

DC Water's financial profile continues to exhibit good operating margins and sufficient reserves, guided primarily by strong financial management and supported by ample flexibility. Senior lien ADS coverage declined to a still strong 3.0 times (x) in fiscals 2009 and 2010 as consumption declined and debt service costs grew in both years.

Operating margins returned to a more favorable level in fiscal 2011, prompted by a 12.5% rate hike that boosted senior and subordinate lien ADS coverage to nearly 4.0x and 1.8x, respectively. The authority maintains satisfactory reserves well in excess of board imposed and indenture required amounts. Fiscal 2011 ended with almost 270 days cash on hand, significantly more than the 120 days of cash reserves required by board policy.

Operating results in fiscals 2010 and 2011 were markedly better in comparison to the authority's 2010 financial forecast, continuing a positive trend of outperforming projections. A combined $23.3 million draw down of the rate stabilization fund planned for fiscals 2010 and 2011 was instead a net $5.8 million deposit to the fund. The authority's current financial forecast shows senior lien ADS coverage staying comfortably above 2.0x through fiscal 2017. All-in ADS coverage is projected to fall to a slimmer 1.3x at the close of fiscal 2012 and remain at that level through the forecast period.

Assumptions incorporated into the forecast include a nearly 150% increase in total debt service and yearly rate hikes of about 6.5%. The forecast also assumes a cumulative increase of about 300% in the impervious fee as well as a 2.2% drop in consumption in fiscal 2012 followed by a 1% annual decline each year after through fiscal 2017. Fitch views the assumptions as reasonable based on recent trends and management's stated goals.

LARGE CAPITAL PROGRAM DRIVEN BY ENVIRONMENTAL MANDATES

DC Water's capital program, while large, appears to have stabilized following several years of rapid growth prompted by a growing number of regulatory mandates. The latest CIP covers fiscals 2011-2020 and is sized at $3.8 billion.

Increases over the years have been driven by the Blue Plains Total Nitrogen Removal Program, CSO long-term control plan and a more aggressive water main rehabilitation program. The largest capital improvement need (36% of planned spending) continues to be the rehabilitation and upgrade of Blue Plains to enhance nutrient removal and ensure regulatory compliance with the NPDES permit. It is expected that through the life of the current CIP, Blue Plains will be completely renovated, resulting in a reduction in future capital spending to a more moderate level equal to routine maintenance-type projects.

The long-term control plan for CSO projects accounts for 31% of planned spending, and all projects are also reportedly on schedule and within budget. Other capital projects included in the 10-year plan are for improvements to the Washington Aqueduct, the sanitary sewer system, and stormwater-related issues.

Of the $3.8 billion in planned spending, approximately $911 million will be funded from capital contributions derived from wholesale customers. About 75% of the remaining 2.9 billion will be debt funded, about 10% will come from state and federal grants, and the remainder will be funded on a pay-go basis. DC Water expects to borrow on average about $235 million annually through 2017. Excess cash flow generated each year is earmarked for pay-go for the CIP, indicating that reserves are likely to remain level through 2017.

LEVERAGE ON THE RISE

Debt levels are somewhat high relative to Fitch's retail medians, although for an older urban system that also serves a large population on a wholesale basis, leverage remains in the moderate range. Annual CapEx/deprecation has averaged a robust 450% over the last six years, demonstrating the high cost of meeting regulatory requirements as well as the authority's commitment to proactively maintaining system assets. Consequently, total debt outstanding has more than doubled over that span.

Debt/Net Plant increased to 52% in fiscal 2011 but compared adequately with the median for similarly rated systems. All-in debt service, despite the rise in leverage, consumed a manageable 22% of gross revenues in fiscal 2011. Issuance of the SIFMA notes makes the first time DC Water has utilized variable rate debt. Post-issuance, the SIFMA notes will account for about 8% of the authority's total debt portfolio.

Fitch expects debt levels to rise significantly over the next several years, which could result in downward pressure on the rating. Plans to borrow approximately $2.1 billion over the next 10 years coupled with the slow amortization of existing debt will likely stress debt ratios. An exceptionally low 7% of principal matures in 10 years, and 29% in 20 years. By fiscal 2017 debt service costs will consume an above average 38% of planned spending.

STABLE SERVICE TERRITORY BOASTS STRONG ECONOMY

DC Water provides retail water and wastewater service to the District of Columbia and wholesale wastewater service to Fairfax and Loudon Counties in Virginia (Fitch rates the general obligation bonds [GO] of both counties 'AAA' with a Stable outlook), Montgomery and Prince George's Counties in Maryland (GOs rated 'AAA' with a Stable Outlook) and Washington Suburban Sanitary Commission (also rated 'AAA' with a Stable Outlook by Fitch).

The District of Columbia is the heart of the service area, and its users, including the federal government, account for more than three-quarters of operating revenue. DC Water's customer base is remarkably diverse; in fiscal 2011 the 10 largest commercial and governmental customers accounted for just 4% and 9% of gross revenues, respectively. Wealth levels within the service area rank among the highest in the nation, and annual collections continue to approximate 100%.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by Creditscope and HIS Global Insight.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (June 20, 2011);

--'Water and Sewer Revenue Bond Rating Guidelines' (Aug. 10, 2011);

--'2012 Water and Sewer Medians' (Dec. 8, 2011);

--'2012 Outlook: Water and Wastewater Sector' (Dec. 8, 2011).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130

U.S. Water and Sewer Revenue Bond Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647331

2012 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=657111

2012 Outlook: Water and Sewer Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=657110

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Contacts

Fitch Ratings
Primary Analyst
Christopher Hessenthaler, +1-212-908-0773
Senior Director
Fitch, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Doug Scott, +1-512-215-3725
Managing Director
or
Committee Chairperson
Adrienne Booker, +1-312-368-5471
Senior Director
or
Media Relations:
Sandro Scenga, +1-212-908-0278
Email: sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Christopher Hessenthaler, +1-212-908-0773
Senior Director
Fitch, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Doug Scott, +1-512-215-3725
Managing Director
or
Committee Chairperson
Adrienne Booker, +1-312-368-5471
Senior Director
or
Media Relations:
Sandro Scenga, +1-212-908-0278
Email: sandro.scenga@fitchratings.com