Fitch Rates Washington Suburban Sanitary District's (Maryland) $198.6MM GOs 'AAA' Outlook Stable

NEW YORK--()--Fitch Ratings assigns an 'AAA' rating to the following Washington Suburban Sanitary District, Maryland (the district) general obligation (GO) bonds:

--$150 million consolidated public improvement bonds of 2014;

--$48.6 million consolidated public improvement refunding bonds of 2014.

The bonds will provide funding for the district's ongoing capital improvement program (CIP). The refunding bonds will refund various series of bonds for debt service savings. The bonds will sell competitively on April 15.

In addition, Fitch affirms the following ratings:

--$1.62 billion GO Bonds at 'AAA'.

The Rating Outlook is Stable.

SECURITY

The bonds are a general obligation of the district, payable from an unlimited ad valorem tax levied in Montgomery County and Prince George's County.

KEY RATING DRIVERS

UNLIMITED TAX PLEDGE: The district's ability to levy an unlimited ad valorem tax on the tax bases of Montgomery and Prince George's Counties (ULTGO bonds each rated 'AAA' by Fitch) to fund operations and pay debt service obligations is the key credit strength providing significant flexibility that has not been utilized to date.

STRONG MANAGEMENT: District financial operations are closely managed to provide generally sum-sufficient coverage of debt service and operations. Despite narrow financial results, financial and capital planning practices are strong and available liquidity has remained at a healthy level relative to the utility's risk profile.

ESSENTIAL SERVICE: The district provides an essential service to a stable and affluent bi-county service area.

AFFORDABLE DEBT LEVELS, LARGE CIP: Fitch expects debt levels will grow significantly over the medium term but should remain manageable. The district's low user rates should provide sufficient flexibility to offset potential risks related to its sizeable capital needs.

RATING SENSITIVITIES

The rating is sensitive to shifts in fundamental credit characteristics of the counties it serves as well as the district's strong financial management practices. The Stable Outlook reflects Fitch's expectation that such shifts are highly unlikely.

CREDIT PROFILE

The district is a sanitary district providing water supply and sewage disposal services for Montgomery and Prince George's Counties, Maryland. The service area encompasses over 950 square miles effectively representing 95% of the land area of both counties and has a population of over 1.8 million.

UNLIMITED TAX PLEDGE SUPPORTED BY A WEALTHY TAX BASE

The 'AAA' rating primarily reflects the wealth and extraordinary diversity of Washington Suburban Sanitary District's bi-county tax base, Montgomery and Prince George's counties. While the Washington Suburban Sanitary Commission (WSSC), which oversees operations of the district, does not currently and has no plans to utilize its taxing power, WSSC maintains the legal authority to levy an unlimited ad valorem tax to cover bond debt service, if necessary.

The district's total assessed valuation (AV) increased 4% in fiscal 2013 to a significant $240 billion or more than $127,000 per capita. The tax base fell by a total of 9% the two prior years following a period of strong growth fueled by appreciation and new construction reflective of the counties' prime location.

Montgomery County's economy is fueled by a large U.S. government presence, with depth and diversity added by an expanding biomedical sector - driven in large part by the presence of the National Institutes of Health. The county's December 2013 unemployment rate was 4.1%, compared to 6.5% for the U.S. and 5.7% for Maryland. The county remains one of the wealthiest in the nation, with median household income between 132% - 181% of the national and state average. Favorable wealth characteristics are fueled by a highly educated workforce.

Prince George's County's economic base is anchored by vital governmental bureaus and higher education, including Andrews Air Force Base and the University of Maryland. Expansion continues in the $2 billion mixed-use National Harbor project along the Potomac River, including the announced construction of the Tanger Outlets at National Harbor, with an estimated capital investment of $100 million.

The December unemployment rate of 5.9% is slightly above the state and well below the national average. County income indicators exceed the nation and are on par with the state.

IMPROVED FINANCIAL OPERATIONS

Financial results of the utility system had typically been narrow, with management budgeting only to cover debt service and operating expenses. However, rates were increased by 8.5% and 7.5% in fiscal years 2012 and 2013 to address debt service expense increases related to the district's sizable capital plan, which resulted in improved debt service coverage and days cash on hand due to conservative budgeting. Fiscal 2013 ended with elevated all-in annual debt service coverage of 1.6x (including connection fees) and days cash on hand increased to 230 from 208 in fiscal 2011.

The fiscal 2014 budget includes a 7.25% increase in customer water and sewer rates to address funding for water and sewer infrastructure improvements, increased costs of sanitary sewer overflow consent decree compliance, and cost increases at regional sewage disposal facilities. Also, the budget appropriates $18.5 million of fund balance, of which $10.2 million will be used to further increase the operating reserve toward the District's goal of 10% of combined water and sewer revenues.

The system's most recent monthly status report for December 2013 shows positive but narrow results for fiscal year end with coverage maintained at 1.02x.

The proposed fiscal 2015 budget is a 1.2% increase over 2014 and includes a 6% rate increase. The budget increase funds compliance with the sanitary sewer overflow consent decree and a contribution of $2.3 million to the operating reserve to increase the balance to 10%.

Multiyear (fiscal 2014 - 2019) financial projections show annual budget gaps going forward that are expected to be addressed with a combination of operational reductions and rate increases. While the budget gaps are a concern for Fitch, much of the budgetary pressure is mitigated by the district's financial flexibility, which includes very low user rates (approximately 1% of household income), 230 days of cash on hand, and its unlimited taxing authority to pay debt service.

DEBT LEVELS EXPECTED TO REMAIN MANAGEABLE DESPITE SIZABLE CAPITAL PLAN

The district's debt burden relative to its tax base, including the current issuance, is notably low at 0.7% and still moderate at 2.4% with overlapping debt of the counties factored in. Pay-out of district debt is rapid with over 67% of principal retired in 10 years. The district currently has $180.1 million (9% of outstanding debt) in variable-rate bond anticipation notes outstanding, which is manageable given the district's solid cash position.

The adopted CIP for fiscals 2014-2019 totals $3.7 billion, which is approximately a 14% increase from the prior year plan. Management reports the increase was driven by an increase in regulatory projects. The capital program continues to focus primarily on water and sewer system reconstruction projects (35% of CIP) and compliance with environmental regulations. Environmental spending will address an outstanding consent decree, and upgrades to the district's wastewater treatment facilities and the Blue Plains treatment plant in order to comply with enhanced nutrient removal requirements mandated by the EPA. In total, environmental spending over the next six years will comprise an above-average 16% of the total CIP.

While more than 85% of the capital program is expected to be debt funded, the debt burden is expected to increase to a somewhat elevated $7,767 per customer; however, on a tax-supported basis the debt profile is a more affordable 3.8% of market value and $4,796 per capita. The district expects to borrow annually with bond issues ranging in size from about $415.7 million to about $666.3 million through fiscal 2019. Additional funding sources include grants, system development charges and existing reserves. Expected grant funding has already been committed by the state, which plans to reimburse the district for expenditures related to nutrient removal.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, National Association of Realtors,

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=826449

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Evette Caze, +1-212-908-0376
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Andrew DeStefano, +1-212-908-0284
Director
or
Committee Chairperson
Michael Rinaldi, +1-212-908-0833
Senior Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Evette Caze, +1-212-908-0376
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Andrew DeStefano, +1-212-908-0284
Director
or
Committee Chairperson
Michael Rinaldi, +1-212-908-0833
Senior Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com