Fitch Rates Washington Suburban Sanitary District, MD's $537MM GOs 'AAA'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned a 'AAA' rating to the following Washington Suburban Sanitary District (the district or WSSC) general obligation (GO) bonds:

--$381.8 million consolidated public improvement refunding bonds of 2016;

--$155.2 million consolidated public improvement bonds of 2016.

The Rating Outlook is Stable.

The proceeds of the refunding bonds will be used to refund certain outstanding securities of the district for debt service savings. Bond proceeds of the new money bonds will be used to fund capital projects throughout the district. The bonds are expected to sell on Nov. 15 via competitive bid.

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. Historically, revenues of the district's water-sewer operations have been sufficient to fully fund debt service.

KEY RATING DRIVERS

The 'AAA' rating reflects the district's strong financial record through the last economic downturn, a low liability burden, and considerable financial flexibility.

Economic Resource Base

WSSC is a sanitary district providing water supply and sewage disposal services for Montgomery and Prince George's Counties, Maryland. The service area encompasses nearly all of the land area of both counties with a 2015 population of about 1.9 million.

Revenue Framework: 'aaa' factor assessment

The district's extraordinary revenue-raising capacity is supported by the ability to levy unlimited fees, taxes, and usage rates. Water-sewer rates and fees alone have funded district financial operations including debt service since WSSC's inception, providing considerable future flexibility should it be needed.

Expenditure Framework: 'aa' factor assessment

Debt service and retiree benefit costs consume a significant share of enterprise spending, reflecting the capital-intensive nature of water-sewer service provisions. Overall, spending pressure is limited.

Long-Term Liability Burden: 'aaa' factor assessment

Tax-supported long-term liabilities are very low, given debt is paid from utility fees and charges.

Operating Performance: 'aaa' factor assessment

Carefully managed finances throughout the recession and prudent budgeting practices have maintained the district's cash position well above the level needed to cushion finances in the event of a revenue downturn. Historical performance indicates that the district would adjust rates to avoid significant cash declines.

RATING SENSITIVITIES

The ratings are sensitive to shifts in the district's strong financial flexibility, including a long-standing history of strong financial management practices. The Stable Outlook reflects Fitch's expectation that these shifts are unlikely.

CREDIT PROFILE

WSSC's bi-county economic base includes both Montgomery and Prince George's Counties (ULTGO bonds for each rated 'AAA'), characterized by considerable diversity, high resident wealth levels, and low unemployment. 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. 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.

Revenue Framework

Rates and fees from water-sewer customers have exhibited solid growth due to active adjustments by management, and have historically been sufficient to address current operations and debt service related to WSSC's capital needs. The district possesses high revenue flexibility, with unlimited ad valorem taxing power and the ability to levy user charges to fund operations and pay debt service obligations.

The district's slow operating revenue growth from volumetric rate charges and connection fees is expected to continue, as water consumption has trended positively, though below the rate of service area population growth. Slow growth is due largely to a trend of increasing conservation in resident water consumption habits.

Revenue flexibility is unusually high. The district's ability to levy an unlimited ad valorem tax on the tax base of Montgomery and Prince George's Counties, in addition to levying user charges to fund operations and pay debt service obligations, provides significant added flexibility that has not been utilized to date.

Expenditure Framework

The district retains adequate spending flexibility with elevated carrying costs related to debt service. High fixed costs are partially mitigated by management's capacity to defer certain capital projects and by the district's control over personnel costs.

Fitch expects spending generally to remain in line with or slightly above revenue growth. Spending has historically trended in line with revenues, with spending items above this level largely driven by system modernization and expansion efforts.

The district's primary spending item is debt service related to capital needs. Management has considerable legal control over personnel costs. The district's overall workforce is modest both in absolute terms and as a share of spending, somewhat limiting flexibility in this spending area.

Long-Term Liability Burden

WSSC's resource base carries a very low tax-supported liability burden, composed almost entirely of debt related to Montgomery and Prince George's Counties as well as the district's modest net pension liability.

Operating Performance

The district's financial resilience is aided by strong spending and revenue flexibility and maintenance of strong, stable cash levels. Moreover, Fitch expects that in the event of material revenue declines, the district would continue to maintain reserves at a sufficiently high level through revenue-raising measures and active expenditure management.

WSSC has practiced strong financial management through times of economic downturn, maintaining ample cash on hand and making necessary rate adjustments to offset declines in water consumption. Despite consumption challenges, the district's cash position remains well above the level Fitch believes is necessary to maintain financial resilience at the current rating level in the event of a downturn. In such an event, the district's track record of rate adjustments indicates a strong commitment to offsetting such declines where necessary.

Date of Relevant Rating Committee: May 10, 2016

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

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.

Applicable Criteria

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)

https://www.fitchratings.com/site/re/879478

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014457

Endorsement Policy

https://www.fitchratings.com/regulatory

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Contacts

Fitch Ratings
Primary Analyst
George Stimola
Associate Director
+1-212-908-0770
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Michael Rinaldi
Senior Director
+1-212-908-0833
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
George Stimola
Associate Director
+1-212-908-0770
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Michael Rinaldi
Senior Director
+1-212-908-0833
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com