Fitch Rates District of Columbia Water & Sewer Auth's $300MM Sr Lien Revs 'AA-'; Outlook Positive

The ratings reflect the strength and stability of WASA's vast and diverse service area, its strong capital planning efforts and financial management. The authority continues to retain flexibility in the form of rate capacity and ample reserves, and proven ability to raise revenues sufficiently to fund ongoing regulatory mandates and environmental challenges. The Outlook revision to Positive reflects primarily WASA's continued progress in addressing its costly capital improvement plan (CIP) while maintaining a favorable financial position. Fitch believes the successful reduction over the last several years of delinquent accounts and water loss, as well as the authority's demonstrated ability to outperform financial projections are also positive indicators. Consideration of a rating upgrade will depend upon WASA's ability to manage the size and scope of an already very large CIP and continue meeting regulatory mandates. Also critical to a rating upgrade will be some evidence that the current economic recession and state of the regional housing market will not adversely impact revenue collections, the ability of the authority to implement sizeable rate increases included in the financial forecast, and its overall financial profile.

The revenue bonds now offered are secured by a senior lien on net revenues of the authority and are on parity with a small amount borrowed from the U.S. Treasury for water supply improvements at the Washington Aqueduct. Outstanding subordinate lien revenue bonds are on parity with repayment of WASA's share of debt issued by the federal government and the Washington Suburban Sanitary Commission to build backup water supply reservoirs, as well as debt service on District of Columbia general obligation bonds assumed by WASA upon its creation in 1996.

WASA continues to face regulatory issues common among older, major metropolitan water and sewer utility systems. In addition to the ongoing, combined sewer overflow remediation, WASA recently consented to an EPA mandate requiring a reduction in nitrogen limits as part of the Chesapeake Bay program. Although the cost to implement the new limits is substantial, estimated at $815 million, the expense will be allocated among wholesale county customers. Efforts over the last several years to chemically improve corrosion control at the Washington Aqueduct, the source of WASA's drinking water, and the continuation of the lead pipe replacement program have resulted favorably in the reduction of lead in District of Columbia drinking water below federal action levels.

WASA's financial management remains a credit strength. Moderate annual rate increases, sound cost control, and a notable reduction in delinquent accounts have allowed for the buildup and retention of ample reserves. Board policy has historically required maintenance of a cash reserve equal to 180 days of expenses, well above the 60 days required by the trust indenture. However, officials are currently considering modifying the policy to provide additional flexibility if needed.

Total unrestricted cash, which includes a sizeable rate stabilization fund, an operating reserve, and a renewal and replacement fund, equated to approximately 300 days cash at the close of fiscal 2008. Financial projections show the balance in the fund being spent down over the next several years in an effort to keep projected rate increases at a moderate level. However, Fitch notes that WASA typically out-performs its financial projections and therefore expects overall liquidity to remain high. While solid in fiscal 2008 at 1.6 times (x), debt service coverage on all outstanding obligations is forecasted to decline to a weak 1.2x by fiscal 2014. Sustained annual rate increases ranging from 7.5%-13% through fiscal 2014 will be needed to service a sharp increase in debt related to the growing CIP. Nevertheless, rates compare favorably to other large U.S. cities.

WASA's 10-year CIP has a projected cost of approximately $3.2 billion through fiscal 2017. Two-thirds of planned spending addresses remaining consent decree projects related to combined sewer overflows (CSO), as well as capacity expansion and rehabilitation and maintenance of the Blue Plains wastewater treatment plant (Blue Plains) existing facilities. Almost two-thirds of the CIP will be debt-financed primarily through short-term note issuance that will ultimately be converted into long-term revenue bonds. Additional funding sources include wholesale customer contributions, state and federal grants, and pay-as-you-go funding from excess revenues. Contributions from wholesale users, mostly for improvements at Blue Plains, make up about 26% of financing sources. Despite the size of the CIP, capital needs are similar to those of other large urban utilities with CSO issues.

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SOURCE: Fitch Ratings

Fitch Ratings, New York Christopher Hessenthaler, +1-212-908-0773 Amy R. Laskey, +1-212-908-0568 Cindy Stoller, +1-212-908-0526 (Media Relations) cindy.stoller@fitchratings.com