Fitch Rates Washington Suburban Sanitary District's (Maryland) $86MM GOs 'AAA'

Fitch Ratings has assigned an 'AAA' rating to the Washington Suburban Sanitary District, Maryland's (the district) approximately $86 million consolidated public improvement bonds, series 2009. Proceeds will be used to refund outstanding parity debt for a net present value savings estimated at approximately 3% of the refunded bonds. The bonds will sell competitively on Nov. 10, 2009 and are ultimately secured by an unlimited ad valorem tax pledge of all taxable property within the district, encompassing most of Montgomery and Prince George's counties, Maryland. At this time, Fitch also affirms the 'AAA' rating on the district's $1.2 billion in outstanding general obligation (GO) bonds. The Rating Outlook is Stable.

The long-term 'AAA' rating primarily reflects the wealth and extraordinary diversity of the district's two-county tax base, Montgomery and Prince George's counties (GO bonds rated 'AAA' and 'AA+', respectively, by Fitch). While the Washington Suburban Sanitary Commission (WSSC), which oversees operations of the district, could if necessary levy unlimited ad valorem taxes to cover bond debt service, WSSC does not have any plans to utilize this taxing power for the foreseeable future. Additional credit strengths, which include the unused GO taxing ability, affordable rates relative to local income levels, and above-average debt amortization, provide substantial flexibility as the district embarks upon the first phase of a 30-year infrastructure plan. Credit concerns are minimal, though WSSD's rate setting ability will continue to be subject to its bi-county governance structure.

A consistent trend of conservative budgeting practices, healthy financial reserve policies, and multiyear forecasting of both operating and capital needs has strengthened the district's financial flexibility. System maintenance efforts have long been extensive and well planned, and as a result, capital needs are now moderate, compared with peer utilities regionally and nationally. Despite its ability to levy ad valorem taxes in the member jurisdictions, WSSC covers district debt service from a stable water and sewer revenue base. Financial operations remain healthy, and liquidity levels are strong.

After holding water and sewer consumption charges constant from 1999-2004, WSSC has boosted rates each year since, with minimal increases at or close to 3% for fiscal years 2005-2007. For fiscal years 2009 and 2010, more sizeable rate increases of 8% and 9%, respectively, were enacted primarily to meet rising energy and operational costs. Despite the increase in rates, fiscal 2009 ended with an operating deficit of approximately $6 million, attributable to an almost 4% drop in consumption, a $4 million increase in bad debt expense related to the current economic downturn, and a notable decline in investment income. Despite the reduction in reserves, WSSC still maintains approximately $262 million in unrestricted cash, equal to almost 300 days of cash on hand and well in excess of its policy requiring maintenance of at least 5% of user charges. Without additional revenue from the failed passage in 2008 of a 10-year monthly infrastructure renewal fee of $20, Fitch believes sizeable annual rate increases comparable to those enacted in recent years will continue to be called upon to fund growing capital costs and debt service obligations.

Fitch believes the district's debt burden is moderate, due in large part to manageable capital needs and rapid debt retirement. System leveraging, as measured by the ratio of debt to net plant, has declined from 70% in the late-1980s, when the district expanded capacity and improved environmental compliance, to approximately 35% at the end of fiscal 2009. With almost 100% of principal retired in 20 years, debt amortization is well above average, particularly for a utility system. Capital financing, totaling $1.7 billion over the next six years, is needed primarily to address ongoing projects related to a sanitary sewer overflow (SSO) consent decree and extensive water and sewer main replacement and rehabilitation. The district is reportedly in compliance with all milestones associated with the SSO consent decree. Slightly more than half of the capital improvement project will be debt financed, including the current borrowing, with the balance of funding derived from system development charges, developer contributions, and federal and state grants.

Additional information is available at www.fitchratings.com.

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