TEXT-Fitch rates Washington Suburban Sanitary District, Md. GOs

Oct 22 - Fitch Ratings assigns an 'AAA' rating to the following Washington Suburban Sanitary District, Maryland (the district) general obligation (GO) bonds: --$250 million Consolidated Public Improvement Bonds of 2012. The bonds will provide funding for the district's ongoing capital improvement program. The bonds will sell competitively on Oct. 30. In addition, Fitch affirms the following rating: --$1.4 billion GO Consolidated Public Improvement 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 to fund operations and pay debt service obligations is a notable credit strength and provides significant flexibility that has not been utilized to date. STRONG MANAGEMENT: Despite narrow financial results, financial and capital planning practices are strong. Liquidity is satisfactory. ESSENTIAL SERVICE: The district provides an essential service to a stable and affluent bi-county service area. AMPLE CAPACITY: Water supply and overall system treatment capacity are sufficient for the foreseeable future. AFFORDABLE DEBT LEVELS, LARGE CIP: Debt levels are moderate but are expected to grow significantly over the medium term given additional borrowing plans. The district's capital improvement plan (CIP) is sizeable and relies on significant, but apparently affordable, debt issuance amounts. CREDIT PROFILE 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 (GO bonds for both counties rated 'AAA' with a Stable Outlook by Fitch). 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 could levy an unlimited ad valorem tax to cover bond debt service, if necessary. The district encompasses over 950 square miles within the two counties (both bordering Washington D.C.), effectively representing 95% of the land area of both counties and servicing a population of over 1.8 million. 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 August 2012 unemployment rate was 5.2%, compared to 8.2% for the U.S. and 7% for Maryland. The county remains one of the wealthiest in the nation, with per capita money income and median household income 170%-180% of the national averages. 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. The university has begun construction of M Square, a planned 2.5 million square foot university-related research park. 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 August unemployment rate of 7% is on par with the state and is well-below national average. County income indicators generally equal or exceed the nation's and are below those of other parts of the region. The district's total assessed valuation (AV) increased by an average annual rate, between 2007 and 2010, of 8.5% due to rapid appreciation of residential real estate and new residential construction reflective of the counties' prime location. The recent national housing correction led to 9% decline in AV in fiscal 2011 and fiscal 2012 to $227.73 billion. ADEQUATE FINANCIAL OPERATIONS Financial results of the utility system are typically narrow, as management budgets only to cover debt service and operating expenses and maintain sufficient liquidity. Despite increasing rates by an annual average of about 6.5% between 2007 and 2010, financial performance has trended downward mostly due to rising expenditures and a decline in consumption levels. Consequently, fiscal years 2009 and 2010 ended with annual debt service coverage below 1.0x as fund balance was appropriated to offset budget gaps. The fiscal 2011 budget was adopted with a nominal use of fund balance ($3.1 million), although management's prudent decision to redeem about $26.6 million of outstanding bonds prompted a $26.8 million draw on reserves. Reflecting an 8.5% rate hike, fiscal 2012 ended with adequate all-in annual debt service coverage of 1.25x and days cash on hand increased to 215 from 207. The fiscal 2013 budget includes a 7.5% 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 to 10% of combined water and sewer revenues. Multiyear (fiscal 2014-2019) financial projections show annual budget gaps going forward that are expected to be addressed through a combination of rate increases and spending reductions. 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, more than 200 days of cash on hand, and its unlimited taxing authority. DEBT LEVELS EXPECTED TO REMAIN AFFORDABLE DESPITE SIZABLE CAPITAL PLAN Overall tax-supported debt levels for Montgomery County are moderate at nearly $3,000 per capita and about 1.6% of market value. Overall debt of Prince George's County, excluding self-supporting debt of multiple enterprise systems, is low at about $1,950 per capita basis and 1.7% as a percent of market value. Pay-out for both counties is rapid with over 65% of principal retired within 10 years. The district's debt burden relative to its tax base, including the current issuance, is notably low at 0.6% and still moderate at 2.8% with overlapping debt of the counties, underlying municipalities and other entities factored in. Pay-out of district debt is rapid with 72% of principal retired in 10 years. The district currently has $149.5 million (8% 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 2013-2018 totals $3.25 billion, which is approximately a 10% increase from the prior year plan ($2.9 billion). 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 (39% 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 13% of the total CIP. More than 80% of the capital program is expected to be debt funded. The district expects to borrow annually with bond issues ranging in size from about $380 million to about $540 million through fiscal 2018. 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.