OREANDA-NEWS. February 16, 2015. Fitch Ratings has assigned an 'AA-' rating to the following District of Columbia Water and Sewer Authority (DC Water or the authority) revenue bonds:

--Approximately \\$385.2 million public utility subordinate lien revenue bonds, series 2015A.

The series 2015A bonds are scheduled for negotiated sale the week of Feb. 17, subject to market conditions. Bond proceeds will be used to advance refund portions of outstanding subordinate lien bonds (series 2007A, 2008A and 2009A) for cost savings.

In addition, Fitch affirms the following ratings:

--\\$693.2 million public utility senior lien revenue bonds at 'AA';
--\\$1.8 billion public utility subordinate lien revenue bonds at 'AA-'.

The Rating Outlook is Stable
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SECURITY

The series 2015A bonds are secured by a subordinate lien on net revenues of DC Water, after provision for the senior lien bonds. Outstanding senior lien bonds are secured by a first lien on net revenues. A default on the subordinate lien obligations would not trigger a default on the senior lien bonds. The series 2015A bonds will not have a debt service reserve fund.

KEY RATING DRIVERS

REGIONAL PROVIDER OF ESSENTIAL SERVICE: DC Water provides retail water and wastewater service to a large territory that includes the nation's capital and a highly diverse and mostly affluent customer base.

SOUND FINANCIAL METRICS: The authority continues to generate strong coverage of senior-lien debt service while maintaining satisfactory reserves and adequate coverage of subordinate-lien obligations. DC Water's conservative projection of 1.4x all-in debt service coverage (DSC) through the current forecast period is below Fitch's 'AA' rating category median but is satisfactory relative to the system's overall risk profile.

LARGE CAPITAL PROGRAM: A majority of the authority's sizable capital program will be financed with long-term debt over the next several years that will increase leverage from an already high level. A planned increase over time in the use of variable rate debt coupled with the exceptionally long life of the recently issued series 2014A bonds (the century bonds) is a departure from DC Water's historically conservative approach to debt issuance which Fitch views with some concern.

STRONG MANAGEMENT: The authority's operations and large capital program are guided by an effective financial management team that ensures regulatory compliance and consistently healthy financial performance.

RATE FLEXIBILITY: Affordable user charges and management's ability to raise rates independent of outside oversight provides considerable flexibility to contend with planned borrowings and mounting debt service obligations. Manageable annual rate increases included in the authority's financial forecast should keep user charges at a reasonable level.

AMPLE CAPACITY: The combined system benefits from an abundant water supply and ample water and sewer treatment capacity.

RATING SENSITIVITIES

GROWTH IN CAPITAL NEEDS: Increases to the size and scope of DC Water's current capital program and debt financing plans beyond what is currently projected would exert downward pressure on the current ratings.

PROLIFERATION OF LONG-DATED DEBT: Escalation in the use of long-dated debt, particularly as a means to avoid increasing rates when needed, would likely lead to negative rating action.

DEVIATION FROM FINANCIAL FORECAST: Weaker than currently projected operating results, while not anticipated, would be viewed negatively by Fitch.

CREDIT PROFILE

SOUND FINANCIAL RESULTS EXPECTED TO CONTINUE
Coverage of senior lien annual debt service remained strong in fiscal 2014, reaching nearly 5.0x and easily exceeding prior year projections. Coverage on an all-in basis also outperformed budgeted expectations, equaling 1.7x. The utility's solid cash flow metrics in fiscal 2014 continue a positive trend of outperforming financial projections.

The authority maintains sound reserves well in excess of board-imposed and indenture-required amounts, but slightly below Fitch's rating category median of almost 450 days cash on hand (DCOH). Fiscal 2014 ended with about 330 days cash, inclusive of the authority's rate stabilization fund (RSF). Board policy prudently requires reserves to be maintained at no less than 120 DCOH.

The authority's current financial forecast remains relatively unchanged from the prior year's forecast, showing senior lien DSC staying comfortably above 4.0x through fiscal 2019 while all-in coverage falls to a narrower but still adequate 1.4x through the forecast period. Liquidity is projected to remain at its current level. Fitch considers the assumptions incorporated into the forecast to be reasonable and expects DC Water will continue its practice of outperforming financial projections.

AFFORDABLE RATES
DC Water's rates are still considered affordable for the vast majority of the rate base and should continue to provide an adequate amount of flexibility needed to support the authority's growing debt burden. Retail rates consist primarily of a flat metering fee and a volumetric rate. The authority also levies an impervious charge designed to recover mandated capital costs associated with its combined sewers. A flat system replacement fee will also be charged beginning in fiscal 2016. The latter two charges reflect the authority's efforts to decouple rates from consumption and bring about better cost recovery, which Fitch views positively.

LARGE CAPITAL PROGRAM DRIVEN BY ENVIRONMENTAL MANDATES
The latest capital improvement plan (CIP) covers fiscal years 2015-2024 and remains significant with an estimated cost of \\$3.8 billion. Mandated capital projects now account for approximately 43% of the overall CIP, compared to a more onerous 52% as recently as 2008. Fitch expects this percentage will continue to decline through the current planning period, which should ultimately provide the authority with greater flexibility.

Of the nearly \\$3.8 billion in planned spending, approximately \\$670.5 million will be funded from capital contributions derived from wholesale customers. Almost 60% of the CIP will be debt financed, about 5% will come from state and federal grants, while the remaining 17% will be funded from excess cash flow and existing reserves. Projected cash flows through fiscal 2019 demonstrate the sufficiency of excess revenues needed to meet targeted pay-go amounts.

RISING DEBT LEVELS
Debt levels are higher relative to Fitch's 'AA' category retail medians, and the size of planned borrowings programmed into the current CIP will continue to be well in excess of scheduled amortization of existing debt, leaving the system highly leveraged for the foreseeable future.

Annual capital spending has averaged a robust 625% of annual depreciation over the past six years, demonstrating the high cost of complying with regulatory requirements as well as the authority's commitment to proactively maintain system assets. Consequently, total debt outstanding has more than doubled over that time, pushing debt/net plant and debt-to-equity to 52% and 13.4x, respectively. Fitch's rating category medians for both ratios are 50% and 3.6x.

All-in debt service, despite the ongoing rise in leverage, consumed a manageable 25% of gross revenues in fiscal 2013. However, by 2019 all-in debt service will consume an above-average 34% of gross revenues, compared to the current rating category median of 23%. Principal amortization is slow relative to other similarly rated utility systems with just 43% of principal being amortized over the next 20 years compared to the rating category median of 81%. The slower pay-out of existing obligations is driven in part by the authority's issuance of 100-year debt earlier this year.

STABLE SERVICE TERRITORY BOASTS STRONG ECONOMY
DC Water provides retail water and wastewater service to the District of Columbia and wholesale wastewater service to Fairfax and Loudon Counties in Virginia (Fitch rates the general obligation bonds [GO] of both counties 'AAA' with a Stable Outlook), Montgomery and Prince George's Counties in Maryland (GOs rated 'AAA' with a Stable Outlook) and Washington Suburban Sanitary Commission (GOs also rated 'AAA' with a Stable Outlook).

DC Water's retail base is highly diverse with the 10 largest commercial and governmental customers typically accounting for just 3% and 8% of gross revenues, respectively. The district is the heart of the service area, and its residents, including the federal government, account for more than three quarters of operating revenue. Wholesale users account for the balance.

The strength and stability of DC Water's service territory remains a key rating factor. High wealth levels throughout much of the service area coupled with a regional unemployment rate that remains below 6% have helped keep delinquent retail account balances below a nominal 1.5% over the prior six years.