Fitch Rates Washington Suburban Sanitary District, MD AAA

Fitch assigns its highest long- term rating of `AAA' to the Washington Suburban Sanitary District, MD's $1.58 billion of outstanding general obligation bonds.

Feb. 27, 2001—Fitch assigns its highest long- term rating of `AAA' to the Washington Suburban Sanitary District, MD's $1.58 billion of outstanding general obligation bonds.

The rating is Fitch's first for the issuer's debt and reportedly marks the first time the water and wastewater treatment utility has received the top credit designation from a bond rating agency. It is only the seventh `AAA' rating ever assigned by Fitch to a water and/or sewer utility based on its own taxing or revenue- raising ability. The district, governed by the Washington Suburban Sanitary Commission (WSSC), provides water and sewer services for a service area with 1.6 million residents in Montgomery County and Prince George's County, which border the District of Columbia.

The `AAA' rating applies to various series of long-term general obligation debt issued by the district, including general construction, water supply, sewage disposal, administration building construction, and Maryland Water Quality Loan Fund bonds. Fitch expects to assign its `AAA' rating to the district's upcoming $109 million bond issue, scheduled for competitive sale on March 20, upon final review of transaction documents.

The `AAA' rating primarily reflects the wealth and extraordinary diversity of the two-county tax base, upon which WSSC could levy unlimited ad valorem taxes, if needed, to cover bond debt service. Currently, WSSC does not utilize this taxing power, nor does it expect to. Financial flexibility has been further strengthened by decades of conservative budgeting practices, healthy financial reserve policies, and multi-year forecasting of operating and capital needs. In practice, WSSC covers bond debt service from a diverse array of revenue sources: front foot assessments on properties benefiting from water and sewer system improvements, water and sewer service charges, and certain other charges principally related to new development. Notably, financial performance was relatively steady during the early 1990s' recession, compared to other `AAA' rated Maryland local entities.

Fitch's `AAA' rating further incorporates the expectation that WSSC management will continue their aggressive efforts, initiated in 1996, to change the commission's operational practices to resemble more those of top-tier private-sector utilities. Particular emphasis is being paid to changing organizational culture to value efficiency and reduce debt, while maintaining consistently high environmental and maintenance standards. The commission's Competitive Action Plan has already yielded noticeable results, in part due to workforce rightsizing. Additional efficiency efforts are firmly expected by key constituencies, including top officials in Annapolis, Montgomery County, and Prince George's County, some of whom have considered privatizing WSSC operations in the past and who can exercise considerable influence over agency activities, given its two-county governance structure.

Current rates are near national averages, relative to customers' high average incomes. Fitch believes WSSC operations will be aided by extremely rapid planned retirement of current debt and moderate future capital needs, which should facilitate further sharp declines in debt load over the medium term and lessen somewhat the need for future rate increases, compared to peer utilities regionally and nationally. Already, WSSC looks forward to its fourth consecutive fiscal year without rate increases, as the utility's debt to net plant ratio, less current maturities, has declined from 70% around the time of its late 1980s program to expand capacity and improve environmental compliance to 43% at the end of fiscal 2000.

Capital needs are moderate, especially given Maryland legislative action effectively requiring developers to fund water and sewer main extensions to multifamily subdivisions, lightening the future burden of WSSC general construction debt. More than 40% of the WSSC's $787 million 2002-2007 capital program relates to improvements at the District of Columbia Water and Sewer Authority's Blue Plains sewage treatment plant, of which WSSC owns a proportionate share, pursuant to inter-municipal agreement. While slightly more than half of the plan is to be financed with bond funding, extremely rapid debt retirement, relative to average asset life, should facilitate continued sharp declines in debt ratios. Moreover, WSSC plans to spend down a portion of its reserves, while maintaining a minimum 5% reserve balance for the water and sewer operating funds, effectively reducing future debt needs.

Taken as a whole, the two-county tax base of the district clearly exhibits characteristics consistent with the top tier of U.S. communities with `AAA' tax-supported debt ratings. Per capita personal income is 130% of the U.S. average. Income growth has outpaced the national inflation rate by an average 1.5-to-1 ratio annually since 1969, and population growth rates have slightly exceeded those of the nation and Maryland. After unsustainable growth of property values through much of the 1980s, tax base expansion settled to a more consistent annual level in the 1990s, which saw significant real estate market activity related in part to the bull market. Property value per capita is a strong $73,000. The economy is securely anchored by a broad array of government, technology, higher education, and health care institutions, as well as a diverse and expanding service sector.

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