OREANDA-NEWS. Fitch Ratings has assigned the following rating to the District of Columbia Water and Sewer Authority (DC Water or the authority) obligations:

--Approximately $372,250,000 public utility subordinate lien revenue bonds, series 2016A, at 'AA-'.

The series 2016A bonds are scheduled for negotiated sale on January 20. Bond proceeds will be used to refund outstanding senior and subordinate lien obligations (series 2007A, 2008A and 2009A) for interest cost savings with no extension of bond maturity dates.

In addition, Fitch affirms the following ratings:
--$676.9 million public utility senior lien revenue bonds at 'AA';
--$2.2 billion public utility subordinate lien revenue bonds at 'AA-'.
--Extendable Municipal Commercial Paper (EMCP) notes, series A (not to exceed $100 million), at F1+

The Rating Outlook is Stable.

SECURITY

The series 2016A bonds are payable from a subordinate lien on net revenues of DC Water, after provision for the senior lien bonds. Outstanding senior lien bonds are payable from a first lien on net revenues while the EMCP Notes, series A are payable from a subordinate lien on net revenues. A default on the subordinate lien obligations would not trigger a default on the senior lien bonds. The series 2016A bonds will not have a debt service reserve fund.

KEY RATING DRIVERS

REGIONAL PROVIDER OF AN ESSENTIAL SERVICE: DC Water provides an essential service to a large service 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 1.5x 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: The authority's sizable capital program will rely significantly on debt issuance over the next several years and 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 bonds issued in 2014 (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 a strong management team that ensures regulatory compliance and consistently solid financial results.

AMPLE RATE FLEXIBILITY: Affordable user charges and management's demonstrated ability and willingness 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.

SHORT-TERM RATING: Repayment of the EMCP notes is largely dependent on future market access for DC Water, which Fitch assesses by analyzing its overall creditworthiness. The 'F1+' short-term rating corresponds to the long-term 'AA-' rating on the authority's outstanding GO bonds.

RATING SENSITIVITIES

DEVIATION FROM FORECAST RESULTS: Weaker than currently projected operating results on the part of DC Water, while not anticipated, would be viewed negatively by Fitch.

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

CREDIT PROFILE

SOUND FINANCIAL RESULTS EXPECTED TO CONTINUE

Coverage of senior lien annual debt service remained strong in fiscal 2015, reaching 5.0x and easily exceeding prior year projections. Coverage on an all-in basis also outperformed budgeted expectations, equaling 2.0x. The utility's solid cash flow metrics in fiscal 2015 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. Fiscal 2015 ended with about 265 days cash, inclusive of the authority's rate stabilization fund (RSF). Board policy prudently requires reserves to be maintained at no less than 120 days of cash on hand.

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 1.5x 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 as well as a flat system replacement fee initiated in fiscal 2016. The latter two charges reflect the authority's continued 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 2016-2025 and remains significant with an estimated cost of $3.66 billion. Mandated capital projects now account for approximately 37% 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 $3.6 billion in planned spending, approximately $659.9 million will be funded from capital contributions derived from wholesale customers. Almost 50% of the CIP will be debt financed, about 5% will come from state and federal grants, while the remaining 29% will be funded from ongoing cash flow and existing reserves. Projected cash flows through fiscal 2020 demonstrate the sufficiency of revenues needed to meet targeted pay-go amounts.

RISING DEBT LEVELS

The system's high debt levels relative to Fitch's 'AA' category retail medians continue to weigh on the authority's overall credit profile. Fitch notes, however, that DC Water is not currently party to any derivative agreements, does not provide post-employment benefits to its employees and has no unfunded pension liability.

Fitch expects the size of planned borrowings programmed into the current CIP will continue to be well in excess of scheduled amortization of existing debt, resulting in an estimated 28% increase in total debt outstanding by fiscal 2019. Escalation in debt levels beyond what is currently forecast and/or at the expense of DC Water's otherwise sound financial metrics would likely lead to negative rating action.

STABLE SERVICE TERRITORY BOASTS STRONG ECONOMY

DC Water exhibits a highly diverse and exceptionally stable customer base. The 10 largest retail customers account for less than 8% of gross revenue, respectively, and serve as important, longstanding economic anchors for the region. 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 consistency of DC Water's service territory remain a key rating factor. High wealth levels across much of the service area and a regional unemployment rate that remains below 5.0% have helped keep customer receivables and annual write-offs at a low level resulting in consistently strong revenue collection rates.