D.C. Water Agency Dealing $300M

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WASHINGTON - The District of Columbia Water and Sewer Authority plans to bring $300 million of public utility senior-lien revenue bonds to market in a negotiated deal Tuesday and Wednesday.

The deal comes after Fitch Ratings - which rates the bonds AA-minus - lifted its outlook on the authority to positive from stable.

"With the way the market is now, just getting reaffirmed as a double-A-rated entity and Fitch positive outlook, I think that puts us in a very good position," said DCWASA chief financial officer Olu Adebo. "Back in April we got upgraded to AA by [Standard & Poor's] so I think the combination of that and all the reaffirmations certainly makes our issuance very marketable."

Moody's Investors Service rates the deal Aa3 with a stable outlook. Standard & Poor's assigns a stable outlook to its AA rating.

The Series 2009A bonds will have a retail-order period on tomorrow with institutional pricing to follow on Wednesday. The deal is structured with serial bonds set to mature out to 2018, and term bonds that mature in 2023, 2028, and 2039.

Morgan Stanley is lead book-runner. JPMorgan, Siebert Brandford Shank & Co., Banc of America Securities LLC, Citi, Goldman, Sachs & Co., Loop Capital Markets LLC, M.R. Beal & Co., Morgan Keegan & Co., and Stifel Nicolaus & Co. round out the underwriting team.

"We always use a pool of underwriters and we rotate the seniors, which just gives us maximum flexibility," Adebo said. "Last year we were concerned with not knowing who was going to be around. But we try to make sure the pool is deep."

Adebo said he is hoping to make the bonds accessible to local retail customers and plans to run an advertisement in The Bond Buyer, as well as the Washington Post.

"We've marketed it as aggressively as possible with the investor calls that we're doing and also the additional advertisements," he said.

Public Financial Management Inc. and P.G. Corbin & Co. are co-financial advisers on the deal. Squire Sanders & Dempsey LLP and Leftwich & Ludaway LLC, both of Washington, D.C., are co-bond counsel.

Adebo said he has been getting a weekly market update over the last couple of weeks, and last week he began receiving a daily update.

"If you asked me [the week of Jan. 12], I was really very excited with the way the market was," Adebo said. Last week, though, was "a little bit of a downer," he said.

"But you can't time the market, you just have to try to be disciplined and be flexible and take advantage of the opportunities when they present themselves," Adebo added. "The market is not as buoyant or as positive as it was [the week of Jan. 12], but still no cause for concern at this point. We'll continue to monitor it."

Fitch said the positive outlook reflects DCWASA's "continued progress in addressing its costly capital improvement plan while maintaining a favorable financial position." Fitch said "consideration of a rating upgrade" would depend on the agency's ability to manage its very large capital improvement program and to continue meeting regulatory mandates.

"Also critical to a rating upgrade will be some evidence that the current economic recession and state of the regional housing market will not adversely impact revenue collections, the ability of the authority to implement sizeable rate increases included in the financial forecast, and its overall financial profile," Fitch said.

DCWASA's total unrestricted cash, which includes a sizeable rate-stabilization fund, an operating reserve, and a renewal and replacement fund, equal to about 300 days' cash at the close of fiscal 2008, according to the rating agency. And while financial projections show the balance in the fund being spent down over the next several years in an effort to keep rate increases at a moderate level, analysts said the water authority typically outperforms its financial projections and therefore Fitch expects overall liquidity to remain high.

Proceeds of the bonds will finance DCWASA's ongoing capital improvement program, a $3.2 billion, 10-year plan scheduled to be completed in 2017. It includes a mandated 20-year combined sewer overflow control plan and enhanced treatment to remove nitrogen at its Blue Plains wastewater treatment plant.

Adebo said the 2009A bond proceeds will go to the nitrogen removal project and pipe replacements and upgrades. In addition, proceeds will refund about $66 million of outstanding commercial paper notes, with the roughly $227 million remaining going to the CIP.

DCWASA was created in 1996 and is an independent regional authority that operates the District of Columbia's water and sewer system, providing retail water and sewer service to about 123,000 customers in the district, as well as wholesale wastewater treatment to Montgomery and Prince George's counties in Maryland and Fairfax and Loudoun counties in Virginia. It provides services to about 1.6 million people in total.

The district previously operated the system through the Department of Public Works, but under the control of the authority and management team, several significant operational improvements have occurred, Standard & Poor's said in a ratings report.

"DCWASA's management has implemented planning tools not typically found in water and sewer enterprises," the report said. "Along with a 10-year CIP, management performs multiyear operating forecasts ... it has established, and met, coverage, liquidity, pay-as-you-go capital, and rate stabilization reserve fund goals."

And while many municipal issuers are facing constrained budgets, difficult market access due to higher interest rates, and the threat of downgrades, water and sewer utilities are "weathering the current economic storm relatively well" because they are essential and have a strong ability to collect from customers even when overdue charges are necessary, according to a recent Fitch report on the sector.

Volatile capital markets, the housing downturn, and the recession "have had little discernible effect on the sector overall," the report said.

DCWASA was last in the market with $310 million of fixed-rate subordinated-lien revenue refunding bonds in April. The bonds refunded outstanding auction-rate securities that faced interest rate spikes amid the collapse of the ARS market.

And while Adebo said that he was concerned with how the market was functioning last week, he thinks his bonds will be well received.

"We are optimistic that we'll meet a favorable market," Adebo said. "We think that we've done everything in our power to maintain our credit strength. As far as what we can do on our part, I think we've done it."

The competitive market will also see $165 million sale of public improvement revenue bonds from the Washington Suburban Sanitary District on Tuesday. The district serves Montgomery and Prince George's counties.

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