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452682NEW ISSUE Ratings: Book-Entry Only Moody’s Aa1 S&P AAA Fitch AA+ See “RATINGS” herein In the opinion of Gilmore & Bell, P.C., St. Louis, Missouri, and White Coleman & Associates, LLC, St. Louis, Missouri, Co-Bond Counsel, under existing law and assuming continued compliance with certain requirements of the Internal Revenue Code of 1986, as amended (the “Code”), (1) the interest on the Series 2011B Bonds (including any original issue discount properly allocable to an owner thereof) is excludable from gross income for federal income tax purposes, and is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations, (2) the interest on the Series 2011B Bonds is exempt from Missouri income taxation by the State of Missouri and (3) the Series 2011B Bonds have not been designated as “qualified tax-exempt obligations” within the meaning of Section 265(b) (3) of the Code. See the section herein captioned “TAX MATTERS” and the form of opinion of Co-Bond Counsel attached hereto as Appendix E. $52,250,000 ThE METROPOlITAN ST. lOUIS SEWER DISTRIcT Wastewater System Revenue Bonds Series 2011B Dated: Date of Delivery Due: As shown on the inside cover The Wastewater System Revenue Bonds, Series 2011B (the “Series 2011B Bonds”) will be issued by The Metropolitan St. Louis Sewer District (the “District”) to provide funds (i) to finance a portion of the costs of a program of capital improvements to the District’s wastewater facilities and system, (ii) to fund a debt service reserve account and (iii) to pay the costs of issuance of the Series 2011B Bonds. The Series 2011B Bonds will be secured by a pledge of certain revenues of the District as further described herein under the section captioned “SEcURITY AND SOURcES OF PAYMENT FOR ThE SERIES 2011B BONDS.” The Series 2011B Bonds are issuable only as fully registered bonds and when issued will be registered in the name of Cede & Co., as registered owner and nominee for The Depository Trust Company (“DTc”), New York, New York. See the section herein captioned “ThE SERIES 2011B BONDS – Book-Entry Only System.” Principal of the Series 2011B Bonds is payable to the registered owners of the Series 2011B Bonds as set forth on the inside cover of this Official Statement. Interest on the Series 2011B Bonds is payable semiannually on May 1 and November 1 of each year, beginning on May 1, 2012. The Series 2011B Bonds and the interest thereon are limited obligations of the District payable solely from the Pledged Revenues, as defined herein, on a parity with the District’s Series 2004A Bonds, Series 2006c Bonds, Series 2008A Bonds, and Series 2010B Bonds. The Series 2011B Bonds and the interest thereon shall not constitute a general or moral obligation of the District nor a debt, indebtedness or obligation of, or a pledge of the faith and credit of, the District or the State of Missouri (the “State”) or any political subdivision thereof, within the meaning of any constitutional, statutory or charter provision whatsoever. Neither the faith and credit nor the taxing power of the District, the State, or any political subdivision thereof is pledged to the payment of the principal of, premium, if any, or interest on the Series 2011B Bonds or other costs incident thereto. The District has no authority to levy any taxes to pay the Series 2011B Bonds. Neither the members of the Board of Trustees of the District nor any person executing the Series 2011B Bonds shall be liable personally on the Series 2011B Bonds by reason of the issuance thereof. The Series 2011B Bonds are subject to optional redemption as described herein. See the section herein captioned “ThE SERIES 2011B BONDS – Optional Redemption.” Maturities, Principal Amounts, Interest Rates, Prices and cUSIP Numbers are shown on the Inside cover Page This cover page contains information for quick reference only. Investors must read the entire Official Statement to obtain information essential to the making of an informed investment decision. The Series 2011B Bonds are offered when, as and if issued by the District, subject to prior placement, withdrawal or modification of the offer without notice and subject to the approval of their validity by Gilmore & Bell, P.C., St. Louis, Missouri, and White Coleman & Associates, LLC, St. Louis, Missouri, Co-Bond Counsel, and subject to certain other conditions. Certain legal matters will be passed upon for the District by its General Counsel. Certain matters relating to this Official Statement will be passed upon by the Hardwick Law Firm, LLC, Kansas City, Missouri. It is expected that the Series 2011B Bonds will be available for delivery through the facilities of DTC in New York, New York on or about December 22, 2011. The date of this Official Statement is December 8, 2011. $52,250,000 The Metropolitan St. Louis Sewer District Wastewater System Revenue Bonds Series 2011B Principal CUSIP Maturity (May 1) Amount Interest Rate Price Number1 2013 $1,640,000 3.00% 103.726% 592481 CB9 2014 1,685,000 4.00 108.293 592481 CC7 2015 1,755,000 5.00 114.139 592481 CD5 2016 1,845,000 5.00 117.718 592481 CE3 2017 1,915,000 5.00 120.875 592481 CF0 2018 2,010,000 5.00 123.194 592481 CG8 2019 2,110,000 5.00 124.690 592481 CH6 2020 2,220,000 5.00 125.786 592481 CJ2 2021 2,330,000 5.00 126.362 592481 CK9 2022 2,445,000 5.00 124.808c 592481 CL7 2023 2,570,000 4.00 112.356c 592481 CM5 2024 2,695,000 4.00 110.859c 592481 CN3 2025 2,830,000 4.00 109.213c 592481 CP8 2026 2,970,000 4.00 108.103c 592481 CQ6 2027 3,120,000 4.00 107.091c 592481 CR4 2028 3,275,000 4.00 106.172c 592481 CS2 2029 3,440,000 4.00 105.345c 592481 CT0 2030 3,615,000 4.00 104.526c 592481 CU7 2031 3,795,000 4.00 103.795c 592481 CV5 2032 3,985,000 4.00 103.070c 592481 CW3 1 CUSIP numbers shown above have been assigned by an organization not affiliated with the District. The District was not responsible for the selection of CUSIP numbers nor does it make any representation as to the correctness of such numbers on the Series 2011B Bonds or as indicated herein. c Priced to call on May 1, 2021. THE METROPOLITAN ST. LOUIS SEWER DISTRICT BOARD OF TRUSTEES Robert T. Berry, Chairman James H. Buford, Vice Chairman Gerald T. Feldhaus, Member John Goffstein, Member Eddie G. Ross Jr., Member David Visintainer, Member ADMINISTRATION Jeffrey L. Theerman, P.E., Executive Director Karl J. Tyminski, CPA, Secretary-Treasurer Susan M. Myers, General Counsel Janice M. Zimmerman, Director of Finance Brian Hoelscher, P.E., Director of Engineering Vicki L. Taylor Edwards, Director of Human Resources Barbara Mohn, Director of Information Systems Jonathan Sprague, P.E., Director of Operations ADVISORS AND CONSULTANTS Co-Bond Counsel Gilmore & Bell, P.C. White Coleman & Associates, LLC St. Louis, Missouri St. Louis, Missouri Co-Financial Advisors to the District Public Financial Management ButcherMark Financial Advisors LLC Des Moines, Iowa and St. Louis, Missouri New York, New York Disclosure Counsel Hardwick Law Firm LLC Kansas City, Missouri Independent Auditor Schmersahl Treloar & Co. St. Louis, Missouri REGARDING USE OF THIS OFFICIAL STATEMENT THE SERIES 2011B BONDS HAVE NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, NOR HAS ANY DOCUMENT BEEN QUALIFIED UNDER THE TRUST INDENTURE ACT OF 1939, AS AMENDED, IN RELIANCE UPON EXEMPTIONS CONTAINED IN SUCH ACTS. IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN EXAMINATIONS OF THE DISTRICT AND THE TERMS OF THE OFFERING. THE SERIES 2011B BONDS HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS OFFICIAL STATEMENT. ANY REPRESENTATION TO THE CONTRARY MAY BE A CRIMINAL OFFENSE. IN CONNECTION WITH THE OFFERING OF THE SERIES 2011B BONDS, THE UNDERWRITER MAY OVER ALLOT OR EFFECT TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SERIES 2011B BONDS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. The Underwriter has provided the following sentence for inclusion in this Official Statement: The Underwriter has reviewed the information in this Official Statement in accordance with, and as part of, their respective responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information. No dealer, broker, salesman or other person has been authorized by the District, the Underwriter or the Financial Advisors to give any information or to make any representations with respect to the Series 2011B Bonds other than those contained in this Official Statement, and, if given or made, such other information or representations must not be relied upon as having been authorized by any of the foregoing. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of the Series 2011B Bonds by any person in any jurisdiction in which it is unlawful for such person to make such offer, solicitation or sale. The information set forth herein has been furnished by the District and other sources which are believed to be reliable, but such information is not guaranteed as to accuracy or completeness and is not to be construed as a representation by the Financial Advisors or the Underwriter. Statements contained in this Official Statement which involve estimates, forecasts or matters of opinion, whether or not expressly so described herein, are intended solely as such and are not to be construed as a representation of fact. The information and expressions of opinion herein are subject to change without notice and neither the delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that the information herein is correct as of any time subsequent to its date. CAUTIONARY STATEMENTS REGARDING FORWARD LOOKING STATEMENTS IN THIS OFFICIAL STATEMENT Certain statements included or incorporated by reference in this Official Statement constitute “forward-looking statements” within the meaning of the United States Private Securities Litigation Reform Act of 1995, Section 21E of the United States Securities Exchange Act of 1934, as amended, and Section 27A of the United States Securities Act of 1933, as amended. Such statements are generally identifiable by the terminology used such as “plan,” “expect,” “estimate,” “anticipate,” “project,” “budget” or other similar words. THE ACHIEVEMENT OF CERTAIN RESULTS OR OTHER EXPECTATIONS CONTAINED IN SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS DESCRIBED TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. NEITHER THE DISTRICT NOR ANY OTHER PARTY PLANS TO ISSUE ANY UPDATES OR REVISIONS TO THOSE FORWARD-LOOKING STATEMENTS IF OR WHEN THEIR EXPECTATIONS, OR EVENTS, CONDITIONS OR CIRCUMSTANCES UPON WHICH SUCH STATEMENTS ARE BASED OCCUR. TABLE OF CONTENTS INTRODUCTION ............................................. 1 Purpose of the Official Statement ...................... 1 The District ........................................................ 1 Purpose of and Authority for the Series 2011B Bonds .......................................................... 2 Security and Sources of Payment for the Series 2011B Bonds .............................................. 2 Other Indebtedness ............................................ 4 Continuing Disclosure Information ................... 4 Additional Information ...................................... 5 THE SERIES 2011B BONDS ........................... 5 General .............................................................. 5 Optional Redemption ........................................ 6 Effect of Notice of Redemption ........................ 7 Book-Entry Only System .................................. 7 Registration, Transfer and Exchange of Series 2011B Bonds .............................................. 9 Persons Deemed Owners of Series 2011B Bonds ........................................................ 10 SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2011B BONDS .......... 10 General ............................................................ 10 Pledged Revenues ............................................ 10 Flow of Funds .................................................. 14 Rate Covenant ................................................. 17 Senior and Subordinate Bonds ........................ 18 PLAN OF FINANCE ....................................... 18 Purpose of and Authority for the Series 2011B Bonds ........................................................ 18 Other Indebtedness .......................................... 18 Capital Finance Plans of the District ............... 19 Estimated Sources and Uses of Funds ............. 20 THE DISTRICT ............................................... 20 General ............................................................ 20 Organization and Management ........................ 21 Board of Trustees ............................................ 22 Administration ................................................. 23 The System ...................................................... 24 Employees and Employee Relations ............... 25 Economic Conditions in the District ............... 25 Security ............................................................ 26 Insurance ......................................................... 26 THE CIRP AND THE PROJECTS ................. 27 General ............................................................ 27 Historic Capital Improvement Expenditures ... 27 Financing Plans for the CIRP .......................... 27 The Projects ..................................................... 29 FINANCIAL OPERATIONS OF THE DISTRICT..................................................... 30 General ............................................................ 30 Budget and Appropriation Process .................. 30 Finance Department ......................................... 31 Fund Structure .................................................. 31 Basis of Accounting ......................................... 31 Financial Statements ........................................ 31 Selected Financial Data of the District............. 32 Management’s Discussion and Analysis .......... 34 Sewer Rates and Revenues .............................. 36 Rate Commission and Rate Setting Process ..... 37 Billing and Collections .................................... 38 Rate Increases .................................................. 39 Historical and Projected Sewer Rates and Charges ...................................................... 39 Customer Accounts .......................................... 42 Largest User Charge Customers ...................... 42 User Charge Revenues ..................................... 43 Outstanding Indebtedness ................................ 43 Pro Forma Statement of Pledged Revenues, Expenses and Debt Service Coverage ....... 44 Employee Benefits ........................................... 45 Other Post-Employment Benefits .................... 46 Tax Limitation Amendment – Hancock Amendment ............................................... 46 REGULATORY REQUIREMENTS .............. 46 General ............................................................. 46 Regulatory Matters ........................................... 47 LITIGATION .................................................. 48 TAX MATTERS ............................................. 52 Opinion of Co-Bond Counsel .......................... 52 Other Tax Consequences ................................. 53 LEGAL MATTERS ........................................ 54 RATINGS ........................................................ 54 CONTINUING DISCLOSURE ....................... 55 UNDERWRITING .......................................... 55 CERTAIN RELATIONSHIPS ........................ 56 FINANCIAL ADVISORS ............................... 56 INDEPENDENT AUDITORS ........................ 56 MISCELLANEOUS ........................................ 56 APPENDIX A: Independent Auditor’s Report, Management Discussion and Analysis and Basic Financial Statements of The Metropolitan St. Louis Sewer District for the Fiscal Years ended June 30, 2011 and 2010 APPENDIX B: Information Regarding the District’s Service Area APPENDIX C: Definitions and Summaries of Certain Provisions of the Bond Ordinance and the Continuing Disclosure Agreement APPENDIX D: Financial Feasibility Report APPENDIX E: Form of Opinion of Co-Bond Counsel [THIS PAGE INTENTIONALLY LEFT BLANK] 1 OFFICIAL STATEMENT $52,250,000 The Metropolitan St. Louis Sewer District Wastewater System Revenue Bonds Series 2011B INTRODUCTION The following introductory information is not a summary of this Official Statement. It is only a brief description of, and is qualified by and subject in all respects to more complete and detailed information contained elsewhere in, this Official Statement, including the cover page and appendices hereto and the documents described herein. The order and placement of materials in this Official Statement, including the Appendices hereto, are not to be deemed a determination of relevance, materiality or relative importance. This Official Statement, including the cover page and Appendices, should be considered in its entirety. The offering of the Series 2011B Bonds to potential investors is made only by means of the entire Official Statement. All capitalized terms used in this Official Statement and not otherwise defined herein have the meanings set forth in the Bond Ordinance, as defined below. Purpose of the Official Statement The purpose of this Official Statement is to set forth certain information concerning The Metropolitan St. Louis Sewer District (the “District”), a body corporate, municipal corporation and political subdivision organized and existing under the laws of the State of Missouri (the “State”), and the District’s Charter (Plan), approved by the voters of The City of St. Louis, Missouri (the “City”) and St. Louis County, Missouri (the “County”) at a special election on February 9, 1954, as amended and approved by the voters of the City and the County at a special election on November 7, 2000 (collectively and as amended, the “Charter”) and the $52,250,000 principal amount of Wastewater System Revenue Bonds, Series 2011B (the “Series 2011B Bonds”) to be issued by the District. See the sections herein captioned “THE DISTRICT” and “THE SERIES 2011B BONDS.” The District The District was created in 1954 to provide a metropolitan-wide system of wastewater treatment and sanitary sewerage facilities for the collection, treatment and disposal of sewage to serve the City and most of the more heavily populated areas of the County. When the District began operations, it took over the publicly owned wastewater and stormwater drainage facilities within its jurisdiction and began the construction of an extensive system of collector and interceptor sewers and treatment facilities. The District’s service area now encompasses 525 square miles, including all 62 square miles of the City and 463 square miles (approximately 90%) of the County. The current population served by the District is approximately 1.4 million. A map of the District’s service area is included on the back cover hereof. See the sections herein captioned “THE DISTRICT,” “THE CIRP AND THE PROJECTS,” “FINANCIAL OPERATIONS OF THE DISTRICT,” and “REGULATORY REQUIREMENTS.” 2 Purpose of and Authority for the Series 2011B Bonds At a special election held on August 5, 2008, voters within the District approved the issuance by the District of $275,000,000 in sewer system revenue bonds (the “2008 Authorization”) to enable the District to comply with federal and state clean water requirements. The District may use the proceeds of such revenue bonds for the purpose of constructing, repairing, replacing and equipping new and existing District wastewater facilities. The District plans to use the proceeds of the Series 2011B Bonds to finance a portion of the costs of the District’s Capital Improvement and Replacement Program (the “CIRP”). A total of $222,750,000 principal amount of the 2008 Authorization has been issued, being its Wastewater System Revenue Bonds, Series 2008A (the “Series 2008A Bonds”) issued on November 25, 2008, in the original aggregate principal amount of $30,000,000, all of which remain outstanding; its Subordinate Wastewater System Revenue Bonds (State of Missouri - Direct Loan Program), Series 2009A (the “Series 2009A Bonds”), issued on October 21, 2009, in the original principal amount of $23,000,000, of which $22,053,000 remains outstanding; its Subordinate Wastewater System Revenue Bonds (State of Missouri -- Direct Loan Program), Series 2010A Bonds (the “Series 2010A Bonds”), issued on January 26, 2010, in an original principal amount not to exceed $7,980,700, all of which remain outstanding; its Taxable Wastewater System Revenue Bonds (Build America Bonds – Direct Pay), Series 2010B (the “Series 2010B Bonds”), issued on January 28, 2010, in the original principal amount of $85,000,000, all of which remain outstanding; its Subordinate Wastewater System Revenue Bonds (State of Missouri – Direct Loan Program), Series 2010C (the “Series 2010C Bonds”), issued on December 21, 2010, in an aggregate principal amount not to exceed $37,000,000, all of which remain outstanding; and its Subordinate Wastewater System Revenue Bonds (State of Missouri – Direct Loan Program), Series 2011A (the “Series 2011A Bonds”), issued on November 30, 2011, in an aggregate principal amount not to exceed $39,769,300. See the section herein captioned “THE CIRP AND THE PROJECTS.” The District will issue the Series 2011B Bonds pursuant to the 2008 Authorization, a Master Bond Ordinance (the “Master Bond Ordinance”) that was approved by the Board of Trustees (the “Board”) of the District on April 22, 2004, and an Ordinance approved by the Board on December 8, 2011 (the “2011B Ordinance,” which together with the Master Bond Ordinance is referred to herein as the “Bond Ordinance”), to provide funds (i) to finance a portion of the costs of the CIRP (collectively, the “Projects”), (ii) to fund a debt service reserve account (the “Debt Service Reserve Account”) and (iii) to pay the costs of issuance of the Series 2011B Bonds. See the sections herein captioned “PLAN OF FINANCE” and “THE CIRP AND THE PROJECTS.” A description of the Series 2011B Bonds is contained in this Official Statement under the caption “THE SERIES 2011B BONDS.” All references to the Series 2011B Bonds are qualified in their entirety by the definitive form thereof and the provisions with respect thereto in the Bond Ordinance. See Appendix C – “DEFINITIONS AND SUMMARIES OF CERTAIN PROVISIONS OF THE BOND ORDINANCE AND THE CONTINUING DISCLOSURE AGREEMENT” for the definitions of all capitalized words used herein and not otherwise defined herein. Security and Sources of Payment for the Series 2011B Bonds General. The Series 2011B Bonds are revenue bonds secured by and payable from certain revenues of the District received from operation of its sanitary sewer system (the “System”) on a parity with four prior series of Bonds issued by the District: $175,000,000 original principal amount of its Wastewater System Revenue Bonds, Series 2004A (the “Series 2004A Bonds”), issued on May 6, 2004, and outstanding in the aggregate principal amount of $165,590,000; $60,000,000 original principal amount of its Wastewater System Revenue Bonds, Series 2006C (the “Series 2006C Bonds”), issued on November 28, 2006, and outstanding in the aggregate principal amount of $60,000,000; the Series 2008A Bonds; and the Series 2010B Bonds (collectively, the Series 2004A Bonds, the Series 2006C Bonds, the 3 Series 2008A Bonds, the Series 2010B Bonds, the Series 2011B Bonds and any additional Bonds issued on a parity therewith are referred to herein as the “Senior Bonds”). The Series 2011B Bonds are also secured by amounts in the Renewal and Extension Fund (as defined herein) and in the Debt Service Reserve Account. See the section herein captioned “SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2011B BONDS.” The Series 2011B Bonds and the interest thereon are limited obligations of the District as provided therein, payable solely from the Pledged Revenues, as defined herein, on a parity with the other Senior Bonds. The Series 2011B Bonds and the interest thereon shall not constitute a general or moral obligation of the District nor a debt, indebtedness, or obligation of, or a pledge of the faith and credit of, the District or the State or any political subdivision thereof, within the meaning of any constitutional, statutory or charter provision whatsoever. Neither the faith and credit nor the taxing power of the District, the State, or any political subdivision thereof is pledged to the payment of the principal of, premium, if any, or interest on the Series 2011B Bonds or other costs incident thereto. The District has no authority to levy any taxes to pay the Series 2011B Bonds. Neither the members of the Board nor any person executing the Series 2011B Bonds shall be liable personally on the Series 2011B Bonds by reason of the issuance thereof. Pledged Revenues. The Series 2011B Bonds are voter-approved revenue bonds secured by a pledge of certain revenues of the System, referred to herein as “Pledged Revenues.” Pledged Revenues means (a) Net Operating Revenues (as defined herein), (b) Investment Earnings (as defined herein), (c) Hedge Receipts and (d) all moneys paid or required to be paid into, and all moneys and securities on deposit from time to time in, the funds and accounts specified in the Bond Ordinance, but excluding any amounts required in the Bond Ordinance to be set aside pending, or used for, rebate to the United States government pursuant to Section 148(f) of the Code, including, but not limited to, amounts in the Rebate Fund created in the Bond Ordinance. See the section herein captioned “SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2011B BONDS – Pledged Revenues” and “ – Flow of Funds” and “FINANCIAL OPERATIONS OF THE DISTRICT – Selected Financial Data of the District” for further discussion of the specific District revenues constituting Pledged Revenues under the Bond Ordinance. Renewal and Extension Fund and Debt Service Reserve Account. The Bond Ordinance establishes a Renewal and Extension Fund into which the District may deposit a portion of the Pledged Revenues. The Bond Ordinance also establishes a Debt Service Reserve Account for the Senior Bonds. The Debt Service Reserve Account will be funded in part from proceeds of the Series 2011B Bonds in the amount of $3,035,553.00, which, together with funds already on deposit in the Debt Service Reserve Account, will equal the Debt Service Reserve Requirement for the Senior Bonds. Whenever for any reason the amount in the Payments Account established under the Bond Ordinance is insufficient to pay all interest or Principal falling due on the Senior Bonds, including the Series 2011B Bonds, within the next seven days (or, in the case of Senior Bonds bearing interest at a Variable Rate, the next Business Day) the District will make up any deficiency by transfers first from the Renewal and Extension Fund and second from the funds and accounts of the District relating to Subordinate Bonds (as defined below) which are not Subordinate SRF Bonds (as defined below). Whenever, on the date such interest or Principal is due on the Senior Bonds, including the Series 2011B Bonds, there are insufficient moneys in the Payments Account available to make such payment, the District shall, without further instructions, apply so much as may be needed of the moneys in the Debt Service Reserve Account to prevent default in the payment of such interest or Principal, with priority to interest payments. See the section herein captioned “SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2011B BONDS – Debt Service Reserve Account.” 4 The Bond Ordinance authorizes the District to issue additional Bonds thereunder which may be either “Senior Bonds” or “Subordinate Bonds,” subject to certain requirements of the Bond Ordinance. The Bond Ordinance defines “Senior Bonds” as Bonds which may have a right to payment and to be secured by a lien on a parity with the Series 2004A Bonds, the Series 2006C Bonds, the Series 2008A Bonds, the Series 2010B Bonds and the Series 2011B Bonds, and any additional Bonds issued on a parity therewith (except with respect to any Credit Facility which may be available only to one or more series of Senior Bonds) with respect to the Pledged Revenues. The Bond Ordinance defines “Subordinate Bonds” as Bonds, including Subordinate SRF Bonds (defined in the Bond Ordinance as SRF Bonds which are Subordinate Bonds), which may have a right to payment from the Pledged Revenues and be secured by a lien on the Pledged Revenues expressly junior and subordinate to the Senior Bonds. The Series 2011B Bonds and any other Senior Bonds or Subordinate Bonds issued by the District previously or in the future under the Master Bond Ordinance are referred to herein collectively as the “Bonds.” See “DEFINITIONS AND SUMMARIES OF CERTAIN PROVISIONS OF THE BOND ORDINANCE AND THE CONTINUING DISCLOSURE AGREEMENT” in Appendix C hereto for a discussion of the requirements that must be satisfied under the Bond Ordinance prior to the issuance of additional Bonds thereunder. Other Indebtedness The District has previously issued thirteen series of bonds which are payable from revenues of the System for the purpose of constructing, repairing, replacing and equipping new and existing District wastewater facilities. Prior to the issuance of the Series 2011B Bonds, the aggregate principal amount of Senior Bonds outstanding is $340,590,000. In addition to the four other series of outstanding Senior Bonds, the District has issued five additional series of bonds payable from wastewater system revenues (“SRF Bonds”) that were purchased by the State Environmental Improvement and Energy Resources Authority of the State of Missouri (the “Authority”) through the Missouri State Revolving Fund Program (the “SRF Program”) of the Authority and the Missouri Department of Natural Resources (“DNR”). The District also issued its Series 2009A Bonds in the aggregate principal amount of $23,000,000, its Series 2010A Bonds in an aggregate principal amount not to exceed $7,980,700, its Series 2010C Bonds in an aggregate principal amount not to exceed $37,000,000, and its Series 2011A Bonds in an aggregate principal amount not to exceed $39,769,300 in connection with direct loans from DNR. The SRF Bonds, the Series 2009A Bonds, the Series 2010A Bonds, the Series 2010C Bonds and the Series 2011A Bonds were issued as Subordinate Bonds under the Master Bond Ordinance and the applicable Series Ordinances. See the section herein captioned “PLAN OF FINANCE.” Continuing Disclosure Information At the time of issuance of the Series 2011B Bonds, the District will enter into a Disclosure Dissemination Agent Agreement dated as of December 1, 2011 (the “Continuing Disclosure Agreement”) with Digital Assurance Certification, L.L.C. (“DAC”), under which the District will designate DAC as Dissemination Agent. Pursuant to the Continuing Disclosure Agreement, the District will covenant to provide certain financial and operating information with respect to the District on an on- going basis and notice of certain events in accordance with Rule 15c2-12 promulgated by the United States Securities and Exchange Commission under the Securities Exchange Act of 1934, as the same may be amended from time to time (“Rule 15c2-12”). These covenants have been made in order to assist the Underwriter (defined herein) in complying with Rule 15c2-12. See “DEFINITIONS AND SUMMARIES OF CERTAIN PROVISIONS OF THE BOND ORDINANCE AND THE CONTINUING DISCLOSURE AGREEMENT” in Appendix C hereto. 5 Additional Information Appendix A to this Official Statement contains the Independent Auditor’s Report, Management Discussion and Analysis and Basic Financial Statements of the District for the Fiscal Years ended June 30, 2011 and 2010. Appendix B to this Official Statement contains certain information regarding the service area of the District. Appendix C to this Official Statement includes definitions of certain capitalized terms used in this Official Statement and summaries of certain provisions of the Bond Ordinance and the Continuing Disclosure Agreement. Appendix D to this Official Statement contains the Financial Feasibility Report prepared on behalf of the District. Appendix E to this Official Statement contains the proposed form of the opinion which is anticipated to be rendered by Co-Bond Counsel at the time of delivery of the Series 2011B Bonds. Brief descriptions of the Series 2011B Bonds, the Bond Ordinance, and the District are included in this Official Statement. Such descriptions, information and summaries provided herein do not purport to be comprehensive or definitive. All references herein to any documents are qualified by the terms of such documents in their entirety. Until the issuance and delivery of the Series 2011B Bonds, copies of the documents described herein may be obtained from the District. After delivery of the Series 2011B Bonds, copies of such documents will be available for inspection at the corporate trust office of The Bank of New York Mellon Trust Company, N.A., in St. Louis, Missouri, as the Paying Agent under the Bond Ordinance (the “Paying Agent”). THE SERIES 2011B BONDS General The Bond Ordinance authorizes the issuance of Bonds thereunder from time to time in one or more series. The Bond Ordinance further authorizes the execution, issuance and delivery of a series of Bonds thereunder to be designated as “The Metropolitan St. Louis Sewer District Wastewater System Revenue Bonds, Series 2011B” in the aggregate principal amount of $52,250,000, which series of Bonds shall be executed, issued and delivered under, and secured by, the Bond Ordinance. Additional Senior Bonds and Subordinate Bonds may also be issued from time to time as provided in, and subject to the limitations set forth in, the Bond Ordinance. See “DEFINITIONS AND SUMMARIES OF CERTAIN PROVISIONS OF THE BOND ORDINANCE AND THE CONTINUING DISCLOSURE AGREEMENT” in Appendix C hereto. The Series 2011B Bonds shall be issued in fully registered form in the denomination of $5,000 each or integral multiples thereof and shall be dated the date of delivery thereof. Each Series 2011B Bond shall be numbered in a convenient manner, established by The Bank of New York Mellon Trust Company, N.A., in St. Louis, Missouri (the “Bond Registrar”) and shown on the Bond Register. The Series 2011B Bonds shall bear interest at the rate per annum set forth on the cover hereof, computed on the basis of a 360-day year consisting of twelve 30-day months, payable on May 1, 2012, and semiannually thereafter on each May 1 and November 1 of each year and shall mature in the principal amounts as set forth on the inside cover hereof, unless earlier called for redemption. So long as any of the Series 2011B Bonds are in book-entry form, the Principal, redemption premium, if any, and interest on such Series 2011B Bonds are payable by check or draft mailed, or wire transfer, to Cede & Co. as Registered Owner thereof and will be redistributed by DTC and the Participants as described below under “Book-Entry Only System.” 6 Optional Redemption The Series 2011B Bonds or portions thereof maturing on May 1, 2022 and thereafter, are subject to redemption prior to maturity at the option of the District on or after May 1, 2021, in whole or in part on any date, at a redemption price equal to 100% of the Principal amount thereof, plus accrued interest thereon to the redemption date. Selection of Bonds to be Redeemed; Redemption Among Series. If less than all of the Bonds of like maturity of any series shall be called for redemption, the particular Bonds, or portions of Bonds, to be redeemed shall be selected by the Paying Agent in such equitable manner as the Paying Agent may determine. The portion of any Bond of a denomination of more than $5,000 to be redeemed shall be in the Principal amount of $5,000 or an integral multiple thereof, and, in selecting portions of such Bonds for redemption, the District shall treat each such Bond as representing that number of Bonds which is obtained by dividing the Principal of such Bond to be redeemed in part by $5,000. Subject to the redemption provisions of any Series Ordinance, the District in its discretion may redeem the Bonds of any series, or a portion of the Bonds of any such series, before it redeems the Bonds of any other series. Within any particular series, any redemption of Bonds shall be effected in the manner provided in the Master Bond Ordinance and in any Series Ordinance. Notice of Redemption. Unless waived by any registered owner of Bonds to be redeemed and except as may be otherwise provided in a Series Ordinance, official notice of any such redemption shall be given by the Bond Registrar on behalf of the District by mailing a copy of an official redemption notice by first class mail, at least 30 days and not more than 60 days prior to the date fixed for redemption to the registered owner of the Bond or Bonds to be redeemed at the address shown on the Bond Register or at such other address as is furnished in writing by such registered owner to the Bond Registrar. All official notices of redemption shall be dated, shall contain the complete official name of the Bond issue, and shall state: (1) the redemption date; (2) the redemption price; (3) the interest rate and maturity date of the Bonds being redeemed; (4) if less than all the Outstanding Bonds are to be redeemed, the Bond numbers, and, when part of the Bonds evidenced by one Bond certificate are being redeemed, the respective Principal amounts of such Bonds to be redeemed; (5) that on the redemption date the redemption price will become due and payable upon each such Bond or portion thereof called for redemption and that interest thereon shall cease to accrue from and after such date; and (6) the place where such Bonds are to be surrendered for payment of the redemption price (which place of payment shall be the principal payment office of the Paying Agent or at such other office designated by the Paying Agent for such purpose) and the name, address, and telephone number of a person or persons at the Paying Agent who may be contacted with respect to the redemption. Any notice of redemption of any Bonds may specify that the redemption is contingent upon the deposit of moneys with the Paying Agent in an amount sufficient to pay the redemption price (which price shall include the redemption premium, if any) of all the Bonds or portions of Bonds which are to be redeemed on that date. Prior to any redemption date, the District shall deposit with the Paying Agent an amount of money sufficient to pay the redemption price of all the Bonds or portions of Bonds which are to be redeemed on that date. 7 For so long as DTC is effecting book-entry transfers of the Bonds, the Bond Registrar shall provide the notices specified in the Bond Ordinance to DTC. It is expected that DTC shall, in turn, notify its participants and that the participants, in turn, will notify or cause to be notified the Beneficial Owners. Any failure on the part of DTC or a participant, or failure on the part of a nominee of a Beneficial Owner of a Bond (having been mailed notice from the Bond Registrar, a participant or otherwise) to notify the Beneficial Owner of the Bond so affected, shall not affect the validity of the redemption of such Bond. Any defect in any notice of redemption shall not affect the validity of proceedings for redemption of the Bonds. Effect of Notice of Redemption Official notice of redemption having been given in the manner and under the conditions provided in the Bond Ordinance and moneys for payment of the redemption price being held by the Paying Agent as provided in the Bond Ordinance, the Bonds or portions of Bonds called for redemption shall, on the redemption date designated in such notice, become and be due and payable at the redemption price provided for redemption of such Bonds or portions of Bonds on such date, and from and after such date interest on the Bonds or portions of Bonds called for redemption shall cease to accrue, such Bonds or portions of Bonds shall cease to be entitled to any lien, benefit, or security under the Bond Ordinance, and the owners of such Bonds or portions of Bonds shall have no rights in respect thereof except to receive payment of the redemption price thereof. Upon surrender for partial redemption of any Bond, there shall be prepared for and delivered to the registered owner a new Bond or Bonds of the same series, maturity, and interest rate in the amount of the unpaid Principal. Book-Entry Only System General. The Series 2011B Bonds are available in book-entry only form. Purchasers of the Series 2011B Bonds will not receive certificates representing their interests in the Series 2011B Bonds. Ownership interests in the Series 2011B Bonds will be available to purchasers only through a book-entry system (the “Book-Entry System”) maintained by The Depository Trust Company (“DTC”), New York, New York. The following information in this section concerning DTC and DTC’s Book-Entry System has been obtained from sources the District believes to be reliable, but the District takes no responsibility for the accuracy thereof. DTC will act as securities depository for the Series 2011B Bonds. The Series 2011B Bonds will be issued as fully-registered securities registered in the name of Cede & Co. (DTC’s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered Bond certificate will be issued for each principal maturity of the Series 2011B Bonds each in the aggregate principal amount of such principal maturity of the Series 2011B Bonds, and will be deposited with the Paying Agent as DTC’s Fast Agent. DTC and its Participants. DTC, the world’s largest securities depository, is a limited-purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing agency” registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC’s participants (“Direct Participants”) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants’ accounts. This eliminates the 8 need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect Participants”). DTC has a Standard & Poor’s rating of AA+. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com. Purchases of Ownership Interests. Purchases of Series 2011B Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Series 2011B Bonds on DTC’s records. The ownership interest of each actual purchaser of each Series 2011B Bond (“Beneficial Owner”) is in turn to be recorded on the Direct and Indirect Participants’ records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Series 2011B Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the Series 2011B Bonds, except in the event that use of the Book-Entry System for the Series 2011B Bonds is discontinued. Transfers. To facilitate subsequent transfers, all Series 2011B Bonds deposited by Direct Participants with DTC are registered in the name of DTC’s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Series 2011B Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Series 2011B Bonds; DTC’s records reflect only the identity of the Direct Participants to whose accounts such Series 2011B Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Notices. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Series 2011B Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Bonds, such as redemptions, tenders, defaults, and proposed amendments to the Series 2011B Bond documents. For example, Beneficial Owners of Series 2011B Bonds may wish to ascertain that the nominee holding the Series 2011B Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of notices be provided directly to them. Redemption notices will be sent to DTC. Redemption notices shall be sent to DTC. If less than all of the Series 2011B Bonds within an issue are being redeemed, DTC’s practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed. 9 Voting. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to Series 2011B Bonds unless authorized by a Direct Participant in accordance with DTC’s MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the District as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.’s consenting or voting rights to those Direct Participants to whose accounts Series 2011B Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy). Payments of Principal, Redemption Price and Interest. Redemption proceeds, distributions, and dividend payments on the Series 2011B Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC’s practice is to credit Direct Participants’ accounts upon DTC’s receipt of funds and corresponding detail information from Paying Agent or the the District, on the payable date in accordance with their respective holdings shown on DTC’s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in “street name,” and will be the responsibility of such Participant and not of DTC, the Paying Agent or the District, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, distributions, and dividend payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the Paying Agent or the District, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants. Discontinuation of Book-Entry System. DTC may discontinue providing its services as depository with respect to the Series 2011B Bonds at any time by giving reasonable notice to the Paying Agent or the District. Under such circumstances, in the event that a successor depository is not obtained, Series 2011B Bond certificates are required to be printed and delivered. The Direct Participant holding a majority position in the Series 2011B Bonds may decide to discontinue use of the system of book-entry transfer through DTC (or a successor securities depository). In that event, Series 2011B Bond certificates will be printed and delivered to DTC. Registration, Transfer and Exchange of Series 2011B Bonds The Paying Agent has been appointed the Bond Registrar and as such shall maintain the Bond Register for the registration and transfer of Series 2011B Bonds as provided in the Bond Ordinance. Any Series 2011B Bond may be transferred only upon the books kept for the registration and transfer of Series 2011B Bonds upon surrender thereof to the Paying Agent duly endorsed for transfer or accompanied by a written instrument of transfer duly executed by the registered owner or his attorney or legal representative in such form as shall be satisfactory to the Paying Agent. Upon any such transfer, the District shall execute and the Paying Agent shall authenticate and deliver in exchange for such Series 2011B Bond a new fully registered Series 2011B Bond or Series 2011B Bonds, registered in the name of the transferee, of any denomination or denominations authorized by the Bond Ordinance. Any Series 2011B Bond, upon surrender thereof at the principal corporate trust office of the Paying Agent together with a written instrument of transfer duly executed by the registered owner or his attorney or legal representative in such form as shall be satisfactory to the Paying Agent, may at the option of the registered owner thereof, be exchanged for an equal aggregate principal amount of Series 2011B Bonds of the same series and maturity and bearing interest at the same rate. 10 In all cases in which Series 2011B Bonds shall be exchanged or transferred, the District shall execute and the Paying Agent shall authenticate and deliver, at the earliest practicable time, Series 2011B Bonds in accordance with the provisions of the Indenture. All Series 2011B Bonds surrendered in any such exchange or transfer shall forthwith be cancelled by the Paying Agent. The District or the Paying Agent may charge the Bondholder requesting the same for every such exchange or transfer of Series 2011B Bonds sufficient to reimburse it for any tax or other governmental charge required to be paid with respect to such exchange or transfer, and such charge shall be paid before any such new Series 2011B Bond shall be delivered. Persons Deemed Owners of Series 2011B Bonds The person in whose name any Series 2011B Bond shall be registered as shown on the Bond Register required to be maintained by the Paying Agent shall be deemed and regarded as the absolute owner thereof for all purposes, and payment of or on account of the principal of and redemption premium, if any, and interest on any such Series 2011B Bond shall be made only to or upon the order of the Registered Owner thereof or his legal representative. All such payments shall be valid and effectual to satisfy and discharge the liability upon such Series 2011B Bond, including the interest thereon, to the extent of the sum or sums so paid. SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2011B BONDS General The Series 2011B Bonds are revenue bonds secured by and payable from Pledged Revenues on a parity with the Series 2004A Bonds, the Series 2006C Bonds, the Series 2008A Bonds, the Series 2010B Bonds and any other Senior Bonds issued under the terms of the Master Bond Ordinance. The Senior Bonds are also secured by amounts on deposit in the Renewal and Extension Fund and the Debt Service Reserve Account. The Series 2011B Bonds and the interest thereon are limited obligations of the District as provided therein payable solely from the Pledged Revenues. The Series 2011B Bonds and the interest thereon shall not constitute a general or moral obligation of the District nor a debt, indebtedness, or obligation of, or a pledge of the faith and credit of, the District or the State or any political subdivision thereof, within the meaning of any constitutional, statutory or charter provision whatsoever. Neither the faith and credit nor the taxing power of the District, the State, or any political subdivision thereof is pledged to the payment of the principal of, premium, if any, or interest on the Senior Bonds or other costs incident thereto. The District has no authority to levy any taxes to pay the Senior Bonds or the Subordinate Bonds. Neither the members of the Board nor any person executing the Series 2011B Bonds shall be liable personally on the Series 2011B Bonds by reason of the issuance thereof. Pledged Revenues Pursuant to the Master Bond Ordinance, the District has pledged all Pledged Revenues to the payment of the Principal of, premium, if any, and interest on all Bonds issued thereunder. Such pledge is for the equal and proportionate benefit and security of the Series 2004A Bonds, the Series 2006C Bonds, the Series 2008A Bonds, the Series 2010B Bonds, the Series 2011B Bonds and any other Senior Bonds issued under the terms of the Master Bond Ordinance regardless of the time or times of their issuance or maturity. In the Master Bond Ordinance, the District covenants that it will not issue obligations of any kind or nature payable from, or with a lien on, the Pledged Revenues or any part thereof having a prior lien over or, except as permitted in the Master Bond Ordinance for the issuance of Senior Bonds, on a 11 parity with the Series 2011B Bonds. Notwithstanding the foregoing, the Master Bond Ordinance permits the issuance of Subordinate Bonds secured by the Pledged Revenues on a subordinate basis to the Series 2004A Bonds, the Series 2006C Bonds, the Series 2008A Bonds, the Series 2010B Bonds and the Series 2011B Bonds, and any other Senior Bonds issued in the future. “Pledged Revenues” means (a) Net Operating Revenues of the System, (b) Investment Earnings (defined in the Bond Ordinance as all interest received on and profits derived from investments of moneys in all funds and accounts of the District other than investments derived from or with respect to (i) stormwater revenues, as described below, (ii) all funds and accounts established in connection with SRF Bonds and (iii) obligations issued by the District on behalf of its subdistricts), (c) Hedge Receipts and (d) all moneys paid or required to be paid into, and all moneys and securities on deposit from time to time in, the funds and accounts specified in the Bond Ordinance, but excluding any amounts required in the Bond Ordinance to be set aside pending, or used for, rebate to the United States government pursuant to Section 148(f) of the Code, including, but not limited to, amounts in the Rebate Fund created in the Bond Ordinance. The Bond Ordinance defines the “System” as the sanitary sewer system of the District, as it now exists and as it may be added to, extended, improved and equipped, either from the proceeds of the Bonds or from any other sources at any time, including, without limitation, (a) all sanitary sewers, all combined sewers, all sanitary and combined sewer pumping stations, all wastewater treatment plants, and all equipment used in connection therewith, all facilities for the collection, treatment and disposal of sewage and wastewater, including industrial wastes, and (b) all other facilities or property of any nature or description, real or personal, tangible or intangible, owned or used by the District in the collection, treatment and disposal of wastewater. The Bond Ordinance defines “Net Operating Revenues” as all Operating Revenues (as defined in the Bond Ordinance), after provision for payment of all Expenses of Operation and Maintenance (as defined in the Bond Ordinance). The Bond Ordinance defines “Operating Revenues” as all income and revenue of any nature derived from the operation of the System, including periodic wastewater billings, service charges, other charges for wastewater service and the availability thereof (other than any special assessment proceeds), connection or tap fees (whether accounted for as revenues or as contributed capital), net proceeds from business interruption insurance, the principal of gifts, bequests, contributions, grants and donations available to pay debt service of Bonds, and any amounts deposited in escrow in connection with the acquisition, construction, remodeling, renovation and equipping of facilities to be applied during the period of determination to pay interest on Bonds. The Bond Ordinance expressly excludes the following from the definition of Operating Revenues: (1) any profits or losses on the early extinguishment of debt or on the sale or other disposition, not in the ordinary course of business, of investments or fixed or capital assets, and local, state or federal grants or other moneys received for the payment of Expenses of Operation and Maintenance, (2) local, state, or federal grants, loans (including Government Loans), capital improvement contract payments, or other moneys received for capital improvements to the System, (3) Investment Earnings, (4) any stormwater charges (referred to herein as the “Stormwater Service Charges”) and (5) any property tax revenues. Although revenues from the Stormwater Service Charge are not included in Operating Revenues and thus not available for payment of debt service on any Bonds issued under the Bond Ordinance, including the Series 2011B Bonds, such revenues are accounted for and included in the amount of Operating Revenues identified in the Independent Auditor’s Report and Financial Statements included as Appendix A to this Official Statement. 12 The District engaged its independent accountants to perform certain agreed-upon procedures in connection with the schedule of Pledged Revenues, as shown below, and prepared a Report on Agreed- Upon Procedures, dated October 29, 2010, with respect to the audited figures for the fiscal years ended June 30, 2010, 2009, 2008 and 2007 in the following table. Figures for June 30, 2011, were prepared by the District. The schedule of Pledged Revenues was prepared to show what Pledged Revenues would have been available historically to pay debt service on the Bonds. The District’s independent accountants performed certain procedures to compare (1) the District’s total operating revenues, nonoperating revenues and operating expenses and (2) revenues, not included in Pledged Revenues, such as Stormwater Revenues, property tax revenues, capital grant revenues and certain interest income, all as reported in the District’s audited financial statements for the years ended June 30, 2010, 2009, 2008 and 2007, with the Pledged Revenues schedule provided by the District to the independent accountants. The independent accountants’ report concluded that all amounts presented on the schedule provided by the District were agreed to either the audited financial statements of the District or other financial information provided by the District. [Remainder of page intentionally left blank.] 13 SCHEDULE OF NET PLEDGED REVENUESFor the Years Ended June 30, 2007 Through 2011(In thousands)20072008200920102011Operating RevenuesSewer service charges, net$193,556 $203,675 $204,947 $200,471 $212,220 Licenses, permits and other fees6,031 4,346 3,475 2,561 2,976Other1,376960 1,551 1,666 1,815Total Operating Revenues$200,963 $208,981 $209,973 $204,698 $217,011 Nonoperating RevenuesInvestment income$13,502 $13,278 $10,280 $5,358 $3,202Improvement surcharge accounts --431 2,023Total Nonoperating Revenues$13,502 $13,282 $10,283 $5,359 $5,225 Total Pledged Revenues$214,465 $222,263 $220,256 $210,057 $222,236 Operating ExpensesPumping and treatment$37,848 $37,103 $37,520 $45,281 $50,532Collection system maintenance27,718 25,669 27,601 23,475 23,098Engineering8,864 4,875 11,518 10,883 6,365General and administrative39,199 33,183 31,798 29,875 36,075Water backup claims --6,198 5,716 3,951 8,912Other24,460 35,696 24,820 32,133 35,590Total Operating Expenses$138,089 $142,724 $138,973 $145,598 $160,572 Nonoperating ExpensesAgency Fees$777 $916 $1,248 $1,012 $1,718Total Expenses138,866 143,640 140,221 146,610 162,290Net Pledged Revenues$75,599 $78,623 $80,035 $63,447 $59,946Senior Debt Service$10,874 $12,578 $13,197 $15,441 $19,270 Total Annual Debt Service$23,553 $25,418 $28,365 $32,647 $35,021 Senior Debt Coverage Ratio7.0x 6.3x 6.1x 4.1x 3.1xTotal Annual Debt Coverage Ratio3.2x 3.1x 2.8x 1.9x 1.7x 14 Flow of Funds Bond Ordinance Funds and Accounts. The Bond Ordinance establishes or ratifies the establishment of the following funds and accounts and provides that the moneys deposited in such funds and accounts shall be held by Bank of America, N.A., St. Louis, Missouri, as the depository (the “Depository”) for the account of the District, in trust for the purposes set forth in the Bond Ordinance: (1) Metropolitan St. Louis Sewer District Wastewater Revenue Fund (the “Revenue Fund”), (2) Metropolitan St. Louis Sewer District Wastewater Sinking Fund (the “Sinking Fund”), and within such Sinking Fund, a Payments Account and a Debt Service Reserve Account, (3) Metropolitan St. Louis Sewer District Wastewater Renewal and Extension Fund (the “Renewal and Extension Fund”), (4) Metropolitan St. Louis Sewer District Wastewater Rebate Fund (the “Rebate Fund”), and within such Rebate Fund a Series 2011B Rebate Account, and (5) Metropolitan St. Louis Sewer District Wastewater Project Fund (the “Project Fund”), and within such Project Fund a Series 2011B Project Account and a Series 2011B Costs of Issuance Account. Deposits to and Uses of Moneys in the Revenue Fund. The Bond Ordinance requires that the District deposit all Operating Revenues into the Revenue Fund from time to time as and when received. The Bond Ordinance also requires that the District apply moneys in the Revenue Fund, prior to the occurrence and continuation of an Event of Default under the Bond Ordinance, in the following order of priority: (1) to pay Expenses of Operation and Maintenance, (2) to deposit into the Sinking Fund the amounts required by the Bond Ordinance, as described below under the heading captioned “Deposits to and Uses of Money in the Sinking Fund,” (3) to deposit into the Rebate Fund the amounts required by Bond Ordinance, (4) to make Replenishment Payments (as defined in the Bond Ordinance) to the Debt Service Reserve Account and to pay to any Credit Facility Provider any amounts due under any Credit Facility Agreement, including Additional Interest, (5) to pay any amounts due any Reserve Account Credit Facility Provider pursuant to a Reserve Account Credit Facility Agreement, (6) to deposit the amounts required to be deposited into the funds and accounts created by any Series Ordinance authorizing the issuance of Subordinate Bonds, for the purpose of paying Principal of (whether at maturity, upon mandatory redemption or as otherwise required by a Series Ordinance relating to Subordinate SRF Bonds) and interest on Subordinate Bonds, making Hedge Payments under Subordinate Hedge Agreements, and accumulating reserves for such payments, 15 (7) to make Accumulation Payments (as defined in the Bond Ordinance) to the Debt Service Reserve Account in accordance with the Bond Ordinance, and (8) to pay any amounts required to be paid with respect to any Other System Obligations. In addition to, and after, the deposits described above, the District may from time to time deposit into the Renewal and Extension Fund any moneys and securities held in the Revenue Fund in excess of 45 days’ estimated Expenses of Operation and Maintenance. If at any time the amounts in any account of the Sinking Fund are less than the amounts required by the Bond Ordinance, and there are not on deposit in the Renewal and Extension Fund available moneys sufficient to cure any such deficiency, as described herein under the subsection captioned “Deposits to and Uses of Moneys in the Renewal and Extension Fund,” then the District shall withdraw from the funds and accounts of the District relating to Subordinate Bonds which are not Subordinate SRF Bonds and deposit in such account of the Sinking Fund, as the case may be, the amount necessary (or all the moneys in such funds and accounts, if less than the amount required) to make up such deficiency. Deposits to and Uses of Moneys in the Sinking Fund. After the District deposits all Operating Revenues into the Revenue Fund and applies such moneys to pay Expenses of Operation and Maintenance, then the Bond Ordinance provides for deposits to and uses of moneys in the accounts and subaccounts in the Sinking Fund as follows: Payments Account – General. Sufficient moneys shall be paid in periodic installments from the Revenue Fund into the Payments Account for the purpose of paying the Principal of and interest (excluding Additional Interest) on the Senior Bonds as they become due and payable and for the purpose of making Hedge Payments under Senior Hedge Agreements. Amounts held in the Payments Account shall be used solely to pay interest (excluding Additional Interest) and Principal of the Senior Bonds as the same become due and payable (whether at maturity or upon redemption) and to pay Hedge Payments under Senior Hedge Agreements when due. As of the date of this Official Statement, there are no Senior Hedge Agreements in effect. Interest. Except as otherwise provided in any Series Ordinance authorizing Senior SRF Bonds, on or before the 30th day preceding each Interest Payment Date for Senior Bonds (or, in the case of Senior Bonds bearing interest at a Variable Rate, on or before the Business Day preceding each Interest Payment Date), the District shall deposit in the Payments Account an amount which, together with any other moneys already on deposit therein and available to make such payment and, in the case of Senior SRF Bonds, anticipated investment earnings on reserve funds held by a bond trustee relating to such Senior SRF Bonds, is not less than the interest (excluding Additional Interest) coming due on such Senior Bonds on such Interest Payment Date. The District shall also deposit and continue to deposit all Hedge Receipts under Senior Hedge Agreements in the Payments Account from time to time as and when received. Principal. Except as otherwise provided in any Series Ordinance authorizing Senior SRF Bonds, on or before the 30th day preceding each Principal Maturity Date for Senior Bonds, the District shall deposit in the Payments Account an amount which, together with any other moneys already on deposit therein and available to make such payment, is not less than the Principal coming due on such Senior Bonds on such Principal Maturity Date. 16 Hedge Payments. On or before the 30th day preceding each payment date for Hedge Payments under Senior Hedge Agreements, the District shall deposit in the Payments Account an amount which, together with any other moneys already on deposit therein and available to make such payment, is not less than such Hedge Payments coming due on such payment date. Application of Moneys in Payments Account. No further payments need be made into the Payments Account whenever the amount available in the Payments Account, if added to the amount then in the Debt Service Reserve Account (without taking into account any amount available to be drawn on any Reserve Account Credit Facility), is sufficient to retire all Senior Bonds then Outstanding and to pay all unpaid interest accrued and to accrue prior to such retirement. No moneys in the Payments Account shall be used or applied to the optional purchase or redemption of Senior Bonds prior to maturity unless: (i) provision shall have been made for the payment of all the Senior Bonds; or (ii) such moneys are applied to the purchase and cancellation of Senior Bonds which are subject to mandatory redemption on the next mandatory redemption date, which falls due within 12 months, such Senior Bonds are purchased at a price not more than would be required for mandatory redemption, and such Senior Bonds are cancelled upon purchase; or (iii) such moneys are applied to the purchase and cancellation of Senior Bonds at a price less than the amount of Principal which would be payable on such Senior Bonds, together with interest accrued through the date of purchase, and such Senior Bonds are cancelled upon purchase; or (iv) such moneys are in excess of the then required balance of the Payments Account and are applied to redeem a part of the Senior Bonds Outstanding on the next succeeding redemption date for which the required notice of redemption may be given. Deposits to and Uses of Moneys in the Debt Service Reserve Account Upon the issuance of the Series 2011B Bonds, the District shall deposit into the Debt Service Reserve Account from the proceeds of the Series 2011B Bonds the amount of $3,035,353.00. The Bond Ordinance requires that the District deposit into the Debt Service Reserve Account the amounts specified in the Series Ordinances with respect to Senior Bonds. Notwithstanding the foregoing, there shall be no deposit into the Debt Service Reserve Account with respect to any SRF Bonds nor shall the Debt Service Reserve Account secure any SRF Bonds. Whenever for any reason the amount in the Payments Account is insufficient to pay all interest or Principal becoming due on the Senior Bonds within the next seven days (or, in the case of Senior Bonds bearing interest at a Variable Rate, on the next Business Day), the District shall make up any deficiency by transfers first from the Renewal and Extension Fund and second from the funds and accounts of the District relating to Subordinate Bonds which are not Subordinate SRF Bonds. Whenever, on the date that such interest or Principal is due, there are insufficient moneys in the Payments Account available to make such payment, the District shall, without further instructions, apply so much as may be needed of the moneys in the Debt Service Reserve Account to prevent default in the payment of such interest or Principal, with priority to interest payments. Whenever by reason of any such application or otherwise (other than required Accumulation Payments, as required in the Bond Ordinance) the amount remaining to the credit of the Debt Service Reserve Account is less than the amount then required to be in the Debt Service Reserve Account, such deficiency shall be remedied by monthly deposits (“Replenishment Payments”) from the Revenue Fund, to the extent funds are available in the Revenue Fund for such purpose after all required transfers set forth above have been made. The District may elect to satisfy in whole or in part the Debt Service Reserve Requirement by means of a Reserve Account Credit Facility, subject to certain requirements as set forth in the Bond Ordinance. See “DEFINITIONS AND SUMMARIES OF CERTAIN PROVISIONS OF THE BOND ORDINANCE AND THE CONTINUING DISCLOSURE AGREEMENT” in Appendix C hereto. 17 Deposits to and Uses of Moneys in the Renewal and Extension Fund. All sums accumulated and retained in the Renewal and Extension Fund shall be used first to prevent default in the payment of interest on or Principal of the Senior Bonds when due and then shall be applied by the District from time to time, as and when the District shall determine, to the following purposes and, prior to the occurrence and continuation of an Event of Default, in the order of priority determined by the District in its sole discretion: (a) for the purposes for which moneys held in the Revenue Fund may be applied pursuant to the Bond Ordinance and as described above, (b) to pay any amounts which may then be due and owing under any Hedge Agreement (including termination payments, fees, expenses, and indemnity payments), (c) to pay any governmental charges and assessments against the System or any part thereof which may then be due and owing, (d) to make acquisitions, betterments, extensions, repairs, or replacements or other capital improvements (including the purchase of equipment) to the System deemed necessary by the District (including payments under contracts with vendors, suppliers, and contractors for the foregoing purposes), (e) to acquire Senior Bonds by redemption or by purchase in the open market at a price not exceeding the callable price as provided and in accordance with the terms and conditions of the Bond Ordinance, which Senior Bonds may be any of the Senior Bonds, prior to their respective maturities, and when so used for such purposes the moneys shall be withdrawn from the Renewal and Extension Fund and deposited into the Payments Account for the Senior Bonds to be so redeemed or purchased, and (f) for any other purpose of the District. Rate Covenant The Bond Ordinance provides that the District shall continuously own, control, operate, and maintain the System in an efficient and economical manner and on a revenue producing basis and shall at all times prescribe, fix, maintain, and collect rates, fees, and other charges for the services, facilities, and commodities furnished by the System fully sufficient at all times to: (1) provide for 100% of the Expenses of Operation and Maintenance and for the accumulation in the Revenue Fund of a reasonable reserve therefor; and (2) produce Net Operating Revenues in each Fiscal Year which, together with Investment Earnings: (a) will equal at least 125% of the Debt Service Requirement on all Senior Bonds then Outstanding for the year of computation and 115% of the Debt Service Requirement on all Bonds then Outstanding for the year of computation; (b) will enable the District to make all required payments, if any, into the Debt Service Reserve Account and the Rebate Fund and to any Credit Facility Provider, any Reserve Account Credit Facility Provider, and any Qualified Hedge Provider; (c) will enable the District to accumulate an amount to be held in the Renewal and Extension Fund which, in the judgment of the District, is adequate to meet the costs of major renewals, replacements, repairs, additions, betterments, and improvements to the System, necessary to keep the same in good operating condition or as is required by any governmental agency having jurisdiction over the System; and (d) will remedy all deficiencies in required payments into any of the funds and accounts established under the Bond Ordinance from prior Fiscal Years. 18 If the District fails to prescribe, fix, maintain, and collect rates, fees, and other charges, or to revise such rates, fees, and other charges, in accordance with these provisions of the Bond Ordinance, the owners of not less than 25% in aggregate Principal amount of the Bonds then Outstanding, without regard to whether any Event of Default shall have occurred, may institute and prosecute in any court of competent jurisdiction an appropriate action to compel the District to prescribe, fix, maintain, or collect such rates, fees, and other charges, or to revise such rates, fees, and other charges, in accordance with the requirements of the Bond Ordinance. Senior and Subordinate Bonds Upon satisfaction of certain conditions, the Bond Ordinance permits the District, for specified purposes, to issue additional Senior Bonds without express limit as to principal amount, which will be equally and ratably secured on a parity basis with the Series 2004A Bonds, the Series 2006C Bonds, the Series 2008A Bonds, the Series 2010B Bonds and the Series 2011B Bonds under the Bond Ordinance. The Debt Service Requirement, as defined in the Bond Ordinance, which is used in the calculation of the additional bonds test, allows the District to take into account the anticipated receipt of U.S. Treasury Interest Subsidy payments to arrive at a net debt service figure with respect to the Bonds issued as “Build America Bonds.” The District may issue additional Senior Bonds in the future to finance part of the cost of capital improvements identified in the CIRP. See the section herein captioned “PLAN OF FINANCE – Capital Finance Plans of the District.” The Bond Ordinance also permits the District to issue Subordinate Bonds which would be secured by a lien on the Pledged Revenues that would be junior and subordinate to the Series 2011B Bonds and any other Senior Bonds. See “DEFINITIONS AND SUMMARIES OF CERTAIN PROVISIONS OF THE BOND ORDINANCE AND THE CONTINUING DISCLOSURE AGREEMENT” in Appendix C hereto. PLAN OF FINANCE Purpose of and Authority for the Series 2011B Bonds At a special election held on August 5, 2008, voters within the District approved the issuance by the District of $275,000,000 in sewer system revenue bonds to enable the District to comply with federal and state clean water requirements. The District may use the proceeds of such revenue bonds for the purpose of constructing, repairing, replacing and equipping new and existing District wastewater facilities. The District plans to use the proceeds of the Series 2011B Bonds to finance a portion of the costs of the CIRP. See the section herein captioned “THE CIRP AND THE PROJECTS.” The District will issue the Series 2011B Bonds pursuant to the 2008 Authorization and the Bond Ordinance to provide funds (i) to finance a portion of the costs of the CIRP (collectively, the “Projects”), (ii) to fund the Debt Service Reserve Account, and (iii) to pay the costs of issuance of the Series 2011B Bonds. See the sections herein captioned “THE CIRP AND THE PROJECTS.” Other Indebtedness The District has previously issued four series of Senior Bonds which are payable from the Pledged Revenues: (1) the Series 2004A Bonds; (2) the Series 2006C Bonds; (3) the Series 2008A Bonds; and (4) the Series 2010B Bonds. It has also issued nine series of Subordinate Bonds: (1) its Subordinate Wastewater System Revenue Bonds (State Revolving Fund Program), Series 2004B (the “Series 2004B SRF Bonds”) currently outstanding in the aggregate principal amount of $126,595,000; (2) its Subordinate Wastewater System Revenue Bonds (State Revolving Fund Program), Series 2005A (the “Series 2005A SRF Bonds”) currently outstanding in the aggregate principal amount of $5,370,000; (3) 19 its Subordinate Wastewater System Revenue Bonds (State Revolving Fund Program), Series 2006A (the “Series 2006A SRF Bonds”) currently outstanding in the aggregate principal amount of $36,335,000; (4) its Subordinate Wastewater System Revenue Bonds (State Revolving Fund Program), Series 2006B (the “Series 2006B SRF Bonds”) currently outstanding in the aggregate principal amount of $12,285,000; (5) its Subordinate Wastewater System Revenue Bonds (State Revolving Fund Program), Series 2008B (the “Series 2008B SRF Bonds”) currently outstanding in the aggregate principal amount of $36,495,000; (6) the Series 2009A Bonds; (7) the Series 2010A Bonds; (8) the Series 2010C Bonds, and (9) the Series 2011A Bonds. The Series 2004B SRF Bonds, the Series 2005A SRF Bonds, the Series 2006A SRF Bonds, the Series 2006B SRF Bonds and the Series 2008B SRF Bonds have been purchased by the Authority through the State Revolving Fund Program. The Series 2009A Bonds, the Series 2010A Bonds, the Series 2010C Bonds and the Series 2011A Bonds have been purchased by the Missouri Department of Natural Resources. Capital Finance Plans of the District The District’s CIRP identifies an estimated $4 billion to $6 billion in capital improvement needs for wastewater system improvements which are to be financed over the next several decades. The Board has approved a resolution that identified proposed expenditures by the District for capital improvements through the District’s Fiscal Year ending June 30, 2012, on a portion of the projects that are included in the CIRP. The District estimates that the cost of the projects identified in the CIRP for the period from FY 2010 through FY 2012 will be approximately $480 million. For a detailed discussion of the CIRP, including those Projects to be financed with the proceeds of the Series 2011B Bonds, the other projects that the District anticipates will be financed with proceeds of future financings under the Bond Ordinance, and projects to be financed by the District with current revenues on a “pay-as-you-go” basis, see the section herein captioned “THE CIRP AND THE PROJECTS.” The Series 2011B Bonds constitute the seventh and last series of Bonds being issued from the $275,000,000 principal amount of sewer system revenue bonds approved in the 2008 Authorization. Prior to the issuance of the Series 2011B Bonds, the aggregate principal amount of Bonds issued under the 2008 Authorization is $222,750,000. At a special election held February 3, 2004, the voters approved the issuance of $500,000,000 of System revenue bonds (the “2004 Authorization”), all of which have been issued in furtherance of the CIRP. The Board is considering calling a bond election in 2012 to authorize the issuance of $945 million principal amount of revenue bonds to finance a portion of the CIRP. The District has submitted a Rate Change Notice to the Rate Commission setting forth two alternatives for rate increases depending on the outcome of the bond election in 2012. The Rate Change Notice sent to the Rate Commission proposes that the District seek voter approval to issue $945 million of bonds to fund capital projects and will finance approximately $171,000,000 on a cash basis. Current estimates of capital improvement needs to finance projects under the proposed Consent Decree are approximately $1,000,000,000 (See “LITIGATION” herein). The District will address these needs either through the issuance of Bonds, on a pay-as-you-go basis, or a combination of the two approaches, See “FINANCIAL OPERATIONS OF THE DISTRICT – Rate Commission and Rate Setting Process” herein for additional information on the rate setting procedures of the District. 20 Estimated Sources and Uses of Funds The following table summarizes the anticipated sources and uses of funds in connection with the issuance of the Series 2011B Bonds: Sources of Funds Par amount of Series 2011B Bonds $52,250,000.00 Original Issue Premium 6,104,835.15 Total $58,354,835.15 Uses of Funds Deposit to Series 2011B Project Account $54,695,127.83 Deposit to Debt Service Reserve Account 3,035,553.00 Deposit to the Series 2011B Costs of Issuance Account (to pay costs of issuance of the Series 2011B Bonds, including underwriting discount) $624,154.32 Total $58,354,835.15 THE DISTRICT General The District is organized pursuant to Article VI, Section 30 of the Missouri Constitution which empowers the people of St. Louis County, Missouri (the “County”) and The City of St. Louis, Missouri (the “City”) “to establish a metropolitan district for functional administration of services common to the area included therein.” The District is the only special district in the State established pursuant to that section of the Missouri Constitution. The Charter (Plan) of The Metropolitan St. Louis Sewer District, approved in 1954 by voters in the City and that portion of the County included in the District at that time (as subsequently amended by the voters of the City and County at a special election on November 7, 2000, the “Charter”), established the District. The District was created to provide a metropolitan-wide system of wastewater treatment and sanitary sewerage facilities for the collection, treatment and disposal of sewage to serve the City and most of the more heavily populated areas of the County. Before the District’s creation, the City, various municipalities in the County and private sewer companies provided sewer service that primarily included only collecting and transporting sewage from small geographic areas to nearby rivers and streams with little or no treatment. Most of the municipalities or private sewer companies serving the area did not have the jurisdictional authority or financial resources needed to eliminate health hazards from untreated sewage. When the District began operations in 1956 it took over the publicly-owned wastewater and stormwater drainage facilities within its jurisdiction and began the construction of an extensive system of collector and interceptor sewers and treatment facilities. In 1977, voters approved the District’s annexation of a 270 square mile area of the lower Missouri River and lower Meramec River watersheds in the County. The District purchased the Fee Fee Trunk Sewer Company and the Missouri Bottoms Sewer Company in 1978. The District has since acquired other investor-owned or municipally operated systems. The District operates the fourth largest wastewater treatment system in the United States. The District’s service area now encompasses 525 square miles including all 62 square miles of the City and 463 square miles (approximately 90%) of the County, including 92 municipalities. Only the extreme western parts of the County are not served by the District. The District provides sanitary sewer collection 21 and treatment and stormwater management to a population of approximately 1.4 million. As of June 30, 2011, the District served approximately 414,912 accounts, including approximately 356,945 single-family residences, approximately 34,740 multi-family apartments and condos, and approximately 23,226 commercial/industrial businesses. For further description of the District’s service area, see the service area map located on the back cover of this Official Statement. For certain economic and demographic information regarding the City and the County, see Appendix B to this Official Statement. The Charter describes the District as “a body corporate, a municipal corporation and a political subdivision of the state.” Following a detailed planning process, in November 2000, a number of proposed amendments to the Charter encompassing a variety of subjects were placed on the ballot by the District’s Board. The amendments were proposed by a number of groups in order to update the District’s procedures and improve its operations. Voters approved all four amendments by wide margins. The amendments provided additional flexibility and structure to several aspects of District operations, including (1) establishment of an independent 15-member Rate Commission to review adjustments to the District’s wastewater and stormwater charges before the Board acts on them; (2) authorization for the District to issue revenue bonds on a District-wide basis and lowering the margin required for passage of both revenue and general obligation bonds to be consistent with the Missouri Constitution; (3) requiring a mandatory rotation of outside auditors every five years and the appointment of an internal auditor; (4) requiring a periodic independent management audit; and (5) permitting the investment of District funds in the same manner as authorized by the Missouri Constitution for the investment of State funds. Other amendments to the Charter include (1) limiting the term on Trustee and a three-member civil service commission (the “Civil Service Commission”) appointments to two terms (eight years), (2) requiring the publication of Board vacancies, and (3) requiring the Board to make a written report to the Mayor and Board of Alderman of the City and to the County Executive and County Council on an annual basis. The Charter requires the District to adopt a continuing five-year strategic and operating plan on an annual basis. The strategic and operating plan states the District’s objectives for the succeeding five years and includes objective targets by which to measure the District’s performance in meeting these objectives. The District is subject to the provisions of the Federal Water Pollution Control Act, as amended, 33 U.S.C. 1251 et seq., commonly referred to as the Clean Water Act, the stated objective of which is to restore and maintain the chemical, physical, and biological integrity of the nation’s waters. The District is also subject to the Missouri Clean Water Law, Sections 644.006 through 644.141, Revised Statutes of Missouri, as amended, and other laws and regulations. The regulatory requirements are administered by the United States Environmental Protection Agency through the Missouri Department of Natural Resources. See the section herein captioned “REGULATORY REQUIREMENTS.” Organization and Management General. The Charter established the Board as the governing body of the District. The Board is composed of six-members, with three members appointed by the Mayor of the City and three members appointed by the St. Louis County Executive. No more than two trustees from each area can be of the same political affiliation. According to the Charter, the Board enacts District ordinances, determines policies, and appoints the Executive Director, the Secretary-Treasurer and the Internal Auditor. The Executive Director appoints all other District officials. Among its duties, the Board makes all appropriations, approves contracts for improvements, and engages an accounting firm to perform the annual independent audit of the District. The Board’s standing committees include Audit, Program Management and Stakeholders Relations. 22 Administration of district-wide operations is by the executive staff under the direct supervision of the Executive Director. The Civil Service Commission serves in an advisory position regarding personnel administration and civil service matters, and hears appeals of disciplinary actions. The 15-member Rate Commission, an advisory body established pursuant to the amendments to the Charter adopted on November 7, 2000 (the “Rate Commission”) makes recommendations to the Board regarding all proposed changes in wastewater rates, stormwater rates and tax rates or regarding changes in structure to the foregoing. See the section herein captioned “FINANCIAL OPERATIONS OF THE DISTRICT – Rate Commission and Rate Setting Process.” District Initiatives. Earlier this decade the District instituted an in-depth review of District policies and practices. Based on this review, the Board implemented a process of measuring the District’s effectiveness in several key areas and made a number of policy initiatives which are still in force today. Among the above-mentioned policy decisions made by the Board was the institution of a revised code of ethics for Board members and District employees concerning conflicts of interest. The policy prohibits any activities that could be construed as a conflict between personnel and District needs, and makes individuals responsible for reporting any potential conflicts. These new standards brought the District’s ethics policy in-line with that of other public agencies. The Board instituted “zero-based budgeting” in the development of the District’s annual budget. This budgeting process breaks the District’s budget into two distinct sections: (i) a base budget representing the cost to run basic operations, and (ii) an incremental budget representing initiatives that are tied directly to the District’s Strategic Business and Operating Plan. Both sections undergo multiple reviews to ensure that planned expenditures are justified and appropriate for the supported business activity. For the incremental budget, an expenditure cannot be justified solely by a like expenditure in a previous year; the expenditure has to clearly support a business objective from the Strategic Business and Operating Plan. The use of zero-based budgeting has played a strong part in helping to keep key areas of the District’s budget at or below the rate of annual inflation. See the section herein captioned “FINANCIAL OPERATIONS OF THE DISTRICT – Management’s Discussion and Analysis” for further discussion. Board of Trustees The current members of the Board are as follows: Name Current Term Expires Robert T. Berry, Chairman March 14, 2012 James H. Buford, Vice Chairman March 15, 2014 John Goffstein, Member March 15, 2013 Gerald T. Feldhaus, Member March 14, 2010 (1) Eddie G. Ross, Jr., Member March 14, 2013 David Visintainer, Member March 15, 2012 __________ (1) Members continue to serve until reappointed or replaced as provided by Missouri law. 23 Set forth below is certain biographical information on the members of the Board. Robert. T. Berry, Chairman (St. Louis County). Mr. Berry retired as vice president and general manager of the St. Louis office of Burns & McDonnell, an engineering company. Mr. Berry has served on the Board since April 2008. James H. Buford, Vice Chairman (St. Louis City). Mr. Buford is the Executive Director of the Urban League and has served on the Board since July 10, 2006. Gerald T. Feldhaus (St. Louis County). Mr. Feldhaus is executive secretary-treasurer of the St. Louis Building and Construction Trades Council and has served on the Board since April 2008. John Goffstein, (St. Louis City). Mr. Goffstein has served on the Board since his initial appointment on December 19, 2005. He is a principal member of the law firm Bartley Goffstein, LLC, which specializes in employment and labor matters for both the public and private sectors. Eddie G. Ross, Jr. (St. Louis County). Mr. Ross is director of field operations for Environmental Operations Inc. and has served on the Board since March 2009. David Visintainer (St. Louis City). Mr. Visintainer retired as the St. Louis City public utilities director and water commissioner in 2007 and has served on the Board since May 2009. Administration Management of the District is provided by a management team that reports to the Board, including an Executive Director, Assistant Executive Director, Secretary-Treasurer, Internal Auditor, General Counsel, and Directors of Finance, Engineering, Human Relations, Operations and Information Systems. Set forth below is certain biographical information regarding selected members of the executive management staff of the District: Jeffrey L. Theerman, P.E., Executive Director. Mr. Theerman has been employed by the District for more than 21 years, and has served as Executive Director since June 10, 2004. Mr. Theerman previously served as Acting Executive Director beginning in October 2003. During his tenure with the District, he has also served in various senior level management capacities within wastewater operations. Before joining the District, Mr. Theerman served for four years as an environmental protection engineer with the Illinois Environmental Protection Agency. Mr. Theerman earned a B.S. in Civil Engineering from the University of Missouri-Rolla and a M.S. in Civil Engineering from Southern Illinois University- Edwardsville. Karl J. Tyminski, CPA, Secretary-Treasurer. Mr. Tyminski has served as the Secretary-Treasurer of the District for more than 19 years. Before becoming Secretary-Treasurer, he served as the Director of Internal Audit of the District. Before joining the District, Mr. Tyminski held various financial and accounting related positions with Anheuser-Busch Companies, Chase-Lincoln Bank and Deloitte & Touche. Mr. Tyminski earned a B.S. in Accounting from the State University of New York at Albany and an M.S. in Management Science from the Stevens Institute of Technology. Susan M. Myers, General Counsel. Ms. Myers has been employed by the District as in-house counsel since 2001 and was recently promoted to General Counsel. Ms. Myers has a unique combination of environmental engineering and legal experience. Prior to joining the District, she served as an environmental engineer for two years with EPA Region VII in RCRA Permitting and for nine years on a 24 billion dollar DOE Superfund Clean-up project. Ms. Myers earned her law degree from St. Louis University, School of Law, and a B.S. in Geological Engineering from the University of Missouri-Rolla. Janice M. Zimmerman, Director of Finance. Ms. Zimmerman has served as the Director of Finance of the District for more than seven years. Before joining the District, Ms. Zimmerman spent 12 years in the banking and savings and loan industries and nine years in public education finance. Ms. Zimmerman has a B.S. in Business from Eastern Illinois University and a Masters of Finance degree from Saint Louis University. Brian Hoelscher, P.E., Director of Engineering. Mr. Hoelscher has served as the District’s Director of Engineering for approximately five years. Before being promoted to his current position, Mr. Hoelscher held several other positions in the District’s engineering department. Mr. Hoelscher has a B.S.C.E. from Washington University in St. Louis, and has been designated a Professional Engineer in Missouri and Illinois. Vicki L. Taylor Edwards, Director of Human Resources. Ms. Edwards has served as the Director of Human Resources at the District for more than eight years. Before her promotion to her current position, Ms. Edwards held several other positions within the human resources department. Before joining the District, she was with Mercantile Bank for seventeen years, also in human resources. Ms. Edwards received her B.A. from Lindenwood University in Human Resources Management. Barbara Mohn, Director of Information Systems. Ms. Mohn was recently named the District’s Director of Information Systems, and has 21 years of experience in the information technology field primarily in the telecommunications and financial services industries. Her most recent position was IT Director – Program Management for General Electric Commercial Distribution Company. Before that, she held positions at Deutsche Financial Services, CIBER Consulting and AT&T. Ms. Mohn has a B.S. in Business Administration from Southeast Missouri University and an MBA from the University of Central Florida. Jonathon Sprague, P.E., Director of Operations. Mr. Sprague is the Director of Operations for the District. He joined the District in May 2005 as Assistant Director of Operations with more than 11 years of experience in public utilities management. Mr. Sprague has a B.S. in Electrical Engineering from the University of Akron and an M.B.A. from the College of William and Mary. The System The District owns and operates the System, which consists of sanitary, stormwater and combined collection sewers, pumping stations, and wastewater treatment facilities in its service area. The District provides sewer collection, pumping and treatment services within five watersheds located within the District’s service area including the Mississippi River watershed, the Missouri River watershed and the Meramec River watershed. In addition, the District provides a variety of other services, including sanitary sewer maintenance, stormwater sewer maintenance, floodwater control, monitoring of industrial waste, issuance of pretreatment discharge permits, engineering design and specification, construction of sewer lines, plan review and approvals, issuance of connection permits, public education and customer service. Collection and Trunk Sewers. The District owns and maintains approximately 9,650 miles of collection and trunk sewers, ranging in size from six inches to 29 feet in diameter. They are classified as one of three types: sanitary, storm or combined. Sanitary sewers accommodate household and industrial waste. Storm sewers carry rainwater and surface water runoff. Combined sewers carry both types of waste. The System currently includes approximately 4,741 miles of sanitary sewers, approximately 2,980 miles of stormwater sewers and approximately 1,928 miles of combined sewers that handle both 25 wastewater and stormwater flows. Maintenance of the System is controlled and conducted out of three regional facilities. Pumping Stations. The District owns and maintains 280 sanitary and stormwater pumping stations which move the flow of wastewater through the wastewater system and utilizes seven treatment facilities treating more than 330 million gallons of wastewater every day. Wastewater Treatment Facilities. The District currently owns and operates seven wastewater treatment facilities. These facilities treated an average flow of 348 million gallons of wastewater per day (“MGD”) for the previous Fiscal Year. The Bissell Point and Lemay wastewater treatment plants are the District’s two largest plants. Both of these plants serve the Mississippi River watershed. The Coldwater Creek and Missouri River wastewater treatment plants service the Missouri River watershed. The remaining wastewater treatment plants serve the Meramec River Basin. As part of the CIRP, the District constructed a new wastewater treatment plant, a collection system to support the new treatment plant, including a tunnel system and pump stations, and an educational visitors center, referred to herein as the “Lower Meramec Project,” to serve the wastewater treatment requirements of portions of its service area. The Lower Meramec Project, which cost approximately $231 million, is the largest project currently under construction by the District. The Lower Meramec Project replaces the District’s existing Meramec and Baumgartner Lagoon treatment plants. With an ultimate maximum capacity of 56 MGD, the plant is capable of receiving and treating an average daily wastewater flow rate of 15 MGD. The new facility conveys treated water into the Mississippi River instead of the more environmentally sensitive Meramec River. See the sections herein captioned “THE CIRP AND THE PROJECTS – The Projects” and “REGULATORY REQUIREMENTS -- Regulatory Matters.” Employees and Employee Relations The District has 944 budgeted positions of which 919 are currently filled. Approximately 45% of the District’s employees within the Operations Department are represented by one of six unions: American Federation of State, County and Municipal Employees; Bricklayers; International Association of Machinists; International Brotherhood of Electrical Workers; Operating Engineers; and Service Employees International. The District had one labor dispute in 1977. For the past 30 years, the District has had no record of any labor dispute or work stoppage and considers its employee relations to be excellent. The District entered into new Memorandums of Understanding with the six unions in 2010 which extend through June 30, 2013. Salary increases for FY 2012 will be 2.5% and for FY 2013 will be 3.0%. The District also retains private companies and consultants, from time to time, to supplement and expand its existing staffing resources. Economic Conditions in the District Generally, the District’s major revenue sources do not fluctuate with the local and national economies as much as local governments that depend on sales or income taxes for their major sources of revenue. The District uses several measures to forecast economic development in the District. Such factors are listed below for Fiscal Years 2007 through 2011: 26 2007 2008 2009 2010 2011 Sewer Plan Reviews: Number of Plans Approved 584 754 564 458 486 Number of Miles of Sewers 51 45 28 22 21 Sewer Construction Permits: Number of Permits Issued 1,742 3,048 2,449 2,406 1,865 Number of Miles of Sewers 48 23 21 28 22 Customer Connections: Number of Connection Permits Issued 782 1,182 844 763 1,183 Connection Fee Revenue $3,268,526 $1,834,515 $1,106,569 $1,259,271 $845,691 Value of Sewers Dedicated to the District by Developers $21,100,000 $44,867,000 $26,303,000 $18,544,232 $7,571,714 Over the years, the St. Louis economy has undergone a transformation from reliance on traditional manufacturing industries to those industries based on advanced technology and service. The St. Louis area is a center for health care, banking, finance, transportation, tourism, and education and has a strong and diverse manufacturing economy. For more information on economic and demographic trends in the City and the County, see Appendix B hereto. Security The System is subject to safety and security inspections on a continuing basis by the District. All treatment plants are maintained as secure facilities with fences, locked gates and electronic surveillance equipment. The District does not represent that any existing or additional safety or security measures will be adequate in the event that terrorist activities are directed at the System. Further, damage to components to the System could have a material adverse impact on the District’s expenditures for repairs to the System. Insurance The District maintains third-party commercial insurance coverage for various risks while self- insuring for other risks and liabilities. Present commercial insurance coverage is maintained for property, boiler and machinery, excess flood, combined liability, excess liability, excess workers’ compensation, public official performance bond, public entity fiduciary liability, crime, major facility pollution liability and sewer backup (main truck line and overcharged line). Such policies contain liability limits, deductions and retentions that management of the District believes to be customary for similar enterprises. Total premiums for third-party insurance coverage for Fiscal Year 2010 were $3,444,594, an approximately 1.6% increase from Fiscal Year 2009. In addition, the District has established a risk management program and self-insures a portion of the risk related to officers’, directors’ and general liability; its obligation to provide workers’ compensation and medical and hospitalization benefits to its employees; and water backup claims to its customers. The District purchases re-insurance to cover the remaining risk on such items. The estimated liabilities for payment of incurred (both reported and unreported) but unpaid claims relating to these matters are included in the District’s financial statements as a component of current deposits and accrued expenses. As of June 30, 2011 and 2010, these liabilities amounted to $5,557,000 and $4,713,013 respectively. The District obtains periodic funding valuations from the third-party administrators managing the self-insurance programs and adjusts the charges as required to maintain the appropriate 27 level of estimated claims liability. For more information regarding the District’s self-insurance program, see Note 10 to the audited financial statements of the District contained in Appendix A to this Official Statement. THE CIRP AND THE PROJECTS General The District has developed a Capital Improvement and Replacement Program (the “CIRP”) which identifies proposed expenditures by the District for capital improvements to the District’s sewer facilities over the next several decades, with an estimated cost of between $4 billion and $6 billion. The general objectives of the CIRP are to meet federal and state requirements and District policy regarding water pollution control, to provide satisfactory level of service to users of the District’s sewer system, including reduction of basement back-up, and to continue the District’s program to rehabilitate its infrastructure system. The CIRP addresses the District’s infrastructure capital improvement projects involving the repair, replacement and upgrade of sanitary and combined sanitary and stormwater sewers. The Projects to be financed with the proceeds of the Series 2011B Bonds constitute a portion of the infrastructure projects identified in the CIRP and generally consist of improvements to the collection system to reduce basement backup problems and potential sewer overflows. Historic Capital Improvement Expenditures Before 2004, the District financed substantially all of the capital improvements to its facilities from available revenues on a “pay-as-you-go” basis. Since 2004 the District has paid for more than $1.004 billion in capital improvements through a combination of debt financing and pay-as-you-go financing. Since the District began implementation of the CIRP in 2004, the District has completed project improvements, in the following categories: • Increasing wastewater treatment capacity • Finishing construction of a new wastewater treatment plant • Improving infrastructure to reduced combined sewer overflows • Improving infrastructure to reduce sanitary sewer overflows Financing Plans for the CIRP There are two primary funding sources for financing the capital improvements identified in the CIRP: (1) debt, including Bonds issued under the Bond Ordinance; and (2) available Operating Revenues on a “pay-as-you-go” basis. The District will use the proceeds of previously issued Bonds, the Series 2011B Bonds, and any Bonds issued by the District in the future under the Bond Ordinance to finance the infrastructure projects identified in the CIRP, and the 2004 Authorization and the 2008 Authorization in the aggregate principal amounts of $500,000,000 and $275,000,000, respectively. Major projects constructed with proceeds of the 2004 Authorization were the Lower Meramec Treatment Plant, $177,000,000; Coldwater Creek Treatment Plant Improvements, $61,000,000; Missouri River Plant Rehab and Improvements, $52,000,000; Grand Glaize Plant Improvements, $35,000,000; Other Treatment Plant Improvements, $24,000,000; CSO/SSO Collection System Improvements $80,000,000; and the Lemay Plant Improvements, $40,000,000. 28 The following table sets forth the existing and anticipated major funding sources for the CIRP for Fiscal Years 2004 through 2012. In addition, the District has had and anticipates that it will have certain grant proceeds and interest earnings available to finance the costs of the CIRP. ACTUAL AND PROJECTED MAJOR FUNDING SOURCES FOR THE CIRP Fiscal Year Ending June 30 Description 2004 2005 2006 2007 2008 2009 2010 2011 2012 Debt Financing(1) Series 2004A Bonds $175,000,000 Series 2004B SRF Bonds 161,280,000 Series 2005A SRF Bonds $6,800,000 Series 2006A SRF Bonds $42,715,000 Series 2006B SRF Bonds $14,205,000 Series 2006C Bonds 60,000,000 Series 2008A Bonds $30,000,000 Series 2008B SRF Bonds 40,000,000 Subordinate Series 2009A Bonds Subordinate Series 2010A Bonds Series 2010B Bonds Subordinate Series 2010C Bonds $23,000,000 7,980,700 85,000,000 $37,000,000 Subordinate Series 2011A Bonds $39,769,300 Series 2011B Bonds 52,250,000 System Revenues(2) 2,398,227 5,370,512 13,937,211 125,394,050 $78,772,276 74,892,000 62,354,000 45,686,000 -- Total $338,678,227 $12,170,512 $56,652,211 $199,599,050 $78,772,276 $144,892,000 $178,334,700 $82,686,000 $92,019,300 (1) This category includes proceeds the District has received or expects to receive in connection with issuance of the Bonds and future additional Bonds under the Bond Ordinance. (2) Does not include revenues from the District’s Stormwater Service Charge. 29 The following table sets forth the District’s historic capital improvement expenditures for improvements to its wastewater system facilities for Fiscal Years 2004 through 2011, including expenditures funded both by Bond proceeds and on a “pay-as-you-go” basis: Fiscal Year Ending June 30 Capital Improvement Expenditures 2004 $ 88,923,498 2005 140,402,733 2006 2007 2008 2009 2010 2011 133,592,404 139,447,160 148,772,276 199,075,923 158,560,144 110,811,121 Total $1,119,585,259 ___________________ Source: The District. The Projects The District anticipates that it will construct approximately $302 million in additional capital improvement projects identified in the CIRP for FY 2011 through FY 2012. The District anticipates that CIRP improvements constructed in FY 2011 and FY 2012 will be funded from the 2008 Authorization of $275,000,000 and the remaining balance on a “pay-as-you-go” basis. See “FINANCIAL OPERATIONS OF THE DISTRICT – Pro Forma Statement of Pledged Revenues, Expenses and Debt Service Coverage” for additional discussion of the projected revenue and projected revenue requirements. The District anticipates that the following Projects of the CIRP will be financed with the proceeds of the Series 2011B Bonds, pay-as-you go revenues of the System and future financings under the Bond Ordinance: Project Estimated Cost Lemay Wastewater Treatment Plant Disinfection Facilities $22,000,000 Bissell Wastewater Treatment Plant Disinfection Facilities 20,740,000 Coldwater Treatment Plant Disinfection Facilities 6,500,000 Bissell Wastewater Treatment Plant Construction Services 1,150,000 Lemay Wastewater Treatment Plant Construction Services 1,200,000 Coldwater Wet Weather Storage Tank 10,600,000 Hermitage I/I Reduction 2,000,000 Total $64,190,000 Of these total funds for capital projects in FY 2010 approximately $61 million was used to help eliminate sanitary sewer overflows; $37 million for treatment plant upgrade and renovation projects; $15 million for general system renewal projects; $5 million for the reduction of combined sewer overflows and $6 million for design of disinfection projects to improve water quality. 30 Planned CIRP improvements in FY 2011 and FY 2012 are expected to be approximately $302 million, including the following: • Infrastructure improvements to reduce combined sewer overflows • Infrastructure improvements to reduce sanitary sewer overflows • Lemay Plant improvements • Collection systems renewal and replacement activity • Disinfection projects at Coldwater, Bissell, Lower Meramec and Lemay plants designed to improve water quality • Planning and Capacity, Management, Operation and Maintenance activity Other CIRP projects scheduled in FY 2011 and FY 2012 are expected to be financed with the remainder of the 2008 Authorization and other funds of the District. See page D-33 of Appendix D – “FINANCIAL FEASIBILITY REPORT” for a summary of the projected CIRP projects for fiscal years 2011 through FY 2016. FINANCIAL OPERATIONS OF THE DISTRICT General The District is supported by various taxes and user charges imposed on taxpayers and users of its facilities within its boundaries. The District has the power, subject to voter approval, to issue general obligation bonds, District-wide revenue bonds, sub-district revenue bonds, or special assessment bonds. The Executive Director is responsible for preparing the annual budget of the District and is responsible for drawing warrants to meet the financial obligations of the District. The Executive Director appoints the Director of Finance, who is responsible for assisting the Executive Director in preparing the annual budget, maintaining the accounting records of the District, and certifying that all warrants are proper and valid under the District’s Charter. The Secretary-Treasurer is appointed by the Board and is responsible for custody of the funds of the District and investing the funds of the District pursuant to the Charter of the District and State law. Budget and Appropriation Process The Executive Director of the District is responsible for preparing the District’s annual budget. Not later than the fifteenth day of March in each year, the Executive Director must submit to the Board a budget for the ensuing year. The Charter requires that the Board adopt the budget no later than June 30. In the event that the Board does not pass a new budget by June 30, the prior year’s budget continues in force until the Board adopts a new budget. The proposed budget is available for public inspection and the District conducts public hearings on the proposed budget prior to its adoption. On or before the thirtieth day of June in each Fiscal Year the Board shall determine the amount of taxes that will be required during the next succeeding Fiscal Year to pay the principal of and interest on general obligation bonds issued and certain costs of operations, maintenance, construction and improvements. The budget provides a complete financial plan for the budget year for all District funds. In no event can the total amount of expenditures for the budget year from any fund exceed the estimated revenues to be actually received plus any unencumbered balance or less any deficit estimated for the beginning of the budget year. 31 Finance Department The Finance Department is enhancing its efforts to substantially reduce its portfolio of accounts receivable, using a combination of internal collection efforts, liens and service shut-off. In addition, a portion of the District’s billing and past-due collections has been outsourced to several outside vendors. These agencies will focus on collecting overdue sewer bills from ratepayers. This outsourcing initiative will also bring new information systems technology to the District. The Government Finance Officers Association of the United States and Canada has honored the District for excellence in budgeting, financial accounting and full disclosure. For the 24th consecutive year, the District earned the Distinguished Budget Presentation Award, the highest form of recognition in government budgeting. For the 23th consecutive year, the District also received the Certificate of Achievement for Excellence in Financial Reporting, the highest recognition in governmental accounting and financial reporting. Fund Structure General Fund. The General Fund was established to provide for the ordinary operations of the District. Since 1978, all operation and maintenance has been funded out of the General Fund. The General Fund receives revenues from ad valorem property taxes levied on all property, real and personal, within the District’s boundaries based on assessed valuations established by the City and County assessors. Tax rates vary by subdistrict and purpose, and are levied in accordance with the Charter of the District. The District discontinued levying real and personal property taxes after FY 2008 as a result of the impervious stormwater charge which it began collecting in March 2008. Currently, a main source of income for the General Fund is a wastewater user charge. The General Fund also receives miscellaneous income from a number of sources, and reimbursement of engineering services provides other non- operating funds. Revenues from the operation of the City of Arnold wastewater treatment plant and other contract wastewater treatment plants are also deposited in the General Fund. The District’s Operating Funds consist of the Wastewater Revenue Fund and the Stormwater Revenue Fund. Wastewater user charge revenues are deposited into the Wastewater Revenue Fund and revenues from the District’s Stormwater Service Charge are deposited into the Stormwater Revenue Fund. The District also maintains an Emergency Fund. This fund is intended to be used for emergency repairs and replacements in the event that no other funds are readily available. District policy requires that a minimum balance of $4 million be maintained in the Emergency Fund. As of June 30, 2011 the Emergency Fund had a balance of $5,594,853. Basis of Accounting The accounts of the District are maintained on the full accrual basis and are reported as a single enterprise. Separate accounting records are maintained for certain subdistricts and to account for restricted resources; however, interorganizational transactions and balances are eliminated for reporting purposes. Financial Statements The accounts of the District are audited annually by an independent firm of certified public accountants. The accounting firm of Schmersahl Treloar & Co. began serving the District as auditor in 2009. The District has a mandatory five-year replacement policy for its auditors. Hoschschild Bloom & Company, LLP served as the District’s auditor from 2007 to 2009. The District’s audited financial statements for the Fiscal Years ended June 30, 2011 and 2010 are attached hereto as Appendix A. 32 Selected Financial Data of the District The District follows Governmental Accounting Standards Board Statement No. 33, “Accounting Reporting for Non-Exchange Transactions,” which establishes accounting and financial standards for non-exchange transactions involving financial or capital resources. During 2005, the District adopted Governmental Accounting Standards Board Statement No. 40, “Deposit and Investment Risk Disclosures, an Amendment of GASB Statement No. 3,” the adoption of which modified certain financial statement disclosure requirements. The new standard enhances the deposit and investment risk disclosures by updating the previous custodial credit risk disclosure requirements and addressing other common risks, including concentrations of credit risk, interest rate risk, and foreign currency risk. The implementation of Statement No. 40 had no effect on financial statement amounts. Governmental Accounting Standards Board Statement No. 43, “Financial Reporting for Post- employment Benefit Plans Other Than Pension Plans” and Governmental Accounting Standards Board Statement No. 45, “Accounting and Financial Reporting by Employers for Post-employment Benefits Other Than Pension Plans” establish accounting and financial reporting standards for post-employment benefits other than pensions. As part of a total compensation package, many governments offer post- employment benefit plans other than pensions such as health care, life insurance and so forth. Statement No. 43 establishes uniform financial reporting standards for other post-employment benefit (“OPEB”) plans and applies to OPEB trust funds included in the financial reports of plan sponsors or employers, as well as in stand-alone financial reports. Statement No. 45 establishes standards for the measurement, recognition and display of OPEB expenses and expenditures and related liabilities and assets, note disclosure, and, if applicable, required supplementary information in the financial reports of state and local government employers. Statement No. 43 became effective for the District for the Fiscal Year ending June 30, 2007, and Statement No. 45 became effective for the District for the Fiscal Year ending June 30, 2008. See “FINANCIAL OPERATIONS OF THE DISTRICT – Other Post Employment Benefits” for additional discussion of the District’s OPEB liabilities. The following table illustrates the financial result of operations of the District for the Fiscal Years ended June 30, 2011, 2010, 2009 and 2008. Revenues from the Stormwater Service Charge are included in these figures but are not included in Pledged Revenues and, therefore, are not available to pay debt service on the Bonds issued under the Master Bond Ordinance, including the Series 2011B Bonds. The following financial information is intended to provide historical information on the financial health of the District. [Remainder of page intentionally left blank.] 33 THE METROPOLITAN ST. LOUIS SEWER DISTRICT STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS ($000) 2008 2009 2010 2011 Operating Revenues: Sewer service charges, net $221,780 $254,378 $251,683 $223,276 Provision doubtful service charge accounts (5,162) (9,678) (10,188) (8,623) Licenses, permits and other fees 4,346 3,475 3,085 2,976 Other 961 1,550 2,007 1,815 Total Operating Revenues $ 221,925 $ 249,725 $246,587 $219,444 Nonoperating Revenues: Property taxes levied by District $ 27,512 $2,129 $1,401 $27,126 Investment income Build America bond tax credits 17,477 13,116 6,554 3,847 2,023 Other 529 215 265 443 Total Nonoperating Revenues $ 45,518 $15,460 $8,220 $33,439 Total Revenues $ 267,443 $265,185 $254,807 $252,833 Operating Expenses: Pumping and treatment $ 44,531 $44,746 $47,266 $50,532 Collection system maintenance 30,807 32,918 36,082 33,152 Engineering 9,973 13,736 15,773 12,486 General and administrative Water backup claims 39,827 7,439 37,922 6,817 39,237 3,951 36,075 8,912 Depreciation 54,934 47,370 54,012 66,854 Other 37,634 28,669 32,458 36,492 Total Operating Expenses $225,145 $212,178 $228,779 $224,503 Nonoperating Expenses: Total Nonoperating Expenses $ 8,259 $18,345 $ 25,781 $29,110 Total Expenses $233,404 $230,523 $254,560 $273,613 Income before Capital Contributions $ 34,039 $34,662 $248 $(20,730) Capital Contributions $45,610 $26,993 $19,786 $19,099 Change in Net Assets $ 79,649 $61,655 $20,034 $(10,629) Net Assets Beginning of Year $ 2,064,313 $2,125,962 $2,187,617 $2,207,650 Net Assets End of Year $ 2,125,962 $2,187,617 $ 2,207,650 $2,197,021 Annual Debt Service $25,418 $28,365 $32,647 $35,021 _________________ Source: The District. 34 Management’s Discussion and Analysis The following Management’s Discussion and Analysis is excerpted from the financial statements of the District for the Fiscal Years ended June 30, 2011 and 2010. For the full discussion (which discussion is unaudited as noted therein), see the financial statements of the District for the Fiscal Years ended June 30, 2011 and 2010, included in Appendix A to this Official Statement. The management of the District has provided this discussion and analysis to be used in combination with the District’s financial statements for the Fiscal Years ended June 30, 2011 and 2010, which are included in Appendix A to this Official Statement. This narrative is intended to provide the reader with more insight into management’s knowledge of the transactions, events and conditions reflected in the accompanying financial statements and the fiscal policies that govern the District’s operations. Financial Highlights. The District placed $300.9 million of capital assets into service during FY 2011. This high level of capitalization occurred to more precisely reflect the timing of placement into service of the District’s plant and system. These capitalized assets include • Treatment and disposal plant and equipment $236.9 million • Collection and pumping plant $34.8 million • General plant and equipment $17.9 million • Land $11.3 million In conjunction with this capitalization of assets, the District increased accumulated depreciation by $58.4 million. Cash and investments decreased by $52.6 million since the District’s new debt was issued as a line of credit requiring the District to spend down reserves. This line of credit structure reflects the State’s change in the administration of its State Revolving Fund program and does not impact the District’s receipt of future State bond financing. Contracts and Accounts Payable increased $23.7 million mostly due to the incursion of $4.3 million in water back up claims from a failure of flood gates along the Mississippi River associated with a severe rain event in June. New construction expenses incurred late in the fiscal year also contributed to this increase. Operating Revenue declined by $27.1 million and non-operating revenue increased by $25.2 million. This resulted from the District’s rescinding of its stormwater impervious charge per a July 9, 2010 Court decision which declared the charge unconstitutional. Property taxes were reinstated to partially replace this stormwater funding. Financial Analysis. The District’s financial position deteriorated slightly in the current year, as evidenced by the decrease in net assets of $10.6 million. The main reason for the decline is the increase of $58.4 million in accumulated depreciation, in connection with the extraordinary amount of capitalization previously mentioned. The District continues capacity expansion and updating of the District’s plant and 35 system. Plans for maintaining the District’s ability to meet future spending needs are discussed in greater detail in the section of the MD&A entitled “Decisions Impacting the Future.” Current restricted and other assets decreased by $23.5 million or 5.0% in the current year. This resulted from new debt consisting of a line of credit reimbursed after payments are made combined with a reduction in revenue from the suspension of the impervious fee. Capital assets net of accumulated depreciation increased by $57.6 million or 2.3% overall as the result of new projects countered by the capitalization and depreciation of completed projects described above. Current liabilities increased by $26.2 million or 34.7% in the current year. The increase is due to $4.3 million in liabilities for overland flooding resulting from a power outage, $4.8 million from stormwater litigation costs and the remainder from increased payables in connection with capital projects. Non current liabilities increased by $18.5 million or 3.0% over the prior year as the District issued a $37 million dollar line of credit and paid down existing debt. Net assets decreased $10.6 million or $30.6 million less than in the prior year. While revenues remained relatively flat expenses grew, at a slower pace during the prior year. Total revenue decreased by $1.9 million or 0.8 %. While the reinstatement of taxes offset the decline in operating revenue, investment income declined by $2.7 million over the prior year. The decline in investment income is the result of low interest rates along with the decrease in funds available for investment. The Build America Bond tax credit for $1.7 million was new this year. Total expenses increased for the year by $19.1 million or 7.5%. Total Operating costs increased by $15.7 million or 7.0%, in large part due to claims for overland flooding and an increase of $12.8 million or 23.8% in depreciation expense in connection with additional assets placed into service. Nonoperating expenses increased by $3.3 million or 12.9% due in part to a $4.8 million legal claim cost in connection with the District’s impervious fee case. Interest expense declined by $3.2 million or 24.2% due to market conditions. The District ended the year with $6.3 million in cash and cash equivalents or $5.4 million lower than the prior year. This was due to a decline in cash received from customers of $24.5 million or 9.9% with the elimination of the impervious fee; partially offset by a decrease in payments to suppliers of $17.4 million or 17.4%. Cash flow from non-capital financing activities increased by $25.7 million as the result of the reinstatement of taxes to fund stormwater activities. Cash flow from capital and related financing activities decreased by $59.7 million or 73%, because the SRF Bond issued in 2010 provides reimbursement of expenditures, not loan proceeds. Investing activity proceeds provided $34.5 million as investments were used to fund operating and capital activities. Total capital assets, net of depreciation, increased by $57.6 million over the prior year. Construction in progress decreased by $169.8 million as $20.5 million in treatment and disposal plant projects were moved into service. Land contributed $8.8 million to the increase from the completion of grading projects. General Plant and equipment also increased by $15.9 million, partially as a result of the reclassification of office building assets from treatment and disposal plant to general plant. The District ended FY 2011 with $626.4 million in long-term debt outstanding, consisting mainly of revenue bonds. The District had one bond addition in FY 2011, the Series 2010C Bonds, resulting in a minimal increase in long-term debt. 36 Decisions Impacting the Future. On July 7, 2011, the District entered into a Consent Decree with the U.S. Environment Protection Agency and the Coalition for the Environment settling a lawsuit for alleged violations of the Clean Water Act. Along with providing a schedule for implementation of various system improvements and programs, the Consent Decree also addresses all allegations made by the Plaintiffs in this action. The Consent Decree will not become final until it is entered by the Federal Court. See note 12 to the audited financial statements of the District contained in Appendix A to this Official Statement for additional information regarding this litigation. The District continues to implement the second phase of its multi decade wastewater capital improvement program utilizing the proceeds of a $275 million bond authorization granted by St. Louis voters in August 2008. The remainder of this phase of the CIRP program includes the design and construction of $131 million of capital improvements through 2012. These regulatory required projects include completion of the Lemay Treatment Plant expansion, pump station improvements, and sewage collection system replacement and rehabilitation. The next phase of the capital program is expected to reflect $1 billion of projects through FY2016 to comply with the Consent Decree. Sewer Rates and Revenues The primary source of funding for the operation and maintenance of the District’s sewerage and drainage system is a user charge that is projected to average $27.80 per month for a single-family residence as of June 30, 2011. The District’s charges for residential wastewater service are tied to the amount of measured water usage during a winter quarter. For residential properties without water meters, the charges are based on housing attributes (such as the number of rooms, baths, and toilets) that correlate to water usage. That methodology is the same billing methodology used by the City of St. Louis Water Division for its non-metered properties. Multi-family residential and commercial and industrial rates are proportionate to the single-family charge and are based on water consumption and the strength of the discharge. The District has other sources of revenue. Real and personal property taxes were levied by the District in an amount of almost $2.129 million in FY 2009 to service subdistrict indebtedness, fund subdistrict construction and/or to fund part of the District’s stormwater operating expenses. The District discontinued levying real and personal property taxes after FY 2008 as a result of the impervious stormwater charge which it began collecting in March 2008; however, the District suspended collection of the impervious stormwater charge and resumed collection of real and personal property taxes in August 2010 in light of the court decision concerning the impervious stormwater charge. See “LITIGATION -- William Zweig et al. v. The Metropolitan St. Louis Sewer District” herein. The District also receives some federal, state, and local grants to help defray the cost of constructing sewage treatment and drainage facilities and improvements. The District also charges fees for plan review, permits, construction inspection of new system development, and special discharges. The District charges a uniform connection fee in all service areas. The District may issue general obligation bonds and revenue bonds to finance the cost of improvements and extensions to the sewer system. The District also may issue, on behalf of each of its subdistricts, general obligation bonds or revenue bonds. The issuance of general obligation bonds, payable from a general tax levy on all taxable property within the District or a subdistrict, requires the approval of either a four-sevenths or two-thirds majority of the voters voting at an election held in the District or subdistrict, as the case may be. General obligation bonds outstanding cannot exceed five percent of the assessed valuation of the area benefited. Subdistricts may also issue revenue bonds, payable from user charges after a similar procedure, but require only a simple majority vote. 37 Rate Commission and Rate Setting Process General. The District’s Rate Commission reviews and makes recommendations to the Board regarding all proposed changes in wastewater rates, stormwater rates and tax rates or change in the structure of any of the foregoing. Upon receipt of a rate change notice from the District pursuant to the Charter, the Rate Commission recommends changes in rates to the Board that will be necessary to pay interest and principal falling due on bonds issued to finance assets of the District, the costs of operation and maintenance and such amounts as may be required to cover emergencies and anticipated delinquencies. Membership. The Rate Commission consists of one representative from each of fifteen organizations within the District, each of which have been identified and designated by the Board as a “Rate Commission Representative Organization.” The organizations selected by the Board are diverse and represent residential customers, commercial and industrial customers, environmental interests, labor interests, community and neighborhood organizations and nonprofit organizations. The current Rate Commission Representative Organizations are as follows: Missouri Coalition for the Environment Missouri Industrial Energy Consumers Home Builders Association of Greater St. Louis St. Louis County Municipal League Engineers Club of St. Louis League of Women Voters of St. Louis The Human Development Corporation of Metro St. Louis Missouri Botanical Garden Associated General Contractors of St. Louis Cooperating Schools Districts Regional Chamber & Growth Association West County Chamber of Commerce St. Louis Council of Construction Consumers St. Philip’s Lutheran Church Greater St. Louis Labor Council, AFL-CIO The Rate Commission has reviewed and recommended all rate increases that were approved by the Board since August 2003. The District anticipates increasing rates in the future to finance additional capital improvement projects constructed under the CIRP. Such rate increases are subject to further review and approval by the Board and the Rate Commission in accordance with established procedures. Rate Setting Process. Pursuant to the Charter, whenever the District proposes or recommends a change in rates, it shall give written notice (“Rate Change Notice”) to the Board and the Rate Commission. Upon receipt of a Rate Change Notice and after review of same, the Rate Commission shall cause at least one public hearing to be held on the record regarding the proposed rate change. The Rate Commission shall issue its rate recommendation report (“Rate Commission Report”) to the Board and to the public no later than 120 days after receipt of a Rate Change Notice. If the Board accepts the Rate Commission Report or if the Board is deemed to have accepted a Rate Commission Report as set forth in the Charter, the Board enacts an ordinance consistent with the Rate Commission Report. The Board may reject, or fail to accept, the Rate Commission Report only upon a finding that such report does not conform to the requirements of the Charter. No ordinance to effect a change in rates shall be introduced 38 for adoption under the Charter prior to the earlier of 45 days after receipt of the Rate Commission Report or 45 days after the date on which the Rate Commission Report is due. Pursuant to the Charter, any change in a rate recommended to the Board by the Rate Commission must be accompanied by a statement of the Rate Commission that the proposed rate change and all portions thereof: (1) is consistent with constitutional, statutory or common law as amended from time to time; (2) enhances the District’s ability to provide adequate sewer and drainage systems and facilities, or related services; (3) is consistent with and not in violation of any covenant or provision relating to any outstanding bonds or indebtedness of the District; (4) does not impair the ability of the District to comply with applicable Federal or State laws or regulations as amended from time to time; and (5) imposes a fair and reasonable burden on all classes of ratepayers. Billing and Collections The District bills residential and commercial customers monthly for sewer service charges. As described below, sewer bills are calculated upon several different bases, including the amount of water used each quarter, the winter-quarter usage only or, when water meters are not in use, the structure of the building. For customers whose bills are based upon water usage, the District purchases data from the three water agencies serving the metropolitan area: the St. Louis City Water Division, Missouri-American Water Company and Kirkwood Water. In the City of St. Louis, most single-family homes and smaller multi-unit buildings are not equipped with water meters. There are also a small number of properties in the County that use well water. When no water meter reading is available, the District calculates the bill based on the attributes of the structure, including the number of rooms, toilets, baths and separate showers. Single-family residential properties that have water meters are billed based on the winter quarter water usage. The winter quarter is defined as the 3-month water meter reading taken in February, March or April. With each July sewer bill the service charges are calculated on a 91-day prorated amount using the previous winter quarter water meter reading. The monthly usage remains the same until the following July, when the process is repeated. For single-family customers who have limited income, the District offers a Low-Income Assistance program. For eligible customers, the monthly sewer bill is reduced by 50% each month. Commercial and multi-unit properties are billed based on the amount of water used each quarter or, in a few cases, each month. The District’s bill is based on one-third of the prior quarter’s reading and remains the same amount for three months. The process is repeated for the next three months. In the case of commercial properties, there is an additional compliance charge on each month’s bill and the bill may include a surcharge for difficult to treat industrial waste or there may be a reduction factor, based on water used in processing and not entering the sewer system. Multi-unit property owners also have the option of being billed on the winter quarter reading or on each quarter reading. 39 In 2004, the District implemented a new billing system using the same billing parameters described above; under the new system, bills are issued on a daily basis. Rate Increases Pursuant to the rate review and setting procedures discussed under the caption “Rate Commission and Rate Setting Process” above, the District submitted to the Rate Commission a request to increase wastewater user charge rates. A Wastewater Rate Change Proposal (the “Rate Change Proposal”) was presented to the Rate Commission on May 10, 2011. The Rate Commission has initiated proceedings to provide for the submission of written testimony, technical conferences, discovery procedures, a public hearing and post-hearing briefs. Pursuant to the Charter, the Rate Commission is required to submit a rate recommendation to the District’s Board of Trustees upon conclusion of its deliberations. On October 17, 2011, the Rate Commission submitted its recommendation to the Board. In that report the Rate Commission found that the Rate Change Proposal is necessary to pay (i) interest and principal falling due on bonds issued to finance assets of the District, (ii) the costs of operations and maintenance of the System and (iii) such amounts as may be required to cover emergencies and anticipated delinquencies. The Board accepted the Rate Commission’s recommendation on December 8, 2011, and is expected to introduce and approve an ordinance setting rates consistent with such report in early 2012, to become effective in July 2012 and thereafter. Historical and Projected Sewer Rates and Charges The following tables set forth the wastewater sewer user charge rates in effect on June 30, 2010, and 2011. In October 2011, the Rate Commission recommended a four-year series of rate increases, which rate increase proposal the Board of Trustees is expected to consider in December, 2011. [Remainder of page intentionally left blank.] 40 Effective Effective Type of Monthly Charge July 1, 2010 FY2011 July 1, 2011 FY 2012(a) Base Charge - $/Bill Billing & Collection Charge $ 2.60 $2.65 System Availability Charge 8.80 9.20 Total Base (Residential) Service Charge $11.40 $11.85 Compliance Charge - $/Bill (a) $ 30.85 $31.95 Total Nonresidential Service Charge $ 42.25 $43.80 Volume Charge Metered - $/Ccf $ 2.02 $2.11 Unmetered - $/Bill Each Room 1.32 1.38 Each Water Closet 4.93 5.15 Each Bath 4.11 4.30 Each Separate Shower 4.11 4.30 Extra Strength Surcharges - $/ton (b) Suspended Solids over 300 mg/l $222.62 $231.35 Biological Oxygen Demand: (BOD’s) over 300 mg/l $596.72 $620.14 Chemical Oxygen Demand: (COD’s) over 600 mg/l $298.36 $310.07 _________________________ (a) Reflects recommended rates approved by the Rate Commission, and enacted by the Board pursuant to Ordinance No. 12905. (b) Applicable only to nonresidential customers. Key: Ccf – Hundred Cubic Feet. mg/l – milligram per liter. Source: The District. The Rate Change Proposal is for a term of four years, FY 2013 through 2016. The Rate Commission Report states that the record of proceedings supports a finding that the requested District’s $661 million CIRP would allow the District to meet the near-term capital improvements needs until 2016. The Rate Commission further believed that the proceedings supported a finding that an additional rate change proposal and/or the issuance of debt would be required prior to 2012 to fund any compliance required by settlement or court order in the proceedings captioned United States of America and the State of Missouri v. The Metropolitan St. Louis Sewer District. See “LITIGATION” herein. The following table sets forth the rate increases included in the Rate Commission recommendation for each of the years indicated. See “Rate Setting Process” in this Official Statement. 41 Proposed Wastewater Charges Type of Monthly Charge Effective July 1, 2012 FY 2013 Effective July 1, 2013 FY 2014 Effective July 1, 2014 FY 2015 Effective July 1, 2015 FY 2016 96 Base Charge - $/Bill Billing & Collection Charge 3.25 3.45 3.55 3.70 System Availability Charge 9.90 11.40 12.70 14.55 ____ ____ ____ ____ Total Base (Residential) Service Charge 13.15 14.85 16.25 18.25 Compliance Charge - $/Bill (a) Tier 1 23.00 16.00 9.00 2.15 Tier 2 39.30 40.65 41.20 41.60 Tier 3 83.65 86.60 87.75 88.55 Tier 4 122.65 126.95 128.65 129.85 Tier 5 161.60 167.30 169.55 171.10 Volume Charge Metered - $/Ccf 2.28 2.50 2.82 3.21 Unmetered - $/Bill Each Room 1.48 1.63 1.83 2.09 Each Water Closet 5.56 6.10 6.88 7.83 Each Bath 4.64 5.08 5.73 6.53 Each Separate Shower 4.64 5.08 5.73 6.53 Extra Strength Surcharges - $/ton (a) Suspended Solids over 300 mg/l 231.35 231.35 244.03 251.88 BOD over 300 mg/l 620.14 620.14 620.14 632.38 COD over 600 mg/l 310.07 310.07 310.07 316.19 Typical Residential Bill - $/Bill(b) User Charge Portion 27.20 29.40 31.79 33.46 Capital Charge Portion 4.19 5.45 7.02 10.47 ____ ____ ____ ____ Total 31.39 34.85 38.81 43.93 (a) Applicable only to nonresidential customers. (b) Rates as recommended by the Rate Commission. Under the District’s Charter, the Board may not introduce for adoption any ordinance to effect a rate change prior to 45 days after recept of the Rate Commission Report. The Charter further provides that the Board shall enact an ordinance consistent with the Rate Commission Report unless certain findings are made which authorize deviation from the Rate Commission recommendation. 42 Customer Accounts The District imposes a user charge on all customers that use its system of sewers, treatment plants and other facilities. The number of customers per category of accounts is as follows: The Metropolitan St. Louis Sewer District Number of Customers by Type Last Ten Fiscal Years Fiscal Year Ending June 30 Single- Family Residential Multi- Family Residential Commercial/ Industrial Total Accounts 2002 353,166 44,581 25,664 423,411 2003 353,935 44,632 25,672 424,239 2004 356,069 45,969 25,806 427,844 2005 360,104 44,506 25,758 430,368 2006 362,043 44,700 25,700 432,443 2007 362,569 44,875 25,647 433,091 20081 391,181 54,862 32,336 478,379 20091 388,791 51,441 32,161 472,393 2010 384,749 51,088 32,123 467,960 2011 356,945 34,740 23,226 414,912 _________________ Source: The District. 1 Due to the implementation of the impervious area charge in 1998, approximately 46,000 stormwater only accounts are billed each month. This charge was challenged and a court decision was entered on July 2, 2010. Based on that decision the 46,000 accounts were not to be billed an impervious charge in FY 2011. Largest User Charge Customers The following table lists the District’s ten largest wastewater user charge customers for the Fiscal Year ended June 30, 2011: Customer User Charges Percent of Total Anheuser-Busch Companies, Inc. $4,935,239 2.30% Washington University 1,268,801 0.59 Mallinckrodt, Inc. 1,048,204 0.49 Cott Beverages, Inc. 805,108 0.38 City of St. Louis 787,548 0.37 Zoological Gardens 710,365 0.33 Sigma-Aldrich 595,897 0.28 Boeing 593,991 0.28 BJC Health Systems 481,937 0.22 Sensient 474,099 0.22 Total: $11,701,189 5.46% ___________________________________ Source: The District. 43 User Charge Revenues The following table shows the amount of wastewater user charge revenues which were billed and collected by the District for the Fiscal Years ended June 30, 2006 through June 30, 2011: Collections as a Fiscal Wastewater Wastewater % of Wastewater Year Charges Billed Charges Collected Charges Billed 2006 $197,604,224 $189,709,994 96.92% 2007 193,056,700 189,249,138 98.03 2008 203,634,800 195,441,462 95.98 2009 183,512,398 177,872,543 96.93 2010 203,649,824 198,413,235 97.43 2011 213,503,730 203,520,767 95.32 __________________________ Source: The District. Outstanding Indebtedness Direct Bonded Indebtedness. As of the date of this Official Statement, the District has no outstanding general obligation indebtedness on either a District-wide or subdistrict basis. Other Outstanding Debt. The District ended Fiscal Year 2011 with approximately $626 million in long-term debt outstanding. The increase of approximately $21 million from the prior fiscal year is due to the issuance of one additional series of bonds. The following table summarizes the outstanding long- term debt for the District at the end of Fiscal Years 2009, 2010 and 2011: Total Long-Term Debt Outstanding (000s) 2009 2010 2011 Revenue Bonds: Series 2004A $168,965 $167,370 $165,590 Series 2004B 136,795 130,110 123,055 Series 2005A 5,955 5,665 5,370 Series 2006A 40,480 38,420 36,335 Series 2006B 13,575 12,935 12,285 Series 2006C 60,000 60,000 60,000 Series 2008A Series 2008B 30,000 39,128 30,000 37,375 30,000 35,610 Series 2009A 0 23,000 22,053 Series 2010A Series 2010B Series 2010C 0 0 0 7,981 85,000 0 7,981 85,000 37,000 West Watson and Nanell Loan Agreement 100 0 0 Ozark and Tablerock Loan Agreement 68 0 0 Energy Loan Program 48 37 25 Oracle/Blue Heron Loan Agreement 4,130 7,264 6,096 $499,244 $605,157 $626,400 __________________________ Source: The District. 44 Pro Forma Statement of Pledged Revenues and Debt Service Coverage The following table shows pro forma statements(1) showing projected wastewater revenues and expenditures and debt service coverage on existing and anticipated revenue bonds during the current fiscal year and next four fiscal years. COMPARISON OF PROJECTED PLEDGED REVENUES AND PROJECTED DEBT SERVICE COVERAGE 2012 2013 2014 2015 2016 Total Service Charge Revenue $220,387,500 $235,224,900 $256,143,100 $282,068,100 $316,227,600 Other Operating Revenue $3,382,400 $1,489,600 $790,000 $(108,100) $(1,314,000) Connection Fee Revenue 1,288,000 1,327,000 1,367,000 1,408,000 1,450,000 Interest Income 1,683,600 1,808,400 1,987,600 2,163,000 2,330,300 Subtotal Other Revenue $6,354,000 $4,625,000 $4,144,600 $3,462,900 $2,466,300 Total Revenue $226,741,500 $239,849,900 $260,287,700 $285,531,000 $318,693,900 Operation and Maintenance Expense $157,876,600 $157,006,600 $158,371,900 $168,336,100 $173,566,300 Pledged Revenue $68,864,900 $82,843,300 $101,915,800 $117,194,900 $145,127,600 Debt Service Existing Senior Revenue Bonds(2) $20,195,031 $23,408,700 $23,536,600 $23,690,100 $23,827,750 Proposed Senior Revenue Bonds(3) 0 5,087,700 16,087,500 26,950,000 36,712,500 Total Senior Revenue Bonds $20,195,031 $28,496,400 $39,624,100 $50,640,100 $60,540,250 Existing State Revolving Fund Loans $20,232,600 $21,395,200 $21,345,500 $21,545,900 $21,324,600 Proposed State Revolving Fund Loans (3) 729,700 2,988,600 5,233,700 7,478,800 9,723,900 Total State Revolving Fund Loans $20,730,300 $24,383,800 $26,579,200 $29,024,700 $31,048,500 Total Projected Debt Service $40,925,331 $52,880,200 $66,203,300 $79,664,800 $91,588,750 Total Projected Senior Debt Service Coverage 3.41x 2.91x 2.57x 2.31x 2.40x Total Projected Coverage for all Debt 1.68x 1.57x 1.54x 1.47x 1.58x (1) See APPENDIX D – Financial Feasibility Report for detailed discussion of assumptions upon which projects are based. (2) Includes debt service on Series 2011B Bonds. (3) Assumes passage of referendum authorizing $945,000,000 in 2012 and issuance of $895,000,000 of revenues bonds in FY 2013 to FY 2016. 45 Employee Benefits The District currently maintains three pension plans for its employees: (i) a noncontributory single employer defined benefit plan (the “Defined Benefit Plan”) providing retirement benefits as well as death and disability benefits to all full-time District employees, (ii) a defined contribution plan (the “Defined Contribution Plan”) and (iii) a deferred compensation plan (the “Deferred Compensation Plan”). A Pension Committee (consisting of two members of the District’s Board of Trustees, two elected employee members and four members of the District’s management staff) administers the Defined Benefit Plan. The Defined Benefit Plan is exempt from the requirements of the Employee Retirement Income Security Act of 1974 (“ERISA”) and, as such, is not subject to ERISA’s reporting requirements. As a noncontributory plan, the District’s employees do not contribute to the Defined Benefit Plan. Ordinances establishing the Defined Benefit Plan provide for actuarially determined annual contributions, paid solely by the District, that are sufficient to pay benefits when due. Contributions of $10,500,769 and $9,583,137, excluding certain professional fees paid by the District, were made to the Defined Benefit Plan during the Defined Benefit Plan’s Fiscal Years ended December 31, 2010 and 2009, respectively. These contributions were made in accordance with actuarially determined contribution requirements based on actuarial valuations performed at December 31, 2010 and 2009, respectively, and for 2010 consisted of (a) $6,103,002 normal cost plus (b) $3,484,662 amortization of the actuarial accrued assets in excess of the actuarial accrued liability and prior changes (c) multiplied by an inflation factor of 1.075. The District provides certain professional fees, office space, utilities, and other services to the Defined Benefit Plan at no cost. Other costs of administering the Pension Plan are financed from plan net assets. For more information regarding the District’s Defined Benefit Plan, see Note 8 to the audited financial statements of the District contained in Appendix A to this Official Statement. Effective January 1, 2011, the District started the Defined Compensation Plan for all new hires. Current employees with less than 10 years of service on December 31, 2010, could voluntarily elect to transfer from the Defined Benefit Plan into the Defined Contribution Plan. The Defined Contribution Plan provides a basic contribution of 7% of employee annual earnings and provides a matching contribution of 50% of the first 4% of earnings the employee defers into the Deferred Compensation Plan. (This is a maximum matching contribution of 2% of earnings.) Employees decide upon the investment of these contributions and savings from funds offered by Vanguard. Of the 404 District employees with less than 10 years of service, 23 elected to participate in the Defined Contribution Plan. A transfer of $70,869 representing the actuarial accrual of pension benefits for each employee was made from the Defined Benefit Plan to the Defined Contribution Plan for these 23 employees. The District also offers its employees the Deferred Compensation Plan created in accordance with Internal Revenue Code Section 457. The Deferred Compensation Plan, available to all District employees, permits them to defer a portion of their salary until future years. The deferred compensation is not available to employees until separation from service, or in special approved circumstances due to financial hardship as defined by the Deferred Compensation Plan. Plan assets are held in trust for the exclusive benefit of participants and their beneficiaries. As a result, the assets and liabilities of the Deferred Compensation Plan are not included in the District’s financial statements. For more information regarding the District’s Deferred Compensation Plan, see Note 9 to the audited financial statements of the District contained in Appendix A to this Official Statement. 46 Other Post-Employment Benefits The District pays the monthly group health insurance premium for the individual until the retiree becomes eligible for Medicare. During Fiscal Years 2011 and 2010, expenses of $2.142 million and 2.104 million, respectively, were recognized for post-retirement health care premiums as those premiums were paid. The District’s net current OPEB obligation at June 30, 2011 and 2010, respectively, were $2,704,799 and 1,924,100. It is estimated that for the Fiscal Year ending June 30, 2009, the District’s unfunded accrued liability will be approximately $24,412,000 assuming a 4.50% return on investment. The significant reduction in accrued liability resulted from a change in benefits offered to existing and future retirees age 65 and over. For more information regarding the District’s OPEB plans, see Note 10 to the audited financial statements of the District contained in Appendix A to this Official Statement. Also see the section herein captioned “FINANCIAL OPERATIONS OF THE DISTRICT – Selected Financial Data of the District.” Tax Limitation Amendment – Hancock Amendment An amendment to the Missouri Constitution (the “Hancock Amendment”) limits the rate of increase and the total amount of taxes on property which may be imposed in any year, and the limit may not be exceeded without voter approval. Provisions are included in the amendment for rolling back tax rates to produce an amount of revenues equal to that of the previous year if the definition of the tax base is changed or if property is reassessed. The tax levy on the assessed valuation of new construction is exempt from this limitation. The Hancock Amendment also requires a political subdivision of the State to seek voter approval in order to increase any “tax, license or fee” over existing rates. A Missouri court has held that the District’s current wastewater user charge structure does not constitute a “tax, license or fee” for purposes of the Hancock Amendment’s voter approval requirements. The Hancock Amendment does not prohibit an increase in the District’s wastewater user charges to pay debt service on the Bonds because voters in the District approved the issuance of the Series 2011B Bonds at the August 2008 election, including increases in the District’s wastewater user charges sufficient to pay debt service on the Bonds. REGULATORY REQUIREMENTS General The District is subject to the provisions of the Federal Water Pollution Control Act, as amended, 33 U.S.C. 1251 et seq., commonly referred to as the “Clean Water Act,” the stated objective of which is to restore and maintain the chemical, physical, and biological integrity of the nation’s waters. The District is also subject to the Missouri Clean Water Law, Sections 644.006 through 644.141, Revised Statutes of Missouri, as amended, and other laws and regulations. The regulatory requirements are administered by the United States Environmental Protection Agency (“EPA”) through DNR. The District is currently not subject to the Federal Safe Drinking Water Act, as amended, 42 U.S.C. 300f et seq., which is also administered by the EPA. The Clean Water Act imposes several permit and regulatory requirements on wastewater treatment systems. Public sewage treatment plant owners and operators such as the District are required to provide secondary treatment as established by federal regulation for all wastewater discharge from treatment plants into waters of the United States. Under the Clean Water Act, states also establish water quality standards, classifying water body uses, and pollutant control criteria to protect those uses. All sewage system discharges require National Pollutant Discharge Elimination System (“NPDES”) permits 47 specifying the permissible pollutant levels in wastewater effluent discharged from the plants. In addition to secondary treatment requirements for publicly-owned treatment plants, all discharges from plants and combined sewer overflows (“CSO”) may be subject to additional stringent controls (which are then incorporated into NPDES permits) if such discharges are required to achieve the water quality standards established by the state pursuant to federal regulations. Under state law, the State also requires treatment plants to obtain state surface water discharge permits, which, in the discretion of EPA and DNR, may be issued jointly with the NPDES permit. Major wastewater treatment systems also must adopt and enforce pretreatment regulations for industries and other non-domestic sources discharging into sewers. Treatment plants are also subject to Clean Water Act and state regulations governing sludge use and disposal. The Clean Water Act is enforced by EPA through administrative orders and procedures. Violations may be the basis for federal lawsuits brought on EPA’s behalf by the U.S. Department of Justice or by private citizens. Regulatory Matters US and State of Missouri v. Metropolitan St. Louis Sewer District; In the U.S. District Court for the Eastern District of Missouri; Case No. 07-1120. A lawsuit was filed by the Department of Justice on behalf of the EPA for various alleged violations of the Clean Water Act. The District has been the subject of several investigatory actions by EPA over the past several years. Negotiations have been ongoing with EPA and the Missouri Department of Natural Resources (“MDNR”) regarding the sewer collection system, both the combined system and the sanitary system, for several years. The Missouri Coalition for the Environment (“MCE”) gave Notice of Intent to Sue the District under the citizen suit provisions of the Clean Water Act. EPA and MDNR then brought the suit on June 11, 2007, and MCE moved to intervene on August 13, 2007. Intervention was granted on August 29, 2007. The District filed its answer to the complaint filed by United States and Missouri on September 21, 2007, including in its response filing counterclaims against the State of Missouri. Concurrently with the answer and counterclaims, the District filed a motion to dismiss all claims and penalties that occurred before July 11, 2002, as barred by the applicable statute of limitations. Following a responsive pleading filed by the U.S. Department of Justice and a reply by the District, on October 4, 2007, the U.S. District Court for the Eastern District of Missouri (the “Court”) granted the District’s motion to dismiss, thus barring all of plaintiffs’ claims for civil penalties attributable to any and all of the District’s alleged violations of the Clean Water Act that occurred before June 11, 2002, from this litigation. A group of companies called the MIEC filed a Motion to Intervene. This motion was denied on September 12, 2008. Further, the original judge in this matter, and the subsequently assigned judge, have either been recused or rejected by a party from presiding over this case. The current judge is Carol E. Jackson, Chief United States District Judge. The suit is based on violations of the Clean Water Act as a result of overflows in the combined and sanitary sewer systems causing pollutants to reach waters of the United States. There are other counts involving violations of permit conditions. Also, the suit alleges that the District does not have an approved Long-Term Control Program (“LTCP”) for the combined system. The District has been working on these issues for several decades. The District has asked voters to approve bonds and rate increases to rehabilitate and maintain the collection system. The District finished this year’s process required by its Charter to increase rates which will continue to fund the improvements sought by EPA and MDNR. The Judge made a major ruling on September 12, 2008, putting in place a stay while the parties mediate the issues. On October 14, 2008, the MIEC appealed the denial of the Motion to Intervene. That motion was denied by the Eighth Circuit Court of Appeals on June 22, 2009. In addition, the State of Missouri filed an appeal of the September 12, 2008, ruling which disallowed the State’s claim of sovereign immunity as 48 to the counterclaims made by the District. On August 3, 2009, this decision was upheld by the Eighth Circuit Court of Appeals. The parties have continued mediation. A status report on the stay is due June 30, 2011. The District has submitted its updated LTCP, which is currently under review by the regulators. The District approved an ordinance at its July 2011 meeting which authorizes the Executive Director and General Counsel to sign an agreement with the Environmental Protection Agency (the “Consent Decree”). Under the Consent Decree, the District has agreed to spend $4.7 billion over the next 23 years to upgrade and build treatment plants, make other repairs and install sewer lines. Most of the projects enumerated in the proposed settlement agreement were already addressed in the District’s long-term $6 billion capital program. The environmental group has also agreed to the terms of the settlement, but the State of Missouri, which is also a party to the litigation, has not agreed to sign the Consent Decree in its present form. However, all parties, including the State of Missouri, have accepted language in a motion filed with the Court in August 2011 which indicates that there are no issues remaining to be resolved in the proceedings. On August 4, 2011, the Consent Decree was lodged with the Court. An extended public comment period ended October 10, 2011. While the District does not have the right to make changes to the Consent Decree, the Department of Justice could reopen the discussions based on comments it receives during the comment period. The Department of Justice will not file the comments and responses thereto until December 23, 2011. At that time the Department of Justice will determine if there is any issue in the comments that is new information which would cause it to withdraw the government's support for the Consent Decree. The District is expected to file supporting documents and possibly a new Motion to deal with currently pending counterclaims on December 21, 2011. If the Department of Justice decides not to reopen the discussions, it is expected that the Court will then make a decision whether to lodge the Consent Decree, hold a hearing or take some other action with respect to the lawsuit. See “Appendix D − Financial Feasibility Report – Capital Improvement and Replacement Program” for a discussion of the major components of the Consent Decree. Unilateral Administrative Order issued by the US EPA Region VII. This is a Unilateral Administrative Order (“UAO”) issued by the United States Environmental Protection Agency Region VII requiring that the District: (1) provide notice to EPA of the District’s intent to comply with the Amended Order; (2) post signs according to the instructions and schedule contained in the UAO; (3) forward notices to customers and post a notice on the District’s website as described in the UAO; and (4) provide notice to EPA and MDNR of all known discharges from constructed Sanitary Sewer System Overflows (“SSOs”) on a quarterly basis, beginning in August 2007. The District is complying with the UAO. EPA has been notified of the District’s intent to comply with the Amended Order, subject to the District’s legal authority and capabilities. The notices have been forwarded to customers and a copy posted on the District’s website. Signs have been posted as instructed. The District has notified EPA and MDNR of all known discharges from constructed SSOs for the quarter May 2007 through July 2007, and continues such notifications on a quarterly basis. The Second Amended Order required additional information, signs, and adjusted the non-constructed SSO sign inspection schedule as well as requested electronic raw data. The District has sent such information to EPA and complied with all requests subject to the District’s legal authority and capabilities and continues to do so. LITIGATION Except as described in the “REGULATORY REQUIREMENTS – Regulatory Matters” above and in this Section, to the knowledge of the District there is no legal action, suit, proceeding, inquiry or investigation at law or in equity before or by any court, public board or body for which the District has been served with process or official notice or threatened against or affecting the District or any reasonable basis therefor, wherein an unfavorable decision, ruling or finding would adversely affect the transaction 49 contemplated by this Official Statement or the validity of the Series 2011B Bonds, the Bond Ordinance, or any agreement or instrument to which the District is a party and which is used or contemplated for use in the transactions contemplated by this Official Statement, and no member, employee or agent of the District has been served with any legal process regarding such litigation or other proceeding. William Zweig et al. v. The Metropolitan St. Louis Sewer District. This case was filed on July 18, 2008 in the Circuit Court for St. Louis County. The lawsuit, as amended, contends that District Ordinances No. 12560 and No. 12789, which enacted increases in the District’s stormwater user charge based on the amount of impervious area on the customer’s property, are unconstitutional. The lawsuit claims the ordinances violate the so-called Hancock Amendment, Mo. Const. art. X, § 22(a), because the stormwater user charge is in reality a tax that requires voter approval. The District’s Board of Trustees passed the ordinances in December 2007 and December 2008, respectively, without submitting them to the voters. The District contends the stormwater user charge is not a tax and, thus, not subject to voter approval. The original plaintiff, William Zweig, is a District stormwater customer residing in Chesterfield, Missouri, who seeks to represent a class of all District stormwater customers. In July 2009, two more plaintiff class representatives, David Milberg and Mark Kurz, were added to the lawsuit. The lawsuit seeks (1) a declaration that the stormwater user charge is unconstitutional, (2) a refund of all stormwater user charges collected, and (3) payment of the plaintiffs’ costs, including attorneys’ fees. On August 27, 2008, the District filed an answer and affirmative defenses to the original Petition, and on August 6, 2009, the District filed an answer and affirmative defenses to the Second Amended Petition. Since the case was filed, the parties have engaged in extensive discovery, including depositions of the original plaintiff and several District witnesses. Discovery is continuing, including depositions of the new plaintiffs and expert witness discovery. Plaintiffs’ motion for class certification was filed in May 2009, but has not been fully briefed and has not been argued to the court. A motion to intervene was filed in February 2009 on behalf of a number of putative class members who allege they are not adequately represented by the plaintiffs. The plaintiffs and the District both oppose the motion to intervene. The class certification and intervention motions were set for hearing in early October 2009. The pace of the case has been significantly slowed due to the retirement of the judge originally assigned to the case, the assignment and subsequent recusal of a replacement judge, and then the recusal of all the judges in the St. Louis County Circuit Court, presumably because they are all putative class members as District customers. In August 2009, the Missouri Supreme Court assigned a judge from Lincoln County to hear the case. Trial was held April 13, 2010 through April 16, 2010. On July 9, 2010, the court handed down Findings of Fact, Conclusions of Law, Judgment and Decree in the first phase of the bifurcated trial. The Court declared the Stormwater User Charge is a tax under the Hancock Amendment. The second phase of the trial was heard on October 6, 2010, to determine the amount, if any, to be refunded. The amount of a full refund would be approximately $87 million; a partial refund for the additional amount collected under the user charge would amount to approximately $35 million. The judge ruled on November 29, 2010 that no refund would be issued by the District. The third phase, to determine the amount of Plaintiffs’ counsel’s attorneys’ fees, to be paid by the District was heard on January 18, 2011. On February 4, 2011, the judge awarded Plaintiff’s counsel $4.8 million in attorney’s fees and expenses. The District has appealed the portion of the Lincoln County judge’s decision that invalidated the stormwater user charge and the award of attorney’s fees. There are four cases associated with the September 14, 2008, flooding of the River Des Peres in the aftermath of heavy rains from Hurricane Ike. They are as follows: 50 Angela Holland v. The Metropolitan St. Louis Sewer District. St. Louis County Circuit Court, Cause No. 08SL-CC04922. On November 25, 2008, Plaintiff Angela Holland filed this action against the District in the Circuit Court of St. Louis County for wrongful death and property damage. The initial Petition alleged that the District was liable for the wrongful death of Louise Bryant who was swept away by the flood waters and drowned while trying to save her car. The petition alleged that the District was liable because (1) it failed to construct adequate stormwater facilities along the River Des Peres, such as levees, retaining walls, and water detention basins; and (2) it failed to forecast and warn plaintiff and her decedent about the potential dangers of flash flooding on September 14, 2008. The petition further alleged that the District’s sovereign immunity was waived under the circumstances of the case under the “dangerous condition” waiver of sovereign immunity contained in RSMo. § 537.600. On February 23, 2009, the District moved to strike certain allegations of petition and to make the petition more definite and certain. As grounds for the motion to strike, the District argued that the allegations failed to state a claim against the District arising out of the alleged dangerous condition of public property and that the District had no private duty to plaintiff or plaintiff’s decedent to construct stormwater facilities along the River Des Peres or to warn plaintiff or plaintiff’s decedent of potential flash flooding of the River Des Peres on September 14, 2008. In response to the District’s Motion, plaintiff Holland filed her first amended petition on April 13, 2009. The First Amended Petition sounded in two Counts. Count I purports to state a claim for negligence and a dangerous condition of public property, alleging basically the same grounds for liability as in the initial petition but omitting claims of liability arising out of the District’s alleged failure to forecast and warn of the flooding on the River Des Peres. Count II purports to state a claim for inverse condemnation and damage to Louise Bryant’s residence on Wilson Avenue in University City, Missouri. The first amended petition seeks damages for Ms. Bryant’s wrongful death and residential property damage as a result of the River Des Peres flooding. The District answered the first amended petition on May 4, 2009, denying liability and raising affirmative defenses. The parties have exchanged written discovery requests and responses and have produced documents. Discovery is proceeding. The District’s insurance carrier has assumed defense of this case and is paying attorney’s fees and costs Frederick Eppenberger, et al. vs. The Metropolitan St. Louis Sewer District. St. Louis County Circuit Court, Cause No. 08SL-CC05270. On December 17, 2008, plaintiffs Frederick Eppenberger, Maxine Smith and William Bain, as individuals and as putative class representatives filed this action against the District in the Circuit Court of St. Louis County for property damages. Like the Holland petition, the initial Eppenberger Petition alleged that the District was liable for the property damage to their homes and personal property caused by the flash flooding of the River Des Peres. Like the Holland Petition, the Eppenberger petition alleged that the District was liable because (1) it failed to construct adequate stormwater facilities along the River Des Peres, such as levees, retaining walls, and water detention basins; and (2) it failed to forecast and warn plaintiffs and the plaintiff class about the potential dangers of flash flooding on September 14, 2008. The petition further alleged that the River Des Peres was owned by and under the exclusive control of the District; that it was in a dangerous condition for which the District was responsible; and that plaintiffs’ damages resulted from the dangerous condition of the River Des Peres. On February 23, 2009, the District moved to dismiss the petition for failure to state a claim and, alternatively, to strike certain allegations. The District moved to dismiss on grounds that plaintiffs failed 51 to plead essential facts establishing a waiver of the District’s sovereign immunity. As grounds for the motion to strike, the District argued that the allegations failed to state a claim against the District arising out of the alleged dangerous condition of the public property and that the District had no private duty to plaintiffs or the plaintiff class to construct stormwater facilities along River Des Peres or to warn plaintiffs or the plaintiff class of potential flash flooding of the River Des Peres on September 14, 2008. In response to the District’s motion, plaintiffs filed their first amended petition on April 13, 2009. The first amended petition contained two Counts. Count I purports to state a claim for negligence and a dangerous condition of public property, alleging basically the same grounds for liability as in the initial Petition but omitting claims of liability arising out of the District’s alleged failure to forecast and warn of the flooding on the River Des Peres. Count II purports to state a claim for inverse condemnation and damage to the homes and personal property of plaintiffs and the plaintiff class. The first amended petition seeks monetary relief for plaintiffs and the plaintiff class to compensate them for flood damage to their property. The District answered the first amended petition on May 4, 2009, denying liability and raising affirmative defenses. The parties have exchanged written discovery requests and responses and have produced documents. At present, there is no discovery deadline for this matter. However, a case management conference was held on September 15, 2009 and plaintiffs’ counsel indicated an intent to file a motion for class certification on or before January 25, 2010, the date of the next scheduled case management conference. The District filed a Motion for Summary Judgment claiming Plaintiff’s petition failed to state a claim against the District. On April 19, 2011 the Court of Appeals remanded the case back to Circuit Court for further proceedings, stating that it was premature to uphold the Summary Judgment. The District has asked the Court for a rehearing. The request for a rehearing was denied. The case was remanded back to the Circuit Court and continues on the litigation track. The District’s insurance carrier has assumed defense of this case and is paying attorney’s fees and costs. Peggy Sausville v. The Metropolitan St. Louis Sewer District. St. Louis City Circuit Court, Cause No. 0922-CC01248. On April 1, 2009, plaintiff Peggy Sausville filed this against the District in the Circuit Court of the City of St. Louis for property damages. The case arises out of the same facts and circumstances as the Holland and Eppenberger lawsuits and the allegations of the petition mirror the initial Holland petition. Plaintiff Sausville alleges that she sustained damages to her home and personal property as a result of the flooding on September 14, 2008. The petition contains two Counts. Count I purports to state a claim for negligence, nuisance and a dangerous condition of public property, alleging basically that the District was liable because (1) it failed to construct adequate stormwater facilities along the River Des Peres, such as levees, retaining walls, and water detention basins; and (2) it failed to forecast and warn plaintiff about the potential dangers of flash flooding on September 14, 2008. Count II purports to state a claim for inverse condemnation and damage to plaintiff’s home and personal property caused by the flash flooding of the River Des Peres. On April 21, 2009, the District moved to dismiss and transfer venue to the Circuit Court of St. Louis County. The motion was briefed, argued and laid dormant. On August 31, 2009, the District answered the petition, without waiver of its venue objection. The District’s answer denied liability and 52 raised affirmative defenses. In March 2011 the court ruled there was venue in the City of St. Louis on an inverse condemnation theory. The District is filing a Petition for Writ of Prohibition to prevent the Circuit Court from proceeding with the case because it involves inverse condemnation of property located in St. Louis County. The writ was denied and the case continues in the Circuit Court of the City of St. Louis. The District’s insurance carrier has assumed defense of this case and is paying attorney’s fees and costs. William & Louise Gaddy v. The Metropolitan St. Louis Sewer District. St. Louis County Circuit Court, Cause No. 09SL-CC03426. On August 7, 2009, plaintiffs William and Louise Gaddy, husband and wife, filed this action against the District in the Circuit Court of St. Louis County for property damages. This litigation is similar to the Holland, Eppenberger and Sausville cases and mirrors the pleadings in those cases. However, plaintiffs allege damages as a result of the flooding of Maline Creek on September 14, 2008 (upstream of the River Des Peres). Plaintiffs alleged they sustained damage to their homes and personal property on September 14, 2008 as a result of the flooding of Maline Creek. Plaintiffs allege that the District is liable for flood damage to their homes and personal property because (1) it failed to construct adequate stormwater facilities along the River Des Peres, such as levees, retaining walls, and water detention basins; and (2) it failed to forecast and warn plaintiffs and the plaintiff class about the potential dangers of flash flooding on September 14, 2008. The petition further alleged that the Maline Creek was owned by and under the exclusive control of the District; that it was in a dangerous condition for which the District was responsible; and that plaintiffs’’ damages resulted from the dangerous condition of the Maline Creek. Plaintiff’s attorney is not proceeding with discovery and a trial setting, pending the outcome of the Eppenberger case. TAX MATTERS The following is a summary of the material federal and State of Missouri income tax consequences of holding and disposing of the Series 2011B Bonds. This summary is based upon laws, regulations, rulings and judicial decisions now in effect, all of which are subject to change (possibly on a retroactive basis). This summary does not discuss all aspects of federal income taxation that may be relevant to investors in light of their personal investment circumstances or describe the tax consequences to certain types of owners subject to special treatment under the federal income tax laws (for example, dealers in securities or other persons who do not hold the Series 2011B Bonds as a capital asset, tax- exempt organizations, individual retirement accounts and other tax deferred accounts, and foreign taxpayers), and, except for the income tax laws of the State of Missouri, does not discuss the consequences to an owner under any state, local or foreign tax laws. The summary does not deal with the tax treatment of persons who purchase the Series 2011B Bonds in the secondary market. Prospective investors are advised to consult their own tax advisors regarding federal, state, local and other tax considerations of holding and disposing of the Series 2011B Bonds. Opinion of Co-Bond Counsel In the opinion of Gilmore & Bell, P.C. and White Coleman & Associates, LLC, Co-Bond Counsel, under the law existing as of the issue date of the Series 2011B Bonds: Federal and Missouri Tax Exemption. The interest on the Series 2011B Bonds is excludable from gross income for federal income tax purposes and is exempt from income taxation by the State of Missouri. 53 Alternative Minimum Tax. Interest on the Series 2011B Bonds is not an item of tax preference for purposes of computing the federal alternative minimum tax imposed on individuals and corporations, but is taken into account in determining adjusted current earnings for the purpose of computing the alternative minimum tax imposed on certain corporations. Bank Qualification. The Series 2011B Bonds have not been designated as “qualified tax-exempt obligations” for purposes of Section 265(b) of the Internal Revenue Code of 1986, as amended (the “Code”). Co-Bond Counsel’s opinions are provided as of the date of the original issue of the Series 2011B Bonds, subject to the condition that the District complies with all requirements of the Code that must be satisfied subsequent to the issuance of the Series 2011B Bonds in order that interest thereon be, or continue to be, excludable from gross income for federal income tax purposes. The District has covenanted to comply with all such requirements. Failure to comply with certain of such requirements may cause the inclusion of interest on the Series 2011B Bonds in gross income for federal and Missouri income tax purposes retroactive to the date of issuance of the Series 2011B Bonds. Co-Bond Counsel are expressing no opinion regarding other federal, state or local tax consequences arising with respect to the Series 2011B Bonds but has reviewed the discussion under the heading “TAX MATTERS.” Other Tax Consequences Original Issue Premium. If a Series 2011B Bond is issued at a price that exceeds the stated redemption price at maturity of the Series 2011B Bond, the excess of the purchase price over the stated redemption price at maturity constitutes “premium” on that Series 2011B Bond. Under Section 171 of the Code, the purchaser of that Series 2011B Bond must amortize the premium over the term of the Series 2011B Bond using constant yield principles, based on the purchaser’s yield to maturity. As premium is amortized, the owner’s basis in the Series 2011B Bond and the amount of tax-exempt interest received will be reduced by the amount of amortizable premium properly allocable to the owner. This will result in an increase in the gain (or decrease in the loss) to be recognized for federal income tax purposes on sale or disposition of the Series 2011B Bond prior to its maturity. Even though the owner’s basis is reduced, no federal income tax deduction is allowed. Prospective investors should consult their own tax advisors concerning the calculation and accrual of bond premium. Sale, Exchange or Retirement of Bonds. Upon the sale, exchange or retirement (including redemption) of a Series 2011B Bond, an owner of the Series 2011B Bond generally will recognize gain or loss in an amount equal to the difference between the amount of cash and the fair market value of any property received on the sale, exchange or retirement of the Series 2011B Bond (other than in respect of accrued and unpaid interest) and such owner’s adjusted tax basis in the Series 2011B Bond. To the extent a Series 2011B Bond is held as a capital asset, such gain or loss will be capital gain or loss and will be long-term capital gain or loss if the Series 2011B Bond has been held for more than 12 months at the time of sale, exchange or retirement. Reporting Requirements. In general, information reporting requirements will apply to certain payments of principal, interest and premium paid on the Series 2011B Bonds, and to the proceeds paid on the sale of the Series 2011B Bonds, other than certain exempt recipients (such as corporations and foreign entities). A backup withholding tax will apply to such payments if the owner fails to provide a taxpayer identification number or certification of foreign or other exempt status or fails to report in full dividend and interest income. The amount of any backup withholding from a payment to an owner will be allowed as a credit against the owner’s federal income tax liability. 54 Collateral Federal Income Tax Consequences. Prospective purchasers of the Series 2011B Bonds should be aware that ownership of the Series 2011B Bonds may result in collateral federal income tax consequences to certain taxpayers, including, without limitation, financial institutions, property and casualty insurance companies, individual recipients of Social Security or Railroad Retirement benefits, certain S corporations with “excess net passive income,” foreign corporations subject to the branch profits tax, life insurance companies, and taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry or have paid or incurred certain expenses allocable to the Series 2011B Bonds. Co-Bond Counsel express no opinion regarding these tax consequences. Purchasers of Series 2011B Bonds should consult their tax advisors as to the applicability of these tax consequences and other federal income tax consequences of the purchase, ownership and disposition of the Series 2011B Bonds, including the possible application of state, local, foreign and other tax laws. LEGAL MATTERS Certain legal matters incident to the authorization, issuance, sale and delivery of the Series 2011B Bonds are subject to the approval of Gilmore & Bell, P.C., St. Louis, Missouri, and White Coleman & Associates, LLC, St. Louis, Missouri, Co-Bond Counsel, whose approving legal opinions will be delivered with the Series 2011B Bonds in substantially the form of Appendix E hereto. Certain other legal matters will be passed on for the District by its General Counsel. Certain matters relating to the Official Statement will be passed upon by the Hardwick Law Firm, LLC, Kansas City, Missouri. The various legal opinions to be delivered concurrently with the delivery of the Series 2011B Bonds express the professional judgment of the attorneys rendering the opinions as to the legal issues explicitly addressed therein. By rendering a legal opinion, the opinion giver does not become an insurer or guarantor of that expression of professional judgment, of the transaction opined upon, or of the future performance of parties to such transaction, nor does the rendering of an opinion guarantee the outcome of any legal dispute that may arise out of the transaction. RATINGS Moody’s Investors Service, Standard & Poor’s and Fitch Ratings (the “Rating Agencies”) have assigned the Series 2011B Bonds their respective underlying ratings as shown on the cover page based on each Rating Agency’s respective evaluation of the creditworthiness of the District. Such ratings reflect only the views of the Rating Agencies at the time such ratings are given, and the Underwriter and the District make no representation as to the appropriateness of such ratings. An explanation of the significance of such ratings may be obtained only from the Rating Agencies. The District has furnished the Rating Agencies with certain information and materials relating to the Series 2011B Bonds and the District that have not been included in this Official Statement. Generally, rating agencies base their ratings on the information and materials so furnished and on investigations, studies and assumptions by the rating agencies. There is no assurance that a particular rating will be maintained for any given period of time or that it will not be lowered or withdrawn entirely if, in the judgment of the agency originally establishing such rating, circumstances so warrant. Neither the District nor the Underwriter have undertaken any responsibility to bring to the attention of the holders of the Series 2011B Bonds any proposed revision or withdrawal of a rating of the Series 2011B Bonds or to oppose any such proposed revision or withdrawal. Any revision or withdrawal of a rating could have an adverse effect on the market price and marketability of the Series 2011B Bonds. 55 CONTINUING DISCLOSURE Pursuant to a Disclosure Dissemination Agent Agreement dated as of December 1, 2011 (the “Continuing Disclosure Agreement”) between the District and Digital Assurance Certification, L.L.C. (“DAC”), under which the District has designated DAC as Dissemination Agent, the District has covenanted for the benefit of the holders and beneficial owners of the Series 2011B Bonds to provide, or cause to be provided, certain financial information and operating data relating to the District to certain parties by not later than 180 days following the end of the District’s Fiscal Year (the “Annual Report”), commencing with the report for the Fiscal Year ending June 30, 2012, and to provide notices of the occurrence of certain enumerated events, if material. The Annual Report will be filed by the Dissemination Agent on behalf of the District with the Municipal Securities Rulemaking Board (“MSRB”) pursuant to Rule 15c2-12 of the United States Securities and Exchange Commission under the Securities Exchange Act of 1934, as the same may be amended from time to time (“Rule 15c2-12”). The notices of material events will be filed by the Dissemination Agent on behalf of the District with the MSRB. These covenants have been made in order to assist the Underwriter in complying with Rule 15c2-12. The specific nature of the information to be contained in the Annual Report and in the notices of material events is summarized in “DEFINITIONS AND SUMMARIES OF CERTAIN PROVISIONS OF THE BOND ORDINANCE AND THE CONTINUING DISCLOSURE AGREEMENT” in Appendix C hereto. The District has never defaulted on any of its continuing disclosure obligations under Rule 15c2- 12. The Dissemination Agent has only the duties specifically set forth in the Continuing Disclosure Agreement. The Dissemination Agent’s obligation to deliver the information at the times and with the contents described in the Continuing Disclosure Agreement is limited to the extent that the District has provided such information to the Dissemination Agent as required by the Continuing Disclosure Agreement. The Dissemination Agent has no duty with respect to the content of any disclosures or notice made pursuant to the terms of the Continuing Disclosure Agreement. The Dissemination Agent has no duty or obligation to review or verify any information in the Annual Report, the District’s audited financial statements, a Notice Event (as defined in the Continuing Disclosure Agreement), or any other information, disclosures or notices provided to it by the District and shall not be deemed to be acting in any fiduciary capacity for the District, the holders of the Series 2011B Bonds or any other party. The Dissemination Agent has no responsibility for the District’s failure to report to the Dissemination Agent a Notice Event or a duty to determine the materiality thereof. The Dissemination Agent shall have no duty to determine, or liability for failing to determine, whether the District has complied with the Continuing Disclosure Agreement. The Dissemination Agent may conclusively rely upon certifications of the District at all times. UNDERWRITING The Series 2011B Bonds have been sold at public sale by the District and the purchaser has agreed to purchase the Series 2011B Bonds at a price of $58,192,190.83, which reflects the original principal amount of the Series 2011B Bonds plus the original issue premium of $6,104,835.15, less an underwriters’ discount of $162,644.32 The successful proposal to purchase the Series 2011B Bonds was submitted by a syndicate led by J.P. Morgan Securities LLC (the “Underwriter”). 56 CERTAIN RELATIONSHIPS The Hardwick Law Firm, LLC, has represented the District as co-bond counsel in prior transactions. FINANCIAL ADVISORS Public Financial Management, Des Moines, Iowa, and St. Louis, Missouri, and ButcherMark Financial Advisors LLC, New York, New York, have served as Co-Financial Advisors to the District in connection with the Series 2011B Bonds, relative to a plan of financing and relative to drafting certain portions of this Official Statement for the sale of the Series 2011B Bonds. The Co-Financial Advisors have participated in the compilation and editing of this Official Statement. The Co-Financial Advisors have not, however, independently verified the factual information contained in this Official Statement nor have they conducted an investigation of the affairs of the District for the purpose of determining the accuracy or completeness of any of the information contained herein. The Co-Financial Advisors have relied on the diligence and accuracy of the District which has certified that this Official Statement contains no material misstatement or omission of information. INDEPENDENT AUDITORS The Independent Auditor’s Report and Financial Statements of the District for the Fiscal Years ended June 30, 2011 and June 30, 2010, included in Appendix A of this Official Statement, have been audited by Schmersahl Treloar & Co., independent auditors, as stated in their report also appearing in Appendix A. MISCELLANEOUS The references, excerpts and summaries of all documents referred to herein do not purport to be complete statements of the provisions of such documents, and reference is made to all such documents for full and complete statements of all matters of fact relating to the Series 2011B Bonds, the security for the payment of the Series 2011B Bonds and the rights of the owners thereof. During the period of the offering, copies of drafts of such documents may be examined at the offices of the Financial Advisors; following delivery of the Series 2011B Bonds, copies of such documents may be examined at the corporate trust office of the Paying Agent in St. Louis, Missouri. The information contained in this Official Statement has been compiled from official and other sources deemed to be reliable, and while not guaranteed as to completeness or accuracy, is believed to be correct as of this date. It is anticipated that CUSIP identification numbers will be printed on the Series 2011B Bonds, but neither the failure to print such numbers on any Series 2011B Bonds nor any error in printing of such numbers will constitute cause for a failure or refusal by the purchaser thereof to accept delivery of and pay for any Series 2011B Bonds. The attached appendices are integral parts of this Official Statement and must be read together with all of the foregoing statements. The closing documents will include a certificate by the proper official of the District that, to the best of his knowledge and belief at the time of the acceptance of the delivery of the Series 2011B Bonds, 57 this Official Statement and any information furnished by the District supplementary thereto did not and do not contain any untrue statement of material fact or omit to state a material fact necessary in order to make the statements made in light of the circumstances under which they were made, not misleading in any material respect. Any statement made in this Official Statement involving matters of opinion or of estimates, whether or not expressly so stated, are set forth as such and not as representations of fact, and no representation is made that any of the estimates will be realized. The information and expressions of opinion herein are subject to change without notice and neither the delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the information presented herein since the date hereof. This Official Statement is not to be construed as a contract or agreement between the District, the Paying Agent, or the Underwriter and the purchasers or Owners of any Series 2011B Bonds. [Remainder of page intentionally left blank.] 58 This Official Statement has been authorized and approved by the District, deemed final pursuant to a separate certificate, and duly executed and delivered on its behalf by the officials signing below. THE METROPOLITAN ST. LOUIS SEWER DISTRICT By: /s/ Robert T. Berry Chairman By: /s/ Jeffrey L. Theerman Executive Director By: /s/ Karl J. Tyminski Secretary-Treasurer APPENDIX A INDEPENDENT AUDITOR’S REPORT AND FINANCIAL STATEMENTS OF THE METROPOLITAN ST. LOUIS SEWER DISTRICT FOR THE FISCAL YEAR ENDED JUNE 30, 2011 [THIS PAGE INTENTIONALLY LEFT BLANK] THE METROPOLITAN ST. LOUIS SEWER DISTRICT INDEPENDENT AUDITORS’ REPORT AND FINANCIAL STATEMENTS FOR THE YEARS ENDED JUNE 30, 2011 AND 2010 THE METROPOLITAN ST. LOUIS SEWER DISTRICT Contents Page INDEPENDENT AUDITORS’ REPORT .................................................................................. 1 - 2 MANAGEMENT’S DISCUSSION AND ANALYSIS ............................................................... 3 - 13 FINANCIAL STATEMENTS Statements of Net Assets ............................................................................................................. 14 - 15 Statements of Revenues, Expenses, and Changes in Net Assets ................................................. 16 Statements of Cash Flows............................................................................................................ 17 - 18 Notes to Financial Statements ..................................................................................................... 19 - 52 CS CHMERSAHL TRELOAR & Co. Certified Public Accountants Independent Auditors' Report To the Board of Trustees of the Metropolitan St. Louis Sewer District We have audited the accompanying financial statements of the Metropolitan St. Louis Sewer District (the "District") as of and for the years ended June 30, 2011 and 2010. as listed in the table of contents. These financial statements are the responsibility of the District's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards. issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining. on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the District as of June 30. 2011 and 2010. and the respective changes in financial position and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. In accordance with Government Auditing Standards, we have also issued our report dated November 8, 2011, on our consideration of the District's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or an compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. 1 (314) 966-2727 • fax (314) 966-6464 • 10805 Sunset Office Drive, Suite 400 • St. Louis, MO 63127 • e-mail: stcpa@stcpa.com The management's discussion and analysis on pages 3 through I 3 is not a required part ofthe basic financial statements but is supplementary information required by accounting principles generally accepted in the United States of America. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary infonration. However, we did not audit the information and express no opinion on it. November 8, 2011 St. Louis, Missouri 2 THE METROPOLITAN ST. LOUIS SEWER DISTRICT Management’s Discussion and Analysis For the Years Ended June 30, 2011 and 2010 3 The annual report of The Metropolitan St. Louis Sewer District (the “District”) includes the independent auditors’ report, management’s discussion and analysis (“MD&A”), and the financial statements accompanied by notes essential to the user’s understanding of the financial statements. Management of the District has provided this MD&A to be used in combination with the District’s financial statements. This narrative is intended to provide the reader with more insight into management’s knowledge of the transactions, events, and conditions reflected in the accompanying financial statements and the fiscal policies that govern the District’s operations. 2011 Financial Highlights The District placed $300.9 million of capital assets into service during fiscal year 2011. This high level of capitalization occurred to more precisely reflect the timing of placement into service of the District’s plants and systems. These capitalized assets include: o Treatment and disposal plant and equipment $ 236.9 million o Collection and pumping plant $ 34.8 million o General Plant and equipment $ 17.9 million o Land $ 11.3 million In conjunction with this capitalization of assets, the District increased accumulated depreciation by $58.4 million. Cash and investments decreased by $52.6 million since the District’s new debt was issued as a line of credit requiring the District to spend down reserves. This line of credit structure reflects the State’s change in the administration of its State Revolving Fund (SRF) program and does not impact the District’s receipt of future State bond funding. Contracts and accounts payable increased $23.7 million due to $4.3 million in water backup claims from a failure of flood gates along the Mississippi River associated with a severe rain event in June. New construction expenses incurred late in the fiscal year also contributed to this increase. Operating revenue declined by $27.1 million and non-operating revenue increased by $25.2 million. This resulted from the District’s rescinding of its impervious stormwater charge per a July 9, 2010 Court decision which declared the charge unconstitutional. Property taxes were reinstated to partially replace this stormwater funding. 2010 Financial Highlights The District placed $56.4 million of capital assets into service during fiscal year 2010. This continued high level of expansion and updating of the District’s plant and system is related to the Capital Improvement and Replacement Program (CIRP) required by regulations. o Collection and pumping plant $ 43.7 million o General plant and equipment $ 7.1 million o Treatment and disposal plant and equipment $ 4.4 million o Land $ 1.1 million THE METROPOLITAN ST. LOUIS SEWER DISTRICT Management’s Discussion and Analysis For the Years Ended June 30, 2011 and 2010 4 Interest expense increased $4.1 million compared to the prior year. This can be attributed to additional bond issues in fiscal years 2009 and 2010. Investment income decreased $6.6 million as a result of a reduction in short term interest rates as well as a decrease in investment balances. The continued high level of expansion and updating of the District’s plant and system is the reason for a $6.6 million increase in depreciation expense. The District has determined that a material restatement of $25.7 million is required for prior year financials due to management decisions regarding a number of construction in progress projects. Since prior to 2004 and through 2009, $25.7 million in expenses related to a number of construction in progress projects were capitalized. In 2010, management determined that the scope of these projects was planning in nature and they were non-capital in nature. All expenses prior to 2010 would be recognized in the years they were incurred. This resulted in a restatement of the financials for the following years with the following amounts: 2009 $ 7.2 million 2008 $ 7.7 million 2007 $ 1.2 million 2006 $ 2.2 million 2005 $ 4.5 million 2004 and prior $ 2.9 million Required Financial Statements The financial statements presented by the management of the District include the Statements of Net Assets; Statements of Revenues, Expenses, and Changes in Net Assets; and Statements of Cash Flows. These statements are prepared using the accrual basis of accounting. This method of accounting recognizes revenue at the time it is earned and expense when the related liability occurs. As a result of using this method of accounting, the District’s performance over the time period being reported is more easily determinable. The Statements of Net Assets provide a report of the District’s current, restricted, and other non-current assets such as cash, investments, receivables, and property. Also, the Statements of Net Assets provide a summary of the District’s current, restricted, and non-current liabilities, including contracts and accounts payable, deposits and accrued expenses, and bond and notes payable. The final section of the Statements of Net Assets, the net assets section, contains earnings retained for use by the District. Increases or decreases in the net assets section may be indicative of an improving or declining financial position. This statement provides the basis for computing rate of return, evaluating the capital structure of the District, and assessing the liquidity and financial flexibility of the District. THE METROPOLITAN ST. LOUIS SEWER DISTRICT Management’s Discussion and Analysis For the Years Ended June 30, 2011 and 2010 5 The Statements of Revenues, Expenses, and Changes in Net Assets summarize all of the years’ revenue and expense. This statement indicates how successful the District was at maintaining expense below the level of revenue earned. The Statements of Cash Flows account for the net change in cash and cash equivalents by summarizing cash receipts and cash disbursements resulting from operating activities, non-capital financing activities, capital and related financing activities, and investing activities. These statements assist the user in determining the sources of cash coming into the District, the items for which cash was expended, and the beginning and ending cash balance. Financial Analysis The District’s financial position declined slightly in the current year, as evidenced by the decrease in net assets of $10.6 million. The main reason for the decline is the increase of $12.8 million in depreciation expense, in connection with the extraordinary amount of capitalization previously mentioned. The District continues capacity expansion and updating of the District’s plant and system. Plans for maintaining the District’s ability to meet future spending needs are discussed in greater detail in the section of the MD&A entitled “Decisions Impacting the Future.” Condensed Financial Statements and Analysis Increase Increase (Decrease) 2009 (Decrease) 2011 2010 2011-2010 As Restated 2010-2009 Assets: Current, restricted, and other assets 445,477 $ 469,003 $ (23,526) $ 469,124 $ (121) $ Capital assets (net of accumulated depreciation)2,469,496 2,411,877 57,619 2,292,596 119,281 Total Assets 2,914,973 2,880,880 34,093 2,761,720 119,160 Liabilities: Current liabilities 101,710 75,512 26,198 82,961 (7,449) Noncurrent liabilities 616,244 597,718 18,526 491,142 106,576 Total Liabilities 717,954 673,230 44,724 574,103 99,127 Net Assets: Invested in capital assets, net of related debt 1,915,233 1,868,974 46,259 1,798,914 70,060 Restricted 94,926 80,782 14,144 94,769 (13,987) Unrestricted 186,860 257,894 (71,034) 293,934 (36,040) Total Net Assets 2,197,019 $ 2,207,650 $ (10,631) $ 2,187,617 $ 20,033 $ The Metropolitan St. Louis Sewer District Condensed Statements of Net Assets (000s) THE METROPOLITAN ST. LOUIS SEWER DISTRICT Management’s Discussion and Analysis For the Years Ended June 30, 2011 and 2010 6 2011 Analysis Current restricted and other assets decreased by $23.5 million or 5.0% in the current year. This change is due to the decrease in revenue from the suspension of the impervious fee. Capital assets net of accumulated depreciation increased by $57.6 million or 2.4% overall as the result of new projects in the current year. Current liabilities increased by $26.2 million or 34.7% in the current year. The increase is due to $4.3 million in liabilities for overland flooding resulting from a power outage, $4.8 million from stormwater litigation costs and the remainder from increased payables in connection with capital projects. Noncurrent liabilities increased by $18.5 million or 3.1% over the prior year as the District issued a $37 million dollar line of credit and paid down existing debt. 2010 Analysis Total net assets increased $20.0 million, or 0.9%, above prior year. This change is principally the result of utility plant contributions of $18.5 million, and results in an increase in total assets of $119.1 million countered by an increase in liabilities of $99.1 million. Current, restricted, and other assets decreased by $0.1 million, while capital assets, net of accumulated depreciation, increased by $119.1 million. The increase in capital assets can be attributed to an increase in construction in progress of $120.1 million, collection and pumping plant of $22.4 million, general plant and equipment of $3.4 million, and land of $1.1 million. This was offset by a decrease in treatment and disposal plant and equipment of $27.6 million. The slight decrease in current, restricted, and other assets is attributable to the offsetting increase in current assets and the decrease in restricted assets. The change in total liabilities breaks down to a decrease in current liabilities of $7.4 million and an increase in non-current liabilities of $106.6 million. The increase in non-current liabilities is due to a substantial increase in bonds and notes payable. The District issued new long-term debt in the amount of $122.1 million during the 2010 fiscal year. Current liabilities are down due in part to a decrease in contracts and accounts payable of $10.4 million. These were partially offset by an increase in the balance of deposits and accrued expenses and the current portion of bonds and notes payable of $4.6 million and $0.8 million, respectively. THE METROPOLITAN ST. LOUIS SEWER DISTRICT Management’s Discussion and Analysis For the Years Ended June 30, 2011 and 2010 7 Increase Increase (Decrease)2009 (Decrease) 2011 2010 2011-2010 As Restated 2010-2009 Operating Revenues: Sewer service charges 223,276 $ 251,683 $ (28,407) $ 254,378 $ (2,695) $ Provision for doubtful sewer service charge accounts (6,249) (10,188) 3,939 (9,678) (510) Provision for uncollected stormwater charge accounts (2,374) - (2,374) - - Licenses, permits, and other fees 2,976 3,085 (109) 3,475 (390) Other 1,815 2,007 (192) 1,550 457 Total Operating Revenues 219,444 246,587 (27,143) 249,725 (3,138) Non-operating Revenues: Property taxes levied by the district 27,126 1,401 25,725 2,129 (728) Investment income 3,847 6,554 (2,707) 13,116 (6,562) Build America bond tax credits 2,023 450 1,573 - 450 Rent and other income 443 265 178 215 50 Total Non-Operating Revenues 33,439 8,670 24,769 15,460 (6,790) Total Revenues 252,883 255,257 (2,374) 265,185 (9,928) Operating Expenses: Pumping and treatment 50,532 47,266 3,266 44,746 2,520 Collection system maintenance 33,152 36,082 (2,930) 32,918 3,164 Engineering 12,486 15,773 (3,287) 13,736 2,037 General and administrative 36,075 39,237 (3,162) 37,922 1,315 Water backup claims 8,912 3,951 4,961 6,817 (2,866) Depreciation 66,854 54,012 12,842 47,370 6,642 Other 36,492 32,458 4,034 28,669 3,789 Total Operating Expenses 244,503 228,779 15,724 212,178 16,601 Non-operating Expenses: Net (gain) loss on disposal and sale of capital assets 3,486 2,719 767 2,162 557 Non-recurring projects and studies 10,801 9,872 929 7,104 2,768 Legal Claims 4,829 - 4,829 - - Interest expense 9,994 13,639 (3,645) 9,079 4,560 Total Non-Operating Expenses 29,110 26,230 2,880 18,345 7,885 Total Expenses 273,613 255,009 18,604 230,523 24,486 Income Before Capital Contributions (20,730) 248 (20,978) 34,662 (34,414) Capital Contributions 10,099 19,785 (9,686) 26,993 (7,208) Change in Net Assets (10,631) 20,033 (30,664) 61,655 (41,622) Net Assets - Beginning of Year 2,207,650 2,187,617 20,033 2,125,962 61,655 Net Assets - End of Year 2,197,019 $ 2,207,650 $ (10,631) $ 2,187,617 $ 20,033 $ The Metropolitan St. Louis Sewer District Statements of Revenues, Expenses, and Changes in Net Assets (000s) THE METROPOLITAN ST. LOUIS SEWER DISTRICT Management’s Discussion and Analysis For the Years Ended June 30, 2011 and 2010 8 2011 Analysis Net assets decreased by $10.6 million or $30.6 million less than the prior year. While revenue remained relatively flat expenses grew, at a slower pace than the prior year. Total revenue decreased by $2.3 million or 0.9%. While the reinstatement of taxes offset the decline in operating revenue, investment income declined by $2.7 million over the prior year. The decline in investment income is the result of low interest rates along with the decrease in funds available for investment. Total expenses increased for the year by $18.6 million or 7.3%. Total operating costs increased by 15.7 million or 6.9%, in large part due to claims for overland flooding and an increase of $12.8 million or 23.8% in depreciation expense in connection with additional assets placed into service. Non-operating expenses increased by $2.8 million or 11.0% due in part to a $4.8 million legal claim cost in connection with the Districts impervious fee case. 2010 Analysis Net assets increased $20.0 million or $41.6 million less than in the prior year. While revenue saw a significant decrease, expense grew at a faster pace. Total revenue decreased by $10.4 million largely due in part to a reduction in investment income and sewer service charges of $6.6 million and $2.7 million, respectively. Property tax revenue continued to decrease by $0.7 million as a result of reduction of the tax rate to 0.0% in 2007. The provision for doubtful sewer service charge accounts increased $0.5 million while licenses, permits, and other fees were decreased by $0.4 million. Other operating revenues amounted to a $0.5 million increase when compared to prior year. Total expense ended the year up $24.0 million compared to 2009 due to increases in both operating and non- operating expense. Total operating expense for 2010 increased $16.6 million. Increases in pumping and treatment, collection system maintenance, engineering, and general and administrative expenses totaled $9.0 million. Depreciation expense increased by $6.6 million, mostly due to additional assets that were placed in service. Other operating expense increased by $3.8 million. This was offset by water backup claims decreasing by $2.9 million. Non-operating expenses experienced increases in the costs of net loss on disposal and sale of capital assets, non-recurring projects as well as interest expense totaling $7.4 million. THE METROPOLITAN ST. LOUIS SEWER DISTRICT Management’s Discussion and Analysis For the Years Ended June 30, 2011 and 2010 9 Increase 2009 Increase (Decrease) As (Decrease) 2011 2010 2011-2010 Restated 2010-2009 Cash flows from operating activities 56,676 $ 67,916 $ (11,240) $ 84,222 $ (16,306) $ Cash flows from non-capital financing activities 27,125 1,401 25,724 2,129 (728) Cash flows from capital and related financing activities (141,136) (81,406) (59,730) (163,367) 81,961 Cash flows from investing activities 51,887 17,399 34,488 40,070 (22,671) Net increase (decrease) in cash and cash equivalents (5,448) 5,310 (10,758) (36,946) 42,256 Cash and cash equivalents at beginning of year 11,767 6,457 5,310 43,403 (36,946) Cash and cash equivalents at end of year 6,319 $ 11,767 $ (5,448) $ 6,457 $ 5,310 $ The Metropolitan St. Louis Sewer District Condensed Statements of Cash Flows (000s) 2011 Analysis The District ended the year with $6.3 million in cash and cash equivalents or $5.4 million lower than the prior year. This was due to a decline in cash received from customers of $24.5 million or 9.9% with the elimination of the impervious fee; partially offset by a decrease in payments to suppliers of $17.4 million or 17.4%. Cash flow from non-capital financing activities increased by $25.7 million as the result of the reinstatement of taxes to fund stormwater activities. Cash flow from capital and related financing activities decreased by $59.7 million or 73%, because the State of Missouri Direct Loan Series Bond issuance for 2010 provides reimbursement of expenditures, not loan proceeds. Investing activity proceeds provided $34.5 million as investments were used to fund operating and capital activities. 2010 Analysis The District ended the year with $11.8 million in cash and cash equivalents or $5.3 million higher than the prior year. This was due primarily to cash flow from operating activities contributing a positive $67.9 million, which is a $16.3 million decrease from 2009. Cash flow from investing activities contributed a positive $17.4 million or a $22.7 million decrease from the previous year. This change is due in part to the District purchasing $287.4 million in investments compared to $297.6 million in proceeds from sale and maturity of investments. Cash flow from non-capital financing activities contributed $1.4 million or a decrease from the prior year due to the District suspending the collection of property taxes in 2007. All of this was offset by cash outflow from capital and related financing activities of $81.4 million or $82.0 million less than fiscal year 2009. THE METROPOLITAN ST. LOUIS SEWER DISTRICT Management’s Discussion and Analysis For the Years Ended June 30, 2011 and 2010 10 Capital Assets Increase Increase (Decrease) 2009 (Decrease) 2011 2010 2011-2010 As Restated 2010-2009 Land 36,924 $ 28,129 $ 8,795 $ 27,070 $ 1,059 $ Construction in progress 400,756 570,602 (169,846) 450,540 120,062 Treatment and disposal plant and equipment 597,316 394,826 202,490 422,413 (27,587) Collection and pumping plant 1,393,394 1,393,152 242 1,370,782 22,370 General plant and equipment 41,106 25,168 15,938 21,790 3,378 Total 2,469,496 $ 2,411,877 $ 57,619 $ 2,292,595 $ 119,282 $ The Metropolitan St. Louis Sewer District Condensed Statements of Capital Assets (000s) Net of Accumulated Depreciation 2011 Analysis Total capital assets, net of depreciation, increased by $57.6 million over the prior year. Construction in progress decreased by $169.8 million as $20.5 million in treatment and disposal plant projects were moved into service. Land contributed $8.8 million to the increase from the completion of grading projects. General plant and equipment also increased by $15.9 million, partially as a result of the reclassification of office building assets from treatment and disposal plant to general plant. 2010 Analysis Total capital assets, net of depreciation, increased $119.3 million over prior year. Construction in progress increased $120.1 million due primarily to the large capital improvement and replacement program currently underway. Increases in collection and pumping of $22.4 million and general plant and equipment of $3.4 million are consistent with the increases seen in 2009. Land also contributed an additional $1.1 million to the increase. All of this was offset by treatment and disposal decreasing $27.6 million. This is primarily due to $16.3 million in deletions and reclassifications, only partially offset by additions of $4.4 million. 2010 also recorded a net increase in accumulated depreciation of $15.6 million as 2010 realized a full year of depreciation on $35.3 million in additions placed into service in 2009. THE METROPOLITAN ST. LOUIS SEWER DISTRICT Management’s Discussion and Analysis For the Years Ended June 30, 2011 and 2010 11 Long-Term Debt Increase Increase (Decrease)(Decrease) 2011 2010 2011-2010 2009 2010-2009 Senior Revenue Bonds: Series 2004A 165,590 $ 167,370 $ (1,780) $ 168,965 $ (1,595) $ Series 2006C 60,000 60,000 - 60,000 - Series 2008A 30,000 30,000 - 30,000 - Series 2010B 85,000 85,000 - - 85,000 Subordinate Revenue: Series 2004B 123,055 130,110 (7,055) 136,795 (6,685) Series 2005A 5,370 5,665 (295) 5,955 (290) Series 2006A 36,335 38,420 (2,085) 40,480 (2,060) Series 2006B 12,285 12,935 (650) 13,575 (640) Series 2008AB 35,610 37,375 (1,765) 39,128 (1,753) Missouri DNR: Series 2009A 22,053 23,000 (947) - 23,000 Series 2010A 7,981 7,981 - - 7,981 Series 2010C 37,000 - 37,000 - - West Watson and Nanell - - - 100 (100) Ozark and Tablerock - - - 68 (68) Energy Loan Program 25 37 (12) 48 (11) Oracle/Blue Heron 6,096 7,264 (1,168) 4,130 3,134 Total 626,400 $ 605,157 $ 21,243 $ 499,244 $ 105,913 $ The Metropolitan St. Louis Sewer District Condensed Statements of Long-Term Debt (000s) 2011 Analysis The District ended fiscal year 2011 with $626.4 million in long-term debt outstanding, consisting mainly of revenue bonds. The District had one bond addition this year (Series 2010C) resulting in a minimal increase in long-term debt. 2010 Analysis The District ended fiscal year 2010 with $605.2 million in long-term debt outstanding, consisting mainly of revenue bonds. The District had three bond additions this year (SRF 2009A, SRF 2010A, and Series 2010B) resulting in the substantial increase in long-term debt. THE METROPOLITAN ST. LOUIS SEWER DISTRICT Management’s Discussion and Analysis For the Years Ended June 30, 2011 and 2010 12 Decisions Impacting the Future On July 7, 2011, the District entered into a Consent Decree (CD) with the U.S. Environment Protection Agency and the Coalition for the Environment settling a lawsuit for alleged violations of the Clean Water Act. Along with providing a schedule for implementation of various system improvements and programs, the Consent Decree also addresses all allegations made by the Plaintiffs in this action. The public comment period ended October 10, 2011. The Court has extended the stay of litigation until November 18, 2011, with a joint status report due on November 25, 2011. The CD does not become final until it is entered by the Federal Court. See note 12 for additional information regarding this litigation. The District continues to implement the second phase of its multi decade wastewater capital improvement replacement program (CIRP) utilizing the proceeds of a $275.0 million bond authorization granted by St. Louis voters in August 2008. The remainder of this phase of the CIRP includes the design and construction of $131.0 million of capital improvements through 2012. These regulatory required projects include completion of the Lemay Treatment Plant expansion, pump station improvements, and sewage collection system replacement and rehabilitation. The next phase of the capital program is expected to reflect $1 billion of projects through FY16 in order to comply with the CD. On May 10, 2011, the District proposed a customer wastewater increase to the MSD Rate Commission. The proposed rate increase is needed to address increasing fiscal demands related to the Consent Decree addressing regulatory issues affecting collection and treatment systems. The Rate Commission is defined and authorized in the District’s Charter and is required to review all proposed rate changes prior to the adoption by the District’s Board of Trustees. The Rate Commission is comprised of 15 members representing various commercial and residential customers and local environmental interests. The Rate Commission is required to submit a rate recommendation to the District’s Board of Trustees upon conclusion of its deliberations. The recommendation is due to the Board on October 21, 2011. Implementation of a rate increase is anticipated by January 2012. The District implemented an impervious area based stormwater rate in March 2008. In conjunction, the District elected to discontinue the assessment of approximately $24.4 million per year in property taxes and flat fees previously used for stormwater funding. The impervious stormwater rate structure in place throughout the 2010 fiscal year generated $90.9 million in revenue for stormwater services across the St. Louis region. On July 9, 2010, the Circuit Court of St. Louis County of Missouri ruled the impervious rate unconstitutional. As a result, the District’s Board of Trustees rescinded the impervious based rate effective August 1, 2010. The elimination of the rate has resulted in an estimated $48.3 million loss in revenue anticipated to address stormwater issues throughout the St. Louis region. The District reinstated the property taxes and flat fees previously discontinued in order to provide a base level of stormwater services as required by the District’s Charter. Stormwater services have been drastically reduced in fiscal year 2011 and will continue to be in future years. The potential reinstatement of the stormwater impervious based rate is pending the District’s current appeal of the July 9, 2010 court decision. THE METROPOLITAN ST. LOUIS SEWER DISTRICT Management’s Discussion and Analysis For the Years Ended June 30, 2011 and 2010 13 Requests for Information This financial report is designed to provide a general overview of the District’s finances for all those with an interest in the District’s finances. Questions concerning any of the information provided in this report or requests for additional financial information should be addressed or e-mailed to: Janice M. Zimmerman, Director of Finance The Metropolitan St. Louis Sewer District 2350 Market Street St. Louis, MO 63103-2555 314-768-6200 jzimmer@stlmsd.com IVISB THE METROPOLITAN ST. LOUIS SEWER DISTRICT See the accompanying notes to the financial statements. 14 2011 2010 Current Assets: Cash 6,229,447 $ 11,438,945 $ Pooled cash and investments 190,353,186 228,974,712 Investments 31,200,375 58,240,728 Sewer service charges receivable, less allowance of 35,300,022 35,333,663 $4,087,758 in 2011 and $4,055,258 in 2010 Unbilled sewer service charges receivable, less allowance of 16,338,975 20,379,759 $326,780 in 2011 and $421,210 in 2010 Accrued income on investments 759,812 1,206,821 SRF receivable 41,799,253 7,980,700 Other receivables 1,038,016 837,569 Supplies inventory 6,961,285 6,832,502 Total current assets 329,980,371 371,225,399 Non-current Assets: Restricted Assets: Cash 89,487 327,864 Pooled cash and investments 69,042,313 51,363,267 Investments 31,133,772 30,363,923 Accrued income on investments 466,800 403,372 100,732,372 82,458,426 Other Assets: Note receivable 14,764,507 15,319,087 Capital Assets: Depreciable: Treatment and disposal plant and equipment 979,444,620 750,240,748 Collection and pumping plant 1,941,575,848 1,914,386,404 General plant and equipment 84,858,812 64,195,139 3,005,879,280 2,728,822,291 Less: Accumulated depreciation 974,063,867 915,676,211 Net depreciable assets 2,031,815,413 1,813,146,080 Non-depreciable: Land 36,924,144 28,128,701 Construction in progress 400,756,348 570,602,108 Net capital assets 2,469,495,905 2,411,876,889 Total non-current assets 2,584,992,784 2,509,654,402 Total Assets 2,914,973,155 $ 2,880,879,801 $ June 30, Statements of Net Assets ASSETS THE METROPOLITAN ST. LOUIS SEWER DISTRICT See the accompanying notes to the financial statements. 15 2011 2010 Current Liabilities: Contracts and accounts payable 45,410,443 $ 25,962,579 $ Deposits and accrued expenses 24,910,011 23,418,377 Retainage payable 6,199,009 8,263,134 Current portion of bonds and notes payable 19,383,825 16,192,133 95,903,288 73,836,223 Current Liabilities-Payable From Restricted Assets Contracts and accounts payable 5,602,225 1,341,043 Retainage payable 204,166 334,577 5,806,391 1,675,620 Total current liabilities 101,709,679 75,511,843 Non-current Liabilities: Deposits and accrued expenses 8,365,378 7,295,729 Bonds and notes payable 607,878,962 590,421,835 Total non-current liabilities 616,244,340 597,717,564 Total Liabilities 717,954,019 $ 673,229,407 $ Net Assets: Invested in capital assets, net of related debt 1,915,232,838 $ 1,868,973,772 $ Restricted for: Debt service 34,395,643 29,946,469 Subdistrict construction and improvement 60,530,338 50,836,337 Unrestricted 186,860,317 257,893,816 Total Net Assets 2,197,019,136 $ 2,207,650,394 $ NET ASSETS Statements of Net Assets (Continued) June 30, LIABILITIES THE METROPOLITAN ST. LOUIS SEWER DISTRICT See the accompanying notes to the financial statements. 16 2011 2010 Operating Revenues: Sewer service charges 223,275,722 $ 251,682,865 $ Provision for doubtful sewer service charge accounts (6,248,681) (10,187,508) Provision for uncollected stormwater charge accounts (2,373,731) - Licenses, permits, and other fees 2,976,253 3,084,552 Other 1,814,694 2,007,265 Total operating revenues 219,444,257 246,587,174 Operating Expenses: Pumping and treatment 50,532,451 47,266,420 Collection system maintenance 33,152,223 36,081,992 Engineering 12,485,664 15,772,981 General and administrative 36,075,000 39,237,319 Water backup claims 8,911,970 3,950,797 Depreciation 66,854,265 54,011,776 Other 36,491,526 32,457,589 Total operating expenses 244,503,099 228,778,874 Operating Income (25,058,842) 17,808,300 Non-operating Revenues: Property taxes levied by the District 27,125,451 1,401,100 Investment income 3,847,324 6,553,760 Build America bonds tax credit 2,023,000 450,058 Rent and other income 442,968 265,004 Total non-operating revenues 33,438,743 8,669,922 Non-operating Expenses: Net loss on disposal and sale of capital assets 3,485,952 2,719,163 Non-recurring projects and studies 10,800,843 9,872,088 Legal claims 4,828,828 - Interest expense 9,994,088 13,639,341 Total non-operating expenses 29,109,711 26,230,592 Income before Capital Contributions (20,729,810) 247,630 Capital Contributions: Utility plant contributed 7,571,714 18,544,232 Grant revenue 2,526,838 1,241,780 Total capital contributions 10,098,552 19,786,012 Change in Net Assets (10,631,258) 20,033,642 Net Assets-Beginning of Year 2,207,650,394 2,187,616,752 Net Assets-End of Year 2,197,019,136 $ 2,207,650,394 $ Statements of Revenues, Expenses and Changes in Net Assets For the Years Ended June 30, THE METROPOLITAN ST. LOUIS SEWER DISTRICT See the accompanying notes to the financial statements. 17 2011 2010 Cash flows from operating activities: Received from customers 224,448,633 $ 248,973,260 $ Paid to employees for services (85,069,139) (80,987,401) Paid to suppliers for goods and services (82,703,832) (100,069,468) Net cash provided by operating activities 56,675,662 67,916,392 Cash flows provided from non-capital financing activities Taxes levied and collected 27,125,451 1,401,100 Cash flows from capital & related financing activities: Proceeds from capital grants 2,533,168 1,228,764 Proceeds from issuance of debt 4,539,018 112,193,376 Interest received on bond proceeds to be used for capital improvements 666,548 1,569,661 Principal paid on debt (17,515,733) (16,178,124) Interest and fees paid on debt (22,386,543) (21,986,608) Payments for capital assets (110,811,121) (158,560,144) Proceeds from sale of capital assets 96,658 325,682 Build America bond tax credit 1,742,160 - Net cash used in capital and related financing activities (141,135,845) (81,407,393) Cash flows from investing activities: Purchase of investments (691,222,800) (287,432,264) Proceeds from sale and maturity of investments 737,182,632 297,567,050 Investment income 5,484,057 6,998,794 Proceeds from rents 442,968 265,004 Net cash provided by investing activities 51,886,857 17,398,584 Net increase (decrease) in cash and cash equivalents (5,447,875) 5,308,683 Cash and cash equivalents at beginning of year 11,766,809 6,458,126 Cash and cash equivalents at end of year 6,318,934$ 11,766,809 $ Non-cash capital and investing activities: Portion of utility plant contributed represented by: Utility plant contributed by other governments and developers 7,571,714$ 18,544,232 $ Fair value investment adjustment gain 267,028$ 109,316 $ Statements of Cash Flows For the Years Ended June 30, THE METROPOLITAN ST. LOUIS SEWER DISTRICT See the accompanying notes to the financial statements. 18 2011 2010 Reconciliation of operating income to net cash flows provided by operating activities Operating (loss) income (25,058,842) $ 17,808,300 $ Adjustments to reconcile operating income to net cash provided by operating activities: Depreciation 66,854,265 54,011,776 Change in operating assets and liabilities: Decrease in billed and unbilled sewer service charges receivable 4,074,425 1,396,458 Decrease in other receivables 74,063 410,805 (Increase) decrease in supplies inventory (128,783) 323,495 Increase (decrease) in contracts and accounts payable 7,562,465 (10,388,998) Increase in deposits and accrued expenses 3,298,069 4,354,556 Net Cash Provided by Operating Activities 56,675,662 $ 67,916,392 $ For the Years Ended June 30, Statements of Cash Flows (Continued) THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2011 and 2010 19 1. Organization and Summary of Significant Accounting Policies Organization The Metropolitan St. Louis Sewer District (the District) was authorized by the voters, established and chartered under the provisions of the Constitution of Missouri, as a municipal corporation and a political subdivision of the State of Missouri. Upon creation in 1954, the District assumed responsibilities to provide for the construction, operation, and maintenance of the sewer facilities within its defined boundaries. The District's service area now comprises all of the City of St. Louis and most of St. Louis County. Subdistricts within the District’s total service area represent separate geographic areas within which specific taxes are levied for the retirement of indebtedness issued to finance construction of sanitary or stormwater facilities within the area or to operate, maintain, or construct improvements within the subdistrict. The District also maintains all of the publicly owned stormwater sewers within its original boundaries and is continuing to accept maintenance of the stormwater sewers in the remainder of its service area. Pursuant to provisions of its charter and subject to limitations imposed by the Constitution of Missouri, all powers of the District are vested in a six-member Board of Trustees (the Board), three of whom are appointed by the Mayor of the City of St. Louis and three of whom are appointed by the County Executive of St. Louis County. Reporting Entity The District defines its financial reporting entity to include all component units for which the District’s governing body is financially accountable. To be considered financially accountable, the component unit must be fiscally dependent on the District and the District must either 1) be able to impose its will on the component unit or 2) the relationship must have the potential for creating a financial benefit or imposing a financial burden on the District. Based on the foregoing, the District’s financial statements include all funds that are established under the authority of the District’s charter. There are no agencies, boards, commissions, or authorities that are controlled by or dependent on the District. Measurement Focus, Basis of Accounting, and Financial Statement Presentation Throughout the year, the District maintains its detailed accounting records on the modified accrual basis of accounting. In order to account for the transactions related to certain subdistricts and restricted resources, separate fund accounting records are maintained. For financial reporting purposes, the District reports its operations as a single enterprise fund. Accordingly, the accounting records are converted to the accrual basis of accounting and all interfund transactions are eliminated. Under the accrual basis of accounting, revenues are recognized when earned and expenses are recognized when the related liability is incurred. The District’s measurement focus is on the flow of economic resources. Unbilled sewer service charge revenues are accrued by the District based on estimated billings for services provided through the end of the current fiscal year. THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2011 and 2010 (Continued) 20 1. Organization and Summary of Significant Accounting Policies (Continued) Measurement Focus, Basis of Accounting, and Financial Statement Presentation (Continued) Revenues and expenses are divided into operating and non-operating items. Operating revenues generally result from providing services in connection with the District’s principal ongoing operations. The principal operating revenues of the District are user fees, licenses, and permits for wastewater treatment services. Operating expenses include the costs associated with the conveyance and treatment of wastewater, stormwater, administrative expenses, and depreciation on capital assets. All revenues and expenses not meeting these definitions are reported as non-operating revenues and expenses. The District follows GASB Statement No. 33, Accounting and Financial Reporting for Non-Exchange Transactions (GASB 33), which establishes accounting and financial reporting standards for non-exchange transactions involving financial or capital resources. GASB 33 groups non-exchange transactions into the following four classes, based upon their principal characteristics: derived tax revenues, imposed non-exchange revenues, government mandated non-exchange transactions, and voluntary non-exchange transactions. The District recognizes assets from imposed non-exchange revenue transactions in the period when an enforceable legal claim to the assets arises or when the resources are received, whichever occurs first. Revenues are recognized in the period when the resources are required to be used or the first period that use is permitted. The District recognizes revenues from property taxes, net of estimated refunds and estimated uncollectible amounts, in the period for which the taxes are levied. Imposed non-exchange revenues also include licenses, permits, and other fees. Intergovernmental revenues, representing grants and assistance received from other governmental units, are generally recognized as revenues in the period when all eligibility requirements, as defined by GASB 33, have been met. Any resources received before eligibility requirements are met are reported as deferred revenues. When both restricted and unrestricted resources are available for use, it is the District’s policy to use restricted resources first, and then unrestricted resources as they are needed. The District follows all Governmental Accounting Standards Board (GASB) pronouncements as well as all Financial Accounting Standards Board (FASB) Statements and Interpretations, Accounting Principle Board Opinions, and Accounting Research Bulletins issued on or before November 30, 1989, unless those pronouncements conflict with or contradict GASB pronouncements. In addition, the District also applies all FASB Statements and Interpretations issued after November 30, 1989, except for those that conflict with or contradict GASB pronouncements. THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2011 and 2010 (Continued) 21 1. Organization and Summary of Significant Accounting Policies (Continued) Cash and Cash Equivalents and Investments The District's "cash and cash equivalents" consist of all highly liquid investments (including restricted assets) with maturity dates of 89 days or less from the date acquired by the District. "Investments" consist of those investments with maturity dates 90 days or greater at the time of purchase by the District. Investments are stated at fair value based upon quoted market prices. The District’s investment disclosures follow GASB Statement No. 40, Deposit and Investment Risk Disclosures, an Amendment of GASB Statement No. 3 (GASB 40). This standard’s disclosure requirements address custodial credit risk, concentrations of credit risk, interest rate risk, and foreign currency risk. Capital Assets Capital assets are valued at historical cost or estimated historical cost based in part upon a study performed in 1981. Interest cost is capitalized as part of the historical cost of acquiring certain assets when the effect of such capitalization is material to the financial statements. Interest is not capitalized on assets constructed with contributions from other governmental sources. Depreciation is calculated on a straight-line basis over the following estimated useful lives: Treatment and disposal plant and equipment 10 to 50 years Collection and pumping plant 10 to 100 years General plant and equipment 3 to 50 years When designing user charge rates, the District includes funding for replacement cost of assets, which may differ from depreciation expense recorded for financial reporting purposes. Normal maintenance and repairs that do not add to the value of the asset or materially extend asset lives are not capitalized. Betterments are capitalized and depreciated over the remaining useful lives of the related assets, as applicable. Previously, the District defined capital assets as assets with an initial, individual cost of more than $1,000 and an estimated useful life in excess of three years. In April of 2010 the District updated this policy and as a result, an asset must now have an individual cost of more than $5,000 to be considered a capital asset. This change in policy does not have a retroactive effect on capital assets put in place before April 2010. Capitalization of Interest Interest costs are capitalized as part of the costs of capital assets during the period of construction based on the related weighted average net borrowing costs incurred. Interest earned on temporary investments acquired with the proceeds of such borrowed funds from the date of the borrowing until the assets are ready for their intended use is used to reduce the interest costs capitalized on the constructed assets. Interest is not capitalized for outlays financed by capital grants (or other outside parties) externally restricted for the acquisition of specified assets. In 2011 and 2010, the District capitalized $11,738,283 and $8,203,731 of net interest expense, respectively. THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2011 and 2010 (Continued) 22 1. Organization and Summary of Significant Accounting Policies (Continued) Supplies Inventory Supplies inventory consists of parts and supplies to be used to operate and maintain treatment facilities and various treatment-related equipment at the District. This inventory is stated at the lower of cost or market, determined on the average cost method. Expenses are recognized when the inventory is consumed. Net Assets The invested in capital assets, net of related debt component of net assets consists of capital assets, including restricted capital assets, net of accumulated depreciation and reduced by the outstanding debt that is attributable to the acquisition, construction, or improvement of those assets. The restricted component of net assets consists of constraints placed on net asset use through external constraints imposed by creditors, grantors, contributors, laws, or regulations of other governments or constraints imposed by law through constitutional provisions or enabling legislation. Property taxes levied by the various subdistricts and other revenues received for construction in those subdistricts have also been restricted for that use. Clean water capital improvement surcharges, sewer extension and connection fees, grants, and other revenues received for construction within certain subdistricts have been restricted for that use. In addition, a portion of sanitary sewer charges have been restricted for the payment of principal and interest on certain debt of the District. The unrestricted net assets component of net assets consists of net assets that do not meet the definition of restricted or invested in capital assets, net of related debt. Capital Contributions Capital contributions to the District represent government grants and other aid used to fund capital projects. In accordance with GASB 33, capital contributions are recognized as revenue when the expenditure is made and the amount becomes subject to claim for reimbursement. Bond Issuance Costs/Bond Premiums and Discounts Bond issuance costs incurred, as well as bond premiums and discounts, are paid from the proceeds of revenue bond issues and are deferred and amortized using the straight-line method over the term of the bonds. THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2011 and 2010 (Continued) 23 1. Organization and Summary of Significant Accounting Policies (Continued) Compensated Absences Vacation Under the terms of the District's personnel policies, employees are allowed to carry a maximum of 30 to 45 days of vacation (depending on length of service) from one calendar year to the next. Since vacation accrued at year-end is expected to be used by the employee during the following fiscal year, the accrual is reported as a component of current deposits and accrued expenses payable. Sick Leave Employees earn sick pay benefits at accrual rates ranging from 10 days per year to 12 days per year (depending on length of service). Unused sick leave can be carried over at year-end without limitation. An employee retiring from the District with five or more years of service, who has unused accrued sick leave remaining, will be compensated for that portion of unused accrued sick leave at the rate of 1-1/4% for each year of District service. The District has recorded a liability, which has been actuarially determined to be equal to the accumulated expense charge that will amortize the employees' benefits over their period of District service. The liability, included in current deposits and accrued expenses payable, includes vested accumulated rights to receive sick leave benefits estimated to be paid within one year. The portion of sick leave expected to be paid after one year is recorded as a component of non-current deposits and accrued expenses payable. Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts in the financial statements. Actual results could differ from those estimates. Board Designated Funds The Board has designated certain amounts for construction and improvement of the sewerage and drainage collection systems and treatment facilities, and for real property improvement and alterations. These amounts are included with unrestricted cash and investments. At June 30, 2011 and 2010, designated funds were $202,947,325 and $277,997,841 respectively. Reclassification Certain amounts in prior year financial statements have been reclassified for comparative purposes to conform with the presentation in the current year financial statements. THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2011 and 2010 (Continued) 24 1. Organization and Summary of Significant Accounting Policies (Continued) Subsequent Events In preparing these financial statements, the District has evaluated events and transactions for potential recognition or disclosure through November 8, 2011, the date the financial statements were available to be issued. 2. Deposits and Investments With the approval of the District's Board of Trustees, the Secretary-Treasurer is authorized to invest excess cash in any investment authorized by the District's charter. The District’s investment policy conforms to the investment policy guidelines for the State of Missouri. The District’s investment policy authorizes the District to invest in the following instruments: U.S. Treasury obligations, certificates of deposit, obligations of any agency or instrumentality of the U.S., repurchase agreements, bankers’ acceptances, and commercial paper rated in the three highest classifications, for terms specified in the policy. At June 30, 2011 and 2010, all of the District’s investments were in compliance with the District’s investment policy and charter. In accordance with the District’s investment policy, the District also has the ability to invest in mortgage- backed securities such as collateralized mortgage obligations. These securities are reported at fair value and are based on the cash flow from interest payments by the underlying mortgages. As a result, they are sensitive to prepayments by mortgagees, which may result from a decline in interest rates. For example, if interest rates decline and homeowners refinance mortgages, thereby prepaying the mortgages underlying these securities, the cash flow from interest payments is reduced and the value of these securities declines. Likewise, if homeowners pay on mortgages longer than anticipated, the cash flow is greater and the return on the initial investment would be higher than anticipated. For fiscal years 2011 and 2010, the District has not carried any investment balances in mortgage-backed securities. A summary of deposits and investments as of June 30, 2011 and 2010 is as follows: Investment Type Cost Fair Value Cost Fair Value Deposits $ 38,979,076 $ 38,979,076 $ 38,622,130 $ 38,622,130 U.S. Treasury and agency obligations 211,886,113 213,968,746 246,273,740 248,904,033 Commercial paper 67,890,245 67,909,740 73,440,879 73,463,049 Bankers’ acceptance notes 7,188,960 7,191,018 19,712,541 19,720,227 Total $ 325,944,394 $ 328,048,580 $ 378,049,290 $ 380,709,439 2011 2010 THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2011 and 2010 (Continued) 25 2. Deposits and Investments (Continued) Interest Rate Risk As of June 30, 2011 and 2010, the District had the following investments and maturities: Weighted Weighted Average Average Maturity Maturity Investment Type Fair Value (Years) Fair Value (Years) Certificates of deposit 900,000$ 0.60 2,100,000$0.58 U.S. Treasury obligations 36,390,289 0.91 55,119,909 1.24 U.S. agency obligations 177,578,457 2.24 193,784,124 1.56 Commercial paper 67,909,741 0.10 73,463,049 0.12 Bankers’ acceptance notes 7,191,018 0.10 19,720,227 0.11 Total 289,969,505$ 1.51 344,187,309$1.11 2011 2010 In accordance with the District’s investment policy, the District will minimize the risk that the fair value of debt securities in the portfolio will fall due to increases in general interest rates by: 1. Structuring the investment portfolio so that securities mature to meet cash requirements for ongoing operations, thereby avoiding the need to sell securities on the open market prior to maturity. 2. Investing operating funds primarily in short-term securities. 3. State law limits the maximum stated maturities to five years on any investment from the date of purchase. Custodial/Credit Risk The District will minimize credit risk, the risk of loss due to failure of the security issuer or backer, by: 1. Prequalifying the financial institutions, broker/dealers, intermediaries, and advisors with which the District will do business. 2. Diversifying the portfolio so that potential losses on individual securities will be minimized. In accordance with its investment policy, the District limits its investments in these investment types to the top rating issued by Nationally Recognized Statistical Rating Organizations. As of June 30, 2011 and 2010, the District’s investments in commercial paper were rated A1 by Standard & Poor’s and P-1 by Moody’s Investors Service. The District’s investments in repurchase agreements carry the explicit guarantee of the U.S. Government. The District’s investments in U.S. agency obligations that do not carry the explicit guarantee of the U.S. Government all carry a rating assigned by Standard & Poor’s of “AAA”. All cash deposits of the District were fully collateralized with securities held by a third party financial institution in the District’s name. THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2011 and 2010 (Continued) 26 2. Deposits and Investments (Continued) Concentration of Credit Risk The District places no limit on the amount the District may invest in any one issuer with respect to U.S. Treasury obligations and collateralized time and demand deposits. U.S. agency obligations and government- sponsored enterprises are limited to 60% of the portfolio; and collateralized repurchase agreements are limited to 50% of the portfolio. U.S. agency obligations, commercial paper, and bankers’ acceptances are limited to 30% of the portfolio, each. The following table lists investments in issuers that represent 5% or more of total investments at June 30, 2011 and 2010: Issuer 2011 2010 Federal Home Loan Bank Federal National Mortgage Association 18.9 15.5 Federal Home Loan Mortgage Corporation 11.3 8.5 Percent of Total Investments 19.0%20.1% 3. Note Receivable The District has a note receivable with the City of Arnold, Missouri (the “City”) bearing interest at 4.35% for its portion of the capital costs related to the Lower Meramec Wastewater Treatment Plant. The current portion of this note is contained in the other receivables line on the balance sheet. The note receivable will be paid over 30 years. At June 30, 2011, future payments are as follows: For the Years Ending June 30 2012 $ 1,100,499 2013 1,100,499 2014 1,100,499 2015 1,100,499 2016 1,100,499 2017-2021 5,502,494 2022-2026 5,502,494 2027-2031 5,502,494 2032 1,375,623 23,385,600 8,175,043 $ 15,210,557 $ 446,050 14,764,507 $ 15,210,557 Total Classification in Statement of Net Assets: Current Noncurrent Less: Amount representing interest THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2011 and 2010 (Continued) 27 4. Change in Capital Assets The following is a summary of capital assets changes for the fiscal years ended June 30, 2011 and 2010: Balance Balance June 30, 2010 June 30, 2011 Capital assets not being depreciated: Land 28,128,701 $ 11,342,554 $ - $ 2,547,111 $ 36,924,144 $ Construction in progress 570,602,108 117,135,980 - 286,981,740 400,756,348 Total capital assets not being depreciated 598,730,809 128,478,534 - 289,528,851 437,680,492 Capital assets being depreciated: Treatment and disposal plant and equipment 750,240,748 236,903,865 (6,851,394) 848,599 979,444,620 Collection and pumping plant 1,914,386,404 34,816,152 - 7,626,708 1,941,575,848 General plant and equipment 64,195,139 17,922,435 6,851,394 4,110,156 84,858,812 Total capital assets being depreciated 2,728,822,291 289,642,452 - 12,585,463 3,005,879,280 Less: Accumulated depreciation: Treatment and disposal plant and equipment (355,414,815) (28,782,937) 1,679,361 (389,348) (382,129,043) Collection and pumping plant (521,233,972) (31,129,153) - (4,181,443) (548,181,682) General plant and equipment (39,027,424) (6,942,175) (1,679,361) (3,895,818) (43,753,142) Total accumulated depreciation (915,676,211) (66,854,265) - (8,466,609) (974,063,867) Total capital assets being depreciated, net 1,813,146,080 222,788,187 - 4,118,854 2,031,815,413 Total Capital Assets 2,411,876,889 $ 351,266,721$ - $ 293,647,705 $ 2,469,495,905$ For the Year Ended June 30, 2011 Additions Reclass Deletions Balance June 30, 2009 Balance (As Restated)June 30, 2010 Capital assets not being depreciated: Land 27,070,041 $ 1,058,660 $ - $ - $ 28,128,701 $ Construction in progress 450,539,975 153,818,974 - 33,756,841 570,602,108 Total capital assets not being depreciated 477,610,016 154,877,634 - 33,756,841 598,730,809 Capital assets being depreciated: Treatment and disposal plant and equipment 762,219,595 4,360,055 (9,625,867) 6,713,035 750,240,748 Collection and pumping plant 1,861,695,362 43,669,661 9,625,867 604,486 1,914,386,404 General plant and equipment 60,326,121 7,186,774 - 3,317,756 64,195,139 Total capital assets being depreciated 2,684,241,078 55,216,490 - 10,635,277 2,728,822,291 Less: Accumulated depreciation: Treatment and disposal plant and equipment (339,806,176) (27,019,845) 7,315,692 (4,095,514) (355,414,815) Collection and pumping plant (490,913,350) (23,256,637) (7,315,692) (251,707) (521,233,972) General plant and equipment (38,535,541) (3,735,294) - (3,243,411) (39,027,424) Total accumulated depreciation (869,255,067) (54,011,776) - (7,590,632) (915,676,211) Total capital assets being depreciated, net 1,814,986,011 1,204,714 - 3,044,645 1,813,146,080 Total Capital Assets 2,292,596,027 $ 156,082,348$ - $ 36,801,486 $ 2,411,876,889$ For the Year Ended June 30, 2010 Additions Reclass Deletions THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2011 and 2010 (Continued) 28 4. Change in Capital Assets (Continued) In fiscal year 2007, the District created a treatment and disposal plant asset in order to represent a portion of the Lower Meramec wastewater treatment plant. This was created in order to begin recording depreciation expense for the assets that had been put into service. In fiscal year 2010, a portion of these assets totaling $9,625,867 was reclassified from treatment and disposal to collection and pumping as a result of more detailed information becoming available. This also resulted in a $7,315,692 reclassification of accumulated depreciation. In fiscal year 2011, a review of fixed asset categories caused the District to reclassify capital assets related to the District’s office building. This resulted in a $6,851,394 reclassification from treatment and disposal to general plant and equipment. The accounting change also resulted in a $1,679,361 reclassification of accumulated depreciation. 5. Property Tax On or before October 1 of each year, the District levies ad valorem taxes on all taxable tangible property, real and personal, within its boundaries based on assessed valuations established by the City of St. Louis and St. Louis County Assessors. Tax rates vary by sub-district and purpose. Taxes levied are used for operations and stormwater maintenance, debt service, and construction. Taxes are recorded as non- operating revenues. Property tax bills are mailed in October. They become delinquent and represent a lien on the related property if not paid by December 31. All property taxes are billed and collected by the City of St. Louis and St. Louis County Collectors’ of Revenue and are distributed to the District monthly. On June 12, 2008, pursuant to Ordinance 12661, the District set the property tax rate at zero and began charging a stormwater service charge on March 1, 2008 based on the property’s impervious area. The District continued to collect, and recognize as revenue, $1,401,100 in delinquent property taxes in fiscal year 2010. Only July 9, 2010, the court declared that the stormwater user charge was a tax that requires voter approval under the Hancock Amendment I. In July, the District ceased charging customers for stormwater usage and reenacted the property tax that was previously charged. In fiscal year 2011, the District recorded $27,125,451 in revenue from property taxes. THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2011 and 2010 (Continued) 29 6. Long-Term Liabilities The following is a summary of changes in the District’s long-term liabilities for the year ended June 30, 2011: Original Balance Balance Issuance June 30,June 30, Current Amounts 2010 Additions Retirements 2011 Portion Bonds and notes payable: Senior revenue bonds: Series 2004A 175,000,000 $ 167,370,000 $ - $ 1,780,000 $ 165,590,000 $ 1,960,000 $ Series 2006C 60,000,000 60,000,000 - - 60,000,000 - Series 2008A 30,000,000 30,000,000 - - 30,000,000 - Series 2010B 85,000,000 85,000,000 - - 85,000,000 - Subordinate revenue bonds: Series 2004B 161,280,000 130,110,000 - 7,055,000 123,055,000 7,095,000 Series 2005A 6,800,000 5,665,000 - 295,000 5,370,000 315,000 Series 2006A 42,715,000 38,420,000 - 2,085,000 36,335,000 2,110,000 Series 2006B 14,205,000 12,935,000 - 650,000 12,285,000 665,000 Series 2008A/B 40,000,000 37,375,000 - 1,765,000 35,610,000 1,777,500 Missouri Department of Natural Resources: Energy Loan Program 98,595 36,671 - 11,420 25,251 11,783 Series 2009A 23,000,000 23,000,000 - 946,800 22,053,200 968,700 Series 2010A 7,980,700 7,980,700 - - 7,980,700 - Series 2010C 37,000,000 - 37,000,000 - 37,000,000 1,481,000 Capital Lease: Oracle/Blue Heron 12,000,000 7,263,687 1,759,808 2,927,513 6,095,982 2,999,842 695,079,295 $ 605,156,058 $ 38,759,808 $ 17,515,733 $ 626,400,133 19,383,825 $ Add: Unamortized premium, net 8,699,649 Less: Bond issue costs, net (7,836,995) Total 627,262,787 $ Deposits and accrued expenses: Landfill closure and postclosure costs 662,016$ 47,104$ -$ 709,120$ -$ Compensated absences 6,279,402 860,880 538,336 6,601,946 1,650,487 Net OPEB obligation 1,924,162 2,162,237 1,381,600 2,704,799 - Total 8,865,580$ 3,070,221$ 1,919,936$ 10,015,865$ 1,650,487$ THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2011 and 2010 (Continued) 30 6. Long-Term Liabilities (Continued) Wastewater System Revenue Bonds Payable In February 2004, the District received voter authorization for $500,000,000 of revenue bonds. In August 2008, the District received voter authorization for an additional $275,000,000 of revenue bonds. From the total voter authorization of $775,000,000, $92,019,300 has not been issued as of June 30, 2011. These funds were sought to enable the District to comply with federal and state clean water requirements. In January 2010, the District issued $85,000,000 of Wastewater System Revenue Bonds Series 2010B (Series 2010B). These bonds were issued pursuant to the August 2008 authorization; in this case for the purpose of constructing, repairing, replacing, and equipping new and existing District wastewater facilities. These senior bonds have an interest rate of 5.9% and are payable in semiannual installments at varying amounts through May 1, 2039. The revenue bonds do not constitute a legal debt or liability for the District, the State of Missouri, or for any political subdivision thereof and do not constitute indebtedness within the meaning of any constitutional or statutory debt limitation or restriction. In November 2008, the District issued $30,000,000 of Wastewater System Revenue Bonds Series 2008A (Series 2008A) from the authorization for the purpose of providing funds to finance the capital improvements and replacement program. These senior bonds have interest rates ranging from 5.1% to 5.3% and are payable in semiannual installments at varying amounts through May 1, 2038. The revenue bonds do not constitute a legal debt or liability for the District, the State of Missouri, or for any political subdivision thereof and do not constitute indebtedness within the meaning of any constitutional or statutory debt limitation or restriction. In November 2006, the District authorized and issued $60,000,000 of Wastewater System Revenue Bonds Series 2006C (Series 2006C) for the purpose of providing funds to finance the initial phase of its capital improvements and replacement program, including constructing, repairing, and replacing new wastewater facilities. These senior bonds have interest rates ranging from 4.1% to 5.0% and are payable in semiannual installments at varying amounts through May 1, 2036. The revenue bonds do not constitute a legal debt or liability for the District, the State of Missouri, or for any political subdivision thereof and do not constitute indebtedness within the meaning of any constitutional or statutory debt limitation or restriction. In May 2004, the District authorized and issued $175,000,000 of Wastewater System Revenue Bonds Series 2004A (Series 2004A) for the purpose of providing funds to finance the initial phase of its capital improvements and replacement program, including constructing, repairing, and replacing new wastewater facilities. These senior bonds have interest rates ranging from 2.0% to 5.0% and are payable in semiannual installments at varying amounts through May 1, 2034. The revenue bonds do not constitute a legal debt or liability for the District, the State of Missouri, or for any political subdivision thereof and do not constitute indebtedness within the meaning of any constitutional or statutory debt limitation or restriction. The issuance of the revenue bonds does not obligate the District to levy any form of taxation therefore or to make any appropriation for their payments in any fiscal year. The principal and interest on the bonds are expected to be paid from future wastewater revenues. The scheduled payment of the principal of and interest on the Series 2006C and 2004A Bonds are guaranteed under a financial guaranty insurance policy. THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2011 and 2010 (Continued) 31 6. Long-Term Liabilities (Continued) Water Pollution Control and Drinking Water Revenue Bonds Payable In October 2008, the State Environmental Improvement and Energy Resources Authority (the Authority) authorized and issued $69,435,000 of Water Pollution Control and Drinking Water Revenue Bonds (State Revolving Funds Programs) Series 2008A (Series 2008A). The Series 2008A bonds provided funds to make loans to fourteen Missouri political subdivisions that will be used to finance water pollution control and drinking water projects. A portion of the proceeds of the Series 2008A/B bonds issued by the Authority were used to purchase subordinate Participant Revenue Bonds (Participant Bonds) authorized and issued by the District in the aggregate principal amount of $40,000,000, the proceeds of which will be used for constructing, repairing, and equipping new and existing wastewater facilities. The District’s Participant Bonds have interest rates ranging from 4.0% to 5.7% and are payable in semiannual installments at varying amounts through January 1, 2029. In November 2006, the Authority authorized and issued $22,105,000 of State Revolving Funds Programs Series 2006B (Series 2006B). The Series 2006B bonds provided funds to make loans to seven Missouri political subdivisions that will be used to finance water pollution control and drinking water projects. A portion of the proceeds of the Series 2006B bonds issued by the Authority were used to purchase Participant Bonds authorized and issued by the District in the aggregate principal amount of $14,205,000, the proceeds of which will be used for constructing, repairing, and equipping new and existing wastewater facilities. The District’s Participant Bonds have interest rates ranging from 4.0% to 5.0% and are payable in semiannual installments at varying amounts through July 1, 2027. In May 2006, the Authority authorized and issued $87,505,000 of State Revolving Funds Programs Series 2006A (Series 2006A). The Series 2006A bonds provided funds to make loans to thirteen Missouri political subdivisions that will be used to finance water pollution control and drinking water projects. A portion of the proceeds of the Series 2006A bonds issued by the Authority were used to purchase subordinate Participant Bonds authorized and issued by the District in the aggregate principal amount of $42,715,000, the proceeds of which will be used for constructing, repairing, and equipping new and existing wastewater facilities. The District’s Participant Bonds have interest rates ranging from 3.5% to 4.5% and are payable in semiannual installments at varying amounts through July 1, 2026. In May 2005, the Authority authorized and issued $53,060,000 of State Revolving Funds Programs Series 2005A (Series 2005A). The Series 2005A bonds provided funds to make loans to ten Missouri political subdivisions and one Missouri non-profit corporation that will be used to finance water pollution control and drinking water projects. A portion of the proceeds of the Series 2005A bonds issued by the Authority were used to purchase subordinate Participant Bonds authorized and issued by the District in the aggregate principal amount of $6,800,000, the proceeds of which will be used for constructing, repairing, and equipping new and existing wastewater facilities. The District’s Participant Bonds have interest rates ranging from 3.0% to 5.0% and are payable in semiannual installments at varying amounts through July 1, 2026. THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2011 and 2010 (Continued) 32 6. Long-Term Liabilities (Continued) Water Pollution Control and Drinking Water Revenue Bonds Payable (Continued) In May 2004, the Authority authorized and issued $179,780,000 of State Revolving Funds Programs Series 2004B (Series 2004B). The Series 2004B bonds provided funds to make loans to seven Missouri political subdivisions that will be used to finance water pollution control projects. A portion of the proceeds of the Series 2004B bonds issued by the Authority were used to purchase subordinate Participant Bonds authorized and issued by the District in the aggregate principal amount of $161,280,000, the proceeds of which will be used to finance the District’s three water pollution control construction projects outlined in the agreement. The District’s Participant Bonds have interest rates ranging from 2.0% to 5.3% and are payable in semiannual installments at varying amounts through January 1, 2027. The Series 2004B, 2005A, 2006A, 2006B, and 2008A/B bonds do not constitute a legal debt or liability for the District, the State of Missouri, or for any political subdivision thereof and do not constitute indebtedness within the meaning of any constitutional or statutory debt limitation or restriction. The issuance of the Series 2004B, 2005A, 2006A, 2006B bonds do not obligate the District to levy any form of taxation therefore or to make any appropriation for their payments in any fiscal year. The principal and interest on the bonds are expected to be paid from future wastewater revenues. In connection with the District’s issuance of the Participant Bonds, which were purchased with the proceeds of the Series 2004B, 2005A, 2006A, 2006B, and 2008A/B bonds, the District participates in the State Revolving Loan Program established by the Missouri Department of Natural Resources (the DNR). Monies from federal capitalization grants and state matching funds are used to fund a reserve account for each participant. As the District incurs approved capital expenses, the DNR reimburses the District for the expenses from the bond proceeds account and deposits in a bond reserve fund in the District’s name an additional 60% of the expenditure amount for the Series 2004B bonds or 70% for the Series 2005A, 2006A, and 2006B bonds or 100% for the Series 2008A/B bonds. Interest earned from this reserve fund can be used by the District to fund interest payments on the bonds. On the date of each payment of the principal amount of the District’s Participant Bonds, the trustee transfers from this reserve account to the master trustee an amount equal to 60% of the principal payment for the Series 2004B bonds or 70% for the Series 2005A, 2006A, and 2006B bonds or 100% for the series 2008A/B bonds. The costs of operation and maintenance of the wastewater treatment and sewerage facilities and the debt service is payable from wastewater revenues. In accordance with the Series 2004A, 2004B, 2005A, 2006A, 2006B, and 2008A/B bonds, the District’s annual net operating revenues from wastewater activities, as defined in the agreement, coupled with investments earnings must be at least 125% of the current portion of principal and interest due on all senior bonds and at least 115% of the current portion of principal and interest due on all bonds. At June 30, 2011 and 2010, the District was in compliance with this covenant. THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2011 and 2010 (Continued) 33 6. Long-Term Liabilities (Continued) Principal and Interest Requirements on Revenue Bonds Payable The annual principal and interest requirements to maturity on revenue bonds payable outstanding as of June 30, 2011 are as follows: Years ending June 30,Principal Interest Total 2012 13,922,500$ 23,213,859$ 37,136,359$ 2013 14,257,500 27,591,971 41,849,471 2014 14,792,500 26,970,156 41,762,656 2015 15,175,000 26,320,999 41,495,999 2016 16,080,000 25,613,874 41,693,874 2017-2021 89,917,500 115,767,556 205,685,056 2022-2026 104,215,000 91,676,845 195,891,845 2027-2031 94,760,000 66,224,850 160,984,850 2032-2036 120,790,000 40,082,898 160,872,898 2037-2040 69,335,000 7,840,250 77,175,250 Total 553,245,000$ 451,303,258$ 1,004,548,258$ Water Pollution Control and Drinking Water Revenue Bonds Payable West Watson and Nanell Loan Agreement During fiscal year 2005, the DNR loaned $535,600 to the District. The West Watson and Nanell Loan bears interest at a rate of 1.5% and is payable through November 1, 2014. The purpose of this note is to finance the planning, acquisition, construction, improvement, repair, rehabilitation, and extension of the sewer system of a certain regional subdistrict. This note is classified as special assessment debt by the District; therefore, the principal and interest on this note will be repaid from additional tax assessments on property values within the subdistrict. In April 2010, an additional payment was made to bring the principal balance to zero. Ozark and Table Rock Loan Agreement During fiscal year 2004, the DNR loaned $374,680 to the District. The Ozark and Table Rock Loan bears interest at a rate of 1.5% and is payable through November 1, 2013. The purpose of this note is to finance the planning, acquisition, construction, improvement, repair, rehabilitation, and extension of the sewer system of a certain regional subdistrict. This note is classified as special assessment debt by the District; therefore, the principal and interest on this note will be repaid from additional tax assessments on property values within the subdistrict. In April 2010, an additional payment was made to bring the principal balance to zero. THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2011 and 2010 (Continued) 34 6. Long-Term Liabilities (Continued) Energy Efficiency Leveraged Note Payable In April 2004, the DNR loaned $98,595 to the District. The Energy Efficiency Leveraged Note Payable bears interest at a rate of 3.2% per annum and is payable through August 1, 2013. The purpose of this note is to finance the design, acquisition, installation, and implementation of energy conservation measures. The principal and interest on this note is paid from wastewater revenues. Principal and Interest Requirements on Energy Efficiency Leveraged Note Payable The annual principal and interest requirements to maturity on the Energy Efficiency Leveraged Note Payable outstanding as of June 30, 2011 are as follows: Years ending June 30,Principal Interest Total 2012 11,783 $ 703 $ 12,486 $ 2013 12,157 329 12,486 2014 1,311 21 1,332 Total 25,251 $ 1,053 $ 26,304 $ Energy Efficiency Leveraged Note Payable State of Missouri Direct Loan Series 2009A In October 2009, the DNR loaned $23,000,000 to the District. The State of Missouri Direct Loan Series 2009A bears interest at a rate of 1.5% per annum and is payable through January 1, 2030. The purpose of this note is to finance the designing, constructing, improving, renovating, repairing, replacing and equipping new and existing sewer facilities within the District. The principal and interest on the bonds are expected to be paid from future wastewater revenues. In accordance with the Direct Loan Series 2009A, the District’s annual net operating revenues from wastewater activities, as defined in the agreement, coupled with investments earnings must be at least 115% of the current portion of principal and interest due on all bonds. At June 30, 2011 and 2010, the District was in compliance with this covenant. THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2011 and 2010 (Continued) 35 6. Long-Term Liabilities (Continued) Principal and Interest Requirements on State of Missouri Direct Loan Series 2009A The annual principal and interest requirements to maturity on the State of Missouri Direct Loan Series 2009A outstanding as of June 30, 2011 are as follows: Years ending June 30,Principal Interest Total 2012 968,700$ $ 318,461 $ 1,287,161 2013 991,100 304,237 1,295,337 2014 1,014,000 289,684 1,303,684 2015 1,037,500 274,794 1,312,294 2016 1,061,500 259,560 1,321,060 2017-2021 5,687,100 1,056,663 6,743,763 2022-2026 6,376,000 619,348 6,995,348 2027-2030 4,917,300 145,226 5,062,526 Total 22,053,200$$ 3,267,973 $ 25,321,173 State of Missouri Direct Loan Series 2009A State of Missouri Direct Loan Series 2010A In January 2010, the State of Missouri’s Direct Loan Program – ARRA issued to the District an amount totaling $7,980,700 for the construction, improvement, renovation, repair, replacement and equipping of its wastewater system, under the authority of and in full compliance with the District’s Charter (Plan). The District’s interest rate is 1.5% and is payable in semiannual installments at varying amounts through July 1, 2031. In accordance with the Direct Loan Series 2010A, the District’s annual net operating revenues from wastewater activities, as defined in the agreement, coupled with investments earnings must be at least 115% of the current portion of principal and interest due on all bonds. At June 30, 2011 and 2010, the District was in compliance with this covenant. THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2011 and 2010 (Continued) 36 6. Long-Term Liabilities (Continued) Principal and Interest Requirements on State of Missouri Direct Loan Series 2010A The annual principal and interest requirements to maturity on the State of Missouri Direct Loan Series 2010A outstanding as of June 30, 2011 are as follows: Years ending June 30,Principal Interest Total 2012 -$ 118,114$ 118,114$ 2013 337,700 116,871 454,571 2014 344,500 111,848 456,348 2015 351,500 106,724 458,224 2016 358,600 101,495 460,095 2017-2021 1,905,500 425,257 2,330,757 2022-2026 2,107,100 277,661 2,384,761 2027-2031 2,329,600 114,460 2,444,060 2032 246,200 1,822 248,022 Total 7,980,700$ 1,374,252$ 9,354,952$ State of Missouri Direct Loan Series 2010A State of Missouri Direct Loan Series 2010C In December 2010, the State of Missouri Direct Loan Program – ARRA issued to the District an amount totaling $37,000,000 for the purpose of improving, renovating, repairing, replacing and equipping the District’s Wastewater System. The principal and interest on the bonds are expected to be paid from future wastewater revenues. The District’s interest rate is 1.65% and is payable in semiannual installments at varying amounts through January 1, 2031. In accordance with the Direct Loan Series 2010C, the District’s annual net operating revenues from wastewater activities, as defined in the agreement, coupled with investments earnings must be at least 115% of the current portion of principal and interest due on all bonds. At June 30, 2011 and 2010, the District was in compliance with this covenant. THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2011 and 2010 (Continued) 37 6. Long-Term Liabilities (Continued) Principal and Interest Requirements on State of Missouri Direct Loan Series 2010C The annual principal and interest requirements to maturity on the State of Missouri Direct Loan Series 2010C outstanding as of June 30, 2011 are as follows: Years ending June 30,Principal Interest Total 2012 1,481,000 $ 604,428 $ 2,085,428 $ 2013 1,520,000 579,835 2,099,835 2014 1,560,000 554,590 2,114,590 2015 1,600,000 528,685 2,128,685 2016 1,641,000 502,120 2,143,120 2017-2021 8,868,000 2,087,349 10,955,349 2022-2026 10,081,000 1,311,758 11,392,758 2027-2031 10,249,000 430,081 10,679,081 Total 37,000,000 $ 6,598,846 $ 43,598,846 $ State of Missouri Direct Loan Series 2010C Master Equipment Lease / Purchase Agreement In June 2009, the District entered into a lease purchase agreement in which the District will receive proceeds in the total amount of $12,000,000 in monthly installments over the next nineteen months. These proceeds will be used to lease technology related to the District’s upgrade to a new enterprise system. The lease bears interest at a rate of 3.2% and is payable through June 19, 2013, at which time the District has the option to purchase the leased equipment. Principal and Interest Requirements on Master Equipment Lease/Purchase Agreement Years ending June 30,Principal Interest Total 2012 $ 2,999,842 $ 149,613 $ 3,149,455 2013 3,096,139 53,315 3,149,454 Total 6,095,981$$ 202,928 $ 6,298,909 Master Equipment Lease / Purchase Agreement THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2011 and 2010 (Continued) 38 6. Long-Term Liabilities (Continued) Restricted Cash and Investments The following trustee held accounts have been established in accordance with bond ordinances and financing agreements that require receipts generated from operations be segregated and certain reserve accounts be established: Revenue Fund The Revenue Fund will be used for the purpose of depositing wastewater operating revenues, providing funds to pay for expenses related to the operation and maintenance of the District, and fulfilling Sinking Fund requirements in accordance with the bond ordinances. Sinking Fund The bond ordinances provide for deposits to and the use of monies in the Sinking Fund to be used for the sole purpose of principal and interest payments on the bonds. Sufficient monies shall be paid in periodic installments from the Revenue Fund. Debt Service Fund The Debt Service Fund shall be used by the Trustee for the sole purpose of paying the principal and interest on the bonds, as and when the same become due. Debt Service Reserve Fund After initial deposit of the amount required pursuant to the bond ordinances and financing agreements of the Series 2004A, 2006C, 2008A and 2010B bonds, monies in the Debt Service Reserve Fund shall be disbursed and expensed by the District solely for the payment of the principal and interest on the bonds and notes to the extent of any deficiency in the Debt Service Fund for such purpose. The District may disburse and expend monies from the Debt Service Reserve Fund for such purpose immediately. As of June 30, 2011 and 2010, cash and investments in the Debt Service Reserve Fund totaled $31,223,261 and $30,691,786, respectively. Special Participant Bond Reserve Account For the Series 2004B, 2005A, 2006A, 2006B, 2008A/B, 2009A, 2010A and 2010C bonds, the District shall deposit into the Special Participant Bond Reserve Account amounts in accordance with the bond ordinance, if any, which shall be disbursed and expensed by the District solely for the payment of the principal and interest on the Participant Bonds to the extent of any deficiency in the Sinking Fund for such purpose. At June 30, 2011 and 2010, cash and investments in the Special Participant Bond Reserve Account held on behalf of the District totaled $148,274,220 and $153,013,769, respectively. Monies in this account are not considered to be District funds. However, interest earnings on this account may be used by the District to reduce interest payments on the bonds outstanding. THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2011 and 2010 (Continued) 39 6. Long-Term Liabilities (Continued) Restricted Cash and Investments (Continued) Renewal and Extension Fund All sums accumulated and retained in the Renewal and Extension Fund shall be first used to prevent default in the payment of principal and interest on the bonds when due and shall then be applied by the District for purposes pursuant to the trust indenture. No monies have been deposited into this account at June 30, 2011 and 2010. Project Fund The Project Fund for all bond issuances outstanding will be used for the purpose of providing monies to pay project costs. The proceeds from the bonds and notes, after a deposit into the Debt Service Reserve Fund for the amounts required pursuant to the bond ordinances and note agreements of Series 2004A, 2006C, 2008A and 2010B bonds, shall be deposited into the Project Fund. At June 30, 2011 and 2010, cash and investments in the Project Fund totaled $31,200,465 and $53,416,155, respectively. Rebate Fund The bond ordinances provide for the creation of a Rebate Fund into which shall be deposited such amounts as are required to be deposited therein pursuant to the arbitrage instructions regarding the calculation and payment of rebate amounts due. The District does not have any rights in or claims to such money; provided, however, any funds remaining in the Rebate Fund after redemption and payment of all bonds and payment of any rebatable arbitrage amount, or provision having been made therefore, shall be remitted to the District. At June 30, 2011 and 2010, cash and investments in the Rebate Fund totaled $236,676 and $237,585, respectively. Administrative Fee Fund The Administrative Fee Fund will be used for the payment of the Trustee’s fees and other administrative fees pursuant to the note agreement. The Trustee shall immediately withdraw the fee amounts when due. Monies held in this account shall not be invested. Fair Value of Financial Instruments The value of the District’s long-term debt is estimated based on the current rates offered to the District for debt of the same remaining maturities. The carrying amount and estimated fair value of the District’s long- term debt as of June 30, 2011 was $626,400,132 and $657,967,027, respectively. The carrying amount and estimated fair value of the District’s long-term debt as of June 30, 2010 was $605,156,058 and $631,821,339, respectively. THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2011 and 2010 (Continued) 40 7. Pension Plan Plan Description The Metropolitan St. Louis Sewer District Employees’ Pension Plan (the Plan) is a non-contributory single employer defined benefit plan providing retirement benefits as well as death and disability benefits to members. As a condition of employment, all full-time employees of the District commencing service prior to December 31, 2010, are eligible to be covered by the Plan. The financial statements for the Plan are produced using the accrual basis of accounting. Under the accrual basis of accounting, revenues are recognized when earned and expenses are recognized when the related liability is incurred. The Plan issues a publicly available financial report that includes financial statements and required supplementary information. That report may be obtained by writing: The Metropolitan St. Louis Sewer District, 2350 Market Street, St. Louis, MO 63103-2555. The Plan, established on November 1, 1967, is amended from time to time by the District’s Board of Trustees, primarily to improve benefits to members. The Pension Committee, consisting of two members of the District’s Board of Trustees, two elected employee members, and four members of the District’s management staff, administer the Plan. A committee of the District’s Board of Trustees, with the aid of an investment advisor, reviews and evaluates the Plan’s investments and the related rates of return on a periodic basis. The Plan is exempt from the requirements of the Employee Retirement Income Security Act of 1974 (the “Act”) and, as such, is not subject to the Act’s reporting requirements. All benefits vest after five years of credited service. Members retiring at or after age 65 with five or more years credited service are entitled to a pension benefit. The Plan permits early retirement with reduced benefits beginning at age 55 if the member has completed 60 months of employment. A member whose combined age and term of service is equal to 75 may retire early with unreduced benefits. The annual benefit accrued by a member is equal to 1.5% of final average earnings plus 0.4% of final average earnings that are in excess of covered earnings multiplied by the period of years and months of credited service not to exceed 35 years. A survivor’s benefit for vested members who have not yet reached their normal retirement date or earned 75 points is provided for. The survivor’s benefit is equal to the greater of 50.0% of the member’s monthly-accrued retirement benefit as of the date of death, or 15.0% of the monthly earnings and the member’s monthly-accrued retirement benefit actuarially reduced under the 100.0% joint and survivor annuity option. Members are also able to select a Contingent Annuity Pop-Up option. This option allows the member to elect a survivor annuity for life, with the provision that if the beneficiary should predecease the member, the benefit shall increase to the amount payable had the survivor option not been selected. Ordinance Number 10872, effective January 1, 2001, further amended the Plan to extend the cost of living increases for retirees from a maximum of 30.0% to 45.0% of the original benefit. THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2011 and 2010 (Continued) 41 7. Pension Plan (Continued) Plan Description (Continued) Effective August 1, 2004, Ordinance No. 11781 amended the Plan to change the benefit formula to 1.7% of final average earnings plus 0.4% of final average earnings that are in excess of covered earnings multiplied by the period of years and months of credited service not to exceed 35 years without including accrued sick leave. Effective July 1, 2007, Ordinance No. 12395 amended the Plan for members whose annual retirement benefit , as of July 1, 2007, is determined to be higher under the formula using the definition of “Final Average Earnings” in effect prior to August 1, 2004. Under the interim rule, if such a member retires on his normal retirement date of or after July 1, 2007 and/or before June 1, 2009 (the “window period”), he may elect to have his benefit determined using the 1.5%/0.4% of final average earnings formula including accrued sick leave or the 1.7%/0.4% of final average earnings formula without using accrued sick leave. The interim rule will not apply if at any time during the window period a member’s benefit is determined to be higher under the 1.7%/0.4% formula. Sick leave is paid out at 1.3% per year of service times the amount of leave accrued not to exceed $50,000 unless the employee accrued an amount greater than $50,000 as of July 1, 2004, and retires or dies while in active service prior to July 1, 2007. Also, the Plan was amended to provide the retiring member with a 10% partial lump sum payment option. The balance of the distribution will be paid in accordance with any one of the other payment options available under the Plan. The retirement benefit payable to a member who retires after his or her normal retirement date is the greater of a) the benefit that would have been payable on the normal retirement date plus a special annual retirement benefit provided by the accumulated value, at 4.0% per annum interest, of the monthly benefit that would have been received prior to the postponed retirement date or b) the benefit determined as of the postponed retirement date under the normal formula. Funding Policy The District’s employees do not contribute to the Plan. Ordinances establishing the Plan provide for actuarially determined annual contributions, paid solely by the District, that are sufficient to pay benefits when due. The Entry Age Normal actuarial funding method is used to determine contributions. Annual Pension Cost Contributions of $10,500,769 and $9,583,137, excluding certain professional fees paid by the District, were made to the Plan during the District’s fiscal years ended June 30, 2011 and 2010, respectively. These contributions were made in accordance with actuarially determined contribution requirements based on actuarial valuations performed at December 31, 2010 and 2009, respectively, and for 2010 consisted of a) $6,103,002 normal cost plus b) $3,484,662 amortization of the actuarial accrued assets in excess of the unfunded actuarial accrued liability and prior changes c) multiplied by an interest factor of 1.075. The District provides certain professional fees, office space, utilities, and other services to the Plan at no cost. Other costs of administering the Plan are financed from plan net assets. THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2011 and 2010 (Continued) 42 7. Pension Plan (Continued) Annual Pension Cost (Continued) Significant actuarial assumptions used in the valuations are as follows: Latest valuation date December 31, 2010 Actuarial cost method Entry Age Normal Amortization method Level dollar closed Amortization period 20-year period Asset valuation method Three-year average of adjusted market values Post-retirement benefit increases CPI with maximum per year of 3.0% of current benefit up to $600, and lifetime maximum of 45% of the original monthly benefit up to $9,000 Investment rate of return 7.5% per annum (1) Projected salary increases 4.5% - 10.0% per annum (1) Social Security wage base 4.0% per annum increase (1) (1) Includes inflation component of 3.0% Historical trend information about the District’s participation in the Plan is presented below to help readers assess the Plan’s funding status on a going-concern basis and assess progress being made in accumulating assets to pay benefits when due. Annual Pension Percentage of Net Pension Fiscal Year Cost (APC)APC Contributed Obligation 2011 10,500,769$ 100%-- 2010 9,583,137 100%-- 2009 8,142,569 100%-- Required Supplementary Information in (000s) Unfunded Entry Age Actuarial UAAL as a Actuarial Actuarial Accrued Annual Percentage Actuarial Value Accrued Liability Funded Covered of Covered Valuation of Assets Liability (UAAL) Ratio Payroll Payroll Date (1)(2)(1)-(2) (1)/(2) (3)(1)-(2)/(3) 12/31/2010 189,012$ 231,599$ (42,587)$ 81.6% 51,703$ 82.4% 12/31/2009 185,753 223,063 (37,310) 83.3 52,267 71.4 12/31/2008 183,679 212,066 (28,387) 86.6 48,077 59.0 Schedule of Funding Progress THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2011 and 2010 (Continued) 43 7. Pension Plan (Continued) Effective January 1, 2011, the District started a Defined Contribution Plan for all new hires. This Plan is intended to provide a means whereby the District may provide retirement benefits to eligible employees and encourage employees to establish a regular method of savings, thereby providing a measure of financial security for employees and their beneficiaries upon retirement or in the event of death or disability. Current employees with less than ten years of service on December 31, 2010, could voluntarily elect to transfer from the Defined Benefit Plan into the Defined Contribution Plan. The Defined Contribution Plan provides a basic employer contribution of seven percent of employee earnings. Also provided is an additional matching contribution of 50% of the first four percent of earnings the employee defers into the Defined Contribution Plan. Of the 404 District employees with less than ten years of service, 23 elected to participate in the Defined Contribution Plan. At June 30, 2011, total plan participants and assets totaled 39 and $96,111, respectively. 8. Deferred Compensation Plan The District offers its employees a Deferred Compensation Plan created in accordance with Internal Revenue Code Section 457. The Deferred Compensation Plan, available to all District employees, permits them to defer a portion of their salary until future years. The deferred compensation is not available to employees until termination, retirement, death, disability, or due to financial hardship as defined by the Deferred Compensation Plan The Deferred Compensation Plan was amended and restated to comply with the Economic Growth and Tax Relief Reconciliation Act of 2001 (the Act). The Act made significant changes to Section 457(b) of the Internal Revenue Code of 1986, as previously amended. The Deferred Compensation Plan assets are held in trust for the exclusive benefit of participants and their beneficiaries under Section 1448 of the Small Business Job Protection Act of 1996. As a result, the assets and liabilities of the Deferred Compensation Plan are not included in the accompanying financial statements. The Deferred Compensation Plan issues a publicly available financial report that includes financial statements and required supplementary information. That report may be obtained by writing: The Metropolitan St. Louis Sewer District, 2350 Market Street, St. Louis, MO 63103-2555. THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2011 and 2010 (Continued) 44 9. Post-Employment Benefits Other than Pensions Plan Description As part of a total compensation package effective August 1, 2004 for general employees and, with respect for union members, the later of August 1, 2004 or the date of union ratification of a Memorandum of Understanding with respect to this Plan modification, the District provides a single-employer defined benefit health care plan to employees who retire from the District on or after age 62 and with five years of service or whose age plus years of service equal 75 points (“Rule of 75”). The District pays the monthly group health insurance premium for the individual until the retiree becomes eligible for Medicare at age 65. In addition, there is a closed group of disabled former employees who receive life insurance coverage from the District. Cost Sharing Contributions for retirees are as follows: Coverage Tier Monthly Premium Retiree* $411.37 Retiree + Spouse $876.19 Retiree + Child $796.10 Family (1child) $1,214.35 * The District pays the retiree’s premium for a retiree who retires after age 62 or after attaining 75 points. Eventually, affected retirees will have to pay up to 10% of the above premium. The District’s annual other post-employment benefit (OPEB) cost (expense) is calculated based on the annual required contribution (ARC) of the employer, an amount actuarially determined in accordance with the parameters of GASB 45 and in conjunction with Plan benefits currently in force. The actuarial valuations have been determined using estimated data provided by the District in combination with assumptions on the probability of future events, while also keeping an eye on long-term viability. These valuations are subject to continual revision as future actuarial measurements may differ significantly from current measurements due to the realization of new estimates and factors. THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2011 and 2010 (Continued) 45 9. Post-Employment Benefits Other than Pensions (Continued) Plan Description (Continued) The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost each year and to amortize any unfunded actuarial liabilities. The District’s annual OPEB cost for the current year and the related information are as follows: Amortization of past service cost 850,300 $ Normal cost 1,199,400 Interest to end of fiscal year 92,300 Annual Required Contribution (ARC)2,142,000 Interest on net OPEB obligation 86,587 Adjustment to ARC (66,350) Annual OPEB cost 2,162,237 Contributions made (1,381,600) Increase in net OPEB obligation 780,637 Net OPEB obligation - beginning of year 1,924,162 Net OPEB obligation - end of year 2,704,799$ The Plan was established by District Ordinance, which assigned the authority to establish and amend plan benefit provisions to the District. The contribution requirements of the District and plan members are established and may be amended by the District. Required Supplementary Information Unfunded Actuarial UAAL as a Actuarial Actuarial Accrued Percentage Actuarial Value Accrued Liability Funded Covered of Covered Valuation of Assets Liability (UAAL) Ratio Payroll Payroll Date (1)(2)(1)-(2) (1)/(2) (3) (1)-(2)/(3) 7/1/2009 - 24,412$ 24,412$ 0% 50,230$ 7/1/2007 - 21,938 21,938 0% 43,640 50.3 Schedule of Funding Progress in (000s) 48.6% THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2011 and 2010 (Continued) 46 9. Post-Employment Benefits Other than Pensions (Continued) Plan Description (Continued) Annual Required Interest on Percentage Fiscal Contribution Net OPEB Adjustment Net OPEB Actual of ARC Net OPEB Year (ARC) Obligation to the ARC Cost Contribution Contributed Obligation 2011 2,142,000$ 86,587$ 66,350$ 2,162,237$ 1,381,600$ 64.5% 2,704,799$ 2010 2,103,700 45,663 33,824 2,115,539$ 1,206,100 57.3 1,924,162 2009 1,744,700 21,011 16,100 1,749,024 1,201,200 68.8 1,014,724 Schedule of Employer Contributions Significant actuarial assumptions used in the valuation are as follows: Latest valuation date July 1, 2009 Actuarial cost method Projected unit credit Discount rate 4.5% per annum Amortization method Level Percentage of payroll amount, open Amortization period 30-year period Inflation rate 3.0% Investment Rate of Return 4.5% annual returns net of both administrative and investment expenses Health cost trend assumption Getzen Trend Model – 7.5% graded to 4.4% over 55 years Medical trend: Year Medical Year Medical 2009 2035 2010 7.5 2040 4.8 2011 6.4 2045 4.7 2012 5.7 2050 4.6 2013 5.7 2055 4.5 2014 5.6 2060 4.5 2015 5.6 2065 4.4 2016 5.6 2070 4.4 2020 5.5 2075 4.4 2025 5.4 4.42080+ 8.4%5.0% THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2011 and 2010 (Continued) 47 9. Post-Employment Benefits Other than Pensions (Continued) Plan Description (Continued) The healthcare trends used in this valuation are based on long term healthcare trends generated by the Getzen Trend Model (the Model). The Model is the result of research sponsored by the Society of Actuaries and completed by a committee of economists and actuaries. This model is the current industry standard for projecting long term medical trends. Inputs to the model are consistent with the assumptions used in deriving the discount rate used in the valuation. Payroll inflation 4.5% per annum Mortality 1983 Group Annuity Mortality Table, male rates, set back 6 years for females Years of Attained Service Rate Age Rate 020 1 12.0 30 3.7 2 7.5 40 1.1 50+0.0 Select rates based on service Ultimate rates based on attained age Ultimate rates are from the Sarason T-1 Table above Termination of Employment: Ultimate Rates (after 4 years of service) 20.0%5.5% Select Rates (0 to 4 years of service) Age Before 75 Points After 75 Points 55 56 2.0 10.0 57 2.0 10.0 58 2.0 10.0 59 3.0 10.0 60 4.0 15.0 61 5.0 15.0 62 20.0 35.0 63 10.0 25.0 64 20.0 25.0 65 100.0 100.0 1.0%10.0% Retirement - rates vary by age THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2011 and 2010 (Continued) 48 9. Post-Employment Benefits Other than Pensions (Continued) Plan Description (Continued) Percent Becoming Age Disabled 20 30 0.064 40 0.102 50 0.311 0.056% Disability Future Retiree Coverage 90.0% of employees retiring prior to age 65 are assumed to elect medical coverage Future Dependent Care 25.0% elect spouse coverage 0.0% dependent children coverage 10. Self-Insurance Programs The District is exposed to various risks of loss related to torts; theft of, damage to, and destruction of assets; errors and omissions; injuries to employees; and natural disasters. The District has established a risk management program and retains the risk related to its obligation to provide workers' compensation and medical and hospitalization benefits to its employees; and to pay water backup claims to its customers. The estimated liabilities for payment of incurred (both reported and unreported) but unpaid claims relating to these matters are included as a component of current deposits and accrued expenses, and as such are expected to be paid within one year of the date of the statement of net assets. At June 30, 2011 and 2010, these liabilities amounted to $5,557,000 and $4,713,013, respectively. The claims liabilities reported are based on the requirements of GASB Statement No. 10, which requires that a liability for claims be reported if information obtained prior to the issuance of the financial statements indicates it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. Changes in the balance of claims liabilities during fiscal 2011 and 2010 were as follows: 2011 2010 Liability, beginning of year 4,713,013 $ 2,246,526 $ Current year claims and changes in estimates 12,163,124 12,018,566 Claim payments (11,319,137) (9,552,079) Liability, end of year 5,557,000 $ 4,713,013 $ THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2011 and 2010 (Continued) 49 10. Self-Insurance Programs (Continued) The District obtains periodic funding valuations from the third-party administrators managing the self-insurance programs and adjusts the charges as required to maintain the appropriate level of estimated claims liability. The District also maintains excess liability insurance coverage for workers' compensation and medical and hospitalization claims; general liability; and water backup damage to customers’ property. The District purchases commercial insurance for all other risks of loss. Settled claims have not exceeded this commercial coverage in any of the past three years. 11. Closure and Post-closure Care Costs State and federal laws and regulations require the District to place a final cover on its Prospect Hill Reclamation Project landfill site when it stops accepting waste and to perform certain maintenance and monitoring functions at the site for 30 years after closure. Although closure and post-closure care costs will be paid only near or after the date that the landfill stops accepting waste, the District reports a portion of these closure and post-closure care costs as an operating expense in each period based on landfill capacity used as of the end of the fiscal year. The $709,120 and $662,018 reported as landfill closure and post- closure care liabilities at June 30, 2011 and 2010, respectively, represent the cumulative amounts reported at fiscal year-end based on the use of 94.0% and 88.0% of the estimated capacity of the landfill for fiscal years ended 2011 and 2010, respectively. The District will recognize the remaining estimated cost of closure and post-closure care of $47,102 at June 30, 2012 as the facility nears capacity. These amounts are based on what it would cost to perform all closure and post-closure care in 2011. A study recently completed by Black and Veatch estimated full capacity to be reached in another six years; therefore, the District expects to close the landfill sometime in the year 2017. Final actual costs will be higher due to inflation, changes in technology, and/or changes in regulations. The District is required to demonstrate that it has the financial capability to close the landfill to the State of Missouri through the use of a financial test as specified in 10 CSR 80-2.030(4)(D)6 of the Missouri Solid Waste Management Rules. The District has complied with the State’s requirement. The District recognizes that estimates of closure costs may change as a result of inflation, deflation, and/or changes in technology and applicable laws and regulations. If closure cost estimates change, the liability currently reported on the balance sheet will be adjusted accordingly. THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2011 and 2010 (Continued) 50 12. Commitments and Contingencies US and State of Missouri v. Metropolitan St. Louis Sewer District; In the US District Court for the Eastern District of Missouri; Case No. 07-1120. A lawsuit was filed by the Department of Justice on behalf of the United States Environmental Protection Agency (“EPA”) for various alleged violations of the Clean Water Act. The suit is based on violations of the Clean Water Act as a result of overflows in the combined and sanitary sewer systems causing pollutants to reach waters of the United States. There are other counts involving violations of permit conditions. The District has been the subject of several investigatory actions by EPA over the past several years. Negotiations have been ongoing with the EPA and the Department of Natural Resources (“DNR”) regarding the sewer collection system, both the combined system and the sanitary system, for several years. The Missouri Coalition for the Environment (“MCE”) gave Notice of Intent to Sue the District under the citizen suit provisions of the Clean Water Act. EPA and the DNR then brought the suit in June 2007, and MCE moved to intervene. Intervention was granted in August 2007. In October 2007, the Court granted the District’s motion to dismiss all of the plaintiffs’ claims for civil penalties attributable to any and all of the District’s alleged violations of the Clean Water Act that occurred before June 11, 2002. Also, the suit alleges that the District does not have an approved Long-Term Control Program (“LTCP”) for the combined system. The District has been working on these issues for several decades and has asked voters to approve bonds and rate increases to rehabilitate and maintain the collection system. As required by its Charter, the District has increased rates which will continue to fund the improvements sought by the EPA and the DNR. In September 2008, the Judge put in place a Stay while the parties mediated the issues. Pursuant to MSD Ordinance No. 13277, MSD executed the Consent Decree (“CD”) on July 15, 2011. The CD was lodged with the court on August 4, 2011. The 30 day public comment period has been extended until October 10, 2011. At the closing of the public comment period, the comments received will be responded to by the Department of Justice. The Court has extended the stay of litigation until November 18, 2011, with a joint status report due on November 25, 2011. On June 1, 2011, the State of Missouri approved Chapter 11, Chapter 12, and Appendix Q of the District’s Combined Sewer Overflow Long-Term Control Plan Updated Report, dated February 2011 William Zweig et al. v. Metropolitan Sewer District. This case was filed on July 18, 2008 and, as amended, contends that Metropolitan Sewer District Ordinances No. 12560 and No. 12789, which enacted increases in the District’s stormwater user charge based on the amount of impervious area on the customer’s property, are unconstitutional. The lawsuit claims the ordinances violate the so-called Hancock Amendment, Mo. Const. art. X, § 22(a), because the stormwater user charge is in reality a tax that requires voter approval. The District’s Board of Trustees passed the ordinances in December 2007 and December 2008, respectively, without submitting them to the voters. The District contends the stormwater user charge is not a tax and, thus, not subject to voter approval. The original plaintiff is a District stormwater customer who seeks to represent a class of all the District stormwater customers. In July 2009, two more plaintiff class representatives were added to the lawsuit. The lawsuit seeks (1) a declaration that the stormwater user charge is unconstitutional, (2) a refund of all stormwater user charges collected, and (3) payment of the plaintiffs’ costs, including attorneys’ fees. THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2011 and 2010 (Continued) 51 12. Commitments and Contingencies (Continued) Trial was held April 13, 2010 through April 16, 2010. On July 9, 2010, the court handed down Findings of Fact, Conclusions of Law, Judgment and Decree in the first phase of the bifurcated trial. The Court declared the Stormwater User Charge is a tax under the Hancock Amendment. The second phase of the trial was heard on October 6, 2010, to determine the amount, if any, to be refunded. The amount of a full refund would be approximately $87 million; a partial refund for the additional amount collected under the user charge would amount to approximately $35 million. The judge ruled on November 29, 2010 that no refund would be issue by MSD. The third phase, to determine the amount of Plaintiffs’ counsel’s attorneys’ fees, to be paid by MSD was heard on January 18, 2011. On February 4, 2011, the judge awarded Plaintiff’s counsel $4.8 million in attorney’s fees and expenses. The record on appeal was filed July 20, 2011 with the Court of Appeals, Eastern District of Missouri. The attorney’s fees and expenses were paid into escrow on September 9, 2011, and will remain in escrow pending finality of the litigation. MSD’s appellate was filed September 16, 2011. The District is the defendant in six (6) different flooding cases related to the September 14, 2008 rain event precipitating from remnants of Hurricane Ike. Four (4) of the cases involve flooding of the River Des Peres, they consist of two (2) property damage cases and two (2) wrongful death cases. The defense costs associated with these cases are expected to be covered by the District’s insurance carrier. Of the other two (2) cases, one (1) involves flooding of Maline Creek and the other involves flooding of Deer Creek, they are both property damage cases. These cases are in various stages of discovery. The estimated possible loss varies for each case and is dependent upon the value of the property. The property value losses have not been determined at this time and no written demands have been received at this time for the wrongful death cases. The District has entered into construction and other contracts amounting to $226,105,854 and $212,296,069 at June 30, 2011 and 2010, respectively. Grants to be received from various governmental agencies and entities to partially offset the cost of the contract commitments amounted to $154,237 and $2,693,317 at June 30, 2011 and 2010, respectively. As of June 30, 2011, the District had $92,000,000 in bonds authorized by the voters in August 2008, but unissued. These bonds will fund the second phase of a multi decade wastewater capital improvement program. The District is a defendant in various other matters of litigation. Of these matters, management and District’s legal counsel do not anticipate any material effect on the June 30, 2011 and 2010 financial statements. 13. Restricted Net Assets The Statements of Net Assets reports $94,925,981 and $80,782,806 of restricted net assets at June 30, 2011 and 2010, respectively, of which $60,530,338 and $50,836,337 are restricted due to enabling legislation, as of June 30, 2011 and 2010, respectively. 14. Segment Information The District issued wastewater revenue bonds to finance wastewater infrastructure projects. The District accounts for both Wastewater and Stormwater activities in a single enterprise fund, but investors in those bonds rely solely on the revenue generated by the wastewater activities for repayment. Fiscal Year 2011 summary financial information for each business segment is presented below. THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2011 and 2010 (Continued) 52 14. Segment Information (Continued) Wastewater Stormwater Condensed Statement of Net Assets 323,741,195$ 6,239,176$ 46,036,519 54,695,853 14,764,507 - 2,001,899,133 467,596,772 2,386,441,354 528,531,801 95,855,094 48,194 85,769 5,720,622 616,244,340 - 712,185,203 5,768,816 Invested in capital assets, net of related debt 1,447,636,065 467,596,773 45,950,750 48,975,231 180,669,336 6,190,981 Total net assets 1,674,256,151$ 522,762,985$ Total current assets Total restricted assets Total other assets Net capital assets Total assets Total current liabilities Restricted net assets Unrestricted net assets Total current restricted liabilities Total long-term liabilities Total liabilities Condensed Statement of Revenues, Expenses, and Changes in Net Assets 217,011,360$ 2,432,897$ 56,403,291 10,450,974 160,572,145 17,076,689 Operating income 35,924 (25,094,766) Total nonoperating revenues 5,674,021 27,764,722 Total nonoperating expenses 22,058,529 7,051,182 Nonoperating income (16,384,508) 20,713,540 Capital contributions 5,342,555 4,755,997 Change in net assets (11,006,029) 374,771 Beginning net assets 1,685,262,180 522,388,214 Ending net assets 1,674,256,151$ 522,762,985$ Other operating expenses Operating revenues Depreciation expense Condensed Statement of Cash Flows Operating activities $ 64,382,661 (7,706,999)$ Noncapital financing activities 5,833 27,119,618 Capital and related financing activities (130,523,071) (10,612,774) Investing 60,686,702 (8,799,845) Increase in cash (5,447,875) - Cash beginning 11,766,809 - Cash Ending 6,318,934$ -$ [THIS PAGE INTENTIONALLY LEFT BLANK] APPENDIX B INFORMATION REGARDING THE DISTRICT’S SERVICE AREA [THIS PAGE INTENTIONALLY LEFT BLANK] INFORMATION REGARDING THE DISTRICT’S SERVICE AREA The Series 2011B Bonds are special, limited obligations of the District and are not obligations of the City of St. Louis, Missouri (the “City”), St. Louis County, Missouri (the “County”), the State of Missouri (the “State”), or any political subdivision of the City, the County or the State. The Series 2011B Bonds are payable solely from the revenues described in this Official Statement. As described elsewhere in this Official Statement, the service area of the District consists of the City and most of the County. The following information regarding the City and the County has been obtained from sources that the District believes to be reliable, but should not be construed as an indication that the Series 2011B Bonds are payable from any source other than the revenues of the District described in this Official Statement. See “SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2011B BONDS,” “THE DISTRICT,” and “THE CIRP AND THE PROJECTS” in this Official Statement. Such information is not guaranteed as to accuracy or completeness by the Underwriters and is not to be construed as a representation by the Underwriters. The Underwriters have not verified this information. No representation is made by the Underwriters as to the accuracy or adequacy of such information or as to the absence of material adverse changes in such information subsequent to the date as to which such information is provided. THE SERVICE AREA As more fully described in this Official Statement under the caption “THE DISTRICT - General”, the District was organized in 1954 to provide a metropolitan-wide system of wastewater treatment and sanitary sewerage facilities for the collection, treatment and disposal of sewage within the City and most of the more heavily populated areas of the County. When the District began operations, it took over the publicly owned wastewater and stormwater drainage facilities within its then-existing jurisdiction and began the construction of an extensive system of collector and interceptor sewers and treatment facilities. In subsequent years, voters have approved the District’s annexation of a 270 square mile area of the lower Missouri River and lower Meramec River watersheds, and the District has purchased various investor-owned or municipally operated systems serving areas of the County. The District’s service area now encompasses 525 square miles, including all 62 square miles of the City and 463 square miles of the County. A map showing the District’s current service area appears on the back cover of this Official Statement. The City of St. Louis, Missouri The history of the City of St. Louis dates to 1764 when Pierre Laclede and Auguste Chouteau selected the site as a fur trading post due in large part to its proximity to the confluence of the Mississippi and Missouri Rivers. The City was incorporated in 1823, and its current boundaries were established in 1876, when voters approved separation from St. Louis County and establishment of a home rule charter. The City remains a constitutional charter city not a part of any county, and exists under and pursuant to its Charter and the laws of the State of Missouri. The eastern boundary of the City is formed by the Mississippi River, and the City is bordered on the north, west and south by the County. The City occupies approximately 62 square miles of land, all of which lie within the service area of the District. St. Louis County, Missouri St. Louis County, Missouri was formed by a proclamation of Governor William Clark on October 1, 1812, nine years before Missouri attained statehood. In 1876, by vote of the entire county, the City of St. Louis separated itself from the County. The City of Clayton is the County seat and located in the east central part of the County. Sixty-six percent of the land area of the County is contained within the jurisdictional boundaries of 91 self-governing municipalities, containing more than two-thirds of the B-1 County population. The remaining unincorporated area comes under the direct jurisdiction of the County government. The County is a constitutional charter county operating and existing under its Charter and the laws of the State of Missouri. The County covers an area of approximately 525 square miles, 463 square miles of which lie within the service area of the District. ECONOMIC AND DEMOGRAPHIC DATA Population The City and the County are a part of the St. Louis Standard Metropolitan Statistical Area (the “St. Louis MSA”), comprised of the City, the County, the Counties of Franklin, Jefferson, Lincoln, St. Charles, Warren, Washington and the City of Sullivan in Missouri and the Counties of Bond, Calhoun, Clinton, Jersey, Macoupin, Madison and Monroe in Illinois. According to the U.S. Census Bureau, the population patterns for the City, the County, and the St. Louis MSA have been as follows: City of St. Louis St. Louis County St. Louis MSA Percentage Percentage Percentage Year Population Change Population Change Population Change 1960 750,026 N/A 703,532 N/A 2,161,228 N/A 1970 622,236 -17.04% 951,353 35.23% 2,428,655 -12.37% 1980 453,085 -27.18% 973,896 2.37% 2,376,998 2.13% 1990 396,685 -12.48% 993,529 2.00% 2,444,097 2.82% 2000 348,189 -12.23% 1,016,315 2.30% 2,603,607 6.53% 2010 319,294 -10.46% 998,954 -0.65% 2,812,896 0.57% _____________________ Source: U.S. Census Bureau Population for the years 1960-2010 represent unofficial estimates of the U.S. Department of Commerce, Bureau of the Census. The largest municipalities within the District’s service area are as follows: Population Population Population Population Municipality 2010 2000 1990 1980 St. Louis (City) 319,587 348,189 396,685 453,085 Florissant 52,158 50,497 51,206 55,721 Chesterfield* 47,484 46,802 37,991 -- University City 35,371 37,428 40,087 42,690 Ballwin 30,404 31,283 21,816 12,656 Kirkwood 27,540 27,324 27,291 27,987 Hazelwood 25,703 26,206 15,512 12,935 Maryland Heights* 27,472 25,756 25,407 -- Webster Groves 22,995 23,230 23,097 22,987 Ferguson 21,203 22,406 22,286 24,549 ______________ * The Cities of Chesterfield and Maryland Heights were not incorporated in St. Louis County until after 1980. Source: Missouri Census Data Center. B-2 Employment The following table sets forth information relating to the average composition of non-farm employment in the City and the County for the years 2006, 2008, and 2010: City of St. Louis Employment St. Louis County Employment Private Employment: 2006 2008 2010 2006 2008 2010 Manufacturing 12,926 15,590 11,090 51,570 55,070 49,696 Agriculture -- -- -- -- -- -- Mining -- -- -- -- -- -- Construction 7,946 7,856 5,094 24,691 27,255 19,257 Transportation, Communication and Utilities 7,876 7,053 6,670 25,261 22,317 19,315 Wholesale Trade 3,325 5,419 2,965 20,296 17,360 16,095 Retail Trade 14,412 16,102 13,080 52,309 55,963 54,447 Finance, Insurance and Real Estate 10,401 10,789 8,841 42,094 47,959 44,451 Services 90,060 100,327 95,642 274,609 277,460 275,217 Total 147,262 163,471 143,572 491,674 504,394 480,733 ___________________ Source: Missouri State Census Data Center. The (--) signifies that the data is not shown to avoid disclosure of confidential information, but the estimates for these items are included in the totals. The following table sets forth the total labor force, number of employed and unemployed workers in the City and the County for 2006 through October 2011: City of St. Louis(1) St. Louis County(1) Labor Force Labor Force Year Employed Unemployed Total Employed Unemployed Total 2006 146,344 10,819 157,163 507,486 24,996 532,482 2007 147,253 11,151 158,404 502,704 26,077 528,781 2008 145,567 12,257 157,824 490,271 31,284 521,555 2009 139,840 18,490 158,060 470,073 46,541 516,614 2010 138,840 20,389 159,229 467,614 48,900 516,614 2011(1) 143,705 16,635 160,340 481,258 42,560 523,818 _________________________________________ (1) Figures are based on unofficial results for October 2011. Source: Missouri Economic Research & Information Center, Missouri Department of Economic Development. B-3 The following table sets forth unemployment rates for the City, County, State and the United States for 2005 through 2010 and part of 2011: Unemployment Rates(1) Year City of St. Louis St. Louis County State of Missouri United States 2005 8.1% 5.2% 5.4% 5.1% 2006 11.2 6.2 6.3 6.4 2007 7.0 4.9 5.1 4.6 2008 7.8 5.9 6.3 5.8 2009 11.1 9.6 9.5 10.2 2010 12.8 9.5 9.4 9.6 2011(1) 10.7 8.4 8.7 9.1 _______________________________________ (1) Figures are based on unofficial results. The 2011 results are as of September 2011. Source: Missouri Department of Employment Security, Missouri Department of Economic Development and U.S. Department of Labor, Bureau of Labor Statistics. Per Capita Personal Income The following table presents per capita personal income for the City, the County, the State and the United States for the years 2004 through 2009, the latest date for which such information is available: City of St. Louis (1) St. Louis County(1) State of Missouri(1) United States(1) Year Per Capita Personal Income Per Capita Personal Income Per Capita Personal Income Per Capita Personal Income 2004 $34,735 $45,101 $30,475 $33,050 2005 29,189 46,361 31,426 34,757 2006 29,189 48,848 32,789 36,714 2007 29,724 51,710 33,964 38,615 2008 32,214 54,343 36,631 40,208 2009 32,026 52,214 36,243 38,846 _______________________________________ (1) Per Capita Personal Income is the annual total personal income of residents divided by resident population as of July 1. “Personal Income” is the sum of net earnings by place of residence, rental income of persons, personal dividend income, personal interest income, and transfer payments. “Net Earnings” is earnings by place of work — the sum of wage and salary disbursements (payrolls), other labor income, and proprietors’ income — less personal contributions for social insurance, plus an adjustment to convert earnings by place of work to a place-of-residence basis. Personal Income is measured before the deduction of personal income taxes and other personal taxes and is reported in current dollars (no adjustment is made for price changes). Source: U.S. Department of Commerce, Bureau of Economic Analysis. B-4 APPENDIX C DEFINITIONS AND SUMMARIES OF CERTAIN PROVISIONS OF THE BOND ORDINANCE AND THE CONTINUING DISCLOSURE AGREEMENT [THIS PAGE INTENTIONALLY LEFT BLANK] C-1 The following is a brief summary of certain provisions of the Master Bond Ordinance adopted by the District on April 22, 2004, as supplemented by the Ordinance adopted by the District on December 8, 2011 authorizing the issuance of the Series 2011B Bonds (collectively, the “Bond Ordinance”). This summary is not to be considered as a full statement of the provisions of such documents and is qualified by reference to and is subject to the complete Bond Ordinance, copies of which may be obtained from Public Financial Management, Inc. or ButcherMark Financial Advisors LLC, as Co-Financial Advisors to the District. After delivery of the Series 2011B Bonds, copies of such documents will be available for inspection at the corporate trust office of the Paying Agent in St. Louis, Missouri or at such other office as shall be designated by the Paying Agent. DEFINITIONS The definitions of certain words and terms used in this Official Statement with respect to the Series 2011B Bonds are set forth below: “Accumulation Payments” shall have the meaning ascribed therefor under the caption “Sinking Fund – Debt Service Reserve Account” in this Appendix C. “Accreted Value” means, with respect to each Capital Appreciation Bond, (i) the initial principal amount of such Capital Appreciation Bond plus, on the date of calculation, the interest accrued thereon to such date compounded at the interest rate thereof on each compounding date contained in such Capital Appreciation Bond, and (ii) with respect to any calculation on a date other than a compounding date, the amount determined pursuant to clause (i) above as of the immediately preceding compounding date plus interest on such amount from such compounding date to the date of calculation at a rate equal to the interest rate on such Capital Appreciation Bond. “Additional Interest” means, for any period during which any Pledged Bonds are owned by a Credit Facility Provider pursuant to a Credit Facility or Credit Facility Agreement, the amount of interest accrued on such Pledged Bonds at the Pledged Bond Rate less the amount of interest which would have accrued during such period on an equal Principal amount of Bonds at the Bond Rate. “Annual Budget” means the annual budget of the District relating to the System (which shall include all costs, obligations and expenses properly allocable to the System), as amended or supplemented in accordance with established procedures of the District, adopted or in effect for a particular Fiscal Year. “Balloon Bonds” means any series of Bonds 25% or more of the Principal of which (i) is due in any 12 month period or (ii) may, at the option of the Bondholders, be required to be redeemed, prepaid, purchased directly or indirectly by the District, or otherwise paid in any 12-month period; provided that, in calculating the Principal of such Bonds due or required to be redeemed, prepaid, purchased, or otherwise paid in any 12 month period, such Principal shall be reduced to the extent that all or any portion of such amount is required to be redeemed or amortized prior to such 12 month period. “Balloon Date” means any Principal Maturity Date or Put Date on which more than 25% of the Principal of related Balloon Bonds mature or are subject to mandatory redemption or could, at the option of the Bondholders, be required to be redeemed, prepaid, purchased directly or indirectly by the District, or otherwise paid. “Bond Counsel” means any firm of nationally recognized bond counsel experienced in matters relating to tax-exempt financing, appointed by the District. “Bond Ordinance” means the Master Bond Ordinance adopted by the Board of Trustees of the District on April 22, 2004, and the Ordinance adopted by the Board of Trustees of the District on December 8, C-2 2011 authorizing the issuance of the Series 2011B Bonds, as the same may from time to time be modified, supplemented or amended by Supplemental Ordinances. “Bond Rate” means the rate of interest per annum payable on specified Bonds other than Pledged Bonds. “Bond Register” means the books for the registration, transfer and exchange of Bonds maintained by the Bond Registrar. “Bond Registrar” means any bank or trust company designated as such by the District in the Bond Ordinance with respect to any of the Bonds. Such Bond Registrar shall perform the duties required of the Bond Registrar in the Bond Ordinance. The Bank of New York Mellon Trust Company, N.A. (as successor to BNY Trust Company of Missouri, St. Louis, Missouri), has been designated as Bond Registrar for the Bonds in the Master Bond Ordinance; provided, however, that in connection with the issuance of any SRF Bonds, the District shall appoint such separate Bond Registrar designated by the issuer of the SRF Bonds. “Bondholder” means the registered owner of one or more Bonds. “Bonds” means any revenue bonds authorized by and authenticated and delivered pursuant to the Bond Ordinance, including the Series 2011B Bonds, any other Senior Bonds, and any Subordinate Bonds. “Business Day” means a day other than a Saturday, Sunday or holiday on which the Paying Agent, Bond Registrar or applicable Credit Facility Provider is scheduled in the normal course of its operations to be open to the public for conduct of its banking operations. “Capital Appreciation Bonds” means Bonds which bear interest which is calculated based on periodic compounding, payable only at maturity or earlier redemption. “Charter” means the District’s Charter (Plan) approved by the voters of the City of St. Louis, Missouri and St. Louis County, Missouri on February 9, 1954 and amended on November 7, 2000, and as further amended from time to time in accordance with its terms. “Chief Financial Officer” means the individual presently holding the office of Secretary-Treasurer of the District and any successor who might hereafter hold such office, and any individual, body or authority to whom or which may hereafter be delegated by law the duties, powers, authority, obligations or liabilities of such office. “Chief Officer” means the individual presently holding the office of Executive Director or Acting Executive Director of the District as appointed by the Governing Body and any successor who might hereafter hold such office, and any individual, body or authority to whom or which may hereafter be delegated by law the duties, powers, authority, obligations or liabilities of such office. “Code” means the Internal Revenue Code of 1986, as amended, and the applicable regulations of the Treasury Department proposed or promulgated thereunder. “Commitment,” when used with respect to Balloon Bonds, means a binding written commitment from a financial institution, surety or insurance company to refinance such Bonds on or prior to any Balloon Date thereof, including without limitation any Credit Facility for such Bonds. “Consultant” means an independent engineer or utility consultant or firm of independent engineers or utility consultants experienced in the planning and management of wastewater systems and having a nationally recognized reputation for such work. C-3 “Continuing Disclosure Agreement” means (i) with respect to the Series 2011B Bonds, the Disclosure Dissemination Agent Agreement dated as of December 1, 2011 between the District and Digital Assurance Certification, L.L.C., as Dissemination Agent, as amended from time to time in accordance with its terms, in substantially the form attached as an exhibit to the Bond Ordinance, and (ii) with respect to any other series of Bonds, the continuing disclosure agreement relating to such series of Bonds, as amended from time to time in accordance with its terms. “Costs,” with respect to any Project, means the total cost, paid or incurred, to study, plan, design, finance, acquire, construct, reconstruct, renovate, repair, replace, equip, install, or otherwise develop such Project and shall include, but shall not be limited to, the following costs and expenses relating to such Project and the reimbursement to the District for any such items previously paid by the District: (i) the cost of all lands, real or personal properties, rights, easements, and franchises acquired; (ii) the cost of all machinery and equipment, financing charges, and interest prior to and during construction and for six months after completion of construction; (iii) the cost of the acquisition, construction, reconstruction or installation of such Project; (iv) the cost of engineering, architectural, development and supervisory services, fiscal agents’ and legal expenses, plans and specifications, and other expenses necessary or incident to determining the feasibility or practicability of any Projects, administrative expenses, and such other expenses as may be necessary or incident to any financing by Bonds; (v) the cost of placing such Project in operation; (vi) the cost of condemnation of property necessary for such construction and operation; (vii) Costs of Issuance; and (viii) any other costs which may be incident to such Project. “Costs of Issuance” means issuance costs with respect to the Bonds, including but not limited to the following: underwriters’ spread (whether realized directly or derived through purchase of Bonds at a discount below the price at which they are expected to be sold to the public), management fee and expenses; Credit Facility fees and Reserve Account Credit Facility fees; counsel fees (including bond counsel, underwriter’s counsel, District’s counsel, as well as any other specialized counsel fees incurred in connection with the borrowing); financial advisor fees of any financial advisor to the District incurred in connection with the issuance of the Bonds; rating agency fees; escrow agent and paying agent fees; accountant fees and other expenses related to issuance of the Bonds; printing costs (for the Bonds and of the preliminary and final official statement relating to the Bonds); and fees and expenses of the District incurred in connection with the issuance of the Bonds. “Credit Facility” means any letter of credit, insurance policy, guaranty, surety bond, standby bond purchase agreement, line of credit, revolving credit agreement, or similar obligation, arrangement, or instrument issued by a bank, insurance company, or other financial institution which is used by the District to perform one or more of the following tasks: (i) enhancing the District’s credit by assuring owners of any of the Bonds that Principal of and interest on such Bonds will be paid promptly when due; (ii) providing liquidity for the owners of Bonds through undertaking to cause Bonds to be bought from the owners thereof when submitted pursuant to an arrangement prescribed by a Series Ordinance; or (iii) remarketing any Bonds so submitted to the Credit Facility Provider (whether or not the same Credit Facility Provider is remarketing the Bonds). The term Credit Facility shall not include a Reserve Account Credit Facility. C-4 “Credit Facility Agreement” means an agreement between the District and a Credit Facility Provider pursuant to which the Credit Facility Provider issues a Credit Facility and may include the promissory note or other instrument evidencing the District’s obligations to a Credit Facility Provider pursuant to a Credit Facility Agreement. The term Credit Facility Agreement shall not include a Reserve Account Credit Facility Agreement. “Credit Facility Provider” means any issuer of a Credit Facility then in effect for all or part of the Bonds. The term Credit Facility Provider shall not include any Reserve Account Credit Facility Provider. Whenever in the Bond Ordinance the consent of the Credit Facility Provider is required, such consent shall only be required from the Credit Facility Provider whose Credit Facility is issued with respect to the series of Bonds for which the consent is required. “Debt Service Requirement” means the total Principal and interest coming due on Senior Bonds, or all Bonds, as applicable, whether at maturity or upon mandatory redemption, in any specified period; provided, however, that (i) Debt Service Requirement with respect to SRF Bonds shall mean the net amount of Principal and interest coming due on such SRF Bonds after taking into account any so-called “SRF Subsidy” (i.e., the amount of anticipated investment earnings which will accrue on any reserve account relating to the SRF Bonds and which will reduce the debt service payments of the District with respect to such SRF Bonds), and (ii) Debt Service Requirement with respect to Bonds issued as “build America bonds” shall mean the net amount of Principal and interest coming due on such Bonds after taking into account the anticipated receipt of U.S. Treasury Interest Subsidy payments on such Bonds. If any Bonds Outstanding or proposed to be issued shall bear interest at a Variable Rate, the interest coming due in any specified future period shall be determined as if the Variable Rate in effect at all times during such future period equaled the average of the BMA Municipal Bond Index (formerly PSA Municipal Bond Index) for the prior 5 calendar years, or any successor index as certified by a Financial Advisor. If any Capital Appreciation Bonds are Outstanding or proposed to be issued, the total Principal and interest coming due in any specified period shall be determined, with respect to such Capital Appreciation Bonds, by the Series Ordinance of the District authorizing such Capital Appreciation Bonds. With respect to any Bonds secured by a Credit Facility, Debt Service Requirement shall include (i) any upfront or periodic commission or commitment fee obligations with respect to such Credit Facility, (ii) the outstanding amount of any Reimbursement Obligation owed to the applicable Credit Facility Provider and interest thereon, (iii) any Additional Interest owed on Pledged Bonds to a Credit Facility Provider, and (iv) any remarketing agent fees. With respect to any Hedged Bonds, the interest on such Hedged Bonds during any Hedge Period and for so long as the provider of the related Hedge Agreement has not defaulted on its payment obligations thereunder shall be calculated by adding (x) the amount of interest payable by the District on such Hedged Bonds pursuant to their terms and (y) the amount of Hedge Payments payable by the District under the related Hedge Agreement and subtracting (z) the amount of Hedge Receipts payable by the provider of the related Hedge Agreement at the rate specified in the related Hedge Agreement; provided, however, that to the extent that the provider of any Hedge Agreement is in default thereunder, the amount of interest payable by the District on the related Hedged Bonds shall be the interest calculated as if such Hedge Agreement had not been executed. In determining the amount of Hedge Payments or Hedge Receipts payable or receivable for any future period which are not fixed throughout the Hedge Period (i.e., which are variable), such Hedge Payments or Hedge Receipts for any period of calculation (the “Determination Period”) shall be computed by assuming that the variables comprising the calculation (e.g., indices) applicable to the Determination Period are equal to the average of the actual variables which were in effect (weighted according to the length of the period during which each such variable was in effect) for the most recent twelve-month period immediately preceding the date of calculation for which such information is available (or shorter period if such information is not available for a twelve-month period). For the purpose of calculating the Debt Service Requirement on Balloon Bonds (1) which are subject to a Commitment or (2) which do not have a Balloon Date within 12 months from the date of calculation, such Bonds shall be assumed to be amortized in substantially equal annual amounts to be paid for Principal and interest over an assumed amortization period of 20 years at an assumed interest rate (which shall be the interest rate certified by a Financial Advisor to be the interest rate at which the District could reasonably expect to borrow the same amount by issuing Bonds with the same priority of lien as such C-5 Balloon Bonds and with a 20-year term); provided, however, that if the maturity of such Bonds (taking into account the term of any Commitment) is in excess of 20 years from the date of issuance, then such Bonds shall be assumed to be amortized in substantially equal annual amounts to be paid for Principal and interest over an assumed amortization period of years equal to the number of years from the date of issuance of such Bonds to maturity (including the Commitment) and at the interest rate applicable to such Bonds. For the purpose of calculating the Debt Service Requirement on Balloon Bonds (1) which are not subject to a Commitment and (2) which have a Balloon Date within 12 months from the date of calculation, the Principal payable on such Bonds on the Balloon Date shall be calculated as if paid on the Balloon Date. The Principal of and interest on Bonds and Hedge Payments shall be excluded from the determination of Debt Service Requirement to the extent that (1) the same were or are expected to be paid with amounts on deposit on the date of calculation (or Bond proceeds to be deposited on the date of issuance of proposed Bonds) in the Project Fund, the Sinking Fund or a similar fund for Subordinate Bonds or (2) cash or non-callable Government Securities are on deposit in an irrevocable escrow or trust account in accordance with the provisions of the Bond Ordinance (or a similar escrow or trust account for Subordinate Bonds) and such amounts (including, where appropriate, the earnings or other increment to accrue thereon) are required to be applied to pay Principal or interest and are sufficient to pay such Principal or interest. “Debt Service Reserve Account” means the account by that name within the Sinking Fund established in the Bond Ordinance. “Debt Service Reserve Requirement” means an amount determined from time to time by the District as a reasonable reserve for the payment of Principal of and interest on Senior Bonds which are not Senior SRF Bonds. Initially, this amount shall be the least of (a) 10% of the stated Principal amount of the Senior Bonds which are not Senior SRF Bonds, (b) the maximum annual Principal and interest requirements (taking into account the anticipated receipt of U.S. Treasury Interest Subsidy payments on the Series 2010B Bonds) on the Senior Bonds which are not Senior SRF Bonds (determined as of the issue date of each series of Senior Bonds which are not Senior SRF Bonds), or (c) 125% of the average annual Principal and interest requirements (taking into account the anticipated receipt of U.S. Treasury Interest Subsidy payments on the Series 2010B Bonds) on the Senior Bonds which are not Senior SRF Bonds (determined as of the issue date of each series of Senior Bonds which are not Senior SRF Bonds). The District may in its sole discretion change, reduce or increase this amount from time to time by Supplemental Ordinance, but in no event may the District reduce this amount (A) below the greater of (1) while the Series 2004A Bonds, the Series 2006C Bonds, the Series 2008A Bonds, the Series 2010B Bonds or the Series 2011B Bonds are Outstanding, the least of (x) the aggregate of 10% of the stated Principal amounts of the Series 2004A Bonds, the Series 2006C Bonds, the Series 2008A Bonds, the Series 2010B Bonds and the Series 2011B Bonds, (y) the aggregate of the maximum annual Principal and interest requirements on the Series 2004A Bonds, the Series 2006C Bonds, the Series 2008A Bonds, the Series 2010B Bonds and the Series 2011B Bonds (taking into account the anticipated receipt of U.S. Treasury Interest Subsidy payments on the Series 2010B Bonds) (determined as of their respective issue dates), or (z) the aggregate of 125% of the average annual Principal and interest requirements on the Series 2004A Bonds, the Series 2006C Bonds, the Series 2008A Bonds, the Series 2010B Bonds and the Series 2011B Bonds (taking into account the anticipated receipt of U.S. Treasury Interest Subsidy payments on the Series 2010B Bonds) (determined as of their respective issue dates), or (2) 50% of the average annual Debt Service Requirement with respect to Senior Bonds (other than Senior SRF Bonds) in the then current or any succeeding Fiscal Year, and (B) unless each Rating Agency indicates in writing to the District that such reduction will not, by itself, result in a reduction or withdrawal of its current Rating on the Senior Bonds. If the aggregate initial offering price of a series of Bonds to the public is less than 98% or more than 102% of par, such offering price shall be used in lieu of the stated Principal amount. Notwithstanding the foregoing, the Debt Service Reserve Requirement, if any, in connection with any Senior SRF Bonds or any Subordinate Bonds, including Subordinate SRF Bonds, shall be as provided in the Series Ordinance authorizing the issuance of such Senior SRF Bonds or such Subordinate Bonds. “Depository” means the depository of each fund established under the Bond Ordinance, and any successor depository of such fund hereafter designated by the District from time to time by Supplemental C-6 Ordinance. The Depository for the Series 2004A Bonds, the Series 2006C Bonds, the Series 2008A Bonds, the Series 2010B Bonds and the Series 2011B Bonds is Bank of America, N.A., St. Louis, Missouri. “District” means The Metropolitan St. Louis Sewer District, a body corporate, a municipal corporation and a political subdivision duly created and existing under the laws of the State, and any successor thereto. “DTC” means The Depository Trust Company, New York, New York, or its nominee, or its successors and assigns, or any other depository performing similar functions under the Bond Ordinance. “Event of Default” means any of the events defined as such in the Bond Ordinance. “Expenses of Operation and Maintenance” means all expenses reasonably incurred in connection with the operation, maintenance and repair of the System, including salaries, wages, the cost of materials and supplies, rentals of leased property, if any, management fees, payments to others for the treatment and disposal of sewage, the cost of audits and periodic Consultant’s reports, Paying Agent’s and Bond Registrar’s fees and expenses, payment of premiums for insurance required by the Bond Ordinance and other insurance which the District deems prudent to carry on the System and its operations and personnel, obligations (other than for borrowed money or for rents payable under capital leases) incurred in the ordinary course of business, liabilities incurred by endorsement for collection or deposit of checks or drafts received in the ordinary course of business, short-term obligations incurred and payable within a particular Fiscal Year, other obligations or indebtedness incurred for the purpose of leasing (pursuant to a true or operating lease) equipment, fixtures, inventory or other personal property, and, generally, all expenses, exclusive of interest on the Bonds and depreciation or amortization, which under accounting principles generally accepted for municipal utility purposes are properly allocable to operation and maintenance; however, only such expenses as are reasonable and necessary or desirable for the proper operation and maintenance of the System shall be included. “Expenses of Operation and Maintenance” also includes the District’s obligations under any contract with any other political subdivision or public agency or authority of one or more political subdivisions pursuant to which the District undertakes to make payments measured by the expenses of operating and maintaining any facility which constitutes part of the System and which is owned or operated in part by the District and in part by others. “Financial Advisor” means an investment banking or financial advisory firm, commercial bank, or any other Person who or which is appointed by the District for the purpose of passing on questions relating to the availability and terms of specified types of Bonds and is actively engaged in and, in the good faith opinion of the District, has a favorable reputation for skill and experience in underwriting or providing financial advisory services in respect of similar types of securities. “Fiscal Year” means the 12-month period used by the District for its general accounting purposes, as it may be changed from time to time. The Fiscal Year at the time the Bond Ordinance was adopted begins on July 1 and ends on June 30 of the immediately following calendar year. “Fitch” means Fitch, Inc. or, if such corporation is dissolved or liquidated or otherwise ceases to perform securities rating services, such other nationally recognized securities rating agency as may be designated in writing by the District. At the time the Bond Ordinance was adopted, the notice address of Fitch is One State Street Plaza, New York, New York 10004. “Forecast Period” means a period of three consecutive Fiscal Years commencing with the Fiscal Year in which any proposed Senior Bonds are to be issued. “Governing Body” means the Board of Trustees of the District and any predecessor or successor in office to such present body, and any Person to whom or which may hereafter be delegated by law the duties, powers, authority, obligations, or liabilities of the present body, either in whole or in relation to the System. C-7 “Government Loans” means loans to the District by the government of the United States or the State, or by any department, authority or agency of either, for the purpose of acquiring, constructing, reconstructing, improving, bettering or extending any part of the System. “Government Obligations” means (a) direct obligations of the United States of America for the full and timely payment of which the full faith and credit of the United States of America is pledged or (b) obligations issued by a person controlled or supervised by and acting as an instrumentality of the United States of America, the full and timely payment of the principal of and the interest on which is fully and unconditionally guaranteed as a full faith and credit obligation of the United States of America (including any securities described in (a) or (b) issued or held in book-entry form on the books of the Department of the Treasury of the United States of America), which obligations, in either case, (i) are not subject to redemption or prepayment prior to maturity except at the option of the holder of such obligations and (ii) may include U.S. Treasury Trust Receipts. “Hedge Agreement” means, without limitation, (i) any contract provided by a Qualified Hedge Provider known as or referred to or which performs the function of an interest rate swap agreement, currency swap agreement, forward payment conversion agreement, or futures contract; (ii) any contract provided by a Qualified Hedge Provider providing for payments based on levels of, or changes or differences in, interest rates, currency exchange rates, or stock or other indices; (iii) any contract provided by a Qualified Hedge Provider to exchange cash flows or payments or series of payments; (iv) any type of contract provided by a Qualified Hedge Provider called, or designed to perform the function of, interest rate floors, collars, or caps, options, puts, or calls, to hedge or minimize any type of financial risk, including, without limitation, payment, currency, rate, or other financial risk; and (v) any other type of contract or arrangement provided by a Qualified Hedge Provider that the District determines is to be used, or is intended to be used, to manage or reduce the cost of any Bonds, to convert any element of any Bonds from one form to another, to maximize or increase investment return, to minimize investment return risk, or to protect against any type of financial risk or uncertainty. “Hedge Contingency Payments” means amounts payable by the District pursuant to any Hedge Agreement as termination payments, fees, expenses and indemnity payments. “Hedge Payments” means amounts payable by the District pursuant to any Hedge Agreement, other than Hedge Contingency Payments. “Hedge Period” means the period during which a Hedge Agreement is in effect. “Hedge Receipts” means amounts payable by any provider of a Hedge Agreement pursuant to such Hedge Agreement, other than termination payments, fees, expenses and indemnity payments. “Hedged Bonds” means any Bonds for which the District shall have entered into a Hedge Agreement. “Independent Certified Public Accountant” means a certified public accountant, or a firm of certified public accountants, who or which is “independent” as that term is defined in Rule 101 and related interpretations of the Code of Professional Ethics of the American Institute of Certified Public Accountants, of recognized standing, who or which does not devote his or its full time to the District (but who or which may be regularly retained by the District). “Interest Payment Date” means each date on which interest is to become due on any Bonds, as established in the Series Ordinance for such Bonds, and with respect to the Series 2011B Bonds, shall be as specified in the Bond Ordinance. C-8 “Investment Earnings” means all interest received on and profits derived from investments of moneys in all funds and accounts of the District other than investments derived from or with respect to (a) stormwater revenues, (b) all funds and accounts established in connection with SRF Bonds and (c) obligations issued by the District on behalf of any of its subdistricts. “Maximum Annual Debt Service” means the maximum amount of Debt Service Requirements as computed for the then current or any future Fiscal Year. “Moody’s” means Moody’s Investors Service, Inc. or, if such corporation is dissolved or liquidated or otherwise ceases to perform securities rating services, such other nationally recognized securities rating agency as may be designated in writing by the District. At the time the Bond Ordinance was adopted, the notice address of Moody’s is 99 Church Street, New York, New York 10007. “Net Operating Revenues” means Operating Revenues, after provision for payment of all Expenses of Operation and Maintenance. “Operating Revenues” means all income and revenue of any nature derived from the operation of the System, including periodic wastewater billings, service charges, other charges for wastewater service and the availability thereof (other than any special assessment proceeds), connection or tap fees (whether accounted for as revenues or as contributed capital), net proceeds from business interruption insurance, the principal of gifts, bequests, contributions, grants and donations available to pay debt service of Bonds, and any amounts deposited in escrow in connection with the acquisition, construction, remodeling, renovation and equipping of facilities to be applied during the period of determination to pay interest on Bonds, but excluding (a) any profits or losses on the early extinguishment of debt or on the sale or other disposition, not in the ordinary course of business, of investments or fixed or capital assets, and local, state or federal grants or other moneys received for the payment of Expenses of Operation and Maintenance, (b) local, state, or federal grants, loans (including Government Loans), capital improvement contract payments, or other moneys received for capital improvements to the System, (c) Investment Earnings, (d) any stormwater charges and (e) any property tax revenues. “Other System Obligations” means obligations of any kind, including but not limited to, Government Loans, general obligation bonds, revenue bonds, capital leases, installment purchase agreements, or notes (but excluding Bonds and related obligations to Credit Facility Providers, Reserve Account Credit Facility Providers and Qualified Hedge Providers), incurred or issued by the District to finance or refinance the cost of acquiring, constructing, reconstructing, improving, equipping, bettering, or extending any part of the System. “Outstanding” means, when used in reference to Bonds, all Bonds which have been duly authenticated and delivered under the Bond Ordinance, with the exception of (a) Bonds in lieu of which other Bonds have been issued under agreement to replace lost, mutilated, stolen, or destroyed obligations, (b) Bonds surrendered by the owners in exchange for other Bonds under the Bond Ordinance, and (c) Bonds for the payment of which provision has been made in accordance with the Bond Ordinance. In determining the amount of Capital Appreciation Bonds Outstanding under the Bond Ordinance, the Accreted Value of such Capital Appreciation Bonds at the time of determination shall be used. “Paying Agent” means any bank or trust company, including any successors and assigns thereof, authorized by the District in the Bond Ordinance to pay the Principal of, premium, if any, or interest on any Bonds on behalf of the District. Such Paying Agent shall perform the duties required of the Paying Agent in the Bond Ordinance. The Bank of New York Mellon Trust Company, N.A. (as successor to BNY Trust Company of Missouri, St. Louis, Missouri), is designated as Paying Agent for the Bonds; provided, however, that in connection with the issuance of any SRF Bonds, the District shall appoint such Paying Agent designated by the issuer of the SRF Bonds. C-9 “Payments Account” means the account by that name within the Sinking Fund established in the Bond Ordinance. “Permitted Investments” means obligations in which the District is permitted to invest moneys of the District pursuant to applicable law, which have (or are collateralized by obligations which have) a Rating by any Rating Agency which is equal to or greater than the third highest long-term Rating of such Rating Agency, or which bears (or are collateralized by obligations which bear) the second highest short-term Rating of such Rating Agency. As of the date of adoption of the Master Bond Ordinance, obligations in which the District is permitted to invest proceeds of Bonds are described in Section 7.020 of the Charter. “Person” or “person” means any individual, corporation, partnership, limited liability company, joint venture, association, joint stock company, trust, unincorporated organization, body, authority, government, or agency or political subdivision thereof. “Pledged Bond” means any Bond purchased and held by a Credit Facility Provider pursuant to a Credit Facility Agreement. A Bond shall be deemed a Pledged Bond only for the actual period during which such Bond is owned by a Credit Facility Provider pursuant to a Credit Facility Agreement. “Pledged Bond Rate” means the rate of interest payable on Pledged Bonds, as may be provided in a Credit Facility or Credit Facility Agreement. “Pledged Revenues” means Net Operating Revenues, Investment Earnings, Hedge Receipts, and all moneys paid or required to be paid into, and all moneys and securities on deposit from time to time in, the funds and accounts specified in the Bond Ordinance, but excluding any amounts required in the Bond Ordinance to be set aside pending, or used for, rebate to the United States government pursuant to Section 148(f) of the Code, including, but not limited to, amounts in the Rebate Fund. “Principal” means (i) with respect to a Current Interest Bond, the principal amount of such Bond, and (ii) with respect to a Capital Appreciation Bond, the Accreted Value of such Capital Appreciation Bond. “Principal Maturity Date” means each date on which Principal is to become due on any Bonds, by maturity or mandatory sinking fund redemption, as established in the Series Ordinance for such Bonds. “Project” means the acquisition, construction, reconstruction, improvement, betterment, extension or equipping of the System, in whole or in part, with the proceeds of a series of Bonds, including, but not limited to, the Series 2011B Project. “Project Fund” means the fund by that name established in the Bond Ordinance. “Put Date” means any date on which a Bondholder may elect to have Balloon Bonds redeemed, prepaid, purchased directly or indirectly by the District, or otherwise paid. “Qualified Hedge Provider” means an entity whose senior unsecured long term obligations, financial program rating, counterparty rating, or claims paying ability, or whose payment obligations under the related Hedge Agreement are absolutely and unconditionally guaranteed by an entity whose senior unsecured long term obligations, financial program rating, counterparty rating, or claims paying ability, are rated either (i) at least as high as the third highest Rating of each Rating Agency, but in no event lower than any Rating on the related Hedged Bonds at the time of execution of the Hedge Agreement, or (ii) in any such lower Rating which each Rating Agency indicates in writing to the District will not, by itself, result in a reduction or withdrawal of its Rating on the related Hedged Bonds that is in effect prior to entering into the Hedge Agreement. An entity’s status as a “Qualified Hedge Provider” is determined only at the time the District enters into a Hedge Agreement with such entity and shall not be redetermined with respect to that Hedge Agreement. C-10 “Rating” means a rating in one of the categories by a Rating Agency, disregarding pluses, minuses, and numerical gradations. “Rating Agencies” or “Rating Agency” means Fitch, Moody’s, and Standard & Poor’s or any successors thereto and any other nationally recognized credit rating agency then maintaining a rating on any Bonds at the request of the District. If at any time a particular Rating Agency does not have a rating outstanding with respect to the relevant Bonds, then a reference to Rating Agency or Rating Agencies shall not include such Rating Agency. “Rebate Fund” means the fund by that name established in the Bond Ordinance. “Record Date” means, with respect to any semiannual Interest Payment Date, the 15th day of the calendar month immediately preceding such Interest Payment Date, and any record dates designated by the District in a Series Ordinance. “Reimbursement Obligation” means the obligation of the District to directly reimburse any Credit Facility Provider for amounts paid by such Credit Facility Provider under a Credit Facility, whether or not such obligation to so reimburse is evidenced by a promissory note or other similar instrument. “Renewal and Extension Fund” means the fund by that name established in the Bond Ordinance. “Replenishment Payments” shall have the meaning ascribed therefor in under the caption “Sinking Fund – Debt Service Reserve Account” in this Appendix C. “Reserve Account Credit Facility” means any letter of credit, insurance policy, line of credit, or surety bond, together with any substitute or replacement therefor, if any, complying with the provisions of the Bond Ordinance, thereby fulfilling all or a portion of the Debt Service Reserve Requirement. “Reserve Account Credit Facility Agreement” means any agreement between the District and a Reserve Account Facility Provider relating to the issuance of a Reserve Account Credit Facility, as such agreement may be amended from time to time. “Reserve Account Credit Facility Provider” means any provider of a Reserve Account Credit Facility. “Revenue Fund” means the fund by that name established in the Bond Ordinance. “Senior Bonds” means the Series 2004A Bonds, the Series 2006C Bonds, the Series 2008A Bonds, the Series 2010B Bonds, the Series 2011B Bonds and any Bonds, including Senior SRF Bonds, issued with a right to payment and secured by a lien on a parity with the Series 2004A Bonds, the Series 2006C Bonds, the Series 2008A Bonds, the Series 2010B Bonds and the Series 2011B Bonds (except with respect to any Credit Facility which may be available only to one or more series of Senior Bonds and except that Senior SRF Bonds shall not be secured by the Debt Service Reserve Account) pursuant to the Bond Ordinance. “Senior Hedge Agreements” means Hedge Agreements relating to Hedged Bonds which are Senior Bonds. “Senior SRF Bonds” means SRF Bonds which are Senior Bonds. “Series 2011B Bonds” means the District’s Wastewater System Revenue Bonds, Series 2011B, in the original aggregate Principal amount of $52,250,000 authorized under the Bond Ordinance. C-11 “Series 2011B Costs of Issuance Account” means the account by that name within the Project Fund established in the Bond Ordinance. “Series 2011B Project” means the project as (1) generally described in the report dated September 2002, prepared by the District’s program planners, Sverdrup, Kwame and Metcalf & Eddy, and (2) particularly described in plans and specifications on file from time to time with the District. “Series 2011B Project Account” means the account by that name within the Project Fund established in the Bond Ordinance. “Series 2011B Rebate Account” means the account by that name within the Rebate Fund established in the Bond Ordinance. “Series Ordinance” means a bond ordinance or bond ordinances of the District (which may be supplemented by one or more bond ordinances) to be adopted prior to and authorizing the issuance and delivery of any series of Bonds. The Master Bond Ordinance shall constitute the Series Ordinance for the Series 2004A Bonds, as well as a Master Bond Ordinance for Senior Bonds and Subordinate Bonds. Such a bond ordinance as supplemented shall establish the date or dates of the pertinent series of Bonds, the schedule of maturities of such Bonds, whether any such Bonds will be Capital Appreciation Bonds, the name of the purchaser(s) of such series of Bonds, the purchase price thereof, the rate or rates of interest to be borne thereby, whether fixed or variable, the interest payment dates for such Bonds, the terms and conditions, if any, under which such Bonds may be made subject to redemption (mandatory or optional) prior to maturity, the form of such Bonds, and such other details as the District may determine. “Sinking Fund” means the fund by that name established in the Bond Ordinance. “SRF Bonds” means such Bonds or other obligations issued in connection with the District’s participation in the Missouri State Revolving Fund Program of the Missouri Department of Natural Resources and the State Environmental Improvement and Energy Resources Authority, which SRF Bonds may be Senior SRF Bonds or Subordinate SRF Bonds. “Standard and Poor’s” or “S&P” means Standard & Poor’s, a division of The McGraw-Hill Companies, Inc., or, if such corporation is dissolved or liquidated or otherwise ceases to perform securities rating services, such other nationally recognized securities rating agency as may be designated in writing by the District. At the time the Master Bond Ordinance was adopted, the notice address of Standard & Poor’s is 25 Broadway, New York, New York 10004. “State” means the State of Missouri. “Subordinate Bonds” means Bonds, including Subordinate SRF Bonds, issued with a right to payment from the Pledged Revenues and secured by a lien on the Pledged Revenues expressly junior and subordinate to the Senior Bonds. “Subordinate Hedge Agreements” means Hedge Agreements relating to Hedged Bonds which are Subordinate Bonds. “Subordinate SRF Bonds” means SRF Bonds which are Subordinate Bonds. “Supplemental Ordinance” means (a) any Series Ordinance and (b) any modification, amendment, or supplement to the Master Bond Ordinance other than a Series Ordinance. “System” means the sanitary sewer system of the District, as it now exists and as it may be hereafter added to, extended, improved and equipped, either from the proceeds of the Bonds or from any other sources at C-12 any time hereafter, including, without limitation, (a) all sanitary sewers, all combined sewers, all pumping stations, all wastewater treatment plants, and all equipment used in connection therewith, all facilities for the collection, treatment and disposal of sewage and wastewater, including industrial wastes, and (b) all other facilities or property of any nature or description, real or personal, tangible or intangible, now or hereafter owned or used by the District in the collection, treatment and disposal of sewage. The District may own a partial interest in any sanitary sewer facility, the remaining interest in which may be owned by or on behalf of a political subdivision of the State or any agency or authority thereof. In case of such ownership, the rights and interests possessed by the District in such facility shall be included as part of the System. “Tax-Exempt Bonds” means any Bonds the interest on which has been determined, in an opinion of Bond Counsel, to be excludable from the gross income of the owners thereof for federal income tax purposes. “Underwriter” means (i) with respect to the Series 2011B Bonds, J.P. Morgan Securities LLC, New York, New York, the original purchaser of the Series 2011B Bonds, and (ii) with respect to any additional series of Bonds, the underwriter(s) specified in the Series Ordinance authorizing such series of Bonds. “U.S. Treasury Trust Receipts” means receipts or certificates which evidence an undivided ownership interest in the right to the payment of portions of the principal of or interest on obligations described in clauses (a) or (b) of the term Government Obligations, provided that such obligations are held by a bank or trust company organized under the laws of the United States acting as custodian of such obligations, in a special account separate from the general assets of such custodian. “U.S. Treasury Interest Subsidy” means any interest subsidy paid by the United States Treasury to the District. “Variable Rate” means a rate of interest applicable to Bonds, other than a fixed rate of interest which applies to a particular maturity of Bonds, so long as that maturity of Bonds remains Outstanding. FUNDS AND ACCOUNTS The District establishes or ratifies the establishment of the following funds and accounts, and the moneys deposited in such funds and accounts shall be held in trust for the purposes set forth in the Bond Ordinance: (a) The Metropolitan St. Louis Sewer District Wastewater Revenue Fund (the “Revenue Fund”), to be held by the Depository for the account of the District. (b) The Metropolitan St. Louis Sewer District Wastewater Sinking Fund (the “Sinking Fund”), to be held by the Depository for the account of the District, and within said Sinking Fund a Payments Account and a Debt Service Reserve Account. (c) The Metropolitan St. Louis Sewer District Wastewater Renewal and Extension Fund (the “Renewal and Extension Fund”), to be held by the Depository for the account of the District. (d) The Metropolitan St. Louis Sewer District Wastewater Rebate Fund (the “Rebate Fund”), to be held by the Depository for the account of the District, and within said Rebate Fund a Series 2011B Rebate Account. (e) The Metropolitan St. Louis Sewer District Wastewater Project Fund (the “Project Fund”), to be held by the Depository for the account of the District, and within said Project Fund a Series 2011B Project Account and a Series 2011B Costs of Issuance Account. C-13 Each account listed above shall be held within the fund under which it is created. The District reserves the right, in its sole discretion, to create additional subaccounts or to abolish any subaccounts within any account from time to time. Revenue Fund The District shall deposit and continue to deposit all Operating Revenues in the Revenue Fund from time to time as and when received. Moneys in the Revenue Fund shall be applied by the District from time to time to the following purposes and, prior to the occurrence and continuation of an Event of Default, in the following order of priority: (1) to pay Expenses of Operation and Maintenance, (2) to deposit into the Sinking Fund the amounts required by the Bond Ordinance and described below under the caption “–Sinking Fund”, (3) to make Replenishment Payments to the Debt Service Reserve Account and to pay to any Credit Facility Provider any amounts due under a Credit Facility Agreement, including Additional Interest, in accordance with the Bond Ordinance and described below under the caption “–Sinking Fund – Debt Service Reserve Account,” (4) to deposit into the Rebate Fund the amounts required by the Bond Ordinance, (5) to pay any amounts due any Reserve Account Credit Facility Provider pursuant to the Reserve Account Credit Facility Agreement, (6) to deposit the amounts required to be deposited into the funds and accounts created by any Series Ordinance authorizing the issuance of Subordinate Bonds, for the purpose of paying Principal of (whether at maturity, upon mandatory redemption or as otherwise required by a Series Ordinance relating to Subordinate SRF Bonds) and interest on Subordinate Bonds, making Hedge Contingency Payments under Senior Hedge Agreements, making Contingency Payments under Senior Hedge Agreements, making Hedge Payments and making Hedge Contingency Payments under Subordinate Hedge Agreements, and accumulating reserves for such payments, (7) to make Accumulation Payments to the Debt Service Reserve Account in accordance with the Bond Ordinance and described below under the caption “–Sinking Fund – Debt Service Reserve Account,” and (8) to pay any amounts required to be paid with respect to any Other System Obligations. In addition to, and after, the deposits described above, the District may from time to time deposit into the Renewal and Extension Fund any moneys and securities held in the Revenue Fund in excess of 45 days’ estimated Expenses of Operation and Maintenance. Any money withdrawn from the funds and accounts described in clause (6) above relating to Subordinate Bonds for use in making payments described in said clause (6) shall be released from the lien of the Bond Ordinance. If at any time the amounts in any account of the Sinking Fund are less than the amounts required by the Bond Ordinance, and there are not on deposit in the Renewal and Extension Fund available moneys sufficient to cure any such deficiency, then the District shall withdraw from the funds and accounts of the District relating to Subordinate Bonds and deposit in such account of the Sinking Fund, as the case may be, the amount necessary (or all the moneys in such funds and accounts, if less than the amount required) to make up such deficiency. Sinking Fund Payments Account-General. Sufficient moneys shall be paid in periodic installments from the Revenue Fund into the Payments Account for the purpose of paying the Principal of and interest (excluding Additional Interest) on the Senior Bonds as they become due and payable and for the purpose of making Hedge Payments under Senior Hedge Agreements. Amounts held in the Payments Account shall be used solely to pay interest (excluding Additional Interest) and Principal of the Senior Bonds as the same become due and payable (whether at maturity or upon redemption) and to pay Hedge Payments under Senior Hedge Agreements when due. Amounts held in the Payments Account shall not be used to pay Additional Interest. Interest. Except as otherwise provided in any Series Ordinance authorizing Senior SRF Bonds, on or before the 30th day preceding each Interest Payment Date for Senior Bonds (or, in the case of Senior Bonds bearing interest at a Variable Rate, on or before the Business Day preceding each Interest Payment Date), the District shall deposit in the Payments Account an amount which, together with any other moneys already on C-14 deposit therein and available to make such payment and, in the case of Senior SRF Bonds, anticipated investment earnings on reserve funds held by a bond trustee relating to such Senior SRF Bonds, is not less than the interest (excluding Additional Interest) coming due on such Senior Bonds on such Interest Payment Date. The District shall also deposit and continue to deposit all Hedge Receipts under Senior Hedge Agreements in the Payments Account from time to time as and when received. Principal. Except as otherwise provided in any Series Ordinance authorizing Senior SRF Bonds, on or before the 30th day preceding each Principal Maturity Date for Senior Bonds, the District shall deposit in the Payments Account an amount which, together with any other moneys already on deposit therein and available to make such payment, is not less than the Principal coming due on such Senior Bonds on such Principal Maturity Date. Hedge Payments. On or before the 30th day preceding each payment date for Hedge Payments under Senior Hedge Agreements, the District shall deposit in the Payments Account an amount which, together with any other moneys already on deposit therein and available to make such payment, is not less than such Hedge Payments coming due on such payment date. Application of Moneys in Payments Account. No further payments need be made into the Payments Account whenever the amount available in the Payments Account, if added to the amount then in the Debt Service Reserve Account (without taking into account any amount available to be drawn on any Reserve Account Credit Facility), is sufficient to retire all Senior Bonds then Outstanding and to pay all unpaid interest accrued and to accrue prior to such retirement. No moneys in the Payments Account shall be used or applied to the optional purchase or redemption of Senior Bonds prior to maturity unless: (i) provision shall have been made for the payment of all of the Senior Bonds; or (ii) such moneys are applied to the purchase and cancellation of Senior Bonds which are subject to mandatory redemption on the next mandatory redemption date, which falls due within 12 months, such Senior Bonds are purchased at a price not more than would be required for mandatory redemption, and such Senior Bonds are cancelled upon purchase; or (iii) such moneys are applied to the purchase and cancellation of Senior Bonds at a price less than the amount of Principal which would be payable on such Senior Bonds, together with interest accrued through the date of purchase, and such Senior Bonds are cancelled upon purchase; or (iv) such moneys are in excess of the then required balance of the Payments Account and are applied to redeem a part of the Senior Bonds Outstanding on the next succeeding redemption date for which the required notice of redemption may be given. Debt Service Reserve Account. Upon the issuance of the Series 2011B Bonds, the District shall deposit into the Debt Service Reserve Account the amount specified in the Bond Ordinance. There shall be deposited into the Debt Service Reserve Account the amounts specified in Series Ordinances with respect to Senior Bonds. Notwithstanding the foregoing, there shall be no deposit into the Debt Service Reserve Account with respect to any SRF Bonds nor shall the Debt Service Reserve Account secure any SRF Bonds. After the issuance of any Senior Bonds, the increase in the amount of the Debt Service Reserve Requirement resulting from the issuance of such Senior Bonds shall be accumulated, to the extent not covered by deposits from Bond proceeds or funds on hand, over a period not exceeding 61 months from the date of delivery of such Senior Bonds in monthly deposits (“Accumulation Payments”), none of which is less than 1/60 of the amount to be accumulated. The balance of the Debt Service Reserve Account shall be maintained at an amount equal to the Debt Service Reserve Requirement (or such lesser amount that is required to be accumulated in the Debt Service Reserve Account in connection with the periodic accumulation to the Debt Service Reserve Requirement after the issuance of Senior Bonds or upon the failure of the District to provide a substitute Reserve Account Credit Facility in certain events). There shall be transferred from the Revenue Fund on a pro rata basis (1) to the Debt Service Reserve Account the amount necessary to restore, as further described below, the amount of cash and securities in the Debt Service Reserve Account to an amount equal to the difference between (a) the Debt Service Reserve Requirement (or such lesser monthly amount that is required to be deposited into the Debt Service Reserve Account after the issuance of Senior Bonds or upon the failure of the District to provide a substitute Reserve Account Credit Facility in certain events) and (b) the portion of the required balance of the Debt Service Reserve Account satisfied by means of a Reserve Account Credit Facility, C-15 and (2) to any Reserve Account Credit Facility Provider the amount necessary to reinstate any Reserve Account Credit Facility which has been drawn down. Whenever for any reason the amount in the Payments Account is insufficient to pay all interest or Principal becoming due on the Senior Bonds within the next seven days (or, in the case of Senior Bonds bearing interest at a Variable Rate, on the next Business Day), the District shall make up any deficiency by transfers first from the Renewal and Extension Fund and second from the funds and accounts of the District relating to Subordinate Bonds which are not Subordinate SRF Bonds. Whenever, on the date that such interest or Principal is due, there are insufficient moneys in the Payments Account available to make such payment, the District shall, without further instructions, apply so much as may be needed of the moneys in the Debt Service Reserve Account to prevent default in the payment of such interest or Principal, with priority to interest payments. Whenever by reason of any such application or otherwise (other than required Accumulation Payments), the amount remaining to the credit of the Debt Service Reserve Account is less than the amount then required to be in the Debt Service Reserve Account, such deficiency shall be remedied by monthly deposits (“Replenishment Payments”) from the Revenue Fund, to the extent funds are available in the Revenue Fund for such purpose after all required transfers set forth above have been made. The District may elect to satisfy in whole or in part the Debt Service Reserve Requirement by means of a Reserve Account Credit Facility, subject to the following requirements: (A) the Reserve Account Credit Facility Provider must have a credit rating issued by a Rating Agency not less than the then current Rating on the related series of Senior Bonds (or, in the case of a series of Senior Bonds supported by a Credit Facility, the underlying rating on such Senior Bonds); (B) the District shall not secure any obligation to the Reserve Account Credit Facility Provider by a lien equal to or superior to the lien granted to the related series of Senior Bonds; (C) each Reserve Account Credit Facility shall have a term of at least one (1) year (or, if less, the remaining term of the related series of Senior Bonds) and shall entitle the District to draw upon or demand payment and receive the amount so requested in immediately available funds on the date of such draw or demand; (D) the Reserve Account Credit Facility shall permit a drawing by the District for the full stated amount in the event (i) the Reserve Account Credit Facility expires or terminates for any reason prior to the final maturity of the related series of Senior Bonds, and (ii) the District fails to satisfy the Debt Service Reserve Requirement by the deposit to the Debt Service Reserve Account of cash, obligations, a substitute Reserve Account Credit Facility, or any combination thereof, on or before the date of such expiration or termination; (E) if the Rating issued by the Rating Agency to the Reserve Account Credit Facility Provider is withdrawn or reduced below the Rating assigned to the related series of Senior Bonds immediately prior to such action by the Rating Agency, the District shall provide a substitute Reserve Account Credit Facility within sixty (60) days after such rating change, and, if no substitute Reserve Account Credit Facility is obtained by such date, shall fund the Debt Service Reserve Requirement in not more than twenty-four (24) equal monthly deposits commencing not later than the first day of the month immediately succeeding the date representing the end of such sixty (60) day period; (F) if the Reserve Account Credit Facility Provider commences any insolvency proceedings or is determined to be insolvent or fails to make payments when due on its obligations, the District shall provide a substitute Reserve Account Credit Facility within sixty (60) days thereafter, and, if no substitute Reserve Account Credit Facility is obtained by such date, shall fund the Debt Service Reserve Requirement in not more than twenty-four (24) equal monthly deposits commencing not later than the first day of the month immediately succeeding the date representing the end of such sixty (60) day period; and (G) the prior written consent of the Credit Facility Provider, as to the provider and the structure of the Reserve Account Credit Facility, shall be obtained by the District. If the events described in either clauses (E) or (F) above occur, the District shall not relinquish the Reserve Account Credit Facility at issue until after the Debt Service Reserve Requirement is fully satisfied by the provision of cash, obligations, or a substitute Reserve Account Credit Facility or any combination thereof. Any amount received from the Reserve Account Credit Facility shall be deposited directly into the Payments Account, and such deposit shall constitute the application of amounts in the Debt Service Reserve Account. Repayment of any draw-down on the Reserve Account Credit Facility (other than repayments which reinstate the Reserve Account Credit Facility) and any interest or fees due the Reserve Account Credit Facility Provider under such Reserve Account Credit Facility shall be secured by a lien on the Pledged Revenues subordinate to payments into the Sinking Fund and the Rebate Fund and payments to any Credit Facility Provider securing Senior Bonds. C-16 Any such Reserve Account Credit Facility shall be pledged to the benefit of the owners of all of the Senior Bonds. The District reserves the right, if it deems it necessary in order to acquire such a Reserve Account Credit Facility, to amend the Bond Ordinance without the consent of any of the owners of the Bonds in order to grant to the Reserve Account Credit Facility Provider such additional rights as it may demand, provided that such amendment shall not, in the written opinion of Bond Counsel filed with the District, impair or reduce the security granted to the owners of Senior Bonds or any of them. Renewal and Extension Fund In addition to the deposits to be made to the Renewal and Extension Fund pursuant to the Bond Ordinance, the District shall deposit in the Renewal and Extension Fund all termination payments received under any Hedge Agreements. All sums accumulated and retained in the Renewal and Extension Fund shall be used first to prevent default in the payment of interest on or Principal of the Senior Bonds when due and then shall be applied by the District from time to time, as and when the District shall determine, to the following purposes and, prior to the occurrence and continuation of an Event of Default, in the order of priority determined by the District in its sole discretion: (a) for the purposes for which moneys held in the Revenue Fund may be applied under the Bond Ordinance, (b) to pay any amounts which may then be due and owing under any Hedge Agreement (including termination payments, fees, expenses, and indemnity payments), (c) to pay any governmental charges and assessments against the System or any part thereof which may then be due and owing, (d) to make acquisitions, betterments, extensions, repairs, or replacements or other capital improvements (including the purchase of equipment) to the System deemed necessary by the District (including payments under contracts with vendors, suppliers, and contractors for the foregoing purposes), (e) to acquire Senior Bonds by redemption or by purchase in the open market at a price not exceeding the callable price as provided and in accordance with the terms and conditions of the Bond Ordinance, which Senior Bonds may be any of the Senior Bonds, prior to their respective maturities, and when so used for such purposes the moneys shall be withdrawn from the Renewal and Extension Fund and deposited into the Payments Account for the Senior Bonds to be so redeemed or purchased and (f) for any other purpose of the District. Payments for the purposes set forth in clause (e) of the preceding sentence are not “required payments” for purposes of the District’s rate covenant set forth in the Bond Ordinance. Rebate Fund The District shall calculate, from time to time, as required in order to comply with the provisions of Section 148(f) of the Code, the amounts required to be rebated (including penalties) to the United States and shall deposit or cause to be deposited into the Rebate Fund any and all of such amounts promptly following a determination of any such amount. The District shall direct the Depository of the Rebate Fund to keep all moneys held therein invested in Permitted Investments. To the extent and at the times required in order to comply with Section 148(f) of the Code, the District may withdraw funds from the Rebate Fund for the purpose of making rebate payments (including penalties) to the United States as required by Section 148(f) of the Code. Except as otherwise specifically provided in the Bond Ordinance, moneys in the Rebate Fund may not be withdrawn from the Rebate Fund for any other purpose. All earnings on investments held in the Rebate Fund shall be retained in the Rebate Fund and shall become part of the Rebate Fund. Moneys held in the Rebate Fund, including the Investment Earnings thereon, if any, shall not be subject to a pledge in favor of the owners of the Bonds under the Bond Ordinance and may not be used to pay amounts due on the Bonds or under any Credit Facility Agreements or Hedge Agreements or amounts required for the operation, maintenance, enlargement, or extension of the System. C-17 Project Fund The District shall establish within the Project Fund a separate account for each Project. Except as may be otherwise provided in the Series Ordinance authorizing the issuance of SRF Bonds, moneys in the Project Fund shall be held by the Depository, or such other bank as may from time to time be designated by the District, and applied to the payment of the Costs of the Project, or for the repayment of advances made for that purpose in accordance with and subject to the provisions and restrictions set forth in the Bond Ordinance. The District covenants that it will not cause or permit to be paid from the Project Fund any sums except in accordance with such provisions and restrictions; provided, however, that any moneys in the Project Fund not presently needed for the payment of current obligations during the course of construction may be invested in Permitted Investments maturing not later than (i) the date upon which such moneys will be needed according to a schedule of anticipated payments from the Project Fund filed with the District by the Consultant in charge of the Project or (ii) in the absence of such schedule, 36 months from the date of purchase, in either case upon written direction of the District. Any such investments shall be held by the Depository, in trust, for the account of the Project Fund until maturity or until sold, and at maturity or upon such sale the proceeds received therefrom including accrued interest and premium, if any, shall be immediately deposited by the Depository in the Project Fund and shall be disposed of in the manner and for the purposes provided in the Bond Ordinance. At such time as the Depository is furnished with a certificate from the Chief Financial Officer stating that all Costs of Issuance have been paid, and in any case not later than 6 months after the date of issuance of the Series 2011B Bonds, the Depository shall transfer any money in the Series 2011B Costs of Issuance Account to the Series 2011B Project Account of the Project Fund. Moneys in each separate account in the Project Fund shall be used for the payment or reimbursement of the Costs of the Project for which such account was established as provided in the Bond Ordinance. All payments from the Project Fund shall be made upon draft except as provided in the Bond Ordinance, signed by an officer of the District properly authorized to sign on its behalf, but before such officer shall sign any such draft, there shall be filed with the Depository a requisition for such payment, in substantially the form attached as an exhibit to the Bond Ordinance, stating each amount to be paid and the name of the person to whom payment is due, and certifying: (a) That an obligation in the stated amount has been incurred by the District and that the same is a proper charge against the Project Fund and has not been paid and stating that the bill or statement of account for such obligation, or a copy thereof, is on file in the office of the District; (b) That the signer has no notice of any vendor’s, mechanic’s, or other liens or rights to liens, chattel mortgages, or conditional sales contracts which should be satisfied or discharged before such payment is made; and (c) That such requisition contains no item representing payment on account of any retained percentages which the District is, at the date of any such certificate, entitled to retain. In the event the United States government or government of the State, or any department, authority, or agency of either, agrees to allocate moneys to be used to defray any part of the Cost of any Project upon the condition that the District appropriate a designated amount of moneys for such purpose, and it is required of the District that its share of such cost be deposited in a special account, the District shall have the right to withdraw any sum so required from the Project Fund by appropriate transfer and deposit the same in a special account for that particular Project; provided, however, that all payments thereafter made from such special account shall be made only in accordance with the requirements set forth in the Bond Ordinance. Withdrawals for investment purposes only may be made by the Depository to comply with written directions from the District without any requisition other than such direction. C-18 For each series of Bonds, the District shall, when a Project has been completed, and may, when a Project has been substantially completed, file with the Depository a certificate signed by the Chief Financial Officer estimating what portion of the funds remaining in the separate account relating to such Project will be required by the District for the payment or reimbursement of the Costs of such Project. The Chief Financial Officer shall attach to his or her certificate a certificate of the supervising engineer certifying that such Project has been completed or substantially completed, as the case may be, in accordance with the plans and specifications therefor and approving the estimates of the Chief Financial Officer with respect to the portion of funds in the account required for Costs of the Project. Such funds that will not be used shall be (1) transferred to the Payments Account and used to redeem Bonds of the related series on the next redemption date or to pay Principal of such Bonds on the next Principal Maturity Date, or (2) transferred to the Payments Account and used to pay interest on Bonds of the related series, provided that the District shall first obtain an opinion of Bond Counsel to the effect that, under existing law, the application of such moneys to pay interest on such Bonds (a) is allowed under State law, and (b) if such Bonds are Tax-Exempt Bonds, will not, by itself and without more, adversely affect the exclusion from gross income for federal income tax purposes of interest payable on such Bonds. When all moneys have been withdrawn or transferred from any separate account within the Project Fund in accordance with the provisions of the Bond Ordinance, such separate account shall terminate and cease to exist. DEPOSITS AND INVESTMENTS All moneys in the funds and accounts established under the Bond Ordinance, except those funds and accounts created by a Series Ordinance in connection with the issuance of SRF Bonds, shall be held by the District in one or more Depositories qualified for use by the District. Uninvested moneys shall, at least to the extent not guaranteed by the Federal Deposit Insurance Corporation, be secured to the fullest extent required by the laws of the State for the security of public funds. Moneys in the funds and accounts established under the Bond Ordinance, except those funds and accounts created by a Series Ordinance in connection with the issuance of SRF Bonds, shall be invested and reinvested in Permitted Investments bearing interest at the highest rates reasonably available (except to the extent that a restricted yield is required or advisable under Section 148 of the Code) and containing such maturities as are deemed suitable by the District; provided, however, that without the prior written consent of the Credit Facility Provider, investments of moneys in the Debt Service Reserve Account shall not have maturities extending beyond five years. Investment of moneys in funds and accounts created by a Series Ordinance in connection with the issuance of SRF Bonds shall be as set forth in such Series Ordinance. Investment Earnings in each fund and account (except the Debt Service Reserve Account) shall be retained therein. Investment Earnings from the investment of moneys in the Debt Service Reserve Account shall be retained in the Debt Service Reserve Account at all times the balance is less than the Debt Service Reserve Requirement; thereafter and at all times the balance of the Debt Service Reserve Account is equal to or greater than the Debt Service Reserve Requirement, such Investment Earnings shall be deposited in the Payments Account. The Series Ordinance authorizing the issuance of any Subordinate Bonds shall specify any maturity limitations and allocations of Investment Earnings on investments of moneys in the funds and accounts relating to such Subordinate Bonds. Moneys in each of such funds shall be accounted for as a separate and special fund apart from all other District funds, provided that investments of moneys therein may be made in a pool of investments together with other moneys of the District so long as sufficient Permitted Investments in such pool, not allocated to other investments of contractually or legally limited duration, are available to meet the requirements of the foregoing provisions. C-19 All investments made under the Bond Ordinance shall, for purposes of the Bond Ordinance, be valued at fair market value on the 45th day (or the next succeeding Business Day if such 45th day is not a Business Day) prior to each Interest Payment Date. The valuation of the investment of moneys in funds and accounts created by a Series Ordinance in connection with the issuance of SRF Bonds shall be as set forth in such Series Ordinance. MAINTENANCE OF SYSTEM The District covenants that it will enforce reasonable rules and regulations governing the System and the operation thereof, that it will operate the System in an efficient and economical manner and will at all times maintain the System in good repair and in sound operating condition, that it will make all necessary repairs, renewals, and replacements to the System, and that it will comply with all valid acts, rules, regulations, orders, and directions of any legislative, executive, administrative, or judicial body applicable to the System and the District’s operation thereof. RATE COVENANT See the heading “SECURITY AND SOURCES OF PAYMENT FOR THE BONDS – Rate Covenant.” INSURANCE With respect to the System, the District will carry adequate public liability, fidelity and property insurance, such as is maintained by similar utilities as the System. The District shall indemnify itself against the usual hazards incident to the construction of any Project, and without in any way limiting the generality of the above, shall: (a) require each construction contractor and each subcontractor to furnish a bond, or bonds, of such type and in amounts adequate to assure the faithful performance of their contracts and the payment of all bills and claims for labor and material arising by virtue of such contracts; and (b) require each construction contractor or the subcontractor to maintain at all times until the completion and acceptance of the Project adequate compensation insurance for all of their employees and adequate public liability and property damage insurance for the full and complete protection of the District from any and all claims of every kind and character which may arise by virtue of the operations under their contracts, whether such operations be by themselves or by anyone directly or indirectly for them, or under their control. All such policies shall be for the benefit of and made payable to the District and shall be on deposit with the District; provided, however, the District may elect to be a self-insurer with respect to any risks for which insurance is required under the Bond Ordinance. The cost of such insurance may be paid as an Expense of Operation and Maintenance. All moneys received for losses under any such insurance policies, except public liability policies, are pledged by the District as security for the Bonds until and unless such proceeds are paid out in making good the loss or damage in respect of which such proceeds are received, either by repairing the property damaged or replacing the property destroyed or by depositing the same in the Renewal and Extension Fund. Adequate provision for making good such loss and damage shall be made within 120 days from the date of the loss. Insurance proceeds not used in making such provision shall be deposited in the Renewal and Extension Fund on the expiration of such 120-day period. Such insurance proceeds shall be payable to the District by appropriate clause to be attached to or inserted in the policies. C-20 NO SALE, LEASE OR ENCUMBRANCE; EXCEPTIONS Except as expressly permitted in the Bond Ordinance, the District irrevocably covenants, binds, and obligates itself not to sell, lease, encumber, or in any manner dispose of the System as a whole or in part until all of the Bonds and all interest thereon shall have been paid in full or provision for payment has been made in accordance with the Bond Ordinance. The District shall have and reserves the right to sell, lease, or otherwise dispose of any of the property comprising a part of the System in the following manner, if any one of the following conditions exists: (i) such property is not necessary for the operation of the System; (ii) such property is not useful in the operation of the System; (iii) such property is not profitable in the operation of the System; or (iv) the disposition of such property will be advantageous to the System and will not adversely affect the security for the Bondholders. All proceeds of any such sale, lease or other disposition shall be deposited in the Renewal and Extension Fund. Prior to any such sale, lease or other disposition, there shall be filed with the District: (i) an opinion of Bond Counsel to the effect that such sale, lease or other disposition will not adversely affect the extent to which interest on any Tax-Exempt Bonds is excluded from gross income for federal income tax purposes (provided that such opinion shall not be required if the Chief Financial Officer determines that such portion of the System was not financed with the proceeds of any Tax-Exempt Bonds); and (ii) an opinion of a Consultant expressing the view that such sale, lease or other disposition will not result in any diminution of Net Operating Revenues to the extent that in any future Fiscal Year the Net Operating Revenues and Investment Earnings will be less than (A) 125% of the Maximum Annual Debt Service Requirement on all Senior Bonds to be Outstanding after such sale, lease or other disposition or (B) 115% of the Maximum Annual Debt Service Requirement on all Bonds to be Outstanding after such sale, lease or other disposition. In reaching this conclusion, the Consultant shall take into consideration such factors as the Consultant may deem significant, including (i) anticipated diminution of Operating Revenues, (ii) anticipated increase or decrease in Expenses of Operation and Maintenance attributable to the sale, lease or other disposition, and (iii) reduction in the annual Debt Service Requirement attributable to the application of the proceeds of such sale, lease or other disposition to the provision for payment of Bonds theretofore Outstanding. Such sale, lease or other disposition may include a partial interest in a sanitary sewer facility owned or to be owned in whole or in part by the District. The District reserves the right to transfer the System as a whole to any political subdivision or authority or agency of one or more political subdivisions of the State to which may be delegated the legal authority to own and operate the System, or any portion thereof, on behalf of the public, and which undertakes in writing, filed with the District, the District’s obligations under the Bond Ordinance, provided that there shall be first filed with the District: (i) an opinion of Bond Counsel to the effect that such sale will not adversely affect the extent to which interest on any Tax-Exempt Bonds is excluded from gross income for federal income tax purposes; and (ii) an opinion of a Consultant expressing the view that such transfer will not result in any diminution of Net Operating Revenues to the extent that in any future Fiscal Year the Net Operating Revenues and Investment Earnings will be less than (A) 125% of the Maximum Annual Debt Service Requirement on all Senior Bonds to be Outstanding after such transfer or (B) 115% of the Maximum Annual Debt Service Requirement on all Bonds to be Outstanding after such transfer. In reaching this conclusion, the Consultant shall take into consideration such factors as the Consultant may deem significant, including any rate schedule adopted by the transferee political subdivision, authority, or agency. Upon receipt of an opinion of Bond Counsel to the effect that such action will not adversely affect the extent to which interest on any Tax-Exempt Bonds is excluded from gross income for federal income tax purposes, the District may enter into such management contracts and sale/leaseback agreements as the District may deem appropriate, and such management contracts and sale/leaseback agreements shall not constitute a sale, lease or other disposition within the meaning of the Bond Ordinance. C-21 ENFORCEMENT OF CHARGES AND CONNECTIONS Except as otherwise determined in accordance with District policy and provided that such action or inaction will not materially impair the rights of the Bondholders, the District shall compel the prompt payment of rates, fees, and charges imposed for service rendered on every lot or parcel connected with the System, and to that end will vigorously enforce all of the provisions of any resolution or ordinance of the District having to do with sanitary sewer connections and with sanitary sewer charges, and all of the rights and remedies permitted the District under law. The District expressly covenants and agrees that such charges will be enforced and promptly collected to the full extent permitted by law, including the requirement for the making of reasonable deposits by customers of the System to the extent required by the District and the securing of injunctions against the disposition of sewage or industrial waste into the System by any premises delinquent in the payment of such charges. None of the facilities or services afforded by the System will be furnished to any user without a reasonable charge being made therefor. ANNUAL BUDGET The District agrees to adopt an Annual Budget for the System for each Fiscal Year in compliance with the Charter and the rate covenants as stated in the Bond Ordinance. BOOKS AND AUDITS The District will install and maintain proper books, records and accounts for the System according to standard accounting practices for the operation of facilities comparable to the System. Annual audits will be made by a certified public accountant. SENIOR AND SUBORDINATE LIEN BONDS No Prior Lien Bonds nor Senior Bonds Except as Permitted in the Bond Ordinance All Senior Bonds shall have complete parity of lien on the Pledged Revenues despite the fact that any of the Senior Bonds may be delivered at an earlier date than any other of the Senior Bonds. The District may issue Senior Bonds in accordance with the Bond Ordinance, but the District shall issue no other obligations of any kind or nature payable from or enjoying a lien on the Pledged Revenues or any part thereof having priority over or, except as permitted in the Bond Ordinance, on a parity with the Series 2004A Bonds, the Series 2006C Bonds, the Series 2008A Bonds, the Series 2010B Bonds and the Series 2011B Bonds. Refunding Bonds Any or all of the Senior Bonds may be refunded prior to maturity, upon redemption in accordance with their terms, or with the consent of the owners of such Senior Bonds, and the refunding Bonds so issued shall constitute Senior Bonds, if: (a) The District shall have obtained a report from an Independent Certified Public Accountant or a Financial Advisor demonstrating that the refunding will reduce the total debt service payments on Outstanding Senior Bonds on a present value basis. C-22 (b) As an alternative to, and in lieu of, satisfying the requirements of paragraph (a) above, all Outstanding Senior Bonds are being refunded under arrangements which immediately result in making provision for the payment of the refunded Bonds. (c) The requirements described in paragraphs (e) and (g) below under the caption “- Senior Bonds”) are met with respect to such refunding Bonds. Senior Bonds Bonds (including refunding Bonds which do not meet the requirements of the Bond Ordinance described above under the caption “–Refunding Bonds” may also be issued on a parity with the Series 2004A Bonds, the Series 2006C Bonds, the Series 2008A Bonds, the Series 2010B Bonds and the Series 2011B Bonds pursuant to a Series Ordinance, and the Bonds so issued shall constitute Senior Bonds, if all of the following conditions are satisfied: (a) There shall have been filed with the District either: (i) a report by an Independent Certified Public Accountant to the effect that the historical Net Operating Revenues and Investment Earnings for a period of 12 consecutive months of the most recent 18 consecutive months prior to the issuance of the proposed Senior Bonds were equal to at least (A) 125% of the Maximum Annual Debt Service Requirement on all Senior Bonds which will be Outstanding immediately after the issuance of the proposed Senior Bonds and (B) 115% of the Maximum Annual Debt Service Requirement on all Bonds which will be Outstanding immediately after the issuance of the proposed Senior Bonds, or (ii) a report by a Consultant to the effect that the forecasted Net Operating Revenues and Investment Earnings for each Fiscal Year in the Forecast Period are expected to equal at least (A) 125% of the Maximum Annual Debt Service Requirement on all Senior Bonds which will be Outstanding immediately after the issuance of the proposed Senior Bonds and (B) 115% of the Maximum Annual Debt Service Requirement on all Bonds which will be Outstanding immediately after the issuance of the proposed Senior Bonds. The report by the Independent Certified Public Accountant that is required by the Bond Ordinance and described in subparagraph (i) above may contain pro forma adjustments to historical Net Operating Revenues equal to 100% of the increased annual amount attributable to any revision in the schedule of rates, fees, and charges for the services, facilities, and commodities furnished by the System, adopted prior to the date of delivery of the proposed Senior Bonds and not fully reflected in the historical Net Operating Revenues actually received during such 12-month period. Such pro forma adjustments shall be based upon a report of a Consultant as to the amount of Operating Revenues which would have been received during such 12-month period had the new rate schedule been in effect throughout such 12-month period. The report by the Consultant that is required by the Bond Ordinance and described in subparagraph (ii) above may not take into consideration any rate schedule to be imposed in the future, unless such rate schedule has been adopted by ordinance of the Governing Body. Such rate schedule adopted by ordinance may contain, however, future effective dates. (b) The District shall have received, at or before issuance of the Senior Bonds, a report from an Independent Certified Public Accountant to the effect that the payments required to be made into each account of the Sinking Fund have been made and the balance in each account of the Sinking Fund is not less than the balance required by the Bond Ordinance as of the date of issuance of the proposed Senior Bonds. C-23 (c) Except with respect to Senior SRF Bonds, the Series Ordinance authorizing the proposed Senior Bonds must require (i) that the amount to be accumulated and maintained in the Debt Service Reserve Account be increased to not less than 100% of the Debt Service Reserve Requirement computed on a basis which includes all Senior Bonds which will be Outstanding immediately after the issuance of the proposed Senior Bonds and (ii) that the amount of such increase be deposited in such account on or before the date and at least as fast as specified in the Bond Ordinance. (d) The Series Ordinance authorizing the proposed Senior Bonds must require the proceeds of such proposed Senior Bonds to be used solely to make capital improvements to the System, to fund interest on the proposed Senior Bonds, to acquire existing or proposed sanitary sewer utilities, to refund other obligations issued for such purposes (whether or not such refunding Bonds satisfy the requirements of the Bond Ordinance described above under the caption “–Refunding Bonds”), and to pay expenses incidental thereto and to the issuance of the proposed Senior Bonds. (e) If any Senior Bonds would bear interest at a Variable Rate, the Series Ordinance under which such Senior Bonds are issued shall provide a maximum rate of interest per annum which such Senior Bonds may bear. (f) The Chief Officer shall have certified, by written certificate dated as of the date of issuance of the Senior Bonds, that the District is in compliance with all requirements of the Bond Ordinance. (g) The District shall have received an opinion of Bond Counsel, dated as of the date of issuance of the Senior Bonds, to the effect that the Series Ordinance and any related Supplemental Ordinance authorizing the issuance of Senior Bonds have been duly adopted by the District. Subordinate Bonds Bonds may also be issued on a subordinate basis to the Series 2004A Bonds, the Series 2006C Bonds, the Series 2008A Bonds, the Series 2010B Bonds the Series 2011B Bonds and any other Senor Bonds pursuant to a Series Ordinance, and the Bonds so issued shall constitute Subordinate Bonds, if all of the following conditions are satisfied: (a) There shall have been filed with the District either: (i) a report by an Independent Certified Public Accountant to the effect that the historical Net Operating Revenues and Investment Earnings for a period of 12 consecutive months of the most recent 18 consecutive months prior to the issuance of the proposed Subordinate Bonds were equal to at least (A) 125% of the Maximum Annual Debt Service Requirement on all Senior Bonds which will be Outstanding immediately after the issuance of the proposed Subordinate Bonds and (B) 115% of the Maximum Annual Debt Service Requirement on all Bonds which will be Outstanding immediately after the issuance of the proposed Subordinate Bonds, or (ii) a report by a Consultant to the effect that the forecasted Net Operating Revenues and Investment Earnings for each Fiscal Year in the Forecast Period are expected to equal at least (A) 125% of the Maximum Annual Debt Service Requirement on all Senior Bonds which will be Outstanding immediately after the issuance of the proposed Subordinate Bonds and (B) 115% of the Maximum Annual Debt Service Requirement on all Bonds which will be Outstanding immediately after the issuance of the proposed Subordinate Bonds. The report by the Independent Certified Public Accountant that is required by the Bond Ordinance and described in subparagraph (i) above may contain pro forma adjustments to historical Net Operating Revenues C-24 equal to 100% of the increased annual amount attributable to any revision in the schedule of rates, fees, and charges for the services, facilities, and commodities furnished by the System, adopted prior to the date of delivery of the proposed Subordinate Bonds and not fully reflected in the historical Net Operating Revenues actually received during such 12-month period. Such pro forma adjustments shall be based upon a report of a Consultant as to the amount of Operating Revenues which would have been received during such 12-month period had the new rate schedule been in effect throughout such 12-month period. The report by the Consultant that is required by the Bond Ordinance and described in subparagraph (ii) above may not take into consideration any rate schedule to be imposed in the future, unless such rate schedule has been adopted by ordinance of the Governing Body. Such rate schedule adopted by ordinance may contain, however, future effective dates. (b) The Series Ordinance authorizing the Subordinate Bonds shall provide that such Subordinate Bonds shall be junior and subordinate in lien and right of payment to all Senior Bonds Outstanding at any time. (c) The Series Ordinance authorizing the Subordinate Bonds shall establish funds and accounts for the moneys to be used to pay debt service on the Subordinate Bonds, to pay Hedge Payments under Subordinate Hedge Agreements, and to provide reserves therefor. (d) The requirements of the Bond Ordinance described in paragraphs (d), (e) and (g) above under the caption “–Senior Bonds”) are met with respect to such Subordinate Bonds (as if such Bonds constituted Senior Bonds). In the event of any insolvency or bankruptcy proceedings, and any receivership, liquidation, reorganization, or other similar proceedings in connection therewith, relative to the District or to its creditors, as such, or to its property, and in the event of any proceedings for voluntary liquidation, dissolution, or other winding up of the District, whether or not involving insolvency or bankruptcy, the owners of all Senior Bonds then Outstanding and related Qualified Hedge Providers shall be entitled to receive payment in full of all Principal and interest due on all such Senior Bonds in accordance with the provisions of the Bond Ordinance and related Hedge Payments in accordance with the provisions of the Senior Hedge Agreements before the owners of the Subordinate Bonds or related Qualified Hedge Providers are entitled to receive any payment from the Pledged Revenues or the amounts held in the funds and accounts created under the Bond Ordinance on account of Principal of, premium, if any, or interest on the Subordinate Bonds or Hedge Payments under Subordinate Hedge Agreements. In the event that any of the Subordinate Bonds are declared due and payable before their expressed maturities because of the occurrence of an Event of Default (under circumstances when the provisions of preceding paragraph are not be applicable), no owners of Subordinate Bonds or related Qualified Hedge Providers may receive any accelerated payment from the Pledged Revenues or the amounts held in the funds and accounts created under the Bond Ordinance of Principal of, premium, if any, or interest on the Subordinate Bonds or Hedge Payments under Subordinate Hedge Agreements, until the owners of all Senior Bonds Outstanding and related Qualified Hedge Providers have received timely payment when due of all Principal of and interest on all such Senior Bonds and all Hedge Payments under related Senior Hedge Agreements. If any Event of Default shall have occurred and be continuing (under circumstances when the provisions of second preceding paragraph are not applicable), the owners of all Senior Bonds then Outstanding and related Qualified Hedge Providers shall be entitled to receive payment in full of all Principal and interest then due on all such Senior Bonds and all Hedge Payments under related Senior Hedge Agreements before the owners of the Subordinate Bonds or related Qualified Hedge Providers are entitled to receive any Payment from the Pledged Revenues or the amounts held in the funds and accounts created under the Bond Ordinance of Principal of, premium, if any, or interest on the Subordinate Bonds or Hedge Payments under Subordinate Hedge Agreements. C-25 The obligations of the District to pay to the owners of the Subordinate Bonds the Principal of, premium, if any, and interest thereon in accordance with their terms and to pay Hedge Payments to related Qualified Hedge Providers in accordance with the terms of the Subordinate Hedge Agreements shall be unconditional and absolute. Nothing in the Bond Ordinance shall prevent the owners of the Subordinate Bonds or related Qualified Hedge Providers from exercising all remedies otherwise permitted by applicable law or under the Bond Ordinance or the Subordinate Hedge Agreements upon default thereunder, subject to the rights contained in the Bond Ordinance of the owners of Senior Bonds and related Qualified Hedge Providers to receive cash, property, or securities otherwise payable or deliverable to the owners of the Subordinate Bonds and related Qualified Hedge Providers, and any Series Ordinance authorizing Subordinate Bonds may provide that, insofar as a trustee or paying agent for the Subordinate Bonds is concerned, the foregoing provisions shall not prevent the application by such trustee or paying agent of any moneys deposited with such trustee or paying agent for the purpose of the payment of or on account of the Principal of, premium, if any, and interest on such Subordinate Bonds and Hedge Payments under Subordinate Hedge Agreements if such trustee or paying agent did not have knowledge at the time of such application that such payment was prohibited by the foregoing provisions. Any series of Subordinate Bonds and related Subordinate Hedge Agreements may have such rank or priority with respect to any other series of Subordinate Bonds and related Subordinate Hedge Agreements as may be provided in the Series Ordinance authorizing such series of Subordinate Bonds and may contain such other provisions as are not in conflict with the provisions of the Bond Ordinance. Accession of Subordinate Bonds and Related Subordinate Hedge Agreements to Senior Status By proceedings authorizing all or any Subordinate Bonds, the District may provide for the accession of such Subordinate Bonds and related Subordinate Hedge Agreements to the status of complete parity with the Senior Bonds and related Senior Hedge Agreements if, as of the date of accession, the conditions of the Bond Ordinance described in subparagraphs (a), (e) and (f) above under the caption “–Senior Bonds”) are satisfied, on a basis which includes all Outstanding Senior Bonds and such Subordinate Bonds, and if on the date of accession: (a) the Debt Service Reserve Account contains an amount equal to the Debt Service Reserve Requirement computed on a basis which includes all Outstanding Senior Bonds and such Subordinate Bonds (but which excludes, in the case of both Outstanding Senior Bonds and such Subordinate Bonds, any SRF Bonds); and (b) the Payments Account contains the amount which would have been required to be accumulated therein on the date of accession if the Subordinate Bonds had originally been issued as Senior Bonds. Credit Facilities and Hedge Agreements In connection with the issuance of any Bonds under the Bond Ordinance, the District may obtain or cause to be obtained one or more Credit Facilities providing for payment of all or a portion of the Principal of, premium, if any, or interest due or to become due on such Bonds, providing for the purchase of such Bonds by the Credit Facility Provider, or providing funds for the purchase of such Bonds by the District. In connection therewith the District shall enter into Credit Facility Agreements with such Credit Facility Providers providing for, among other things, (i) the payment of fees and expenses to such Credit Facility Providers for the issuance of such Credit Facilities; (ii) the terms and conditions of such Credit Facilities and the Bonds affected thereby; and (iii) the security, if any, to be provided for the issuance of such Credit Facilities. The District may secure any Credit Facility by an agreement providing for the purchase of the Bonds secured thereby with such adjustments to the rate of interest, method of determining interest, maturity, or redemption provisions as are specified by the District in the applicable Series Ordinance. The District may in a Credit Facility Agreement C-26 agree to directly reimburse such Credit Facility Provider for amounts paid under the terms of such Credit Facility, together with interest thereon; provided, however, that no Reimbursement Obligation shall be created for purposes of the Bond Ordinance until amounts are paid under such Credit Facility. Any such Reimbursement Obligation shall be deemed to be a part of the Bonds to which the Credit Facility relates which gave rise to such Reimbursement Obligation, and references to Principal and interest payments with respect to such Bonds shall include Principal and interest (except for Additional Interest and Principal amortization requirements with respect to the Reimbursement Obligation that are more accelerated than the amortization requirements for the related Bonds, without acceleration) due on the Reimbursement Obligation incurred as a result of payment of such Bonds with the Credit Facility. All other amounts payable under the Credit Facility Agreement (including any Additional Interest and Principal amortization requirements with respect to the Reimbursement obligation that are more accelerated than the amortization requirements for the related Bonds, without acceleration) shall be fully subordinate to the payment of debt service on the related class of Bonds. Any such Credit Facility shall be for the benefit of and secure such Bonds or portion thereof as specified in the applicable Series Ordinance. In connection with the issuance of any Bonds or at any time thereafter so long as such Bonds remain Outstanding, the District may enter into Hedge Agreements with Qualified Hedge Providers, and no other providers, with respect to any Bonds. The District shall authorize the execution, delivery, and performance of each Hedge Agreement in a Supplemental Ordinance, in which it shall designate the related Hedged Bonds. The District’s obligation to pay Hedge Payments may be secured by a pledge of, and lien on, the Pledged Revenues on a parity with the lien created by the Bond Ordinance to secure the related Hedged Bonds, or may be subordinated in lien and right of payment to the payment of the Bonds, as determined by the District. Other Obligations The District expressly reserves the right, at any time, to adopt one or more other bond ordinances and reserves the right, at any time, to issue any other obligations not secured by the amounts pledged under the Bond Ordinance. DEFAULT AND ENFORCEMENT Events of Default An “Event of Default” shall mean the occurrence of any one or more of the following: (a) failure to pay the Principal or redemption price of any Bond when the same shall become due and payable, either at maturity or by proceedings for redemption or otherwise; or (b) failure to pay any installment of interest on any Bond when and as such installment of interest shall become due and payable; or (c) default shall be made by the District in the performance of any obligation in respect to the Debt Service Reserve Account and such default shall continue for 30 days thereafter; or (d) the District shall (1) admit in writing its inability to pay its debts generally as they become due, (2) file a petition in bankruptcy or take advantage of any insolvency act, (3) make an assignment for the benefit of its creditors, (4) consent to the appointment of a receiver of itself or of the whole or any substantial part of its property, or (5) be adjudicated a bankrupt; or (e) a court of competent jurisdiction shall enter an order, judgment, or decree appointing a receiver of the System or any of the funds or accounts established in the Bond Ordinance, or of the whole or any substantial part of the District’s property, or approving a petition seeking reorganization of the District C-27 under the federal bankruptcy laws or any other applicable law or statute of the United States of America or the State, and such order, judgment, or decree shall not be vacated or set aside or stayed within 60 days from the date of the entry thereof; or (f) under the provisions of any other law for the relief or aid of debtors, any court of competent jurisdiction shall assume custody or control of any of the funds or accounts established in the Bond Ordinance, or of the whole or any substantial part of the District’s property, and such custody or control shall not be terminated or stayed within 60 days from the date of assumption of such custody or control; or (g) the District shall fail to perform any of the other covenants, conditions, agreements, and provisions contained in the Bonds or in the Bond Ordinance (other than the covenant in the Bond Ordinance relating to continuing disclosure) on the part of the District to be performed, and such failure shall continue for 90 days after written notice specifying such failure and requiring it to be remedied shall have been given to the District by the owners of not less than, or a Credit Facility Provider securing not less than, 25% in aggregate Principal of the Bonds then Outstanding; provided, however, if the failure stated in such notice can be corrected, but not within such 90-day period, the District shall have 180 days after such written notice to cure such default if corrective action is instituted by the District within such 90-day period and diligently pursued until the failure is corrected; or (h) (1) an Event of Default relating to the non-payment of the Principal or redemption price or installment of interest shall occur under any Series Ordinance or (2) an Event of Default, other than as described in clause (h)(1) shall occur under any Series Ordinance; or (i) failure by any Credit Facility Provider to pay the purchase price of Bonds under any Credit Facility then in effect; or (j) delivery to the District by a Credit Facility Provider of written notice stating that an “Event of Default” has occurred under any Credit Facility Agreement; or (k) delivery to the District by a Qualified Hedge Provider of written notice stating that an “event of default” has occurred under any Senior Hedge Agreement. Remedies Upon the happening and continuance of any Event of Default described in clauses (a), (b) and (h)(1) above under the caption “Events of Default” as to any Senior Bond, then and in every such case, upon the written declaration of the owners of more than 50% in aggregate Principal of all Senior Bonds then Outstanding or upon the written demand of a Credit Facility Provider securing more than 50% in aggregate Principal of the Senior Bonds then Outstanding, the Principal of all Senior Bonds then Outstanding shall become due and payable immediately, together with the interest accrued thereon to the date of such acceleration, at the place of payment provided therein, and interest on the Senior Bonds shall cease to accrue after the date of such acceleration, anything in the Bond Ordinance or in the Senior Bonds to the contrary notwithstanding. With respect to any Senior Bonds secured by a Credit Facility, only the applicable Credit Facility Provider may give written demand to declare the Principal of and accrued interest on such Senior Bonds to be immediately due and payable. Upon the happening and continuance of any Event of Default described in clause (i) above under the caption “Events of Default”, then and in every such case, upon the written declaration of the owners of more than 50% in aggregate Principal of the Senior Bonds of the affected series then Outstanding, the Principal of all Senior Bonds of the affected series then Outstanding shall become due and payable immediately, together with the interest accrued thereon to the date of such acceleration, at the place of payment provided therein, and interest on the Senior Bonds of the affected series shall cease to accrue after the date of such acceleration, anything in the Bond Ordinance or in the Senior Bonds of the affected series to the contrary notwithstanding. C-28 Upon the happening and continuance of any Event of Default described in clause (k) above under the caption “Events of Default”, then and in every such case, upon the written declaration of the owners of more than 50% in aggregate Principal of the Senior Bonds of the affected series then Outstanding, the Principal of all Senior Bonds of the affected series then Outstanding shall become due and payable immediately, together with the interest accrued thereon to the date of such acceleration, at the place of payment provided therein, and interest on the Senior Bonds of the affected series shall cease to accrue after the date of such acceleration, anything in the Bond Ordinance or in the Senior Bonds of the affected series to the contrary notwithstanding. Notwithstanding the foregoing, with respect to any Senior Bonds secured by a Credit Facility, only the applicable Credit Facility Provider may give written demand to declare the Principal of and accrued interest on such Senior Bonds to be immediately due and payable. Upon any declaration of acceleration under the Bond Ordinance, the District shall immediately draw under the applicable Credit Facility to the extent permitted by the terms thereof that amount which, together with other amounts on deposit under the Bond Ordinance, shall be sufficient to pay the Principal of and accrued interest on the related Senior Bonds so accelerated. The above provisions, however, are subject to the condition that if, after the Principal of the Senior Bonds shall have been so accelerated, all arrears of interest upon such Bonds, and interest on overdue installments of interest at the rate on such Bonds, shall have been paid by the District, the Principal of such Bonds which has matured (except the Principal of any Bonds not then due by their terms except as provided above) have been paid, and the District shall also have performed all other things in respect to which it may have been in default under the Bond Ordinance, and, if applicable, each Credit Facility Provider shall have reinstated the Credit Facility in the full amount available to be drawn thereunder by written notice to the District, then, in every such case, the owners of more than 50% in aggregate Principal of all Senior Bonds then Outstanding by written notice to the District, may waive such default and its consequences and such waiver shall be binding upon the District and upon all owners of the Bonds; but no such waiver shall extend to or affect any subsequent default or impair any right or remedy consequent thereon. Notwithstanding the foregoing, as long as the applicable Credit Facility Provider shall not then continue to dishonor draws under the Credit Facility, no Event of Default with respect to the related Senior Bonds may be waived without the express written consent of such Credit Facility Provider. Upon the happening and continuance of any Event of Default, any owner of Senior Bonds then Outstanding affected by the Event of Default or a duly authorized agent for such owner may proceed to protect and enforce its rights and the rights of the owners of Senior Bonds by such of the following remedies as it shall deem most effectual to protect and enforce such rights: (1) by mandamus or other suit, action, or proceeding at law or in equity, enforce all rights of the owners of Senior Bonds, including the right to require the appointment of a receiver for the System or to exercise any other right or remedy provided by the Constitution and laws of the State and the Charter and to require the District to perform any other covenant or agreement contained in the Bond Ordinance; (2) by action or suit in equity, require the District to account as if it were the trustee of an express trust for the owners of the Senior Bonds; (3) by action or suit in equity, enjoin any acts or things which may be unlawful or in violation of the rights of the owners of the Senior Bonds; or (4) by pursuing any other available remedy at law or in equity or by statute. In the enforcement of any remedy under the Bond Ordinance, owners of Senior Bonds shall be entitled to sue for, enforce payment on, and receive any and all amounts then or during any default becoming, and at C-29 any time remaining, due from the District for Principal, redemption premium, interest, or otherwise, under any provision of the Bond Ordinance or of the Senior Bonds, and unpaid, with interest on overdue payments at the rate or rates of interest specified in such Senior Bonds, together with any and all costs and expenses of collection and of all proceedings under the Bond Ordinance and under such Senior Bonds, without prejudice to any other right or remedy of the owners of Senior Bonds, and to recover and enforce a judgment or decree against the District for any portion of such amounts remaining unpaid, with interest, costs, and expenses, and to collect from any moneys available for such purpose, in any manner provided by law, the moneys adjudged or decreed to be payable. If no Senior Bonds are then Outstanding or if no Event of Default with respect to any Senior Bonds has then occurred and is continuing, in the enforcement of any remedy under the Bond Ordinance, owners of Subordinate Bonds shall be entitled to sue for, enforce payment on, and receive any and all amounts then or during any default becoming, and at any time remaining, due from the District for Principal, redemption premium, interest, or otherwise, under any provision of the Bond Ordinance or of the Subordinate Bonds, and unpaid, with interest on overdue payments at the rate or rates of interest specified in such Subordinate Bonds, together with any and all costs and expenses of collection and of all proceedings under the Bond Ordinance and under such Subordinate Bonds, without prejudice to any other right or remedy of the owners of Subordinate Bonds, and to recover and enforce a judgment or decree against the District for any portion of such amounts remaining unpaid, with interest, costs, and expenses, and to collect from any moneys available for such purpose, in any manner provided by law, the moneys adjudged or decreed to be payable. Nothing in this paragraph is intended to diminish the rights of the owners of Subordinate Bonds described in clauses (1) through (4) above. No remedy conferred upon or reserved to the Bondholders is intended to be exclusive of any other remedy or remedies, and each and every such remedy shall be cumulative and shall be in addition to every other remedy given under the Bond Ordinance or now or hereafter existing at law or in equity or by statute. Application of Moneys After Default If an Event of Default occurs and shall not have been remedied, the District or a receiver appointed for the purpose shall apply all Pledged Revenues as follows and in the following order of priority: (a) Expenses of Receiver and Paying Agent and Bond Registrar - to the payment of the reasonable and proper charges, expenses, and liabilities of any receiver and the Paying Agent and Bond Registrar under the Bond Ordinance; (b) Expenses of Operation and Maintenance and Renewals and Replacements - to the payment of all reasonable and necessary Expenses of Operation and Maintenance and major renewals and replacements to the System; (c) Principal or Redemption Price, Interest, and Hedge Payments Relating to Senior Bonds - to the payment of the interest and Principal or redemption price then due on the Senior Bonds and Hedge Payments then due under Senior Hedge Agreements, as follows: (i) Unless the Principal of all the Senior Bonds shall have become due and payable, all such moneys shall be applied as follows: first: To the payment to the persons entitled thereto of all installments of interest then due on the Senior Bonds, in the order of the maturity of such installments (with interest on defaulted installments of interest at the rate or rates borne by the Senior Bonds with respect to which such interest is due, but only to the extent permitted by law), and, if the amount available shall not be sufficient to pay in full any particular installment, then to the payment ratably, according to the amounts C-30 due on such installment, to the persons entitled thereto, without any discrimination or preference. If some of the Senior Bonds bear interest payable at different intervals or upon different dates than the semiannual Interest Payment Dates specified for the Series 2011B Bonds, and if at any time moneys from the Debt Service Reserve Account must be used to pay any such interest, the moneys in the Debt Service Reserve Account shall be applied (to the extent necessary) to the payment of all interest becoming due on the dates upon which such interest is payable to and including the next succeeding semiannual Interest Payment Date specified for the Series 2011B Bonds. After such date, moneys in the Debt Service Reserve Account plus any other moneys available in the Payments Account shall be set aside for the payment of interest on Senior Bonds of each class (a class consisting of all Senior Bonds payable as to interest on the same dates) pro rata among Senior Bonds of the various classes on a daily basis so that there shall accrue to each owner of a Senior Bond throughout each Fiscal Year the same proportion of the total interest payable to such owner of a Senior Bond as shall so accrue to every other owner of a Senior Bond during such Fiscal Year. As to any Capital Appreciation Bond which is a Senior Bond, such interest shall accrue on the Accreted Value of such Bond and be set aside on a daily basis until the next compounding date for such Bonds, whereupon it shall be paid to the owner of such Bond as interest on a defaulted obligation and only the unpaid portion of such interest (if any) shall be treated as Principal of such Bond. second: To the payment of the Hedge Payments due under any Senior Hedge Agreements pursuant to their terms. third: To the payment to the persons entitled thereto of the unpaid Principal of any of the Senior Bonds which shall have become due at maturity or upon mandatory redemption prior to maturity (other than Senior Bonds called for redemption for the payment of which moneys are held pursuant to the provisions of the Bond Ordinance), in the order of their due dates, with interest upon such Senior Bonds from the respective dates upon which they became due, and, if the amount available shall not be sufficient to pay in full Senior Bonds due on any particular date, together with such interest, then to the payment first of such interest, ratably according to the amount of such interest due on such date, and then to the payment of such Principal, ratably according to the amount of such Principal due on such date, to the persons entitled thereto without any discrimination or preference. If some of the Senior Bonds mature (including mandatory redemption prior to maturity as a maturity) upon a different date or dates than the annual Principal Maturity Dates specified for the Series 2011B Bonds, and if at any time moneys from the Debt Service Reserve Account must be used to pay any such Principal becoming due, the moneys in the Debt Service Reserve Account not required to pay interest under paragraph first above shall be applied to the extent necessary to the payment of all Principal becoming due on the dates upon which such Principal is payable to and including the final annual Principal Maturity Date specified for the Series 2011B Bonds. After such date, moneys in the Debt Service Reserve Account not required to pay interest plus any other moneys available in the Payments Account shall be set aside for the payment of Principal of Senior Bonds of each class (a class consisting of all Senior Bonds payable as to Principal on the same date) pro rata among Senior Bonds of the various classes which mature or must be redeemed pursuant to mandatory redemption prior to maturity throughout each Fiscal Year in such proportion of the total Principal payable on each such Senior Bond as shall be equal among all classes of Senior Bonds maturing or subject to mandatory redemption within such Fiscal Year. The Accreted Value of a Capital Appreciation Bond which C-31 is a Senior Bond (except for interest which shall have been paid under paragraph first) shall be treated as Principal for purposes of this paragraph third. fourth: To the payment of the redemption premium on and the Principal of any Senior Bonds called for optional redemption pursuant to their terms. (ii) If the Principal of all the Senior Bonds shall have become due and payable, all such moneys shall be applied to the payment of the Principal and interest then due and unpaid upon the Senior Bonds, with interest thereon as aforesaid, and due and unpaid Hedge Payments under Senior Hedge Agreements, without preference or priority of Principal over interest or Hedge Payments or of interest over Principal or Hedge Payments, or of Hedge Payments over Principal or interest, or of any installment of interest over any other installment of interest, or of any Senior Bond over any other Senior Bonds, or of any such Hedge Payment over any other such Hedge Payment, ratably, according to the amounts due respectively for Principal, interest, and Hedge Payments, to the persons entitled thereto without any discrimination or preference. Rights of Credit Facility Provider Notwithstanding any other provision of the Bond Ordinance, in the event that the District shall draw under a Credit Facility any amount for the payment of Principal of or interest on any Bonds, then upon such payment the related Credit Facility Provider shall succeed to and become subrogated to the rights of the recipients of such payments and such Principal or interest shall be deemed to continue to be unpaid and Outstanding for all purposes and shall continue to be fully secured by the Bond Ordinance until the Credit Facility Provider, as successor and subrogee, has been paid all amounts owing in respect of such subrogated payments of Principal and interest. Such rights shall be limited and evidenced by having the District note the Credit Facility Provider’s rights as successor and subrogee on its records, and the District shall, upon request, deliver to the Credit Facility Provider (i) in the case of interest on the Bonds, an acknowledgment of the Credit Facility Provider’s ownership of interest to be paid on the Bonds specifying the amount of interest owed, the period represented by such interest, and the CUSIP numbers of the Bonds on which such interest is owed and (ii) in the case of Principal of the Bonds, either the Bonds themselves duly assigned to the Credit Facility Provider or new Bonds registered in the name of the Credit Facility Provider or in such other name as the Credit Facility Provider shall specify. Whenever moneys become available for the payment of any interest then overdue, the Credit Facility Provider shall be treated as to interest owed to it as and as if it had been the Bondholder of the Bonds upon which such interest is payable on any special record date therefor. No Obligation to Levy Taxes Nothing contained in the Bond Ordinance shall be construed as imposing on the District any duty or obligation to levy any taxes either to meet any obligation incurred in the Bond Ordinance or to pay the Principal of or interest on the Bonds. DEFEASANCE Except as otherwise provided in any Series Ordinance with respect to Bonds secured by a Credit Facility, Bonds for the payment or redemption of which sufficient moneys or sufficient Government Obligations shall have been deposited with the Paying Agent or the Depository of the Sinking Fund (whether upon or prior to the maturity or the redemption date of such Bonds) shall be deemed to be paid and no longer Outstanding under the Bond Ordinance; provided, however, that if such Bonds are to be redeemed prior to the maturity thereof, notice of such redemption shall have been duly given as provided in the Bond Ordinance or firm and irrevocable arrangements shall have been made for the giving of such notice; and, provided, further, that Bonds bearing interest at a Variable Rate shall not be deemed to have been paid and discharged within the meaning of the Bond Ordinance unless the interest rate payable on such Bonds is calculated at the maximum C-32 interest rate specified for such Bonds to the earlier of the first tender or redemption date. Government Obligations shall be considered sufficient for purposes of the Bond Ordinance only: (i) if such Government Obligations are not callable by the issuer of the Government Obligations prior to their stated maturity; and (ii) if such Government Obligations fall due and bear interest in such amounts and at such times as will assure sufficient cash to pay currently maturing interest and to pay Principal and redemption premiums, if any, when due on the Bonds without rendering the interest on any Tax-Exempt Bonds includable in gross income of any owner thereof for federal income tax purposes. The District may at any time surrender to the Bond Registrar for cancellation by it any Bonds previously authenticated and delivered under the Bond Ordinance which the District may have acquired in any manner whatsoever. All such Bonds, upon such surrender and cancellation, shall be deemed to be paid and retired. SUPPLEMENTAL ORDINANCES Supplemental Ordinances Not Requiring Consent of Bondholders The District, from time to time and at any time, subject to the conditions and restrictions in the Bond Ordinance, may adopt one or more Supplemental Ordinances which thereafter shall form a part of the Bond Ordinance, for any one or more or all of the following purposes: (a) To add to the covenants and agreements of the District in the Bond Ordinance other covenants and agreements thereafter to be observed or to surrender, restrict, or limit any right or power reserved in the Bond Ordinance to or conferred upon the District (including but not limited to the right to issue Senior Bonds); (b) To make such provisions for the purpose of curing any ambiguity, or of curing, correcting, or supplementing any defective provision contained in the Bond Ordinance, or in regard to matters or questions arising under the Bond Ordinance, as the District may deem necessary or desirable and not inconsistent with the Bond Ordinance; (c) To subject to the lien and pledge of the Bond Ordinance additional revenues, receipts, properties, or other collateral; (d) To evidence the appointment of successors to any Depository, Paying Agent, or Bond Registrar; (e) To modify, amend, or supplement the Bond Ordinance in such manner as to permit the qualification of the Bond Ordinance under the Trust Indenture Act of 1939 or any federal statute hereinafter in effect, and similarly to add to the Bond Ordinance such other terms, conditions, and provisions as may be permitted or required by such Trust Indenture Act of 1939 or any similar federal statute; (f) To make any modification or amendment of the Bond Ordinance required in order to make any Bonds eligible for acceptance by DTC or any similar holding institution or to permit the issuance of any Bonds or interests therein in book-entry form; (g) To modify any of the provisions of the Bond Ordinance in any respect if such modification shall not become effective until after the Bonds Outstanding immediately prior to the effective date of such Supplemental Ordinance shall cease to be Outstanding and if any Bonds issued contemporaneously with or after the effective date of such Supplemental Ordinance shall contain a specific reference to the modifications contained in such subsequent proceedings; C-33 (h) Subject to the provisions of the Bond Ordinance relating to the Project Fund, to modify the provisions of the Bond Ordinance with respect to the disposition of any moneys remaining in the Project Fund upon the completion of any Project; (i) To increase the size or scope of the System, to add other utilities to the System, to create additional subaccounts or to abolish any subaccounts within any account, or to change the amount of the Debt Service Reserve Requirement, but not below the amount specified in such definition; (j) To modify the Bond Ordinance to permit the qualification of any Bonds for offer or sale under the securities laws of any state in the United States of America; (k) To modify the Bond Ordinance to provide for the issuance of Senior Bonds or Subordinate Bonds, and such modification may deal with any subjects and make any provisions which the District deems necessary or desirable for that purpose; (l) To make such modifications in the provisions of the Bond Ordinance as may be deemed necessary by the District to accommodate the issuance of Bonds which (i) are Capital Appreciation Bonds (including, but not limited to, provisions for determining the Debt Service Requirement for such Capital Appreciation Bonds and for treatment of Accreted Value in making such determination) or (ii) bear interest at a Variable Rate; and (m) To modify any of the provisions of the Bond Ordinance in any respect (other than a modification of the type described in below under the caption “–Supplemental Ordinances Requiring Consent of Bondholders”) requiring the unanimous written consent of the Bondholders); provided that for (i) any Outstanding Bonds which are assigned a Rating and which are not secured by a Credit Facility providing for the payment of the full amount of Principal and interest to be paid thereon, each Rating Agency shall have given written notification to the District that such modification will not cause the then applicable Rating on any Bonds to be reduced or withdrawn, and (ii) any Outstanding Bonds which are secured by Credit Facilities providing for the payment of the full amount of the Principal and interest to be paid thereon, each Credit Facility Provider shall have consented in writing to such modification. Any Supplemental Ordinance of the District may modify the provisions of the Bond Ordinance in such a manner, and to such extent and containing such provisions, as the District may deem necessary or desirable to effect any of the purposes stated above. As used in the Bond Ordinance, the term “modify” shall mean “modify, amend, or supplement” and the term “modification” shall mean “modification, amendment, or supplement.” Supplemental Ordinances Requiring Consent of Bondholders With the consent (evidenced as provided in the Bond Ordinance) of the owners of not less than a majority in aggregate Principal of the Outstanding Bonds of each class (senior and subordinate), voting separately by class, the District may from time to time and at any time adopt a Supplemental Ordinance for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of the Bond Ordinance or of any Supplemental Ordinance; provided, however, that no such Supplemental Ordinance shall: (1) extend the maturity date or due date of any mandatory sinking fund redemption with respect to any Bond Outstanding under the Bond Ordinance; (2) reduce or extend the time for payment of Principal of, redemption premium, or interest on any Bond Outstanding under the Bond Ordinance; (3) reduce any premium payable upon the redemption of any Bond under the Bond Ordinance or advance the date upon which any Bond may first be called for redemption prior to its stated maturity date; (4) give to any Senior Bond or Senior C-34 Bonds (or related Senior Hedge Agreements) a preference over any other Senior Bond or Senior Bonds (or related Senior Hedge Agreements); (5) permit the creation of any lien or any other encumbrance on the Pledged Revenues having a lien equal to or prior to the lien created under the Bond Ordinance for the Senior Bonds; (6) reduce the percentage of owners of senior or subordinate classes of Bonds required to approve any such Supplemental Ordinance; or (7) deprive the owners of the Bonds of the right to payment of the Bonds or from the Pledged Revenues, without, in each case, the consent of the owners of all the affected Bonds then Outstanding. No amendment may be made under the Bond Ordinance which affects the rights or duties of any Credit Facility Provider securing any of the Bonds or any Qualified Hedge Provider under any Hedge Agreement without its written consent. If the District intends to enter into or adopt any Supplemental Ordinance as described in this caption, the District shall mail, by registered or certified mail, to the registered owners of the Bonds at their addresses as shown on the Bond Register, a notice of such intention along with a description of such Supplemental Ordinance not less than 30 days prior to the proposed effective date of such Supplemental Ordinance. The consents of the registered owners of the Bonds need not approve the particular form of wording of the proposed Supplemental Ordinance, but it shall be sufficient if such consents approve the substance thereof. Failure of the owner of any Bond to receive the notice required in the Bond Ordinance shall not affect the validity of any Supplemental Ordinance if the required number of owners of the Bonds of each class shall provide their written consent to such Supplemental Ordinance. Notwithstanding any provision of the Bond Ordinance to the contrary, upon the issuance of a Credit Facility to secure any Bonds and for the period in which such Credit Facility is outstanding, the Credit Facility Provider may have the consent rights of the owners of the Bonds which are secured by such Credit Facility pertaining to some or all of the amendments or modifications of the Bond Ordinance, to the extent provided in the applicable Series Ordinance. Notwithstanding the foregoing, if a Credit Facility Provider is granted the consent rights of the owners of any Bonds in a Series Ordinance and refuses to exercise such consent rights, either affirmatively or negatively, then the registered owners of the Bonds secured by the related Credit Facility may exercise such consent rights. Notice of Supplemental Ordinances The District shall cause the Bond Registrar to mail a notice by registered or certified mail to the registered owners of all Bonds Outstanding, at their addresses shown on the Bond Register or at such other address as has been furnished in writing by such registered owner to the Bond Registrar, setting forth in general terms the substance of any Supplemental Ordinance which has been adopted and approved. * * * C-35 SUMMARY OF THE CONTINUING DISCLOSURE AGREEMENT The following is a summary of certain provisions and covenants contained in the Continuing Disclosure Agreement. Such summary does not purport to be a complete statement of the terms of the Continuing Disclosure Agreement and accordingly is qualified in its entirety by reference thereto and is subject to the full text thereof. Definitions In addition to the definitions set forth in the Continuing Disclosure Agreement, the following capitalized terms shall have the following meanings: “Annual Filing Date” means the date, set in the Continuing Disclosure Agreement, by which the Annual Report is to be filed with the MSRB. “Annual Financial Information” means annual financial information as such term is used in paragraph (b)(5)(i) of the Rule and specified in the Continuing Disclosure Agreement. “Annual Report” means an Annual Report described in and consistent with the Continuing Disclosure Agreement. “Audited Financial Statements” means the financial statements (if any) of the District for the prior fiscal year, certified by an independent auditor as prepared in accordance with generally accepted accounting principles or otherwise, as such term is used in paragraph (b)(5)(i) of the Rule and as specified in the Continuing Disclosure Agreement. “Certification” means a written certification of compliance signed by the Disclosure Representative stating that the Annual Report, Audited Financial Statements, Notice Event notice, Failure to File Event notice, Voluntary Event Disclosure or Voluntary Financial Disclosure delivered to the Disclosure Dissemination Agent is the Annual Report, Audited Financial Statements, Notice Event notice, Failure to File Event notice, Voluntary Event Disclosure or Voluntary Financial Disclosure required to be submitted to the MSRB under the Continuing Disclosure Agreement. A Certification shall accompany each such document submitted to the Disclosure Dissemination Agent by the District and shall include the full name of the Bonds and the 9-digit CUSIP numbers for all Bonds to which the document applies. “Disclosure Representative” means the Secretary-Treasurer of the District or his or her designee, or such other person as the District shall designate in writing to the Disclosure Dissemination Agent from time to time as the person responsible for providing Information to the Disclosure Dissemination Agent. “Disclosure Dissemination Agent” means Digital Assurance Certification, L.L.C., acting in its capacity as Disclosure Dissemination Agent (“DAC”) under the Continuing Disclosure Agreement, or any successor Disclosure Dissemination Agent designated in writing by the District pursuant to the Continuing Disclosure Agreement. “Failure to File Event” means the District’s failure to file an Annual Report on or before the Annual Filing Date. “Force Majeure Event” means: (i) acts of God, war, or terrorist action; (ii) failure or shut-down of the Electronic Municipal Market Access system maintained by the MSRB; or (iii) to the extent beyond the Disclosure Dissemination Agent’s reasonable control, interruptions in telecommunications or utilities services, failure, malfunction or error of any telecommunications, computer or other electrical, mechanical or technological application, service or system, computer virus, interruptions in Internet service or telephone C-36 service (including due to a virus, electrical delivery problem or similar occurrence) that affect Internet users generally, or in the local area in which the Disclosure Dissemination Agent or the MSRB is located, or acts of any government, regulatory or any other competent authority the effect of which is to prohibit the Disclosure Dissemination Agent from performance of its obligations under this Disclosure Agreement. “Holder” means any person (a) having the power, directly or indirectly, to vote or consent with respect to, or to dispose of ownership of, any Bonds (including persons holding Bonds through nominees, depositories or other intermediaries) or (b) treated as the owner of any Bonds for federal income tax purposes. “Information” means, collectively, the Annual Reports, the Audited Financial Statements (if any), the Notice Event notices, the Failure to File Event notices, the Voluntary Event Disclosures and the Voluntary Financial Disclosures. “MSRB” means the Municipal Securities Rulemaking Board established pursuant to Section 15B(b)(1) of the Securities Exchange Act of 1934. “Notice Event” means any of the events enumerated in paragraph (b)(5)(i)(C) of the Rule and listed in the Continuing Disclosure Agreement. “Obligated Person” means any person, including the District, who is either generally or through an enterprise, fund, or account of such person committed by contract or other arrangement to support payment of all, or part of the obligations on the Bonds (other than providers of municipal bond insurance, letters of credit, or other liquidity facilities). “Official Statement” means that Official Statement prepared by the District in connection with the Bonds. “Paying Agent” means the institution identified as such in the document under which the Bonds were issued. “Rule” means Rule 15c2-12(b)(5) adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as the same may be amended from time to time. “Voluntary Event Disclosure” means information of the category specified in any of subsections (e)(vi)(1) through (e)(vi)(11) of Section 2 of the Disclosure Agreement that is accompanied by a Certification of the Disclosure Representative containing the information prescribed by Section 7(a) of the Disclosure Agreement. “Voluntary Financial Disclosure” means information of the category specified in any of subsections (e)(vii)(1) through (e)(vii)(9) of Section 2 of the Disclosure Agreement that is accompanied by a Certification of the Disclosure Representative containing the information prescribed by Section 7(b) of the Disclosure Agreement. Provision of Annual Reports The District shall provide, annually, an electronic copy of the Annual Report and Certification to the Disclosure Dissemination Agent, together with a copy for the Paying Agent, not later than the Annual Filing Date. Promptly upon receipt of an electronic copy of the Annual Report and the Certification, the Disclosure Dissemination Agent shall provide an Annual Report to the MSRB not later than 180 days after the end of each fiscal year of the District, commencing with the fiscal year ending June 30, 2011. Such date and each anniversary thereof is the Annual Filing Date. The Annual Report may be submitted as a single document or as separate documents comprising a package, and may cross-reference other information as provided in the Continuing Disclosure Agreement. C-37 If on the fifteenth (15th) day prior to the Annual Filing Date, the Disclosure Dissemination Agent has not received a copy of the Annual Report and Certification, the Disclosure Dissemination Agent shall contact the Disclosure Representative by telephone and in writing (which may be by e-mail) to remind the District of its undertaking to provide the Annual Report. Upon such reminder, the Disclosure Representative shall either (i) provide the Disclosure Dissemination Agent with an electronic copy of the Annual Report and the Certification) no later than two (2) business days prior to the Annual Filing Date, or (ii) instruct the Disclosure Dissemination Agent in writing that the District will not be able to file the Annual Report within the time required under the Continuing Disclosure Agreement, state the date by which the Annual Report for such year will be provided and instruct the Disclosure Dissemination Agent that a Failure to File Event has occurred and to immediately send a notice to the MSRB in substantially the form specified in the Continuing Disclosure Agreement. If the Disclosure Dissemination Agent has not received an Annual Report and Certification by 12:00 noon on the first business day following the Annual Filing Date for the Annual Report, a Failure to File Event shall have occurred and the District irrevocably directs the Disclosure Dissemination Agent to immediately send a notice to the MSRB in substantially the form specified in the Continuing Disclosure Agreement. If Audited Financial Statements of the District are prepared but not available prior to the Annual Filing Date, the District shall, when the Audited Financial Statements are available, provide in a timely manner an electronic copy to the Disclosure Dissemination Agent, accompanied by a Certification, together with a copy for the Paying Agent, for filing with the MSRB. The District may adjust the Annual Filing Date upon change of its fiscal year by providing written notice of such change and the new Annual Filing Date to the Disclosure Dissemination Agent, Paying Agent (if any) and the MSRB, provided that the period between the existing Annual Filing Date and new Annual Filing Date shall not exceed one year. Content of Annual Reports Each Annual Report shall contain Annual Financial Information with respect to the District, including the information provided in the Official Statement under the headings: “FINANCIAL OPERATIONS OF THE DISTRICT - Historical and Projected Sewer Rates and Charges,” “- Customer Accounts,” “- Largest User Charge Customers,” and “ – User Charge Revenues.” Each Annual Report shall include Audited Financial Statements prepared in accordance with generally accepted accounting principles (“GAAP”) as described in the Official Statement. If audited financial statements are not available, then, unaudited financial statements, prepared in accordance with GAAP will be included in the Annual Report. Any or all of the items listed above may be included by specific reference to other documents, including official statements of debt issues with respect to which the District is an Obligated Person (as defined by the Rule), which have been previously filed with each of the Securities and Exchange Commission or available on the MSRB Internet Website. If the document incorporated by reference is a final official statement, it must be available from the MSRB. The District will clearly identify each such document so incorporated by reference. C-38 Reporting of Notice Events The occurrence of any of the following events with respect to the Bonds constitutes a Notice Event: 1. Principal and interest payment delinquencies; 2. Non-payment related defaults, if material; 3. Unscheduled draws on debt service reserves reflecting financial difficulties; 4. Unscheduled draws on credit enhancements reflecting financial difficulties; 5. Substitution of credit or liquidity providers, or their failure to perform; 6. Adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax status of the Bonds, or other material events affecting the tax status of the Bonds; 7. Modifications to rights of Bondholders, if material; 8. Bond calls, if material, and tender offers; 9. Defeasances; 10. Release, substitution, or sale of property securing repayment of the Bonds, if material; 11. Rating changes; 12. Bankruptcy, insolvency, receivership or similar event of the Obligated Person; For the purposes of the event described in this subsection, the event is considered to occur when any of the following occur: the appointment of a receiver, fiscal agent or similar officer for an Obligated Person in a proceeding under the U.S. Bankruptcy Code or in any other proceeding under state or federal law in which a court or governmental authority has assumed jurisdiction over substantially all of the assets or business of the Obligated Person, or if such jurisdiction has been assumed by leaving the existing governing body and officials or officers in possession but subject to the supervision and orders of a court or governmental authority, or the entry of an order confirming a plan of reorganization, arrangement or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of the Obligated Person. 13. The consummation of a merger, consolidation, or acquisition involving an Obligated Person or the sale of all or substantially all of the assets of the Obligated Person, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material; and 14. Appointment of a successor or additional trustee or the change of name of a trustee, if material; C-39 The District shall, in a timely manner not in excess of ten business days after its occurrence, notify the Disclosure Dissemination Agent in writing of the occurrence of a Notice Event. Such notice shall instruct the Disclosure Dissemination Agent to report the occurrence and shall be accompanied by a Certification. Such notice or Certification shall identify the Notice Event that has occurred, include the text of the disclosure that the District desires to make, contain the written authorization of the District for the Disclosure Dissemination Agent to disseminate such information, and identify the date the District desires for the Disclosure Dissemination Agent to disseminate the information (provided that such date is not later than the tenth business day after the occurrence of the Notice Event). The Disclosure Dissemination Agent is under no obligation to notify the District or the Disclosure Representative of an event that may constitute a Notice Event. In the event the Disclosure Dissemination Agent so notifies the Disclosure Representative, the Disclosure Representative will within two business days of receipt of such notice (but in any event not later than the tenth business day after the occurrence of the Notice Event, if the District determines that a Notice Event has occurred), instruct the Disclosure Dissemination Agent that (i) a Notice Event has not occurred and no filing is to be made or (ii) a Notice Event has occurred and the Disclosure Dissemination Agent is to report the occurrence pursuant to the Continuing Disclosure Agreement, together with a Certification. Such Certification shall identify the Notice Event that has occurred, include the text of the disclosure that the District desires to make, contain the written authorization of the District for the Disclosure Dissemination Agent to disseminate such information, and identify the date the District desires for the Disclosure Dissemination Agent to disseminate the information (provided that such date is not later than the tenth business day after the occurrence of the Notice Event). If the Disclosure Dissemination Agent has been instructed by the District to report the occurrence of a Notice Event, the Disclosure Dissemination Agent shall promptly file a notice of such occurrence with the MSRB in accordance with the Continuing Disclosure Agreement. Voluntary Filings The District may instruct the Disclosure Dissemination Agent to file a Voluntary Event Disclosure or a Voluntary Financial Disclosure with the MSRB, from time to time pursuant to a Certification of the Disclosure Representative. Nothing in the Continuing Disclosure Agreement shall be deemed to prevent the District from disseminating any other information through the Disclosure Dissemination Agent using the means of dissemination set forth in the Continuing Disclosure Agreement or including any other information in any Annual Report, Audited Financial Statement, Notice Event notice, Failure to File Event notice, Voluntary Event Disclosure or Voluntary Financial Disclosure, in addition to that required by the Continuing Disclosure Agreement. If the District chooses to include any information in any Annual Report, Audited Financial Statement, Notice Event notice, Failure to File Event notice, Voluntary Event Disclosure or Voluntary Financial Disclosure in addition to that which is specifically required by the Continuing Disclosure Agreement, the District shall have no obligation under the Continuing Disclosure Agreement to update such information or include it in any future Annual Report, Audited Financial Statement, Notice Event notice, Failure to File Event notice, Voluntary Event Disclosure or Voluntary Financial Disclosure. Termination of Reporting Obligation The obligations of the District and the Disclosure Dissemination Agent under the Continuing Disclosure Agreement shall terminate with respect to the Bonds upon the legal defeasance, prior redemption or payment in full of all of the Bonds, when the District is no longer an Obligated Person, or upon delivery by the Disclosure Representative to the Disclosure Dissemination Agent of an opinion of counsel experienced in federal securities laws to the effect that continuing disclosure is no longer required. C-40 Disclosure Dissemination Agent The District has appointed Digital Assurance Certification, L.L.C. (“DAC”) as exclusive Disclosure Dissemination Agent under the Continuing Disclosure Agreement. The District may, upon thirty days written notice to the Disclosure Dissemination Agent and the Paying Agent, replace or appoint a successor Disclosure Dissemination Agent. Upon termination of DAC’s services as Disclosure Dissemination Agent, whether by notice of the District or DAC, the District agrees to appoint a successor Disclosure Dissemination Agent or, alternately, agrees to assume all responsibilities of Disclosure Dissemination Agent under the Continuing Disclosure Agreement for the benefit of the Holders of the Bonds. Notwithstanding any replacement or appointment of a successor, the District shall remain liable until payment in full for any and all sums owed and payable to the Disclosure Dissemination Agent. The Disclosure Dissemination Agent may resign at any time by providing thirty days’ prior written notice to the District. Remedies in Event of Default In the event of a failure of the District or the Disclosure Dissemination Agent to comply with any provision of the Continuing Disclosure Agreement, the Holders’ rights to enforce the provisions of the Continuing Disclosure Agreement shall be limited solely to a right, by action in mandamus or for specific performance, to compel performance of the parties’ obligation under the Continuing Disclosure Agreement. Any failure by a party to perform in accordance with the Continuing Disclosure Agreement shall not constitute a default on the Bonds or under any other document relating to the Bonds, and all rights and remedies shall be limited to those expressly stated in the Continuing Disclosure Agreement. Amendment; Waiver Notwithstanding any other provision of the Continuing Disclosure Agreement, the District and the Disclosure Dissemination Agent may amend the Continuing Disclosure Agreement and any provision of the Continuing Disclosure Agreement may be waived, if such amendment or waiver is supported by an opinion of counsel expert in federal securities laws acceptable to both the District and the Disclosure Dissemination Agent to the effect that such amendment or waiver does not materially impair the interests of Holders of the Bonds and would not, in and of itself, cause the undertakings in the Continuing Disclosure Agreement to violate the Rule if such amendment or waiver had been effective on the date of the Continuing Disclosure Agreement but taking into account any subsequent change in or official interpretation of the Rule; provided neither the District or the Disclosure Dissemination Agent shall be obligated to agree to any amendment modifying their respective duties or obligations without their consent thereto. Notwithstanding the preceding paragraph, the Disclosure Dissemination Agent shall have the right to adopt amendments to the Continuing Disclosure Agreement necessary to comply with modifications to and interpretations of the provisions of the Rule as announced by the Securities and Exchange Commission from time to time by giving not less than 20 days prior written notice of the intent to do so together with a copy of the proposed amendment to the District. No such amendment shall become effective if the District shall, within 10 days following the giving of such notice, send a notice to the Disclosure Dissemination Agent in writing that it objects to such amendment. * * * Metropolitan St. Louis Sewer District Principal Assumptions Appendix D Report on the Financial Feasibility of The Metropolitan St. Louis Sewer District Wastewater System Revenue Bonds, Series 2011B [THIS PAGE INTENTIONALLY LEFT BLANK] Black & Veatch Corporation ⋅ 11401 Lamar Avenue ⋅ Overland Park, KS 66211 USA ⋅ Telephone: 913.458.2000 November 17, 2011 Board of Trustees The Metropolitan St. Louis Sewer District 2350 Market Street St. Louis, MO 63103-2555 We are submitting herewith our Financial Feasibility report prepared at the request of The Metropolitan St. Louis Sewer District (“District”) in connection with the proposed issuance of its Wastewater System Revenue Bonds, Series 2011B (“Series 2011B Bonds”). The purpose of this report is to summarize findings of studies performed by Black & Veatch Corporation (“Black & Veatch”) related to the wastewater system of the District (“System”). This report provides a financial feasibility analysis of the District’s Capital Improvement and Replacement Program (“CIRP”) as it relates to the issuance of the proposed Series 2011B Bonds. This report also addresses other technical and financial issues that affect the operation of the System and the District’s ability to issue and repay wastewater revenue bonds issued during the six-year study period of fiscal years 2011 through 2016, where the District’s fiscal year ends on June 30 of each year. In preparing this report, Black & Veatch has examined the financial operations of the District through reviews of financial reports, operating and capital budgets, and other statistical and financial information, and through discussions with the District’s financial staff. We have performed various financial tests and analyses necessary to support our findings and opinions. In the preparation of the forecast of future operations summarized in this report, Black & Veatch has made certain assumptions with respect to conditions, events, and circumstances which may occur in the future. The methodologies utilized in performing our studies follow generally accepted industry practice. While Black & Veatch believes such assumptions are reasonable and attainable for the purpose of forecasting the District’s future operations, the actual results may differ materially from the forecasts as influenced by the conditions, events, and circumstances which actually occur. Page 2 November 17, 2011 D-2 Subject to the limitations set forth herein, this report is based on information not within the control of Black & Veatch. Black & Veatch has not been requested to make an independent analysis, to verify the information provided to us, or to render independent judgment of the validity of information provided by others. As such, Black & Veatch cannot, and does not, guarantee the accuracy thereof to the extent that such information, data, or opinions were based on information provided by others. Use of this report, or any information contained herein, by a third party shall constitute a waiver and release of Black & Veatch from and against all claims and liability, including, but not limited to, liability for special, incidental, indirect, or consequential damages, in connection with such use. In addition, use of this report, or any information contained therein by a third party, shall constitute agreement to defend and indemnify Black & Veatch from and against any claims and liability, including, but not limited to, liability for special, incidental, indirect, or consequential damages in connection with such use. The benefit of such releases, waivers, or limitations of liability shall extend to the related companies, and subcontractors of any tier of Black & Veatch, and the directors, officers, partners, employees, and agents of all released or indemnified parties. Black & Veatch shall have no liability to a third party for any losses or damages arising from or in any way related to the report and/or the information contained therein. Such express waiver of liability by the third party shall include all claims that the third party may allege in connection with Black & Veatch’s report including, but not limited to, breach of contract, breach of warranty, strict liability, negligence, and/or negligent misrepresentation. The results of our investigations and analyses are presented in the report, with separate sections describing institutional framework, wastewater system financing, bond covenant compliance, and recent events that impact debt service coverage. Our summary findings and opinions, which are discussed more fully in the report, are as follows: Institutional Framework • The District was established under the provisions of Section 30 of Article VI of the Constitution of Missouri. This section also provided specific procedures for drafting a plan (“Plan”) under which the District would be formed and operated. The Plan was approved by the voters in 1954. The Plan was challenged in 1955 but found to be constitutional by the Missouri Supreme Court. Amendments to the Plan were approved by voters at a special election held on November 7, 2000. Additional amendments recommended by a Plan Page 3 November 17, 2011 D-3 Amendment Commission in May 2010 have been submitted to the Board for their consideration pursuant to the decennial requirement of the amended Plan or Charter. • The District is managed by a Board of Trustees (“Board”) which appoints the three-member Civil Service Commission, Internal Auditor, Secretary-Treasurer, Executive Director and various community organizations to serve on the Rate Commission. The Executive Director appoints the General Counsel and the directors of the five operating departments. An organization chart of the District is shown in Figure 1 of the report. • All seven of the District’s wastewater treatment facilities have received peak performance awards for the past five calendar years. • Authorized staffing has increased from 852 positions in 2004 when the first series of revenue bonds were sold to 944 budgeted positions in 2012, a 10.8 percent increase during the nine year period. The current authorized staffing level for wastewater operations is expected to remain relatively stable through fiscal year 2016. Current staffing levels are able to meet operating requirements, with about 95 percent of all authorized positions filled. • The District is able to quickly and efficiently procure the services of qualified engineering, architectural, and survey consultants as needed due to an effective consultant procurement process. • Strategic planning efforts are annually conducted by the District to align the District’s vision, mission and values with specific strategies necessary to accomplish the District’s goals. The District outlines these strategies each year in a Strategic Business and Operating Plan. The current strategic business plan covers fiscal years 2012 through 2016. Wastewater System Financing • The District has developed a detailed CIRP required to meet regulatory requirements, maintain the integrity of the System, and continue to address water quality issues. During the six-year study period, the District plans to spend approximately $1.3 billion on major capital improvements to the System. • As shown in Table 3 of the report, capital program requirements are projected to be funded from a combination of available funds on hand, senior and subordinate revenue bond proceeds, annual operating revenues, grants, and interest income. Approximately 76.5 percent of total major capital improvement expenditures are anticipated to be debt financed, with about 22.3 percent of improvements financed directly from operating revenues and the drawdown of available fund balances. The remaining 1.2 percent of major capital improvements are anticipated to be financed by contributions and interest earned on construction funds. • The average number of wastewater customers served by the District is approximately. 424,200. Modest decreases in the number of customers are projected for the study period based on analysis of past growth trends. Page 4 November 17, 2011 D-4 • District revenue is derived principally from charges for wastewater service. The existing schedule of wastewater rates has been in effect since July 1, 2011. The Board adopted these wastewater rates on January 14, 2010 by Ordinance 13021. In addition, a new rate proposal was submitted to the Rate Commission on May 10, 2011 that proposed new wastewater rates for fiscal years 2013 through 2016. The Rate Commission completed its review of the proposed rate changes and submitted its Rate Recommendations Report to the Board on October 17, 2011. The Rate Commission is recommending lower rates than proposed by the District. The lower rates are due to four recommended revisions to the May 10, 2011 rate change proposal. These revisions include: (1) financing capital improvements on a cash basis instead of an appropriations basis; (2) restructuring proposed debt service during the four- year study period to reflect interest only payments; (3) recognition of the District’s recent switch from a defined benefits to a defined contribution pension plan; and (4) holding increases in operation and maintenance expenses to three percent per year or less by lowering projected increases in wages, salaries, and overtime. The tables in this report are based on the May 2011 report and include the Rate Commission’s proposed recommendations to the Board. • The District has four senior revenue bond issues and nine subordinate series of revenue bonds issued under the state’s revolving fund (“SRF”) loan program currently outstanding. Issuance of this debt will fully utilize the total revenue bond authorization approved by the voters of the District at elections held on February 3, 2004 ($500 million) and August 5, 2008 ($275 million). • A summary of the project categories financed by the 2004 and 2008 bond authorizations utilized to date is summarized in the adjoining table. • Proceeds of the Series 2011B Bonds will be used to construct additional disinfection facilities at the Bissell Point, Lemay and Coldwater Creek wastewater treatment plants. The Series 2011B Bonds will use the remainder of the 2008 bond authorization. • The Master Bond Ordinance adopted by the Board on April 22, 2004, as supplemented and amended by ordinances adopted Use of Bond Authorizations Project Category Amount 2004 Bond Authorization $millions Lower Meramec Treatment Plant 177 Coldwater Creek Treatment Plant Improvements 61 Missouri River Plant Rehab & Improvements 52 Grand Glaize Plant Improvements 35 Other Treatment Plant Projects 24 CSO/SSO Collection System Improvements 80 Cityshed Capacity 7 Contingencies and Costs of Issuance 3 Bond Reserve for Series 2004A Bonds 21 Lemay WWTP Improvements 40 Total 2004 Authorization Ut ilized 500 2008 Bond Authorization Lemay WWTP Improvements 62 Missouri River WWTP Improvements 50 Missouri River Disinfection Facilities 40 Bissell Point WWTP Improvements 7 CSO/SSO Collection System Improvements 57 Cityshed Capacity 7 Total 2008 Authorization Ut ilized 223 WWTP - Wastewater Treatment Plant CSO/SSO - Combined Sewer Overflow/Sanitary Sewer Overflow Page 5 November 17, 2011 D-5 by the Board for each bond issue, including the ordinance expected to be adopted by the Board for the proposed Series 2011B Bonds (collectively, the “Bond Ordinance”) establishes covenants between the District and bondholders and various terms and conditions related to the Bonds. • The cash flow analysis of projected wastewater utility revenue and revenue requirements presented in Table 11 of the report shows that projected revenues, including projected revenue increases, will produce sufficient revenues to adequately operate and maintain the System, provide debt service coverage in excess of the requirements of the Bond Ordinance and continue full funding of the CIRP. • Based on the financial projections and analyses presented in the report, it is our opinion that the District will be able to adequately finance the CIRP, meet all known cash requirements of the System, and comply with all Bond Ordinance requirements during the six-year study period. Bond Covenant Compliance • The existing wastewater charges and proposed wastewater charges for fiscal years 2013 through 2016, currently under consideration by the Board, will allow the District to issue additional revenue bonds within the study period, as currently anticipated, and make needed improvements and replacements of the System. • Indicated debt service coverage levels are above the minimum Bond Ordinance requirements and the District is currently in compliance with all other bond covenants. Recent Events Impacting Debt Service Coverage • The District has prepared segmented financial statements for its respective wastewater and stormwater utilities. The recently completed financial statements for fiscal year 2011 primarily reflects a reclassification of CIRP costs as operation and maintenance expenses from those presented in the May 10, 2011 rate proposal and reviewed by the Rate Commission. This reclassification does not impact the rates developed in this report in support of the Rate Commission’s recommendations since the level of revenue previously expected to be used to cash finance part of the CIRP is larger than the reclassified operation and maintenance expense annual amounts. Although this reclassification has a negative impact on annual debt service coverage, rate covenant and additional bond related debt service coverage remains above the required debt service levels. Conclusion • Based on the financial study performed by Black & Veatch related to the System, we believe that the District’s organizational structure, planned CIRP, and financing plans are sound for purposes of supporting the pending Series 2011B Bonds and subsequent bonds required to support the full implementation of the CIRP for the 2012 through 2016 fiscal years. Page 6 November 17, 2011 D-6 The summary statements presented in this letter do not address all of the issues examined and described in the full report. Accordingly, the findings and conclusions presented herein should not be considered complete except in the context of the detailed descriptions and information contained in the report. We appreciate the opportunity to be of service to the District in this important matter. Very truly yours, BLACK & VEATCH CORPORATION Keith D. Barber, P.E. Principal Consultant KDB Enclosure Metropolitan St. Louis Sewer District Contents D-7 Contents Page Introduction ............................................................................................................................. 10 Background ......................................................................................................................... 11 Purpose ................................................................................................................................ 12 Scope ................................................................................................................................... 12 Black & Veatch Qualifications ........................................................................................... 13 Institutional Framework .......................................................................................................... 14 Enabling Legislation ........................................................................................................... 14 Organization ........................................................................................................................ 15 Board of Trustees ............................................................................................................ 16 Rate Commission ............................................................................................................ 16 Civil Service Commission .............................................................................................. 17 Internal Auditor ............................................................................................................... 17 Secretary-Treasurer ......................................................................................................... 18 Executive Director .......................................................................................................... 18 General Counsel .............................................................................................................. 19 Human Resources ........................................................................................................... 20 Finance ............................................................................................................................ 20 Information Systems ....................................................................................................... 21 Engineering ..................................................................................................................... 22 Operations ....................................................................................................................... 23 Peak Performance Awards .............................................................................................. 23 Staffing ................................................................................................................................ 24 Contractors ...................................................................................................................... 26 Consultant Procurement Process ..................................................................................... 26 Strategic Business Plan ....................................................................................................... 27 Wastewater System Financing ................................................................................................ 29 Program Planning ............................................................................................................... 29 Capital Improvement and Replacement Program ............................................................... 30 Bond Financed Projects .................................................................................................. 33 CIRP Financing ................................................................................................................... 34 Wastewater Service Charges .............................................................................................. 37 General Service Charges ................................................................................................. 37 Metropolitan St. Louis Sewer District Contents D-8 Low Income Charges ...................................................................................................... 39 Other Charges and Fees .................................................................................................. 39 Rate Setting Process ........................................................................................................ 40 Revenues ............................................................................................................................. 42 Customer Growth ............................................................................................................ 42 Wastewater Volumes ...................................................................................................... 44 Wastewater Revenues Under Existing Rates .................................................................. 46 Other Operating Revenues .............................................................................................. 46 Revenue Requirements ....................................................................................................... 48 Operation and Maintenance Expense .............................................................................. 49 Routine Capital Improvements ....................................................................................... 51 Cash Financing of Capital Improvements ....................................................................... 51 Debt Service .................................................................................................................... 51 Operating Reserve Allowance ........................................................................................ 52 Financial Analysis ............................................................................................................... 52 Wastewater Bill Comparison .............................................................................................. 56 Bond Covenant Compliance ................................................................................................... 60 Rate Covenants ................................................................................................................... 60 Reasonable Charges ............................................................................................................ 60 Adequate Maintenance ....................................................................................................... 61 Additional Bonds Coverage Tests ...................................................................................... 61 Recent Events Impacting Debt Service Coverage .................................................................. 64 Impact of Recent Adjustments ............................................................................................ 65 Principal Black & Veatch Assumptions ................................................................................. 69 Metropolitan St. Louis Sewer District Contents D-9 Contents (Continued) List of Tables Page Table 1 Historic Staffing Levels ...................................................................................25 Table 2 Capital Improvement and Replacement Program ............................................32 Table 3 Capital Improvement Program Financing ........................................................35 Table 4 Historic District-Wide User Charges ...............................................................38 Table 5 Historical and Projected Customer Accounts ..................................................43 Table 6 Historical and Projected Contributed Wastewater Volume .............................45 Table 7 Historical and Projected Billed Wastewater Service Revenue ........................47 Table 8 Projected Other Wastewater Operating Revenue ............................................48 Table 9 Projected Wastewater Operating Costs ............................................................50 Table 10 Projected Debt Service Requirements .............................................................53 Table 11 Comparison of Projected Wastewater Revenue with Projected Revenue Requirements ....................................................................................54 Table 12 Typical Bill Comparison ..................................................................................57 Table 13 Survey of Typical Monthly Wastewater Bills – 50 Largest Cities ..................59 Table 14 Debt Service Coverage Under Indicated Revenue Levels ...............................63 Table 15 Segmented Financial Statement Adjustments ..................................................64 Table 3A Capital Improvement Program Financing ........................................................66 Table 11A Comparison of Projected Wastewater Revenue with Projected Revenue Requirements ....................................................................................67 Table 14A Debt Service Coverage Under Indicated Revenue Levels ...............................68 Metropolitan St. Louis Sewer District Introduction D-10 Report on the Financial Feasibility of The Metropolitan St. Louis Sewer District Wastewater System Revenue Bonds, Series 2011B Introduction The Metropolitan St. Louis Sewer District (“District”) is responsible for providing wastewater and stormwater services for the City of St. Louis, Missouri (“City”) and most of St. Louis County, Missouri (“County”). In order to continue to improve and expand its wastewater system (“System”) and keep the System in compliance with state and federal regulations, the District has developed a major capital improvement and replacement program (“CIRP”). To provide for equitable recovery of capital financing costs from existing and future wastewater customers, the District plans to partially finance System improvements by the issuance of long-term debt. The remainder of the funds required to finance the CIRP will be obtained from annual operating revenues, interest income, grants and contributions, and funds on hand. The District is governed by a Board of Trustees (“Board”), which is comprised of six members, three of whom are appointed by the Mayor of the City and three of whom are appointed by the County Executive of the County. The Board enacts ordinances, adopts annual budgets and determines District policies. The Board also appoints the Executive Director, the Secretary-Treasurer, the Internal Auditor and various organizations that serve staggered terms on the Rate Commission. The Executive Director appoints the General Counsel and the directors of the five operating departments. Revenue bonds are issued pursuant to the District’s Charter, which was approved by the voters of the City and the County at a special election held on February 4, 1954 (“1954 Plan” or “Plan”) and amended at a special election held on November 7, 2000 (“Charter”). Assent of the majority of voters voting at the initial bond authorization election held on February 3, 2004 authorized the District to issue up to $500 million of wastewater revenue bonds. A second authorization was approved by the majority of voters on August 5, 2008, which authorized the District to issue up to $275 million of additional wastewater revenue bonds. A third authorization of up to $945 million is expected to be placed before the voters in February 2012. All bonds are issued under the provisions of the Master Bond Ordinance adopted by the Board on April 22, 2004, as supplemented and amended by ordinances adopted by the Board for each bond issue including, the ordinance expected to be adopted by Metropolitan St. Louis Sewer District Introduction D-11 the Board on December 8, 2011 (collectively, the “Bond Ordinance”) for the proposed Wastewater System Revenue Bonds, Series 2011B (“Series 2011B Bonds”). Background The District was created under the provisions of Section 30 of Article VI of the Missouri Constitution. This section empowered the people of the City and the County “to establish a metropolitan district or districts for the functional administration of services common to the area included therein” based on their approval of a plan submitted to them by Members of the Board of Freeholders. The District is the only special district in Missouri created under these provisions. To enable the District to sell revenue bonds on a district-wide basis, and update other key provisions of the 1954 Plan, the Board submitted four propositions to the voters in November 2000. All four propositions passed, with three of the propositions receiving more than 70 percent of the popular vote. Several additional key changes to the 1954 Plan also affect the District’s capital improvement and financial planning process. These key revisions: • Established a requirement to annually develop and adopt a continuing five-year Strategic and Operating Plan for the District. • Lowered the vote required to pass revenue bonds from four-sevenths to a simple majority and changed the vote required for passage of general obligation bonds from two-thirds to the requirement currently specified by Article VI, Section 26(b) of the Missouri Constitution, which is a four-sevenths majority at primary or general elections and two-thirds majority at all other elections. • Allow the issuance of revenue bonds through a negotiated sale process. • Established an independent Rate Commission charged with the responsibilities to review and make recommendations to the Board regarding all proposed changes in wastewater and stormwater rates. • Provide the ability to invest funds in the same manner permitted by the State of Missouri and other Missouri public bodies. • Require that a management audit be conducted every five years by a nationally recognized management consulting firm. • Require a mandatory rotation of auditors every five years and formally established the Internal Auditor position. • Provide for the appointment of a Plan Amendment Commission every ten years to review and recommend potential amendments to the Charter. Other Charter revisions set a maximum two term (8 years) limit on the Trustees and Civil Service Commission appointments, require the publication of Board vacancies, and Metropolitan St. Louis Sewer District Introduction D-12 require the Board to make a written report to the Mayor and Board of Aldermen of the City and to the County Executive and County Council of the County on an annual basis. A Plan Amendment Commission was formed in July 2009 pursuant to Charter requirements to discuss and draft recommendations for possible additional amendments to the Charter. The Commission and supporting District staff met regularly through May 2010 and sought and reviewed comments from stakeholders. The Commission’s recommendations and stakeholder comments are presented in the 2010 Plan Amendment Commission Report and Recommendations document submitted on May 27, 2010. All recommendations presented in the Commission report that were approved by eight or more members are currently being considered by the Board. If the Board determines that the recommended revisions are necessary and beneficial, those revisions will be presented to registered voters for their consideration and possible approval by a majority vote. Purpose The purpose of this report is to summarize findings of the financial study performed by Black & Veatch related to the System and independently assesses the financial feasibility of the District’s proposed issuance of the Series 2011B Bonds. This report addresses financial issues that affect the operation of the System and the District’s ability to issue and repay wastewater revenue bonds. Scope This report addresses the organization and management of the District. Also included are the results of analyses related to existing and future financial requirements of the System based on a review of financial reports, ordinances, budgets and other information. Information from these documents was supplemented through meetings and conversations with key District representatives. Projections of revenue and revenue requirements of the System are shown in this report for a study period that includes fiscal years 20111 through 2016. Evaluation of the financial feasibility of the proposed Series 2011B Bonds is based upon a review of historical financial information provided by the District, an examination of revenue and expenditure projections by District staff and Black & Veatch, and the preparation of cash flow analyses examining projected System operation and capital programming financing through fiscal year 2016. The level of debt service coverage for the 1 Tables presented in this report were developed prior to the end of fiscal year 2011 as part of the rate proposal submitted to the Rate Commission on May 10, 2011. Projections for fiscal years 2013 through 2016 were based on the District’s fiscal year 2011 budget and used to set proposed wastewater rates. Therefore, the projection period used in this report also begins with fiscal year 2011 to be consistent with information provided to the Rate Commission. Metropolitan St. Louis Sewer District Introduction D-13 proposed Series 2011B Bonds and subsequent bonds issued through fiscal year 2016 is determined and compared with requirements of the Bond Ordinance. Black & Veatch Qualifications Black & Veatch is one of the largest and most experienced firms of consulting engineers specializing in utility engineering and has extensive experience in the planning, design, and operation analysis of wastewater systems. In addition, the firm has extensive experience in assisting utilities with management and financial aspects of their operations. The firm has been engaged in various assignments for thousands of clients, including municipally-owned utilities ranging in size from small villages to large metropolitan regions; investor-owned utilities; industrial and commercial businesses; and agencies of the U.S. Government. Over the past 40 years, Black & Veatch has provided numerous planning, design, and financial services for the District. The financial, organization, and management reviews have been performed by personnel from Black & Veatch Management Consulting, which provides specialized services in such areas as utility rate studies, revenue bond feasibility studies, best practice studies, organizational strengthening studies, and other management related services. Black & Veatch Management Consulting has assisted the District with its wastewater rates and other financial matters on a continuous basis since 1975. This includes prior revenue bond feasibility work related to the successful first issuance of district-wide revenue bonds in April 2004 and development of the District’s existing and currently proposed wastewater rates. Metropolitan St. Louis Sewer District Institutional Framework D-14 Institutional Framework The institutional framework of the District’s wastewater utility operation provides the basis and direction under which the System is operated, maintained, improved, and expanded. Such framework includes the District’s enabling legislation, organization, staffing, and means of retaining assistance for the design and construction of major capital improvements. Enabling Legislation The District was established under the provisions of Section 30 of Article VI of the Constitution of Missouri. This section states that the “people of the city of St. Louis and the people of the county of St. Louis shall have power…to establish a metropolitan district or districts for the functional administration of services common to the area included therein….” This section also provided specific procedures for a nineteen member Board of Freeholders to draft a plan under which the District would be formed and operated for consideration by qualified voters within the affected region. At a special election held on February 9, 1954, the voters approved the proposed Plan. Section 30(b) of Article VI of the Missouri Constitution provides that upon adoption of the Plan, it “shall become the organic law of the territory therein defined, and shall take the place of and supersede all laws, charter provisions and ordinances inconsistent therewith relating to said territory.” The 1954 Plan was challenged in 1955 and found to be constitutional by the Missouri Supreme Court (State on Inf. Dalton v. Metropolitan St. Louis Sewer District, 275 S.W.2d 225). This case also defined “functional administration” to mean the administration of such services so as to make them function properly for the purposes for which they were intended. Amendments to the Plan were approved by voters at a special election held on November 7, 2000. The revised Plan or Charter defines the District as “a body corporate, a municipal corporation, and a political subdivision of the state, with power to adopt, use, and alter at its pleasure a corporate seal, sue and be sued, contract and be contracted with, and in other ways to act as a public corporation within the purview of this Plan, and shall have the powers, duties, and functions as herein prescribed” (Charter Section 1.010). Additional amendments recommended by a Plan Amendment Commission in May 2010 have been submitted to the Board pursuant to the requirements of the Charter. Any recommendations approved by the Board must be submitted to the voters at a future election. However, the Board is also considering various options that balance the cost of an election with the benefits gained by making the recommended Charter changes. At this time no decision has been reached on whether or not the District will seek a Charter change election. Metropolitan St. Louis Sewer District Institutional Framework D-15 Organization Figure 1 presents an organization chart of the District. As indicated, the District is managed by a Board of Trustees. The Board appoints community organizations to serve on the Rate Commission, the three-member Civil Service Commission, Internal Auditor, Secretary-Treasurer, and Executive Director. The Executive Director appoints the General Counsel and the directors of the five operating departments. Figure 1 Metropolitan St. Louis Sewer District Organization Chart Board of Trustees Executive Director Human Resources Finance Information Systems Engineering Operations Employment and Accounting ES Retooling Design Mintert Yard Classification Purchasing Business Integration Planning Grand Glaize Yard Training Accounts Receivable Application Services Construction Sulphur Yard & Employee Benefits Technical Services Management Garage/Shops Diversity Environmental Pump Stations & Risk M anagement Compliance Technical Services Lemay Treatment Bissell Point Treat. County Treatment Support Services Secretary-Treasurer Civil Service Commission General Counsel Internal Auditor Rate Commission Metropolitan St. Louis Sewer District Institutional Framework D-16 Board of Trustees The Board is composed of six members, three of whom are appointed by the Mayor of the City and three of whom are appointed by the County Executive of the County. Each Trustee is appointed for a four year term and may not serve more than two consecutive terms. Also, no more than two Trustees appointed by the City or County can be affiliated with the same political party. Trustees must be registered voters, have lived in their representative areas for at least three years, and continue to reside in their respective areas for the tenure of their office. A Trustee can not hold “an office of profit under the United States or any state or local government” with the exception of serving in an organized militia, reserve corps, or as a public notary. They must not “have been convicted of a felony, malfeasance in office, bribery, or other corrupt practice, or of a misdemeanor involving moral turpitude” (Charter Section 5.020). The Board enacts ordinances, adopts annual budgets, and determines District policies. A majority of both City and County Trustees is required to approve an ordinance. Members appoint a chair and vice-chair to manage Board meetings, with these positions alternating between the City and County representatives every two years. Board members chair one of five standing Board committees. These committees include Audit, Finance, Program Management, Pension and Stakeholder Relations. Each committee is allowed to have citizen advisors that can serve one year terms if approved by the Board and continue to serve up to three years with annual Board approval. The Board conducts its business under rules and procedures periodically adopted by resolution. The current rules were adopted by Resolution 2941 on November 10, 2010. Rate Commission The Charter provides for the formation of an independent Rate Commission “to review and make recommendations to the Board regarding all proposed changes in wastewater rates, stormwater rates and tax rates or change in the structure of any of the foregoing” (Charter Section 7.040). Organizations are selected to provide a diverse mixture of residential customers, commercial and industrial customers, environmental interests, labor interests, community and neighborhood organizations, and nonprofit organizations. Each Rate Commission member serves a six-year staggered term that allows re-appointment or replacement of five members of the Rate Commission every two years. The Rate Commission performs its duties under a set of Operational Rules, Regulations, and Procedures, as amended. These rules were most recently amended by the Rate Commission on March 7, 2011. Metropolitan St. Louis Sewer District Institutional Framework D-17 Civil Service Commission Section 8.020 of the Charter requires the Board to appoint a three member Civil Service Commission. The qualifications for these members are the same as those for the Board plus members must be “persons who are known to be in sympathy with the application of merit principles to public employment” (Charter Section 8.020). The duties of the Civil Service Commission include: (1) advising the Board, Executive Director, and Human Resources Director on problems concerning personnel administration; (2) reporting to the Board at least once a year concerning personnel administration matters; (3) recommending civil service rules to the Board; (4) hearing appeals from disciplinary actions; and (5) fostering the improvement of personnel standards and conditions in the District. Internal Auditor The Internal Auditor is the auditing officer of the District as provided by Section 7.030 of the Charter. This position is appointed directly by the Board and may be held by either an individual or a firm of Certified Public Accountants if such firm has no personal or financial interest in District affairs or have any material financial relationship with any Trustee or any officer of the District. The Internal Auditor must have at least ten years experience in accounting. The duties of the Internal Auditor include: (1) review and recommend periodic changes to the District’s accounting system; (2) audit the accounts and records of accountable officers and employees of the District; (3) investigate matters relating to the receipt, disbursement and application of public funds; (4) perform investigations and create reports on fiscal matters required by the Board; (5) perform periodic operational audits and recommend potential changes to the Board; (6) evaluate compliance with District policies, ordinances, Charter, and third party agreements; (7) examine District staff and others as required to complete an investigation; and (8) perform such other duties as may be required by the Board. On August 11, 2011, the Board of Trustees adopted Ordinances 13290 and 13291 which authorized the District to enter into contracts with two accounting firms: (1) Deloitte & Touche, LLP; and (2) Brown, Smith, Wallace, LLC. The current contracts provide for internal auditing services to be controlled by an Internal Audit Administrator retained by the District and have one-year terms that expire in August 2012. This arrangement allows the District to provide independent audit services at lower costs than potential full-time in-house services while receiving required specialized audit skills of the respective firms. The Mission of the Internal Auditor is to provide independent, objective assurance and consulting services designed to add value and improve the operations of the District. The Department assists the Board and the Executive Director in accomplishing their oversight responsibilities by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, internal control, and governance processes. Metropolitan St. Louis Sewer District Institutional Framework D-18 Secretary-Treasurer Section 7.020 of the Charter requires the Board to appoint a Secretary-Treasurer who “shall have at least ten years experience in the management and investment of public funds, and have knowledge of banking operations and municipal accounting.” The duties of this position include: (1) maintain a journal of Board proceedings and all ordinances, resolutions, regulations, rules, and orders; (2) make daily deposits of District revenues; (3) invest available District funds; (4) pay money out of the treasury on warrants drawn by the Executive Director or Finance Director; (5) appoint and remove any employees provided for his/her office, subject to personnel provisions; (6) foster the improvement of personnel standards and conditions in the District; and (7) perform such other duties as are required by the Board. The department is organized and operated by the following four functions: (1) Secretary, to maintain all records of the District; (2) Treasurer, to handle and invest the available funds of the District; (3) Audit, to serve as the administrative coordinator for an independent audit of the District’s financial records; and (4) Elections, to assure that the relevant issues are placed on the ballot in an appropriate and timely fashion and monitor District funds used by the Board of Election Commissioners. The District approved its investment policy (as required by Ordinance 10908) on February 8, 2001 through Resolution 2389. It was also formally certified by the Association of Public Treasurers of the United States and Canada in July 2005. Such certification acknowledges that the District’s investment policy has met all of the Association’s critical elements such as liquidity; selection and review of suitable investment instruments; internal controls; reporting; portfolio diversification; custody and safekeeping; selection of investment institution criteria; ethics; and conflicts of interest. Executive Director The Executive Director is “the chief executive and administrative officer of the District and all subdistricts” and is “responsible to the Board for the proper administration of all affairs of the District and all subdistricts” (Charter Section 6.010). To qualify for this position, a person must be a registered professional engineer, possess technical or specialized skill or knowledge in the field of engineering, and have at least ten years of practical experience as an engineer with at least five years in a responsible The Mission of the Executive Director is to ensure that all affairs of the District are in accordance with the Charter of the District and the policies of the Board of Trustees and to inform and engage the stakeholders regarding the services they receive from the District and the District’s importance to the community. The Mission of the Secretary-Treasurer is to serve as the Secretary to the Board of Trustee, manage District funds, provide administrative support and oversight to the Audit function, and provide services to all customers. Metropolitan St. Louis Sewer District Institutional Framework D-19 administrative and executive capacity.2 The duties of the Executive Director include: (1) appoint and, when necessary, remove all officers and employees of the District, except as otherwise provided by the Charter or delegated to department heads; (2) prepare and submit an annual budget to the Board; (3) prepare and submit an annual report of the finances and administrative activities of the District to the Board; (4) advise the Board of the District’s financial condition and make recommendations concerning future needs; (5) attend all Board meetings and, in so far as possible, its committee meetings; (6) enforce all District ordinances and see that all contracts are faithfully performed; (7) foster the improvement of personnel standards and conditions in the District; and (8) perform such other duties as may be prescribed by the Charter or required by the Board which are not inconsistent with the Charter. This department is organized under two major functions: (1) District Administration, and (2) Public Information. The District Administration function is responsible for the administration of all affairs of the District in accordance with the Charter and as directed by the Board. Efforts to inform the District’s rate payers about the services they receive from the District and the District’s importance to the community is the responsibility of the Public Information function. General Counsel The General Counsel oversees all legal matters affecting the District including specialized matters that may require legal assistance from private law firms. This department has the following three major organizational functions: (1) Legal Administration; (2) Litigation and Claims; and (3) Collection Litigation. The Legal Administration function is responsible for all legal matters involving or affecting the District and provides legal services as required by the Board or Executive Director. It also has the responsibility of coordinating with federal, state, and local officials to secure additional support as required and informing public officials about the beneficial services provided by the District. The Litigation and Claims function handles all litigation and claims involving the District, and supervises outside counsel, if required. The Collection Litigation function assists the Finance Department in the collection of delinquent customer accounts and any other amounts due the District. 2 The 2010 Plan Amendment Commission has recommended that these requirements be revised to remove the registered professional engineer requirement. The recommended qualifications for this position require “at least ten years of progressive professional experience at a leadership level and an appropriate graduate degree or professional certification.” The Mission of the General Counsel is to handle all legal matters involving or affecting the District. The Department provides legal services and guidance as requested or required by the Board of Trustees, Executive Director and District staff. Metropolitan St. Louis Sewer District Institutional Framework D-20 Human Resources The Director of Human Resources supervises all personnel related issues. These issues are addressed by the five functional areas of Training; Employee Benefits; Employment and Classification; Diversity; and Risk Management. Training activities are designed to help achieve the District’s Strategic Business and Operating Plan by administering programs to improve employee performance. The Employee Benefits function administers and communicates employee benefit programs consistent with the Charter and ensures proper fiscal management of all benefit programs. Responsibilities of ensuring accurate job descriptions; job performance accountabilities and performance standards; employee recruitment; internal job posting and promotional opportunities; and consistent compensation practices are part of the Employment and Classification function. The Diversity function develops, recommends, implements, and administers policies, procedures and programs which advance the District’s commitment to inclusion in all of its activities and communicates these to internal personnel and others. This function also administers District policies and goals related to the inclusion of minority and women business owners in District contracts. The protection of the District’s assets from loss is the responsibility of the Risk Management function. Finance Section 7.010 of the Charter states that the Director of Finance “shall have charge of the administration of the financial affairs of the District and all subdistricts, subject to the supervision and direction of the Executive Director.” This section also requires the Finance Director to “have knowledge of municipal accounting and taxation and shall have had experience in budgeting and finance control.” The duties of the Director of Finance include: (1) assisting the Executive Director in the preparation of the annual operating and capital budgets; (2) maintaining the District’s financial records; (3) prescribing reimbursement documentation criteria; (4) certifying that sufficient funds are available before a contract is executed; (5) auditing and approving bills and other District expenditures prior to payment; (6) inspecting, supervising, and auditing all financial transactions; (7) contracting for, purchasing, storing, and distributing all supplies, materials, and equipment required by any department; and (8) performing such other duties as may be imposed by the Executive Director or by ordinance. The Mission of the Human Resources Department is to support a learning and business oriented culture based on accountability. This Department measures its success by customer’s satisfaction with performance in accomplishing mutual objectives. The Mission of the Finance Department is to manage the District’s costs and revenues to improve financial performance. Metropolitan St. Louis Sewer District Institutional Framework D-21 The Finance Department is organized into three functional areas: (1) Accounting; (2) Purchasing; and (3) Accounts Receivable, which also includes the District’s Customer Billing Call Center. The Accounting function ensures that District payments and receipts are properly authorized, recorded and reported in accordance with District policy and generally accepted accounting principles. It also prepares the District’s annual operating budget, debt service report, and the CIRP. The Purchasing function is responsible for contracting all of the supplies, materials, equipment, construction repairs, professional services, and improvement construction projects required by the District. It is also responsible for the timely disposal of all surplus property and equipment. The Account Receivable function generates monthly customer bills, collects District revenue and maintains an account receivable record for each of the District’s customers. This function also assists District customers with user charge billing and collection questions, and enforces user charge ordinances. Through the efforts of the Finance Department, the District has received the Distinguished Budget Presentation Award from the Government Finance Officer Association for its comprehensive annual budgets for the past 24 consecutive years and a Certificate of Achievement for Excellence in Financial Reporting for its Comprehensive Annual Financial Reports for the past 23 consecutive years. Information Systems The Director of Information Services is responsible for all computer related services and applications required by the District. The department is organized by the following three functions: (1) Business Integration; (2) Application Services; and (3) Technical Services. The primary function of the Business Integration function is to ensure that business and stakeholder needs are satisfied through enhancements to the District’s business application systems. This includes working with the business departments to review and improve business processes to better support stakeholders. The Application Services function provides technical support to all District users and maintains the District’s business application systems. This group develops new systems and also provides ongoing support for change to existing systems. The Technical Services function is responsible for managing the District’s information technology infrastructure, including servers, enterprise storage, desktop services, peripheral devices and telecommunications equipment. The Technical Services group manages and supports both the Local Area Network and the Wide Area Network and serves as the focal point for the evaluation, procurement, and installation of new technologies. The The Mission of the Information Systems Department is to lead the District in the implementation of business processes and information technology that will assist the District in providing the highest quality services in the most efficient and cost effective manner possible. The priority is placed on making it easier for residents, businesses and community agencies to “do business” with the District through improved business processes and the effective use of information technology. Metropolitan St. Louis Sewer District Institutional Framework D-22 Information Systems Department in partnership with the business departments has just recently implemented an enterprise initiative that replaced legacy business processes and applications with an enterprise resource planning (“ERP”) system. The new ERP system provides an integrated view of corporate data enabling the District to be more efficient in its operation. Engineering The Director of Engineering is responsible for the design, planning, and management of all of the District’s wastewater and stormwater capital improvement projects. This department is also responsible for all environmental compliance activities. The Director of Engineering is assisted by four Assistant Directors of Engineering that are each directly responsible for one of the following four functions: (1) Design; (2) Planning; (3) Construction Management; and (4) Environmental Compliance. The Design function consists of three groups that provide for preparation of construction bid documents and property rights acquisition for sanitary sewer, storm, and combined sewer projects to execute the District’s capital and infrastructure repair program and includes work performed in-house as well as by contracted consultant resources. Long and short-term planning for all sewer projects within the District is provided by the Planning function. This function evaluates, prioritizes and selects projects to be included in the CIRP and is responsible for infiltration/inflow investigations, mapping activities, regulatory coordination concerning overflow issues, evaluation of sewer system hydraulic models and management of engineering documents. This function also provides plan review and permitting of all private development involving sewers and drainage systems located within the District. Management, coordination and monitoring of the construction of all capital improvement projects is the responsibility of the Construction Management function. This includes project reviews, budget and schedule compliance monitoring, fee negotiation, contract management, and construction management and inspection. The responsibilities of the Environmental Compliance function include the monitoring of waters and wastewaters, analytical support for compliance programs and treatment plants, investigation of pollution sources, environmental compliance assessments of District facilities and pollution control programs, administration of programs designed to recover the cost of treating high-strength wastes from industrial and hauled waste customers, administration of the District’s Industrial Pretreatment Program, overseeing cleanup of collection system overflows, and implementing stormwater quality best management practices. The Mission of the Engineering Department is to responsibly deliver stormwater and wastewater facilities to protect the water environment. Metropolitan St. Louis Sewer District Institutional Framework D-23 Operations The Director of Operations is responsible for the day to day operation of all wastewater collection and treatment services provided by the District as well as all stormwater removal and pollution abatement services. The Director of Operations is assisted by an Assistant Director of Operations and seven Division Managers. Operations related services are organized into eight basic functions consisting of (1) Mintert Yard; (2) Grand Glaize Yard; (3) Sulfur Yard and Garage/Shops; (4) Lemay Treatment; (5) Bissell Point Treatment; (6) County Treatment; (7) Pump Stations and Technical Services; and (8) Support Services. The three regional maintenance yards are responsible for the sanitary, combined, and storm sewers within their designated service areas. The Garage and Shops Division provides for the maintenance, repair, and upkeep of the District’s vehicles, office buildings and grounds. It also operates machine shop, garage, and carpentry facilities. The three regional treatment control centers are responsible for treatment services provided in their respective service areas. The Pump Stations and Technical Services Division is responsible for all wastewater pumping across the District; the automated overflow regulation systems; flood wall pump stations and the flow monitoring group. The Support Services Division is responsible for the proper management of the Department’s spare parts inventory out of three warehouse hubs. It also supports all customer calls of a non-billing nature, provides administrative support to all treatment plants and maintenance yards, and tracks and reports on a variety of performance indicators. The Assistant Director of Operations has direct responsibility for operation of the garage facilities and also manages the Support Services Division. Each of the three regional treatment control centers, the pump station group and each of the three maintenance yards are supervised by one of the seven Division Managers. Peak Performance Awards The success of the District’s wastewater operations can be measured by its ability to consistently meet the requirements of its National Pollutant Discharge Elimination System (“NPDES”) permits. The District has been very successful in meeting its discharge requirements as recognized by the National Association of Clean Water Agencies (“NACWA”). NACWA has a three-tiered recognition system consisting of silver, gold and platinum awards. Silver awards recognize facilities that received no more than five NPDES permit violations over the past calendar year. Gold awards honor treatment plants that have achieved 100 percent compliance with their NPDES permit during an entire calendar year. The Mission of the Operations Department is to protect the public’s health, safety and water environment by effectively operating and maintaining the District’s wastewater and stormwater infrastructure. Metropolitan St. Louis Sewer District Institutional Framework D-24 The platinum award is only presented to treatment plant facilities that have achieved five- consecutive gold awards, which represent five-consecutive years of no NPDES permit violations. One of the District’s largest plants, Bissell Point, won this prestigious award in 2000 for full NPDES compliance during calendar years 1995 through 1999. The table below shows an 11-year history of the peak performance awards presented to the District. As indicated by this table, all of the District’s treatment plants earned awards for permit compliance during calendar years 2006 through 2010 and the Missouri River plant has a chance to earn a platinum award in 2011. Staffing Authorized staffing as of July 1, 2011 for the District is summarized in Table 1 by department and compared to prior levels since the first successful issuance of district-wide revenue bonds in fiscal year 2004. These levels include all personnel involved with the day to day operation of the District, including all stormwater operations. Of the 944 budgeted positions, 895 positions or approximately 95 percent are currently filled. About 84 percent of these full time equivalent positions are required for the operation and maintenance of the System with the remaining positions required for stormwater activities. All of the stormwater positions are in the Operations and Engineering departments with support from other departments. The District employs both union and nonunion employees. About 83 percent of the employees within the Operations Department are eligible to be represented by one of six unions consisting of the American Federation of State, County and Municipal Employees (AFSCME) No. 410; the Bricklayer’s Union No. 1; the International Association of Machinists (IAM) District 9; International Brotherhood of Electrical Workers (IBEW) No. 1; the International Union of Operating Engineers (IUOE) No. 513; and the Service Employees NACWA Peak Performance Awards Treatment Facility 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010________________________________________________ Bissell Point **P**GGS S GS S GS Lemay SSS SSSSSSG Coldwater Creek SS SGGSSSSG Missouri River GGS S GGS GGGG Grand Glaize GS S S GGS S S G Fenton S G S S GS S GGG Meramec Lagoon SSSGSSSSxxx Baumgartner SGGSSGxxx Lower Meramec WWTP (a)S GGG P - Platinum; G - Gold; S - Silver; x - Out of Service (a) Replaced Meramec and Baumgartner lagoons in 2008. Metropolitan St. Louis Sewer District Institutional Framework D-25 International Union (SEIU) No. 2000. About 52 percent of the employees within the Operations Department or 62 percent of those eligible for union membership are actual union members. Table 1 Historic Staffing Levels Since the first series of district-wide revenue bonds was issued, the District has increased staffing from 852 positions in 2004 to 944 positions in 2012, a 10.8 percent increase in a nine year period. Most of this increase was realized by the Operations Department as the District continues to actively address overflow problems in both the combined and sanitary sewer systems. The current authorized staffing level for wastewater operations is expected to remain relatively stable through fiscal year 2016. Table 1 Historic Staffing Levels Budget 2004 2006 2008 2010 2012________________________________________ Secretary-Treasurer 6 7 7 7 7 Internal Auditor 40000 Executive Director 6 5 4 4 4 General Counsel 8 8 7 7 7 Human Resources 24 25 25 25 27 Finance 6559667063 Information Systems (a)22 38 41 42 43 Engineering Planning & Design 118 108 125 131 125 Project Management 40 51 57 54 54 All Other (b) 5952494950____ ____ ____ ____ ____ Total 217 211 231 234 229 Operations Collection System (c)282 282 374 356 326 Pump Stations 45 42 40 61 62 Treatment Plants 173 180 174 175 176____ ____ ____ ____ ____ Total 500 504 588 592 564____ ____ ____ ____ ____ Total 852 857 969 981 944 (a) Includes computer operations, application development and network operations. (b) Includes operational support, compliance programs and technical services functions. (c) Includes Mintert, Sulphur and Grand Glaize maintenance yards; support services; and garage & shops functions. Metropolitan St. Louis Sewer District Institutional Framework D-26 Contractors To supplement and expand its existing staffing resources, the District enlists the aid of private companies and consultants on an as needed basis. Currently, the District has outstanding contracts for such services as billing and collection of user charges, collection of past due bills, legal, project management, claims management administration, public relations activities, internal auditing, consulting and various other professional services. To assist the District with the CIRP, a number of design and construction firms will be contracted. The District has established specific procedures to be used to retain private firms for such services. Consultant Procurement Process To enable the District to quickly and efficiently procure services of qualified engineering, architectural, and survey consultants, the District has established a procurement policy and related procedures. This policy was most recently updated on March 1, 2011. To qualify for the procurement procedure, a consultant must submit an annual Qualification Form and insurance certificate meeting District requirements that must be updated on an annual basis. These forms are used to create a pre-qualification list of consultants to be considered in the selection of firms to provide professional services. Each firm must have a full-time office within the District boundaries with a professional staff capable of producing architectural, surveying or engineering products; at least one professional engineer/architect/surveyor registered in the State of Missouri, and must provide verifiable documentation of experience in their area of expertise to be considered for the pre- qualification list. However, any prior poor performance could result in the District rescinding or denying prequalification of a previously qualified firm. The procedure used to select firms from the pre-qualification list for a project depends upon the estimated value of the project. For projects in which the total fee is estimated to be less than $500,000, two similar projects are selected for which proposals from three experienced consultants on the pre-qualified list are solicited. This approach virtually assures a response from all three qualified candidates due to a high probability of success. For projects that exceed $500,000, the District sends out requests for qualifications and will consider any pre-qualified consultant that expresses an interest in the project. A short list selection committee of senior Engineering and Operations staff and the Manager of Diversity Programs reviews the qualifications of each interested firm and prepares a short list of at least three consultants. These firms are then asked to submit a proposal which is evaluated by a selection committee composed of at least five senior Engineering and Operations staff that does not include any members from the short list selection committee Metropolitan St. Louis Sewer District Institutional Framework D-27 unless it is deemed necessary by the Executive Director. A point system is used to select a consultant, usually the one with the highest number of first place selections, and the winning consultant is then asked to submit a fee proposal. Contracts are negotiated to reasonably assure the best and fairest rates are obtained by the District for the services required. If a reasonable contract can not be negotiated, the District repeats the process with the next highest rated consultant. If no contract can be negotiated, the procurement process will be repeated with all new consultants. For unusual or unique projects, negotiations with qualified consultants, who do not have offices in St. Louis, may be undertaken after written justification by the Director of Engineering and approval by the Executive Director. In either of these two cases, a performance evaluation of the quality of professional services completed and ability to meet project schedules and budget is prepared by District staff. This evaluation is discussed with the consultant and filed for use in a future selection process. Strategic Business Plan Section 5.110 of the Charter requires the District to adopt a continuing five-year Strategic Business and Operating Plan or strategic business plan on an annual basis. The Strategic Business and Operating Plan must “state the District’s objectives for the succeeding five years and include objective targets by which to measure the District’s performance in meeting these objectives.” The objectives are achieved by various strategies consistent with overall goals established by the District. The first strategic business plan was completed in June 2001 and was based on priority initiatives recommended by an Advisory Committee composed of 50 individuals and groups from throughout the St. Louis community. The five initial goals lend support to the District’s capital improvement planning and financing plan and provide the foundation for the District to update and revise the Strategic Business and Operating Plan on an annual basis. The goals established in 2001 are listed below. Goal 1. To deliver effective and dependable wastewater and stormwater services to the citizens of the District. Goal 2. To earn the community’s trust, understanding, and support. Goal 3. To utilize the District’s resources appropriately and efficiently. Goal 4. To create a sustainable and effective organizational environment that is open, effective, and supportive of all employees and volunteers. Goal 5. To make the protection, beautification, and enhancement of the region’s water environment among the community’s highest priorities. Metropolitan St. Louis Sewer District Institutional Framework D-28 The updated Strategic Business and Operating Plan provides a broad look at where the District needs to focus its attention and resources over the next five years (fiscal years 2012 through 2016). It identifies four near-term goals compatible with the original goals and develops six business-focused strategies to achieve those goals. A set of specific objectives that support the six strategies required to achieve the goals of the Strategic Business and Operating Plan are delineated in the plan and segmented into applicable time frames for their completion. The near term goals for the fiscal year 2012 Strategic Business and Operating Plan are as follows: Goal 1. Deliver consistent, high quality customer service; Goal 2. Comply with all legal and regulatory requirements and schedules; Goal 3. Minimize customer rate increases; and Goal 4. Be accountable to the St. Louis Community. To achieve these goals, the fiscal year 2012 Strategic Business and Operating Plan proposes the following six business-focused strategies: Strategy 1. Educate and partner with stakeholders to build community support. Strategy 2. Manage the District’s costs and revenues to optimize financial impacts. Strategy 3. Integrate and improve the District’s business processes. Strategy 4. Promote appropriate regulatory standards through proactive government involvement. Strategy 5. Address customer service levels and needs, and regulatory requirements through a comprehensive asset management program. Strategy 6. Create a learning- and business-oriented culture based on competency and accountability. The annual Strategic Business and Operating Plan is a critical and invaluable document that provides the framework, the direction and the plan for success that the District’s various stakeholders require and expect. Metropolitan St. Louis Sewer District Wastewater System Financing D-29 Wastewater System Financing The general objectives of the District’s wastewater Capital Improvement and Replacement Program (“CIRP”) are to provide the facilities necessary to meet federal and state requirements, maintain the integrity of the system, and provide satisfactory levels of service and performance to customers. To accomplish these objectives, the District must have sufficient operating revenues and adequate funding for CIRP projects. The proceeds of the Series 2011B Bonds are to be used along with wastewater service charge revenues, grants, other revenues and available fund balances to meet the costs of the an ongoing $6.0 billion, 20-year CIRP that was initiated in fiscal year 2002. Program Planning The District is responsible for operating and maintaining an extensive system of sanitary, combined and stormwater sewers. The age of the sewers maintained by the District range from 150 years old to less than one year old. Over 311 miles of sewers predate 1890 and another 524 miles of sewers are more than 80 years old. The District operates and maintains 9,649 miles of sewers consisting of 4,741 miles of sanitary sewers, 1,928 miles of combined sewers, and 2,980 miles of stormwater sewers and improved channels. It also operates and maintains over 280 pumping stations and utilizes seven treatment facilities treating more than 330 million gallons of wastewater every day. This extensive collection, drainage, and treatment system required a comprehensive plan to prioritize and address the wastewater infrastructure needs that are present in the City and the County. With the possibility of over 2,300 CIRP projects to be constructed, the District embarked on a major program planning process to verify, evaluate and establish the priority of these capital projects. Due to the magnitude of the undertaking and relatively short time frame to complete the study, the District elected to utilize the services of consultants versed in facility planning and knowledgeable of regulatory requirements. A joint venture team was selected by the District in March 2001 to provide the required program planning services. The intensive planning effort was initiated in July 2001 and completed in September 2002. The District and joint venture consultants first developed a Program Planning Strategic Plan (“Strategic Plan”) to identify high-level goals and issues that help define the District’s CIRP. The Strategic Plan set forth these issues to accomplish the following objectives: • Keep critical issues and considerations in the forefront as the CIRP was developed. • Facilitate tracking and discussion of these issues so the CIRP is responsive to them. Metropolitan St. Louis Sewer District Wastewater System Financing D-30 • Facilitate senior level (Board and senior staff) review and input on issues affecting the CIRP. The Strategic Plan is intended to be a “living document” that will periodically be updated by the District’s senior management and refined as the program planning continues and as issues that impact the program evolve. Capital Improvement and Replacement Program The District reviews and modifies its wastewater system CIRP on an ongoing basis. Detailed wastewater system analyses are periodically conducted to identify and prioritize needed capital improvements. The most recent detailed CIRP plan was completed in September 2002 by the District and the joint venture team of Sverdrup, Kwame, and Metcalf & Eddy. This plan is being followed by the District with annual modifications as required to reflect current needs and priorities. In June of 2007, a lawsuit was filed by the Environmental Protection Agency (“EPA”) and the State of Missouri accusing the District of violating state and federal clean water statutes. The lawsuit alleges the District allowed polluted water to be dumped into waterways through “overflows”, sewer pipes that empty into rivers and act as relief valves when heavy rainfall clogs the system. Through court filings, the District has denied all allegations in the federal lawsuit. In the past 15 years, the District has spent approximately $2.0 billion on improvements to comply with the Clean Water Act. In July 2008, all parties to the lawsuit agreed to try to resolve the case out of court and hired a mediator. In June 2011, the District agreed in principle to sign a Consent Decree agreement with the EPA and the Coalition for the Environment, which intervened in the lawsuit, that commits it to spending $4.7 billion over a 23 year period. The State of Missouri did not agree to sign the Consent Decree in its present form. However, all parties, including the State of Missouri, have accepted language in an August 2011 motion stating that there are no remaining issues to be resolved in the proceedings. Major components of the Consent Decree are presented in the following text box. Table 2 presents a summary of the projected CIRP for fiscal years 2011 through 2016. These costs were obtained from the District’s supplemental budget documents and other data provided by District staff. The costs for projects benefiting special assessment districts are not included in Table 2 since they are fully funded by subdistrict tax revenues and thus do not impact the magnitude of the proposed bonds or required revenue increases. All costs shown in Table 2 include an inflation allowance of three percent per year. The proposed CIRP is primarily focused on collection system improvements projects that include an estimated $630.8 million to eliminate sanitary sewer overflows and $205.9 to reduce or eliminate combined sewer overflows. About $259.7 million is earmarked for Metropolitan St. Louis Sewer District Wastewater System Financing D-31 Source: Fact Sheet for Agenda Item No. 44 for June 9, 2011 Board meeting. Major Federal Consent Decree Components: 1. Schedule and Estimated Cost – The Consent Decree will have an implementation schedule of 23 years after the CSO Long Term Control Plan is approved by the State of Missouri. The District estimates the cost to comply with the Consent Decree to be $4.7 billion in 2011 dollars. 2. Early Elimination Projects – Requires the completion of sanitary sewer projects that will eliminate 50 specific constructed SSO Outfalls by December 31, 2012. 3. SSO Master Plan – Requires the submission of an SSO Master Plan that includes an extensive sewer system evaluation survey, hydraulic modeling, and capacity analysis of the sanitary sewer system. The SSO Master Plan will identify remedial measures and projects aimed at eliminating all constructed SSO Outfalls, known SSOs, treatment plant bypassing within the sanitary sewer system, and reducing building backups. This plan must be submitted by the District no later than December 31, 2013. 4. Remedial Measures – Requires the completion of the remedial measures and elimination projects identified in the SSO Master Plan in accordance with the schedule provided therein, which includes the removal of 85 percent of the constructed SSO Outfalls, and a goal of eliminating all other known SSOs by no later than December 31, 2023, and all remaining constructed SSO Outfalls by December 31, 2033. 5. CMOM Program – Requires the District continue its development and implementation of a Capacity, Management, Operations, and Maintenance (CMOM) program that includes detailed performance goals for the prioritization, cleaning, inspection, and rehabilitation of the entire sewer system. This program also includes continued implementation of the District’s Fats, Oils, and Grease (FOG) program, the development and implementation of a Private Inflow and Infiltration Reduction Program, Building Backup Response Plan, and a Non-Capacity Related SSO Response Plan. 6. Cityshed Mitigation Program – Requires the commitment of a regular annual program to mitigate the effects of wet weather surcharging and overland flooding of the combined sewer system, with an anticipated expenditure of $230 million over the life of the Consent Decree. 7. CSO Long Term Control Plan (LTCP) – Requires the construction and implementation of CSO control measures in accordance with the requirements and schedule set forth in the approved LTCP and Consent Decree. The projects in the LTCP will be completed 23 years after the LTCP is approved by the State of Missouri. 8. CSO Post Construction Monitoring Program – Requires the implementation of a Post Construction Monitoring Program to validate performance of completed CSO control measures as set forth in the approved LTCP and Consent Decree. 9. CSO Green Infrastructure Program – Includes the commitment of $100 million to implement a Green Infrastructure Program. This will include a five-year pilot program aimed at using green infrastructure to reduce stormwater and resulting CSO volumes. 10. Consent Decree Reporting – Requires significant and continuous detailed reporting and transparency on all activities identified above, as well as reporting progress in achieving the overall goals of the Consent Decree to eliminate and reduce sewer system overflows. The annual reports will be made available on the District’s website. 11. Supplemental Environmental Project (SEP) – To offset civil penalties, the District will spend $1.6 million dollars for a SEP program that will implement a sewer connection and septic tank closure program for low-income residents. This program must be completed within five years of the effective date of the Consent Decree. 12. Civil Penalty – Within 30 days of the effective date of the Consent Decree, the District will pay the United States $1,200,000 as a civil penalty. This penalty is consistent with public entities of similar size that have begun the process of addressing overflow issues. 13. Stipulated Penalties – The District will be subject to stipulated penalties if it fails to meet certain specified requirements outlined in the Consent Decree. 14. Coalition for the Environment – In settlement of the Coalition’s claim for costs of litigation, including attorneys’ fees, the District will pay $116,050 to be used to fund projects as determined by joint agreement between the District and the Coalition. The Consent Decree also requires the District to provide a copy of various documents and reports to the Coalition. D-32 Metropolitan St. Louis Sewer District Wastewater System Financing Table 2 Capital Improvement and Replacement Program Table 2Capital Improvement and Replacement ProgramFiscal Year Ending June 30, ____________________________________________________________No. Description2011 2012 2013 2014 2015 2016 Total__________________________________________________________________________________$$$$$$ $0Sanitary Sewer Overflow Control1 Design12,410,000 728,000 42,885,000 72,383,000 48,035,000 13,317,000 189,758,0002 Construction54,931,000 18,093,000 55,333,000 41,637,000 101,433,000 169,658,000 441,085,000_________________________________________________________3 Subtotal67,341,000 18,821,000 98,218,000 114,020,000 149,468,000 182,975,000 630,843,000Combined Sewer Overflow Control4 Design13,415,000 5,284,000 19,661,000 11,514,000 12,180,000 26,255,000 88,309,0005 Construction0 2,206,000 7,095,000 47,994,000 51,287,000 9,001,000 117,583,000_________________________________________________________6 Subtotal13,415,000 7,490,000 26,756,000 59,508,000 63,467,000 35,256,000 205,892,000System projects7 Cityshed Improvements6,283,0000 16,241,000 12,044,000 6,847,000 8,882,000 50,297,0008 Asset Management15,697,000 23,234,000 46,685,000 51,636,000 23,855,000 40,702,000 201,809,0009 Billing & Collection System00 3,111,000 4,473,00000 7,584,000_________________________________________________________10 Subtotal21,980,000 23,234,000 66,037,000 68,153,000 30,702,000 49,584,000 259,690,00011 Wastewater Treatment55,487,000 81,558,000 25,538,000 287,000 1,630,0000 164,500,000________ ________ ________ ________ ________ ________ _________ 12 Total 158,223,000 131,103,000 216,549,000 241,968,000 245,267,000 267,815,000 1,260,925,000Line Metropolitan St. Louis Sewer District Wastewater System Financing D-33 system improvements throughout the District that includes asset management and collection system improvements. Improvements related to existing treatment plants are expected to cost about $164.5 million during the five-year study period. Bond Financed Projects At special elections held on February 3, 2004 and August 5, 2008, District voters approved the issuance of $500 million and $275 million, respectively, of wastewater system revenue bonds. To provide assurances to its ratepayers that the revenue bonds authorized by the two elections would be properly expended on the most essential projects, such as those designed to bring the community into compliance with federal and state clean water laws and regulations, the Board adopted Resolution 2533 for the initial authorization and Resolutions 2808 and 2889 for the second authorization. These resolutions established a list of priority projects that would be financed by each revenue bond authorization. The resolutions also required quarterly progress reports and an independent audit of the projects by an outside accounting firm to be made available to the public. A summary of the 2004 and 2008 authorizations used to date is presented in the table below. Projects financed by the 2004 Authorization included improvements to the collection system to reduce or eliminate combined sewer overflows (“CSO”), sanitary sewer overflows (“SSO”) and basement backup problems as well as several improvements to the District’s wastewater treatment plants. The bond financed treatment plant improvements included $177 million applied toward the estimated $239 million total cost of constructing the new Lower Meramec River Wastewater Treatment Plant, $61 million to expand and improve the Coldwater Treatment Plant, $52 million to rehabilitate and improve the Missouri River Treatment Plant, $35 million to expand and improve the Grand Glaize Wastewater Treatment Plant, and $64 million for other Use of Bond Authorizations Project Category Amount 2004 Bond Authorization $millions Lower Meramec Treatment Plant 177 Coldwater Creek Treatment Plant Improvements 61 Missouri River Plant Rehab & Improvements 52 Grand Glaize Plant Improvements 35 Other Treatment Plant Projects 24 CSO/SSO Collection System Improvements 80 Cityshed Capacity 7 Contingencies and Costs of Issuance 3 Bond Reserve for Series 2004A Bonds 21 Lemay WWTP Improvements 40 Total 2004 Authorization Ut ilized 500 2008 Bond Authorization Lemay WWTP Improvements 62 Missouri River WWTP Improvements 50 Missouri River Disinfection Facilities 40 Bissell Point WWTP Improvements 7 CSO/SSO Collection System Improvements 57 Cityshed Capacity 7 Total 2008 Authorization Ut ilized 223 WWTP - Wastewater Treatment Plant CSO/SSO - Combined Sewer Overflow/Sanitary Sewer Overflow Metropolitan St. Louis Sewer District Wastewater System Financing D-34 treatment costs such as wet weather expansion of the Lemay Plant and increasing capacity at the Fenton Plant. Projects financed by the 2008 authorization also include improvements to the collection system to reduce or eliminate CSO and SSO overflows and basement backup problems as well as additional wastewater treatment plant improvements. Treatment plant improvements financed by the 2008 authorization include $62 million for aeration blower modifications, incinerator improvements and wet weather expansion at the Lemay plant and $50 million for secondary treatment expansion and additional disinfection facilities at the Missouri River Treatment Plant. Projects to be financed by the Series 2011B Bonds primarily include disinfection facilities at the Bissell Point, Lemay and Coldwater wastewater treatment plants as well as a wet weather storage tank at the Coldwater treatment plant. Other projects that could be partially financed by the Series 2011B Bonds include improvements at the Bissell Point and Lemay treatment plants and an infiltration/inflow reduction project. CIRP Financing Table 3 presents the proposed capital improvement financing plan and summarizes the projected source and application of funds over the six-year study period. This plan reflects the recommendations proposed by the Rate Commission and anticipates that proposed capital improvements will be financed from a combination of available funds on hand, bond proceeds, annual operating revenues, and interest income. A fiscal year 2011 beginning year balance of $92,977,300 in unencumbered capital funds is indicated to be available to assist in the financing plan as shown on Line 1 of Table 3. Revenue bond issues in the amounts of $52,250,000 in fiscal year 2012 $185,000,000 in fiscal year 2013, $215,000,000 in fiscal year 2014, $180,000,000 in fiscal year 2015 and $175,000,000 in fiscal year 2016 for a total of $807,250,000 are shown on Line 2 of Table 3. State revolving loan proceeds in the amounts of $37,000,000 in fiscal year 2011, $39,769,300 in fiscal year 2012, and $35,000,000 in fiscal years 2013 through 2016 for a total of $216,769,300 are projected and shown on Line 3 of Table 3. The revenue bonds and state revolving loan proceeds together total $1,024,019,300 and are expected to finance about 76.5 percent of the total six-year major capital improvement program costs (Line 8 of Table 3) net of issuance costs and funding of applicable bond reserve requirements. The amount of each debt issue is developed considering capital program needs, current policies, other sources of capital improvement program financing, and debt service coverage requirements related to the issuance of district-wide revenue bonds. Cash financing of capital improvements from annual revenues is expected to total $239,440,000 for the study period as indicated on Line 4 of Table 3. Included in this amount D-35 Metropolitan St. Louis Sewer District Wastewater System Financing Table 3 Capital Improvement Program Financing Table 3Capital Improvement Program FinancingFiscal Year Ending June 30,__________________________________________________________No Description2011 2012 2013 2014 2015 2016 Total__________________________________________________________________________________$$$$$$ $Source of Funds1 Beginning of Year Balance92,977,300 8,668,600 6,231,700 31,951,300 58,747,600 54,120,800 92,977,3002 Revenue Bond Proceeds0 52,250,000 185,000,000 215,000,000 180,000,000 175,000,000 807,250,0003 State Revolving Loan Proceeds 37,000,000 39,769,300 35,000,000 35,000,000 35,000,000 35,000,000 216,769,3004 Cash Financing of Construction 37,250,000 40,038,000 34,577,000 33,717,000 38,208,000 55,650,000 239,440,0005 Grants & Contributions (a)454,800 474,500 1,494,900 516,300 538,600 561,900 4,041,0006 Interest Income (b)2,768,900 1,998,100 1,189,200 1,593,500 1,541,100 1,421,600 10,512,400________________________________________________________________7 Total Funds Available170,451,000 143,198,500 263,492,800 317,778,100 314,035,300 321,754,300 1,370,990,000Application of Funds8 Major Capital Improvements158,223,000 131,103,000 216,549,000 241,968,000 245,267,000 267,815,000 1,260,925,0009 Improvement Fund Projects1,265,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 11,265,00010 Issuance Costs (c)552,200 990,000 2,817,500 3,237,500 2,747,500 2,677,500 13,022,20011 Revenue Bond Reserve Fund (d)1,742,200 2,873,800 10,175,000 11,825,000 9,900,000 9,625,000 46,141,000________________________________________________________________12 Total Application of Funds161,782,400 136,966,800 231,541,500 259,030,500 259,914,500 282,117,500 1,331,353,20013 End of Year Fund Balance8,668,600 6,231,700 31,951,300 58,747,600 54,120,800 39,636,800 39,636,800 (a) Includes anticipated contributions from the City of Arnold to reserve capacity in the Lower Meramec River Wastewater Treatment Plant. (b) Interest Income is estimated at 1% of the average of the beginning and end of year balances. (c) Issuance Costs are estimated at 1.40% of the issue amount for Revenue Bonds, 0.65% of the issue amount for SRF Loans, and $25,000 per issue for commercial paper. (d) The required balance in the Revenue Bond Reserve Fund is determined to be the maximum principal and interest payment on senior debt.Line Metropolitan St. Louis Sewer District Wastewater System Financing D-36 are the revenues derived from the district-wide connection fees that are used to finance the Improvement Fund projects shown on Line 9 of Table 3. The unencumbered beginning of fiscal year 2011 fund balance is expected to be reduced by $53,340,500 during the six-year study period. Pay-as-you-go cash financing and drawdown of available fund balances net of funds used for Improvement Fund projects is expected to provide about 22.3 percent of major capital improvement costs over the six-year study period. The District anticipates receiving contributions from the City of Arnold for a share of capacity in the Lower Meramec River Wastewater Treatment Plant. District staff estimates that this revenue will average about $506,800 per year for each year of the study period. These amounts together with a one million dollar grant are shown on Line 5 of Table 3. Interest income earned on invested capital improvement funds is also available to meet capital improvement expenditures. Interest earnings recognize an assumed 1.0 percent average annual interest rate on funds maintained in the construction account. Line 6 indicates the estimated interest income earned on capital improvement program balances and Line 7 shows the total of all funds available to finance the capital improvement program. Total revenues obtained by grants, contributions and interest income will provide the remaining 1.2 percent of major capital improvement costs for the six-year study period. The application of funds shows that about $1,260,925,000 in total major capital improvement expenditures is projected over the planning period, as previously summarized in Table 2. All of these projects are identified and tracked in the Sanitary Replacement Fund. In addition, about $11,265,000 of Improvement Fund projects will be constructed during the study period, as shown on Line 9 of Table 3. Line 10 of Table 3 shows the debt issuance costs associated with projected revenue bond issues. These costs are estimated to be 1.4 percent of the total principal amount for Senior Bonds (as defined in the Bond Ordinance) and 0.65 percent of total principal amount for SRF Bonds (as defined in the Bond Ordinance). Line 11 of Table 3 indicates the amount of revenue bond reserve payments required by the bond covenants to maintain a reserve fund equal to the least of (a) ten percent of the stated principal amount of the Senior Bonds, (b) the maximum principal and interest payment of all outstanding Senior Bonds, or (c) 125 percent of the average annual principal and interest requirement on the Senior Bonds. Interest earned on this reserve is credited to the Payment Account since the bond reserve is used as a source of security for debt service payments and may be used to make the last annual debt payment of each revenue bond issue. Although a cash funded debt service reserve is provided for in this analysis, it is not intended to preclude the option of satisfying a debt reserve requirement through the purchase of a surety bond or other credit facility, should the District find this to be a more attractive alternative. Metropolitan St. Louis Sewer District Wastewater System Financing D-37 Subsequent to the recent Rate Commission proceedings, certain CIRP costs were reclassified as operation and maintenance expenses. The impact of these recent adjustments on capital improvement financing, operations and debt service coverage is discussed in the Impact of Recent Adjustments section at the end of this report. Wastewater Service Charges Table 4 presents a summary of the district-wide charges imposed by the District since the beginning of fiscal year 2004. Rates adopted by the Board for fiscal years 2004, 2005 and 2006 were the first rates reviewed and recommended by the Rate Commission. Rates for fiscal year 2008 and three subsequent years were based on a pay-as-you-go financing plan and were recommended to the Board by the Rate Commission on August 13, 2007 as a result of the 2007 proceedings. Subsequent to the Board’s acceptance of the projected rate increases, concerns over their cumulative impact on residential bills arose from customer advocacy groups who did not participate in the 2007 Rate Commission proceedings. To respond to these concerns, a proposed Rate Change was submitted to the Rate Commission in January 2008 that advocated the use of $275 million in additional wastewater revenue bonds to lower wastewater rates from those that were previously recommended by the Rate Commission and introduced by the Board on October 11, 2007. As a result of the 2008 rate proceedings, the Rate Commission recommended and the Board accepted the lower wastewater rates proposed for fiscal years 2010, 2011, and 2012 with no increase in fiscal year 2009 contingent upon voter approval of the $275 million of additional revenue bond authorization. Since the additional bond authorization was approved by the District’s voters, the revised wastewater rates for fiscal years 2010, 2011 and 2012 have been implemented. The rates recommended by the Rate Commission for fiscal year 2013, if approved by the Board, will become effective on July 1, 2012 and are expected to increase user charge revenues by 7.5 percent. General Service Charges The current wastewater rates were adopted on January 14, 2010 and became effective on July 1, 2011. These rates are part of the third set of rates to go through the Rate Commission review procedures mandated by the Charter. The rates consist of a monthly base charge, a uniform volume charge, and extra strength surcharges for biochemical oxygen demand (“BOD”) in excess of 300 milligrams per liter (“mg/l”) or chemical oxygen demand (“COD”) in excess of 600 mg/l, and suspended solids (“SS”) in excess of 300 mg/l. The base charge includes a billing and collection charge component and system availability charge component that are applicable to all customer classes. A compliance charge is applied to non-residential customers, in addition to the base charge, to recover monitoring and pretreatment program related costs. Metropolitan St. Louis Sewer District Wastewater System Financing D-38 Table 4 Historic District-Wide User Charges Table 4 Historical District-Wide User Charges Fiscal Year Ending June 30,_________________________________________________ No. Type of Monthly Charge 2004 2005 2006 2008 2010 2011 2012___________________________________________________________________ (b) Ordinance 11553 11692 12019 12561 12754 13021 13021 Adopted Date 07/24/03 03/11/04 07/14/05 12/13/07 10/07/08 01/14/10 01/14/10 Effective Date 08/01/03 07/01/04 07/01/05 01/01/08 07/01/09 07/01/10 07/01/11 Base Charge - $/Bill 1 Billing & Collection Charge 0.85 0.85 0.85 2.30 2.30 2.60 2.65 2 System Availability Charge 5.30 6.45 7.05 8.40 8.60 8.80 9.20 ____________________________ 3 Total Base (Residential) Service Charge 6.15 7.30 7.90 10.70 10.90 11.40 11.85 4 Compliance Charge - $/Bill (a)11.80 12.15 12.55 27.40 29.65 30.85 31.95____________________________ 5 Total Nonresidential Service Charge 17.95 19.45 20.45 38.10 40.55 42.25 43.80 Volume Charge 6 Metered - $/Ccf 1.34 1.66 1.81 1.88 1.92 2.02 2.11 Unmetered - $/Bill 7 Each Room 0.88 1.08 1.18 1.23 1.25 1.32 1.36 8 Each Water Closet 3.28 4.04 4.42 4.59 4.69 4.93 5.15 9 Each Bath 2.74 3.37 3.69 3.83 3.91 4.11 4.30 10 Each Separate Shower 2.74 3.37 3.69 3.83 3.91 4.11 4.30 Extra Strength Surcharges - $/ton (b) 11 Suspended Solids over 300 mg/l 162.88 200.15 218.90 218.90 218.90 222.62 231.35 12 Biochemical Oxygen Demand over 300 mg/l 319.24 412.58 461.44 529.56 551.52 596.72 620.14 13 Chemical Oxygen Demand over 600 mg/l 159.62 206.29 230.72 264.78 275.76 298.36 310.07 Ccf - Hundred Cubic Feet mg/l - milligram per liter (a) Applicable only to non-residential customers. (b) Current rates as recommended by the Rate Commission and adopted by the Board of Trustees. These rates were previously adopted by Ordinance 12754 and reaffirmed by Ordinances 12905 and 13021. Line Metropolitan St. Louis Sewer District Wastewater System Financing D-39 Low Income Charges The first low-income rates were adopted by the Board in 1993 by Ordinance 9031, which was promulgated at the same time as the general service wastewater charges enacted by Ordinance 9029. Current District policy defines low income credit eligibility as residential customers with household income (for the previous calendar year) less than 150 percent of the most recent Health and Human Services poverty guidelines by household size and less than 175 percent for disabled individuals and seniors at least age 62. The District recently expanded the eligibility criteria to include multifamily residential customers residing in multifamily housing consisting of six units or less. The Water Quality Act of 1987 (Public Law 100-4) allows such consideration for low-income customers and states that: "A system of user charges which imposes a lower charge for low- income residential users (as defined by the Administrator) shall be deemed to be a user charge system meeting the requirements of clause (A) of this paragraph if the Administrator determines that such system was adopted after public notice and hearing.” Wastewater charges applicable to eligible low-income residential customers are set equal to 50 percent of those presented in Table 4 by District policy. The cost impact on a typical single family residential customer not eligible for low-income assistance and discharging 8 hundred cubic feet (“Ccf”) per month of wastewater is expected to be less than $0.05 per month in fiscal year 2013. This cost is expected to increase in subsequent years as the District more actively promotes this program and the number of qualified low-income customers increases. Other Charges and Fees In addition to the normal and excess strength wastewater service charges, the District also imposes a number of other charges to meet cost related to growth and system operations. The District imposes District-wide sewer system connection fees per Ordinance 9346 adopted in 1994. Under this system of capital recovery charges, new customers buy into the wastewater system so that they are on an equal equity basis with customers having similar service requirements. The current charge is based on a unit equity value of $2.96 per gallon of wastewater per day attributed to each new customer. For all single family customers, the sewer system connection fee is $1,072. For non-residential customers, the charge varies from $1,072 for customers served by a 5/8 or 3/4-inch water meter to $82,655 for customers served by a 10-inch water meter. Multifamily customers have the option to be billed on a flat $713 per unit basis or on the standard meter size basis. Metropolitan St. Louis Sewer District Wastewater System Financing D-40 A $0.08 per gallon charge for septage or other wastewater hauled to the Bissell Wastewater Treatment Plant is imposed on all permitted waste haulers that serve customers having septic tanks, cesspools, private treatment facilities, or customers otherwise not connected to the District’s sewer system per Ordinance 12716, adopted on August 14, 2008. Costs incurred for sampling and testing wastewater samples from industrial users are recovered by a system of wastewater monitoring fees. These fees are typically published in ordinances updating the wastewater service charges. A number of engineering and service fees are also applied to reimburse the District for various services such as plan review, construction permits, construction related inspections, machine taps, project bid fees, provision of blueprint and microfilm copies, and permitting pretreatment customers. Rate Setting Process Historically, wastewater rates have been based on cost of service principles and then presented to the Board for their consideration and final approval. This general rate setting process was significantly changed upon passage of the amendments to the Plan in November 2000, which required the formation of a Rate Commission and a much more detailed rate setting procedure based on five governing criteria. Wastewater rates are still determined based on cost of service principles recognized throughout the industry but now the District is required to submit a written rate change notice to the Board and Rate Commission to initiate a 120 to 165 day rate review process. The District must also submit direct testimony of all District witnesses and other rate setting documents within three business days after submission of the rate change notice. These documents will typically present the District’s case concerning how the proposed rate change meets the five governing criteria specified by Section 7.270 of the Charter. Specifically, the documents must present sufficient information to allow the Rate Commission to determine if the rate change and all portions thereof: 1) is consistent with constitutional, statutory or common law as amended from time to time; 2) enhances the District’s ability to provide adequate sewer and drainage systems and facilities, or related services; 3) is consistent with and not in violation of any covenant or provision relating to any outstanding bonds or indebtedness of the District; 4) does not impair the ability of the District to comply with applicable Federal or State laws or regulations as amended from time to time; and 5) imposes a fair and reasonable burden on all classes of ratepayers. Per Section 7.300(b) of the Charter, the Board is required to accept the Rate Commission report unless it finds that the report or any part thereof, violates any of the five governing criteria. If the Board fails to accept or reject the Rate Commission report or any Metropolitan St. Louis Sewer District Wastewater System Financing D-41 part thereof after consideration at two Board meetings, the Rate Commission report is deemed to be accepted by the Board. Once the report is accepted or deemed to be accepted, the Board must enact an ordinance consistent with the Rate Commission report. If the Rate Commission report is rejected by the Board, the Board must submit a written report to the Rate Commission explaining the reasons why the Rate Commission report was rejected. Rejection of the Rate Commission report does not prevent the Board from enacting an ordinance establishing different rates or taxes. Although the current rate setting process extends the time required to obtain rate adjustments, the involvement of local organizations and the opportunity for interveners and other ratepayers to participate in the process, provides assurances to the public that the proposed rates are needed and have been thoroughly reviewed by an independent Rate Commission. The process can also provide a deeper understanding and appreciation of the detailed rate design process by all participants of the rate review proceedings. Such understanding can avoid potential future rate related misunderstandings between interested parties and the District. A new wastewater rate change proposal was submitted to the Rate Commission on May 10, 2011. Under this proposal, wastewater bills for typical residential customers were projected to increase by about 13 percent per year in fiscal years 2013 through 2016. A transition from the current environmental compliance charge to a five-tier system of charges was also proposed to more equitably recover costs from non-residential customers. The Rate Commission completed its deliberations and submitted a Rate Recommendation Report to the Board of Trustees on October 17, 2011. The Rate Commission accepted the new five-tier environmental compliance charge but proposed changes to certain assumptions that impact the CIRP and operation and maintenance expenditures. The new assumptions lowered the wastewater rates proposed in the District’s May 10, 2010 rate change proposal. These new assumptions include: 1) financing capital improvements on a cash basis instead of an appropriations basis; 2) restructuring proposed debt service during the four-year study period to reflect interest only payments; 3) recognizing the District’s recent switch from a defined benefits to a defined contribution pension plan; and 4) holding increases in operation and maintenance expenses to three percent per year or less by lowering projected increases in wages, salaries, and overtime. All tables in this report are based on the Rate Commission’s proposed recommendations to the Board. Metropolitan St. Louis Sewer District Wastewater System Financing D-42 Revenues District revenue is derived primarily from charges for wastewater service, including revenues from extra strength surcharges. Other sources of income include, dedicated subdistrict assessments, connection fees, waste hauler permits, industrial monitoring charges, various engineering fees, interest earnings, late charges and other operating income. Customer Growth Table 5 presents a summary of the historical and projected average number of wastewater customers served by the District. All customer projections are based on an analysis of historic growth patterns by customer class during the past five years. As indicated by Table 5, the number of metered customers is projected to decrease from 348,200 in 2011 to 347,600 in 2016 and the number of unmetered customers is projected to decrease from 77,400 in 2011 to 75,600 in 2016. The total number of customer accounts is expected to decrease at an average rate of 0.1 percent per year throughout the six-year study period. D-43 Metropolitan St. Louis Sewer District Wastewater System Financing Table 5 Historical and Projected Customer Accounts Table 5Historical and Projected Customer AccountsHistoricalProjected___________________________________________________________________________________________________No. Customer Class 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016__________________________________________________________________________________________________________Metered Customers1 Single Family 301,122 302,582 302,694 302,843 303,096 302,300 302,100 302,100 302,100 302,100 302,1002 Multifamily20,825 20,816 20,824 20,862 20,787 20,800 20,700 20,700 20,700 20,700 20,8003 Non-Residential 25,712 25,620 25,583 25,387 25,165 25,100 24,900 24,800 24,800 24,700 24,700_____________________________________________________________________________4 Total347,659 349,018 349,102 349,092 349,048 348,200 347,700 347,600 347,600 347,500 347,600Unmetered Customers5 Single Family 60,010 59,977 59,733 58,757 58,034 57,400 56,800 56,400 56,200 56,200 56,2006 Multifamily23,757 23,818 23,780 20,437 19,938 20,000 19,700 19,500 19,400 19,400 19,400_____________________________________________________________________________7 Total83,767 83,795 83,513 79,194 77,972 77,400 76,500 75,900 75,600 75,600 75,600Total Customer Accounts8 Single Family 361,132 362,559 362,427 361,601 361,130 359,700 358,900 358,500 358,300 358,300 358,3009 Multifamily44,582 44,634 44,605 41,299 40,725 40,800 40,400 40,200 40,100 40,100 40,20010 Non-Residential 25,712 25,620 25,583 25,387 25,165 25,100 24,900 24,800 24,800 24,700 24,700_____________________________________________________________________________11 Total431,426 432,813 432,616 428,287 427,020 425,600 424,200 423,500 423,200 423,100 423,20012 Annual % Increase 0.4% 0.3% 0.0% -1.0% -0.3% -0.3% -0.3% -0.2% -0.1% 0.0% 0.0%Line Metropolitan St. Louis Sewer District Wastewater System Financing D-44 Wastewater Volumes Table 6 presents a summary of historical and projected contributed or billed wastewater volumes. Billed wastewater volume is the amount of wastewater flow contributed to the System by residential and non-residential customers. The determination of contributed wastewater volume for unmetered residential customers is based on the same indoor water usage attributes previously used to develop water rates for unmetered water customers in the City. The indicated unit volumes include: • 16 gallons per day (“gpd”) for each room, • 60 gpd for each water closet, and • 50 gpd for each bath or separate shower Billable wastewater volumes for all single family customers with metered water usage are determined on the basis of water used during the period best equated to contributed wastewater volume. For District customers, this period is from November 1 through April 30. Billed wastewater volume for non-residential customers is equal to actual metered water usage less exemption allowances for any water that does not enter the sewer system. Multifamily customers are either billed based on actual annual water usage or the average annual water usage established during the best equated period for wastewater contribution, depending on the billing method selected by each multifamily customer. The selected billing basis is permanent and cannot be changed. Projected volumes are based on the recognition of historical billing volumes and trends. Also considered are projections of numbers of customers and average historic billed volume per customer. The District’s largest customer, Anheuser-Busch, was analyzed separately for projection purposes. This large customer has had a significant reduction in contributed wastewater over the past few years due to several successful water conservation and reduction projects. It is projected that annual wastewater flow from Anheuser-Busch will remain at about 1.9 percent of total wastewater volume throughout the study period. Total wastewater volume for metered and unmetered customers is expected to modestly decrease during the six-year period from 69,302,900 Ccf in 2011 to 68,004,000 Ccf in 2016. D-45 Metropolitan St. Louis Sewer District Wastewater System Financing Table 6 Historical and Projected Contributed Wastewater Volume Table 6Historical and Projected Contributed Wastewater VolumeHistoricalProjected___________________________________________________________________________________________________No. Customer Class2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016_______________________________________________________________________________________________Ccf Ccf Ccf Ccf Ccf Ccf Ccf Ccf Ccf Ccf CcfMetered Customers1 Single Family27,437,644 26,166,748 26,229,750 25,672,899 24,884,791 24,820,900 24,646,300 24,458,200 24,457,100 24,458,100 24,460,8002 Multifamily9,763,965 9,625,609 9,419,644 9,160,576 8,904,095 8,839,200 8,667,400 8,639,400 8,607,900 8,572,900 8,558,9003 Non-Residential31,600,536 30,567,364 30,117,889 26,940,750 25,006,893 23,370,600 23,224,200 23,136,100 23,092,100 23,077,500 23,077,500________________________________________________________________________________________5 Total68,802,145 66,359,721 65,767,283 61,774,225 58,795,779 57,030,700 56,537,900 56,233,700 56,157,100 56,108,500 56,097,200Unmetered Customers (a)6 Single Family7,068,871 7,112,387 7,105,847 7,076,700 7,215,245 7,442,300 7,291,000 7,234,100 7,213,400 7,215,400 7,218,2007 Multifamily5,044,805 5,038,213 5,008,881 4,928,578 4,823,684 4,829,900 4,744,500 4,700,200 4,687,700 4,689,300 4,688,600________________________________________________________________________________________8 Total12,113,676 12,150,600 12,114,727 12,005,278 12,038,928 12,272,200 12,035,500 11,934,300 11,901,100 11,904,700 11,906,800Total Contributed Wastewater Volume9 Single Family34,506,515 33,279,135 33,335,597 32,749,599 32,100,036 32,263,200 31,937,300 31,692,300 31,670,500 31,673,500 31,679,00010 Multifamily14,808,770 14,663,822 14,428,525 14,089,154 13,727,779 13,669,100 13,411,900 13,339,600 13,295,600 13,262,200 13,247,50011 Non-Residential31,600,536 30,567,364 30,117,889 26,940,75025,006,893 23,370,600 23,224,200 23,136,100 23,092,100 23,077,500 23,077,500________________________________________________________________________________________12 Total80,915,821 78,510,321 77,882,010 73,779,503 70,834,707 69,302,900 68,573,400 68,168,000 68,058,200 68,013,200 68,004,000 Ccf = Hundred Cubic Feet (748 gallons)(a) Unmetered wastewater volume is determined by multiplying the number of fixtures by their respective unit usage values. Unit usage values are 16gallons per day (gpd) per room, 60 gpd per water closet, and 50 gpd per bath or separate shower.Line Metropolitan St. Louis Sewer District Wastewater System Financing D-46 Wastewater Revenues Under Existing Rates Existing wastewater rates for the District, as presented in Table 4, have been in effect since July 1, 2011. The rates currently consist of a monthly service or base charge, a uniform volume charge, and extra strength surcharges for BOD in excess of 300 mg/l or COD in excess of 600 mg/l, and suspended solids in excess of 300 mg/l. The base charge includes a billing and collection charge and system availability charge that are applicable to all customer classes, and an environmental compliance charge that is only applicable to non- residential customers. A summary of historical revenues for fiscal years 2006 through 2010 and projected wastewater revenues under existing rates for fiscal years 2011 through 2016 from the May 10, 2011 rate change proposal is presented in Table 7. Projected billed wastewater revenues do not include allowances for bad debt, refunds or billing adjustments. These billing adjustments are included with other operating revenues in Table 8. Full year revenues from normal and excess strength wastewater billings under present rates, are projected to increase from about $213,795,600 in 2011 to about $210,431,800 in 2016. Other Operating Revenues Projected other wastewater utility revenue is presented in Table 8. These revenues are grouped in the same manner as summarized in the District’s budget documents. All of these revenues are used to offset operating costs. Wastewater billing adjustments are determined based on current budget estimates and are projected in proportion to the changes in wastewater service revenue shown on Table 7. These adjustments include late charges, refunds and other adjustments. The provision for bad debt is projected to be temporarily offset in 2012 and 2013 due to the expected recovery of prior years’ bad debt expense by greater use of contracted collection agencies, law firms and computer automated payment reminders. However, after these enhanced collection efforts of prior year’s bad debt, the annual allowance for bad debt expense is projected to increase from normal levels in proportion to the proposed revenue increases. The balance of the wastewater billing adjustment revenue is estimated to remain stable. Revenue from inspection, plan review fees and submittal fees are expected to increase from the 2011 amount based on anticipated inflationary increases. Miscellaneous revenue is projected to increase 0.5 percent per year from the 2011 amount currently budgeted, based on historical trends. Total other operating revenue is therefore projected to decrease from $(750,500) in 2011 to $(1,314,000) in 2016 as shown on Line 8 of Table 8 primarily due to the projected bad debt allowances. Revenue derived from connection fees, as shown on Line 9 of Table 8, is projected to increase from $1,250,000 in 2011 to $1,450,000 in 2016. D-47 Metropolitan St. Louis Sewer District Wastewater System Financing Table 7 Historical and Projected Billed Wastewater Service Revenue Table 7Historical and Projected Billed Wastewater Service RevenueUnder Existing RatesHistoricalProjected___________________________________________________________________________________________________________No. Customer Class 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016__________________________________________________________________________________________________________$$$$$$$$$$$Metered Customers1 Single Family 77,985,843 76,252,80082,111,500 87,057,200 86,945,80091,333,800 90,945,900 90,536,400 90,505,900 90,471,600 90,452,7002 Multifamily 19,646,971 19,238,700 19,693,800 19,900,500 19,815,100 20,696,500 20,338,100 20,275,800 20,206,700 20,131,400 20,103,700 Non-Residential3 Normal Strength 63,506,77761,644,900 64,381,700 62,255,400 60,182,084 59,920,000 59,539,80059,311,100 59,196,900 59,158,900 59,158,9004 Excess Strength 6,782,384 5,924,400 5,789,800 6,136,700 5,772,600 6,524,900 6,524,900 6,524,9006,524,900 6,524,900 6,524,900___________________________________________________________________________________________________5 Total167,921,974 163,060,800 171,976,800 175,349,800 172,715,584 178,475,200 177,348,700 176,648,200 176,434,400 176,286,800 176,240,200Unmetered Customers6 Single Family 18,282,428 18,485,90019,745,100 20,808,800 21,152,60022,804,300 22,403,200 22,215,800 22,133,900 22,112,100 22,101,4007 Multifamily 11,399,822 11,510,000 11,912,900 11,916,200 11,879,600 12,516,100 12,278,100 12,155,700 12,113,500 12,102,900 12,090,200___________________________________________________________________________________________________8 Total29,682,249 29,995,900 31,658,000 32,725,000 33,032,200 35,320,400 34,681,300 34,371,500 34,247,400 34,215,000 34,191,600Total Wastewater Service Revenue9 Single Family 96,268,271 94,738,700 101,856,600 107,866,000 108,098,400 114,138,100113,349,100 112,752,200 112,639,800 112,583,700 112,554,10010 Multifamily 31,046,793 30,748,700 31,606,700 31,816,700 31,694,700 33,212,600 32,616,200 32,431,500 32,320,200 32,234,300 32,193,90011 Non-Residential 70,289,161 67,569,300 70,171,500 68,392,100 65,954,684 66,444,900 66,064,70065,836,000 65,721,800 65,683,800 65,683,800___________________________________________________________________________________________________12 Total Wastewater 197,604,224 193,056,700 203,634,800 208,074,800 205,747,784 213,795,600 212,030,000 211,019,700 210,681,800 210,501,800 210,431,800Line Metropolitan St. Louis Sewer District Wastewater System Financing D-48 Table 8 Projected Other Wastewater Operating Revenue Revenue Requirements The revenue required to provide for the continued operation of the District must be sufficient to meet the cash requirements for System operation. Revenue requirements include (1) total System operation and maintenance expenses; (2) expenditures for routine and major capital improvements met directly from revenues; (3) total System debt service (consisting of principal and interest payments); and (4) provision for an adequate operating reserve. Projections of the cash requirements to meet these system expenditures for the period of 2011 through 2016 from the May 10, 2011 rate change proposal with adjustments for Rate Commission recommendations are presented in this section. Table 8 Projected Other Wastewater Operating Revenue Projected ___________________________________________________________ No. Description 2011 2012 2013 2014 2015 2016______________________________________________________________________ $$$$$$ 1 Billing Adjustment (a)4,556,700 4,538,700 4,535,500 4,545,600 4,559,000 4,575,100 2 Bad Debt Provision (10,910,900) (6,820,800) (8,780,000) (9,560,800) (10,545,600) (11,842,700) Other Fees 3 Construction Inspection Fees 100,000 103,000 106,100 109,300 112,600 116,000 4 Waste Hauler Permits 1,450,000 1,457,300 1,464,600 1,471,900 1,479,300 1,486,700 5 All Other Fees (b)482,500 497,100 512,100 527,500 543,300 559,600________________________________________________ 6 Subtotal 2,032,500 2,057,400 2,082,800 2,108,700 2,135,200 2,162,300 7 Miscellaneous Revenue (c) 3,571,200 3,607,100 3,651,300 3,696,500 3,743,300 3,791,300________________________________________________ 8 Total Other Operating Revenue (750,500) 3,382,400 1,489,600 790,000 (108,100) (1,314,000) 9 Connection Fee Revenue (d) 1,250,000 1,288,000 1,327,000 1,367,000 1,408,000 1,450,000________________________________________________ 10 Total Other Revenue 499,500 4,670,400 2,816,600 2,157,000 1,299,900 136,000 (a)Includes Late Charges, Refunds, Adjustments, Wastewater Lien Interest and fees, and Other Adjustments including revenue from Arnold. (b)Includes Plan Review Fees, Submittal Fees, Wastewater Monitoring Cost Fees, Pretreatment Discharge Permits, and all other fees. (c)Includes Reimbursements, Sale of Fixed Assets, Reimbursable Engineering & Maintenance, and all other miscellaneous revenue. (d) Revenue available for improvements financed out of Improvement Fund. Line Metropolitan St. Louis Sewer District Wastewater System Financing D-49 Operation and Maintenance Expense Operation and maintenance expense includes the total annual salaries and wages of personnel, costs for materials and supplies, fuel and electrical power costs and other costs such as employee benefits, insurance, and contract services. Since these costs are an ongoing annual obligation of the District, they are met from wastewater and stormwater operating revenues as they are incurred. A summary of projected wastewater related operation and maintenance expense for the period 2011 through 2016 is presented in Table 9. Wastewater related operation and maintenance expense projections for the years 2011 through 2016 are based on budgeted 2011 expense amounts adjusted to recognize allowances for known cost increases, the estimated effects of inflation, and anticipated system growth. The escalation factors used in the projections shown in Table 9 are as follows: • Wages, Salaries and Overtime (a) - 2011-2012 3.0%; 2013-2016 0% • Personnel Services and Benefits (b) - 2011 3.5%; 2012-2016 3.0% • Group Insurance – 2011-2015 10%; 2016 6.0% • Supplies, including Chemicals and other costs (c) – 2011 3.5%; 2012-2016 3% • Electric and Gas - 2011-2012 3.5%; 2013 3%; 2014-2016 5.5% • Contractual Services- 2011-2012 3.5%; 2013 3%; 2014-2016 4.5% • Capital Outlay – 2011-2012 3.5%; 2013-2016 3.0% • Pension (d) - 2011 8.4%; 2012 9.3%; 2013 6.8%; 2014 8.2%; 2015 2.4; 2016: 3.2%. (a) Inflation shown in rate report for 2013 – 2016 decreased to 0% by Rate Commission. (b) Except group insurance and pension. (c) Other costs include parts, building supplies, water, telephone and ash hauling. (d) Reflects recent change from a defined benefit to a defined contribution pension plan The indicated annual pension plan increases are designed to meet the required funding needs. Future operation and maintenance expense for the wastewater program is projected to increase from about $2,378,600 in 2011 to about $2,770,900 in 2016 as shown on Line 21 of Table 9. This includes estimated additional amounts required for new facilities to be completed during the study period and provision for a $1.2 million civil penalty in fiscal year 2012 as part of the Consent Decree settlement. Metropolitan St. Louis Sewer District Wastewater System Financing D-50 Table 9 Projected Wastewater Operating Costs Table 9 Projected Wastewater Operating Costs Fiscal Year Ending June 30, ___________________________________________________________ No Department 2011 2012 2013 2014 2015 2016_____________________________________________________________________ $$$$$$ 1 Board of Trustees 2,400 2,500 2,600 2,700 2,800 2,900 2 Rate Commission (a)423,800 9,400 9,700 10,100 485,600 11,100 3 Civil Service Commission 7,800 7,800 7,800 7,800 7,800 7,800 4 Secretary - Treasurer 1,613,700 1,674,900 1,720,500 1,787,100 1,852,200 1,918,800 5 Executive Director 712,400 739,500 755,600 776,100 793,700 811,300 6 General Counsel 4,116,800 4,265,200 4,384,400 4,563,300 4,744,800 4,933,200 7 Office of Human Resources 9,847,600 10,303,000 10,718,100 11,232,100 11,764,700 12,231,000 8 Engineering 18,206,400 18,991,700 19,377,700 19,839,500 20,186,400 20,493,600 Operations 9 Collection System (b) 19,579,200 20,400,700 20,870,700 21,430,000 21,901,700 22,327,200 10 Pump Stations 7,931,300 8,210,700 8,407,000 8,713,400 9,011,900 9,314,400 11 Wastewater Treatment (c) 35,427,500 36,664,200 37,543,900 38,862,300 40,137,200 41,427,100 12 Support (d)7,265,000 7,534,700 7,725,200 7,942,700 8,141,800 8,336,100______________________________________________________ 13 Total Operations 70,203,000 72,810,300 74,546,800 76,948,400 79,192,600 81,404,800 14 Finance 15,885,700 15,985,500 16,025,300 16,347,200 16,747,100 17,247,500 15 Information Systems 8,470,500 8,780,000 10,202,100 10,874,400 9,527,400 9,782,800______________________________________________________ 16 Subtotal (General Fund) 129,490,100 133,569,800 137,750,600 142,388,700 145,305,100 148,844,800 17 Water Backup Program 4,000,000 4,300,000 5,000,000 5,000,000 5,000,000 5,000,000 18 Real Property Fund (e)904,700 931,800 959,800 988,600 1,018,300 1,048,800 _________ _________ _________ _________ _________ _________ 19 Subtotal O&M 134,394,800 138,801,600 143,710,400 148,377,300 151,323,400 154,893,600 20 Additional O&M (f)0 0 109,200 2,115,500 7,396,000 7,809,100______________________________________________________ 21 Total O&M 134,394,800 138,801,600 143,819,600 150,492,800 158,719,400 162,702,700 22 Capital Outlay 2,378,600 2,461,900 2,535,700 2,611,800 2,690,100 2,770,900 _________ _________ _________ _________ _________ _________ 23 Total Operating Expense 136,773,400 141,263,500 146,355,300 153,104,600 161,409,500 165,473,600 (a) It is assumed that the Rate Commission will review proposed changes in wastewater rates every four years. (b) Includes Mintert, Sulphur, and Grand Glaize maintenance yards and technical services. (c) Includes Lemay, Bissell, and county treatment plants. (d) Includes costs related to the customer care group, administrative support and materials management. (e) Expenditures offset by rental income. (f) O&M costs related to anticipated regulatory projects. These projects include improved disinfection at the Missouri River WWTP in 2013 and 2014; expansion of the Missouri River WWTP in 2015; and Capacity, Management, Operation, and Maintenance (CMOM) program activities related to anticipated Consent Decree requirements in 2016. Line Metropolitan St. Louis Sewer District Wastewater System Financing D-51 Routine Capital Improvements Expenditures for routine annual capital improvements include those costs that tend to be routinely incurred each year for normal replacements such as vehicles and office equipment, and minor improvements or repairs. Since the costs of these improvements are a continuing expense to be met each year, the District appropriately finances these expenditures from current wastewater and stormwater revenues. These expenditures are included in the District's annual budgets as Capital Outlay costs. As shown on Line 22 of Table 9, total capital outlay costs for the wastewater program are projected to increase from about $2,378,600 in fiscal year 2011 to about $2,770,900 in fiscal year 2016. Cash Financing of Capital Improvements In addition to cash financing routine capital improvements, the District partially finances major capital improvements on a cash or pay-as-you-go basis. The District is expected to continue to cash finance all routine capital improvements and a portion of the CIRP. The amount of projected cash financing of the major capital improvement program was previously identified on Line 4 of Table 3. Debt Service The District issued its first district-wide revenue bonds in April 2004 in the principal amount of $175,000,000. Additional revenue bonds were issued in November 2006, November 2008 and January 2010 where the 2010 issue was part of the Build America Bond federal subsidized loan program. Total revenue bonds issued to date total $350,000,000 as indicated by the adjoining table. The District has also participated in nine subordinate series of revenue bonds issued under the Missouri State Revolving Fund (“SRF”) loan program, including a recent November 2011 issuance of $39,769,300. The total amount of SRF loans issued to date is $372,750,000. These loans, together with the four series of revenue bonds, have used $722,750,000 of the District’s $775,000,000 total revenue bond authorization. The District expects to issue the remaining $52,250,000 of its voter approved debt authorization during fiscal year 2012 with the issuance of the Series 2011B Bonds in December 2011. Additional revenue bonds and SRF loans are expected to be issued during the study period beginning in fiscal year 2013, assuming the District obtains additional revenue bond authorization. Additional debt required to partially finance major Debt Issues Series Amount________________ $ Revenue Bonds 2004A 175,000,000 2006C 60,000,000 2008A 30,000,000 2010B 85,000,000_________ Total 350,000,000 State Revolving Fund Loans 2004B 161,280,000 2005A 6,800,000 2006A 42,715,000 2006B 14,205,000 2008B 40,000,000 2009A 23,000,000 2010A 7,980,700 2010C 37,000,000 2011A 39,769,300_________ Total 372,750,000 Remaining Authorization Bonds 52,250,000_________ Grand Total 775,000,000 Metropolitan St. Louis Sewer District Wastewater System Financing D-52 capital improvements from fiscal year 2013 through fiscal year 2016 is estimated to be $895 million, as indicated in Table 3. The proposed Series 2011B Bonds are expected to have a 30 year term and a debt repayment schedule similar to the one specified by the District’s financial advisors. Additional bonds are assumed to have 30-year terms and an annual interest rate of 5.5 percent for fiscal years 2013 through 2016. Additional revenue bonds issued as part of the SRF loan program are expected to have 20-year terms and a net effective annual interest and administration cost of about 2.5 percent per year. The total annual debt service requirement resulting from existing debt plus proposed debt issued during the study period is expected to increase from $38,404,300 in 2011 to $96,883,700 in 2016 as indicated by Table 10. The scheduling of the proposed revenue bond issues and SRF loans reflects current planning considerations, as recognized for purposes of this report. This is not intended to preclude the possible modification or rescheduling of issues at a later date, if desirable, due to market conditions, local financing policy or other practical considerations. The projected payments to be made to the bondholders from funds accrued in the Sinking Fund are also shown in Table 10. Operating Reserve Allowance The operating reserve allowance is a recommended balance to accommodate fluctuations in annual revenues and expenditures. The existing revenue bond covenants require the District to maintain a minimum balance equal to 45 days of operation and maintenance expense. For this report, an operating reserve allowance equal to 60 days or about 16.4 percent of annual operating expense is assumed to be maintained, as provided by the current budget. Operating expense, as routinely presented in the District's annual budgets, is equal to the sum of operation and maintenance expense and routine annual capital improvements. The operating reserve for wastewater operations is projected to increase to about $28,415,000 by the end of the study period through revenues set aside to maintain a 60-day operating reserve allowance. Financial Analysis A pro forma cash flow statement showing projected wastewater revenues and revenue requirements for the District during the study period is presented in Table 11. System revenues must be at least sufficient to finance the costs of operation and maintenance expense, routine annual capital improvements, and debt service costs on existing and Metropolitan St. Louis Sewer District Wastewater System Financing D-53 Table 10 Projected Debt Service Requirements Table 10 Projected Debt Service Requirements Existing Proposed Existing Proposed Fiscal Revenue Revenue SRF SRF Year Bonds Bonds Loans Loans (a) Total________________________________________________ $$$$ $ Payments to Sinking Fund 2011 19,290,600 0 19,113,700 0 38,404,300 2012 19,415,200 1,676,400 21,311,100 1,701,000 44,103,700 2013 19,550,800 13,048,800 21,401,300 4,048,100 58,049,000 2014 19,686,000 24,873,800 21,483,500 6,293,200 72,336,500 2015 19,834,400 34,773,800 21,355,600 8,538,300 84,502,100 2016 19,973,200 44,398,800 21,728,600 10,783,100 96,883,700 Payments to Bondholders 2011 19,270,300 0 18,292,600 0 37,562,900 2012 19,392,400 1,436,900 20,232,600 497,100 41,559,000 2013 19,528,800 7,961,300 21,395,200 2,988,600 51,873,900 2014 19,660,900 18,961,300 21,345,500 5,233,700 65,201,400 2015 19,811,800 29,823,800 21,545,900 7,478,800 78,660,300 2016 19,947,200 39,586,300 21,324,600 9,723,900 90,582,000 (a) Includes debt service on Series 2011A SRF loan. Metropolitan St. Louis Sewer District Wastewater System Financing D-54 Table 11 Comparison of Projected Wastewater Revenue with Projected Revenue Requirements Table 11 Comparison of Projected Wastewater Revenue with Projected Revenue Requirements Fiscal Year Ending June 30,__________________________________________________________ No. Description 2011 2012 2013 2014 2015 2016 Total__________________________________________________________________________________ $$$$$$ $ 1 Revenue Under FY 2011 Rates (a) 213,795,600 212,030,000 211,019,700 210,681,800 210,501,800 210,431,800 1,268,460,700 Additional Revenue Required Fiscal Revenue Months Year Increase Effective____________________ 2 2012 4.3% 12 8,357,500 9,073,800 9,059,300 9,051,600 9,048,600 44,590,800 3 2013 7.5% 12 15,131,400 16,480,600 16,466,500 16,461,000 64,539,500 4 2014 9.2% 12 19,921,400 21,713,800 21,706,600 63,341,800 5 2015 10.3% 12 24,334,400 26,537,700 50,872,100 6 2016 12.3% 12 32,041,900 32,041,900_________________________________________________________________ 7 Total Additional Revenue 0 8,357,500 24,205,200 45,461,300 71,566,300 105,795,800 255,386,100_________________________________________________________________ 8 Total Service Charge Revenue 213,795,600 220,387,500 235,224,900 256,143,100 282,068,100 316,227,600 1,523,846,800 9 Other Operating Revenue (750,500) 3,382,400 1,489,600 790,000 (108,100) (1,314,000) 3,489,400 10 Connection Fee Revenue 1,250,000 1,288,000 1,327,000 1,367,000 1,408,000 1,450,000 8,090,000 11 Interest Income - Reserve Funds 888,800 952,300 1,107,000 1,319,300 1,522,900 1,711,600 7,501,900 12 Interest Income - Operations 30,800 47,300 50,000 49,900 50,000 50,100 278,100 13 Interest Income - Arnold 650,700 631,000 610,500 589,100 566,800 543,600 3,591,700_________________________________________________________________ 14 Subtotal Other Revenue 2,069,800 6,301,000 4,584,100 4,115,300 3,439,600 2,441,300 22,951,100_________________________________________________________________ 15 Total Revenue 215,865,400 226,688,500 239,809,000 260,258,400 285,507,700 318,668,900 1,546,797,900 16 Operation and Maintenance Expense 134,394,800 138,801,600 143,710,400 148,377,300 151,323,400 154,893,600 871,501,100 17 Additional O&M (b)0 0 109,200 2,115,500 7,396,000 7,809,100 17,429,800_________________________________________________________________ 18 Net Revenue 81,470,600 87,886,900 95,989,400 109,765,600 126,788,300 155,966,200 657,867,000 Debt Service 19 Existing Senior Revenue Bonds 19,290,600 19,415,200 19,550,800 19,686,000 19,834,400 19,973,200 117,750,200 20 Proposed Senior Revenue Bonds 0 1,676,400 13,048,800 24,873,800 34,773,800 44,398,800 118,771,600 _________________________________________________________________ 21 Total Senior Revenue Bonds 19,290,600 21,091,600 32,599,600 44,559,800 54,608,200 64,372,000 236,521,800 22 Existing State Revolving Fund Loans (c) 19,113,700 21,311,100 21,401,300 21,483,500 21,355,600 21,728,600 126,393,800 23 Proposed State Revolving Fund Loans (c)0 1,701,000 4,048,100 6,293,200 8,538,300 10,783,100 31,363,700 _________________________________________________________________ 24 Total State Revolving Fund Loans 19,113,700 23,012,100 25,449,400 27,776,700 29,893,900 32,511,700 157,757,500 25 Commercial Paper 000000 0 _________________________________________________________________ 26 Total Debt Service 38,404,300 44,103,700 58,049,000 72,336,500 84,502,100 96,883,700 394,279,300 27 Routine Annual Improvements 2,378,600 2,461,900 2,535,700 2,611,800 2,690,100 2,770,900 15,449,000 28 Cash Financing of Major Improvements 37,250,000 40,038,000 34,577,000 33,717,000 38,208,000 55,650,000 239,440,000 29 Additions to Operating Reserve 674,500 738,100 837,000 1,109,500 1,365,200 668,000 5,392,300 30 Net Annual Balance (d)2,763,200 545,200 (9,300) (9,200) 22,900 (6,400) 3,306,400 31 Beginning of Year Balance (e)1,696,900 4,460,100 5,005,300 4,996,000 4,986,800 5,009,700 1,696,900 32 End of Year Balance (e)4,460,100 5,005,300 4,996,000 4,986,800 5,009,700 5,003,300 5,003,300 (a) Revenue under wastewater rates effective July 1, 2010. (b) O&M costs related to anticipated regulatory projects. These projects include improved disinfection at the Missouri River WW TP in 2013 and 2014; expansion of the Missouri River WWTP in 2015; and Capacity, Management, Operation, and Maintenance (CMOM) program activities related to anticipated Consent Decree requirements in 2016. (c) Debt service on State Revolving Fund (SRF) Loans are net of the state's interest subsidy. (d) Negative balances indicate need to drawdown available fund balance. (e) Does not include funds set aside for a minimum operating reserve equal to 60 days of operating expenses. Line Metropolitan St. Louis Sewer District Wastewater System Financing D-55 proposed debt, while maintaining adequate operating reserve funds and complying with all revenue bond debt service coverage requirements. Annual revenues can also be used to finance a portion of the major capital improvement program. Table 11 indicates that annual wastewater revenues under rates effective during the development of the May 10, 2010 rate change proposal, existing rates effective beginning July 1, 2011 and rates resulting from recommendations by the Rate Commission for fiscal years 2013 through 2016 are sufficient to meet the total revenue requirements of the system during the study period. Line 1 of Table 11 shows projected revenue under rates effective for fiscal year 2011, as previously presented in Table 7. Lines 2 through 6 show projected increases in wastewater revenues to be in effect at the beginning of each fiscal year. It is anticipated that ordinances will be enacted by the Board to impose the proposed wastewater rates when required. The magnitude of the revenue increases shown in Table 11 were selected based on consideration of three principal criteria, which include: (1) total revenue necessary to meet cash requirements for normal operations, (2) gradual annual increases in revenues available to cash finance major capital improvements, and (3) total revenue required to provide a reasonable margin of debt service coverage in excess of minimum expected bond covenant requirements. As indicated on Lines 9 and 10 of Table 11, other operating revenue and connection fee revenue, previously projected in Table 8, are available for the wastewater system. Projected revenue from district-wide connection fees is included in the cash financing of major improvements line item (Line 28), which is also shown as Line 4 of Table 3, and is used to cash finance the Improvement Fund projects shown on Line 9 of Table 3. Interest income that is available from restricted or reserve funds for operating purposes is shown on Line 11 of Table 11. No restricted fund balances are included in the fund balances shown on Lines 31 and 32 of Table 11. Interest earned on operating fund balances is shown on Line 12 and the interest portion of the City of Arnold’s debt repayment for a portion of the Meramec River Treatment Plant is shown on Line 13 of Table 11. Interest income is estimated based on a 1.0 percent annual interest rate applied to the average beginning and end of year fund balances. A slightly higher rate of 1.2 percent is assumed for funds held in the revenue bond reserve fund to reflect the ability to invest these funds for a longer term. Total revenue available for wastewater utility operations is shown on Line 15 of Table 113. Total operation and maintenance expense for the wastewater program, previously projected in Table 9, is shown on Lines 16 and 17 of Table 11. Line 18 shows the estimated net revenue remaining after deducting total projected operation and maintenance expense (Lines 16 and 17 from total wastewater revenue (Line 15). This net wastewater revenue is available or pledged for debt service coverage purposes. 3 Excludes interest earned on available construction account balances. Metropolitan St. Louis Sewer District Wastewater System Financing D-56 Debt service requirements on existing and projected revenue bonds and SRF loans are presented on Lines 19 through 26. As previously described, it is projected that revenue bonds in the aggregate amount of $807,250,000 and SRF loans in the aggregate amount of $216,769,300 will be issued in fiscal years 2011 through 2016 to help finance major capital program expenditures. This debt financing program will provide a mechanism to spread the costs of major capital improvements over a portion of their useful lives and more equitably recover these costs from both current and future users of the improvements. Line 27 of Table 11 shows the total amount of routine annual improvements, which are completely financed by annual revenues. Funds used to finance a portion of the major capital improvement program are reported as a cost on Line 28 of Table 11 and as a source of revenue on Line 4 of Table 3. Annual amounts required to maintain an operating balance equal to 60 days of combined operation and maintenance expense (Lines 16 and 17) and routine annual capital expenditures (Line 27) are shown on Line 29. The net annual balance of annual revenues less expenditures is presented on Line 30. Lines 31 and 32 of Table 11 show the projected combined beginning and ending cash balances of the wastewater utility for each year of the study period exclusive of the targeted operating reserve balances. District staff provided information regarding the unencumbered balance of funds available at the beginning of 2011. Wastewater Bill Comparison Table 12 presents a comparison of typical wastewater service bills under rates imposed for fiscal year 2011, existing rates for fiscal year 2012 and rates proposed to be effective in fiscal years 2013 through 2016 for various billable wastewater volumes. As indicated in the table, the monthly wastewater bill for the average metered residential customer contributing 8 Ccf of wastewater per month would increase by 4.2 percent in 2012 with additional increases of 9.3 percent in 2013, 11.0 percent in 2014, 11.4 percent in 2015 and 13.2 percent in 2016. These increases are slightly higher than the overall average revenue increases for the wastewater system reflected in Table 11. The higher residential increases are due to the proposed recovery of some environmental compliance costs from all customers instead of only the non-residential customers. This results in a net shift of costs from non-residential customers to residential customers over a four-year transition period. Table 13 presents the results of a 2009 Black & Veatch rate survey of the 50 largest U.S. cities. Rates shown in this survey were in effect on July 1, 2009 and reflect the District’s wastewater rates implemented by Ordinance 12754 on July 1, 2009, two years prior to the implementation of the existing rates. Based on this survey, St. Louis had the twenty-seventh lowest wastewater bill for medium residential customers of the fifty largest U.S. cities and charges its customers less than the average wastewater charge for four of the five categories Metropolitan St. Louis Sewer District Wastewater System Financing D-57 surveyed. The typical bill for small residential customers was slightly higher than the national average due to higher than average costs recovered by the fixed monthly service charge. Table 12 Typical Bill Comparison Table 12 Typical Bill Comparison Line Typical Wastewater Bills______________________________________________________ No. Customer Class Volume 2011 2012 2013 2014 2015 2016_________________________________________________________________________ Ccf$$$$$$ Single Family (a) 1 Small 5 21.50 22.40 24.55 27.35 30.35 34.30 2 Medium 8 27.56 28.73 31.39 34.85 38.81 43.93 3 Medium per 50 Largest Cities 10 31.60 32.95 35.95 39.85 44.45 50.35 4 Large 20 51.80 54.05 58.75 64.85 72.65 82.45 Multifamily 5 Small 20 51.80 54.05 58.75 64.85 72.65 82.45 6 Medium 40 92.20 96.25 104.35 114.85 129.05 146.65 7 Large 60 132.60 138.45 149.95 164.85 185.45 210.85 Non-Residential - Normal Strength with Tier 2 Environmental Compliance Charge 8 Small 70 183.65 191.50 212.05 230.50 254.85 284.55 9 Medium 100 244.25 254.80 280.45 305.50 339.45 380.85 10 Medium per 50 Largest Cities 134 312.93 326.54 357.97 390.50 435.33 489.99 11 Large 160 365.45 381.40 417.25 455.50 508.65 573.45 Non-Residential - Excess Strength with Tier 2 Environmental Compliance Charge (b) 12 Small 70 210.49 219.39 239.94 258.39 283.16 313.52 13 Average 100 282.60 294.65 320.30 345.35 379.89 422.23 14 Large 160 426.80 445.16 481.01 519.26 573.36 639.66 Ccf - Hundred Cubic Feet (a) Existing rates effective July 1, 2011. (b) Assumes suspended solids excess strength of 150 mg/l and biochemical oxygen demand excess strength of 150 mg/l. Billed Wastewater Metropolitan St. Louis Sewer District Wastewater System Financing D-58 The figure below shows historic and projected wastewater bills for residential customers using 10 Ccf per month (bars) compared to the national average for respondents to the NACWA annual surveys through 2009 with their 5-year projection through 2014 (line) and the average of the 50 largest cities surveyed periodically by Black & Veatch (triangles). As indicated in the above figure, the residential bills for District customers have closely tracked the NACWA national average. This trend is expected to continue through 2016. As shown in Table 13, the District’s typical bills compare more favorably with other large cities as billed wastewater volume increases. Historic and Projected Residential Bills (10 Ccf/month) 0 10 20 30 40 50 2000 2002 2004 2006 2008 2010 2012 2014 2016 Fiscal YearResidential Bill - $/Mo. Metropolitan St. Louis Sewer District Wastewater System Financing D-59 Table 13 Survey of Typical Monthly Wastewater Bills – 50 Largest Cities Table 13 Survey of Typical Monthly Wastewater Bills - 50 Largest Cities Ranked from Lowest (1) to Highest (50) Small M e dium L arge R esident ia l (a )Resident ia l (b)R esident ia l (c )Commercia l (d)I n dustr ia l (e )______________________________________________________________________ Bill wit h Bill wit h Bill wit h Bill wit h Bill wit h City 3 .75 M gal R an k 7 .5 M ga l R ank 15 M ga l Ran k 100 M gal R ank 10,000 M ga l Ran k_____________________________________________________________________________ $$$$$ Albuquerque 11.60 9 15.71 6 23.93 7 125.31 4 13,225.47 5 A r lington 18.72 26 29.67 25 51.57 22 346.39 24 29,486.00 21 A t lanta 50.06 49 110.69 50 235.19 50 1 ,654.49 50 166,816.19 50 A ust in 27.60 43 55.50 45 111.30 45 731.00 45 66,408.00 44 Ba lt imore 33.19 47 33.19 30 66.38 32 531.04 38 44,474.60 34 Boston 24.40 37 49.44 44 100.57 44 724.52 44 79,075.96 46 Ch arlotte 21.80 35 41.80 41 81.80 42 537.80 39 53,601.80 42 Chicago 5 .59 2 11.19 3 22.37 6 149.89 5 14,989.24 6 Clevelan d 18.58 25 37.15 35 74.30 38 497.81 35 49,781.00 39 Co lorado Springs 25.71 38 37.66 37 61.56 29 372.57 28 34,598.85 28 Co lum bus 20.34 31 37.46 36 71.71 35 462.08 32 45,889.51 35 D a llas 19.20 28 34.92 32 66.94 33 279.44 16 26,339.51 15 D enver 7 .31 5 14.63 5 29.25 11 190.00 8 19,000.00 10 D etroit 21.54 34 33.89 31 58.60 27 411.44 30 33,191.73 27 El P aso 11.38 8 17.73 9 30.43 12 227.34 12 17,341.20 9 F ort W orth 17.70 22 30.90 27 44.10 18 427.94 31 42,348.50 33 F resno 21.01 33 21.01 13 21.01 5 195.70 9 7 ,423.60 2 H onolulu 53.44 50 59.96 46 73.00 36 734.00 46 73,400.00 45 H ouston 6 .51 3 29.93 26 60.39 28 509.20 36 50,803.21 40 I n dianapo lis 15.55 18 25.41 16 46.16 19 290.82 17 28,993.22 20 Jack sonville 22.87 36 41.39 40 80.67 40 528.81 37 49,617.37 38 K ansas City 20.00 30 31.40 28 54.20 26 314.12 20 30,560.60 22 L as Vegas 19.67 29 19.67 10 19.67 4 262.20 14 26,220.00 14 L ong B each 6 .61 4 7 .85 2 10.33 1 55.70 1 3 ,458.86 1 L os A ngeles 16.35 20 32.70 29 65.40 31 394.36 29 39,436.20 32 L ouisv ille 17.29 21 26.06 17 43.61 17 312.89 19 28,281.05 18 M emp his 3 .59 1 7 .19 1 14.37 3 95.80 2 9 ,580.00 3 M esa 13.86 17 20.05 11 34.60 14 199.84 10 19,405.84 11 Miam i 10.17 6 27.62 23 67.19 34 541.03 40 53,169.76 41 Milwauk ee 10.74 7 16.90 8 29.23 10 179.24 6 16,523.27 7 Minneapo lis 13.05 13 26.10 18 52.20 23 349.74 25 34,974.00 29 N ash v ille 18.89 27 39.39 39 92.52 43 550.56 41 38,858.41 31 N ew Y ork City 18.36 24 36.73 34 73.46 37 492.17 34 49,216.86 37 O a klan d 12.86 12 13.15 4 13.15 2 183.34 7 16,898.50 8 Okla h oma City 13.13 14 24.72 15 47.89 21 310.54 18 30,901.54 23 O mah a 12.76 11 16.71 7 24.62 8 115.53 3 11,050.07 4 Phila de lp hia 26.61 40 36.47 33 118.00 46 662.61 42 28,914.33 19 Phoenix 13.46 16 26.92 20 53.83 25 315.76 21 31,575.76 24 P ortland 32.50 46 65.00 47 130.00 47 888.82 47 88,882.20 47 Ra le igh 13.30 15 23.20 14 43.00 16 268.72 15 26,535.40 16 Sacramento 26.32 39 26.32 19 30.69 13 357.91 27 35,790.77 30 San A ntonio 12.40 10 20.11 12 35.54 15 210.38 11 20,574.68 12 San Diego 31.13 45 47.95 43 81.58 41 676.79 43 66,173.58 43 San Francisco 27.36 42 76.21 48 173.91 48 1 ,107.76 48 110,776.46 48 San Jose 27.09 41 27.09 21 27.09 9 325.62 22 32,562.00 26 Seatt le 44.45 48 88.90 49 177.80 49 1 ,191.26 49 119,126.00 49 T ucson 17.79 23 27.25 22 46.18 20 261.98 13 25,374.52 13 T ulsa 16.19 19 28.31 24 52.53 24 329.96 23 32,319.10 25 Virgin ia B each 30.94 44 42.34 42 65.14 30 356.94 26 28,099.61 17 W ashington 20.51 32 38.59 38 74.82 39 486.96 33 48,547.41 36, Average 20.03 33.80 63.28 434.52 41,011.83 Median 18.65 29.80 54.02 353.34 32,440.55 St. Louis (f)20.50 32 30.10 27 49.30 22 297.83 18 25,768.55 14 (a) Assumes 3,750 gallons (or 500 cubic feet) monthly billed wastewater volume and a 5/8" (or nearest equivalent) meter size. (b) Assumes 7,500 gallons (or 1,000 cubic feet) monthly billed wastewater volume and a 5/8" (or nearest equivalent) meter size. (c) Assumes 15,000 gallons (or 2,000 cubic feet) monthly billed wastewater volume and a 3/4" (or nearest equivalent) meter size. (d) Assumes 100,000 gallons (or 13,400 cubic feet) monthly billed wastewater volume and a 2" (or nearest equivalent) meter size. (e) Assumes 10,000,000 gallons (or 1,340,000 cubic feet) monthly billed wastewater volume and a 6" (or nearest equivalent) meter size. (f) Wastewater rates effective July 1, 2009 and in place during the Black & Veatch survey period. Metropolitan St. Louis Sewer District Bond Covenant Compliance D-60 Bond Covenant Compliance Rate Covenants The majority of all District wastewater and stormwater revenues are deposited into and accounted for by separate wastewater and stormwater operating funds. Portions of these revenues are transferred to the General Fund, as required, to pay each utility’s portion of operation and maintenance expense and routine capital expenditures. Section 6.1 of the Bond Ordinance requires the District to operate the System on a revenue producing basis and at all times to prescribe, fix, maintain, and collect rates, fees, and other charges for the services, facilities, and commodities furnished by the System fully sufficient at all times to pay annual operation and maintenance expense, provide a reasonable operating reserve, produce net revenues in each fiscal year equal to at least 1.25 times the Debt Service Requirement on all Senior Bonds currently outstanding and 1.15 times the Debt Service Requirement on all Bonds then outstanding and accumulate sufficient funds to meet the costs of major renewals, replacements, repairs, additions, betterments, and improvements to the System to keep it in good working condition. In addition, Section 3.020(16) of the Charter requires the District to establish fair and reasonable schedules of charges and Section 7.130 of the Charter requires a balanced budget. Based on a detailed analysis of the System’s revenue and revenue requirements, as presented in the Wastewater System Financing section of this report, the District will continue to meet the rate covenant requirements after issuance of the Series 2011B Bonds. In addition, the existing wastewater rates in effect for fiscal year 2012 and the rates proposed for fiscal years 2013 through 2016 are projected to provide sufficient user charge revenues, together with other available revenue sources, to meet all projected revenue requirements related to the proposed CIRP and remain in compliance with the rate covenants throughout the six-year study period. Reasonable Charges Section 6.7 of the Bond Ordinance requires that: “None of the facilities or services afforded by the System will be furnished to any user without a reasonable charge being made therefor.” Current and proposed rates for the System are based on detailed cost of service analyses to provide reasonable assurance that each customer class pays its proportionate share of the costs required to provide utility service. All users of the System are paying their Metropolitan St. Louis Sewer District Bond Covenant Compliance D-61 proportionate share of operating and maintenance expenses in compliance with the Bond Ordinance requirement and Federal user charge requirements. No free service is being provided by the District. Adequate Maintenance Section 6.2 of the Bond Ordinance requires the District to operate the System in an efficient and economical manner and maintain the System at all times in good repair and sound operating condition. The System has historically been adequately maintained and found to be in good working order. Although costs are considered reasonable and result in rates comparable to similar sized utilities, the District is continuously looking at ways to reduce costs and keep utility rates as low as possible. Additional Bonds Coverage Tests In order to issue additional revenue bonds on parity with prior Bonds, the District must have sufficient revenues to meet either a preceding year or ensuing year additional bonds coverage test. Section 5.3 of the Bond Ordinance requires historical Net Operating Revenues and Investment Earnings (“net revenues”) for a period of 12 consecutive months of the most recent 18 consecutive months prior to the issuance of the proposed Senior Bonds to be at least equal to (i) 1.25 times the Maximum Annual Debt Service Requirement on all Senior Bonds which will be Outstanding immediately after the issuance of the proposed Senior Bonds, and (ii) 1.15 times the Maximum Annual Debt Service Requirement on all Bonds which will be Outstanding immediately after the issuance of the proposed Senior Bonds. For the ensuing year additional bonds test, the Bond Ordinance requires the forecasted net revenues for each fiscal year in the Forecast Period (the three consecutive fiscal years commencing with the fiscal year in which any proposed Senior Bonds are to be issued) to be at least (i) 1.25 times the Maximum Annual Debt Service Requirement on all Senior Bonds that will be Outstanding immediately after the issuance of the proposed Senior Bonds, and (ii) 1.15 times the Maximum Annual Debt Service Requirement on all Bonds which will be Outstanding immediately after the issuance of the proposed Senior Bonds. Revenue adjustments are allowed for the preceding year test for any rate increase enacted prior to the delivery date of the proposed Senior Bonds and not fully reflected in the historical Net Operating Revenues actually received during the 12-month period. A similar adjustment is allowed for the ensuing year test if the rates were actually adopted by ordinance prior to issuance of the bonds. Without a future rate adjustment provision for the ensuing year test, the normal inflationary increases in operation and maintenance expenses Capitalized terms are defined in the Bond Ordinance. Metropolitan St. Louis Sewer District Bond Covenant Compliance D-62 could outpace the revenues obtained from a relatively stable customer base such that future net revenues and ensuing year debt service coverage may significantly decrease towards the end of the Forecast Period. This may require the District to enact multiple year rate increases prior to issuance of the Bonds, set rates at a current year debt service coverage level of 1.50 times the Debt Service Requirement or higher to account for the expected coverage deterioration, or only rely on the historic year test to issue additional Senior Bonds. The Bond Ordinance also specifies additional bond tests for the issuance of any Subordinate Bonds. These tests are identical to the additional Senior Bond tests. The District has never defaulted on any District-wide or subdistrict revenue bond payment and is expected to be able to issue additional revenue bonds throughout the study period. However, the issuance of additional revenue bonds in 2013 through 2016 will require voter approval of an additional revenue bond authorization of about $1 billion. Table 14 presents the results of the rate covenant and additional bond coverage tests during the six- year study period. As indicated by Line 4 of Table 14, the indicated annual rate covenant coverage ranges from 2.55 times annual debt service to 4.23 times annual debt service, well above the 1.25 minimum requirement. Likewise, the additional bond coverage levels for Senior Bonds, as shown on Lines 11 and 16 of Table 14, are also well above their 1.25 minimum requirements. Coverage indicated for total debt is also above the 1.15 minimum requirement, as shown on Lines 12 and 17 of Table 14. Metropolitan St. Louis Sewer District Bond Covenant Compliance D-63 Table 14 Debt Service Coverage Under Indicated Revenue Levels Table 14 Debt Service Coverage Under Indicated Revenue Levels Fiscal Year Ending June 30,_______________________________________________________________ No. Description 2011 2012 2013 2014 2015 2016________________________________________________________________________________ Rate Covenant Coverage 1 Projected Actual Net Revenue (a) 81,470,600 87,886,900 95,989,400 109,765,600 126,788,300 155,966,200 Projected Actual Debt Service Becoming Due in Each Fiscal Year (b) 2 Senior Lien Bonds 19,270,300 20,829,300 27,490,100 38,622,200 49,635,600 59,533,500 3 Total Debt (c)37,562,900 41,559,000 51,873,900 65,201,400 78,660,300 90,582,000 Projected Actual Net Revenue as a Percent of Debt Service 4 Senior Bonds (d)4.23 x 4.22 x 3.49 x 2.84 x 2.55 x 2.62 x 5 Total Debt (e)2.17 x 2.11 x 1.85 x 1.68 x 1.61 x 1.72 x Additional Parity Bond Coverage Projected Maximum Annual Debt Service (f) 6 Senior Bonds Only 32,433,300 35,307,100 45,482,100 57,307,100 67,207,100 76,832,100 7 All Senior and Subordinate Bonds 43,232,200 48,657,100 61,077,200 75,147,300 87,292,400 99,162,500 Preceding Year Test 8 Net Revenue for Prior Fiscal Year 58,614,700 81,470,600 87,886,900 95,989,400 109,765,600 126,788,300 9 Net Revenue Adjustment (g)18,591,700 9,193,200 16,586,000 20,869,800 23,696,600 28,558,600 _________ _________ _________ _________ _________ _________ 10 Adjusted Net Revenue 77,206,400 90,663,800 104,472,900 116,859,200 133,462,200 155,346,900 Adjusted Net Revenue for Preceding Year as a Percent of Debt Service 11 Senior Bonds (h)2.38 x 2.57 x 2.30 x 2.04 x 1.99 x 2.02 x 12 Total Debt (i)1.79 x 1.86 x 1.71 x 1.56 x 1.53 x 1.57 x Ensuing Year Test 13 Net Revenue for Ensuing Fiscal Year 87,886,900 95,989,400 109,765,600 126,788,300 155,966,200 184,748,700 14 Net Revenue Adjustment (j)(8,357,500) (15,131,400) (19,921,400) (24,334,400) (32,041,900) (33,933,400) _________ _________ _________ _________ _________ _________ 15 Adjusted Net Revenue 79,529,400 80,858,000 89,844,200 102,453,900 123,924,300 150,815,300 Projected Actual Net Revenue for Ensuing Fiscal Year as a Percent of Debt Service 16 Senior Bonds (k)2.45 x 2.29 x 1.98 x 1.79 x 1.84 x 1.96 x 17 Total Debt (l)1.84 x 1.66 x 1.47 x 1.36 x 1.42 x 1.52 x (a) Net revenue as shown on Line 18 of Table 11. Includes the impact of adopted rate increases each year, which will be fully operative in the years indicated by Table 11. (b) Projected actual payments of principal and interest from the Sinking Fund to bondholders. (c) Includes senior revenue bond and subordinate debt obligations. (d) Line 1 / Line 2. The Bond Ordinance requires net revenue to equal or exceed 1.25x actual debt service. (e) Line 1 / Line 3. The Bond Ordinance requires net revenue to equal or exceed 1.15x actual debt service. (f) Maximum future debt service for all series of revenue bonds issued in previous years or during the current fiscal year. (g) Adjustment for revenue increases to be fully operative July 1 of the current fiscal year as permitted by the Bond Ordinance. (h) Line 10 / Line 6. The Bond Ordinance requires adjusted net revenue for the preceding fiscal year to equal or exceed 1.25x the maximum annual debt service on all then outstanding senior lien revenue bonds. (i) Line 10 / Line 7. The Bond Ordinance requires adjusted net revenue for the preceding fiscal year to equal or exceed 1.15x the maximum annual debt service on all then outstanding debt obligations. (j) Adjustment for revenue increases not permitted for the ensuing year coverage test unless already authorized by the Board. (k) Line 15 / Line 6. The Bond Ordinance requires net revenue for the ensuing three fiscal years to equal or exceed 1.25x the maximum annual debt service on all then outstanding senior lien revenue bonds. (l) Line 15 / Line 7. The Bond Ordinance requires net revenue for the ensuing three fiscal years to equal or exceed 1.15x the maximum annual debt service on all then outstanding debt obligations. Line Metropolitan St. Louis Sewer District Recent Events Impacting Debt Service Coverage D-64 Recent Events Impacting Debt Service Coverage During the development of the official statement for the Series 2011B Bonds, actual financial data for the wastewater utility during fiscal year 2011 was collected and summarized. This data indicated differences in revenues and operation and maintenance expenditures for fiscal year 2011. The primary difference for operation and maintenance expenses was due to reclassification of CIRP costs used in the May 10, 2011 rate change proposal as adjusted by the Rate Commission to reflect a cash instead of an appropriations basis. Table 15 presents the CIRP projects that have been reclassified as operating costs. This reclassification results in lower CIRP costs and higher operation and maintenance costs as well as higher costs for routine capital expenditures than previously provided to the Rate Commission and presented in this report. Table 15 Segmented Financial Statement Adjustments Table 15 Segmented Financial Statement Adjustments Line No. Description 2011 2012 2013 2014 2015 2016__________________________________________________________________ $$$$$$ Indicated Decrease in CIRP Costs (a) 1 Planning 15,090,448 5,380,000 4,730,000 1,330,000 1,330,000 1,330,000 2 Infiltration/Inflow 8,740,874 5,500,000 3,000,000 3 CCTV Inspection 4,799,690 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000 4 In-House Engineering 2,320,258 1,100,000 5 Cleaning 1,826,514 6 Infrastructure Repairs (b) 1,354,574 1,500,000 2,000,000 2,000,000 2,000,000 2,000,000 7 Flow Metering & Monitoring 560,085 8 Design 88,709 3,000,000________________________________________________ 9 Total at 2010 Cost Level 34,781,152 19,480,000 12,730,000 6,330,000 6,330,000 6,330,000 10 Inflation Factors (c)1.0300 1.0609 1.0927 1.1255 1.1593 1.1941 11 Inflated CIRP Adjustments 35,825,000 20,666,000 13,910,000 7,124,000 7,338,000 7,558,000 Indicated Increases in Operating Costs 12 O&M 34,429,400 19,075,000 11,725,000 4,873,500 5,019,700 5,170,200 13 Routine Capital 1,395,600 1,591,000 2,185,000 2,250,500 2,318,300 2,387,800________________________________________________ 14 Total Increase 35,825,000 20,666,000 13,910,000 7,124,000 7,338,000 7,558,000 15 2011 O&M Adjustment (d) (8,252,100)________________________________________________ 16 Net O&M Adjustments 26,177,300 19,075,000 11,725,000 4,873,500 5,019,700 5,170,200 (a) Derived from detailed CIRP costs available during the Rate Commission proceedings. (b) Infrastructure repairs are classified as routine capital costs. (c) All CIRP costs were inflated at 3 percent per year without adjustment by the Rate Commission. (d) Adjustment required to match fiscal year 2011 O&M cost per District's segmented financial statement. Metropolitan St. Louis Sewer District Recent Events Impacting Debt Service Coverage D-65 Impact of Recent Adjustments Although the reclassification of CIRP projects to operation and maintenance and routine capital costs that must now be financed by annual revenues instead of a mixture of cash and debt financing, the increase in operating costs is less than the amount of revenue previously used to cash finance major capital improvements. Therefore, this reclassification has no impact on the wastewater rate increases required to support the Rate Commission recommendations. However, it has a significant impact on debt service coverage ratios. The impact of these adjustments is illustrated by a restatement of Tables 3, 11 and 14 in this section. As indicated by Table 14A, debt service coverage remains above the stated minimum required levels. D-66 Metropolitan St. Louis Sewer District Recent Events Impacting Debt Service Coverage Table 3A Capital Improvement Program Financing Table 3ACapital Improvement Program FinancingFiscal Year Ending June 30,__________________________________________________________No Description2011 2012 2013 2014 2015 2016 Total__________________________________________________________________________________$$$$$$ $Source of Funds1 Beginning of Year Balance92,977,300 15,430,100 14,374,000 39,587,700 64,580,700 55,332,200 92,977,3002 Revenue Bond Proceeds0 52,250,000 185,000,000 215,000,000 180,000,000 175,000,000 807,250,0003 State Revolving Loan Proceeds 37,000,000 39,769,300 35,000,000 35,000,000 35,000,000 35,000,000 216,769,3004 Cash Financing of Construction8,650,000 20,688,000 20,077,000 24,717,000 26,208,000 42,200,000 142,540,0005 Grants & Contributions (a)454,800 474,500 1,494,900 516,300 538,600 561,900 4,041,0006 Interest Income (b)2,305,400 2,062,900 1,273,300 1,666,200 1,581,400 1,409,500 10,298,700________________________________________________________________7 Total Funds Available141,387,500 130,674,800 257,219,200 316,487,200 307,908,700 309,503,600 1,273,876,300Application of Funds8 Major Capital Improvements122,398,000 110,437,000 202,639,000 234,844,000 237,929,000 260,257,000 1,168,504,0009 Improvement Fund Projects1,265,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 11,265,00010 Issuance Costs (c)552,200 990,000 2,817,500 3,237,500 2,747,500 2,677,500 13,022,20011 Revenue Bond Reserve Fund (d)1,742,200 2,873,800 10,175,000 11,825,000 9,900,000 9,625,000 46,141,000________________________________________________________________12 Total Application of Funds125,957,400 116,300,800 217,631,500 251,906,500 252,576,500 274,559,500 1,238,932,20013 End of Year Fund Balance15,430,100 14,374,000 39,587,700 64,580,700 55,332,200 34,944,100 34,944,100 (a) Includes anticipated contributions from the City of Arnold to reserve capacity in the Lower Meramec River Wastewater Treatment Plant. (b) Interest Income is estimated at 1% of the average of the beginning and end of year balances. (c) Issuance Costs are estimated at 1.40% of the issue amount for Revenue Bonds, 0.65% of the issue amount for SRF Loans, and $25,000 per issue for commercial paper. (d) The required balance in the Revenue Bond Reserve Fund is determined to be the maximum principal and interest payment on senior debt.Line Metropolitan St. Louis Sewer District Recent Events Impacting Debt Service Coverage D-67 Table 11A Comparison of Projected Wastewater Revenue with Projected Revenue Requirements Table 11A Comparison of Projected Wastewater Revenue with Projected Revenue Requirements Fiscal Year Ending June 30,__________________________________________________________ No. Description 2011 2012 2013 2014 2015 2016 Total__________________________________________________________________________________ $$$$$$ $ 1 Revenue Under Existing Rates (a) 213,795,600 212,030,000 211,019,700 210,681,800 210,501,800 210,431,800 1,268,460,700 Additional Revenue Required Fiscal Revenue Months Year Increase Effective____________________ 2 2012 4.3% 12 8,357,500 9,073,800 9,059,300 9,051,600 9,048,600 44,590,800 3 2013 7.5% 12 15,131,400 16,480,600 16,466,500 16,461,000 64,539,500 4 2014 9.2% 12 19,921,400 21,713,800 21,706,600 63,341,800 5 2015 10.3% 12 24,334,400 26,537,700 50,872,100 6 2016 12.3% 12 32,041,900 32,041,900_________________________________________________________________ 7 Total Additional Revenue 0 8,357,500 24,205,200 45,461,300 71,566,300 105,795,800 255,386,100_________________________________________________________________ 8 Total Service Charge Revenue 213,795,600 220,387,500 235,224,900 256,143,100 282,068,100 316,227,600 1,523,846,800 9 Other Operating Revenue 3,283,700 3,382,400 1,489,600 790,000 (108,100) (1,314,000) 7,523,600 10 Connection Fee Revenue 1,250,000 1,288,000 1,327,000 1,367,000 1,408,000 1,450,000 8,090,000 11 Interest Income - Reserve Funds 926,100 1,002,300 1,147,500 1,348,100 1,545,800 1,736,400 7,706,200 12 Interest Income - Operations 25,100 50,300 50,400 50,400 50,400 50,300 276,900 13 Interest Income - Arnold 650,700 631,000 610,500 589,100 566,800 543,600 3,591,700_________________________________________________________________ 14 Subtotal Other Revenue 6,135,600 6,354,000 4,625,000 4,144,600 3,462,900 2,466,300 27,188,400_________________________________________________________________ 15 Total Revenue 219,931,200 226,741,500 239,849,900 260,287,700 285,531,000 318,693,900 1,551,035,200 16 Operation and Maintenance Expense 160,572,100 157,876,600 156,894,200 156,212,100 160,852,000 165,635,500 958,042,500 17 Additional O&M (b)0 0 112,400 2,159,800 7,484,100 7,930,800 17,687,100_________________________________________________________________ 18 Net Revenue 59,359,100 68,864,900 82,843,300 101,915,800 117,194,900 145,127,600 575,305,600 Debt Service 19 Existing Senior Revenue Bonds 19,290,600 19,415,200 19,550,800 19,686,000 19,834,400 19,973,200 117,750,200 20 Proposed Senior Revenue Bonds 0 1,676,400 13,048,800 24,873,800 34,773,800 44,398,800 118,771,600 _________________________________________________________________ 21 Total Senior Revenue Bonds 19,290,600 21,091,600 32,599,600 44,559,800 54,608,200 64,372,000 236,521,800 22 Existing State Revolving Fund Loans (c) 19,113,700 21,311,100 21,401,300 21,483,500 21,355,600 21,728,600 126,393,800 23 Proposed State Revolving Fund Loans (c)0 1,701,000 4,048,100 6,293,200 8,538,300 10,783,100 31,363,700 _________________________________________________________________ 24 Total State Revolving Fund Loans 19,113,700 23,012,100 25,449,400 27,776,700 29,893,900 32,511,700 157,757,500 25 Commercial Paper 000000 0 _________________________________________________________________ 26 Total Debt Service 38,404,300 44,103,700 58,049,000 72,336,500 84,502,100 96,883,700 394,279,300 27 Routine Annual Improvements 3,774,200 4,052,900 4,720,700 4,862,300 5,008,400 5,158,700 27,577,200 28 Cash Financing of Major Improvements 8,650,000 20,688,000 20,077,000 24,717,000 26,208,000 42,200,000 142,540,000 29 Additions to Operating Reserve 3,512,100 0 0 0 1,479,200 884,500 5,875,800 30 Net Annual Balance (d)5,018,500 20,300 (3,400)0 (2,800) 700 5,033,300 31 Beginning of Year Balance (e)2,000 5,020,500 5,040,800 5,037,400 5,037,400 5,034,600 2,000 32 End of Year Balance (e)5,020,500 5,040,800 5,037,400 5,037,400 5,034,600 5,035,300 5,035,300 (a) Revenue under wastewater rates effective July 1, 2010. (b) O&M costs related to anticipated regulatory projects. These projects include improved disinfection at the Missouri River WW TP in 2013 and 2014; expansion of the Missouri River WWTP in 2015; and Capacity, Management, Operation, and Maintenance (CMOM) program activities related to anticipated Consent Decree requirements in 2016. (c) Debt service on State Revolving Fund (SRF) Loans are net of the state's interest subsidy. (d) Negative balances indicate need to drawdown available fund balance. (e) Does not include funds set aside for a minimum operating reserve equal to 60 days of operating expenses. Line Metropolitan St. Louis Sewer District Recent Events Impacting Debt Service Coverage D-68 Table 14A Debt Service Coverage Under Indicated Revenue Levels Table 14A Debt Service Coverage Under Indicated Revenue Levels Fiscal Year Ending June 30,_______________________________________________________________ No. Description 2011 2012 2013 2014 2015 2016________________________________________________________________________________ Rate Covenant Coverage 1 Projected Actual Net Revenue (a) 59,359,100 68,864,900 82,843,300 101,915,800 117,194,900 145,127,600 Projected Actual Debt Service Becoming Due in Each Fiscal Year (b) 2 Senior Lien Bonds 19,270,300 20,829,300 27,490,100 38,622,200 49,635,600 59,533,500 3 Total Debt (c)37,562,900 41,559,000 51,873,900 65,201,400 78,660,300 90,582,000 Projected Actual Net Revenue as a Percent of Debt Service 4 Senior Bonds (d)3.08 x 3.31 x 3.01 x 2.64 x 2.36 x 2.44 x 5 Total Debt (e)1.58 x 1.66 x 1.60 x 1.56 x 1.49 x 1.60 x Additional Parity Bond Coverage Projected Maximum Annual Debt Service (f) 6 Senior Bonds Only 32,433,300 35,307,100 45,482,100 57,307,100 67,207,100 76,832,100 7 All Senior and Subordinate Bonds 43,232,200 48,657,100 61,077,200 75,147,300 87,292,400 99,162,500 Preceding Year Test 8 Net Revenue for Prior Fiscal Year 58,646,300 59,359,100 68,864,900 82,843,300 101,915,800 117,194,900 9 Net Revenue Adjustment (g)18,591,700 9,193,200 16,586,000 20,869,800 23,696,600 28,558,600 _________ _________ _________ _________ _________ _________ 10 Adjusted Net Revenue 77,238,000 68,552,300 85,450,900 103,713,100 125,612,400 145,753,500 Adjusted Net Revenue for Preceding Year as a Percent of Debt Service 11 Senior Bonds (h)2.38 x 1.94 x 1.88 x 1.81 x 1.87 x 1.90 x 12 Total Debt (i)1.79 x 1.41 x 1.40 x 1.38 x 1.44 x 1.47 x Ensuing Year Test 13 Net Revenue for Ensuing Fiscal Year 68,864,900 82,843,300 101,915,800 117,194,900 145,127,600 172,667,700 14 Net Revenue Adjustment (j)(8,357,500) (15,131,400) (19,921,400) (24,334,400) (32,041,900) (33,933,400) _________ _________ _________ _________ _________ _________ 15 Adjusted Net Revenue 60,507,400 67,711,900 81,994,400 92,860,500 113,085,700 138,734,300 Projected Actual Net Revenue for Ensuing Fiscal Year as a Percent of Debt Service 16 Senior Bonds (k)1.87 x 1.92 x 1.80 x 1.62 x 1.68 x 1.81 x 17 Total Debt (l)1.40 x 1.39 x 1.34 x 1.24 x 1.30 x 1.40 x (a) Net revenue as shown on Line 18 of Table 11. Includes the impact of adopted rate increases each year, which will be fully operative in the years indicated by Table 11. (b) Projected actual payments of principal and interest from the Sinking Fund to bondholders. (c) Includes senior revenue bond and subordinate debt obligations. (d) Line 1 / Line 2. The Bond Ordinance requires net revenue to equal or exceed 1.25x actual debt service. (e) Line 1 / Line 3. The Bond Ordinance requires net revenue to equal or exceed 1.15x actual debt service. (f) Maximum future debt service for all series of revenue bonds issued in previous years or during the current fiscal year. (g) Adjustment for revenue increases to be fully operative July 1 of the current fiscal year as permitted by the Bond Ordinance. (h) Line 10 / Line 6. The Bond Ordinance requires adjusted net revenue for the preceding fiscal year to equal or exceed 1.25x the maximum annual debt service on all then outstanding senior lien revenue bonds. (i) Line 10 / Line 7. The Bond Ordinance requires adjusted net revenue for the preceding fiscal year to equal or exceed 1.15x the maximum annual debt service on all then outstanding debt obligations. (j) Adjustment for revenue increases not permitted for the ensuing year coverage test unless already authorized by the Board. (k) Line 15 / Line 6. The Bond Ordinance requires net revenue for the ensuing three fiscal years to equal or exceed 1.25x the maximum annual debt service on all then outstanding senior lien revenue bonds. (l) Line 15 / Line 7. The Bond Ordinance requires net revenue for the ensuing three fiscal years to equal or exceed 1.15x the maximum annual debt service on all then outstanding debt obligations. Line Metropolitan St. Louis Sewer District Principal Assumptions D-69 Principal Black & Veatch Assumptions In conducting our analyses and in forming an opinion of future operations summarized in this report, Black & Veatch has made certain assumptions with respect to conditions, events, and circumstances that may occur in the future. The methodology utilized by Black & Veatch in performing the analysis follows generally accepted practices for such projections. Such assumptions and methodologies are summarized in this report and are reasonable and appropriate for the purpose for which they are used. While Black & Veatch believes the assumptions are reasonable and the projection methodology valid, actual results may differ materially from those projected, as influenced by the conditions, events, and circumstances that actually occur. The principal assumptions used in the forecast of future operations are as follows: 1. In preparation of this report, Black & Veatch has relied on certain historical, financial, and statistical data supplied by District staff. While such data is considered reliable, Black & Veatch has not independently verified the detailed accuracy of such data. 2. The District’s estimates of content, scheduling, and cost of the six-year capital improvement program present a reasonable projection of the future construction program and complies with the initial terms of the Consent Decree. 3. Billed wastewater volume will continue to decrease but will level off towards the end of the study period. 4. A Bond election will be held in fiscal year 2012 and the qualified voters in the District will authorize $945 million of additional wastewater revenue bonds. 5. The Board will approve the indicated revenue increases for fiscal years 2013 through 2016 and the issuance of additional bonds as required to finance the CIRP. 6. Debt service for the revenue bonds proposed to be issued after the Series 2011B Bonds will be approximately as estimated. 7. The District will maintain a minimum operating reserve balance at all times that is at least equal to 60 days of operating expenditures. 8. If the District does not obtain additional revenue bond authority, the Board will approve the alternative pay-as-you-go wastewater rates for fiscal year 2013 presented in the May 10, 2011 rate change proposal.. 9. There will be no material changes in federal and state laws or regulations that would adversely impact the District’s ability to secure tax-exempt financing for its System, place more stringent limitations on wastewater effluent discharges, materially increase the cost of constructing or operating the wastewater system, or otherwise adversely impact operations of the System. Metropolitan St. Louis Sewer District Principal Assumptions D-70 10. The general economy that impacts System costs and users’ capabilities to pay wastewater service charges will remain relatively stable at current conditions. 11. All revenue and revenue requirement projections presented in this report are expressed on a cash basis consistent with the District’s operating budgets. It is assumed that similar analysis based upon an accrual basis will not significantly alter the findings with respect to the financial feasibility of the Series 2011B Bonds. E-1 FORM OF OPINION OF CO-BOND COUNSEL Gilmore & Bell, P.C., St. Louis, Missouri, and White Coleman & Associates, LLC, St. Louis, Missouri, Co- Bond Counsel, propose to issue their approving opinions upon the issuance of the Series 2011B Bonds in substantially the following form: The Metropolitan St. Louis Sewer District St. Louis, Missouri J.P. Morgan Securities LLC New York, New York Re: $52,250,000 The Metropolitan St. Louis Sewer District, Wastewater System Revenue Bonds, Series 2011B Ladies and Gentlemen: We have acted as co-bond counsel in connection with the issuance by The Metropolitan St. Louis Sewer District (the “District”), of the above-captioned bonds (the “Bonds”). In this capacity, we have examined the District’s Charter, the law and the certified proceedings, certifications and other documents that we deem necessary to render this opinion. The Bonds are issued pursuant to a Master Bond Ordinance adopted by the Board of Trustees of the District on April 22, 2004, as supplemented by the Ordinance adopted by the Board of Trustees of the District on December 8, 2011 (collectively, the “Bond Ordinance”). Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Bond Ordinance. Regarding questions of fact material to our opinion, we have relied upon the certified proceedings and other certifications of public officials furnished to us without undertaking to verify the same by independent investigation. Based on and subject to the foregoing, we are of the opinion, under existing law, as follows: 1. The Bonds have been duly authorized, executed and delivered by the District and are valid and legally binding limited obligations of the District, payable solely from the Pledged Revenues of the District’s sanitary sewer system (the “System”), after providing for the costs of operation and maintenance thereof. The Bonds do not constitute general obligations of the District nor do they constitute an indebtedness of the District within the meaning of any constitutional, statutory or charter provision, limitation or restriction, and the taxing power of the District is not pledged to the payment of the Bonds. 2. The Bond Ordinance has been duly adopted by the Board of Trustees of the District and constitutes a valid and legally binding obligation of the District enforceable against the District. The Bond APPENDIX E E-2 Ordinance creates a valid lien on the revenues and other funds pledged by the Bond Ordinance for the security of the Bonds on a parity with any Senior Bonds issued or to be issued as provided under the Bond Ordinance. 3. The interest on the Bonds (i) is excludable from gross income for federal income tax purposes, (ii) is exempt from income taxation by the State of Missouri, and (iii) is not an item of tax preference for purposes of computing the federal alternative minimum tax imposed on individuals and corporations, but is taken into account in determining adjusted current earnings for the purpose of computing the alternative minimum tax imposed on certain corporations. The opinions set forth in this paragraph are subject to the condition that the District complies with all requirements of the Internal Revenue Code of 1986, as amended (the “Code”) that must be satisfied subsequent to the issuance of the Bonds in order that interest thereon be, or continue to be, excludable from gross income for federal income tax purposes. The District has covenanted to comply with all of these requirements. Failure to comply with certain of these requirements may cause the interest on the Bonds to be included in gross income for federal and State of Missouri income tax purposes retroactive to the date of issuance of the Bonds. The Bonds have not been designated as “qualified tax-exempt obligations” for purposes of Section 265(b) of the Code. We express no opinion regarding the accuracy, completeness or sufficiency of the Official Statement or other offering material relating to the Bonds (except to the extent, if any, stated in the Official Statement). Further, we express no opinion regarding the perfection or priority of the lien on revenues or other funds pledged under the Bond Ordinance or tax consequences arising with respect to the Bonds other than as expressly set forth in this opinion. The rights of the owners of the Bonds and the enforceability of the Bonds and the Bond Ordinance may be limited by bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors’ rights generally and by equitable principles, whether considered at law or in equity, and their enforcement may be subject to the exercise of judicial discretion in appropriate cases. This opinion is given as of its date, and we assume no obligation to revise or supplement this opinion to reflect any facts or circumstances that may come to our attention or any changes in law that may occur after the date of this opinion. Very truly yours, [THIS PAGE INTENTIONALLY LEFT BLANK] [THIS PAGE INTENTIONALLY LEFT BLANK] The MeTropoliTan ST. louiS Sewer DiSTricT • waSTewaTer SySTeM revenue BonDS, SerieS 2011B