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2019B&C Fitch Rating New Issue │ November 14, 2019 fitchratings.com 1 Public Finance Water and Sewer U.S.A. Metropolitan St. Louis Sewer District, Missouri Wastewater System Revenue Bonds New Issue Details Sale Date: Week of Nov. 18, via negotiation. Series: Approximately $52,280,000 Wastewater System Revenue Bonds, Series 2019B, and approximately $312,730,000 Taxable Wastewater System Refunding Revenue Bonds, Series 2019C. Purpose: To finance a portion of Metropolitan St. Louis Sewer District’s (the district) capital and improvement replacement program (CIRP) costs, refund a portion of the district’s outstanding bonds for savings and pay costs of issuance. Security: The bonds are payable from net revenues of the district’s sanitary sewer system (the system). No debt service reserve is being funded in connection with the 2019B or 2019C bonds. Key Rating Drivers Financial Margins Remain Sound: Debt service coverage (DSC) margins have remained solid over the past five years. Forecasts provided by management show this trend continuing through fiscal 2024. Fiscal 2019 finished with senior and all-in DSC of 3.1x and 2.1x, respectively. Escalating Debt Burden: Leverage ratios are elevated and will continue to climb as the district borrows to address regulatory requirements. Voter Support for Debt: The district’s charter requires voter approval of any new debt issuance. Strong approval levels experienced to date should provide ongoing support for rate increases necessary to service the district’s increasing debt carrying costs. Strong Liquidity: Liquidity margins have been strong and are expected to remain so. Cash and investments, including noncurrent unrestricted investments, equaled 843 days cash on hand (DCOH) at fiscal year-end 2019. Rating Sensitivities Reduced Financial Margins: Ongoing retail rate support will be critical to maintenance of the Metropolitan St. Louis Sewer District's rating given the rapid escalation in system debt. Coverage margins that are weaker than forecast levels, or a decline in liquidity below historical norms, would likely result in negative rating action. Increases in Debt Metrics: Unexpected increases in the district’s debt metrics, including debt- per-customer and debt-to-funds available for debt service (FADS), would also likely pressure the rating. New Issue Wastewater System Revenue Bonds, Series 2019B AA+ Taxable Wastewater System Refunding Revenue Bonds, Series 2019C AA+ Outstanding Debt Wastewater System Revenue Bonds AA+ Rating Outlook Stable Applicable Criteria Public Sector, Revenue-Supported Entities Rating Criteria (November 2019) U. S. Water and Sewer Rating Criteria (November 2018) Related Research Fitch Rates Metro St. Louis Sewer District, MO's Wastewater Revs 'AA+'; Outlook Stable (November 2019) 2020 Water and Sewer Medians (November 2019) Fitch Ratings 2019 Outlook: U.S. Water and Sewer Sector (December 2018) Analysts Julie Garcia Seebach +1 512 215 3743 julie.seebach@fitchratings.com Alessandra Felloni +1 646 582 4694 alessandra.felloni@fitchratings.com New Issue │ November 14, 2019 fitchratings.com 2 Public Finance Water and Sewer U.S.A. Credit Profile The district provides wastewater treatment services to a population of approximately 1.3 million or roughly 427,000 accounts within the city of St. Louis and the vast majority of St. Louis County. The customer base is stable, with accounts experiencing flat growth over the past five fiscal years. Solid Financial Metrics The district has been largely debt financing its CIRP, which is leading to a growth in annual debt service carrying costs. Notably, the district's carrying costs have more than doubled since 2014. To offset the rising cost of capital, the district has steadily increased rates and thus has managed to keep financial margins stable. Resulting financial metrics have been sound with all-in DSC ranging between 1.8x and 2.1x over the past five fiscal years. For comparison purposes, Fitch Ratings’ 2019 ‘AA’ median for all-in DSC is just slightly higher at 2.5x. The rate package approved in fiscal 2016 is projected to keep all-in DSC above 2.0x through fiscal year 2020, which coincides with the end of the 2016 rate package. The next round of four-year rate increases was accepted by the district’s 15-member rate commission in October 2019, and the board is expected to approve the rates in early 2020. If approved, rate increases are expected to range between 2% and 4% over the fiscal 2020 to 2024 period. Future rate hikes will be necessary to support the rising costs of capital. Reserve balances have historically been very strong, with available cash and investments equal to $410 million or 843 DCOH at the end of 2019. Cash balances are expected to remain robust moving forward. Regulatory-Driven Capital Plan The district’s CIRP is largely driven by an EPA consent decree entered into on April 27, 2012. The consent decree provides for an estimated $4.7 billion (in 2010 dollars) in projects focusing primarily on the elimination of sanitary sewer and combined sewer overflows (SSOs and CSOs) and asset reinvestment. The district has spent approximately $1.4 billion on consent decree-related capital projects through fiscal 2019. Actual spending has reportedly been slightly lower than initially budgeted thus far. An amendment was requested and approved in 2018 extending the implementation timeline from 23 years to 28 years as newly issued regulations have resulted in the delay of some of the projects associated with the original consent decree. The extension should allow the district to better manage costs and therefore help to temper year-over-year rate increases. Increasing Debt and Capital Needs Capital spending over the next five years is projected to be a su bstantial $2.0 billion, with the costs divided between CSO and SSO remediation, system renewal and capacity projects and treatment plant upgrades. Approximately 53% of the spending is expected to be funded from planned debt with the remaining from surplus cash and existing bond proceeds. Due to funding of the large capital plan, leverage ratios are high and are expected to continue climbing. Outstanding debt per customer is projected to increase from $3,915 at the end of fiscal 2019 to over $5,400 by the end of fiscal 2024, compared to Fitch's sector 'AA' median of $1,673 in five years. Debt-to-FADS is also elevated at 7.0x compared to Fitch’s ‘AA’ median of 5.2x. Approximately 85% of voters supported the $945 million debt authorization in June 2012 and 76% approved the $900 million authorization in April 2016. The continued support of voters for additional debt and rate increases tied to the carrying cost of the debt are key to maintaining the district’s rating. Additionally, any expansion of the CIRP requiring more debt will likely pressure the rating. Limited Rate Flexibility Customers without water meters (primarily in-city customers) pay a fixed amount plus additional fees based on the number of rooms, water closets, and baths or showers in each Rating History — Senior Lien Rating Action Outlook/ Watch Date AA+ Affirmed Stable 11/8/19 AA+ Affirmed Stable 12/6/18 AA+ Affirmed Stable 11/20/17 AA+ Affirmed Stable 11/18/16 AA+ Affirmed Stable 11/18/12 AA+ Affirmed Stable 10/12/12 AA+ Downgraded Stable 11/29/11 AAA Revised Stable 4/3/10 AA+ Affirmed Stable 8/29/11 AA+ Upgraded Stable 10/8/08 AA Assigned Stable 4/1/04 New Issue │ November 14, 2019 fitchratings.com 3 Public Finance Water and Sewer U.S.A. residence. Metered customers are billed based on a fixed and volumetric charge, with fixed charges representing approximately 40% of the total bill for an average user. Assuming Fitch's standard usage of eight hundred cubic feet (or 6,000 gallons of sewer flow s per month), the fiscal 2019 average monthly wastewater bill for a metered customer was around $59.16. This is slightly above Fitch's affordability threshold of 1% of median household income (MHI) and therefore could limit future rate-raising ability. Already approved rate hikes will result in an increase of 11% in fiscal 2020, and rate increases averaging 3% annually over the next five years are being proposed. However, the large fixed component of the bill is viewed favorably by Fitch and thus, along with the strong voter support, somewhat mitigates the higher rates. Mixed But Sound Service Area The St. Louis metropolitan area is home to a number of Fortune 1,000 companies and is the primary economic engine for Missouri. Given its access to major waterwa ys, it is also a hub for trade and distribution. County unemployment rates are lower than state and national averages while income levels are higher than average. However, the city of St. Louis, which represents approximately 35% of the district’s serviced population, exhibits below-average income and higher poverty statistics. ESG Considerations Unless otherwise disclosed in this section, the highest level of Environmental, Social and Governance (ESG) credit relevance is a score of 3. This signals that ES G issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on our ESG Relevance Scores, visit www.fitchratings.com/esg. New Issue │ November 14, 2019 fitchratings.com 4 Public Finance Water and Sewer U.S.A. Financial Summary ($000, Audited Years Ended June 30) 2015 2016 2017 2018 2019 2020a 2021a 2022a 2023a 2024a Balance Sheet Unrestricted Cash and Investments 132,951 182,927 286,332 300,591 241,182 — — — — — Other Unrestricted Current Assets 80,305 92,395 93,373 103,832 113,242 — — — — — Available Restricted Cash and Investments 165,781 156,994 61,275 67,265 168,650 — — — — — Current Liabilities Payable from Unrestricted Assets (100,969) (113,902) (122,406) (130,451) (139,995) — — — — — Net Working Capital 278,068 318,415 318,574 341,237 383,078 — — — — — Net Fixed Assets 2,426,122 2,584,522 2,778,088 2,962,768 3,141,476 — — — — — Total Debt 1,135,101 1,315,402 1,475,902 1,693,176 1,670,520 — — — — — Operating Statement Operating Revenues 288,836 318,463 333,470 368,293 401,109 442,295 450,571 467,051 483,998 502,623 Non-Operating Revenues Available for Debt Service 2,403 3,877 2,485 6,359 14,437 10,345 8,690 8,867 8,865 9,575 BABs/RZED Bonds Subsidy 1,615 1,624 1,623 1,625 1,631 — — — — — Total Revenues Available for Debt Service 292,854 323,964 337,578 376,276 417,177 452,640 459,261 475,917 492,863 512,199 Operating Expenditures (Excluding Depreciation) 163,288 171,317 174,869 166,422 177,516 179,674 194,305 194,557 201,294 205,945 Depreciation 68,289 73,783 71,129 71,366 73,523 — — — — — Fitch-Calculated Operating Income 61,277 78,864 91,580 138,488 166,138 272,966 264,956 281,360 291,569 306,254 Net Revenues Available for Debt Service 129,566 152,647 162,708 209,854 239,660 272,966 264,956 281,360 291,569 306,254 Senior Lien ADS 38,352 46,381 58,182 67,923 77,941 79,150 84,018 91,357 98,317 109,129 All-In ADS 61,848 73,760 89,361 100,399 114,133 117,202 125,151 136,228 150,205 169,289 Financial Statistics Sr. Lien DSC 3.4 3.3 2.8 3.1 3.1 3.5 3.2 3.1 3.0 2.8 Sr. ADS (Excluding BABs/ RZED Bonds Subsidy) 3.3 3.3 2.8 3.1 3.1 3.5 3.2 3.1 3.0 2.8 All-In ADS 2.1 2.1 1.8 2.1 2.1 2.3 2.1 2.1 1.9 1.8 All-In ADS (Excluding BABs/ RZED Bonds Subsidy) 2.1 2.1 1.8 2.1 2.1 2.3 2.1 2.1 1.9 1.8 Days Cash on Hand 668 724 726 807 843 — — — — — Days Working Capital 622 678 665 748 788 — — — — — Debt/Net Plant (%) 47 51 53 57 53 — — — — — Outstanding L/T Debt Per Customer ($) 2,672 3,113 3,461 3,969 3,915 — — — — — Outstanding L/T Debt Per Capita ($) 1,134 1,318 1,481 1,698 — — — — — — Free Cash/Depreciation (%) 99 107 103 153 171 — — — — — aForecast. N.A. – Not available. Notes: Fitch may have reclassified certain financial statement items for analytical purposes. Sources: Fitch Ratings, Fitch Solutions, Metropolitan St. Louis Sewer District. New Issue │ November 14, 2019 fitchratings.com 5 Public Finance Water and Sewer U.S.A. The ratings above were solicited and assigned or maintained at the request of the rated entity/Issuer or a related third party. Any exceptions follow below. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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