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2019B&C S&P RatingSummary: Metropolitan St. Louis Sewer District, Missouri; Combined Utility; Water/Sewer Primary Credit Analyst: Gregory Dziubinski, Chicago + 1 (312) 233 7085; gregory.dziubinski@spglobal.com Secondary Contact: Scott D Garrigan, New York (1) 312-233-7014; scott.garrigan@spglobal.com Table Of Contents Rationale Outlook WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 6, 2019 1 Summary: Metropolitan St. Louis Sewer District, Missouri; Combined Utility; Water/Sewer Credit Profile US$312.73 mil wastewater sys rev bnds ser 2019C dtd 12/04/2019 due 05/01/2045 Long Term Rating AAA/Stable New US$52.28 mil wastewater sys rev bnds ser 2019B dtd 12/04/2019 due 05/01/2049 Long Term Rating AAA/Stable New Metro St Louis Swr Dist wastewtr sys rev bnds Long Term Rating AAA/Stable Affirmed Rationale S&P Global Ratings assigned its 'AAA' rating and stable outlook to Metropolitan St. Louis Sewer District (MSD), Mo.'s series 2019B and 2019C wastewater system revenue and revenue refunding bonds and affirmed its 'AAA' rating, with a stable outlook, on MSD's existing sewerage system revenue debt. The rating reflects our opinion of the combination of exceptionally strong enterprise- and financial-risk profiles. The enterprise-risk profile reflects our opinion of MSD's: • Service-area participation in the broad and diverse St. Louis metropolitan statistical area economy; • Very low industry risk as a monopolistic service provider of an essential public utility; • Current rate affordability we consider strong when benchmarked against income and St. Louis County's poverty rate, which overlaps with most of MSD's service base--However, increasing county poverty rates and future rate increases needed to support the capital plan could pressure our affordability assessment; and • Strong Operational Management Assessment practices and policies. The financial-risk profile reflects our opinion of MSD's: • Financial performance that routinely exceeds bond-covenant minimums for debt service coverage (DSC); • Large unrestricted cash and investments on hand that have represented no less than 400 days' operating expenses since, at least, fiscal 2010; and • Strong financial management practices and policies under our Financial Management Assessment methodology. The system has a predominantly locally derived revenue base. Local service charges, derived through an autonomous rate-setting process, represent all system revenue; coupled with operating expense flexibility, this limits exposure to federal revenue. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 6, 2019 2 Officials intend to use series 2019B bond proceeds to fund planned projects for fiscal years 2020-2022, including: • Collection system improvements to reduce combined sewer overflows (CSOs), eliminate sewer overflows, and reduce building backups; • Design storage tunnels and tanks and relief sewers; and • Continue to fund Deer Creek Sanitary Tunnel's construction. Officials plan to use series 2019C bond proceeds to advance refund portions of bond series outstanding. A senior-lien net-wastewater-operating-revenue pledge, excluding stormwater-system-related property tax revenue, secures the bonds. MSD has agreed to maintain rates and charges to sustain, at least, 1.25x DSC on all senior-lien debt and 1.15x on all debt-service requirements. MSD could issue additional senior-lien revenue bonds if pro forma net revenue equals, at least, 1.25x maximum annual debt service (MADS) on new and existing senior-lien debt and 1.15x MADS on all new and existing debt. Officials indicate the debt-service-reserve fund will not secure series 2019B and 2019C bonds. Rather, the bonds will be on parity with $1.145 billion of wastewater revenue bonds senior to $363 million of subordinate wastewater revenue bonds and state-revolving-fund loans at June 30, 2019. In 2016, MSD's electorate authorized $900 million of additional sewer system revenue bonds. MSD provides wastewater treatment and stormwater management to St. Louis and about 87% of St. Louis County. The large customer base includes roughly 427,000 accounts, serving a population estimate of 1.3 million, which we consider stable and diverse. County accounts represent 80% of total customers. Anheuser-Busch InBev N.V./S.A., the leading user in St. Louis, accounted for just 1.36% of wastewater user charges in fiscal 2019; the next nine leading users accounted for 3.22%. MSD has entered into a consent decree with the U.S. Environmental Protection Agency to address $4.7 billion, in 2010 dollars, of needs over a 23-year period, incorporating various projects as part of its CSO long-term-control plan and sanitary-sewer-overflow projects. The consent decree, in MSD's view, aligns with its capital-improvement-and-replacement program (CIRP). MSD invested close to $1.5 billion in capital expenditures from fiscal years 2013-2019. From fiscal years 2017-2020, CIRP project allocations include: • $561 million for the elimination of sanitary sewer overflows, • $311 million for system-renewal-and-capacity projects, • $230 million for the reduction and control of CSOs, and • $65 million for treatment-plant improvements. MSD earmarked $1.26 billion in the fiscal years 2017-2020 CIRP to continue to address consent-decree overflows, renewal-and-capacity projects, and treatment-plant improvements. To date, we understand that CIRP spending remains underbudget and that management expects this to continue through fiscal 2020. CIRP investment for fiscal years 2021-2024 is roughly $1.7 billion. Through fiscal 2019, MSD has funded the CIRP with a mix of debt (73% of program costs) and cash (27%). Management plans to increase pay-as-you-go cash funding by 38% and 45% in fiscal WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 6, 2019 3 Summary: Metropolitan St. Louis Sewer District, Missouri; Combined Utility; Water/Sewer years 2020 and 2021, respectively. In June 2018, MSD finalized an amendment to its consent decree that extends the compliance date to 28 years, which is an additional five years. The extension will allow it to address certain nonconsent-decree capital projects and delay the start of some CSO tunnels while expediting solids-handling projects, including air-emission improvements to incinerators to meet Clean Air Act requirements. We consider affordability strong. Following a 10.3% rate increase in July 2019, the monthly average residential rate, as reported by management, for 700 cubic feet of use is $60.44. When benchmarked against St. Louis County's median household effective buying income of 111% and 10% poverty rate, we consider rates affordable, representing 1.3% of median household effective buying income. MSD is currently finalizing its next multiyear rate proposal that extends from fiscal years 2021-2024. Proposed rate increases are lower than recent adjustments, ranging from 2.4%-3.9% annually. A 15-member rate commission, established in 2000, reviews MSD's rate proposal, seeks public feedback, and submits recommendations to the board of trustees. Historical finances, measured by DSC and liquidity, have remained, in our opinion, exceptionally strong. During fiscal years 2013-2019, net pledged revenue--essentially a standard net revenue calculation less unpledged property taxes--has covered annual total debt service by no less than 1.6x. All-in DSC was 2x at fiscal year-end June 30, 2019. During those same seven fiscal years, unrestricted current cash and investments have represented no less than 550 days' cash on hand and about 860 days', or $421 million, in fiscal 2019. Management plans to ramp up pay-as-you-go funding to alleviate some additional rate adjustments and debt needs; therefore, we expect liquidity will likely decrease during the next few fiscal years. However, management's target is to maintain, at least, 550 days' cash on hand, which we still consider extremely strong. Our analysis of MSD's projections indicates strong financial performance is likely to continue. A wide array of management policies--including strategic, long-term capital and pro forma financial planning--support the enterprise- and financial-risk profiles. MSD continues to adjust rates annually; it is also finalizing the next round of rate adjustments to meet targets of no less than 1.8x all-in DSC and, at least, 550 days' cash on hand. A formal policy, however, exists to maintain 60 days' operating reserves. Although MSD is operating under a consent decree, it has met all project deadlines; it also expects to be underbudget for fiscal years 2017-2020. Management updates its strategic business plan and CIRP annually, including goals for customer outreach, revenue diversification, formal staff training, and capital improvements and replacements. Management's revenue and expense projections are, in our opinion, reasonable. MSD completes timely generally accepted-accounting-principles audits. In 2018 and 2019, MSD began addressing cybersecurity risk by completing a security-access review, a cybersecurity audit for its plants and pumps, and a vulnerability test on its network. Outlook The stable outlook reflects S&P Global Ratings' opinion MSD will likely continue to adjust rates and expenses, as necessary, to maintain financial performance consistent with historical trends, particularly because it continues to fund CIRP projects with additional debt and pay-as-you-go funding. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 6, 2019 4 Summary: Metropolitan St. Louis Sewer District, Missouri; Combined Utility; Water/Sewer Downside scenario While unlikely during the current two-year outlook period, we could lower the rating if MSD does not produce financial metrics we consider consistent with the rating, particularly since it continues to fund the large capital plan. We posit the additional debt needed to support its capital program could pressure rate affordability because it continues to increase rates to preserve strong finances; if this were to occur, we could lower the rating during the next few fiscal years. Ratings Detail (As Of November 6, 2019) Metropolitan St Louis Swr Dist wastewatr sys rev bnds ser 2018A Long Term Rating AAA/Stable Affirmed Metro St Louis Swr Dist wastewtr Unenhanced Rating AAA(SPUR)/Stable Affirmed Many issues are enhanced by bond insurance. Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. 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