HomeMy Public PortalAboutExhibit MSD 16M Moody's Credit RatingExhibit MSD 16M
MOODY'S ASSIGNS Aa2 RATING AND STABLE OUTLOOK TO METROPOLITAN ST. LOUIS SEWER
DISTRICT'S (MO) $85 MILLION TAXABLE WASTEWATER SYSTEM REVENUE BONDS (BUILD
AMERICA BONDS — DIRECT PAY), SERIES 2010B
Aa2 RATING AND STABLE OUTLOOK APPLIES TO $344 MILLION OF SENIOR LIEN SEWER
REVENUE DEBT, INCLUDING CURRENT OFFERING
Moody's Investors Service has assigned a Aa2 rating and stable outlook to the Metropolitan St. Louis Sewer
District's (MO) $85 million Taxable Wastewater System Revenue Bonds (Build America Bonds — Direct Pay),
Series 2010B. Concurrently, Moody's has affirmed the Aa2 rating and stable outlook on the district's
outstanding senior lien sewer debt. The Metropolitan St. Louis Sewer District has $344 million in outstanding
senior lien sewer revenue debt, including the current offering. Secured by a senior lien on the net revenues
of the district's wastewater system, the current bonds represent a portion of $275 million of debt capacity
that was authorized by voters in August 2008 to fund improvements and expansions to the sewer system.
Assignment of the Aa2 rating and stable outlook reflects the system's large and diverse service area, which
encompasses the City of St. Louis (general obligation rated A2/stable outlook) and most of St. Louis County
(general obligation rated Aaa/stable outlook); satisfactory financial operations that benefit from the district's
independent rate setting authority; ample debt service coverage; debt levels that are expected to
significantly increase to fund extensive capital improvements needed to address Combined Sewer Overflow
(CSO) and Sanitary Sewer Overflow (SSO) issues; and satisfactory legal covenants.
LARGE AND DIVERSE SERVICE AREA ENCOMPASSES CITY OF ST. LOUIS AND MOST OF ST. LOUIS
COUNTY
The Metropolitan St. Louis Sewer District (MSD) is the nation's fourth largest wastewater system, with 1,928
miles of combined sewers and a customer base of approximately 430,000. MSD's service area
encompasses 525 square miles and includes the entirety of the City of St. Louis and 90% of St. Louis
County. More than 75% of total accounts and 65% of total billings are attributable to customers in the
County. The user base is diverse with the top 10 customers accounting for only 5.8% of fiscal 2009 billings.
The system's top customer, InBev Anheuser Busch (senior unsecured rated Baa2/stable outlook) accounted
for 3.1 % of fiscal 2009 billings. MSD officials do not expect the recent merger of Anheuser Busch and InBev
to impact the wastewater system's operating revenues in the foreseeable future. The system operates seven
treatment facilities covering the Mississippi, Missouri, and Meramac River watersheds and has adequate
capacity. The system is permitted to handle 423 million gallons of flow per day, which exceeds the system's
2008 maximum level of 395 million gallons per day.
The St. Louis regional economy is sizeable and diverse. Considerable institutional stability exists in the
healthcare sector, with BJC Healthcare (revenue rated Aa2/stable outlook) as the area's top employer. The
area is also home to multiple education institutions, as well as corporate headquarters such as Monsanto,
Edward Jones, Express Scripts and Enterprise Rent-A-Car. However, economic pressures exist. The
region's prolonged trend of population and property valuation growth have recently reversed due in part to
the economic recession. Additionally, Chrysler Corporation closed its St. Louis plant in 2009. Chrysler was
the system's fifth largest customer, representing $700,000 in revenue in fiscal 2009. MSD officials plan to
offset the lost revenue through various revenue enhancements and expenditure controls. The system may
also be impacted by defense industry pressures at Boeing Co. (senior unsecured rated A2/negative outlook),
which is the area's second largest employer and the wastewater system's sixth largest user. Despite these
challenges, Moody's believes the size and diversity of the regional economy support the system's Aa2
ratings.
SATISFACTORY FINANCIAL OPERATIONS BENEFIT FROM DISTRICT'S INDEPENDENT RATE
SETTING AUTHORITY; AMPLE DEBT SERVICE COVERAGE
Moody's expects the district's sound financial operations will continue due to management's demonstrated
willingness and ability to adjust rates as needed to provide for strong debt service coverage. Although
coverage has dropped from levels in the early 2000s as MSD has issued additional debt, it remains strong.
Senior lien debt service coverage was 4.5 times in fiscal 2008 and 5.8 times in fiscal 2009. Debt service
coverage on all debt, including subordinate lien State Revolving Loan Fund (SRF) debt, is also sound at 2.3
times in fiscal 2008 and 3.1 times in fiscal 2009. The district's financial projections through fiscal 2012
(which incorporate expected debt issuance and rate increases) show similar levels of coverage, with senior
lien debt service coverage projected to range between 5.3 times and 5.8 times, and debt service coverage
on all debt to range between 2.9 times and 3.6 times. The district's fiscal 2009 net working capital
represented a robust 235% of operations and maintenance expenditures. Fiscal 2009 operating revenues
equaled $210 million (wastewater system revenues only) and have increased annually since fiscal 2002 due
to rate increases and modest increases in billable flow with the exception of a slight drop in fiscal 2007 when
service charges dropped largely due to water conservation programs enacted by some of MSD's largest
customers.
While MSD's rate -setting process includes a Rate Commission comprised of community groups that
recommend rates to the board, MSD's board has ultimate rate -setting authority and can set rates at odds
with the Commission's recommendations. MSD most recently enacted a 13% rate increase effective for the
final 7 months of fiscal 2008. Additional rate increases of 2.4%, 4.7%, and 4.3% are planned for fiscals 2010,
2011, and 2012, respectively. The system's current rates are average for comparably sized peers, although
future rate increases tied to CSO and SSO work are expected to be substantial. Favorably, MSD officials are
already preparing the public for the scope of future capital needs and the likely impact on customers.
DEBT LEVELS EXPECTED TO SIGNIFICANTLY INCREASE; EXTENSIVE CAPITAL IMPROVEMENTS
NEEDED TO ADDRESS CSO AND SSO ISSUES
Moody's believes the district's present debt profile is manageable with a fiscal 2009 debt ratio of 17%.
However, debt levels are expected to significantly increase in the next several decades. In August 2008,
76% of district voters authorized the issuance of $275 million in revenue bonds to fund a variety of capital
projects, including increasing the system's wastewater treatment capacity by building a new treatment plant
and expanding and improving existing plants. To date, the district has issued $146 million of the authorized
debt, including the current issue. Officials expect to issue the remaining $129 million in two installments: $78
million in subordinate lien SRF loans in 2011 and $51 million in senior lien bonds in 2012. MSD has kept
debt ratios manageable through considerable pay -go financing, with approximately 47% of capital project
costs cash funded, a ratio that officials expect to maintain with future projects.
Over the longer term, Moody's expects the system's debt levels to significantly increase in order to address
CSO and SSO issues. In June 2007, the United States Environmental Protection Agency (EPA) and
Missouri Department of Natural Resources (DNR) filed a lawsuit against the district due to violations of the
Clean Water Act. The violations were related to CSO and SSO events. CSO events are largely tied to
infrastructure in the central city and inner -ring suburbs while SSO events are found throughout the suburban
areas of the system. In July 2008, MSD and the EPA entered into discussions, and in March 2009,
mediation. In September 2009, the district submitted a wet weather control plan to EPA to address the CSO
issue. The EPA is currently reviewing the plan, although the exact review timeframe is not known. MSD also
plans to submit a SSO plan to EPA within the next three years. Early estimates indicate the plan will cost
approximately $3.8 billion to fund wastewater system improvements, with an additional $2.2 billion for
possible stormwater system projects. The EPA has historically required that plans be implemented over 20
years, although the MSD plans assume a 25 year to 30 year project timeline. MSD has begun addressing
some work tied to CSO and SSO issues such as expanding wet weather capacity at treatment plants, but
Moody's believes the liabilities incurred as a result of EPA litigation will significantly add to the district's
capital needs. Favorably, the district's practice of cash funding a portion of capital projects should mitigate
future debt levels, and MSD's demonstrated willingness and ability to increase rates should provide for a
continuation of healthy debt service coverage. All of MSD's outstanding debt is in fixed rate mode, and the
district is not a party to any interest rate swap agreements.
SATISFACTORY LEGAL PROVISIONS
Moody's believes that the legal provisions outlined in the master and supplemental bond ordinances provide
satisfactory security for bondholders. Debt service on the current bonds is secured by a senior lien on the
net revenues of the wastewater system and are on parity with the system's Series 2004A, 2006C, and
2008A wastewater revenue bonds. Net revenues are defined as gross operating revenues of the wastewater
system less operating and maintenance expenditures. Pledged revenues explicitly exclude stormwater
system revenues. The rate covenant calls for net revenues to provide at least 1.25 times annual debt service
coverage on all senior lien bonds and 1.15 times debt service coverage on all debt. An additional bonds test
calls for net revenues to equal a strong 1.25 times MADS on all senior lien debt and 1.15 times MADS on all
debt for either 12 consecutive months during the most recent 18 month period or in the financial forecasts
for the next three fiscal years. The debt service reserve requirement is the lesser of 10% of the principal on
the senior lien bonds; MADS on senior lien debt; or 1.25 times average annual debt service on senior lien
debt. The district will fund the debt service reserve with bond proceeds.
KEY STATISTICS
Type of system: Sewage collection and treatment
2009 estimated service area population: 1.4 million
Fiscal 2009 customer base: 427,205
Fiscal 2009 net working capital: $376 million
Fiscal 2009 operating revenues: $210 million (excludes stormwater system revenues)
Fiscal 2009 operating ratio: 64%
Fiscal 2009 debt ratio: 17%
Fiscal 2009 debt service coverage: 5.83 times (senior lien); 3.06 times (all debt)
Post -sale sewer revenue debt outstanding: $344 million (senior lien); $529 million (all debt)
RATING METHODOLOGIES AND LAST RATING ACTION
The principal methodology used in rating the current issue was Analytical Framework for Water and Sewer
System Ratings, which is available on www.moodys.com in the Rating Methodologies sub -directory under
the Research & Ratings tab. Other methodologies and factors that may have been considered in the
process of rating this issuer can also be found in the Rating Methodologies sub -directory on Moody's
website.
The last rating action for the Metropolitan St. Louis Sewer District was on October 15, 2008, when the Aa2
rating and stable outlook on the district's senior lien sewer revenue debt was affirmed.