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HomeMy Public PortalAbout2020B S&P RatingSummary: Metropolitan St. Louis Sewer District, Missouri; Combined Utility; Water/Sewer Primary Credit Analyst: John Schulz, Centennial + 1 (303) 721 4385; john.schulz@spglobal.com Secondary Contact: Scott D Garrigan, New York + 1 (312) 233 7014; scott.garrigan@spglobal.com Table Of Contents Rating Action Stable Outlook Credit Opinion Related Research WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 13, 2020 1 Summary: Metropolitan St. Louis Sewer District, Missouri; Combined Utility; Water/Sewer Credit Profile US$120.0 mil wastewtr sys rev bnds ser 2020B due 05/01/2050 Long Term Rating AAA/Stable New Rating Action S&P Global Ratings assigned its 'AAA' rating to Metropolitan St. Louis Sewer District (MSD), Mo.'s roughly $120 million series 2020B wastewater system improvement revenue bonds. At the same time, S&P Global Ratings affirmed its 'AAA' rating on MSD's existing wastewater system revenue debt. The outlook is stable. Officials intend to use bond proceeds to fund a portion of the district's Capital Finance Plans Contemplated under Consent Decree (CIRP). 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. Credit overview The rating reflects our opinion of MSD's general creditworthiness and a combination of very strong enterprise-risk and extremely strong financial-risk profiles; both profiles incorporate our analysis of historical and projected extremely strong all-in DSC and liquidity. MSD makes timely multiyear rate increases to support its finances and a capital-intensive combined-sewer-overflow (CSO) consent decree. The affirmation of the 'AAA' rating reflects our opinion of MSD's extremely strong liquidity and management's conservative and strategic planning, which provides financial and operating flexibility during the two-year outlook. However, S&P Global Ratings believes there remains a high degree of uncertainty about the evolution of the COVID-19 pandemic. Reports that at least one experimental vaccine is highly effective and might gain initial approval by the end of the year are promising, but this is merely the first step toward a return to social and economic normality; equally critical is the widespread availability of effective immunization, which could come by the middle of next year. We use this assumption in assessing the economic and credit implications associated with the pandemic. For more information, see our article "Potholes On The Road To Recovery" (published Sept. 29, 2020, on RatingsDirect). As the situation evolves, we will update our assumptions and estimates accordingly. The enterprise-risk profile reflects our opinion of MSD's: WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 13, 2020 2 • 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: • MSD continues to adjust rates annually; it is also finalizing the next round of rate adjustments to meet no less than 1.8x all-in DSC and, at least, 550 days' cash on hand. A formal policy, however, maintains 60 days' operating reserves; • 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. Environmental, social, and governance (ESG) factors Overall, we think management mitigates most ESG-related risk by adopting, adhering to, and adjusting its operating and financial policies and procedures. Management's well-defined and conservative long-term planning meets all compliance and milestones of its long-term-control plan, which is currently underbudget, mitigating environmental risk from sewer overflows that resulted in the U.S. Environmental Protection Agency (EPA) consent decree. Combined with the consent decree regarding flooding from the facility's proximity to the Mississippi River, we believe the MSD demonstrates elevated environmental risk. Additionally, greater pressure on the service-area economy due to higher public health-and-safety risks from COVID-19 increases MSD's overall social-risk factors due to rate-affordability issues. To mitigate affordability risk, management has developed a customer-assistance program that offers a 50% rate reduction to qualifying low-income, elderly, and disabled customers. Additionally, management has partnered with other lower-income programs to expand and educate customers on the program. Therefore, we consider government risk factors a strength. Supporting this assessment is MSD's wide array of management policies--including strategic, long-term capital, and pro forma financial planning--supporting the enterprise and financial risk profiles. Although MSD operates under a consent decree, it has met all project deadlines; it also been under budget for fiscal years 2017-2020. Management updates its strategic-business plan and CIRP annually, including customer-outreach; revenue-diversification; and formal-staff-training goals, as well as capital improvements and replacements. In 2018 and 2019, MSD began addressing its cybersecurity risk by completing a security-access review, a cybersecurity audit for its plants and pumps, and a vulnerability network test. Stable Outlook Downside scenario We could lower the rating or revise the outlook to negative during the two-year outlook if economic fundamentals were to erode materially due to the pandemic until economic normality returns, resulting in weakening affordability WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 13, 2020 3 Summary: Metropolitan St. Louis Sewer District, Missouri; Combined Utility; Water/Sewer and limiting additional rate-raising flexibility to support the long-term-control plan and currently exceptional financial profile. We could also lower the rating if MSD were to lose revenue from all customer classes due to a prolonged economic shutdown, significantly deteriorating all-in DSC or liquidity. Credit Opinion Enterprise risk 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 1.33% of wastewater user charges in fiscal 2020; the next nine leading users accounted for 3.16%. MSD entered into a consent decree with the EPA to address $4.7 billion (in 2010 dollars) of needs during 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 CIRP. MSD invested close to $1.1 billion in capital expenditures from fiscal years 2013-2019. From fiscal years 2017-2020, CIRP project allocations include: • $526 million for the elimination of sanitary-sewer overflows; • $297 million for system-renewal-and-capacity projects; • $209 million for CSO reduction and control; and • $62 million for treatment-plant improvements. For fiscal years 2021-2024, CIRP investments are roughly $1.7 billion. Through fiscal 2019, MSD has funded the CIRP with a mix of debt (71% of program costs) and cash (29%). Management plans to increase pay-as-you-go cash funding by 52% and 41% in fiscal years 2021 and 2022, respectively. We consider affordability strong, albeit pressured by the COVID-19-related recession. Following a 10.3% rate increase in July 2019, the monthly average residential rate, according to management, for 600 cubic feet of consumption is $55.57. When benchmarked against St. Louis County's median household effective buying income of 111% and 10% poverty rate, we consider rates affordable, representing 1.2% of median household effective buying income. We note affordability is more of a concern in St. Louis, which accounts for about 20% of customers. St. Louis' median household effective buying income was 73.5%, significantly lower than the county's, representing greater affordability stress. MSD's customer-assistance program--a 50% rate reduction to qualifying low-income, elderly, and disabled customers--somewhat mitigates affordability concerns. MSD has finalized its next multiyear rate proposal from fiscal years 2021-2024. Proposed rate increases are lower than recent adjustments, ranging from 1.5%-3.7% 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. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 13, 2020 4 Summary: Metropolitan St. Louis Sewer District, Missouri; Combined Utility; Water/Sewer Financial risk profile 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--covered annual total debt service by no less than 1.6x. All-in DSC was 2.0x at fiscal year-end June 30, 2019. During those same seven fiscal years, unrestricted current cash and investments represented no less than 550 days' cash on hand compared with about 860 days', or $421 million, in fiscal 2019. Audited 2020 is coming in at 2.46x all-in DSC and $467 million or about 971 days of cash on hand. 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. Management's target, however, 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. We stressed management's projections by applying a 15% haircut to operating revenue, and we expect that through fiscal 2022 all-in DSC will likely remain near 1.6x. Related Research Through The ESG Lens 2.0: A Deeper Dive Into U.S. Public Finance Credit Factors, April 28, 2020 Ratings Detail (As Of November 13, 2020) Metro St Louis Swr Dist wastewtr sys rev bnds Long Term Rating AAA/Stable Affirmed Unenhanced Rating NR(SPUR) Metropolitan St Louis Swr Dist wastewatr sys rev bnds ser 2018A Long Term Rating AAA/Stable Affirmed Metro St Louis Swr Dist wastewtr (MBIA) (National) 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. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 13, 2020 5 Summary: Metropolitan St. Louis Sewer District, Missouri; Combined Utility; Water/Sewer WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 13, 2020 6 STANDARD & POOR’S, S&P and RATINGSDIRECT are registered trademarks of Standard & Poor’s Financial Services LLC. S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. 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