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HomeMy Public PortalAbout2020B Fitch Rating11/16/2020 Fitch Rates Metropolitan St. Louis Sewer District, MO's Wastewater Revs 'AA+'; Outlook Stable https://www.fitchratings.com/research/us-public-finance/fitch-rates-metropolitan-st-louis-sewer-district-mo-wastewater-revs-aa-outlook-stable-16-11-2…1/12 RATING ACTION COMMENTARY Fitch Rates Metropolitan St. Louis Sewer District, MO's Wastewater Revs 'AA+'; Outlook Stable Mon 16 Nov, 2020 - 10:02 AM ET Fitch Ratings - Austin - 16 Nov 2020: Fitch Ratings has assigned the following rating to the Metropolitan St. Louis Sewer District, MO (MSD, or the district): --Approximately $120 million wastewater system revenue bonds, series 2020B at 'AA+'. The bonds are scheduled to sell competitively the week of Nov. 30. Bond proceeds will be used to finance a portion of the district's capital improvement replacement program (CIRP) costs, and pay costs of issuance. In addition, Fitch affirms the following ratings: --Issuer Default Rating (IDR) at 'AA+'; --$1.2 billion in outstanding wastewater system revenue bonds at 'AA+'. The Rating Outlook is Stable. 11/16/2020 Fitch Rates Metropolitan St. Louis Sewer District, MO's Wastewater Revs 'AA+'; Outlook Stable https://www.fitchratings.com/research/us-public-finance/fitch-rates-metropolitan-st-louis-sewer-district-mo-wastewater-revs-aa-outlook-stable-16-11-2…2/12 ANALYTICAL CONCLUSION The 'AA+' IDR and bond ratings reflect the system's low financial leverage in the context of its very strong revenue defensibility and very low operating risk profile, both assessed at 'aa'. The strength of the system's revenue defensibility is rooted in the district's strong revenue-raising ability, supported by a large and diverse retail customer base in the service territory of St. Louis County, and very strong rate flexibility. MSD's operating cost burden is moderate, with capital spending expected to continue ramping up to address regulatory requirements. The system's low leverage, as measured by net adjusted debt to adjusted funds available for debt service (FADS), has trended down over the last three fiscal years ending at 4.5x in fiscal 2020, but is expected to increase over the next five years with additional planned debt. CREDIT PROFILE The district operates the fourth largest wastewater treatment system in the U.S. MSD provides retail wastewater, collection, treatment and disposal service 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 modest growth over the past five fiscal years. Coronavirus Considerations The recent outbreak of coronavirus has created an uncertain environment for the water and sewer sector. While only about 6% of the district's customers are commercial/industrial businesses, roughly 30% of MSD's user charge revenue comes from these customers. The district continues to evaluate potential impacts to revenue due to the coronavirus outbreak, including the impact local health-related orders and the federal stimulus package may have on delinquencies and collection activity. Additionally, a rate increase of 1.5% in fiscal 2021 was postponed by three months from July 1, 2020, to October 1, 2020. Fitch's ratings are forward-looking in nature, and we will continue to monitor developments related to the severity and duration of the virus outbreak, as well as revise expectations for future performance as appropriate. KEY RATING DRIVERS Revenue Defensibility 'aa' 11/16/2020 Fitch Rates Metropolitan St. Louis Sewer District, MO's Wastewater Revs 'AA+'; Outlook Stable https://www.fitchratings.com/research/us-public-finance/fitch-rates-metropolitan-st-louis-sewer-district-mo-wastewater-revs-aa-outlook-stable-16-11-2…3/12 Affordable Rates; Favorable Service Area Characteristics All revenues are generated from monopolistic sources. Service area characteristics are favorable, with relatively little customer growth coupled with midrange income levels and unemployment rates. While rate increases are subject to review by an independent rate commission (RC), the board is not prevented from adopting rate increases that are different from the RC report and thus possesses full ability to determine its rates for service. Rates are affordable for the vast majority of the population MSD serves. Operating Risks 'aa' Very Low Cost Burden; Moderate Life Cycle Investment Needs Operating costs are very low, and the district's life cycle investment needs are moderate given that capital spending has consistently exceeded the pace of annual depreciation. While the district's multi-decade capital plan is very large, it is well developed. Increased spending will continue as the district continues to address regulatory requirements as part of a consent decree. Financial Profile 'aa' Strong Financial Profile The district's financial profile is strong but is expected to weaken somewhat over the next five years as additional debt is issued to construct consent decree-related projects. Coverage and liquidity levels are robust and do not constrain the assessment. 11/16/2020 Fitch Rates Metropolitan St. Louis Sewer District, MO's Wastewater Revs 'AA+'; Outlook Stable https://www.fitchratings.com/research/us-public-finance/fitch-rates-metropolitan-st-louis-sewer-district-mo-wastewater-revs-aa-outlook-stable-16-11-2…4/12 ASYMMETRIC ADDITIVE RISK CONSIDERATIONS No asymmetric additive risk considerations affected this rating determination. RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: --Consistently stronger than expected cash flow from operations that reduces the district's reliance on additional debt to fund the planned capital program and drives leverage ratios down to around 4.0x or less in Fitch's base and stress case. Factors that could, individually or collectively, lead to negative rating action/downgrade: --A material increase in the leverage metric above Fitch's projections that is consistently over 7.0x. --A continuation of sizeable rate increases that ultimately leads to rate pressure such that the rate flexibility subfactor assessment falls to 'a'. BEST/WORST CASE RATING SCENARIO International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector- specific best- and worst-case scenario credit ratings, visit [https://www.fitchratings.com/site/re/10111579]. SECURITY 11/16/2020 Fitch Rates Metropolitan St. Louis Sewer District, MO's Wastewater Revs 'AA+'; Outlook Stable https://www.fitchratings.com/research/us-public-finance/fitch-rates-metropolitan-st-louis-sewer-district-mo-wastewater-revs-aa-outlook-stable-16-11-2…5/12 The senior lien bonds are payable from pledged revenues of the district's sanitary sewer system after payment of O&M expenses. Pledged revenues include all operating revenues from the sanitary sewer system, interest earnings (excluding interest earnings derived from state revolving fund [SRF] bonds, stormwater revenues and obligations issued by the district related to its subdistricts), hedge payments, and moneys in funds and accounts specified in the bond ordinance, including amounts in the renewal and extension funds. Subordinate lien SRF bonds are paid subsequent to the senior lien bonds. REVENUE DEFENSIBILITY The revenue defensibility assessment is based on the monopolistic nature of the services provided by the sanitary sewer system. Service area characteristics are considered favorable for MSD with income levels consistently about 8%-10% above national averages, low unemployment and relatively flat customer growth over the past five years. Further, the service territory is diverse with limited concentration. System rate increases are subject to review by an independent RC (as mentioned previously). However, the board is not prevented from adopting rate increases that are different from the RC report and thus possesses full authority to determine its rates for service. Rates are affordable for the vast majority of the population MSD serves, with around 18% of the population considered to face high charges. Rates have grown at or around double-digit levels in recent years, which has reduced affordability in the service territory, but adjustments over the next several years are expected to be more moderate (in the 2%-4% range), which should lessen concerns regarding deterioration in affordability. OPERATING RISKS MSD's operating cost burden has been very low with costs consistently well below the 'aa' assessment of $6,500/mg. The system also has a low life cycle ratio, and annual capital spending has consistently exceeded 250% of depreciation over the past five years. The district's capital improvement and replacement program (CIRP) is primarily driven by an EPA consent decree entered into on April 27, 2012. MSD has spent over $1.8 billion thus far on consent decree-related capital projects, and this has greatly contributed to system upgrades and renewal. The consent decree provides for an estimated $4.7 billion (in 2010 dollars) for projects focusing primarily on the elimination of sanitary sewer and combined 11/16/2020 Fitch Rates Metropolitan St. Louis Sewer District, MO's Wastewater Revs 'AA+'; Outlook Stable https://www.fitchratings.com/research/us-public-finance/fitch-rates-metropolitan-st-louis-sewer-district-mo-wastewater-revs-aa-outlook-stable-16-11-2…6/12 sewer overflows (SSOs and CSOs), along with asset reinvestment. Given the level of investment associated with the consent decree, coupled with other planned system improvements, capital spending is expected to continue ramping up and should continue to support the current operating risk assessment. FINANCIAL PROFILE Combined with healthy cash balances, the system's leverage ratio, including all fixed obligations, was a low 4.5x in fiscal 2020. The system's outstanding debt increased to $1.7 billion at the end of fiscal 2020 from $1.3 billion in fiscal 2017 to fund capex discussed above. Cash balances and FADS over the same period increased to $555 million and $273 million from $340 million and $153 million, respectively. The result is that leverage declined to 4.5x from over 6.0x in prior years due to increased cash reserves and higher operating margins. Liquidity at 641 current days cash on hand provides financial flexibility and coverage of full obligations has been consistently over 1.7x over the past five years. Fitch Analytical Stress Test (FAST) Fitch's FAST considers the potential trend of key ratios in a base case and a stress case. The stress case is designed to impose capital costs 10% above expected levels and evaluate potential variability in projected key ratios. The FAST base case is informed by MSD's financial forecast. Leverage under the base and the stress case is expected to reach 7.3x- 7.9x by fiscal 2025 given expected additional debt of around $1.2 billion over the next five years. While leverage may exceed 7.0x for two to three years over the next five-year period, the rating reflects Fitch's expectation that leverage will decline thereafter as capital costs ramp down. Any change to this expected trend could pressure the leverage profile assessment and rating. ASYMMETRIC ADDITIVE RISK CONSIDERATIONS No asymmetric additive risk considerations affect the rating. SOURCES OF INFORMATION 11/16/2020 Fitch Rates Metropolitan St. Louis Sewer District, MO's Wastewater Revs 'AA+'; Outlook Stable https://www.fitchratings.com/research/us-public-finance/fitch-rates-metropolitan-st-louis-sewer-district-mo-wastewater-revs-aa-outlook-stable-16-11-2…7/12 In addition to the sources of information identified in Fitch's applicable criteria specified below, this action was informed by information from Lumesis. REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria. ESG CONSIDERATIONS Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG 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 Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg VIEW ADDITIONAL RATING DETAILS FITCH RATINGS ANALYSTS Julieta Seebach Director Primary Rating Analyst RATING ACTIONS ENTITY/DEBT RATING PRIOR Metropolitan St. Louis Sewer District (MO) LT IDR AA+ Rating Outlook Stable Affirmed AA+ Rating Outlook Stable LT AA+ Rating Outlook Stable Affirmed AA+ Rating Outlook Stable Metropolitan St. Louis Sewer District (MO) /Sewer Revenues/1 LT • 11/16/2020 Fitch Rates Metropolitan St. Louis Sewer District, MO's Wastewater Revs 'AA+'; Outlook Stable https://www.fitchratings.com/research/us-public-finance/fitch-rates-metropolitan-st-louis-sewer-district-mo-wastewater-revs-aa-outlook-stable-16-11-2…8/12 +1 512 215 3743 Fitch Ratings, Inc. 111 Congress Avenue Suite 2010 Austin, TX 78701 Major Parkhurst Director Secondary Rating Analyst +1 512 215 3724 Amy Laskey Managing Director Committee Chairperson +1 212 908 0568 MEDIA CONTACTS Sandro Scenga New York +1 212 908 0278 sandro.scenga@thefitchgroup.com Additional information is available on www.fitchratings.com APPLICABLE CRITERIA ADDITIONAL DISCLOSURES Dodd-Frank Rating Information Disclosure Form Solicitation Status Endorsement Policy ENDORSEMENT STATUS Public Sector, Revenue-Supported Entities Rating Criteria (pub. 27 Mar 2020) (including rating assumption sensitivity) U.S. Water and Sewer Rating Criteria (pub. 03 Apr 2020) (including rating assumption sensitivity) Metropolitan St. Louis Sewer District (MO)EU Endorsed 11/16/2020 Fitch Rates Metropolitan St. Louis Sewer District, MO's Wastewater Revs 'AA+'; Outlook Stable https://www.fitchratings.com/research/us-public-finance/fitch-rates-metropolitan-st-louis-sewer-district-mo-wastewater-revs-aa-outlook-stable-16-11-2…9/12 DISCLAIMER ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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US Public Finance Infrastructure and Project Finance North America United States 11/16/2020 Fitch Rates Metropolitan St. Louis Sewer District, MO's Wastewater Revs 'AA+'; Outlook Stable https://www.fitchratings.com/research/us-public-finance/fitch-rates-metropolitan-st-louis-sewer-district-mo-wastewater-revs-aa-outlook-stable-16-11-…12/12