HomeMy Public PortalAboutExhibit MSD 48 - Standard & Poor's Rating ReportExhibit MSD 48
Metropolitan St. Louis Sewer District, Missouri;
Water/Sewer
Credit Profile
US$150.0 mil wastewtr sys rev bnds ser 2013B due 05/01/2034
Long Term Rating AAA/Stable
Rationale
New
Standard & Poor's Ratings Services assigned its 'AAA' rating to Metropolitan St. Louis Sewer District (MSD or the
district), Mo.'s 2013B wastewater system revenue bonds. At the same time, Standard & Poor's affirmed its 'AAA' rating
on the MSD's existing revenue -secured debt. The outlook is stable.
The rating reflects our assessment of the district's:
• Strong and diverse service area economy covering the City of St. Louis and St. Louis County;
Large, diversified customer base;
▪ Moderate rates not subject to outside regulation;
• Strong financial operations, with strong pro forma debt service coverage; and
• Strong management policies and planning capabilities.
MSD's net wastewater operating revenues, excluding property tax revenues and stormwater service charges, secure
the bonds. Bond proceeds will finance various improvements, as part of the district's long-term planning in addressing
needs, mostly related to the consent decree. The district will fund a debt service reserve at the standard three -prong
test. These bonds are on parity with the district's debt outstanding, other than its subordinate state revolving fund debt.
MSD provides wastewater treatment and storm water management to the city of St. Louis and most of St. Louis
County. The customer base is large (approximately 425,000 accounts), stable, and diversified. Accounts in the county
make up 64% of the total. The largest user, InBev (Anheuser-Busch InBev N.V./S.A.), in the City of St. Louis,
accounted for only 2.4% of wastewater user charges in fiscal 2013. The next nine largest users made up another 3.6%.
MSD's capital program plan, formulated in 2004 for the next couple of decades, calls for $4 billion-$6 billion for various
projects to allow the district to meet federal and state discharge requirements, as well as to renovate and rebuild
infrastructure. The district also entered into a consent decree with the U.S. Department of Justice to address $4.7
billion (2010 dollars) of needs over a 23-year period. This incorporates addressing various projects as part of its
combined sewer overflow (CSO) long-term control plan and sanitary sewer overflow (SSO) projects as well. The
consent decree, in the district's view, aligns with plans already initiated by the district. The $1 billion earmarked in the
2012-2016 capital improvement and replacement program (CIRP) addresses some of these needs. The SSO master
plan, which is due at the end of 2013, covers about 40% of the total long-term needs. Of the current CIRP: $160 million
will address reduction and control of CSOs, $597 million is elimination of SSOs, $212 million is for system projects,
and $161 million is for treatment plant improvements. With the CIRP, MSD adopted rate increases between fiscal
years 2012-2016, such that it would produce annual revenue increases of 1.53%, 6.77%, 8.89%, 10.30%, and 12.13%,
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respectively. For fiscal 2014, the rate is at $39.85, assuming 1,000 cubic feet for a monthly residential bill. By fiscal
2016, it will reach $50.35 per 1,000 cubic feet. The district is planning on approaching its board sometime over the
next year to discuss the next series of multiyear rate increases. Between fiscal years 2013 and 2016, the district plans
to address its capital needs mostly through debt, using nearly 80% debt to finance these needs through 2016.
Given the capital needs already addressed, we view MSD's financial operations as strong, reflecting large amounts of
pay-as-you-go capital spending. Net income (excluding depreciation, property tax revenues, grant revenue, and
stormwater service charges) has produced very strong coverage for senior -lien debt and all -in annual debt service
coverage. Over the past few fiscal years (2009-2013), coverage of senior -lien debt ranged between 3.13x-6.06x. All -in
coverage was between 1.7x-2.8x for the same time period. Net available revenues decreased 25% between fiscal years
2009 and 2011 due to a district court finding the district's impervious stormwater charge unconstitutional. The district
has implemented a property tax to partially offset the loss of this. However, the recent Missouri Supreme Court
decision ruled that the stormwater fee is a tax, and the district is figuring out its next course of action to address
stormwater needs.
In our view, the district's liquidity has remained very strong, at nearly $238 million (594 days' unrestricted cash and
investments at the end of fiscal 2013, when looking at the wastewater operations only). Liquidity from the district's
current asset totals $149 million; the district has additional liquidity that's listed as unrestricted but is listed as
long-term investments available and is equal to $89 million. The district is projecting liquidity to increase in fiscal 2014
and then decrease due to capital spending. Management's liquidity policy is to maintain at least 60 days' cash, but the
district is targeting to maintain a significantly higher level, especially as MSD addresses its capital needs. The district's
debt to plant has $913.9 million of revenue bonds payable outstanding as fiscal 2013 year-end, translating to a 34%
debt to plant ratio.
The district is projecting strong annual debt service coverage. Coverage of senior -lien debt, which includes the 2013B
issuance and projected rate increases, is 2.4x-2.9x in fiscal years 2014-2016. Projected all -in coverage ranges between
1.65x-1.81x for the same time frame. Coverage during this period declines as recently issued new money bond
issuance debt service starts to be repaid. The district is planning to next issue debt in fall 2014, although it intends to
use the state revolving fund where possible to obtain lower interest rates. It has only fixed-rate debt outstanding.
Coverage could decrease following this additional debt issuance, but as the district addresses implementation
additional rate increases for the period beyond fiscal 2016, we expect coverage to remain at least good, in our view.
Beyond the current planning horizon for the district's CIRP that goes through fiscal 2016, annual debt service coverage
could decrease further in the absence of additional rate increases. However, we do expect the district to increase rates
sufficiently to maintain at least its good coverage levels.
The district's unfunded pension and other postemployment benefits (OPEB) do not constrain the district's financial
operations, in our view. MSD has been making its annual required contribution with a funded ratio of 83% as of Dec.
31, 2012 and $45.2 million in unfunded liability, and is down $4 million from the previous year. The OPEB estimated
unfunded liability, as of June 30, 2014, was at $26.0 million as of the last actuarial valuation. The district made a
change to the defined benefit program recently and plans to continue using its pay-as-you-go approach.
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Outlook
The stable outlook reflects Standard & Poor's expectation that MSD will adjust rates as necessary to maintain strong
debt service coverage as it issues additional debt, as well as to generate at least good net revenues to support its large
capital program. The strength of the district's service area provides additional rating stability, as does the district's
ability to adjust rates as needed. While not expected during the current two-year outlook period, we could lower the
rating if the district is not able to maintain at least its good financial position, particularly as it begins to address its
capital needs with additional debt. Beyond the outlook period, any trend of deteriorating finances could pressure the
rating.
Operations And Governance
MSD serves 525 square miles of the St. Louis metropolitan area, which has a population of about 1.3 million. Within
the service area are five separate subregions, distinguished by watershed. Each subregion contains at least one
wastewater treatment plant. The district operates seven treatment facilities, which are designed with a combined
secondary treatment capacity of 356 million gallons per day. The district operates about 9,578 miles of collection and
trunk sewers, including 1,806 miles of combined sanitary and stormwater sewers that are mostly located in St. Louis.
A six -member board of trustees governs MSD. St. Louis' mayor appoints three members and the St. Louis County
executive appoints the rest. The board appoints a 15-member rate commission made up of representatives from
different local organizations to review and make recommendations regarding all proposed rate increases. The final
decision rests with the board. The district bills its customers directly.
Bond Provisions
We believe that bond provisions as set out in the master bond ordinance are satisfactory. The rate covenant requires
MSD to set rates and charges to cover at least 100% of operating and maintenance expenses; 1.25x debt service on all
senior -lien debt; and 1.15x.on all bonds outstanding, including subordinate debt. The district may issue additional
parity bonds upon either of the following:
• An independent certified public accountant's report stating that the historical net operating revenues and investment
earnings for 12 consecutive months out of the previous 18 were at least equal to 125% of maximum annual debt
service (MADS) on the outstanding and additional bonds; or
• A consultant's report stating that the forecast net operating revenues and investment earnings for the year in which
the bonds are to be issued and the following two years are at least equal to 125% of MADS after the additional
bonds.
The first part of the additional bonds test may adjust for pro forma rate increases imposed before the issuance of the
additional bonds. The second may take into account future board -approved rate increases. A debt service reserve fund
will be established at closing, equal to the least of 10% of bond principal, 125% average annual debt service, and
MADS.
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Related Criteria And Research
• USPF Criteria: Key Water And Sewer Utility Credit Ratio Ranges, Sept. 15, 2008
• USPF Criteria: Standard & Poor's Revises Criteria For Rating Water, Sewer, And Drainage Utility Revenue Bonds,
Sept. 15, 2008
• US. State And Local Government Credit Conditions Forecast, Oct. 1, 2013
Ratings Detail (As Of November 15. 201
Metro St Lows Swr Dist wastewtr sys rev bnds
Long Term Rating
Unenhanced Rating
AAA/Stable
NR(SPUR)
Affirmed
Withdrawn
Metro St Louis Swr Dist wastewtr
Unenhanced Rating AAA(SPUR)/Stable Affirmed
Many issues are enhanced by bond insurance.
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