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HomeMy Public PortalAboutExhibit MSD 49 - Moody's Rating ReportNew Issue: Moody's assigns Aa1 to Metropolitan St. Louis Sewer District's (MO) $150M on Wastewater Revenue Bonds, Series 2013B Global Credit Research - 19 Nov 2013 Rating affirmed on outstanding senior lien revenue bonds; stable outlook maintained METROPOLITAN ST. LOUIS SEWER DISTRICT, MO Sewer Enterprise MO Moody's Rating ISSUE RATING Wastewater System Revenue Bonds Series 2013B Aa1 Sale Amount $150,000,000 Expected Sale Date 11/28/13 Rating Description Revenue: Government Enterprise Moody's Outlook STA Opinion NEW YORK, November 19, 2013 --Moody's Investors Service has assigned a Aa1 rating to the Metropolitan St. Louis Sewer District's (MO) $150 million Wastewater System Revenue Bonds, Series 2013B. Concurrently, we have affirmed the Aa1 rating on the district's senior lien revenue bonds. Post sale, the district will have $744 million of senior lien revenue bonds outstanding; the outlook remains stable. The Series 2013B bonds are secured by a senior lien on the net revenues of the district's wastewater system and will finance a portion of the district's capital projects to meet its obligations under its consent decree. SUMMARY RATINGS RATIONALE Assignment of the Aa1 rating and stable outlook reflects the system's large and diverse service area that encompasses the City of St. Louis (general obligation rated Aa3/stable outlook) and most of St. Louis County (general obligation rated Aaa/stable outlook). The rating assignment is also based on the district's demonstrated willingness and ability to raise rates at regular intervals; declining but still sound debt service coverage; debt levels that will significantly increase to fund extensive capital improvements needed to address long term CSO and SSO issues; and satisfactory legal covenants. STRENGTHS -One of the largest wastewater systems in the U.S. serves an economically diverse region covering St. Louis County and the City of St. Louis -Timely implementation of rate increases has historically provided for satisfactory financial operations and debt service coverage in light of extensive capital investment -Finalized consent decree which thoroughly identifies and plans for the system's infrastructure needs for the next two decades CHALLENGES -Debt levels expected to double over the next two decades due to capital improvements needed to address CSOs, SSOs, and other regulatory requirements and infrastructure needs -Recent, declines in debt service coverage Exhibit MSD 49 -The substantial rate inc reases instituted to finance the $1.01 billion in approved capital requirements could impair voter support of future needed borrowing requests DETAILED CREDIT DISCUSSION SATISFACTORY LEGAL PROVISIONS AND BONDHOLDER PROTECTION; RECENT COURT DECISION NOT EXPECTED TO AFFECT SANITARY SEWER OPERATIONS OR REVENUE PLEDGE The legal provisions outlined in the master and supplemental bond ordinances prov ide satisfac tory security for bondholders. Debt service on the current bonds is sec ured by a senior lien on the net rev enues of the wastewater sy stem and is on parity with the s ystem's Series 2004A, 2006C, 2008A, 2010B, 2011B, 2012A, and 2012B wastewater rev enue bonds. Net revenues are defined as gross operating revenues of the was tewater system, less operating and maintenance expenditures, and investment earnings. Pledged revenues explicitly exc lude storm water sys tem revenues . The rate c ovenant calls for net revenues to provide at least 1.25 times annual debt serv ice coverage on all senior lien bonds and 1.15 times debt s ervice coverage on all debt, including s ubordinate lien debt which consists of state revolving fund loans. An additional bonds test calls for net revenues to equal 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 rec ent 18 month period or in the financial forecasts for the nex t three fiscal years. The debt servic e res erve requirement is the lesser of 10% of the principal on the senior lien bonds; MADS on s enior lien debt; or 1.25 times av erage annual debt service on senior lien debt. As with the previous ly issued senior lien bonds, the district will cash fund the debt service reserve with Series 2013B bond proceeds. In 2008, the district implemented a storm water user fee to financ e certain storm water improvements within its storm water enterprise. Subsequently, a lawsuit was filed challenging the legality of that user fee which was determined against the district requiring the dis trict to no longer collect the user fee. On Nov ember 12, 2013, the Missouri Supreme Court affirmed the lower court ruling that the user fee was a tax, and therefore cannot be collected. The district currently finances a portion of the storm water improv ements through a property tax, but any additional discretionary projects will need to be financed with voter approved tax increas es. While this is a credit negative for the dis trict as a whole, the storm water enterprise is separate from the sanitary sewer enterpris e and does not affect the net rev enue security pledge on these bonds . 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 was tewater system in terms of geographic boundaries, with 1,806 miles of combined sewers and 4,744 miles of sanitary sewers. MSD's wastewater sy stem customer base was 424,800 in fisc al 2013, which represented a 2.3% dec line since fiscal 2009. Approximately one-third of this decline reflected the economic downturn that led to an uptic k in vac ant structures. MSD's serv ice 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 64% of total billings are attributable to customers in St. Louis County. The user base is divers e with the top ten c ustomers acc ounting for only 5.95% of fiscal 2013 billings . The sys tem operates seven treatment facilities c overing the Miss issippi, Missouri, and Meramec River watersheds and has adequate capacity. The system is permitted to handle 428 million gallons of flow per day (MGD); this capacity exceeds the s ystem's maximum peak flow of 365 MGD, whic h oc curred in 2010. The St. Louis regional ec onomy is sizeable and div erse. Considerable institutional stability exists in the higher education and health c are s ectors. BJC Health System (Aa2/stable outlook) is the region's largest employer, and Washington University (Aaa/s table outlook) is the region's third larges t employer and MSD's second largest user. The region is somewhat dependent on the defens e industry: Boeing Integrated Defense Sy stems (The Boeing Company is rated A2/stable outlook) is the area's sec ond largest employer and MSD's seventh largest user. Numerous corporations maintain offices in downtown St. Louis, inc luding the North American headquarters of Anheuser-Busch InBev Worldwide Inc. (senior uns ecured rated A3/positiv e outlook), whic h is MSD's top user, comprising a modest 2.42% of system operating revenues in fiscal 2013. The size and div ersity of both the regional economy and the s ystem's cus tomer base are key components of the Aa1 rating. INDEPENDENT RATE-SETTING AUTHORITY PROVIDES SOUND, THOUGH SLIGHTLY DECLINING, DEBT SERVICE COVERAGE The district's s ound financial operations will likely be maintained due to management's demonstrated willingness and ability to adjust rates as needed to provide for s ound debt serv ice coverage. Any further weakening of coverage trends c ould undermine credit quality. Debt serv ice coverage has dec lined in recent years due to a number of factors: inc reased debt levels, budgetary foc us on as set management, conservation initiatives among top customers, lower interes t income, and declining connection fee revenue. As recently as fis cal 2008, s enior lien debt servic e coverage was a strong 6.3 times . By fiscal 2013, senior lien debt serv ice coverage dropped to a s till sound 3.4 times. Debt service cov erage on all debt, including subordinate lien State Revolving Loan Fund (SRF) debt, decreased from 3.0 times in fis cal 2008 to 1.9 times in fis cal 2013. The district's financial projections through fiscal 2016 (which incorporate expected debt issuance and approved rate increases ) show coverage lev els declining further from fiscal 2011 levels. In MSD's multi-year forecas t, projected s enior lien debt service coverage ranges between 2.91 times and 2.41 times, and debt service cov erage on all debt ranges between 1.73 times and 1.62 times . Historical financ ial performance has typic ally fared better than original projec tions. Fiscal 2013 wastewater gross operating revenues equaled $240 million. Fis cal 2013 pledged rev enues (net wastewater sy stem revenues ) would provide 1.7 times maximum annual debt service (MADS) cov erage on senior lien debt, which is scheduled to occur in 2030. While MSD's rate-setting proc ess is s ubject to recommendations of a Rate Commission, which is comprised of community groups, MSD's board has ultimate rate-setting authority and can override rates recommended by the Rate Commission. MSD enacted consecutive annual rate inc reases of 11%, 11.4%, and 13.2% through fiscal 2016. These rate inc reases are largely due to the additional debt undertaken related to the consent decree. The board ex pects to continue increasing rates for additional CSO and SSO work planned for the next decade. DEBT LEVELS TO SIGNIFICANTLY INCREASE GIVEN SUBSTANTIAL REGULATORY REQUIREMENTS; BALANCE SHEET BENEFITS FROM CONSERVATIVE DEBT STRUCTURE AND SATISFACTORY NET WORKING CAPITAL The district's present debt profile is manageable relativ e to the sewer sy stem's ass ets, as evidenced by a moderate debt ratio of 34% at fisc al y earend (FYE) 2013. Howev er, over the nex t two decades, the system's debt levels will significantly increas e in order to address the CSO and SSO issues. In June 2007, EPA and the Missouri Department of Natural Resources (DNR) filed a lawsuit against the district for violations of the Clean Water Act related to CSO and SSO ev ents . CSO events are largely tied to infrastructure in the central city and inner-ring suburbs while SSO events are found throughout the s uburban areas of the system. All parties engaged in mediation. On June 1, 2011 the Distric t's CSO Long Term Control Plan was approv ed by the DNR. The consent decree was then lodged with the U.S. Eastern District Court (Court) in August 2011. On April 27, 2012 the consent decree was finalized by the Court. By December 2013, MSD will submit a plan to EPA to remedy the SSOs . The consent decree outlines $4.7 billion in capital improvements to be undertaken over a 23 year timeframe, including $1 billion in capital projec ts planned from 2013 through 2016.. In June 2012, district voters approved $945 million of additional borrowing authorization to address mandated improvements of the district's CSO and SSO iss ues under the consent decree. The projec ts will be financ ed with a combination of s enior and subordinate debt, as well as cash on hand. MSD's debt struc ture is cons ervative. All outstanding debt is fixed rate, and the district is not a party to any interes t rate swap agreements, whic h limits the balance sheet's exposure to the liquidity risks assoc iated with variable rate debt and non-amortizing debt instruments . The dis trict's fiscal net working capital of $374 million represented 233% of operating and maintenanc e ex penditures. At FYE 2013, MSD's unres tricted cash and investments related to sanitary sewer sy stem equaled a healthy $238 million. At FYE 2013, the district had over 590 days of cash on hand. Outlook The outlook on the Metropolitan St. Louis Sewer District's senior lien revenue debt is stable, based on our belief that the system's s ize, rate-setting authority, and satisfactory legal provisions should support the current rating despite increasing debt levels. Our rating outlook assumes that future declines in debt service coverage will be far less than current projections . Further narrowing of coverage and/or increases in capital requirements could pres sure credit quality. WHAT COULD CHANGE THE RATING - UP -Significant and sus tained improvement of debt servic e coverage levels -Ability to phase in planned borrowing for nec essary capital improvements without adversely affec ting financ ial operations, debt service cov erage, balance sheet strength, and/or voter support WHAT COULD CHANGE THE RATING - DOWN -Regional economic pressures, including population los s, that lead to substantial reductions in billable flow -Declines in debt service cov erage KEY STATISTICS Type of sys tem: Sewage c ollection and treatment 2013 estimated service area population: 1.3 million Fiscal 2013 customer base: 424,801 Fiscal 2013 net working capital: $374 million Fiscal 2013 operating revenues: $240 million (excludes storm water system revenues) Fiscal 2013 operating ratio: 66.2% Fiscal 2013 debt ratio: 29.2% Fiscal 2013 debt servic e coverage: 3.4 times (senior lien); 1.9 times (all debt) (excludes storm water sys tem rev enues) PRINCIPAL METHODOLOGY USED The principal methodology used in this rating was Analytic al Framework For Water And Sewer System Ratings published in Augus t 1999. 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