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Home My Public Portal AboutExhibit MSD 50 - Fitch Ratiing ReportFITCH RATES METRO ST. LOUIS SEWER DISTRICT, MISSOURI'S WASTEWATER REVS 'AA+'; OUTLOOK STABLE Fitch Ratings-Austin-18 November 2013: Fitch Ratings has assigned an 'AA+' rating to the following Metropolitan St. Louis Sewer District, Missouri's (the district, or MSD) revenue bonds: --Approximately $150 million wastewater system revenue bonds, series 2013B. The bonds are scheduled to sell via negotiated sale the week of December 2. Bond proceeds will be used to finance a portion of the district's capital improvement plan (CIP) costs, fund a debt service reserve, and pay costs of issuance. In addition, Fitch affirms the 'AA+' rating on the following district's bonds: --$594.7 million in outstanding wastewater system revenue bonds. The Rating Outlook is Stable. SECURITY The bonds are secured by pledged revenues of the district's sanitary sewer system (the system) after payment of operations and maintenance expenses. KEY RATING DRIVERS WEAKENED BUT STILL GOOD COVERAGE MARGINS PROJECTED: Total debt service coverage (DSC) was solid at 2.4x and 1.9x in fiscals 2012 and 2013, but was lower as expected, after generating coverage levels above 2.5x over the fiscal 2005 to 2009 period. DSC margins are expected to hover around 1.7x through fiscal 2016, nevertheless, projected DSC levels are good and still adequate for the 'AA+' rating level. ESCALATING DEBT BURDEN: Leverage ratios currently are moderately-high with debt per customer at approximately $2,200; debt will likely more than double over the next five years based on Fitch estimates as a result of additional borrowing needs to address regulatory requirements. Furthermore, debt amortization is below average with principal payout at 29% and 67% in 10 to 20 years, respectively. VERY GOOD LIQUIDITY: Liquidity margins are projected to remain solid; current cash and investments at year end fiscal 2013 equaled over one year of operations. ADEQUATE RATE FLEXIBILITY: User charges are moderate but will increase to fund capital and operating costs, reducing overall affordability. Rates are reviewed and adjustments are proposed by a 15-member rate commission (RC) before recommendations are made to the district's Board of Trustees. STABLE AND DIVERSE ECONOMY: The system serves a sizeable, diverse and stable service area. RATING SENSITIVITIES Exhibit MSD 50 REDUCED FLEXIBILITY; INCREASED DEBT: Long-term projections which forecast debt levels and/or financial margins inconsistent with the 'AA+' rating median levels would likely result in negative rating action. CREDIT PROFILE REDUCED BUT STILL SOUND FINANCIAL METRICS All-in annual DSC (including senior and subordinate-lien debt) was historically very strong, comfortably exceeding 2.5x through fiscal 2009. However, senior-lien DSC declined as expected to 3.4x in fiscal 2013 from 6.2x in fiscal 2009. All-in DSC declined to 1.9x in the same year from 2.7x in fiscal 2009. The declines were driven by a sharp drop in investment earnings and an increase in operating expenditures, particularly related to the district's capital improvement and replacement program (CIRP), and a 69% increase in total debt service costs from fiscal 2009 to fiscal 2013. Due to the planned borrowings associated with the CIRP and consent decree, total coverage on all outstanding and anticipated debt is projected to be in the 1.7x - 1.8x range and coverage on senior lien debt is projected to be in the 2.4x - 2.9x range for fiscals 2014 - 2016. Fitch's rating incorporates the weaker DSC, although any deterioration in financial performance beyond projected levels could result in negative rating action. Reserve balances remain solid, with available current cash and investments at 2013 fiscal year-end equal to $159 million or more than 390 days of operations. This amount does not include an additional $89 million in long-term investments, a large portion of which are invested in callable securities. Based on issuer projected cash flows through fiscal 2016, cash balances are expected to remain within historical norms. Fitch notes, however, that a reduction in liquidity levels below historical norms would likely pressure the rating unless balanced with increased DSC. REGULATORY The district executed a consent decree with the U.S. Environmental Protection Agency in July 2011 that substantially aligns with the district's CIRP. The consent decree provides for an estimated $4.7 billion (in 2010 dollars) in projects implemented over 23 years that include the elimination of sanitary sewer overflows (SSO), implementation of the combined sewer overflow (CSO) long-term control plan, and asset reinvestment. The consent decree was entered into on April 27, 2012 with no substantive changes after the public comment period. The district has appropriated $319 million in consent decree related capital projects thus far with $4.4 billion remaining to be funded. RISING DEBT AND CAPITAL NEEDS The fiscal years 2014 - 2016 capital program totals a substantial $824 million, with approximately 53% of the costs focused on SSO remediation, 14% for CSO control, and the remainder dedicated for other system projects and wastewater treatment. Approximately 78% of the plan through fiscal 2016 is expected to be funded from existing and planned debt. Leverage ratios are expected to continue escalating through the CIP period, with outstanding debt per capita increasing from $668 at the end of fiscal 2013 to over $1,230 by fiscal 2016. Debt per customer is anticipated to increase from $2,206 as of fiscal 2013 to between $4,600 to $4,800 in five years. Furthermore, debt amortization is below average with principal payout at 29% and 67% in 10 to 20 years (the series 2013B bonds are being issued as 30-year fixed rate debt). Bonding capacity requires voter approval and the board maintains strong voter confidence, as evidenced by the 85% approval rate of the recent $945 million authorization in June 2012. The series 2012A bonds issued in July 2012 represented the first installment of the 2012 authorization to fund a portion of the CIRP/consent decree requirements. The current offering represents the third installment of the 2012 authorization; bond proceeds will be used to provide funding for collection system improvements to reduce SSO's and CSO's, the elimination of SSO structures, and initial design work on wastewater treatment plant improvements. REDUCED AFFORDABILITY To support the additional planned debt, the board approved annual rate increases averaging 9.8% for fiscals 2013 through 2016. The current average monthly wastewater bill of $31 after implementation of the fiscal 2013 adjustment is considered affordable at 0.7% of median household income, but the planned rate hikes will reduce overall affordability. SERVICE AREA Serving a population of around 1.3 million and roughly 425,000 accounts, the district was established in 1954 to provide wastewater treatment and stormwater services to both the city of St. Louis and the vast majority of St. Louis County. The customer base is stable, with accounts experiencing a modest 0.4% annual decline over the past five fiscal years. For August 2013, the county unemployment was 7.0%, compared to the state rate of 7.1% and national rate of 7.3%. The St. Louis metropolitan area is the primary economic engine for Missouri and home to a number of Fortune 1,000 companies. Given its access to major waterways, it is a hub for trade and distribution. Contact: Primary Analyst Julie G. Seebach Director +1-512-215-3740 Fitch Ratings, Inc. 111 Congress, Suite 2010 Austin, TX 78701 Secondary Analyst Adrienne Booker Senior Director +1-312-368-5471 Committee Chairperson Arlene Bohner Director +1-212-908-0554 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. Additional information is available at 'www.fitchratings.com' In addition to the sources of information identified in Fitch's U.S. Municipal Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope. Applicable Criteria and Related Research: --'Revenue-Supported Rating Criteria' (June 12, 2012); --'U.S. Water and Sewer Revenue Bond Rating Criteria' (Aug. 3, 2012); --'2013 Water and Sewer Medians' (Dec. 5, 2012); --'2013 Outlook: Water and Sewer Sector' (Dec. 5, 2012). Applicable Criteria and Related Research: Revenue-Supported Rating Criteria http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499 U.S. Water and Sewer Revenue Bond Rating Criteria http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275 2013 Water and Sewer Medians http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695756 2013 Outlook: Water and Sewer Sector http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695755 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/ UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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