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HomeMy Public PortalAbout2022B S&P GlobalSummary: 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 MAY 16, 2022 1 Summary: Metropolitan St. Louis Sewer District, Missouri; Combined Utility; Water/Sewer Credit Profile US$113.095 mil wastewtr sys imp and rfdg rev bnds ser 2022B due 05/01/2052 Long Term Rating AAA/Stable New Metro St Louis Swr Dist wastewtr sys rev bnds Long Term Rating AAA/Stable Affirmed Unenhanced Rating NR(SPUR) Rating Action S&P Global Ratings assigned its 'AAA' rating to The Metropolitan St. Louis Sewer District (MSD), Mo.'s roughly $113 million series 2022B wastewater system improvement and refunding 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 refund the series 2012B ($9.3 million) and to fund their capital improvement and replacement program (CIRP) to address their combined-sewer-overflow (CSO) consent decree. 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 debt service coverage (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. The MSD system has a predominantly locally derived revenue base. Local service charges, derived through an autonomous rate-setting process, represent virtually all revenue. This, coupled with operating-expense flexibility, limits the system's exposure to federal revenue and allows us to rate MSD debt above the U.S. sovereign rating. Credit overview The rating reflects our opinion of MSD's general creditworthiness and a combination of deep and robust enterprise-risk and 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 CSO. The affirmation of the 'AAA' rating reflects our opinion of MSD's robust liquidity and management's conservative and strategic planning, which provides financial and operating flexibility during the two-year outlook. Key credit strengths: • Service-area participation in the broad and diverse St. Louis metropolitan statistical area economy; • Current rate affordability we consider strong when benchmarked against income and St. Louis County's poverty WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MAY 16, 2022 2 rate, which overlaps with most of MSD's service base--although increasing county poverty rates and future rate increases needed to support the capital plan could pressure our affordability assessment; and • MSD continues to adjust rates annually; and management projects to meet no less than 1.8x all-in DSC and at least 550 days' cash on hand. Although it lacks a formal policy, MSD informal minimum is to maintains 60 days' cash on hand in operating reserves. Based on projections we believe DSC coverage will be maintained above 1.8x during the outlook period. The stable outlook reflects S&P Global Ratings' opinion that the system will likely generate financial results that routinely meet or exceed projections within the two-year outlook period. Other factors supporting the rating include the maintenance of strong liquidity, which management could use to absorb unexpected revenue decreases or expenses; the continuation of annual rate increases; and the customer base's overall depth and diversity. Environmental, social, and governance Overall, we think management mitigates most environmental, social, and governance (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 under budget, 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 2017-2022. 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, resulting in weakening affordability and limiting additional rate-raising flexibility to support the long-term-control plan and currently exceptional financial profile. Additionally, our expectation is that management will diligently monitor rates on an annual basis to ensure coverage levels do not fall below targeted levels, but should the need arise for additional debt (potentially due to inflationary WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MAY 16, 2022 3 Summary: Metropolitan St. Louis Sewer District, Missouri; Combined Utility; Water/Sewer pressures or supply-chain issues), which in turn lowers coverage levels significantly over a sustained period, the rate could be lowered. We could also consider doing so should management choose to fund any capital program needs above what it projects from reserves, thereby lowering reserves to levels that are more in line with lower rated entities. Credit Opinion 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 1.25% of wastewater user charges in fiscal 2021; the next nine leading users accounted for 2.9%. 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 Combined Sewer Overflow (CSO) long-term-control plan and sanitary-sewer-overflow projects. The consent decree, in MSD's view, aligns with its Capital Improvement and Replacement Program (CIRP). MSD invested close to $2.3 billion in capital expenditures from fiscal years 2013-2021. From fiscal years 2018-2021, CIRP project allocations include: • $523 million for the elimination of sanitary-sewer overflows; • $404 million for system-renewal-and-capacity projects; • $169 million for CSO reduction and control; and • $77 million for treatment-plant improvements. For fiscal years 2021-2024, CIRP investments are roughly $1.6 billion. Through fiscal 2021, MSD has funded the CIRP with a mix of debt (70% of program costs) and cash (30%). Management plans to increase pay-as-you-go cash funding to 39% and 40% in fiscal years 2021 and 2022, respectively. We consider affordability strong, albeit pressured by the COVID-19-related recession. Following a 3.5% rate increase in March 2022, the monthly average residential rate for 600 cubic feet of consumption is $58.33. When benchmarked against St. Louis County's median household effective buying income of 108% and 9.1% poverty rate, we consider rates affordable at 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 74.4%, significantly lower than the county's, which represents greater affordability stress. MSD's customer-assistance program--a 50% rate reduction to qualifying low-income, elderly, and disabled customers--somewhat mitigates affordability risks. 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% to 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. Historical finances, measured by DSC and liquidity, have remained, in our opinion, exceptionally strong. During fiscal WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MAY 16, 2022 4 Summary: Metropolitan St. Louis Sewer District, Missouri; Combined Utility; Water/Sewer years 2013-2020, 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 2.04x at fiscal year-end June 30, 2021. During those same seven fiscal years, unrestricted current cash and investments represented no less than 668 days' cash on hand compared with about 1,002 days' cash on hand, or $480 million, in fiscal 2021. 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% cut to operating revenue, and we expect that through fiscal 2024 all-in DSC will likely remain near 1.6x. Related Research Through The ESG Lens 3.0: The Intersection Of ESG Credit Factors And U.S. Public Finance Credit Factors, March 2, 2022 Ratings Detail (As Of May 16, 2022) Metropolitan St Louis Swr Dist wastewatr sys rev bnds ser 2018A Long Term Rating AAA/Stable Affirmed St. Louis Metro Swr Dist wstwtr sys rfdg rev bnds ser 2026A due 05/01/2041 Long Term Rating AAA/Stable Affirmed 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 MAY 16, 2022 5 Summary: Metropolitan St. Louis Sewer District, Missouri; Combined Utility; Water/Sewer WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MAY 16, 2022 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. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees. 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