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HomeMy Public PortalAbout2022B_ MoodysU.S. PUBLIC FINANCE CREDIT OPINION 18 May 2022 Contacts Nathan Phelps +1.214.979.6853 Analyst nathan.phelps@moodys.com Thomas Jacobs +1.212.553.0131 Senior Vice President/Manager thomas.jacobs@moodys.com CLIENT SERVICES Americas 1-212-553-1653 Asia Pacific 852-3551-3077 Japan 81-3-5408-4100 EMEA 44-20-7772-5454 Metropolitan St. Louis Sewer District, MO Update to credit analysis Summary Metropolitan St. Louis Sewer District's, MO (Aa1 stable) credit profile benefits from a strong management team that consistently reviews and adjusts utility rates, which has led to healthy debt service coverage and a very strong liquidity position. Additionally, the profile benefits from a very large and diverse service area that encompasses both the City of St. Louis (A3 stable) and St. Louis County (Aaa stable). The credit profile is challenged, however, by a high debt profile that will remain elevated as management continues to address a $6 billion (2018 dollars) consent decree. The coronavirus pandemic has not had a material effect on the system's credit profile given its strong system liquidity and solid debt service coverage, supported by strong rate management. Exhibit 1 Future borrowing will keep the debt profile high through fiscal 2024 3.0 3.5 4.0 4.5 5.0 2017 2018 2019 2020 2021 2022*2023*2024* De b t t o O p e r a t i n g R e v e n u e s Fiscal Year *Projected Source: Moody's Investors Service; Metropolitan St. Louis Sewer District, MO Credit strengths »Established annual rate increases »Healthy liquidity and debt service coverage »Stable and large customer base »Prudent fiscal management in conjunction with conservative budgeting practices Credit challenges »Elevated debt profile MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE »Plans for additional borrowing related to consent decree Rating outlook The stable outlook reflects the district’s large service area encompassing the St. Louis metro area and our expectation of continued strong financial performance due in large part to multiyear adopted annual rate increases and prudent management practices. Factors that could lead to an upgrade »Significant reduction of balance sheet leverage »Material increase in debt service coverage Factors that could lead to a downgrade »Narrowed liquidity or debt service coverage »Inability to successfully manage consent decree »Significant decline in system demand »Further leverage beyond expectations Key indicators Exhibit 2 Metropolitan St. Louis Sewer District, MO System Characteristics Asset Condition (Net Fixed Assets / Annual Depreciation)44 years System Size - O&M ($000)$180,844 Service Area Wealth: MFI % of US median 113.10% Legal Provisions Rate Covenant (x)1.15x Debt Service Reserve Requirement No explicit DSRF; or funded with speculative grade surety (Baa and Below) Management Rate Management Aa Regulatory Compliance and Capital Planning Aa Financial Strength 2017 2018 2019 2020 2021 Operating Revenue ($000)$333,470 $368,293 $401,109 $437,982 $427,145 System Size - O&M ($000)$168,836 $154,963 $170,585 $175,849 $180,844 Net Revenues ($000)$167,226 $219,942 $245,264 $276,646 $247,930 Net Funded Debt ($000)$1,296,118 $1,470,946 $1,452,402 $1,524,614 $1,637,359 Annual Debt Service ($000)*$69,328 $80,362 $84,025 $88,723 $119,302 Annual Debt Service Coverage (x)2.4x 2.7x 2.9x 3.1x 2.1x Cash on Hand 619 days 708 days 516 days 658 days 585 days Debt to Operating Revenues (x)3.9x 4.0x 3.6x 3.5x 3.8x *In fiscal 2021 the district implemented Governmental Accounting Standard Board (GASB) Statement No. 89, resulting in all interest cost incurred in fiscal year 2021 being charged to interest expense in the period in which it was incurred. Prior to fiscal 2021, construction-period interest cost was capitalized and netted against total interest expense. Source: Metropolitan St. Louis Sewer District, MO's financial statements FYs 2017-2021; U.S. Census Bureau This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history. 2 18 May 2022 Metropolitan St. Louis Sewer District, MO: Update to credit analysis MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE Profile The district owns and operates the system, which consists of sanitary, stormwater and combined collection sewers, pumping stations, and wastewater treatment facilities. The service area includes 525 square miles within the City of St. Louis (A3 stable), and St. Louis County (Aaa stable). The district encompasses five watershed areas and serves a population of roughly 1.3 million. Detailed credit considerations Service area and system characteristics: large service area; diverse customer base The large customer base and service area will remain stable over the near term. The district owns and operates the system, which consists of sanitary stormwater and combined stormwater collection sewers, pumping stations and wastewater treatment facilities. The service area is comprised of 525 square miles; the City of St. Louis represents approximately 20% of the customer base while the remaining 80% is within St. Louis County. During fiscal 2021 the district provided secondary treatment averaging 300.6 million gallons per day (MGD), compared to a treatment design capacity of 593 MGD. The district serves approximately 428,000 wastewater accounts and operates seven treatment facilities. Between 2020 and 2021, total customer counts increased by less than 1%. The top ten largest customers account for a modest 4.2% of total user charges in 2021; Anheuser-Busch InBev SA/NV (Baa1 stable), the district's largest customer, accounted for 1.3% of total user charges. Debt service coverage and liquidity: strong financial performance supported by annual rate increases The district's financial performance remains stable, reinforced by conservative projections, close monitoring of expenditures and established multi-year rate increases. Double-digit rate increases have fostered healthy revenue growth in recent years, though operating revenues (wastewater segment) declined 2.5% in fiscal 2021 (June 30 year-end) to $427.1 million from lower water usage during the pandemic. Despite the small decline, total debt service coverage was healthy at 2.1 times. Wastewater rates increased by 3.5% in fiscal 2022, which will further strengthen the financial profile. Fiscal 2022 operating revenue through March is up nearly 10% compared to the prior year period. Net revenues are projected to provide 3.6 times coverage of senior lien debt service and 2.4 times coverage of total debt service. The rate structure for fiscals 2021-2024 includes an average annual rate increase of 3%, as voters approved a $500 million bond authorization in April 2021. The consistent rate increases are necessary in order to help address a significant $6 billion (2018 dollars) consent decree that the district entered into in April 2012. The consent decree was originally scheduled to be addressed over a 23 year period, however, in June of 2018 a United States District Judge approved an amendment that extended the schedule to 28 years. Liquidity Liquidity remains a credit profile strength, with approximately $290 million of unrestricted cash and investments available as of fiscal 2021, equivalent to a strong 585 days cash on hand (DCOH). Despite plans to cash fund about 40% of capital expenditures over the medium term, the district's strong liquidity profile will be maintained by the aforementioned annual rate increases. Debt and legal covenants: high debt profile expected to be maintained The debt profile is elevated, and will likely remain high given the significant anticipated debt issuance necessary to address the outstanding consent decree. The district has approximately $1.7 billion of net debt outstanding, consisting of $1.3 billion of senior lien debt and $413 million of subordinate lien debt. Total debt is elevated relative to operating revenue at 4.1 times. During the April 2021 election, voters approved a $500 million bond package. After issuance of the Series 2022B, the district will have about $750 million of authorization remaining. The district's capital improvement and replacement program (CIRP) for fiscals 2021-2024 identifies $1.6 billion of capital projects, of which roughly two-thirds will be debt funded. However, the debt profile will be managed closely to ensure that net revenues remain strong to meet debt service requirements and that borrowing is strategic in terms of the overall capital improvement plans, the consent decree, and the life of the assets funded via bond proceeds. During 2021 the district rehabilitated almost 60 miles of sewer and installed more than 13.5 miles of new sewers. The district also removed 17 sanitary sewer overflows (SSOs). Since 2012, MSD has spent $2.4 billion on consent decree compliance. Legal security The legal provisions outlined in the master and supplemental bond ordinances provide satisfactory security for bondholders. Debt service on the current bonds is secured by a senior lien on the net revenues of the wastewater system and is on parity with the district's 3 18 May 2022 Metropolitan St. Louis Sewer District, MO: Update to credit analysis MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE previously issued senior lien wastewater revenue bonds. Pledged revenues explicitly exclude storm water system revenues. The rate covenant calls for net revenues to provide at least 1.25 times annual debt service coverage on all senior lien bonds and 1.15 times debt service coverage on all debt. An additional bonds test calls for net revenues to equal 1.25 times maximum annual debt service (MADS) on all senior lien debt and 1.15 times MADS on all debt for either 12 consecutive months during the most recent 18 month period or in the financial forecasts for the next three fiscal years. Series 2015B, 2016C, 2017A, 2019B, 2019C, 2020B, and Series 2022B bonds do not have a debt service reserve. The debt service reserve requirement on other outstanding parity senior lien bonds is the lesser of 10% of bond proceeds, maximum annual debt service and 125% of average annual debt service. Debt structure All of the district's debt is fixed rate. Principal amortization is relatively slow, with approximately 37% of debt retired over the next 10 years. Debt-related derivatives The district is not party to any derivative agreements. Pensions and OPEB Budgetary pressure in relation to defined benefit pension exposure will be minimal, given that the district's pension plan is currently closed to new entrants. Employees hired after January 1, 2011 instead participate in the Metropolitan St. Louis Sewer District Defined Contribution Plan. The district's adjusted net pension liability (ANPL) based on a 3.22% discount rate was $185.2 million in fiscal 2020, equivalent to a modest 0.42 times operating revenues. Total contributions made by the district (wastewater segment only) to the defined benefit pension plan totaled $11.1 million for fiscal 2020, which was above the tread water indicator of $8.4 million. In order to “tread water” or in other words prevent the unfunded liability from growing, contributions must be sufficient to cover interest on the unfunded liability in addition to annual employer service cost, assuming reported assumptions hold. The district also provides other post employment benefits through the defined benefit Metropolitan St. Louis Sewer District Retiree Medical Coverage Plan. Exposure to unfunded OPEB liabilities are minimal ESG considerations Environmental The local government sector has generally low exposure to environmental risks. Metropolitan St. Louis Sewer District is bordered by two large rivers – the Missouri River to the north and the Mississippi River to the east – which puts it at medium risk for growing exposure to extreme weather events, including excessive rainfall and localized flooding. In 2007, the State of Missouri and the United States Environmental Protection Agency (EPA) filed a lawsuit against the district regarding sewage overflows. A consent decree agreement between the district, the EPA, and the Missouri Coalition for the Environment totaling $6 billion (2018 dollars) was accepted by the United States District Court and went into effect on April 27, 2012. The consent decree was originally scheduled to be addressed over a 23 year period, however, in June of 2018 a United States District Judge approved an amendment that extended the schedule to 28 years. The district will continue utilize both debt financing and cash on hand to address the consent decree. Favorably, at the end of fiscal 2021, the district had spent $2.3 billion toward completion of the $6 billion of total capital outlay required under the consent decree. Social Social considerations, such as demographics, labor, and income are important for the credit profile. Resident incomes within the service area are solid with the median family income equivalent to 113.1% of the US as of 2019, indicating financial flexibility among residents absorb future planned rate adjustments. Responsible production is strong, as the district engages community stakeholders through a rate commission composed of 15 member organizations representing a broad cross-section of the service area. Governance Governance considerations are a key determinant of credit quality. The district exhibits strong governance through the adoption and adherence to formal financial policies, monthly financial reporting, and multiyear capital and financial planning. A strong track record of 4 18 May 2022 Metropolitan St. Louis Sewer District, MO: Update to credit analysis MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE timely, multiyear rate increases and voter support of revenue debt have been key toward completion of the capital projects prior to the consent decree deadline. The district is governed by a six-member board of trustees, of which three members are each appointed by the Mayor of St. Louis and the St. Louis County Executive. A rate commission, inclusive of vested parties associated with the district and their services, reviews proposed changes to rates and charges and makes recommendations to the board of trustees. 5 18 May 2022 Metropolitan St. Louis Sewer District, MO: Update to credit analysis MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE © 2022 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved. 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REPORT NUMBER 1328813 6 18 May 2022 Metropolitan St. Louis Sewer District, MO: Update to credit analysis MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE CLIENT SERVICES Americas 1-212-553-1653 Asia Pacific 852-3551-3077 Japan 81-3-5408-4100 EMEA 44-20-7772-5454 7 18 May 2022 Metropolitan St. Louis Sewer District, MO: Update to credit analysis