Fitch Rates Metro St. Louis Sewer District, Missouri's Wastewater Revs 'AA+'; Outlook Stable

AUSTIN, Texas--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'AA+' rating to the following Metropolitan St. Louis Sewer District, Missouri (the district) revenue bonds:

--Approximately $147 million wastewater system revenue refunding bonds, series 2012B.

The bonds are expected to sell via negotiation the week of Oct. 22. Proceeds will be used to advance refund a portion of the district's outstanding series 2004A bonds and pay costs of issuance.

Fitch also affirms its 'AA+' rating on the following district debt:

--$626.5 million in outstanding parity 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. Pledged revenues include all operating revenues from the system, interest earnings (excluding interest earnings derived from state revolving fund bonds, stormwater revenues, and obligations issued by the district related to its sub-districts), hedge payments, and amounts in the renewal and extension and debt service reserve funds.

KEY RATING DRIVERS

WEAKENED BUT SATISFACTORY COVERAGE MARGINS: Total debt service coverage (DSC) declined as expected in fiscal 2011 to 1.7x, after generating coverage levels above 2.5x over the fiscal 2005 to 2009 period, and margins are expected to remain at these lower levels going forward. Nevertheless, DSC levels remain consistent with the 'AA+' rating level.

GROWING DEBT BURDEN: Leverage ratios are relatively high and are projected to escalate further with implementation of the district's large capital improvement and replacement program (CIRP).

STRONG LIQUIDITY: Liquidity margins are projected to remain strong. Unrestricted cash and investments at year end fiscal 2011 equaled well over one year of operations; unaudited fiscal 2012 figures indicate further improvement.

ADEQUATE RATE FLEXIBILITY: User charges are moderate but will increase to fund increasing 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 ECONOMY: The large service area--including St. Louis and most of St. Louis County--is stable and diverse.

CREDIT PROFILE

REDUCED BUT STILL SOUND FINANCIAL METRICS

All-in annual DSC (including senior and subordinate-lien debt) has historically been very strong, comfortably exceeding 2.5x through fiscal 2009. However, senior-lien DSC declined as expected to 3.1x in fiscal 2011 from 6.1x in fiscal 2009 and all-in DSC declined to 1.7x in the same year from 2.8x in fiscal 2009. The decline was driven by a modest reduction in operating revenues, a sharp drop in investment earnings, and an increase in expenditures, particularly for one-time projects and studies for the development of the CIRP.

Unaudited fiscal 2012 figures were more favorable, with total DSC at 2.3x for the year. But due to the planned borrowings associated with the CIRP and consent decree, the district projects total coverage on all outstanding and anticipated debt to be in the 1.7x - 1.8x range and coverage on senior lien debt in the 2.4x - 3.0x range for fiscals 2013 - 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 strong. Unrestricted cash and investments at 2011 fiscal year-end equaled $228 million or more than 500 days of operations. Based on projected cash flows through fiscal 2016, cash balances should remain fairly sizeable relative to other 'AA+' rated utilities. For fiscal 2012, unaudited days cash rose to 595 days.

REGULATORY REQUIREMENTS DRIVE RISING DEBT AND CAPITAL NEEDS

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 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 Aug. 4, 2011 with no substantive changes after the public comment period.

The fiscal years 2013 - 2016 capital program totals a substantial $993 million, with approximately 57% of the costs focused on SSO remediation, 14% for CSO control, and the remainder dedicated for other system projects and wastewater treatment. Approximately 91% of the plan through fiscal 2016 is expected to be funded from planned debt, which marks a departure from the district's goal of providing at least 50% capital funding from equity. As a result, leverage ratios are expected to continue escalating through the CIP period, with outstanding debt per capita increasing from $474 at the end of fiscal 2012 to over $1,250 by fiscal 2016.

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 represented the first installment of the 2012 authorization to fund a portion of the CIRP/consent decree requirements. The current offering is strictly an economic defeasance that will result in interest savings without extension of the original maturity of the debt.

REDUCED AFFORDABILITY

The board recently approved annual rate increases averaging 9.8% for fiscals 2013 through 2016 to support the additional planned debt. 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

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 district serves a population of around 1.4 million or roughly 424,000 accounts. The customer base is stable, with accounts experiencing a modest 0.3% annual decline over the past five fiscal years.

The county unemployment in July 2012 was 7.3%, compared to the state rate of 7.6% and national rate of 8.6%. 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.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was 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);

--'2012 Water and Sewer Medians' (Dec. 8, 2011);

--'2012 Outlook: Water and Sewer Sector' (Dec. 8, 2011).

Applicable Criteria and Related Research:

2012 Outlook: Water and Sewer Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=657110

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015

U.S. Water and Sewer Revenue Bond Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684901

2012 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=657111

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. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

Fitch Ratings
Primary Analyst
Doug Scott, [phone]
Managing Director
Fitch, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Adrienne Booker, [phone]
Senior Director
or
Committee Chairperson
Jessalynn Moro, [phone]
Managing Director
or
Media Relations
Elizabeth Fogerty, [phone] (New York)
[e-mail]

Source: Fitch Ratings