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Deal in Focus

St. Louis Sewer Agency Gears Up

CHICAGO — The Metropolitan St. Louis Sewer District will exhaust its remaining borrowing authority next month when it competitively bids $52 million of revenue bonds, but the agency hopes to return to the market by spring if voters grant $945 million in new bond authority.

The new authorization, tentatively slated to go before voters in February, would finance projects in a four-year, $1.9 billion capital program that’s part of a larger $4.7 billion series of projects to be completed over the next two decades under a consent degree MSD reached with federal authorities in June.

If voters approve, the district likely would return to the market as soon as the spring with plans to borrow $250 million to $300 million over the course of the year.

The upcoming deal is slated for Dec. 8, said district treasurer Karl Tyminski. It will exhaust remaining capacity from a $275 million referendum approved by voters in August 2008 to fund projects promoting the upgrading of the utility’s entire wastewater collection and treatment capabilities.

The transaction marks MSD’s first use of a competitive sale in several decades in a decision driven by public comment during the last referendum and rate-setting process, suggesting the agency use a mix of competitive and negotiated offerings.

“This issue fits the parameters of a candidate for a competitive sale. It’s a smaller issue and we are in a good credit position and think it should be well-received,” Tyminski said.

Public Financial Management Inc. and ButcherMark Financial Advisors LLC are advising MSD on the sale and Gilmore & Bell PC and White Coleman & Associates LLC are bond counsel.

The finance team began meetings this week with rating agencies ahead of the sale. The 57-year-old sewer district provides wastewater treatment and stormwater services to 1.4 million residents in St. Louis and St. Louis County. It last sold bonds in a 2010 issue that tapped the Build America Bond program.

Ahead of that issue all three rating agencies affirmed MSD’s ratings: AA-plus from Fitch Ratings and Standard & Poor’s, and Aa2 from Moody’s Investors Service. The bonds are secured by a pledge of net wastewater system revenue. 

Fitch analysts said the utility’s rating was supported by solid operating performance, consistently generating high annual debt-service coverage of 3.1 times, and strong reserves and user rates that are competitive with other systems.

Fitch cited the absence of a final settlement with the U.S. Environmental Protection Agency as a credit challenge. Moody’s wrote that it expected the “district’s sound financial operations will continue due to management’s demonstrated willingness and ability to adjust rates as needed to provide for strong debt-service coverage.”

The settlement resolves claims the U.S. Justice Department, the EPA and environmental groups brought against the district in 2007 in the U.S. District Court for Eastern District of Missouri.

The litigation resembled action taken by the EPA against other major cities across the country alleging violations of federal clean-water laws by allowing untreated sewage to seep into area waterways and the ground.

The agreement was submitted to the courts in August and a public comment period recently closed. A court hearing is scheduled for later this month on the status of the pact, which the state has not yet blessed.

The settlement calls for the district to install a variety of pollution controls, including three large storage tunnels, and to expand capacity at two treatment plants to reduce overflows into nearby streams and rivers, along with other projects aimed at curbing untreated discharge.

Many of the projects outlined in the decree are already in MSD’s long-term capital program, so they are not expected to have a material financial impact. To ease the affect of financing four years’ worth of projects, officials hope to win voter approval for the new bonding.

The district’s board last month gave preliminary approval to putting the question to voters on the Feb. 7, 2012, ballot and is expected to give final approval at its Nov. 10 meeting. The board in December will then weigh two versions of a rate increase plan.

One was  proposed by agency staff and the other by an independent advisory rate-setting commission. Both anticipate passage of the referendum that requires a simple majority. Under the MSD proposal, rates would rise by 64% over four years with the average monthly sewer bills growing from $28.73 to $47.05 in 2015.

The rate commission’s proposal would raise rates by 53% over four years with the average monthly bill growing to $43.93 in 2015.

The commission recommended that MSD trim some costs to keep the rate hike lower. Its decision stemmed from testimony during public hearings of the hardship the increases would pose.

The AARP submitted a position statement on behalf of residential households with customers over the age of 50, warning that the increases “generally will bring greater hardship during a time of widespread financial stress.”

While the bond referendum would keep rates lower in the long run, it’s not a sure bet as voters could opt to keep near-term rates lower. If voters reject the bond authorization, MSD has warned monthly rates could rise to $70 if it must use pay-as-you-go to fund projects now required under the consent decree.

In addition to limiting rate hikes, the borrowing authority would allow the utility to speed up projects, capitalizing on lower construction costs while creating jobs. “It is a great time to take advantage of low construction costs and low interest rates,” Tyminski noted.

While the district can hope for voter approval, as a public agency it must leave the advocacy to others.

“This work must be done. It’s a question of the timing,” said MSD spokesman Lance LeComb. Prior to the 2008 referendum, the district won voter approval for $500 million in debt in 2004.

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