OREANDA-NEWS. Fitch Ratings has assigned an 'AA' rating to the following Springfield Metro Sanitary District, IL (the district) general obligation (GO) bonds:

--\\$22,225,000 GO bonds (alternate revenue source) series 2015A;

--\\$2,775,000 taxable GO bonds (alternate revenue source) series 2015C.

The bonds are expected to be sold through negotiation on July 16.

The proceeds of the 2015A bonds will be used to (i) finance certain capital improvements, including a portion of the costs of the construction of a new Sugar Creek Wastewater Treatment Plan, (ii) fund capitalized interest, and (iii) currently refund the district's outstanding sewer revenue subordinate lien bonds, series 2012. The proceeds of the series 2015C bonds will be used to (i) together with funds of the district, fund debt service reserve funds for the district's Illinois Environmental Protection Agency (IEPA) loans, and (ii) fund capitalized interest.

In addition, Fitch affirms the following ratings:

--\\$54.8 million in outstanding GO bonds (alternate revenue source) series 2009A and series 2009E (taxable) at 'AA'; and

--\\$55.1 million in outstanding senior lien sewer revenue bonds series 2010A (taxable) and series 2011A at 'AA-'.

The Rating Outlook is Stable.

SECURITY

The GO bonds are payable from (a) net revenues of the district's sewer system (the system) after payment of debt service of senior lien revenue bonds and (b) ad valorem taxes levied within the district, without limitation to rate or amount.

The senior lien sewer revenue bonds are payable from a first lien on the net revenues of the system. Revenues include interest income, connection fees, and tax revenues (excluding those levied upon all taxable property in the district for public benefit purposes and taxes levied for the Illinois Municipal Retirement Fund).

KEY RATING DRIVERS

GO PLEDGE: While debt service for the GO bonds is expected to be paid from net system revenues, the 'AA' rating is based on the unlimited tax GO pledge of the district.

SOUND ECONOMIC FUNDAMENTALS: The 'AA' tax-supported GO rating reflects a stable and diverse service area economy and tax base, characterized by below average unemployment, average wealth levels, stable population, growing assessed valuation and strong property tax collections.

LOW COVERAGE; RISING DEBT: Debt service coverage (DSC) from net revenues is low. Fitch-calculated all-in DSC, which includes all revenues and expenditures and all debt service payments, equaled just 1.16x in fiscal 2014, although indenture compliant DSC met the rate covenant of 1.25x in fiscal 2014.

ELEVATED DEBT PROFILE: Existing debt ratios are expected to reach over 2x median levels in all categories over the next several years as the district continues to borrow to complete treatment plant expansions. In addition, debt will likely continue to rise with significant costs in the intermediate horizon as the district implements the long-term control plan (LTCP) to address combined sewer overflows (CSOs). Amortization of principal is slow.

CONTINUED RATE FLEXIBILITY: Despite recent sizable rate increases to support escalating debt, the district maintains good rate flexibility with an average monthly sewer bill at just 0.7% of median household income (MHI) including annual rate increases through fiscal 2017. Collection of property tax revenues help to diversify the revenue base.

RATING SENSITIVITIES

SHARP CAPITAL AND DEBT INCREASES: Specific mandates for the LTCP to address CSOs are pending regulatory input/approval and will likely be significant. Depending on the magnitude and timing of the costs, the plan could prove difficult to afford given the already elevated debt levels, pressuring the tax base.

WEAKER THAN EXPECTED FINANCIALS: With the elevated debt profile and expectations of additional debt, failure to improve financial performance, including Fitch-calculated DSC, could lead to negative rating action.

CREDIT PROFILE

The district was organized in 1924 and is located in Sangamon County in central Illinois, approximately 190 miles southwest of Chicago. Headquartered in Springfield, the state capital and county seat, the district serves an area of approximately 165 square miles and a population of about 150,135. Roughly two-thirds of the district's service territory is within the city of Springfield. The district also serves the villages of Chatham, Grandview, Jerome, Leland Grove, Rochester, Sherman and Southern View as well as some unincorporated areas near Springfield.

The district is governed by a five-member board appointed by the county board chairman and confirmed by the county board of supervisors. Daily operations are administered by the Director/Engineer. The district's service area includes approximately 76% of the equalized assessed value of the county. Annexations of territory contiguous to the district within the county are on-going and added approximately \\$33 million to the equalized value of the district from 2013 to 2014.

STABLE ECONOMIC PROFILE

The district's economy is anchored by the stable presence of state government. Local government, healthcare, higher education and professional services sectors are also well represented. Springfield's March 2015 unemployment rate of 5.4% is improved from a year prior (7.1%) and below the state (6.3%) and national (5.6%) averages. The city figure incorporates declines in both employment and labor force versus the year prior, and the year-on-year improvement is driven by labor force contraction outpacing employment declines. Wealth levels as measured by per capita income approximate the state and U.S. averages.

The district's equalized assessed valuation (EAV) growth has continued throughout the recession. Annexations into the district continue on a moderate but steady basis. The majority of EAV growth stems from new property with more projects expected to affect the tax rolls over the coming two years.

The tax rate has fluctuated over the past five years but remains moderate at \\$0.0955 per \\$100 EAV for 2015, up a manageable 9.6% since 2010. The tax base is well diversified with the top ten payers accounting for a small 2.7% of assessed valuation. Total property tax collections are strong, averaging 99.7% over the last three years.

WEAK FINANCIAL PROFILE

As the district's debt service burden has increased, DSC has declined. Fitch calculated all-in DSC declined from 3.4x in fiscal 2012 to 1.26x in fiscal 2013 and 1.16x in fiscal 2014. Fiscal 2015 DSC based on estimated revenues is just 1.09x and projections for fiscal 2016 DSC based on reasonable assumptions and adopted rate hikes increases to a still weak 1.28x. The district did not provide projections beyond fiscal 2016.

Senior lien DSC has been strong with coverage of at least 2.25x (including Build America Bonds subsidy interest payments as revenues instead of as an offset to debt service) through fiscal 2014. Senior lien debt service payments increased in fiscal 2015 as the 2014 IEPA loan rolled on, resulting in DSC of 1.85x. However, these have since been subordinated and senior lien DSC is projected at 3.1x for fiscal 2016.

In addition to the low total DSC, liquidity and surplus cash flows have declined to weak levels in recent years. For fiscal 2014, days cash was just 90 days and free cash as a percent of depreciation was just 22%. Failure to improve key financial metrics in the upcoming years could lead to downward rating pressure.

Rates are affordable at 0.7% of the MHI and are expected to remain so through the last increase of the five-year rate package next year. However, rate flexibility may decline given the possibility of additional large hikes needed to fund large capital needs.

PLANT IMPROVEMENTS DOMINATE EXISTING CAPITAL PLAN

In June 2005, the district was notified by the IEPA that its Spring Creek and Sugar Creek treatment plants were operating in excess of rated design capacity. The facilities plan for the Spring Creek plant was approved by the IEPA in January of 2009, construction of the \\$144 million plant commenced in September 2009, and final completion occurred in August 2014. The district recently began construction on its \\$67 million Sugar Creek treatment plant expansion and expects completion by early 2018.

RISING DEBT AND CAPITAL NEEDS

The district does not have a capital improvement plan (CIP), but expects to spend approximately \\$67 million on the Sugar Creek treatment plant project and about \\$600,000 per year on ongoing repair and replacement projects over the next five years. Approximately 64% of the total \\$70 million is anticipated to be funded with debt, including the \\$25 million 2015 issuance, a \\$20 million 2015 IEPA loan, and another \\$25 million IEPA loan expected to be issued in fiscal 2018. The remainder of the CIP will be funded from pay-as-you-go sources.

Of note is that the current CIP does not include expected regulatory requirements related to CSO remediation. The district has not yet received a response from the IEPA on a draft LTCP submitted in December 2011 that identified \\$65.5 million of improvements (2011 dollars) over 20 years as its preferred alternative; regulators may ultimately require other possible options. Debt ratios are already high with debt to plant at 78% and debt per customer at \\$2,774 as of fiscal 2014 and will rise to \\$3,600 over the five year horizon with the current and anticipated debt and loan issuances to fund the existing Sugar Creek project.

With the finalization of the LTCP and inclusion of additional capital needs in the CIP, expected borrowing would likely rise further over the medium-to long term, could be significant depending on the scope and timing of the LTCP, and thus could ultimately pressure the rating. In addition to debt burden concerns, amortization of principal is slow, with payout at 36% and 65% in 10 and 20 years, respectively.