OREANDA-NEWS. Fitch Ratings affirms its 'AA-' rating on the following Louisville and Jefferson County Metropolitan Sewer District, Kentucky's (the district) debt as follows:

--$1.1 billion sewer and drainage revenue bonds series 2006A, 2009C (Build America Bonds), 2010A (Build America Bonds), 2011A, 2013A, 2013B and 2013C.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from all revenues from the sewer and stormwater drainage systems, including assessments charged against new connections.

KEY RATING DRIVERS

SIZABLE CAPITAL COSTS: The district's large capital needs in the next few years are regulatory driven and will be primarily debt funded. As a result, debt levels will increase from already high levels.

STABLE FINANCIAL FORECAST: Despite growing annual debt service (ADS) costs, the district's financial forecast point to stable all-in debt service coverage (DSC) remaining at or near 1.6x and sound liquidity.

STRONG RATE ADJUSTMENT HISTORY: The governing body has demonstrated a strong commitment to raising rates as necessary, which supports the district's ability to implement continued annual rate increases, as projected. The district's rate structure also benefits from a substantial fixed charge component, which reduce revenue variability.

STRONG SERVICE AREA: The large and diverse service area is the economic engine for the state. Continued steady gains in employment bolster the district's customer base.

RATING SENSITIVITIES

DETERIORATION OF FINANCIAL PERFORMANCE: Fitch's Stable Outlook reflects the expectation that Louisville & Jefferson County Metropolitan Sewer District will maintain financial metrics consistent with or better than management's current forecast. However, meaningfully higher debt issuance than levels already projected, as the district proceeds through the next few intensive years of capital construction, could pressure financial metrics and the rating.

CREDIT PROFILE

The district provides wastewater collection, treatment, and disposal service as well as stormwater drainage service to around 760,000 people within the boundaries of the Louisville/Jefferson County Metro Government (Metro) and certain outlying areas. Like many large urban wastewater utilities, the district's wastewater system has encountered periodic sanitary sewer overflows (SSOs) and combined sewer overflows (CSOs) during wet weather events, which led to regulatory action against the district. The regulatory actions culminated with the district entering into an amended consent decree (CD) in 2009 with the U.S. Environmental Protection Agency. The CD superseded a prior consent decree and outlines various actions for the district to accomplish in order to achieve compliance with its discharge permits.

SIZABLE CAPITAL NEEDS DRIVEN BY REGULATORY CONSENT DECREE
The CD provides the framework for district actions over a 20-year period (ending in 2024) and is estimated to require total capital spending of around $850 million. Approximately 45% of the estimated costs have been spent to date. Upon completion of the CD milestones, the district expects to capture and treat 96% of all CSOs and eliminate all previously identified SSOs. The bulk of all capital projects associated with the CD are expected to be in construction or completed by fiscal 2018, after which time, capital spending should decrease. During fiscals 2016-2020, the district's comprehensive capital improvement program calls for high levels of capital spending and project management of around $553 million, most of which is directly related to CD projects.

ACCELERATION OF DEBT ISSUANCE
The district's capital outlays will be primarily be debt funded. In October 2015, the district issued $87.5 million in refunding bonds and an additional $175 million in revenue bonds, which will be used to finance capital projects. This is up from the $80 million in bonds anticipated in Fitch's last review. In addition, the district's fiscal 2016 budget points to the issuance of $430 million in bonds during fiscals 2016-2019, compared to the $245 million which was anticipated over the same time period in the fiscal 2015 budget.

Higher debt issuance is a concern, given the district's highly leveraged position currently. However, capital needs beyond 2018 appear to be significantly lower, which should provide relief from the recent pace of debt issuance. The district's current debt per capita of $2,457 is higher than Fitch's 'AA' sector median of $521 and all in annual debt service (ADS) takes up a large 44% of the district's fiscal 2014 gross revenues. The district's debt to net assets was 82% at the end of fiscal 2014 as compared to Fitch's 'AA' median of 50%.

WILLINGNESS TO RAISE RATES A SIGNIFICANT CREDIT STRENGTH
The district's board has raised both wastewater and drainage charges almost continuously since 1991 in an effort to ensure necessary resources for capital spending. In addition, to fund required regulatory capital items, the board (with the approval of the Metro council) implemented a special surcharge in fiscal 2008, effectively boosting charges by 33%. Since that time the board has adopted additional annual increases of 6.5% in fiscals 2009-2013 and a 5.8% increase in fiscal 2014. Additional rate increases of 5.5% annually on both the sewer and drainage charge are anticipated through fiscal 2020. While combined wastewater and drainage charges are slightly elevated at 1.2% of median household income (MHI), combined utility charges (including water) fall below Fitch's affordability benchmark of 2% of MHI.

SOUND FINANCIAL PERFORMANCE/STABLE DSC FORECAST
Continued rate adjustments have produced adequate financial metric while debt costs have continued to grow. In fiscal 2014, senior DSC was 1.9x while all-in DSC was 1.6x, slightly outpacing forecasted DSC of 1.7x and 1.5x, respectively. Liquidity continued to improve for the third straight year, peaking at 422 days, and was generally on par with Fitch's 'AA' category median. The district's unaudited actual results for fiscal 2015 again slightly outpaced budget estimates with senior and all-in DSC totaling 1.9x and 1.6x, respectively. However, the district's days cash fell to a still healthy 287 days.

The district's latest forecast for fiscals 2016-2020 anticipates all-in DSC to range between 1.5x-1.6x. In recent years, the district's actual performance has been favorable relative to previous forecasts.

DIVERSE SERVICE TERRITORY
Metro (general obligation bonds rated 'AAA' by Fitch) serves as the major economic engine of the state. The area's job base has diversified over the last decade from primarily manufacturing to include a strong service component. The region saw positive employment gains from 2009 through 2013, including significant additions at the reopened and retooled Ford Motor Company assembly plant (Issuer Default Rating 'BBB-'/Positive Outlook). July 2015 unemployment of 5.3% was slightly better than the state (5.7%) and nation (5.6%). Wealth levels are above the state average but about 11% lower than the nation's.