Revenue bonds will help finance this Water Replenishment District of Southern California facility, which will treat water that replenishes two aquifers.

LOS ANGELES — A district that replenishes Los Angeles-area aquifers is selling bonds for a project designed to help eliminate its use of imported water.

The Water Replenishment District of Southern California, which serves roughly 4 million people in 43 cities, was created in 1959 by popular vote to prevent the over-pumping of water from the Central and West Coast groundwater basins. It injects water into the aquifers or spreads it on the surface to filter down into the natural underground water basins.

The imported water the district receives from wholesaler Metropolitan Water District of Southern California costs four times as much as the assessment it charges the cities and private companies that pump water out of the two aquifers it protects, said Scott Ota, the district's chief financial officer.

"The idea is to get off imported water," Ota said. "Over the past 30 years, the cost for imported water has increased, on average, 8% a year."

The water district charges its users $283 an acre foot to pump water out of the aquifers, compared to the $1,254 per acre foot the wholesaler currently charges the district, Ota said.

It has two projects underway that will eliminate the district's need to purchase water from the wholesaler.

Next week's $160 million revenue bond deal will provide $69.5 million of the $95 million cost of constructing a treatment facility. The district will pay cash for the rest of the cost of the project now under construction, which is expected to be completed in 2018.

The district also plans to advance refund about $95 million in certificates of participation issued in 2004, 2008 and 2011. It's hoping to achieve $7 million in net present value savings on the refunding and interest rates of 3.5%, Ota said.

The district received AA-plus ratings with a stable outlook from Fitch Ratings and Standard & Poor's ahead of the sale.

Wells Fargo Securities is the senior manager and FTN Financial Capital Markets is co-manager. Norton Rose Fulbright is bond and disclosure counsel.

The district also hired Kosmont Companies to act as a pricing advisor.

"They will come in at the end and make sure the rates we are getting from the underwriters are fair," Ota said. "They will make sure we are in line with everyone else, by doing comps like you would use in purchasing a house."

In a Wednesday call, the finance team decided next week looked like an auspicious time for the bond sale, Ota said.

Matt Fabian, a partner with Municipal Market Advisors, said the market will likely be receptive, particularly since the bonds are funding a water replenishment project in the drought-stricken Golden State.

The first two weeks of December are also the busiest time of year for the muni market, Fabian said.

The current calendar is $10 billion, which is average, but last year's calendar for the same week saw $15 billion, Fabian said.

With much of the focus on refundings, he said, the fact that the district's deal includes a new money piece will also draw interest.

The month is a big one for the market, particularly since $18 billion of bonds are maturing in December that will need to be reinvested, he said.

"It is a very good time to be an issuer," Fabian said. "Yields are low, spreads are tight and lending conditions are extremely generous."

The recent flattening of the treasury curve also makes advance refundings more efficient, he said.

The plant will use reverse osmosis and ultraviolet sterilization to further treat water coming out of the Los Angeles County sewage treatment plants, so it can be used to replenish the two aquifers it monitors.

The district already purchased the land for $10 million and is razing existing buildings in preparation for construction, Ota said.

That project will replace 10,000 acre-feet of the 21,000 acre-feet it normally purchases from the water wholesaler.

The remaining 11,000 will come from a second project, which diverts treated water from Los Angeles County's sewer plant to spreading grounds where the water percolates down into the aquifers.

The State Water Resources Control Board's rules requiring mandatory reductions in water use by California's retail water providers doesn't directly impact the water district. They do affect the cities that pump water from the aquifers managed by the water district.

Roughly 95% of the water district's income comes from replenishment assessments on the cities and private companies that pump water out of the aquifers, Ota said. Users of the aquifers pump about 244,000 acre-feet of water annually.

The district raised its replenishment assessments by 18.5% in fiscal 2010, 13.1% in fiscal 2011, 19% in fiscal 2012 and 9.8% in fiscal 2013, but they remain substantially below the rates MWD charges, according to a Fitch Ratings report.

Since groundwater is going to be the cities' cheapest supply of water, the water district's revenues aren't likely to be impacted by reduced pumping from conservation, said Tim Tung, a Standard & Poor's credit analyst. The cities that pump water from the aquifers are more likely to reduce the amount of water they receive from MWD, he said.

Analysts are also finding that as consumers conserve and revenues drop that operating costs are decreasing, Tung said.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.