CHICAGO — Columbus will enter the market next week with $440 million of new-money and refunding sewer system revenue bonds, kicking off the Ohio city’s $2.5 billion, 40-year project to update its sewer systems to meet Environmental Protection Agency requirements.

The deal is the first piece of financing to address the triple-A rated city’s 2005 wet weather management plan, a comprehensive capital improvement plan that addresses all outstanding environmental compliance issues.

Columbus also plans to spend an additional $2.5 billion — most of it through tax-exempt borrowing — during the next 40 years on its regular capital improvements, officials said.

“This is the first phase,” said Rob Newman, the city’s debt management coordinator. “We plan large issuances annually. These are brand new projects associated with the EPA [agreement].”

The upcoming issue consists of two series — $385.7 million of new-money, fixed-rate bonds and $52.1 million of variable-rate bonds. The variable-rate issue will refinance existing sewer revenue debt. The planned sale date is Jan. 15.

JPMorgan will lead a five-firm underwriting team. Bricker & Eckler, the city’s counsel, is bond counsel. Prism Municipal Advisors LLC is acting as financial adviser on the transaction.

Ohio’s Environmental Protection Agency and the city signed consent decrees in 2002 and 2004 mandating the sewer system improvements. The 2002 consent decree requires a halt to sanitary system overflows into rivers and streams. The 2004 order calls for a reduction in combined sewer overflows.

The Columbus sewer system provides services for more than one million people, serving the city as well as 23 suburbs.

Most municipalities with combined sewer systems are expected to develop long-term overflow control plans to comply with a 1994 EPA order. The agency estimates that 762 cities across the country are required to develop plans to control overflow for combined sewer systems. Upgrading sewer systems is a particular need in the Midwest, where systems can be more than 100 years old.

The Ohio Environmental Protection Agency has not yet approved the Columbus’ overall plan, but has approved several projects related to the 2004 consent decree that the city expects to complete by 2015.

Some Midwestern cities are in the midst of funding similar long-term plans, while others are still in negotiations with either the federal or state EPAs.

By preparing for its projects for the last several years, Columbus is slightly ahead of many other Midwestern cities, analysts say.

“There are other cities that have started to issue debt and address these projects, but everyone is in various stages,” said Moody’s Investors Service analyst Henrietta Chang. “Columbus has been very proactive in getting rate increases in place, and has a very aggressive initial start-up to get the key projects done in time.”

Moody’s gave next week’s fixed-rate issue a Aa2 rating and the variable-rate issue a Aa2/VMIG 1 short-term rating. Standard & Poor’s assigned its AA rating to the fixed-rate bonds and its AA/A1-plus to the adjustable-rate piece. Fitch Ratings assigns a AA and AA/F1-plus to the series.

The first chunk of the city’s 40-year plan includes a $1.6 billion, six-year capital plan. Improvements include a $250 million tunnel project and expansion of one of two treatment plants.The city is prepared to begin work as soon as bond funding is in place, said Steve Snedaker, assistant director of public utilities. “I guarantee you that shovels will be in the ground within just months,” he said.

The City Council is expected to approve legislation for the plan at its Feb. 4 meeting.

While the first phase of the EPA projects will be launched with revenue bonds, it’s likely Columbus will issue GOs in the future for the project, Newman said.

Officials plan to ask voters for authority to sell GOs for the EPA-related projects and regular city improvements on the November 2008 ballot.

“In the future we will probably reserve the right to issue GO bonds — we don’t want to limit ourselves to having to issue revenue debt all the time,” Newman said.

After next week’s offering, Columbus will have a total of $435.6 million of outstanding sewer revenue debt. it also carries $558 million of Ohio Water Development Authority loans, a funding source that is expected to dry up in the future, according to Snedaker.

The city has a total of $1.58 billion of outstanding GOs, 74% of which mature within the next 10 years.

The sewer revenue bonds are secured by a pledge of net revenues from the city’s sewer enterprise system. Funding the EPA-related projects over the next several years is expected to require annual sanitary system revenue increases of roughly 10%. In addition to fee increases, additional revenue is expected from the system’s steadily growing customer base.

“Financial projections through 2018 assume primarily revenue debt financing and rate increases, leading to total revenue debt service coverage ranging from a high of 6.4 times in 2008 to a low of 2.2 times in 2018,” Fitch analyst Melanie A.J. Shaker wrote in a recent report. “Despite the declining revenue bond coverage, Fitch expects that finances will remain strong and the city will increase rates as necessary to preserve its financial condition in excess of required coverage levels.”

In preparation for the projects, Columbus has increased its sewer fees over the last four years, raising rates by 17% in 2006 and 19% in 2007, with plans to raise rates another 10% in 2008. Officials estimate that the EPA project will create significant fee increases throughout its 40-year span, and will consider slowing the schedule of improvements if rates become too high.

The variable-rate bonds initially will be remarketed weekly but the mode could be converted to other structures.

Triple-A rated Columbus will forgo any outside liquidity facility and provide its own liquidity for the variable-rate bonds, with the city pledging to pay the purchase price of bonds in the event they are tendered and not remarketed.

The city holds an investment portfolio totaling $1.1 billion that provides “substantial liquidity for the $130 million of variable-rate debt that is not secured by a separate liquidity facility,” Shaker wrote.

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