CHICAGO – Kansas City, Missouri prices a nearly $200 million new money and refunding sewer revenue bond deal Wednesday as the city chips away at needed infrastructure upgrades and its $4.5 billion overflow control program.
Ahead of the sale, Moody's Investors Service affirmed the system's Aa2 rating and Standard & Poor's affirmed its AA rating, which also applies to about $300 million of outstanding junior lien debt. Both assign a stable outlook.
Proceeds will finance upgrades to the system that is operated by the city's Water Services Department with a small portion refunding 2005 and 2007 debt for savings.
The bonds are secured by a subordinate lien on revenues generated by the operations of the Sanitary Sewer System, which come from customer payments. The senior lien is closed.
The city is responsible for wastewater collection system piping, pump stations, and treatment facilities serving 164,000 customers in the city and 28 neighboring communities, and it manages all of the wastewater collection and treatment services.
"The Aa2 rating reflects the system's strong asset life; large and diverse customer base and service area; and solid financial performance and debt service coverage which is supported by annual rate increases," Moody's said.
The rating also reflects the need for additional debt as the system works through a significant consent decree-driven capital program. The OCP control plan was prepared more than a decade ago based on requirements of the federal Clean Water Act to stem the tide of storm water entering the system and to separate the sanitary sewer system to reduce sewer overflows. The plan lists $4.5 billion of needs to be addressed through fiscal 2035.
"The city continues to work through the funding resources to satisfy the plan's needs. Including OCP needs and other related system needs, the system's capital plans through fiscal 2020 total about $828 million," Standard & Poor's said.
Standard & Poor's said rates are currently on the threshold of what it considers less affordable, given that the combined water and sewer rates are above 4% of the city's median household and are expected to increase in the next few years.
The credit benefits from historically strong debt service coverage and increased liquidity with timely rate increases. Debt service coverage has traditionally remained above two times and city officials project that level to continue at about 2.3 times to 2.6 times up to 2019. "Built into the projections are additional rate increases of about 13% annually and issuing debt in 2017," Standard & Poor's said.
Financing demands associated with the overflow control program and uncertainty regarding the pace of additional debt that could be issued under a remaining $325 million authorization offset credit strengths.
In August 2012, 80% city voters approved $500 million in wastewater borrowing. The city will tap the $325 million of authority that will remain after Wednesday's sale in 2017.