CHICAGO – Kansas City, Mo., heads into the market Wednesday with $215 million of sanitary sewer system bonds that will keep the city up to speed on meeting its obligations under a federal consent decree.
The city is offering $165 million of new money and $45 million of forward delivery refunding bonds for savings, said City Treasurer Doug Buehler.
Morgan Stanley is senior manager. Hilltop Securities and Moody Reid Financial Advisors are the advisors. Gilmore & Bell PC and Martinez Law Firm are bond counsel.
Ahead of the deal, Moody’s Investors Service affirmed the system at Aa2 with a stable outlook and S&P Global Ratings affirmed its AA rating and stable outlook. The bonds are secured by system revenues.
About $148 million of the new money will fund “overflow control projects in order to meet consent decree requirements,” Kansas City Water Services’ Chief Financial Officer Sean Hennessey said in a recorded investor presentation.
The federal court signed off on a consent decree between the city and federal authorities in 2010 that required the city over a 25-year period to enable its system to target the capture and treatment of “88% of our combined sewer flows and eliminate sanitary sewer overflows during a five-year 24-hour rainfall event,” Hennessey said.
The system has a $1.1 billion capital plan through fiscal 2021 to fund overflow control projects under the consent decree as well as other capital needs. The 25-year overflow control program totals $4.5 billion.
The borrowing marks the latest to tap a $500 million authorization approved by voters in 2012. About $160 million will remain after the new financing with the next one planned in fiscal 2019. The city is planning to return to voters in 2020 with a $1 billion bonding request that would see it through 2030.
The city has enacted a series of rate hikes – including 9% this year and 9% in the next fiscal year and then 13% the following year -- to fund projects and repay borrowing.
Those hikes along with bringing new customers on board have brought overall revenues up to $198.5 million from $123.5 million five years ago. Debt service coverage ratios have risen during that period to 2.97 times from 2.34 times and are projected to grow to more than three times in the next fiscal year, but longer term pressure abound.
“We expect coverage and liquidity to decline in the medium-to-long term and the leverage to increase, which, in our opinion, poses downward pressure on the rating in the long term. However, we note, the city has demonstrated a willingness to adjust rates in a timely manner to preserve a strong financial profile,” S&P wrote.
Moody’s said its rating reflects a large and economically vibrant service area and solid financial performance including strong debt service coverage supported by annual rate increases. The system has a sizable capital improvement plan but it “continues to complete projects on time and on budget in order to comply with a consent decree while maintaining healthy debt service coverage.”
The department is responsible for wastewater collection and treatment services and oversees the planning and construction of wastewater collection system piping, pump stations, and treatment facilities that serve 165,000 retail customers in the city and neighboring communities.
The city is also working on a roughly $45 million new money and $48 million refunding general obligation sale that would mark its first borrowing under an $800 million authorization approved by voters last spring to fund infrastructure projects. The city will tap the authorization through about $40 million of annual borrowing over 20 years, Buehler said.