CHICAGO — A group of governments near Flint, Mich., hopes to solidify a plan over the next month to break away from the Detroit Water and Sewerage Department and begin construction of their own bond-financed water pipeline to Lake Huron.
The move would mean independence and lower water rates for the Karegnondi Water Authority, a relatively new bond issuer made up of Genesee, Lapeer and Sanica counties and the cities of Flint and Lapeer.
It could also mean that the Detroit water system — one of the nation’s largest and one of that city’s strongest assets — would lose three of the eight counties it now serves.
The water and sewer department, which carries high single-A ratings on its senior-lien debt, has been hit with two downgrades in the past 13 months and is struggling to limit its exposure to the city’s own problems.
Moody’s Investors Service recently put the system’s $4.6 billion of bonds on review for possible downgrade in light of the possibility of a takeover of Detroit by Michigan — currently under state review — and the threat of a city bankruptcy.
The KWA was formed in October 2010, a year before its members’ 30-year leases with the Detroit water system expired. Its members have been wanting to build their own water pipeline for nearly all of those 30 years, according to KWA director John O’Brien.
“We need a reliable water source for this region,” he said.
The governments have talked with Detroit water officials about building a second pipeline but “they want to charge us too much to build it,” O’Brien added.
The pipeline project carries a total price tag of $1.9 billion. The KWA hopes to hit the market in about six months with a $300 million bond issue that would finance the first phase of work.
The authority is already working with bond counsel and a financial advisor, but O’Brien would not release the names of the firms until the authority board signs off on them at its February meeting.
“We’re putting together our final financial plan now, and it will be 30 days before we release the package,” he said.
He added that the authority has already met with two of the three major rating agencies to discuss the project.
The next meeting is scheduled for Feb. 15.
The authority does not expect to issue a request for proposal for underwriters, he said.
It has not yet decided whether to opt for a negotiated or competitive sale, though nearly all of Genesee County’s own sales are competitive, said Michelle Cole, the authority’s deputy treasurer.
The bonds would be backed by revenues from the system and may or may not carry a backup pledge of the participating members.
“If we can get a better bond rating, it would be considered,” O’Brien said.
Officials said they are not worried about any fallout on the KWA’s credit from Flint, which is in a state of emergency financial management.
“Our revenues are not based on the city of Flint’s financial well-being,” Cole said.
The Detroit water and sewer system has long faced the risk of communities breaking away, said Moody’s analyst Genevieve Nolan.
“From our perspective, this is something that’s been in discussion for awhile — the possibilities of communities breaking off and forming their own systems,” Nolan said. “The impact of that is something that we look at for all enterprise systems.”
Nolan said it’s still too early to predict how the KWA’s break would affect the Detroit system.
“This seems to be more of a preliminary issue for the water system, and we’d certainly want to do our due diligence to look at the actual impact on the system and on the revenues should this deal go through,” she said.
The KWA has all the state approvals in hand except for routine construction permits from the Michigan Department of Environmental Quality, according to O’Brien.
The Detroit water system serves 45% of Michigan’s population and has typically been considered isolated from the rest of the city’s financial problems. More than 80% of the system’s revenues come from outside of the city.
Standard & Poor’s rates the senior-lien water bonds A-plus with a stable outlook. Moody’s rates the debt A2 and has it on review for possible downgrade. Fitch Ratings assigns a AA-minus.