DALLAS — The Louisiana State Bond Commission on Thursday approved the sale by the East Baton Rouge Sewerage Commission of $202.5 million of variable-rate revenue bonds.

The bonds are expected to be issued by the end of July.

Proceeds will finance the next phase of improvements to East Baton Rouge Parish’s sewer system, as part of its consent decree with the U.S. Environmental Protection Agency.

The total cost of the effort to rehabilitate existing lines, expand the system’s capacity, and improve sewage treatment facilities is expected to be $1.2 billion.

The bonds will be supported by sewer revenues and a parish-wide 0.5% sales tax. Revenues are expected to provide 65% of debt service.

The upgrades will be financed in part through the parish commission’s $645 million capital improvement program over the next four years. The program must be completed by Jan. 1, 2015.

The sewer commission’s $723.8 million of outstanding debt is rated AA by Fitch Ratings, AA-minus by Standard & Poor’s, and Aa3 by Moody’s Investors Service.

With the sale, almost 22% of the sewer commission’s debt will be as hedged variable-rate bonds.

Moody’s downgraded the commission’s debt from the Aa2 rating assigned to its $375 million issue in 2010 that included $357.8 million of taxable Build America Bonds.

Moody’s analysts lowered their rating on the debt due to the utility’s expected borrowing of $404 million over the next four years required by the EPA consent decree.

The bonds will carry an index floating rate of 70% of the one-month London Interbank Offered Rate plus a spread set at pricing before converting to a fixed rate on the mandatory tender date of Aug. 1, 2014.

The Sewerage Commission’s forward delivery agreements from 2006 were amended by the Bond Commission to replace the original providers of the hedge agreement with Deutsche Bank.

Bond Commission director Whit Kling Jr. was directed to issue solicitations for professional services that would be needed for a proposed state general obligation refunding. However, he said only a limited number of state GO issues would qualify for refunding under current market conditions.

Sponsors for projects that received an authorization for Gulf Opportunity Zone bonds but have not yet gone to market will be asked to attend the commission’s meeting on Aug. 18.

Louisiana Treasurer John Kennedy, who chairs the commission, said authorization that cannot be issued soon should be returned for reallocation. The federal tax-exempt private-activity bond program expires at the end of 2011.

Kling said the state has $830,000 of GO Zone bond capacity remaining from the $7.8 billion of bonds it was allocated.

The commission gave final approval to $75 million of GO Zone bonds to a liquids terminal in Saint James Parish and $10 million of GO Zone bonds that will be issued by the Louisiana Public Facilities Authority for a bio-diesel production facility.

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