Louisville, Ky.'s Metro Sewer District has completed nearly half of an $850 million sewer and waste water consent decree on time and under budget, according to chief financial officer Chad Collier.

BRADENTON, Fla. — Kentucky's double-A rated Louisville & Jefferson County Metropolitan Sewer District plans to competitively sell $326 million of bonds and notes Wednesday backed by a new positive outlook from Moody's Investors Service.

The MSD collects, treats, and disposes of wastewater and storm water for 750,000 residents as well as businesses.

Proceeds of $100 million of new-money bonds will fund capital needs of the district, including its $850 million, 2009 consent decree with the Environmental Protection Agency. Work on the 19-year decree is 45% complete, on schedule, and under budget.

The bonds are expected to be structured with serial and term maturities from 2015 to 2044 to provide level debt service.

Another $226.3 million of proceeds will be used to roll over existing subordinated bond anticipation notes for another year. The BANs are being used to match up with an orphaned swap in the same notional amount.

BANs have been used to cover the swap since 2009 because of attractive short-term interest rates, and they've been appealing to investors attracting as many as six institutional bidders even with a subordinated revenue pledge, according to chief financial officer Chad Collier.

"This has been a good risk to take on because of the short-term market," he said.

The bonds and notes are rated AA-minus/F1-plus by Fitch Ratings, Aa3/MIG-1 by Moody's, and AA/SP-1-plus by Standard & Poor's. Fitch and S&P maintained stable outlooks on the debt.

Moody's changed its outlook to positive from stable citing MSD's "greatly simplified swap portfolio," as well as increased unrestricted reserves and debt service coverage levels going forward. A refunding this spring allowed the district to unwind seven of nine swaps and pay down portions of the remaining two.

The positive outlook also considers planned rate increases, an aggressive revenue enhancement program, and expected expense savings from shared services with the Louisville Water Works Board, a separate entity.

The positive outlook from Moody's nearly half way through MSD's consent decree program is "a classic example of strong management," said the agency's financial advisor, Chip Sutherland with J.J.B. Hilliard, W.L. Lyons LLC.

Water and sewer debt should be a consideration for well-diversified portfolios and for investors seeking structural protection, according to a report on Wednesday from Barclays Municipal Credit Research that says the sector is stable but not risk-free.

"Overall, we believe that water and sewer bonds offer some value at current levels with the effects of mandated spending largely manageable over the near to medium term," said Barclays, advising investors to keep a long-term eye on environmental consent decrees and mandated capital spending.

Analysts covering the Louisville MSD cited its strong management, willingness to raise rates, and efforts to increase revenues.

"The district's board has raised both wastewater and drainage charges almost continuously since 1991 in an effort to ensure necessary resources for capital spending," said Fitch analyst Adrienne Booker. "In addition, to fund required regulatory capital items, the board — with the approval of the Metro council — implemented a special surcharge in fiscal 2008, effectively boosting charges by 33%."

The surcharge earmarked for consent decree-related costs resulted in $28.9 million in new revenue the first year, according to Moody's.

Even with yearly rate increases, the average wastewater bill in fiscal 2013 was $37.91 per month, slightly below the national average, according to a consultant's report.

Operating revenues have increased year-over-year partly due to the district's "successful revenue enhancement program," Moody's analyst Joshua Travis said. "Management has focused on accurate billing of customers, which added $1.7 million in annually recurring revenues."

The district hired a firm three years ago to review billing problems. Since then, two analysts were hired to bring the program in-house to continue determining why some customers were not getting bills, if improper discounts were being given, and to detect those not paying drainage fees, said Collier.

Another $2.5 million in income is expected next year because of the billing program, he said, adding the district's administrators have focused on expenses, savings, and debt.

Last year, operational expenses were $9 million less than budgeted. The savings is used to pay for capital or reduce rate increases.

"It's pretty obvious from the situation we're in that we have to do a combination of raising new rates and issuing bonds" to primarily fund all the requirements of the consent decree, he said. "The good news is we're ahead of schedule and under budget."

Louisville Metro Sewer District had $1.5 billion of outstanding debt as of Nov. 1, 2012. The agency encompasses 375 square miles in north-central Kentucky.

Peck, Shaffer & Williams LLP is bond counsel for Wednesday's offering.

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