BRADENTON, Fla. – Columbia, S.C.’s mostly bond-financed $750 million water and sewer system capital plan, driven by a federal order to stop sewage overflows, is a credit negative, Moody’s Investors Service said in a special comment Thursday.

Columbia has entered a proposed consent decree with the Department of Justice, Environmental Protection Agency, and South Carolina Department of Health and Environmental Control, which is open for public comment until Oct. 17. After that it is expected to be approved by a federal court.

The EPA said Thursday that similar agreements with other local governments in the Southeast region are anticipated.

The self-supporting water and sewer enterprise system operated by Columbia has an already above average $372 million of outstanding debt, according to analyst Lauren Von Bargen. The system’s debt is rated Aa1 by Moody’s and AA by Standard & Poor’s.

The system’s debt ratio – next fixed assets and revenues divided by outstanding debt - was 49.5% as of fiscal 2012.

“The proposed consent decree is credit negative for the water and sewer enterprise because it requires the city to address unauthorized overflows of untreated raw sewage through approximately $750 million of new capital investments, most of which will be funded with debt,” Von Bargen said.

About 80% of the capital plan is expected to be financed with bonds, and the remaining 20% will be funded from system revenues and reserves.

Moody’s said the city has a history of adopting timely rate increases to offset rising capital costs, including an average 8% increase that was implemented May 1. Columbia has also hired a consultant to review the rate structure.

“The system’s total debt service coverage in fiscal 2012 was a strong 2.66 times with maximum annual debt service coverage of 2.79 times given the declining debt-service schedule,” said Von Bargen. “The city faces a choice of allowing debt-service coverage to decline as a result of the new debt, or passing on the full incremental cost of the new debt to customers through rate increases.”

Despite recent rate increases, the system’s rates remain relatively low so additional increases should not create an economic hardship on ratepayers, she said.

“This is the latest example of a longstanding trend of the high capital cost of environmental compliance for water and sewer systems in the U.S.,” Von Bargen said, citing expensive consent decrees approved by Atlanta and Miami-Dade County.

Atlanta, which has a $4 billion water and sewer repair program under way, has complied with one consent order and is still operating under a second one to address EPA violations. Miami-Dade County recently entered a second settlement that incorporates $1.6 billion in consent-related repairs into a $12.6 billion capital plan through 2027.

The EPA said Thursday that the agency continues to investigate cities and counties in the Southeast for combined sewer systems, known as CSO/SSOs, which have unpermitted sewer and storm water overflows that pollute nearby water bodies, including those that serve as a source of drinking water.

Of 155 CSO/SSO systems in the Southeast, 114 are complying with the Clean Water Act or have a formal agreement to correct violations, said EPA spokeswoman Davina Marraccini.

There will be more consent decrees, she said.

“The Clean Water Act requires that municipalities treat sewage before it is discharged and to control contaminated storm water discharges, but many municipalities across the country are not complying with these requirements,” Marraccini said, adding that enforcing the act continues to be a priority of the EPA. “EPA’s enforcement efforts in recent years have resulted in agreements by many cities to remedy these problems, but the problem remains in many other cities.”

The EPA’s efforts are aimed at reducing discharges from CSO/SSOs as well as separate municipal storm water systems through agreements that obtain local government commitments to “implement timely, affordable solutions to these problems, including increased use of green infrastructure and other innovative approaches,” she said.

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