The Great Lakes Water Authority will take two upgrades into the bond market next week when it sells its second offering since taking over Detroit's water and sewer operations in 2016.
The GLWA -- which absorbed Detroit Water and Sewerage Department debt that had been cut to junk during the city's Chapter 9 bankruptcy -- believes the upgrade will boost its savings as it sells about $400 million of new money and refunding water and sewer revenue bonds.
“GLWA intends to have a substantial refinancing program to capture significant debt savings and continue the momentum from its improving bond ratings,” said GLWA's chief financial officer and treasurer, Nicolette Bateson.
On Sept. 5, S&P Global Ratings upgraded GLWA’s senior lien water system revenue bonds three notches to AA-minus from A-minus and existing second lien bonds to A-plus from BBB-plus. Moody’s Investors Service on Aug. 31 upgraded the senior bonds to A2 from A3 and the second lien bonds to A3 from Baa1. The outlook is positive for S&P and stable for Moody’s.
GLWA’s sewer system senior lien bonds were upgraded to A-plus from A-minus by S&P and A2 from A3 by Moody’s. The second lien bonds were upgraded to A from BBB-plus by S&P and A3 from Baa1 by Moody’s. The outlook is positive for S&P and stable for Moody’s.
Fitch Ratings affirmed its A rating on the senior bonds and A-minus rating on the second lien bonds. It revised its outlook to positive from stable.
“Achieving double-A-category status is an extraordinary achievement for an organization that is, essentially, a start-up,” said Bateson. “We understand that there remains work for us to do. We are committed to continuing to utilize the principles of effective utility management to become not only a sustainable utility, but one that is recognized as a strong credit by the rating agencies.”
The GLWA opened its doors on Jan. 1, 2016, assuming more than $5 billion in Detroit water and sewer bonds. Both its inaugural 2016 bond sale and this 2018 bond sale included both refunding and new money pieces.
Sue McCormick, CEO of GLWA, credits the upgrade to strong and experienced leadership, strong financial performance that include increased debt service coverage and strong liquidity levels, the authority’s strong competitive position and strong bondholder protections that come from the legal frameworks that launched GLWA.
“We are in an enviable position because our capital investments are being driven by optimizing the systems rather than mandates," McCormick said.
“While we view the GLWA system as highly leveraged, the fact that all of the capital plan is forward-looking and not mostly being used to cure regulatory infractions is a key credit strength that is supportive of the current rating level.” S&P said.
For its second turn in the bond market, the authority plans to offer $155 million of tax-exempt water supply system refunding revenue bonds and $252 million of new money and refunding sewer system bonds.
The sewer piece will offer roughly $80 million in new money, tax-exempt sewer system bonds to fund local sewer system capital improvements and $128 million of senior lien, tax-exempt refunding bonds. GLWA is also offering $43 million of taxable bonds.
The bonds are secured by a pledge of system revenues as well as a statutory lien on the pledged accounts.
Citi is running the books and Wells Fargo Securities is the co-senior manager. PFM Financial Advisors LLC is advising the authority and Dickinson Wright Pllc is bond counsel.
Bateson said that the authority anticipates substantial savings from the 2018 refunding, “including both cash flow and present value savings in each and every year where bonds are being refunded,” she said. The exact amount of savings will be determined at the time of pricing.
The authority’s five-year capital improvement plan and related capital improvement program for the regional water and sewer systems totals $584 million and $528 million, respectively for the next five fiscal years.
The authority plans to rely more on pay-as-you-go and less on bonds to fund capital improvements for both the wastewater and water system. Funding for the consolidated CIPs is expected to be provided by approximately 40% debt proceeds and 60% pay-go for the water system and 60% debt and 40% pay-go for the sewer system.
“In general, the GLWA expects to finance an increasing share of its CIP with ‘pay go’ capital provided by current revenues and revenue-generated funds on hand in its improvement and extension funds," Bateson said.
The water system serves nearly 30% of Michigan's population with 75% of revenue coming from wealthier suburbs, and the sewer system serves 30% of Michigan's population with more than 50% of operating revenues coming from suburban customers. Since 2008, 80 of GLWA's wholesale customers signed new model contracts with 30-year terms and automatic 10-year renewal.
On December 2017, the authority entered into a 30-year agreement for water delivery with Flint, the Karegnondi Water Authority, the Genesee County Drain Commissioner and state of Michigan.
The contract saves the city about $9 million by locking in a more favorable rate with GLWA and addresses $7 million in debt service payments Flint is currently obligated to pay on bonds issued to finance the Karegnondi Water Authority pipeline under construction.
After Flint's previous water supply contract with Detroit ended, the city's emergency manager shifted to Flint River water as the city awaited completion of the new pipeline. Flint did not treat the water properly, leading to a contamination crisis. The city later shifted back to Detroit-supplied water and is sticking with GLWA.
As part of the long-term contract, the KWA bonds that are currently being paid by Flint would continue to be paid, but GLWA issues credits to the city of Flint to offset the cost. Flint is responsible for about 35% of the debt service on the $220 million of KWA bonds, which are to be repaid over the next 28 years.
