The Bond Buyer reported earlier this week [3/26] that the Karegnondi Water Authority (KWA) is making plans for an initial $220 million bond offering to finance its new 63 mile pipeline, which was first proposed in 2009. Bonds could be sold as early as next week [4/1].
As the Detroit Water and Sewerage Department's bond rating falls deeper into junk territory, the Karegnondi Water Authority has been assigned an initial A2 rating by Moody's in advance of this first bond sale.
The Bond Buyer article details some of the particulars about the KWA's bonding offering:
"In light of Flint's severe fiscal distress — the city has been under state controlled emergency management since late 2011 — the bonds feature a back-up pledge from Genesee County.
"The governments expect to make their payments from the system's revenues, but the debt carries the limited-tax general obligation pledge of both credits. Genesee has promised to cover Flint's payments within 15 days if the struggling city is unable to make its payments.
* * *
"Flint is set to no longer receive water from the DWSD as early as April 17, relying on its own water treatment plant and water drawn from the Flint River. The city expects to see significant savings from the move.
"Genesee will pursue a separate contract with the Detroit system through at least 2016. The DWSD and Genesee are also negotiating a separate contract that would require Detroit to provide a long-term emergency stand-by service if the new system fails.
The bonds sold by Genesee County will mature in 30 years and are payable from the water supply contracts as well as Long Term General Obligation (LTGO) pledges of the City of Flint and Genesee County.
For more background on the Karegnondi Water Authority, click here.
For more about DWSD Update, click here.
Update (4/2): Bloomberg is reporting (here) that KWA completed its $220 million bond sale yesterday.
"The water agency's sale included debt maturing as late as November 2043 that priced to yield 4.89 percent, or about 1.2 percentage points more than benchmark munis. The securities are rated A2 by Moody's Investor Service, five steps below the top."
On March 26, 2014, the Michigan Chronicle published an exclusive interview with Detroit Emergency Manager Kevyn Orr and asked for his take on why negotiations for a regional water authority (have thus far) failed.
Here are excerpts from that interview:
MICHIGAN CHRONICLE: What really happened in the deal involving the Detroit
Water and Sewerage Department that made Oakland and Macomb counties balk?
KEVYN ORR: We tried to design a proposal for them that was responsive in a
number of ways. First, it was responsive to their request for decades that they
have increased governance control and management of the water department.
Suburban communities make up over 65 percent of our revenue. We appreciate that
and we want to be responsive. Secondly, it was to make sure that citizens of
Detroit continue to own the water department. So the pipes, the lines,
switches, the sewerage system, all of that is still going to be owned by the
City of Detroit. You can’t replace that overnight. No matter what happens it
will be owned by the City of Detroit. Number three, it was to generate
sufficient cash from interest rate savings by having a better credit rating
department.
Number four, capital improvements. The concerns about capital improvements
were going to be addressed, provide a reserve for delinquent accounts that
would be replenished yearly. That there will be no delinquencies, rate
pressures on the counties customers or city customers and result of rate
pressures. And generate a revenue stream of 47 million dollars a year for 40
years for Detroit’s creditors. We thought it was an ideal solution that was
going to benefit all parties and be responsive to the requests that people have
been talking about.
* * *
MICHIGAN CHRONICLE: Can you explain what you meant by leasing as an option?
KEVYN ORR: We were going to create an authority, which would essentially
lease the department and operate it and pay the city a lease payment. That
would be $47 million a year. Our county partners don’t want to do that. That’s
fine. So we are going to move away from the lease concept more to a contract.
There are operating contractors out there who would bring greater efficiency to
the system. That’s what they do. We would also entertain requests for
information about an outright purchase. I said when I first came in here I did
not want to sell the water department. I still do not want to sell the water
department.
But I think because our expectation was that we
were going to have an authority deal in fairly short time, that’s what everybody
wanted. But I think in order for me to be responsive to our creditor class now
that the authority proposal appears to be slipping away, we have to be able to
say we explored every avenue to rationalize the key assets of the city. And
when I came in I said there are 15 buckets of assets. We’ve dealt with most of
them.
Click here to read the full interview with Mr. Orr at the Michigan Chronicle.
Photo Credit: Reuters
For more about DWSD Update, click here.
On March 21, 2014, Detroit Emergency Manager Kevyn Orr issued an RFP seeking proposals from potential private operators for the Detroit Water and Sewerage Department. This RFP comes after negotiations with Oakland and Macomb County stalled. Proposals are due April 7, 2014.
Given the size and complexity of the DWSD system, there are only a few companies that will likely respond to the RFP. I would look for responses from:
The RFP can be viewed or downloaded below.
For more about DWSD Update, click here.
Update (3/31): The Detroit News is reporting here that Kevyn Orr's office has been in contact with 41 companies who are interested in operating and managing DWSD. The EM's office must be using a loose definition of "interest" as there are only a handful of companies that could qualify to operate a utility as large and complex as DWSD and respond to this RFP in 2 weeks.
Update (6/6): The Detroit Free reported on Wednesday that Kevyn Orr's office received proposals from two companies. American Water has confirmed they are in discussions. United Water and Aqua America have confirmed that that did not submit bids. The likely second bidder, Veolia Water North America, would not comment either way.
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