Joliet, Illinois, has wrapped up the first leg of financing for work that lays the foundation for the city to switch its water supply from a rapidly draining aquifer to treated Lake Michigan water supplied by Chicago.
The city about 45 miles southwest of Chicago also is leading the effort to establish a commission with nearby communities that will also partake in the new water source under the pact Joliet
The city sold short-term debt Thursday as part of the financing plan for an overhaul of 192 miles of aged water lines and to help cover the design and engineering costs for the new Lake Michigan line. The financing plan for the Water Main Replacement Project and Water Transmission Project, along with other related capital work, totals $784 million.
The $76.4 million of Waterworks and Sewerage Senior Lien Revenue Bond Anticipation Notes sold in two tranches with $55 million due in 2024 and $21.4 million due in 2025. JP Morgan managed the deal.
The city will close in the coming weeks on two Water Infrastructure Finance and Innovation Act, or WIFIA, loans from the federal government totaling $308.5 million with plans to begin drawing on them in two years to both pay off the BANs and cover additional project expenses. A third WIFIA loan for $35 million is expected next year related to the water transmission project.
“This is the first step in a relatively long financing strategy. We are happy that this is under our belt,” said Anthony Miceli, a senior vice president at Speer Financial Inc., which is advising the city.
The city will pay a true interest cost on the BANs of 2.36%.
By locking in a rate on the
Using the BANs up front “provides the city some extra flexibility to manage the costs,” Miceli said.
Rates are set based on comparable Treasury securities and the addition of one basis point to the State and Local Government Series, SLGS, daily rate with a maturity that is equal or greater than the weighted average life of the WIFIA loan.
Rates also depend on whether the loan carries a subordinate or senior lien pledge. Repayment must begin no later than five years after a project’s substantial completion and must be repaid by 35 years after substantial completion.
The BANs carry a K1 rating and the senior lien WIFIA loans an A rating and stable outlook from Kroll Bond Rating Agency. Both are secured under a new master trust indenture following the city’s defeasance of outstanding bonded debt under the prior indenture. The WIFIA loan credit benefits from the city’s “full autonomy to set rates” and its demonstrated “willingness to increase rates to ramp up revenues in anticipation of the project,” Kroll said.
Historical financial results have been adequate and liquidity is robust providing operational flexibility. Challenges include the significant execution risk of such an undertaking. Cost overruns could pose a significant financial burden and system leverage will increase substantially as capital needs associated with the projects are financed.
The $453 million financing plan for the Water Main Replacement Project calls for replacing all mains constructed before the 1970s. The $267 million financing plan for the Water Transmission System Project covers initial costs for the new transmission system. The city is planning an additional $64 million of related work bringing to the total financing plan to $784 million.
The two projects are linked because replacing the old lines allows the city to reduce water leakage from about a 30% level to the less than 10% required to secure regulatory permission to use Lake Michigan water.
State revolving fund loans, future revenue-backed long-term borrowing, and city cash on hand will round out the full financing package. City water and sewer rate increases are planned to repay the debts. Final design work is expected in 2024 and construction is anticipated to begin in 2025.
The full cost of the water transmission system ranges from "$600-$800 million depending upon capacity, not including purchased water costs,"
Officials said about $170 million of Joliet's $267 million financing plan for the system's design and engineering work is incorporated into the $600 million to $800 million.
Future financing needs related to the new transmission system may come from the new southwest suburban regional water commission. Joliet spearheaded the efforts and Gov. J.B. Pritzker last December signed enabling legislation for the commission.
In February membership was finalized with Crest Hill, Channahon, Minooka, Romeoville, and Shorewood joining the ranks.
“We have taken another step forward along the path to securing the vitality of our region for the future,” Joliet Mayor Bob O’Dekirk said in a statement.
The six communities will work out the final details to officially form the commission which is expected in April 2023.
The deep groundwater sandstone aquifer that serves the Joliet region is running dry and could fall short of providing enough water for the region by 2030, according to the Illinois State Water Survey.
Commission members must individually secure a Lake Michigan Water Allocation permit from the Illinois Department of Natural Resources. Joliet and Shorewood already have these permits in place.
The plan structure with Chicago calls for the
Joliet, the state’s fourth-largest city with about 147,000 residents, launched a study of alternative sources of water in 2018 with 14 alternatives considered. They covered a range of options from groundwater and rivers and Lake Michigan.
The city narrowed the options down to five in 2019, including Lake Michigan water coming from either Chicago, the DuPage Water Commission, or a new Indiana intake. Drawing water from the Illinois River and Kankakee River was also considered. DuPage pulled itself from consideration.
The city later narrowed it down to two options: Chicago which would provide treated water and a new Indiana intake that would require Joliet to treat the water. Joliet opted to go with the Chicago option because of its state-of-the-art purification facilities, expertise, and cost, the city said.
“This decision gives the citizens of Joliet all the knowledge and resources of a system that purifies and distributes over 1 billion gallons of water each day to over 5.3 million residents in northeast Illinois,” O’Dekirk said.
Joliet and Chicago inked a preliminary pact in early 2021 that’s expected to lead to a 100-year contract.
The deal should generate around $30 million of new revenue for Chicago annually and “importantly will help lower the cost for all of our customers because of the fact that they are joining our system,” Chicago Chief Financial Officer Jennie Huang Bennett said last year. “It’s a meaningful new customer to the system and ultimately what we think is a supportive of the strength of the water system and credit.”
That $30 million would be added to an enterprise system with net annual income of $130 million, Bennett said.
Under the preliminary water supply agreement, Chicago would own and operate a tunnel connection, a low service pump station, and service valve. Joliet would own other infrastructure beyond the valve, a 31-mile pipeline and a high service pumping station.
Under the agreement, Chicago would charge a customer rate based on the industry standard American Water Works Association M1 methodology for rate setting. This AWWA rate setting methodology calculates the cost of providing water service to customers and determines a rate based on that cost of service and taking account infrastructure costs into account.
Chicago also plans to establish an advisory council to share information about water operations and allow regional water partners to collaborate with Chicago on making water operations and rate setting more transparent, fair and efficient, Bennett said. That could help Chicago’s attractiveness as other communities grapple with depleted aquifers in the coming years.
Chicago is a large retail and wholesale potable water supplier with roughly 494,000 customer accounts within the city limits, plus those in 125 suburban communities. Raw water is supplied by Lake Michigan through four water intakes and treated by two large water purification plants.
