The Louisville and Jefferson County Metropolitan Sewer District, Kentucky, is set to sell a climate certified green bond deal in the primary market next week.
This may be the first time a large competitive green bond offering has been climate bond certified in Kentucky.
The $225 million of tax-exempt Series 2022A sewer and drainage system revenue green bonds have been climate bond certified by Kestrel Verifiers and are set for sale Tuesday with a closing date of Jan. 31.
Robert W. Baird is municipal advisor on the deal while Wyatt, Tarrant & Combs LLP, is bond counsel and Bank of New York Mellon is the paying agent.
The issue is tentatively structured as serials due May 15 and running from 2022 to 2052.
The bonds are payable from pledged revenues from the district's collection of rates, rents and charges for services.
MSD was last in the competitive arena in September 2020, when it sold $112.075 million of taxable Series 2020C sewer and drainage system revenue refunding bonds. Wells Fargo won that issue with a true interest cost of 2.3929%.
Moody's Investors Service has assigned its Aa3 rating to the Series 2022A bonds along with a stable outlook.
Moody’s also rates the system's outstanding parity debt Aa3. Following the sale, MSD will have about $2.4 billion in revenue bonds outstanding.
Moody’s said its rating reflects “the essential service provided by the district to a large and stable service area that acts as a regional economic center and sound financial metrics supported by timely rate increases and long-term financial and capital planning.”
The district was established in 1946 and is responsible for the sewer and drainage system serving the Louisville and Jefferson County Metro Government and parts of Bullitt County. MSD collects and treats wastewater from customers in Jefferson County and a part of Oldham County. In addition, the district is responsible for stormwater collection, drainage and flood protection within Jefferson County. The system provides service to about 250,000 customers, most of which are residential.
While Kestrel has tagged several large transactions as climate bond certified, this looks likely to be the first competitive sale in Kentucky that has qualified the climate bond designation.
“In working with Louisville MSD, we at Kestrel saw an innovative regional utility that was truly exemplary for its use of green infrastructure and nature-based solutions to reduce flooding and manage water quality,” Monica Reid, CEO of Kestrel Verifiers, told The Bond Buyer.
“Many of the district’s wastewater and stormwater infrastructure projects enhance climate resilience and environmental justice in the long term," Reid said. “We chose to apply the climate bonds standard to shine a light on the fact that Louisville MSD's bond-financed activities are 100% aligned with a transition to a low-carbon economy."
Proceeds will be used to pay refund commercial paper notes issued to finance capital improvements to the wastewater, stormwater and flood protection systems.
“We felt strongly that using a second-party opinion was the way to go versus self-designation,” Brad Good, CFO of the Louisville MSD, told The Bond Buyer. “We wanted an independent review of our program and because this is our first green offering we wanted the additional guidance that a verifier can provide.”
He added that the district is focused on the environment as well as the bottom line.
“The CBI designation reflects the alignment of MSD’s capital program with CBI’s water infrastructure criteria,” Good said. “This enables us to connect our capital program with outcomes that provide long-term environmental benefits to the community and really tell that story in a meaningful way.”
MSD entered into a federal
MSD committed to taking steps to control overflows under the decree signed by the district, the United States Environmental Protection Agency, the Kentucky Department for Environmental Protection and the United States Department of Justice.
To help meet the terms of the agreement, MSD prepared a plan to reduce and mitigate the effects of combined sewer overflows and to eliminate sanitary sewer overflows and other unauthorized discharges.
MSD said the plan runs through 2024 at an estimated cost of $1.15 billion.
The Waterway Protection Tunnel will be the largest project funded by the bond proceeds.
Before MSD’s consent decree work began, more than 5 billion gallons of rainwater and wastewater overflowed into our waterways each year. MSD’s Waterway Protection Tunnel will store this overflow of rainwater and wastewater underground until it can be pumped to a wastewater treatment facility, cleaned and released to the Ohio River.
The tunnel is a $201 million project now underway and planned to be operational this year.
“The district demonstrates leadership in integrated water resource management by reducing combined sewer overflows and sanitary sewer overflows to meet consent decree obligations and by financing upgrades to the flood control, stormwater, and wastewater systems which integrate nature-based solutions,” according to Kestrel’s report. “The bonds align with the water infrastructure eligible sector criteria under the climate bonds standard.”
The Morris Forman drum dryer replacement is another big project that will benefit from the bond proceeds.
It is Kentucky's largest and oldest water treatment center.
On a normal day, it treats 100 million gallons of wastewater and up to 350 million gallons per day during storms, the district said. Morris Forman WQTC also handles the biosolids processing for all five WQTCs in Louisville Metro. The project will replace two drum dryers used for processing, which reached the end of their useful lives in 2019.
“Two main factors were driving our decision to seek an ESG (environmental, social and governance) label for this bond: connecting the programmatic work associated with our mission to the financings that support it and making a focused effort to broaden our investor base,” Good said. “Both of these objectives are measurable and will be used to evaluate the success of the label. A ‘greenium’ is harder to quantify so that wasn’t the primary focus but our thought is that if we are broadening the investor base we are creating more demand for our bonds.”
MSD has committed to posting annual continuing disclosures on the Municipal Securities Rulemaking Board’s EMMA website. The district also is expected to provide voluntary annual update reports on EMMA and through
MSD is required to report on the completion of its projects to reduce overflows of untreated wastewater into local waterways and monitor and report on water quality and stream health.
