BRADENTON, Fla. - Kentucky's gilt-edged Louisville Water Co. plans to advance refund $64.3 million in bonds as analysts and traders see market conditions increasingly favor refundings.
The utility, overseen by the Louisville-Jefferson County Metropolitan Government water works board, plans to auction the 2014 bonds via the Parity electronic bidding system on Aug. 13.
Proceeds will advance refund new-money bonds sold in 2006 to finance construction of Louisville Water's $55 million award-winning riverbank filtration well system at the B.E. Payne Treatment Plant, the first of its kind. The utility is planning a similar project at its second treatment plant.
The refunding bonds will price with maturities between 2014 and 2031. Proceeds will be held in escrow until Nov. 15, 2016 when the eligible maturities of 2006 bonds to be refunded will be called.
The deal is estimated to achieve present value savings of 10.7% or $6.6 million of refunded par, according to Amber Halloran, vice president of finance.
The offering is structured to achieve level debt service, and is being sold for debt service savings, she said.
The bonds are secured by a lien on pledged revenues, and legal covenants provide strong bondholder protection, said analysts.
The deal should be well received given current market conditions, according to a trader based in the Southeast.
"With supply so low, any large issues that come to market are getting good bids on the competitive side," the trader said. "I believe the Louisville Water deal will follow suit, and be very attractive to bidders and buyers."
More refundings are beginning to emerge in the market, the trader added.
According to Interactive Data, the volume of refundings and advance refundings this year increased steadily each month between January and June for a total of $71.96 billion.
The amount is still 35.7% less than the total volume issued in the first six months of 2013, which was $111.92 billion, though some investment banks believe market conditions will become more favorable for advance refundings this year.
"We continue to see low rates and a flattened Treasury curve as favorable factors for both new money and advance refunding issuance," said a Bank of America Merrill Lynch Global Research report released Monday. "Recent steepening in the Treasury curve should be temporary."
The report said flattening of the curve should "resume soon."
Those factors should bode well for Louisville Water next week.
The utility is an infrequent, highly rated issuer that provides drinking water to 850,000 people in Louisville and parts of five nearby counties. Its last bond deal was sold in 2009.
Moody's Investors Service and Standard & Poor's assigned triple-A ratings to the 2014 advance refunding bonds and affirmed their triple-A ratings on $240 million of outstanding debt. Outlooks are stable.
"The Aaa rating reflects the large and stable customer base located within a major economic center, stable financial metrics, including favorable debt service coverage attributed to the system's strong management team, and a manageable debt profile with plans for additional near term borrowing," said Moody's analyst Nathan Phelps.
The stable outlook reflects Moody's expectation the system's water supply operations will continue to be proactively managed, and user rates will be adjusted to maintain healthy financial metrics, Phelps said.
S&P said the utility board has a history of consistent rate increases, and that debt service coverage and liquidity will likely remain strong even with a subordinate dividend payment to the metro government included.
The payment totaled $19.65 million in 2013 and $19.34 million in 2012, said the preliminary official statement.
The dividend payment is subordinate to all operating expenses and debt service on the bonds. However, S&P said that it considers the payment as an operating expense because of its recurring nature.
Louisville Water, which sits on the Ohio River and delivers about 121 million gallons of drinking water daily, is innovative and has significant capacity to meet the region's water needs, officials said.
That doesn't mean customers don't worry sometimes.
The utility had callers this week who heard about the massive algal bloom 300 miles away on Lake Erie last weekend that left more than 400,000 people in Toledo, Ohio and surrounding areas without potable water for nearly three days.
People who called the Louisville utility wanted to know if it could happen to them.
Louisville is not a stranger to occasional algal blooms, said the water company's president and chief executive officer James Brammell.
"We take a lot pride in our ability to treat ever-changing river conditions," he said. "Algal blooms occur when there's a hot and dry weather pattern. Historically we have been at effective treating those, and there has never been an interruption to the public."
When a toxic chemical contaminated the Charleston, W.V., drinking water supply in January and made its way down the Ohio River basin toward Louisville, some cities upstream turned off the taps.
"We were able to treat that as business as usual, and we had no detection of chemicals in our water supply," said Brammell.
The utility has also put innovative measures in place to counter a decline in water consumption by providing other communities with water, and operating water treatment plants at Fort Knox and a large industrial park, he said.
While aging water main ruptures plague many systems - such as the one that burst and inundated Westside Los Angeles neighborhoods and the University of California, Los Angeles campus July 29 with an estimated 20 million gallons of water - Louisville has maintained a rehabilitation and replacement program.
In 2007, Louisville completed a 15-year campaign to replace or renovate all cast-iron water mains installed before 1935, according to the POS.
The company also developed a unique riverbank filtration program to provide for water supply needs and comply with federal drinking water regulations. Financed with bonds sold in 2006, the project included boring a 7,800-foot-long tunnel in the bedrock, 150 feet below the ground. The 10-foot diameter tunnel was lined with concrete, and wells were sunk into the aquifer to collect ground water. The water flows from the wells into the tunnel, and a pump station pulls the water from the tunnel into the B.E. Payne Treatment Plant.
The process uses the natural filtering properties of the sand and gravel in the aquifer to remove most contaminants and sediment. It also provides an additional barrier for pathogen removal, and creates a more stable water temperature to help prevent against water main breaks in the distribution system, officials said.
The project was completed in December 2010, and won the Society of Civil Engineers' Outstanding Civil Engineering Achievement Award in 2011.
Louisville Water is in the midst of the preliminary engineering for riverbank filtration at its larger Crescent Hill Treatment Plant, said spokeswoman Kelley Dearing Smith.
"That's what the next bond issue would help to fund," she said.
Louisville Water is planning to issue new money bonds in late 2015, in a deal expected to range between $125 million and $140 million. Proceeds will pay a portion of the 10-year, $150 million cost of the second filtration project, Halloran said.
Raymond James & Associates Inc. is financial advisor on the 2014 refunding. Stites & Harbison PLLC is bond and disclosure counsel.
