A long-planned flood prevention project on the Red River between North Dakota and Minnesota reached a financing milestone last week with the pricing of a $273 million tax-exempt bond issue for the public private partnership for a civil works project led by the Army Corp of Engineers.
The $273 million “green” labeled bonds, issued through the Wisconsin-based Public Finance, Authority, will help fund the local piece of the $2.75 billion Fargo-Moorhead Diversion Project first spearheaded by the Corps to stem the chronic overflow of the Red River and tributaries that flood during storms and snow melt, repeatedly submerging parts of Fargo, North Dakota and Moorhead, Minnesota, across the river.
The project launches the inaugural use of a P3 model involving the Army Corps that could benefit other federal projects.
“There’s a saying in the P3 world, which is when you’ve worked on one P3, you’ve worked on one P3,” John Shockley, an attorney at Ohnstad Twichell PC, said in an interview last week. “The challenge with building the model the first time is bringing all the parts together and making them work cohesively.” Shockley, who is general counsel and bond counsel at the
The Baa3-rated transaction represents the project’s final large financing in a diverse package that also included a $569 million Water Infrastructure Finance and Innovation Act loan in June. The team may return to the market with a borrowing of around $100 million after substantial completion in six years, said Shockley.
As a first-of-its-kind deal in North America, the Fargo project was crafted from the bottom up, said Shockley.
Building the multi-jurisdictional diversion authority and knitting together the various tax revenues backing the availability payments were key early steps, he said. “It’s an interesting project with a lot of novel innovations, especially on the finance side,” he said. “Having worked on this since 2012, it’s fun to watch the transaction come to fruition now.”
The authority in June selected a contractor consortium called the Red River Valley Alliance as the private partner. The P3 project costs during construction totals $2.1 billion including a $1.175 billion design and build price tag. The developers are putting in $48 million of equity.
The project’s planning dates back more than a decade with Army Corps approval coming in 2014 and a project partnership finalized between the Army Corp and local governments in 2016.
The overall $2.75 billion project relies on $750 million from the federal government, $870 million from North Dakota, $86 million from Minnesota, and $1.1 billion from local tax levies.
The Corps plans to use the project as a template for its
“We anticipate this approach can be replicated across the nation, not only with flood risk management projects but also ecosystem restoration projects,” said Snyder. “This Fargo project demonstrates there’s a new tool in the toolbox for the Army Corps of Engineers to implement infrastructure, and we’ve proven it can provide the cost savings and get the project in the ground sooner.”
An Army Corps-led project would have taken 16 years to complete, compared to the six-year period expected under the P3 structure, Snyder said. The savings are estimated at $330 million.
Two other projects are in the Corps' P3 pipeline: the Brazos Island Harbor Channel Improvement Project in Texas and the Los Angeles River Ecosystem Restoration Project.
Snyder said the Brazos project will likely not be structured as a design-build-finance-operate-maintain project, he said. The L.A. River project is more likely to be a full-blown P3 but the agency is still negotiating with Los Angeles to decide the structure, Snyder said. The aim is to complete the project before Los Angeles hosts the summer Olympics in 2028, he added.
The corps turned to a P3 model as a means to “streamline delivery, share risk, and provide significant life-cycle cost savings. Implementation guidelines on the screening and selection criteria were struck in 2019.
Pricing
Citigroup Global Markets Inc. and Morgan Stanley were lead managers on the deal, which carried the lowest investment grade rating of Baa3 from Moody's Investors Service.
Morgan Stanley was identified as the “green structuring agent” and SMBC Nikko Securities America, Inc. was a co-manager. Orrick is bond counsel.
The tax-exempt, senior revenue bonds are subject to the alternative minimum tax. The bonds mature in March 2056 with bullets in 2051 and 2056.
The 2051 bond, which totaled $121.8 million, featured a 4% coupon and yielded 2.980%. That’s a spread of 130bps over the AAA 5% coupon, or 114bps over the AAA 4% coupon and 72bps over the BBB 5% coupon. The 2056 bond, which totaled $147 million, also had a 4% coupon with a yield of 3.080%, 140bps over the AAA 5% 30-year yield and 124bps over the AAA 4% 30-year yield.
Besides providing a long-term fix for the 235,000 residents in the area from flooding the project aims to meet federal rules as to what qualifies to win accreditation due to enhanced protection from 100-year flood events that govern national insurance eligibility.
The combined goals meet the requirements as an essential climate adaptation and resilience asset and so the bonds received a second party opinion from Sustainalytics that the project adheres to International Capital Market Association’s green bond principles and best practices.
Project
The Metro Flood Diversion Authority is managing the P3-financed piece of the overall project under a 35-year agreement with the private partners. Fargo and Cass County in North Dakota, Moorhead and Clay County in Minnesota and the Cass County Water Resource District formed the district for the project and all have a fiscal stake.
The Red River Valley Alliance LLC is composed of lead contractors Spain-based Acciona with a 42.5% equity stake; Israeli firm Shikun & Binui with 42% equity investment; and Canada's North American Construction Group with a 15% equity investment. Senior lenders include CaixaBank SA, Sumitomo Mitsui Banking Corp., and Korea Development Bank.
Bond proceeds including an expected bond premium of $27 million will flow to Red River Valley Alliance as part of the financing package that will cover the design, construction, operation, and maintenance costs of a 30-mile diversion channel that’s roughly five feet deep and 700 feet wide. The project also entails construction of two four- lane interstate bridges, four railroad bridges, and 12 county highway bridges.
The other piece of the larger project calls for modifications to 13 levees and 27 storm water lift stations in the cities of Fargo and Moorhead to manage snow melt and storm waters.
The Army Corps will lead delivery of what’s known as the Southern Embankment and Associate Infrastructure, SAI, and the Mitigation and Associate Instructure, MAI.
The P3 relies on an availability payment structure based on a design-build-finance-operate-and maintain model. The design-construction period runs for five years with “milestone” payments and the operating and maintenance period goes for another 30 during which availability payments are to be made.
The authority will cover the P3 payments through local sales and use taxes which voters have approved and if they were to ever fall short the payments are backstopped by the ability to levy special assessments and property taxes. A P3 reserve account holds enough funds to cover eight months of availability payments. Several other special reserve accounts are also in place.
To cover construction costs upfront, the authority will tap the WIFIA loan, is borrowing up to $82 million through the state revolving fund, and will use $564 million of funds appropriated by Minnesota and North Dakota as well as other borrowings and cash on hand from sales and use taxes.
Offering documents laid out the termination and event risks as well as the project management risks and challenges that include dealing with fish that travel through the aqueducts.
Moody's Baa3 rating and stable outlook also applied to a $200 million senior secured note issue Baa3. The rating recognizes the project’s essential nature, strong support from local governments and its inclusion in the larger Army Corps project.
“The payment mechanism includes standard features, however the unique nature of the project as a first in class in the United States introduces risks that the performance measures require adjustment when actual performance is established,” Moody’s said.
Moody’s said adequate contractor experience, but lack of external performance supports differentiates the project from Moody's previously rated US-based PPP projects.
The global experience of Acciona and Shikun in water management projects in Spain and Israel benefit the project as will NACG's experience in heavy excavation in similar soils in Canada and with similar equipment but “the lack of experience working together or in the region presents risk,” Moody’s wrote.
Adequate liquidity exists in the event of construction delays and financial metrics were labeled adequate with weak structural protection with debt service coverage ratios reaching 1.15 times.
The authority’s WIFIA loan received an Aa3 rating from Moody’s as it’s ultimately backed by Cass County’s general obligation pledge. Cass County’s $2.5 million of GO debt and the county’s joint water resource district’s $191 million of GOs are also rated Aa3.
S&P rated the WIFIA loan AA-minus. The authority projects overall financing savings of $438 million from using WIFIA. The authority will repay the WIFIA loan from flood control and infrastructure dedicated sales revenues generated in Fargo and Cass County. A special assessment levy provides a backup pledge if sales taxes drop below a 1.2 times coverage ratio.
The project hit several snags along the way with a temporary roadblock
Some cities and counties upstream of the project sought to scuttle the project over the potential impact on their communities and they mounted a legal challenge. The Buffalo-Red River Watershed District and its managers refused to grant a permit in 2019. The district authority fired back with its own legal action.
The district authority reached a settlement with the watershed district and several other upstream authorities and local governments late last year pledging to minimize the impact and compensate upstream communities for the project’s impact. The pact won final approval in February providing $75 million toward an economic impact relief fund for the communities.
