HARRISBURG, Pa. — The restructuring and rebranding efforts of the Harrisburg, Pa. public works agency have paid off in its first investment-grade rating since 2011.
In November 2013, when the Harrisburg Authority changed its name to Capital Region Water, its leaders focused on operational improvements while rebranding the organization once linked to the incinerator bond financing scandal that pushed the city to the brink of bankruptcy.
Standard & Poor's on March 25 assigned an A-plus rating, its fifth highest, with a stable outlook, for the agency's Series 2016A and B water revenue refunding bonds. The new rating and outlook also applies to outstanding 2008 bonds.
"From a larger perspective, it shows that we're headed in the right direction," said the agency's chief executive, Shannon Williams.
Capital Region Water, which provides water, sanitary sewer and drainage services to Harrisburg and residents of nearby Susquehanna Township, Penbrook Township and Lower Paxton Township, plans to sell about $52.8 million of Series 2016A and B fixed-rate refunding bonds on Wednesday.
Morgan Stanley is senior manager for the financing.
The $51.6 million of Series 2016 A tax-exempt bonds will refund 2002 and 2004 refunding bonds, while a $1.2 million taxable offering will refund other 2002 bonds and advance refund some 2008 bonds.
"We understand that this will also take out a direct purchase arrangement with a financial institution," S&P wrote of the taxable side of the deal, "an agreement that had otherwise exposed the water system to acceleration."
Market access will enable the agency to save about $5 million to $7 million on a net present value basis, said Williams.
Public Resources Advisory Group is the financial advisor to the bond sale. Cohen & Grigsby PC is bond counsel.
S&P cited the agency's general creditworthiness, strong risk and financial profiles, strong regional economy, affordable rates, proactive management and financial independence from other entities, notably the city, through a lockbox provision.
Since taking over operations from the city in 2013, CRW moved utility collections to a lockbox and took over billing functions from the city, although the city still appoints board members.
It has implemented three rate increases to boost cash flow for operating expenses, debt service and capital improvement projects.
"I think separating from the city was probably the largest factor to them," Williams said of S&P's March 25 report.
According to primary S&P credit analyst Ted Chapman, a closed flow of funds enhanced the agency's debt profile.
"The water system does not make transfers to support the city's general government or any other fund, including any legacy enterprises associated with the former Harrisburg Authority's incinerator project," he wrote.
Other priorities, according to Williams, include streamlined billing and collections, and meeting regulatory mandates. CRW also has a rolling five-year capital improvement plan, she said.
Moody's Investors Service withdrew the Harrisburg Authority's Ba3 rating in 2011. The authority had sold city-guaranteed debt for an incinerator retrofit project, financing overruns for which largely accounted for Harrisburg's roughly $600 million in debt.
The Harrisburg Strong recovery plan, which the Commonwealth Court of Pennsylvania approved in 2013, called for transitioning the agency from a financing authority to an operating one for water and sewer services. The Lancaster County Solid Waste Management Authority bought the incinerator and about $360 million of debt was repaid or forgiven.
Administrative fees to the city, which once reached $5.6 million, ended in 2014. Capital Region Water now does all billing and collections, and is no longer a city component.
"We view this as a credit positive," said Chapman.
According to Moody's, Harrisburg represents how shared exposure to strong or weak management practices can link issuers. Before withdrawing its rating for the Harrisburg Authority, Moody's cited poor city management practices in part for its downgrades in 2011 from A1 to Ba1 and then to Ba3.
"Although linkages remain – the city appoints the CRW board and represents more than 80% of its customers – the creation of CRW was recognition that the credit stress of the city of Harrisburg was affecting the water utility," said Moody's.
