This week we’re looking at D.C. Water and Sewer Authority which is issuing $367 million of debt to finance the Authority’s Clean Rivers Project and other capital improvement projects. The Clean Rivers Project, which began in 2005, is a 25-year $3 billion dollar series of infrastructure projects aimed at preventing the discharge of wastewater into the region’s waterways.
District of Columbia Water and Sewer Authority, Public Utility Subordinate Lien Revenue Bonds ($367,070,000)
The District and the Bonds
This $367 million issuance is split into four series with the proceeds going for capital improvements to the System, including financing a portion of the DC Water Authority’s Clean River Project, as well as refinancing previously issued debt. The Authority provides water and sewer services to ~700,000 residential and commercial customers and serves 1.6 million people in Maryland’s Prince George and Montgomery Counties and Virginia’s Fairfax and Loudon Counties through wholesale distribution. The Authority has received numerous awards and recognitions for its governance practices and execution of services (see page 36), and also operates Blue Plains Advanced Wastewater Treatment Facility which is one of the world’s largest wastewater treatment facilities. Once complete, the Clean Rivers Project is expected to reduce the discharge of harmful wastewater pollutants from entering the Potomac, Anacostia and Rock Creek waterways by >95%.
The population living within the DC Water’s service area has a low Social Impact Score of 11, driven by its robust underlying socioeconomic attributes. Having a well-resourced community is to their advantage because the community by and large has the financial means to invest in the necessary System upgrades. For example, looking at the UI’s residential and workplace demographic metrics, we see that 64% of the population earns more than $3,333 a month (86th percentile nationally) and the median household income is approximately $104,000m, ranking 80th percentile nationally.
Response to Challenges posed by Climate Change
“Numerous scientific studies on global climate change show that…extreme weather events will become more frequent as a result of increasing global temperatures attributable to atmospheric pollution. Over the next 25 to 100 years, such extreme events and conditions are expected to increasingly disrupt and damage critical infrastructure and property as well as regional economies… near-coastal areas like the greater Washington, D.C. metropolitan area (which contains areas of land that are at or near sea level) may be at risk of substantial flood damage over time, affecting private development and public infrastructure” (pg. 36).
While DC Water Authority is lower risQ than the issuers we usually look at, it is not without its own vulnerabilities. With a Flood risQ Score of 1.5, a 100-year inland flood still impairs ~7% of GDP while a 500-year flood engenders 11% GDP impairment. In response to a 2010 update of FEMA flood insurance rates, the Authority conducted a flood risk assessment for its Blue Plains Wastewater Treatment Facility and ultimately decided to construct floodgates around the facility to ensure that it’d remain operational during a 500-year flood event. In lieu of this floodwall, DC Water claims, a 500-year flooding event “would flood galleries in the plant resulting in ceasing operation of treatment process equipment. The time it would take to place the systems back in operation after the storm could be weeks or months. The impact of this disruption to plant operations would be significant detriment to public health and the environment.” In 2021, the first floodgate segment was completed and the three remaining sections are slated for future construction.
As a water service provider it’s critical to ensure that equipment remains operational, especially as climate change amplifies extreme weather risks. It’s the Authority’s responsibility to ensure that the community is prepared for these challenges. With that goal in mind, DC Water Authority began the Clean Rivers Project in 2005.
Clean Rivers Project
The Clean Rivers Project is a series of strategic infrastructure projects that range from improved surface-level stormwater management to the construction of massive underground tunnels — 20+ feet in diameter and several miles long — which divert and store wastewater. One of the challenges the Authority faces is that when large rainfall events occur, they can overwhelm the system. “When the collection system reaches capacity, typically during periods of heavy rainfall, the system is designed to overflow the excess diluted sewage” (pg. 52). The construction of surface-level systems to mitigate water runoff and the new tunnel system will dramatically reduce the discharge. “When completed, the DC Clean Rivers Project will reduce the combined sewer overflows by at least 96% (exceeding the EPA standard of 85%), reducing pollution to the Potomac, Anacostia and Rock Creek waterways, improving water quality, and reducing locally generated debris from the combined sewer system and local waterways” (pg. 52).
The Authority’s first tunnel was completed in 2016 and received national recognition for excellence in engineering by completing the project safely and under budget. The Authority’s projects continued and that same year the Anacostia River Tunnel was completed with the help of the tunnel boring machine that ate a 23 foot diameter, 2.5 mile long tunnel through the earth. Now operational, the Anacostia Tunnel is already paying major dividends to the area’s ecology. “As of March 2021, the first portion of the Anacostia River Tunnel system has captured approximately 10 billion gallons of combined sewer overflows and nearly 5,000 tons of trash, debris, and other solids” (pg. A-5).
It’s great to see that D.C. Water Authority is funding solutions that insulate its water treatment facility from flooding risks, but that the Authority is also investing almost $3 billion dollars to protect the local community and its waterways from pollution that results from flooding. Beyond these applaudable efforts, the Authority released its inaugural ESG report last year where it outlines its values and actions related to energy and water conservation, social equity, and governance. Overall, there’s ample ESG appeal for this DC Water issuance aimed at improving local water quality and public health.
San Bernardino County Transportation Authority, CA (risQ Score 2.3, Wildfire risQ Score 3.4) $60,030,000
Santa Cruz Metropolitan Transit District, CA (risQ Score 1.4, Flood risQ Score 2.8) $51,765,000
San Bernardino County Transit Authority (SBCTA), located just east of Los Angeles, ranks in the 98th percentile nationally for property VaR from wildfire. Yet, the POS offers a vague, geographically ambiguous disclosure of climate risk, without mentioning wildfire once (SBCTA pg. 33). The County has bore witness to numerous wildfires–including the 2016 Blue Cut Fire which burned more than 35,000 acres. In addition, under RCP 8.5 the percent months in a 30 year period with extreme drought by 2040 ranks in the 95th percentile nationally. Santa Cruz Metropolitan Transit District (SCMTD) also faces considerable wildfire risk with the added bonus of flood risk thanks to its coastal location. The combination of wildfire and flooding can engender landslides. In 2017, landslides impeded travel on major highways (SCMTD pg. 22) while the Bear Fire destroyed 29 homes (SCMTD pg. 21). If that wasn’t enough, heightened wildfire risk in tandem with dry conditions can lead to Public Safety Power Shutoffs (PSPS); the County, who sources electricity from PG&E, has so far been subject to one PSPS. In both Counties, climate risk poses challenges to the transportation system, as inadequate preparation can hinder travel (more than 20% of commuters in both Counties travel more than 40 minutes for work) or emergency evacuations.
Secured by sales tax, these bonds are liable to the Counties’ GDP. The sales tax revenue in both SBCTA and SCMTD were adversely impacted by COVID-19 (SCMTD pg. 19, SBCTA pg. 20), which may be indicative of the impact other disruptions—such as a wildfire or flood event—may have. Fortunately, both the transit authorities and their respective counties are actively addressing climate risks. On the adaptation front, San Bernardino County’s Resilience Strategy identifies actions the County and agencies could implement to address and ameliorate key vulnerabilities; the Strategy puts forth several transit related actions—including redundancy of critical routes and the integration of climate adaptation in transportation plans—and equity oriented measures (Social Impact Score of 76). Both San Bernardino County and Santa Cruz County have released greenhouse gas reduction plans, each equipped with chapters dedicated to transportation. Both transit authorities are aiming to transition their fleet to zero emission vehicles (SBCTA pg. Vii of the Annual Comprehensive Financial Report, SCMTD pg. A-10)and reduce vehicle miles traveled.
Fort Lauderdale (Las Olas Isles Special Assessment Area), FL (risQ Score 4.7, Flood risQ Score 5.0) $7,030,000
The Series 2022 Bonds are primarily used to provide funding costs for the undergrounding of overhead utility lines, including electrical, telephone, and cable television in the residential community of Las Olas Isles, located within Fort Lauderdale. The infrastructure upgrade could potentially benefit the Community facing future climate events. Given its location, however, Las Olas Isles faces extreme climate risk that could endanger the sustainability of the Community itself. The Las Olas Isles Special Assessment Area ranks 99th percentile nationally for property losses from combined physical perils and 100th percentile for GDP impairment. The small Community of 309 single-family homes is affluent (Low Affluence Score 2), but the Percent of Income Spent on Housing Score 83 is high. Upgrading property to keep pace with climate change in the area can be expensive in an area surrounded by the waterways and canals of Fort Lauderdale, on the edge of the Atlantic Ocean. A 500-year coastal event drives ~38% property losses and South Floridians incur disastrous flooding quite frequently.
The good news is that Fort Lauderdale seems to be proactive about facing climate risk. The POS mentions climate change and their involvement in the formation of the South Florida Regional Climate Compact which includes the creation of their Regional Climate Action Plan (pg. 37-38). Fort Lauderdale also has a plan for the City itself. State politics and the lust for development funding, however, will eventually be outpaced by climate. Infrastructure improvements are great for future proofing, but consideration at the highest levels must take place before the Community (Flood risQ Score 5.0) sinks.
Bridge City Independent School District, TX (risQ Score 3.8, Flood risQ Score 4.4)
Based in Bridge City, Texas, the School District operates four schools (Flood risQ Score 4.4). The $4 million in proceeds are secured by annual ad valorem tax for renovations and maintenance of School District facilities. 100 miles east of Houston, the School District is susceptible to a high concentration of climate risk. With a risQ Score of 3.8, Bridge City ISD ranks 99th percentile nationally for property losses from combined perils and 98th percentile for impairment to the School District’s GDP. The POS mentions Hurricanes Harvey (2017) and Laura (2020), along with Tropical Storm Imelda (2019), and the damages incurred (pg. 19). Located near the Gulf Coast, the School District should anticipate and prepare for more hurricanes in the future (Hurricane risQ Score 2.8).
Bridge City ISD also faces significant wildfire risk (Wildfire risQ Score 3.7) and Carbon Transition Risk to property with appraised valuation of over $800 million during the 2010-2011 school season. A 500-year wildfire event projects 42% property losses. Carbon emissions from industry and electrical production sectors push per capita emissions >98th percentile nationally. Even though the issuer is small with large challenges, it is good to see some climate risk disclosure within their POS.