Regional News

New Twist on a 'Sinking Fund'

DALLAS - Pumping water out of the ground allowed the greater Houston area to grow from fewer than 100,000 people to a population of more than four million in less than a century, but it also caused the metropolis to sink as much as 10 feet in some areas.

To slow the process of subsidence, Harris and Fort Bend counties now have subsidence districts to tighten control of groundwater usage and water districts to provide alternative supplies.

One of those newly created districts, the North Fort Bend Water Authority plans to issue its first debt next month - $138 million of revenue bonds to buy surface water rights from Houston and to build a system to serve customers in the area. The deal is likely to come to market between June 15 and June 25, officials said.

"This issue is obviously very important to the authority because it provides the financing it needs to accomplish its purpose," said David Oliver Jr., partner at Allen Boone Humphries Robinson and bond counsel to the water authority. "We feel there's going to be a very favorable response from the market."

The negotiated deal with RBC Capital Markets as senior manager will also provide a reading on how investors feel about insurance on top of an A-minus credit. The water authority is negotiating with Assured Guaranty Corp. to back the debt.

Even with insurance, the bonds will not carry multiple triple-A ratings due to Fitch Ratings' downgrade of the insurer to AA earlier this month. Moody's Investors Service last week put Assured's Aa2 rating on review for possible downgrade. Standard & Poor's continues to rate Assured Guaranty AAA.

The water authority has underlying ratings of A-minus from Standard & Poor's and Fitch, with no rating from Moody's.

"We were very pleased to get that credit rating, given that this is our first bond issue," Oliver said. "This authority was just created by legislation in 2005, and we've got to get all our work done by 2012, so we've got a very narrow window of opportunity."

Working with financial adviser Terrell Palmer at First Southwest Co., the authority would have gone to market earlier in the year if conditions had permitted, according to Oliver.

"We have been very deliberate about this financing," he said.

In issuing its first rating, Fitch analysts considered the water authority's legal structure, the essential service provided, the low cost of service, the agency's limited history, its narrow financial margins, and the construction risk ahead.

Standard & Poor's analysts Theodore Chapman and James Breeding also weighed those factors against the authority's regulatory mandate, the aggregate strengths of its customers, and the growing residential area served by the agency.

The water authority's customer base is made up of 65 municipal utility districts, some of which are not fully developed, and part of the city of Katy. The authority's service area is about one-fourth built out. Fort Bend County has a population of more than 532,000 and has grown 50% in less than a decade, according to the U.S. Census Bureau.

"While individual contracts with each participant do not secure the bonds, some participants have a relatively young development, meaning their respective revenue shares, generated by the regional water authority, are modest," Chapman and Breeding wrote. "The fact that those participants' corresponding shares of demand are similarly modest minimizes this risk."

Revenues backing the debt include net system revenue and available balances in special funds established in the trust indenture. A debt service reserve in the amount of the greater of maximum annual debt service or 125% of average annual debt service provides additional security. The authority can satisfy the requirement with a surety bond, analysts said.

As a wholesaler of water, the authority will allow customers the ability to reduce their consumption of groundwater. Under Texas state law, municipalities in the area must get 30% of their water from reservoirs by 2013. By 2025, surface water must make up 60% of their supplies. Subsidence districts in the area regulate usage by imposing steep penalties for pumping any groundwater beyond those ratios.

Any city that annexes a municipal utility district in the water authority's service area will inherit all of the MUD's obligations to the authority. It can cut off or remove any participant from the authority, at any time, with cause.

In 2008, the authority signed a 40-year agreement with Houston with 20-year renewal options to buy 19.5 million gallons of water per day. Officials expect that amount to be sufficient until 2025. In the meantime, the agency will continue to develop infrastructure to deliver surface water throughout its service area, including a capital plan of about $1.3 billion through 2025. Authority officials expect to issue an additional $60 million of debt within the next two to three years.

The Houston metro area's heavy dependence on groundwater has left some sections below sea level, which has increased the risk of flooding and hurricane damage. Groundwater levels in wells drawing from the Chicot and Evangeline aquifers fell more than 150 feet from 1943 to 1977. Photos show the bases of well pumps suspended high in the air over land that has sunken over time.

The land sinks as layers of clay beneath the land surface compress. In other parts of the country, subsidence is sometimes caused by extraction of oil or coal. But in the Houston area, which is just a few feet above sea level, any subsidence poses a greater risk of damage from storms or, long term, rising shorelines from global warming.

In Baytown, a coastal city near Houston, the Brownwood subdivision is now mostly underwater and has been turned into a nature center.



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