DALLAS — In a holiday-shortened week, Dallas plans to offer investors $236 million of highly rated water and sewer bonds as the city continues to reduce spending amid continuing economic weakness.
The 30-year, fixed-rate bonds could include up to $170 million to retire commercial paper and refund $115 million in existing revenue bond debt. Pricing is expected on Thursday. JPMorgan will act as book-runner on the deal.
The advance refunding will retire Series 2003A bonds maturing from 2013 through 2023 for an anticipated net present-value cash savings of $5.8 million, or 5.5%, including $1.3 million in the upcoming fiscal year, said the city’s chief financial officer, Jeanne Chipperfield.
“The refunding does not extend or increase debt-service payments in any year,” Chipperfield told the City Council.
Dallas’ commercial paper program has grown to $600 million and is used to provide initial funding for major projects before long-term debt is issued. The outstanding balance is $138 million with an average interest rate of 0.3416% for 146 days, according to the CFO.
Over the years, the city has expanded its CP program as it increased the size of its capital improvement program. In August 2004, the council increased the CP program from $200 million to $300 million.
The system’s debt ratio is around 45.2%, which is considered comparable to similar water-sewer systems.
The bonds, backed by a senior lien on revenues from Dallas Water Utilities, will carry ratings of AAA from Standard & Poor’s with a stable outlook.
“The stable outlook reflects our expectation that management’s conservative planning and successful oversight of its capital needs will continue and that officials will implement timely and necessary rate increases to manage changes in economic, sales, hydrological, and growth conditions,” said credit analyst Theodore Chapman. “In addition, we expect continued revenue stability from wholesale customers.”
Moody’s Investors Service assigned a Aa1 rating to the deal. Fitch Ratings does not rate the debt.
Co-senior manager on this week’s deal is M.R. Beal & Co. Co-managers include Bank of America Merrill Lynch, Morgan Stanley, Southwest Securities Group, RBC Capital Markets, Raymond James & Associates, and Cabrera Capital Markets.
The syndicate is one of two teams approved by the City Council in April 2010 for negotiated deals. The team underwrote a $298.9 million deal a year ago. Issuance costs of $579,800 will be paid from Dallas Water Utilities operating funds, according to Chipperfield.
First Southwest Co. and Estrada Hinojosa & Co. are the city’s financial advisers with the law firms of McCall, Parkhurst & Horton and Escamilla, Poneck & Cruz as co-bond counsel.
Dallas Water Utilities plans to spend about $2.1 billion of its nearly $3.5 billion, 10-year capital improvement program to deal with water service issues using a combination of internally generated funds, the commercial paper program, and bond proceeds while maintaining system equity near 50% of total capital, according to Standard & Poor’s.
“The focus is primarily rehabilitation and maintenance of existing assets,” Standard & Poor’s Chapman noted. “The most capital-intensive water supply projects are thus far in very early feasibility and planning stages.”
The City Council has targeted replacing half of the system that is over 50 years old within the next 50 years. The result will be to reduce the replacement cycle from a recent measure of 130 years to 70 years.
Covering a vast service area that includes Dallas’ 1.3 million people and 23 wholesale water customers, the city has aggressively pursued water rights since a devastating drought in the 1950s that led to construction of the largest reservoirs in North Texas. Dallas Water Utilities uses water from seven reservoirs, including lakes Lewisville and Grapevine, built in the mid-1950s on the Trinity River.
“All wholesale contracts are long term and have been renewed at every opportunity,” Chapman observed. “From a practical standpoint, alternative supplies for those wholesale customers are either nonexistent or economically and operationally impractical.”
Wholesale customers account for more than one-third of water consumption and typically about 20% of operating revenues.
“Supporting DWU credit quality, in our opinion, is that most of those customers are or likely would be highly rated counterparts,” Chapman wrote in his rating report.
City officials estimate the combined average residential bill will remain affordable in the region, even with extensive efforts to reflect management’s focus on water conservation awareness and implementation.
The City Council has approved retail rate increases of between 4% and 11% each year since 2004. Still, the typical residential bill remains barely 2% of median household effective buying income.
Moody’s, which dropped Dallas from its ranks of triple-A cities in 2003, issued a negative outlook on the city’s general obligation debt last year.
At the time of the 2003 downgrade, analysts said “the economic challenges have been so severe that, despite generally quite conservative budgeting, the city has experienced three consecutive general fund operating deficits.”
While the city enjoyed a brief respite from the first recession of the new century, hard times came back with a vengeance in 2007.
Like most cities, Dallas has been continually cutting its budget since the 2007 recession as its tax base declined amid falling property values.
The separately managed Dallas Area Rapid Transit Authority was forced to revise its long-term outlook and plans for expanding light rail amid falling sales-tax revenue.
The overlapping Dallas Independent School District is trapped in one of the worst fiscal crises in its history with another major hit coming from a $4 billion reduction in state funding for public schools statewide.
Despite the ongoing hardship, Dallas is seeing signs of improvement, according to city manager Mary Suhm. At a meeting last month, Suhm told the council that next years budget gap estimate has fallen from $79 million to about $52 million, due to a better-than-expected property tax outlook, fewer federal cuts than expected, and other variables.
Still, Suhm cautioned that “new or expanded revenue sources must be considered to help make up for property tax revenue losses that result from declining values.”
