Deal in Focus

Lubbock Deals Against Arid Future

DALLAS — As the hub of the largest cotton-growing region in the world, Lubbock, Texas, depends on groundwater from the Ogallala Aquifer, a vast underground reservoir covering parts of eight states in the Great Plains.

But with water coming out of the ground at a rate that could deplete the aquifer in 60 years, the utilities that sit atop the Ogallala these days are seeking other sources to sustain their growth.

Lubbock, home of Texas Tech University, is nearing completion of a $240 million pipeline from Lake Alan Henry, the largest infrastructure project in the city’s history. The 51-mile pipe is expected to supply up to 3.2 billion gallons of water per year upon completion in 2012.

Projects such as the pipeline are a major component of Lubbock’s $410 million, five-year capital improvement program through 2016. About 90% of the projects are expected to be financed with self-supported debt mostly from the water, wastewater, and drainage utilities.

A big chunk of that debt goes to market this week in the form of three series of bonds valued at nearly $149 million. In a year that has begun with meager issuance, the Lubbock bonds represent one of the largest deals from a Texas city or county so far in 2011.

Morgan Keegan & Co. serves as lead underwriter with Citi, First Southwest Co., and Oppenheimer Co. as co-managers. RBC Capital Markets serves as financial adviser, with Vinson & Elkins as bond counsel and McCall Parkhurst & Horton as underwriters counsel.

This week’s deal, expected to price Tuesday, is similar in size to a $145 million issue from the city a year ago, with the major difference being this year’s debt won’t receive the federal subsidies provided by Build America Bonds.

Last year’s taxable BABs, which mature in 2030, priced 150 basis points over Treasuries.

The tax-exempt loan matures serially from 2012 through 2031 and includes $13.9 million of general obligation bonds, $16.3 million of GO refunding bonds, and $118.5 million of tax and waterworks-system surplus revenue certificates of ­obligation.

All three tranches are rated AA-plus by Standard & Poor’s and Fitch Ratings and Aa2 by Moody’s Investors Service.

Ratings analysts generally see a bright future for the city. Unlike many towns in West Texas, Lubbock’s population is growing along with cotton and other crops. According to the 2010 U.S. Census, Lubbock grew at 15% over the last decade to 229,573 people, the fastest rate since the 1970s.

The unemployment rate was a modest 5.6% at the end of 2010, well below the Texas 8% and national 9.1% averages. Taxable assessed value gains have moderated over the last two fiscal years, Fitch analysts noted.

Nonetheless, TAV continued to show year-over-year gains at an annual average rate of 5.3% over the past five fiscal years.

Standard & Poor’s rated the government’s financial management as “strong,” including operations of the city-owned Lubbock Power & Light utility.

“The stable outlook reflects our expectation that, over the next two years, all of the city’s enterprise funds, including Lubbock Power & Light, will continue to fully self-support their allocable shares of tax-secured debt,” analyst Russell Bryce wrote.

With a 2011 tax base of $12.8 billion, this week’s offering will take Lubbock’s debt over the $1 billion threshold.

To support the water and wastewater projects, the city has recently raised rates, including a 41% rate increase in fiscal 2009 for high-volume water users. Future projected rate increases through fiscal 2015 range from 10 to 12% for water and 15% for wastewater.

Storm-water rate increases are also significant, Fitch noted, ranging from 22 to 50% in annual hikes in fiscal years 2010-2012, stemming from the reallocation of street-maintenance debt service from the interest and sinking fund to the storm water fund. The city plans to sell an additional $18 million of GO bonds and an estimated $80 million of certificates of obligation within the next 12 months.

The rate hikes reflect the reality that the aquifer that waters the nation’s breadbasket is falling at a rate that prompts visions of a future dust bowl.

In Texas, water is often more politically contentious than oil. Oilman T. Boone Pickens, who is considered the largest owner of water rights in the nation, bought access to the aquifer with a long-term plan to pipe the water to the booming Dallas-Fort Worth area. Fort Worth is also in litigation for the right to buy water from Oklahoma landowners.

In the Lubbock area, where Ogallala conservation compliance is voluntary, farmers are sorting through new usage rules in public meetings, casting a wary eye on the city’s possible use of loopholes in the new regulations.

The city participates in the High Plains Underground Water Conservation District, a locally elected regulator responsible for 17 counties. The district could bar drilling new wells into the most heavily drained parts of the aquifer and cap the amount of water farmers draw for their crops.

The district last year set a state-mandated goal to preserve half of the groundwater in the aquifer over the next 50 years.

“The High Plains Water District has used water-well spacing as a means of managing groundwater since the 1950s,” district manager Jim Conkwright noted.

“However, dwindling surface water levels in area reservoirs and other contributing factors have caused more dependence upon groundwater in our region. Because of this, the district cannot rely on well spacing alone,” he said.

One of the world’s largest aquifers, the Ogallala covers portions of eight states of the Great Plains, with Lubbock at the south end. About 27% of the irrigated land in the United States sits atop the underground reservoir, which yields about 30% of the nation’s groundwater for irrigation. The aquifer also provides drinking water to 82% of the people who live within the aquifer boundary, including those in the arid West Texas city of Lubbock, known as the “Hub City.”

Lubbock assigned the city’s Water Advisory Commission in July 2003 to develop a 100-year water supply plan. In July 2007, the City Council approved the plan.

The city currently receives its water supply from the city-owned Bailey County Well Field, and two sources owned by the Canadian River Municipal Water Authority: Roberts County Well Field and Lake Meredith.

With Lake Meredith falling dramatically due to drought, the cities of Lubbock and Amarillo were relying more on new wells in the aquifer.

Lake Alan Henry, built by Lubbock in 1993, is in development as a future water source. In addition to the 51-mile pipeline, the city is building pump stations, a new water treatment plant, and treated water transmission lines.

The treatment facilities include a 225-million-gallon terminal storage reservoir and a high service pump station to transfer the treated water into the city’s distribution system.

Lubbock provides water service to over 79,000 meters through 1,500 miles of distribution lines.



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