DALLAS – The San Antonio Water System’s 30-year, $3.4 billion plan to buy water from a new, privately financed pipeline faces a delay after the major partner in the project filed for bankruptcy.
Abengoa S.A., a Spanish utility infrastructure giant, filed for reorganization of its U.S. operations in U.S. Bankruptcy Court March 29 after attempts to restructure its debts. In November 2015, the parent firm sought court protection to reorganize in Spain.
The company, an 80% partner in the proposed 142-mile Vista Ridge water pipeline, has announced plans to reduce its share of the project to 20% and sell its majority stake in the project to Garney Construction, a Kansas City, Mo.-based company that has worked with SAWS in the past.
Although the SAWS board has expressed confidence in Garney, financial details still have to be negotiated with Abengoa and its creditors before Garney can take over the project with the city’s approval.
The primary issue is what becomes of a $120 million loan Abengoa took out to buy pipe for the project. SAWS chief executive Robert Puente said the pipe is unavailable, leaving the two companies and creditors to decide how to resolve the issue.
Despite that financial problem, Puente expressed confidence in Garney’s “strong history with SAWS” and “unparalleled continuity and skill.”
SAWS officials are careful to point out that the city-owned utility is not at risk because it has no money invested in the private pipeline and does not assume any responsibility for getting the project built other than a commitment to buy the water.
Under the agreement with partners known as the Vista Ridge Consortium, SAWS will buy up to 16.3 billion gallons of water a year for 30 years and then own the pipeline. The SAWS commitment comes to about $3.4 billion, though the pipeline itself is expected to cost less than $900 million.
“We pay for the water, if it is made available at our delivery point in Bexar County,” SAWS chief financial officer Doug Evanson told The Bond Buyer. “We would like to continue with the current financial structure.
“We’ve had investment bankers in our office that have spent significant time looking at the project and they continue to be impressed with the level of protection built into the contract,” Evanson said.
Original plans called for construction to begin after the financial close, which was expected to come in May. However, under the contract with SAWS, the construction phase cannot begin if there are legal proceedings or if there is a change in the financial condition of the project company. With the bankruptcy, both conditions were triggered.
SAWS can also terminate the contract, at no charge, starting May 2, 2017, if financial close has not occurred for any reason.
“The structure and key provisions within the SAWS contract should provide sufficient protection for the system,” according to a Moody’s Investors Service report issued in January.
Under a best-case scenario, the transfer of project management from Abengoa to Garney would probably mean a delay of a couple of months, Evanson said.
The pipeline, the largest of its type in Texas history, was originally expected to begin delivery by 2020, expanding the SAWS water supply by 20%.
Payment for the additional supply would come through an increase in SAWS customers’ bills. Claiming the lowest water bill of any major city in Texas, San Antonio estimates that the average residential bill will be about $88 in 2020. From that amount, no more than $12 will be needed to pay for Vista Ridge water, SAWS told customers.
The pipeline is expected to transport groundwater from Burleson and Milam counties east of Austin to the SAWS delivery point. Vista Ridge has acquired 3,400 leases for water rights with local landowners in the two counties.
Vista Ridge was given up to 30 months to arrange financing followed by 42 months to build the pipeline.
The importance of the deal was underscored as San Antonio coped with serious drought and a heavy dependence on the Edwards Aquifer beneath the region.
"With this agreement we are moving from a city perceived to lack water supplies to a city that will ensure economic prosperity for our children and grandchildren," SAWS board chairman Berto Guerra Jr. said after the original contract was approved. "And we will be able to do this while fulfilling our commitment to protect the Edwards Aquifer, even in times of drought."
Since then, heavy rains have allowed SAWS to recharge its aquifers as the most serious concern facing the economy became the impact of falling oil prices on the Eagle Ford Shale play south of San Antonio.
One of the partners in the Vista Ridge Consortium, Blue Water Regional Supply Project LP, is required to provide water for the pipeline based on water rights acquired in the two counties.
But Blue Water is now tied up in litigation with one of its own partners, Metropolitan Water PC, or Met Water.
Met Water acquired water leases, then entered a contract with Blue Water. In its lawsuit, Met Water contends the agreement calls for an even split of profits from the deal.
However, Met Water says it has received none of the $2.5 million in payments Blue Water has received. The lawsuit in Travis County State District Court in Austin poses a risk if it cannot be resolved quickly. Under the contract with SAWS, all litigation must be resolved by May 2017.
After Abengoa’s bankruptcy filing, Puente said that SAWS knew that Abengoa’s financial future was uncertain when negotiations began.
"The fact remains that when we walked in and reached an agreement with them, yes, we knew they ran a business model that was very risky, and that’s why we had a contract that would protect us from any kind of situation that would arise because of their potential financial problems and, in fact, that’s what happened,” Puente told The Texas Tribune. “It’s not fair to second guess, with 2016 eyes, what was happening in 2011, 2012, 2013 and ultimately 2014 when we signed this contract.”
Founded in 1941 in Seville, Spain, Abengoa has built and financed projects involving solar power, waste treatment, telecommunications, power stations and other infrastructure around the world. Annual revenues were reported at about 7.2 billion Euros.
Abengoa’s financial standing began weakening in mid-2014, about the time San Antonio’s City Council unanimously approved the SAWS contract. Prior to the vote, the SAWS staff recommended a vote against the project, then changed positions after consultation with Abengoa, according to news reports.
The pipeline is opposed by environmentalists and others who question the reliability of the supply. Burleson County landowners have also protested the project.
SAWS defended the contract, saying San Antonio ratepayers would not be responsible for undelivered water.
“This project has been on my mind for four years since I started on this board,” Guerra said at the last board meeting. “The biggest risk we have is to not do this project.”
