DALLAS — Dallas plans to take advantage of continuing low interest rates with a $640 million issue of water and sewer bonds that combine new money and refunding.
The negotiated deal is scheduled to go to market Thursday, with Goldman Sachs & Co. as book runner and Loop Capital Markets as co-senior manager.
First Southwest Co. and Estrada Hinojosa & Co. share duties as co-financial advisors.
The city maintains two teams of underwriters approved by the council in 2010. Each team includes three national firms, three regional firms and three firms owned by ethnic minorities or women.
The city will issue taxable and tax-exempt series with 30-year maturities and 10-year call dates. The bonds are rated AAA by Standard & Poor's Global Ratings and AA-plus by Fitch Ratings. Outlooks are stable.
Dallas chief financial officer Jeanne Chipperfield asked the city council for a maximum authorization of $640 million, a total that could change based on market conditions.
"Current interest rates provide an opportunity to advance refund outstanding revenue bonds using a combination of tax-exempt and taxable refundings," Chipperfield told the council. "Our co-financial advisors will continue to monitor the market to ensure the feasibility of refunding, which may be restructured or deleted if market changes prior to pricing."
Proceeds of the sale will retire up to $230 million in commercial paper and $410 million in taxable and tax-exempt revenue bond debt, Chipperfield said. Issuance costs are about $1.25 million.
"Based on current interest rates, the estimated savings are total net present value cash savings of $25.87 million or 6.54%," Chipperfield said.
After the Federal Reserve's Open Market Committee passed on the chance to raise benchmark interest rates this month, the muni market has continued to enjoy strong demand as issuers reap record low yields.
Jim Colby, chief municipal strategist at the VanEck investment firm, noted that issuance at the end of the second quarter tends to intensify as issuers near the end of their fiscal year.
"In July and August, there is a natural lull as people take vacations and the market receives less attention," Colby wrote earlier this month. "Finally, in the last quarter of the year, the pace of issuance generally picks up again as bankers seek to book deals before the year ends.
"We entered 2016 coming off the back of two strong years in 2014 and 2015, and investors comfortable with, if not reliant upon, steady income from the muni space," Colby wrote.
"And in the face of persistent uncertainty in both the domestic U.S. and international markets, munis have continued to provide investors with low correlation to other asset classes, and strong credit quality, in addition to positive performance for the past three years according to the Barclays muni bond indices," he wrote
Bond proceeds will retire various maturities of the city's series 2006, 2007, 2008, 2010, 2011, 2012A, and 2013A utility revenue bonds. Additional liquidity includes a fully funded debt service reserve.
The series 2016A and 2016B bonds are secured by a first lien pledge on the net revenues of the city's waterworks and sanitary sewer system.
While Dallas no longer carries triple-A ratings for its general obligation bonds, the water utility bonds earn top marks from S&P based on their strong pledged revenue.
"Despite the challenges facing the city's general fund budget -- including the pension fund for the city's police and fire employees -- city leaders remain committed to the utility's financial independence and have not turned to DWU's surplus net revenues to plug any budget gap," S&P analyst Theodore Chapman noted.
As of May 31, Dallas Water Utilities had about $2.1 billion in long-term debt outstanding and commitments of about $3.6 billion under its capital plan through 2024, according to S&P.
One of the utility's largest commitments is to the $2.4 billion Integrated Pipeline under a partnership with Tarrant Regional Water District in Fort Worth. The Fort Worth utility is managing construction and financing of the 150-mile pipeline from Lake Palestine in East Texas with partial financing from Dallas.
The triple-A-rated Texas Water Development Board awarded TRWD $440 million in low-interest loans in July 2015 to help defray costs.
The pipeline is designed to help meet the region's water needs for the next several decades. Construction began in 2014, and the first phase is expected to be completed by spring 2018.
"While replacing aging infrastructure will remain a focus, enhancing the long-term water supply will remain among the highest profile of the system's capital commitments," Chapman said.
The IPL is designed to move 350 million gallons of water per day from Lake Palestine in east Texas to the Dallas-Fort Worth area. The project includes 150 miles of pipeline, three new pump stations on Lake Palestine and three new booster pump stations.
Total capital costs associated with the IPL are estimated at $2.4 billion, with DWU's portion at around $977 million. DWU's portion of the capital costs has been financed through contract revenue bonds issued by TRWD and payable by DWU.
To date, TRWD has issued $474 million in contract revenue bonds on behalf of DWU with $463 million currently outstanding.
"It is expected that DWU's remaining capital costs associated with the IPL will be funded through future issuances of additional TRWD contract revenue bonds over the next 10-15 years," according to Fitch analyst Doug Scott.
While DWU's debt will rise with its ongoing projects, Scott said that "debt levels are relatively reasonable for systems with significant wholesale service components like DWU.
"Also, the system's debt structure is relatively conservative (including the IPL obligations), consisting solely of fixed rate obligations apart from commercial paper outstanding at any given time, thereby limiting interest rate and third party credit risks," Scott wrote. "Further, maximum annual debt service on direct debt occurs in the current year followed by gradual declines in carrying costs, affording the system a good deal of structuring flexibility, if needed."
Current plans call for Dallas to close on the bond deal July 7.
