DALLAS – The City of Austin Water Utilities will price $251.9 million of double-A-rated refunding bonds that have regained stable outlooks from Moody's Investors Service and Fitch Ratings.
Moody's revised its outlook on the Texas capital's water utility to stable from negative ahead of the deal; it rates the water utility's first-lien debt Aa1 and separate lien bonds Aa2, and had revised the outlook to negative in May 2014, citing tightening liquidity and the need to raise water rates.
The upcoming deal is on the separate lien.
"The stable outlook reflects rate increases that have resulted in a marked improvement in the system's financial performance in 2015 and year to date in 2016, boosting reserves and liquidity to healthier levels than in years past," Moody's analyst James Hobbs wrote.
Fitch rates the bonds a notch lower at AA-minus, with the stable outlook replacing the negative outlook imposed a year ago.
"Fitch's revision of the outlook to stable from negative reflects modest but notable improvement in AWU's financial performance," analyst Christopher Hessenthaler said. "Fitch expects improvement to continue at least through the current forecast period ending in fiscal 2021."
Ahead of the deal, S&P affirmed its AA rating on the separate lien water and wastewater bonds.
"The stable outlook reflects our expectation that the ratings are unlikely to change in the next two years," said S&P analyst Theodore Chapman. "We recognize management's commitment to improving AWU's financial risk profile and maintaining it at those improved levels. We believe, however, that the improvements will be gradual."
Standard & Poor's retains a AA-plus rating on Austin Water's prior first-lien combined water and electric utility bonds.
The water utility bonds are expected to price Tuesday through bookrunner Ramirez & Co. Robin Redford, managing director, and Lorraine Palacios, senior vice president, are lead bankers for Ramirez.
Dennis Waley, managing director at Public Financial Management, is financial advisor on the deal.
Co-managers in the underwriting syndicate are Coastal Securities, Fidelity Capital Markets, Goldman Sachs, Morgan Stanley and Raymond James.
McCall, Parkhurst & Horton is bond counsel.
Proceeds will refund 2006 and 2007 debt for savings and take out $190 million in commercial paper.
Based on rates available on March 28, the refunding could produce $12.1 million in present value savings or 10.94%, according to Austin Treasurer Art Alfaro.
"Actually, I think rates have gotten even better since then," Alfaro said.
The series 2016 bonds are secured by net revenues of the water utility, after provision for the prior first-lien obligations of the combined utility systems. The bonds are on parity with the prior subordinate lien obligations of the combined utility systems and all outstanding water and wastewater revenue bonds, according to Fitch.
Under Austin's master bond ordinance, new bonds for the city's electric and water utilities no longer carry a combined pledge. The prior-lien bonds still carry that pledge, however.
With this deal, Austin Water will have $2.32 billion in total debt outstanding, which Moody's describes as "sizeable." About $2.2 billion is separate-lien debt, while $29 million is prior first lien and $137 million is prior subordinate lien.
"The Aa1 rating on the prior lien reflects the relatively small amount of debt outstanding under the prior lien and strong debt service coverage that will continue given that the lien is closed," Hobbs said.
In fiscal year 2015, the utility increased rates 13.5% for water and 2.3% for wastewater. Those rate hikes went into effect on Nov. 1, 2014. In fiscal 2015, operating revenues increased 9% to $516.9 million from $472.5 million in the previous year.
Fiscal 2015 net revenues of the system increased to $300.3 million from $246 million, providing 1.44 times coverage of separate lien obligations.
Among the largest projects for the water utility is the reclaimed water program, designed to supply non-potable water for uses such as watering lawns, cooling towers, industrial use and toilet flushing. Reclaimed water is highly purified wastewater that is ordinarily discharged to the Colorado River.
The city has more than 50 miles of purple pipes carrying reclaimed water. The current phase of the project will serve the state Capitol complex.
The Capitol Complex Reclaimed Water Main Project is expected to reach completion in December with installation of 10,500 feet of reclaimed water main.
The Austin water and wastewater system serves the city of Austin and areas in Travis and Williamson counties. Lake Travis and Buchanan are the city's two major water supply storage reservoirs and are managed by the Lower Colorado River Authority.
After years of drought followed by heavy rains in 2015, combined lake storage is at 99%, a dramatic improvement from the 38% level in May of 2015.
The system owns and operates three water treatment plants and storage and transportation infrastructure. The city has two main wastewater treatment plants with a capacity of 150 million gallons per day.
"The service area continues to be a strong point for the system," Hobbs said.
"We anticipate the system's customer base will remain stable and diverse for years to come," Hobbs said.
With the city's unemployment rate in February at 2.7%, the water utility has seen few customer delinquencies while enjoying "consistently strong" revenue collection, according to Fitch.
