DALLAS — With a new water treatment plant nearing completion, Austin, Texas will issue about $575 million of taxable and tax-exempt bonds to provide long-term financing and refund outstanding debt.
The deal is expected to price July 9 through negotiation with senior managers JPMorgan and Ramirez & Co., said Austin treasurer Art Alfaro.
The Austin City Council on Thursday authorized up to $500 million of tax-exempt and $200 million of taxable bonds to be sold by the end of the year. Alfaro said the city wants to get to market as soon as possible to capture the low interest rates that are still available.
"We're seeing rates trying to rise and we decided we better pull the trigger when we can," Alfaro said.
Financial advisor Public Financial Management, Inc. told city officials that refunding $123.7 million of Series 2004A and $113.3 million Series 2005A bonds may result in present value savings exceeding the city's target guideline of 4.25%.
The new money bonds will take out $220 million of commercial paper issued for construction of Water Treatment Plant 4 currently under construction in northwest Austin.
Despite the name, Water Treatment Plant 4 will be the city's third treatment plant when completed in 2014; another plant was decommissioned.
The plant will be the first to draw water for Austin from Lake Travis, one of a chain of lakes on the Colorado River that includes Lake Austin, the city's primary water source. The so-called Highland Lakes are managed by the Lower Colorado River Authority in Austin. Although Travis is one of the largest of the Highland Lakes, it has been dramatically reduced by drought, forcing drastic conservation measures by LCRA customers.
The new water plant will serve the fast-growing north and northwest areas of Austin and have the capacity to treat 50 million gallons of water per day with the possibility of expanding to up to 300 million gallons per day.
Bond investors, particularly risk-averse institutional buyers, are expected to be attracted to the Austin's high credit ratings and the city's long-term prospects.
Austin has a triple-A general obligation bond rating, and these water revenue bonds drew ratings of AA from Standard and Poor's, Aa2 from Moody's Investors Service and AA-minus from Fitch Ratings.
While Moody's and Fitch assign a stable outlook, Standard & Poor's issued a positive outlook, indicating a potential upgrade.
"We believe the systems' recently adopted financial management policies and supporting rate adjustments will likely bolster the systems' financial risk profile over the outlook's two-year period, especially working capital levels, which could result in our raising the rating," said Standard & Poor's credit analyst Theodore Chapman.
Moody's noted the utility's plans to strengthen liquidity with a rate stability fund and to increase the net working capital from 45 days to 60 days.
"Although the utility has significant plans for future debt, the city has a long demonstrated history of using annual rate increases to support debt and growing operating costs," wrote Moody's analyst Kristin Button.
Austin Water's debt service coverage mirrors weather conditions, rising in times of drought and heavy water usage and falling in wet years, Moody's observed.
Between the 2007 and 2010 fiscal years, debt service coverage averaged 1.45 times including a high of 1.55 times in fiscal 2009 and a low of 1.31 times in fiscal 2010, analysts said. With dry weather conditions and a rate increase for fiscal 2011, debt service coverage was 1.88 times on all debt. Wetter weather conditions in fiscal 2012 resulted in lower coverage of 1.43 times for all debt.
Debt service in fiscal year 2012, for the water and sewer system, totaled $155 million, according to Moody's.
Austin operates both water and electric utilities for the city. First-lien and subordinate-lien debt is backed by net revenues of the combined utility systems. In rating this deal, Fitch upgraded prior-lien ratings to AA from AA-minus.
Analysts cited the city's foresight in acquiring long-term water supplies from the LCRA.
In 1999, the city signed a 50-year agreement with the LCRA, with an option to renew for another 50-year period.
"By securing 100 years of water supply, the system has a significant advantage to expand and accommodate a growing customer base within the city and to serve wholesale customers," Button wrote. "Over the next five years, officials project customer accounts to grow by approximately 1.7% annually."
Austin Water Utility has one outstanding variable rate series of bonds issued in the calamitous year 2008, with $154.4 million outstanding. The bonds carry letters of credit from Sumitomo Mitsui Banking Corp. and Bank of Tokyo-Mitsubishi UFJ. That deal includes a swap agreement with Goldman Sachs in which the utility pays a fixed rate of 3.6% and receives SIFMA. The mark to market for the swap was a negative $18.6 million as of May 31, 2013, according to Moody's.
Austin Water Utilities provides water and wastewater service to 214,000 water and 204,000 wastewater customer accounts. The system's customer base is mostly residential users with the 10 largest customers accounting for a 6% of total revenues in fiscal 2012.
The system also provides water and wastewater service on a wholesale basis to five municipal utility districts, one water control and improvement district, six water supply corporations, one private utility, and four neighboring towns.
Wholesale revenues accounted for 4% of total system revenues in fiscal 2012.
Austin's population, estimated at roughly 811,000 for 2012, has increased more than 20% since 2000. With the University of Texas and state government providing a stable employment base, wealth indicators for the area are comparatively high and the city's March 2013 unemployment rate of 4.6% is exceptionally low relative to the state and national averages, according to Fitch Ratings.
"AWU's growing service area exhibits a deep and diverse economy, exceptionally low unemployment, above-average wealth levels and a highly diversified customer base," wrote Fitch analyst Christopher Hessenthaler.
After this deal, Austin plans to issue $150 million of general obligation bonds in August, with $100 million refunding issue expected in September, Alfaro said.