Corpus Christi eyes debt defeasance after rejecting desalination project again

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The Corpus Christi City Council once again declined to pursue seawater desalination in the Inner Harbor, a move that could lead to the city's defeasance of bonds sold for the project by a Texas agency and further pressure its bond ratings.

In a 3-5 vote Tuesday night, the council rejected an initial $78.6 million design-build contract with Corpus Christi Desal Partners, which had preliminarily pegged the project's maximum cost at $978.77 million.

The action reinforces concerns about the city's long-term water supply planning while raising questions about how to handle debt the state already issued for the project on Corpus Christi's behalf.

"I'm not against seawater desal, I just don't like this particular project," said Council Member Gil Hernandez, who pointed to its cost, location and environmental limitations.

A year ago, the council terminated the project as its price tag reached $1.2 billion under a previous design-build contractor.

 At that time, Corpus Christi had $235 million of outstanding debt issued specifically for the Inner Harbor project through the triple-A-rated Texas Water Development Board, which had agreed to an additional $535.1 million in low-cost financing.

The city is obligated to pay off the outstanding State Water Implementation Fund for Texas bond principal plus total interest of $138.5 million of which $63.79 million is locked in through the two call dates, TWDB told The Bond Buyer last year, adding that the bonds have a final maturity in July 2054.

The next steps for the city are for the council to adopt a resolution formally terminating the project, which would be submitted to TWDB, along with a status report and a final accounting of unspent loan proceeds, followed by a bond-financed defeasance, according to a Corpus Christi staff memo.

"These actions would potentially necessitate higher utility rates to support the new debt issued for the defeasance," the memo said. "In addition, formally discontinuing a long‑term water supply initiative could be viewed unfavorably by credit rating agencies, creating potential downward pressure on both the city's general obligation and utility system ratings." 

The Inner Harbor project was part of the drought-stricken city's long-term plan to boost water supplies as it faced a Level 1 emergency, indicating its regional water system is 180 days from supply not meeting demand.

The looming crisis weighed on the bond ratings for the city of 317,000, which have been hit with downgrades and negative outlooks since late last year. 

Meetings are scheduled this week with rating agencies ahead of an approximately $300 million water utility revenue bond sale, according to City Manager Peter Zanoni.

Summer rainfall, along with $1.1 billion of groundwater, wastewater reuse, and other projects aimed at producing 66 million gallons of water daily, enabled Corpus Christi to push back the projected onset of an emergency to September 2028 and ease water-use restrictions. 

At Tuesday's meeting, the council received an update on the Nueces River Authority's Harbor Island seawater desalination public-private partnership project, which is seeking a state offshore discharge permit. Corpus Christi has an option to reserve 50 million gallons per day from the facility once it begins operating potentially by the end of this decade.

Corpus Christi Water, a city agency, is the primary water supplier for a seven-county region.