DALLAS — Houston will surpass the $2 billion mark in issuance for the year if it issues the full $530 million of revenue and refunding bonds it has authorized for its water and sewer system this week.
"We're running into some negative arbitrage issues, so we may not issue the full amount," said Houston Controller Ronald Green. "But the minimum is going to be around $200 million. It will probably be more in the $400 million range."
Houston could come out ahead of the Texas Transportation Commission as Texas' top issuer for the first half of 2014 if the TTC remains on the sidelines with a $900 million bond deal that had been expected this month. The TTC has issued $1.5 billion of bonds so far this year.
Houston plans to price its Series D bonds Thursday through negotiation with senior manager Goldman Sachs with Citi, Piper Jaffray & Co., Bank of America Merrill Lynch, FTN Financial Markets and Ramirez & Co. as co-managers.
Michael Bartolotta, vice chairman of First Southwest Co., serves as financial advisor on the deal.
On June 18, the city will price $200 million of revenue anticipation notes in a competitive sale.
This week's deal comes amid a rise in bond volume in an otherwise lean year. Scheduled volume is projected to jump to $8.67 billion the week of June 9, more than $3 billion higher than the $5.6 billion that came in last week, according to data provided by Ipreo and The Bond Buyer.
Houston's water and sewer deal is expected to appeal mostly to institutional investors.
For the first five months of 2014, muni volume of $115.15 billion was 24% below the volume of $153.03 billion for the same period in 2013.
"The long drought in muni issuance got some relief this week as new issue supply surged," Phil Fischer, head of municipals and indices research at Bank of America Merrill Lynch, wrote in a report Friday. "We remain positive on the market, however, since the supply should not be expected to materially affect spreads. The added issuance comes at a period of high seasonal liquidity. Any spread widening should be seen as a buying opportunity."
Houston's upcoming utility bonds carry ratings of AA from Standard & Poor's and Fitch Ratings with stable outlooks. Moody's Investors Service rates the deal Aa2.
"A higher rating is precluded due to the system's substantial capital improvement plan for fiscal years 2014 through 2018, which will likely require rate increases and keep coverage levels stable at best," wrote S&P analysts James Breeding and Theodore Chapman.
"Automatic rate increases, coupled with ongoing high liquidity levels should allow management to address any unanticipated expenditures, while continuing to fund the significant capital improvement program," they added.
The bonds will redeem all outstanding commercial paper used for water and sewer projects and refund outstanding bonds.
Fitch noted that Houston's $2 billion capital improvement project is large due to the age of the infrastructure, expected growth, and higher health and safety standards.
"The high leverage was driven partly by ground subsidence issues that forced the system to shift its water reliance from ground water to surface water," said analysts Gabriela Gutierrez and Teri Wenck.
Indeed, Houston's land is sinking as the seas are rising, adding additional stress to the city's flood-prone drainage system. Years of pumping groundwater to supply households and businesses has lowered some areas below sea level.
"Extensive subsidence, caused mainly by ground-water pumping but also by oil and gas extraction, has increased the frequency of flooding, caused extensive damage to industrial and transportation infrastructure, motivated major investments in levees, reservoirs, and surface-water distribution facilities, and caused substantial loss of wetland habitat," a 1999 report from the U.S. Geological Survey noted.
In some areas of Houston, the land has subsided as much as 10 feet, according to the USGS. At the San Jacinto Battleground State Historical Park, about 20 miles east of downtown, a road that once led to the San Jacinto Monument is now submerged.
The USGS estimates the relative sea level rises at the rate of 0.08 inches per year. Global warming is expected to raise sea levels nearly 4 inches by 2050.
While the water is rising, money is also pouring into the nation's energy hub.
The Houston-Sugar Land-Baytown Metro Area added 85,800 jobs in the 12 months ending in April, according to the Texas Workforce Commission, lowering the unemployment rate to 4.6%. Wages have grown by more than $33.5 billion since 2009, according to a report this month from the Greater Houston Partnership.
The impact of massive investment in chemical plants and liquid natural gas export terminals on the Texas Gulf Coast and the opening up of Mexico's oil production to Houston businesses could add 55,185 jobs to the region's economy, the report said.
"The export expansion about to occur is worth at least 10 months of job growth to the region's economy," the GHP report added.
Metro Houston fared better than many other large U.S. urban areas during the recession, as relatively high energy prices and a favorable business climate provided some cushion against other recessionary forces, Fitch noted.
For local governments, particularly schools and utilities, keeping up with growth while replacing aging infrastructure has created the greatest challenge.
The City of Houston has more than 5,300 miles of sewer pipelines, some of which are nearly 50 years old. The system, through the city, operates under a 2005 order with the Texas Commission on Environmental Quality to replace or rehabilitate 600,000 feet annually of sewer lines and clean another 2 million feet by 2016.
The system is currently in compliance with the order, and expects to meet the current deadline, Moody's notes. In addition, system officials have recently commenced negotiations with the Environmental Protection Agency regarding additional remedial measures to the city's sanitary sewer system.
To help finance improvements, Houston has borrowed more than $1.46 billion from the Texas Water Development Board since 1998. Most recently, the TWDB committed $58.2 million to fix approximately 90 miles of sewer lines within the city.
The utility system's water is supplied from lakes Conroe, Livingston, and Houston, and other smaller surface water sources designed to limit the pumping of groundwater. The system has funds dedicated in the Capital Improvement Plan to address relatively modest regulatory requirements.
While expanding and rehabilitating its water treatment system, Houston has also taken advantage of low interest rates in the municipal bond market to provide savings on refunding issues.
A $1.3 billion refunding of combined utility system debt on March 13 provided $207.5 million in present-value savings over 15 years, Green said.
In addition to demand from previous purchasers, the deal attracted 46 new investors who placed orders totaling more than $455 million, he said. Investors placed $2.7 billion of priority orders for the tax-exempt offering of approximately $693 million.
