DALLAS -After converting $249 million more of its auction-rate debt to variable-rate this week, Houston is planning a similar $200 million deal the week of May 22.

The city closes today on $49 million of weekly variable-rate bonds that refinanced a 2004 tranche of auction-rate Combined Utility System securities. The deal that priced yesterday followed a $200 million issue on Wednesday that also refunded auction-rate debt. Banc of America Securities LLC served as underwriter on the deal with its affiliate Bank of America providing a letter of credit.

With nearly $2 billion of auction-rate securities outstanding when the market for such debt imploded earlier this year, Houston began refinancing and remarketing those bonds in March. The utility system, which builds water and sewer projects, had $1.3 billion in auction-rate mode. After this week's deal, the system will have about $476 million remaining to be refunded, said deputy controller Jim Moncur.

In April the city did a $653 million utility refinancing.

"Before the refinancing, we were paying interest rates as high as 6.7%" said city Controller Annise Parker. "Now the interest rate averages 1.6%. That is a weekly savings for taxpayers of about $640,000."

On yesterday's deal, the city drew an initial rate of 2.2% that will reset weekly. The initial rate on the $200 million tranche was 2.3%, Moncur said.

"That's a big improvement over the 5% that we were paying," he said.

Helping the city shape the deal were co-financial advisers Coastal Securities, Morgan Keegan & Co., and Estrada Hinojosa & Co.

The bank letter provides triple-A ratings from Standard & Poor's and Moody's Investors Service. Underlying ratings are AA from Standard & Poor's, A-plus from Fitch Ratings, and A1 from Moody's. Fitch did not issue a credit-enhanced rating.

"The rating reflects the utility's crucial role as the primary water provider to the growing Houston metropolitan region; loosened revenue growth limitations, following a voter-approved charter amendment; healthy debt service coverage from net revenues, facilitated by a systematic process to introduce rate increases as needed; an assertive capital improvement plan, which is expected to keep debt levels relatively high; and adequate bond covenants," wrote Moody's analyst Dwight Burns.

The utility system serves 2.2 million people in Houston and its suburbs through a network of reservoirs, pipes, and treatment facilities. With subsidence of the land in the Houston-Galveston area through overuse of groundwater, state law requires the utility to increase its use of surface water to 30% by 2010 and 80% by 2030.

The system's 2008-2012 capital improvement program includes projects worth nearly $1.4 billion that will be funded through debt issuance. The system's Series A commercial paper program has a $900 million total capacity.

"Moody's believes the city's utility debt position will remain manageable, as long as the annual rate increase ceiling established by voters does not hinder timely and effective revenue adjustments," Burns wrote. "System debt includes numerous swap agreements. The city's highly sophisticated management has sufficient policies and monitoring procedures in place to address market impact on the utility's derivative structures."


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