DALLAS — The Houston suburb of Pasadena plans to offer $55.4 million of waterworks and sewer system revenue bonds competitively Tuesday to begin expansion of a water treatment plant.
The bonds, which are structured as serials with maturities from 2010 through 2033, are secured with the first lien and pledge of the revenue generated by the system. Insurance for the debt will be at the bidder’s option.
Andrews Kurth is bond counsel and RBC Capital Markets is the financial adviser to the city of nearly 155,000, which is the largest suburb in the Houston area, according to analysts. Pasadena’s population is up about 10% since the 2000 Census tally of 141,674.
Fitch Ratings assigned an A-minus rating to the issue and revised its outlook on the system to positive from stable, citing improved coverage levels and adequate liquidity after a significant rate increase.
“The system quickly recovered its financial position after a string of wet years and a lack of rate adjustments had negatively affected the system’s liquidity and debt service coverage,” Fitch said.
Analysts said the system’s annual debt service requirements are now strong following a debt restructuring in 2005 and the rate increase a year later. Debt service coverage for fiscal 2008 is projected at 1.7 times with an average of 1.4 times for the following five years, according to Fitch.
Standard & Poor’s also assigned an A-minus rating with an outlook revision to positive ahead of the issue.
“We believe Pasadena city officials will consistently maintain the system’s sound financial position and sustain cash on hand,” said credit analyst Sarah Smaardyk. “Furthermore, if they can maintain the system’s fiscal position, we might raise the rating.”
The rate hike allowed officials to “to restore fiscal health to the utility and continue to make debt service payments without having an effect on reserves,” Standard & Poor’s said.
Analysts said the city is considering another rate increase in April or May that could add another $2.5 million for debt service.
The majority of the proceeds from next week’s sale will fund expansion of the city’s participation in Houston’s southeast water production plant, with the remaining proceeds used for improvements to the city’s water distribution system.
Fitch said the Pasadena system provides service to about 34,000 water and 33,000 sewer connections. The city began a cost-sharing agreement with Houston for water supply, acquiring rights to 15 million gallons a day from the southeast plant. The bond-financed expansion will provide another 25 million gallons per day of surface water rights to Pasadena to meet long-term needs, according to analysts.
Following this sale, the growing suburb about 15 miles southeast of downtown Houston doesn’t expect to issue additional waterworks and sewer debt again until 2010 at the earliest. Although another $47 million of bonds eventually will come to market within five years to complete the city’s portion of the expansion of the plant, according to analysts.
Moody’s Investors Service has yet to issue a rating for the bonds.
