DALLAS — San Antonio, the largest bond issuer in the Southwest for the first half of 2012, plans to issue $1.1 billion of debt through 2016 to finance improvements and expansion of its water and sewer system as drought adds urgency to the city’s conservation efforts.
For all the projects under the five-year capital improvement program, the city expects to invest $1.43 billion, with some of the cost covered by revenues and impact fees.
The city outlined its plans in a preliminary official statement for a $175 million senior-lien deal expected to go to market after Labor Day. The city will also issue $19.6 million of junior-lien debt. The bonds will refund commercial paper and pay for ongoing projects.
Wells Fargo Securities is senior manager on the negotiated sale with co-managers Loop Capital Markets, SAMCO Capital Markets, Ramirez & Co. and Siebert, Brandford Shank & Co.
First Southwest Co. and Estrada Hinojosa & Co. are financial advisors. Bond counsel are Fulbright & Jaworski and Escamilla, Poneck & Cruz. McCall, Parkhurst & Horton is underwriter’s counsel.
The bonds mature serially through 2042. The senior-lien bonds carry ratings of AA from Standard & Poor’s, Aa1 from Moody’s Investors Service and AA-plus from Fitch Ratings, all with stable outlooks.
While San Antonio has triple-A general obligation bond ratings, Moody’s has a negative outlook on the debt.
The financial plan for the San Antonio Water System, or SAWS, includes a 20-year capital improvement program that anticipates a total cost of $5 billion for various projects. The CIP includes projects for water supply, water delivery, wastewater, chilled water and steam, with water supply comprising 13% of the identified needs over the next 19 years.
Funding for the total CIP will be provided from revenues, impact fees and debt proceeds, officials say. Between 2012 and 2016, they expect to issue around $1.1 billion of debt.
In 2001, SAWS launched a water supply fee that had annual increases built in for each subsequent year through 2005 without requiring additional City Council approval. In 2010, the water supply fee was changed from a flat fee per 100 gallons to a tier based on usage.
Increases in fees were adopted for fiscal years 2011 and 2012, with projected increases included through 2016. The fee generates a revenue source to support the development of long-term water supplies for the service area.
“Moody’s views the specificity of the fee as a favorable resource that is somewhat unique to SAWS,” wrote analyst Adebola Kushimo.
The second-most populous city in Texas behind Houston, San Antonio was the largest issuer of debt in the state for the first half of 2012, according to data from Thomson Reuters. The city issued $1.56 billion in the first six months of the year, with the largest individual deal coming from a $655.4 million electric power refunding on May 23.
San Antonio owns both its electric utility, CPS Energy, and the SAWS water utility.
SAWS continues to grow along with the city and surrounding Bexar County. Over the past five years, water customers increased an annual average of 1.6% with sewer customer numbers increasing 2.2%, to 358,656 and 402,942 customers, respectively.
San Antonio’s historic reliance on groundwater has presented a challenge during one of the worst droughts in modern history. SAWS takes 59% of its water supply from the Edwards Aquifer. Additional supply is provided by aquifer storage and recovery, accounting for 20%, which protects the system from drought conditions when water use in the aquifer is restricted.
“The current combined water supply is more than sufficient to meet annual needs with a total unrestricted supply of 387,045 acre-feet in 2012 (the Edwards Aquifer providing 258,945 acre-feet), which far exceeds the 217,000 acre-feet demand reported in fiscal year 2011,” Kushimo wrote. Even in periods of drought when SAWS supply is reduced to a combined total of 224,348 acre-feet, the system still has sufficient supply to service its customers, she added.
The system adopted a water management plan in 2009, which has since been updated for planning for medium- and long-term water supply.
The water utility is also pursuing additional rights to the Edwards Aquifer, a brackish water desalination plant, an expanded local aquifer, savings from water restrictions, and an ongoing bid for future water supplies. SAWS expects to close the supply gap and ensure water supply till 2039 in a drought of record, officials said.
“SAWS’ strong planning for future water supply remains a credit-positive and contributes to the high credit rating,” Kushimo said.
At the Twin Oaks Aquifer Storage and Recovery site SAWS will draw brackish water from 13 production wells more than 1,500 feet deep. With the first phase of the project scheduled to come online in 2016, the facility will produce about 10 million gallons of new water each day.
“Utilizing brackish water allows our community to make the most of a previously untapped resource,” SAWS president and chief executive Robert R. Puente said in a March news release. “San Antonio continues to invest in new sources to help us meet the city’s water needs over the next 50 years while reducing dependency on the Edwards Aquifer.”
The second phase, projected to come on line in 2021, will bring another 10 million gallons per day, and the final phase in 2026 will provide an additional five million gallons per day.
SAWS says it is ahead of schedule on implementing its 50-year water management plan. Last year, an agreement was signed with the Schertz-Seguin Local Government Corp. to rent available capacity in its pipeline to bring water from the Carrizo Aquifer in Gonzales County to San Antonio. The Regional Carrizo project is expected to bring water for about 60,000 households beginning in late 2013.
One of the challenges for SAWS is the absorption of the former Bexar Metropolitan Water District, or BexarMet, which supplied water to 20% of Bexar County. On Jan. 27, SAWS received approval of the 2011 election results from the U.S. Justice Department, which officially dissolved BexarMet.
SAWS is combining the two systems, but full integration is not expected until 2017. In the meantime, officials report that coverage of BexarMet’s debt, which remains separated from that of SAWS, remains satisfactory at 1.52 times for the senior lien and 1.39 times for the junior lien.