Texas Drought Drives Midland's $200M Water Pipeline Deal

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DALLAS — A water district serving the west Texas city of Midland will price $200 million of debt Tuesday for a 60-mile pipeline to the drought-stricken city in the heart of the state’s oil-producing Permian Basin.

There is no retail-order period, but calls to the underwriters from area residents about the upcoming deal indicate good demand, according to Paul Jack, managing director at Estrada Hinojosa & Co.

“It’s also one of the largest, if not the largest, municipal bond project the city has ever undertaken,” he said.

Estrada serves as senior manager on the negotiated deal with Wells Fargo Securities, BOSC Inc., Frost Bank and JP-
Morgan are co-managers. Don Henderson at Buckshot Strategies serves as financial advisor, with Andrews Kurth as bond counsel.

While the debt deal is for a city of Midland project, the issuer will be the Midland County Freshwater Supply District No. 1.

The MCFSD offering includes about $70 million of revenue refunding bonds to take out commercial paper and around $130 million of revenue notes that will have long-term maturities of 30 years.

The bonds and notes carry ratings of AA-plus from Standard & Poor’s and Aa3 from Moody’s Investors Service.

While S&P has a stable outlook on the issue, Moody’s outlook is negative. Fitch Ratings does not rate the debt.

“We believe current water supply limitations and use restrictions as a result of drought conditions have adversely affected the system’s financial performance,” wrote Moody’s analyst Nathan Phelps in explaining the negative outlook.

Moody’s also expressed uncertainty about how long the water supply will last and how it will match up with debt service.

The water will come from the 22,000 acre T-Bar Ranch in sparsely populated Winkler and Loving counties. Midland bought the ranch in 1966 for access to its water rights.

The ranch draws water from the Pecos Valley Aquifer. Under Texas law, property owners also own the rights to groundwater under their land.

In January, the Midland City Council voted unanimously to award a contract requiring the Freshwater Supply District No. 1 to build and maintain water pipelines from the ranch to the city. The city will then purchase an average of 10 million gallons of water per day from the district at a cost not to exceed $2.78 per thousand gallons of water.

“We pitched this as a public-to-public partnership,” Jack said. “This is allowing for very accelerated delivery for the city. The project is on schedule and is expected to open by the end of May 2013. Local banks provided the interim loans.”

Even with the expedited delivery, Moody’s Phelps said Midland is cutting it close when it comes to maintaining water supplies. The Colorado River Municipal Water District that supplies the city currently is expected to exhaust its supplies by June 2013, just as the new pipeline is scheduled to open.

“We believe the timing of project completion is narrow given CRMWD’s projected exhaustion dates,” Phelps wrote.

Midland’s population grew 17% between the 2000 and 2010 Census, increasing to 111,147. The water system’s customer base has increased at a five-year average annual rate of 1.25%, reaching 37,767 water and sewer customers in fiscal 2011.

Officials project the system’s customer base to grow by 1.5% annually through the medium-term, based on projected issuance of residential building permits.

Along with neighboring Odessa, Midland is the major population center for the Permian Basin, a semi-desert environment that is experiencing a surge in production of oil and gas due to new techniques of exploration and drilling.

At 4.2%, the city’s unemployment rate is far below the state’s 7.6% rate.

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