DALLAS — In an unusual combination of financings, the Tarrant Regional Water District in Fort Worth will issue $295 million of bonds in two deals for a $2.3 billion water pipeline from East Texas.
A negotiated $161 million deal, expected in the first week of February, will coincide with a $134 million competitive sale under the name of the TRWD but backed by Dallas, a partnerin the 150-mile project that will reach from Tarrant County to Lake Palestine.
“The city of Dallas will have capacity rights, but they want us to own and operate the pipeline,” said Sandra Newby, the district’s chief financial officer.
Given the scarcity of long-term bonds amid growing demand, Newby expects appetite for the bonds to be strong.
Other draws are its rating of AA-plus from Fitch Ratings, and an existing rating of AAA from Standard & Poor’s, which had not issued its new report as of last week.
“We expect a very good response,” Newby said. “We have great contracts with our customers.”
The underwriters on the negotiated deal are Bank of America Merrill Lynch, Morgan Keegan & Co., RBC Capital Markets and JPMorgan.
The district’s financial advisor is First Southwest Co. McCall, Parkhurst & Horton and Newby & Davis are bond counsel.
Jeffrey Timlin, principal at Sage Advisory Services in Austin, said that a highly rated issue like the TRWD’s is well-timed in a depleted primary market.
“People are clamoring for bonds because there’s not a lot of supply,” he said. “The year 2012 started off gangbusters for municipal bonds across the credit curve. It’s definitely been a seller’s market.”
The district could have priced the $161 million competitively if not for a refunding component of $28 million, Newby said. That tranche will take out a 2002 issue for expected savings of about $2 million.
Maturities are expected to run to 30 years but could extend to 35, depending on market conditions. The TRWD is expected to formally approve the issue Tuesday.
The upcoming deal is the first of many to come.
“Every other year, we expect to be issuing debt for this project,” Newby said. “To get to that $2.3 billion, there’s going to be a lot more from us and Dallas.”
The district’s debt burden is expected to double over the next five fiscal years, according to Fitch.
Combining financial resources to bring water hundreds of miles to the growing Dallas-Fort Worth area is necessary, because of the difficulty of authorizing and permitting new reservoirs, accordnig to Newby. “Sadly, that’s how things have to be done,” she said.
The upcoming bonds will finance engineering work for the for the upcoming TRWD/Dallas Integrated Pipeline Project. The TRWD also built and operates pipelines from the Richland-Chambers, Cedar Creek and Eagle Mountain reservoirs.
The district provides raw water service to about 50 utilities in and around Tarrant County. It provides water either directly or indirectly to about 95% of Tarrant County and an estimated 1.6 million people in total.
“Each contractor is either totally or largely dependent on the district for raw water supplies,” noted Fitch analyst Julie Seebach. “Because the credit quality of the contractors largely determines the rating on the bonds, any change in the credit profiles of the contractors, either positively or negatively, could have an impact on the district’s rating.”
Buyers of TRWD water agree to make monthly payments equal to the annual requirement of the district’s operations and maintenance expenses, debt service needs and any other requirement under the district’s bond resolution. If revenues fall short, the contractors make up the difference proportionally to their level of consumption.
The contractors have never failed to make timely payments to the district, Fitch noted.
Standard & Poor’s raised its rating on the district’s water revenue bonds to AAA from AA in 2009.
In a protracted legal case filed in 2007, the TRWD is seeking the right to buy water from Oklahoma and pipe it to the Dallas-Fort Worth area. The 10th U.S. Circuit Court of Appeals in Denver last year ruled against the district, which is preparing an appeal to the U.S. Supreme Court.
A Supreme Court ruling on interstate water rights could have a profound effect in the region, where water is scarce.
In September, the appellate court ruled that an agreement known as the Red River Compact protects Oklahoma from any claims on its surface water.
The 10th Circuit also ruled against another plan to sell water to North Texas. The court ordered a federal district court to dismiss a lawsuit by the town of Hugo, Okla., which had challenged the Oklahoma Water Resources Board’s ban on the sale of water to the Dallas suburb of Irving.
“Water is an important resource that is vital to Oklahomans, and my office will continue to defend our state’s interests,” Oklahoma Attorney General Scott Pruitt said in a statement.
The Red River compact that includes Texas, Oklahoma, Arkansas, and Louisiana gives states the right to discriminate against interstate commerce rules since all states entered into the agreement with approval from Congress.
The TRWD argued that the water flowed into the Red River, the border between Texas and Oklahoma where the states share water.
