The Texas City of San Antonio's $3.4 billion Vista Ridge pipeline PPP is the largest water PPP to reach financial close in the US to date, it is also the only water deal to have closed in the country in 2016. Overall by value, the deal is among the largest PPPs to have been financed in the US this year, just a shade behind the $4 billion LaGuardia Airport Terminal redevelopment PPP, which was the largest PPP transaction to close in US in 2016.

Vista Ridge's financing also eclipsed that of other notable US water PPP transactions including the $922 million Carlsbad Desalination Plant PPP  and the $172 million Rialto water and wastewater facilities PPP, both based in California and closed within months of each other in 2012. That said, the average deal volume for the US water PPP sector has remained thin, with less than a handful having been brought to the market to date and reached financial close. This has largely been the case due to the relative lack of federal financing support for the sector as compared to some others, like transportation.

However the expectation is that the successful procurement and financing of the Vista Ridge pipeline, despite some sponsor-led challenges, will provide a good template to enable other cities and counties in bring water infrastructure projects to market.

 Ownership shuffle

The San Antonio Water System (SAWS), procurement authority for the project on behalf of the city, had originally named the majority-Abengoa-led Vista Ridge consortium as preferred bidder for the project in July 2014 with final approval granted in November of the same year. This came less than a year prior to the onslaught of financial instability and looming bankruptcy for the Spanish renewables developer in late 2015.

Abengoa had suffered several years of declining performance, after its highly ambitious renewables programme failed to produce the gains it had anticipated, which eventually led the company to report insolvency in the final months of 2015. The Spanish government then gave the company four months until early 2016 to come up with a new, viable financial restructuring plan, under Article 5 of the Spanish Insolvency Law.

In March 2016, while experiencing ongoing troubles and trying to reach agreements with its creditors to reach a restructuring plan it also filed for Chapter 15 bankruptcy protection in the US. A US judge granted bankruptcy protection to Abengoa in April 2016. Against this background, in line with its strategy to rearrange its debt, Abengoa also reached an agreement to hand over 80% equity ownership in Texas' Vista Ridge water pipeline PPP to Garney Construction, reducing its own equity stake to 20% and becoming a ‘silent’ partner in the project.

The SAWS board formally approved this change in equity ownership for the project on 18 May 2016. Garney Construction, a Kansas City, Missouri-based company, had been part of the original Vista Ridge consortium but as a minority shareholder and construction partner. While the company had never developed a PPP or built a project of this scale before, it had a reputable financial position and a 20-year working relationship with SAWS, both of which calmed the nerves of lenders. Moreover Garney financed project-level equity on balance sheet which was also partly supported by a letter of credit backed by Commerce Bank.

Contractual rates

Water PPPs are often controversial for the impact they may have on the prices consumers pay for water under a private developer-owner. However, a notable highlight of the transaction was that SAWS and the private sector consortium were able to lock contractual rates on the pipeline projected to save SAWS ratepayers upward of $500 million over the project's 30-year concession lifecycle. The new fixed price as a result of the interest rate lock - (capital & raw groundwater unit price) is set at $1,606 per acre-foot.

Once operational, the new water plant will deliver 168,970m3 per day of water (50,000 acre-feet per year) through a 225km pipeline. The project involves new production wells, pumping stations, raw water collection, storage tanks and a 142-mile pipeline to deliver the new water supply. The water will be delivered from the Carrizo and Simsboro Aquifers in Burleson and Milam Counties, located northeast of Austin, Texas. The project will support the growing water demand of an additional 20,000 San Antonians every year.  The project is an essential water resource to a growing, water constrained city with recurring stage 4 droughts, providing 20% of the city’s water - enough for 162,000 families.

All costs of construction and right-of-way acquisition are being covered by privately raised debt and equity capital. No public funds from the city will be used to build the project. SAWS will pay only for the water that is actually delivered and for certain associated operating and maintenance expenses once the project has been built and is operating. Construction on the pipeline is scheduled to commence in early January 2017 with commercial operations expected to begin by April 2020.

Capital markets

While both previously closed Californian water PPP project sponsors tapped the capital markets for debt financing, Vista Ridge was financed entirely in the bank market, raising $852 million, alongside $75 million in sponsor equity. The seven-strong lending club (ING, Credit Agricole, Societe Generale, Korea Development Bank, CoBank and Commonwealth Bank of Australia) was brought together by Japanese lender SMBC who also served as coordinating lead arranger and structuring agent for the financing. The lenders provided an approximately 5-year non-recourse project loan in one of the largest syndicated bank financings of a greenfield PPP project to date. The mini-perm term-loan is tailed by a long-dated swap. The debt also covered repayment of a guaranteed bridge loan of $120 million that Abengoa's US subsidiary had taken out as part of the original deal in July 2015 to pay for the development costs.

The debt was priced at a tight 175bp over LIBOR, according to sources close to the transaction, taking advantage of a favourable interest rate environment. The project sponsors plan to tap the capital markets in the next 18 to 24 months for a bond issue to refinance the debt during the project's construction phase, as exclusively reported by IJGlobal previously. A timeline for the bond issue has not been set yet. The financing is testimony to the lending group gaining comfort in Garney's capabilities as a construction and financing partner on a deal for the first time. The transaction was further enhanced by the AA rating of the offtaker SAWS and being low demand risk on the back of guaranteed water supply.

Advisers

Societe Generale was financial adviser for the consortium, while Husch Blackwell was legal counsel. Milbank, Tweed, Hadley & McCloy was legal adviser to the lenders and INTECH Risk Management was their insurance adviser.