• Sales and Trading

Shifting the Shape of Water in Texas

Morgan Stanley is helping the Texas Water Development Board keep the water spigots flowing for the Lone Star's booming population.

In the land of big country, oil, cattle and the Dallas Cowboys, the most valuable commodity in Texas may be as basic as water.

Like many other Southwestern states, Texas struggles to meet the growing demand for water from its agricultural and industrial sectors. But it’s the projected surge in its population over the next 50 years that could turn a chronic problem into a calamitous shortage, if nothing is done to increase its water supply. At close to 30 million people1, Texas is bigger than Australia, and one of the fastest-growing states in the U.S. by population. The Texas Water Development Board (TWDB) projects there will be 51 million Texans by 20702. Water shortages could grow by 87%3 between now and then, according to projected worst-case supply scenarios.

Meeting that future demand will take more than 5,000 water projects scattered across the state, the Texas Water Development Board (TWDB) estimates, ranging from digging wells in small towns to building vast networks of pipelines and canals to connect metropolises like Houston to reservoirs.4

Paying for all of this is no mean feat for the thousands5 of local utilities responsible for carrying them out. To make it affordable, the TWDB is using its clout as a State-owned entity, to raise some $27 billion6 and lend it to them. “It’s not just a matter of raising those funds, but doing it in a way that doesn’t drastically increase the cost of these water projects, and the cost of water for everyone,” says Richard Weiss, an Executive Director in Morgan Stanley’s Public Finance group. “This is a situation where size really does matter.”

The Bigger the Better

Weiss is referring to the magnitude of TWDB’s bond issues. Larger deals tend to feature more easily traded maturities that are more attractive to investors, hence, better-priced for issuers. One catch: The municipal-bond market rarely sees deals that big. Yet, in late September, Morgan Stanley underwrote a $1.1 billion bond issue for TWDB.  The offering was just 1-of-19 munibond transactions to exceed  the $1 billion mark7 during the year.

The size of the deal helped the TWDB  save local utilities about $198 million8 on the cost of their water projects. “The more money utilities save, the higher the savings passed along to their customers,” says Weiss.

Every last dollar of savings can be quantified, because whatever the TWDB pays for its bonds dictates the rates it charges on its loans to local utilities.  “The more attractive the price on TWDB loans, the greater the ability for utilities to undertake the water projects,” Weiss adds.

The Cost of Doing Nothing

Texans have learned that the costs of not addressing the State’s water problems can be extreme. One of the factors that exacerbated Hurricane Harvey’s devastation of the Houston area in August was subsidence, the term used to describe land that's sinking because of ground water being pumped out of underground acquifers.  Subsidence increases an area’s vulnerability to flooding.

While this sinking can’t be reversed, new water projects are underway to prevent further erosion of ground water levels. Part of the TWDB’s $1.1 billion in newly raised funds will help fund the $350 million Luce Bayou project, which  involves five different regional Texan water authorities working together, to build 26 miles of pipes and canals. The objective is to channel surface water from the Trinity River to Lake Houston, to provide cleaner water to more people in Houston and to reduce the area's reliance on pumping water out of the ground.

The $1.1 billion deal Morgan Stanley underwrote is just a beginning. The TWDB hopes to issue more such “jumbo” munibonds. “The expectation is that the TWDB will become one of the biggest issuers in the muni market over the next decade,” says Weiss. “We have started the process of nurturing a loyal following of retail and institutional investors. If TWDB follows the right issuance strategy, these investors will remain loyal throughout. Soon there will be no doubt in anyone’s mind that it’s water, not oil, that is the most precious resource in Texas.”