Deal Struck to Move Forward with Pipeline

Last fall, the financially troubled Spanish company whose subsidiary contracted with San Antonio to build a massive water pipeline entered into the early phases of bankruptcy proceedings. Utility and city officials insisted that the Abengoa S.A.’s fiscal difficulties would not derail a project they say is key to the city’s long-term water security.

For now, it looks like they will be able to keep that promise by signing off on a near takeover of the 142-mile Vista Ridge pipeline by a different company, one that critics say has little experience with project financing.

The San Antonio Water System knew all along that Abengoa’s financial difficulties could upend the project, CEO Robert Puente now says. But the utility believes it wrote the Vista Ridge contract with enough safeguards to protect its interests.

This week, the Seville-based company’s subsidiary, Abengoa Vista Ridge, announced it had struck a deal to sell 80 percent of the project, and all its decision-making authority, to its primary construction contractor, Kansas City-based Garney Construction.

Abengoa would become a silent, 20 percent equity partner while Garney would take the lead on the design, construction and financing of the $884 million pipeline. It is supposed to deliver up to 16.3 billion gallons of water per year to San Antonio from a well field in Burleson County starting in 2020, expanding the city’s water supply by 20 percent.

The deal, which Puente says is subject to approval by the water system's board, had been in the works since early this year. In February, Abengoa Vista Ridge Director Pedro Almagro told the board that it was behind on payments to project vendors and was seeking an 80 percent equity partner to pick up that share of the $82 million it had agreed to pay into the project. (It planned to finance the remainder.)

About three months earlier, a debt-ridden Abengoa S.A. filed for creditor protection in Spain trying to avoid full-on bankruptcy. At the time, Puente emphasized that Abengoa Vista Ridge was “financially independent and legally separate from the holding company,” saying “that means the San Antonio Vista Ridge project will continue to move forward.”

But in an interview this week, Puente said the city-owned utility knew things could go south with Abengoa from the very beginning, so it included protections in its contract including a $2 million early termination fee. The utility had no way of knowing exactly how bad things were getting with the company, he said, because of laws prohibiting insider trading.

"The fact remains that when we walked in and reached an agreement with them, yes, we knew they ran a business model that was very risky, and that’s why we had a contract that would protect us from any kind of situation that would arise because of their potential financial problems and, in fact, that’s what happened,” he said. “It’s not fair to second guess, with 2016 eyes, what was happening in 2011, 2012, 2013 and ultimately 2014 when we signed this contract.”

Abengoa told the utility about the 80-20 contingency plan just after it filed for creditor protection, he said. Under Spanish law, it has four months — until March 28 — to reach an agreement with creditors.

Abengoa’s financial standing began eroding in summer 2014, around the same time the city council unanimously approved the SAWS-Abengoa contract. The vote followed a period of indecision that saw SAWS staff recommend against the project, then change its mind after Abengoa asked it to reconsider.

The company’s financial troubles are far from the only reason the Vista Ridge project has garnered such fierce opposition, however. Opponents have questioned whether the city really needs the water and whether the Carrizo-Wilcox Aquifer will physically be able to provide it. There’s also the possibility that the local groundwater conservation district will cut off the water if the pumping adversely impacts the aquifer or other users — a big fear for Burleson County landowners, who have protested the project.

The utility's response has centered on the terms of its contract with Abengoa Vista Ridge, which agreed to assume all risk so San Antonio ratepayers wouldn’t be on the hook for undelivered water. The average customer will, however, see water rates increase by 50 percent by 2020 to pay for debt service, which will total $3.4 billion over 30 years. SAWS will own the pipeline by 2050.

In taking over the project, Garney has agreed to assume the same risk, Puente and San Antonio Mayor Ivy Taylor have emphasized.

“Vista Ridge is, in fact, less risky now than it has ever been,” Taylor said Tuesday in her State of the City address.

“This agreement does not change the price of the water to be delivered or alter the risk profile of the existing contract,” she said in a statement to the Tribune, noting the utility will provide a “full briefing” on the change “well in advance of SAWS’ projected board consideration.”

Asked why the city initially didn't seek a more financially stable partner, Puente said no other companies responding to the original request for proposal wanted to assume the risk, or had secured rights to the water.

Ron Nirenberg, a councilman who has been critical of the pipeline project, said he can support the Garney takeover if ratepayers are protected. However, he also is pushing a resolution that would give council the final signoff on the deal rather than the utility's board.

“I’m cautiously supportive,” he said. “Abengoa has long caused me concerns for a number of reasons, but I think that we need to make sure that we bring it to council to determine the details.”

Puente said he is “very comfortable” with Garney taking control of the project because SAWS has worked extensively with the company for 20 years. The firm is involved in three utility projects, including building a 28-mile stretch of pipeline to deliver water from SAWS’ brackish groundwater desalination plant to the city.

But critics have been quick to point out that, despite Abengoa’s deteriorating financial status, it had far more experience with financing and other components of a large-scale project than Garney, whose main focus is construction.

“Maybe they’re capable, maybe they’re not. I don’t know,” said Amy Hardberger, an assistant professor of water law at St. Mary's University who has fiercely opposed the project. There are a lot of other things involved — like condemning land — and Hardberger said she wonders “if they’re in a position to be managing all those parts.”

Garney is a smaller firm than Abengoa — national rather than global — that brought in $610 million in total revenue in 2015, according its website. 

But Puente said Garney is seeking help from companies with more experience and “all of the financial-type issues they are not necessarily familiar with.”

Garney President and CEO Mike Heitmann said in an emailed statement that “Garney has built a solid financial foundation with a $1.5 billion bonding capacity. The safety and security of the Vista Ridge Project will be backed by dual sureties with top rankings from insurance and credit rating agencies.”

Garney’s 80-percent equity stake — $65 million — “will be provided from Garney’s balance sheet," he said, while “the construction financing is being provided by a consortium of banks being led by Sumitomo (SMBC).”

The company plans to pursue a low-interest loan from the Texas Water Development Board that SAWS and Abengoa had applied for before the Garney deal was announced, Heitmann said.

Disclosure: The San Antonio Water System was a corporate sponsor of The Texas Tribune in 2012 and 2013. A complete list of Tribune donors and sponsors can be viewed here.