San Francisco Selling $335M to Fund Capital Plan

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SAN FRANCISCO — The San Francisco Public Utilities Commission will enter the market next week with $335 million of new-money bonds as part of a major 10-year capital plan that will be mostly funded by debt.

The city agency will sell fixed-rate revenue bonds with maturities out to 30 years via a competitive sale Tuesday morning, and officials expect strong demand for the double-A-minus-rated credit.

“We think we are going to come out strong — there has just been a lot of investor interest in our bonds,” said Todd Rydstrom, the SFPUC’s assistant general manager and chief financial officer.

The sale will be the first time the commission has been in the market with new-money sewer revenue bonds since 2010.

Last week, the utility sold $194 million of revenue refunding bonds in an oversubscribed negotiated deal led by Citi, grabbing average interest rates of around 1.2% on maturities out on average four and half years, according to SFPUC debt manager Richard Morales.

Morales said they expect to snag average interest rates of around 3.5% to 4% “if not lower” on next week’s sale. Public Resources Advisory Group is financial advisor.

The SFPUC’s revenue bonds sold in 2010 at an interest rate of 5% and price of 107% of par that mature in 2029 last traded on Jan. 31 in the secondary market at a yield of 2.55% and a price of 116%.

The money raised from the sale will go towards funding the major upgrades to San Francisco’s sewer system, which is part of a 10-year capital improvement plan that will spend $5.3 billion.

In May the SFPUC sold $686 million of revenue bonds, also out to 30-year maturities, to pay for seismic upgrades to its water system, also part of its long-term construction plan.

San Francisco has raised rates to pay for capital program, which was approved by voters in 2002. It will need to revisit raising rates next year.

The commission’s focus on infrastructure increased after the 1989 Loma Prieta earthquake, which damaged infrastructure across the Bay Area region. The Hetch Hetchy water system crosses or runs next to three major fault lines.

The average monthly bill for San Francisco residents for both sewer and water is $82 a month on average, according to Rydstrom.

San Francisco’s sewer rates have increased in each fiscal year since fiscal 2005, rising by an average amount of 8.6% through fiscal 2013. Another 5% increase is projected for fiscal 2014, with an average annual rate increase of 9% projected for fiscal years 2015 through 2021, according to Moody’s.

The utility’s revenue bonds are rated AA-minus by Standard & Poor’s and Aa3 by Moody’s Investors Service, both with stable outlooks. In 2010, S&P upgraded the SFPUC from A and Moody’s raised it from A2.

Moody’s said debt service coverage should remain strong assuming commission continues to raise rates.

“The rating is derived from the SFPUC’s satisfactory fiscal position, improving volumes, and debt service coverage that should remain stable given anticipated rate increases which are expected to offset the burden of additional debt issuances,” Moody’s said in its report last month.

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