San Francisco's wastewater debt gets positive outlook
The San Francisco Public Utilities Commission received a rating outlook bump as it embarks on a $2.9 billion plan to upgrade its sewer system.
Moody's Investors Service moved its outlook from stable to positive and affirmed the San Francisco PUCs Aa3 rating ahead of a deal in which the commission will sell $587 million of 2018 series A, B and C wastewater revenue bonds. The series A is for $221.9 million, series B for $185.1 million and series C for $180 million, according to the preliminary offering statement.
The city will also finance its sewer improvements through a $699 million loan from the Environmental Protection Agency – to which Moody’s also assigned an Aa3 rating.
“The rating assignment reflects the PUC's strong current and projected liquidity and debt service coverage driven by multi-year rate increases amid an exceptionally large and wealthy service area,” Moody’s analysts wrote in a report issued Thursday. “These factors are counterbalanced by an already large capital program and debt burden, which will with grow substantially with the current issue.”
The series A and B bonds will be sold as 30-year fixed-rate bonds while the series C bonds will be sold as long-term variable rate debt. The series A and C bonds have also been labeled green bonds because they help fund environmentally friendly improvements to the utility’s sewer system, according to the utility.
The limited obligation bonds, which are secured through rates collected by the wastewater system, will be sold in a negotiated sale. JPMorgan is the senior underwriter for the series A and B bonds while Citi is the senior underwriter for the series C bonds.
The Public Utilities Commission has approved $2.9 billion in projects as part of phase 1 of its plan to modernize its aging facilities and pipes. Its full plan calls for $7 billion in improvements over 20 years involving 70 projects.
One of the biggest projects is a $1.3 billion rebuilding of one of the city’s three sewer treatment plants. The facility built in 1952 is its largest and treats 80% of the city’s waste.
The project, approved by the utility in March, will replace the outdated solids treatment process with modern technology; remove digesters away from residences and reduce odors; utilize 100% of the biogas to generate heat and power to support the plant; and treat biosolids to reduce more pathogens so they can be used as fertilizer or compost, according to a press release from the utility.
The EPA loan – through the federal Water Infrastructure and Finance Act – will cover 49% of the project costs and at rate lower than bond financing, according to the utility.
The WIFIA program provides low-cost loans and loan guarantees to water and wastewater projects. San Francisco is the largest recipient of funds from the program in its inaugural outing in which a dozen projects were selected, according to its press release.
The bonds are scheduled to be priced this week, according to a report to the commission.
Stradling, Yocca, Carlson & Rauth and Curls Bartling are the co-bond counsel. Montague DeRose and Associates LLC and Hilltop Securities are the municipal advisors.