SAN FRANCISCO — The San Francisco Public Utility Commission will hit the market with $686 million of revenue bonds as it continues to raise billions for a seismic upgrade of its water system.
The agency will sell fixed-rate bonds with maturities out to 30 years via a competitive sale Tuesday, and officials expect strong demand for the double-A-minus rated credit.
“I think you will see very aggressive bidding on our sale next week,” said Todd Rydstrom, SFPUC assistant general manager and chief financial officer. “We are in the market so much because of our [water] program — investors know us.”
Rydstrom said the deal is timed to meet cash needs for a $4.6 billion upgrade project and take advantage of funds becoming available due to bond redemptions and to be ahead of sales by the state of California.
The timing may be just right.
“The market is starved for size, and given the shortage of supply in California, our best guess is that the deal goes very well,” said Michael Pietronico, chief executive officer at Miller Tabak Asset Management in New York.
During their last deal in July of last year, SFPUC sold $720 million of bonds for the same project. The average interest cost across four series of 30-year bonds was 4.3%.
“I’m knocking on wood, hopefully it will be even stronger demand given there is so much money in redemptions right now in the hands of investors and portfolio managers,” Rydstrom said.
SFPUC officials have gone with competitive sales for the last several years because they feel they have been able to secure the best interest rates due to the utility’s strong and regular market name.
“We have had a very strong track record on selling on a competitive basis,” said SFPUC’s debt manager Richard Morales.
A small piece of the deal, $93 million, will be refunding bonds.
But $575 million of bonds backed by the utility’s water revenues is slated to help pay for SFPUC’s seismic upgrade of its Hetch Hetchy water system — one of 10 planned bond sales for the project.
The utility is about half way through the 86 projects involved in the upgrade that are expected to be finished by 2016. Rydstrom said the utility makes payments of between $5 million and $30 million a week to fund the upgrade.
“We are in the market frequently,” he said.
The biggest project funded by the bond issue will be fixing the Calaveras Dam in Santa Clara County. It will one of the first major dams SFPUC has rebuilt since the 1970s.
The system upgrade is financed from a ballot measure that voters passed in 2002. The measure laid out $5 billion of costs funded by increasing water rates from $13 a month in 2002 to around $40 to $42 a month by the time the project is finished in 2016.
The measure passed in the wake of 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.
SFPUC officials say they won’t be back in the market for the water system until 2014, but will be back this summer to raise money for the wastewater system.
Rydstrom said they are in the early stages of planning what may be a $6-7 billion construction program for the utility’s wastewater system over the next 15 years. The agency will also likely be selling refunding bonds in July, which may be a negotiated sale because of possibly shorter maturities.
The utility’s capital program requires the issuance of another $2.1 billion through 2015 after issuing $2.2 billion over the last two fiscal years, according to a Standard & Poor’s report earlier this month.
Standard & Poor’s rated the revenue bonds being sold this week AA-minus. Moody’s Investors Service assigned them a Aa3. S&P said SFPUC’s annual debt service is expected to climb to $400 million by 2024 from $70 million in 2010, reducing its coverage ratio to 1.4 times by 2016.
Moody’s analysts said ts rating “reflects the SFPUC’s narrow but stable fiscal position.”