Capital Financing Plan for
Fiscal Year 2022
-
23 Nikolai J. Sklaroff
Capital Finance Director
Business Services
September 27, 2022
1 • Large outstanding debt portfolio and significant projected f
uture debt issuance and credit needs
• Activities guided by Commission Policy
• Debt Management Policies and Procedures, updated
N
ovember 2019
• Capital Financing Policy, adopted March 2017
• Debt Service Coverage Policy, adopted March 2017
• Revenue Bond Oversight Committee (RBOC)
• Annual Capital Financing Plan
• Provides the Commission visibility regarding upcoming c
apital financing activity
Debt Management
2 Water Wastewater Power
Revenue Bonds $4.7B $2.1B $160M
SRF/WIFIA Loans*
• Executed
• Drawn
$373M
129M
$1.5B
115M
-
-
Tax Credit Bonds - - $5.2M
Commercial Paper
• Authorized
• Drawn
$500M
206M
$750M
380M
$250M
40M
Ratings
Long-Term Aa2/AA- Aa2/AA AA/AA-
Short-Term P-1/A-1 P-1/A-1+ F1+/A-1
3 *State Revolving Fund (SRF) / Water Infrastructure Finance and Innovation Act (WIFIA) Loans SFPUC Debt Portfolio
New Money/Credit Needs
• Issue debt to meet ongoing enterprise capital requirements • Regular monitoring/analysis of how much and when funds are needed Administration of Existing Debt Portfolio
• Renew or replace bank credit facilities for Interim Funding Commercial Paper (CP) Programs
• Increase program authorization, when needed
Market Opportunities
• Active monitoring of credit markets
• Execute debt refundings for ratepayer savings
• Limited by tax-exempt advance refunding repeal
Capital Financing Activities
4 Historical Interest Rates
• SFPUC has benefited from
m
any years of very low
interest rates
• 2022 Fed actions to control
i
nflation are raising rates
quickly
• Rising rates already
af
fected Commercial Paper,
but not outstanding fixed
rate bonds
• Future fixed rate bonds will
be
at higher rates
5Source: Montague DeRose and Associates, SFPUC financial advisors Projected Fed Hikes and Rates
6 Source: Montague DeRose and Associates, financial advisors to the SFPUC FY 2022-23 Capital Financing Plan
7 Activity Size
Comm
Action Closing
1. Wastewater - Water Infrastructure
Finance and Innovation Act (WIFIA) Loan
Agreement - Resilience Projects
$618m Q2 FY23 Q2 FY23
2. Water - Clean Water State Revolving
Fund (SRF) amended Loan Agreement -
Westside Recycled Water Project
$4.9m increase to
$191m total Q2 FY2023 Q2 FY2023
3. Wastewater - two Clean Water SRF
Loan Agreements:
• Wawona
• Treasure Island $100 - $200m
$22 - $45m
as soon as
2/2023
as soon as
2/2023
4. Wastewater – Revenue Bonds issuance up to $775m Q3 FY2023 Q3 FY2023
5. Water – Revenue Bonds issuance up to $425m Q3 FY2023 Q4 FY2023 Note: Dates and amounts are approximate and subject to change.
FY 2022-23 Capital Financing Plan
8 Activity Size
Comm
Action Closing
6. Power – Revenue Bond issuance Up to $110m Q4 FY2023 Q1 FY2024
7. Wastewater & Power - renewal or
replacement of bank credit facilities for
interim funding programs
CleanPowerSF Credit Agreement –
Amend credit agreement
$125m - Power
$100m-Wastewater
Up to $20m
increase to $40m
total
2/2023
2/2023
5/2023
3/2023
4/2023
5/2023
Note: Dates and amounts are approximate and subject to change. 9 Questions
OUR MISSION: To provide our customers with high-quality, efficient and reliable water, power and sewer services in a manner that values environmental and community interests and sustains the resources entrusted to our care.
Page | 1
Financial Services - Capital Finance Group
525 Golden Gate Avenue, 4th Floor
San Francisco, CA 94102
Date: September 27, 2022
To: Commissioner Anson Moran, President
Commissioner Newsha Ajami, Vice President
Commissioner Sophie Maxwell
Commissioner Tim Paulson
Through: Dennis Herrera, General Manager
From: Nikolai Sklaroff, Capital Finance Director
Subject: Fiscal Year 2022-23 Capital Financing Plan
BACKGROUND
Each of the San Francisco Public Utilities Commission’s (SFPUC) enterprises has a sizeable outstanding debt portfolio to manage. In addition, successful execution of the SFPUC’s Capital Plan requires an effective and efficient approach to the issuance of new debt financing. This Capital Financing Plan memorandum provides the Commission advanced notice of planned FY 2022- 23 debt transactions, as guided by Commission approved “Debt Management Policies & Procedures”, last updated November 2019
1. The following table summarizes the outstanding debt and credit ratings of each enterprise:
1 https://sfpuc.org/sites/default/files/about-us/policies-reports/DebtManagementPolicy_9819.pdf
Memo: Fiscal Year 2022-23 Capital Financing Plan
September 27, 2022
Summary of Enterprise Debt
(as of August 1, 2022)
Water Wastewater Power
Debt
Revenue Bonds and
Notes $4.7B $2.1B $160.0M
SRF or WIFIA
Loans2
• Executed
• Drawn
$373M
129M
$1.5B
115M
-
-
Tax Credit Bonds - - $5.2M
Commercial Paper
• Authorized
• Drawn
$500M
206M
$750M
380M
$250M
40M
Credit Ratings3
Long-Term
• Moody’s
• S&P
• Fitch
Aa2
AA-
-
Aa2
AA
-
-
AA
AA-
Short-Term
• Moody’s
• S&P
• Fitch
P-1
A-1
-
P-1
A-1+
-
-
A-1
F-1+
Giv
en the size, number and complexity of the capital financing transactions, as well as long lead times to generate the required documentation, staff develops and provides this annual capital financing plan. This plan not only provides the Commission visib ility on planned future capital financing activity, but also serves as a planning tool for staff. Each time staff returns to the Commission for approval of a capital financing transaction, it will update the progress relative to this plan.
2 State Revolving Fund (SRF)/ Water Infrastructure Finance and Innovation Act (WIFIA) Loans 3 Updated ratings available from Moody’s Investors Service (www.moody’s.com), S&P Global Ratings (www.spglobal.com) a nd Fitch Ratings (www.fitchratings.com). In addition, CleanPowerSF received an A2 issuer rating from Moody’s in December 2020, however the CleanPowerSF Program currently does not have any debt outstanding Memo: Fiscal Year 2022-23 Capital Financing Plan
September 27, 2022
This is the seve nth annual Capital Financing Plan being presented to the Commission. Last year’s Plan described six capital financing transactions. Five transactions w ere successfully closed in FY22 and based on shifting interest rate dynamics one transaction was rescheduled and closed in early July 2022.
The completed transactions were as follows:
Description
Transaction
Size
Commission
Action Closing
1. Water - Drinking Water SRF Loan for Mountain
Tunnel Project
$238M
12/2021
2/2022
2. Wastewater – 2021 Series A and 2021 Series B
Revenue Notes (Green Notes) $348M 10/2021 11/2021
3. Wastewater – 2021 Series A (SSIP)(Green
Bonds) and 2021 Series B (Non-SSIP) Revenue
Bonds
$298M 10/2021 11/2021
4. Power – 2021 Series A (Green Bonds) and
2021 Series B Revenue Bonds $124M 11/2021 12/2021
5. Wastewater – 2022 Series B Refunding $137M 4/2022 7/2022
6. Water, Wastewater & Power - Approve renewal
or replacement of bank credit facilities for interim
funding programs
• Wastewater
• Water
• Power
• Wastewater
• Water
• Wastewater
$75M
$100M
$125M
$100M
$200M
$75M
12/2021
12/2021
2/2022
5/2022
5/2022
6/2022
1/2022
1/2022
3/2022
6/2022
6/2022
7/2022
Transaction group #6 above is comprised of six credit facility amendments or replacements that support the Interim Funding Programs of the Water and Wastewater Enterprises and Commercial Paper Program of the Power Enterprise. The expiring bank credit facilities were either renewed or replaced with lower cost facilities . Transaction #5 above was not originally in the proposed FY22 Capital Financing Plan, but the SFPUC subsequently Memo: Fiscal Year 2022-23 Capital Financing Plan
September 27, 2022
successfully sold $137M in Wastewater Refunding Bonds which closed on July 6, 2022 resulting in $12M in debt service savings over the life of the bonds.
The current Capital Finance Plan has been developed amid a dramatic change in interest rate dynamics as the Fed has taken unprecedented actions to curb inflation by instituting a series of rate hikes (2.25% increase over four meetings). While the market expects significant further hikes in September 4 and November, there is no market consensus on where rates will end up in the second half of the fiscal year
5. The Capital Finance team will work with its
advisory team to continue to adapt debt management plans amid this rapidly shifting market to try to achieve optimal ratepayer outcomes.
The capital financing plan is also being prepared in the midst of complex dynamics affecting construction, including supply chain issues and inflationary pressures on a wide variety of materials and supplies. The Capital Finance Team has compiled and analyzed spending year -to-date, against budgeted spending, to further inform this plan.
FY 2022-23 CAPITAL FINANCING PLAN
This Memorandum sets forth the Capital Financing Plan for FY 2022-23 b ased on capital needs outlined in the 10-Year Financial Plan presented to the Commission at its February 8, 2022 meeting. The plan calls for the SFPUC to undertake revenue bond transactions for the Water, Wastewater and Power Enterprises; execute two new State Revolving Fund (“ SRF”) loan agreements for the Wastewater Enterprise to fund the Wawona Area Stormwater Improvement project and Treasure Island Wastewater Treatment Facility Project; execute a new WIFIA Loan agreement to fund Wastewater Enterprise Resilience Projects ; and renew , replace or amend bank credit facilities supporting CleanPowerSF, the Wastewater Enterprise, and the Power Enterprise. However, based on further spending it appears likely that while Wastewater and Water financing will be required this year, the Power financing may be able to be deferred into the next fiscal year. The proposed capital financing transactions can be categorized as follows:
A. New Money/Credit Needs – By policy, the SFPUC finances each respective enterprise capital plan through a combination of cash and debt financing, including the issuance of bonds, notes, and loans . New expenditures are typically financed first with interim financing, such as commercial paper. Periodically, the SFPUC enters the debt market to raise funds through the issuance of bonds or notes for “new money” capital needs, or to secure borrowing from State and Federal programs or through bank facilities. Based on the 10-Year Capital Plan, all three enterprises are currently anticipated to require additional new money borrowing (transactions 4 , 5 and 6 in the table below), however the
4 The Fed is schedule to meet September 20-21, 2022, following the submission of this memo. 5 While rate expectations are shifting rapidly, as of August 9, 2022, the market was expecting significant (75 and 50 basis point) increases in September and November, with a lack of market consensus on rate direction thereafter.
Memo: Fiscal Year 2022-23 Capital Financing Plan
September 27, 2022
Capital Finance team will closely monitor actual project spending and will only proceed with a bond sale when appropriate based on spending needs and borrowing conditions.
B. Administration of Existing Debt Portfolio – Once issued, SFPUC bond transactions require substantial maintenance to ensure the investors, rating agencies and other creditors are receiving timely on- going disclosure, to ensure the SFPUC is complying with covenants in the respective financing documents and to ensure debt service and all associated fees are paid on time. The SFPUC’s debt portfolio also requires renewal or replacement of existing bank credit facilities or other forms of interim funding supporting the interim funding programs of the Water, Wastewater and Power Enterprises. Please note that while bonds are typically issued for 25-30 years, interim funding is outstanding for a much shorter timeframe.
C. Market Opportunities – M unicipal bonds, including the SFPUC’s, are typically issued with serialized maturities. For example, a 30-year bond may be issued with as many as 30 different annual maturities with interest slightly higher on each successive maturity. As time passes – even without any changes in general interest rates – bonds can typically be refinanced before maturity with few original bonds remaining outstanding for the full term. Additionally , bond interest rate changes may afford the SFPUC even greater opportunities to refund debt to achieve debt service savings. The Capital Finance team, with the assistance of its external legal and financial advis ors, continues to monitor the SFPUC’s debt portfolio to execute potential refinancing transactions within the constraints established under the existing obligations, prevailing tax law and SFPUC debt policy . These obligations are brought to the Commission for approval to be issued on either a tax exempt or taxable basis to provide the optimal refinancing results.
Guided by the latest revisions to the Commission-adopted 10-Year Capital and Financial Plans, as well as internal capital financing modeling tools and spending projections provided by each Enterprise, the transactions in the table below include a description of the proposed transaction, approximate size, and the projected timing of Commission action and transaction closing. Detailed descriptions of the transactions are provided in the following section.
Memo: Fiscal Year 2022-23 Capital Financing Plan
September 27, 2022
FY 2022-23 Capital Financing Plan6
Commission Action Description
Transaction
Size ($million)
Commission
Action Closing
1. Wastewater - Approve Water Infrastructure
Finance and Innovation Act (WIFIA) Loan
Agreement - Resilience Projects
$618
Q2 FY2023
Q2 FY2023
2. Water - Authorize Clean Water State
Revolving Fund (SRF) execution of amended
Loan Agreement - Westside Recycled Water
Project
$4.9 increase to
$191 Q2 FY2023 Q2 FY2023
3. Wastewater- Approve Clean Water SRF
Loan Agreements:
• Wawona
• Treasure Island
$100 - $200
$22 - $45
as soon as
2/2023
as soon as
2/2023
4. Wastewater – Authorize Revenue Bonds to
refinance outstanding commercial paper
and/or provide other new money
up to $775 Q3 FY2023 Q3 FY2023
5. Water – Authorize Revenue Bonds to
refinance outstanding commercial paper
and/or provide other new money
up to $425 Q3 FY2023 Q4 FY2023
6. Power – Authorize Revenue Bonds to
refinance outstanding commercial paper
and/or provide other new money
up to $110 Q4 FY2023 Q1 FY2024
7. Wastewater & Power - Approve renewal or
replacement of bank credit facilities for interim
funding programs
CleanPowerSF Credit Agreement – Amend
credit agreement
$125 - Power
$100-
Wastewater
Up to $20
increase to $40
total
2/2023
2/2023
5/2023
3/2023
4/2023
5/2023
6 Dates and amounts are preliminary and subject to change.
Memo: Fiscal Year 2022-23 Capital Financing Plan
September 27, 2022
Market Dependent Refinancing Opportunities:
Commission Action Description
Transaction
Size ($million)
Commission
Action Closing
8. Wastewater - Authorize Remarketing or
Refunding of 2018 Wastewater Revenue
Bonds (either in conjunction with the issuance
of the 2023 Wastewater Revenue Bonds or
on a standalone basis, depending on
prevailing market conditions)
$179
Q3 FY 2023 (in
conjunction
with #4 or
Standalone by
Oct 2023)
Q4 FY 2023
or Q1 FY
2024
TRANSACTION DESCRIPTIONS
The following describes the planned capital financing transactions:
1. Approve WIFIA Loan, Wastewater Enterprise’s Resilience Projects:
The Commission will be asked to approve a loan agreement with the U.S.
Environmental Protection Agency (EPA) for a WIFIA loan under the federal Water Infrastructure Finance and Innovation Act of 2014. The SFPUC submitted a Letter of Interest to the EPA in July 2021 for a WIFIA loan in the amount of $618M to fund 49% of the cost of SFPUC Wastewater Capital Plan Resilience Projects (WW Resilience Projects).
The WIFIA loan is expected to provide low -cost funding for this project versus issuing revenue bonds as well as offer flexible repayment structures to the SFPUC. The loan rate will be the U.S. Treasury 30-Year Bond interest rate at the time of entering into the loan plus 0.01% . Based on rates from May 2022, the WIFIA interest rate would be approximately 1.00% lower than the revenue bond interest rate. The loan will also be paid over 35 years, instead of the 30- year revenue bond repayment term, with repayment beginning five years after completion of project construction.
2. Authorize Clean Water State Revolving Fund (SRF) Loan Agreement, Westside Recycled Water Project : In connection with the extended construction contract for the Westside Recycled Water Project and in order to take advantage of potential additional eligible Project expenditures that may be reimbursed the Commission will be asked to authorize the General Manager to enter in to amendments to the Installment Sale Agreement & Grant, increasing the loan amount by $4,874,031 for a new total not to exceed agreement amount of $191,094,031 and extension of the agreement’ s stated estimated construction completion.
Memo: Fiscal Year 2022-23 Capital Financing Plan
September 27, 2022
3. Approve Two Wastewater State Revolving Fund Loan Agreements, Wawona and Treasure Island:
It is anticipated that as soon as February 2023 the Commission may be asked to approve an Installment Sale Agreement with the State Water Resources Control Board (SWRCB) for a low -cost Clean Water State Revolving Fund (SRF) loan for the Treasure Island Wastewater Facility and Wawona Street Stormwater Improvement Project that are expected to be in the range of $100M-200M and $22M-24M, respectively, with final loan amounts subject to review and negotiation with the SWRCB on eligible project costs allowable for SRF funding. The loans would be the SFPUC’s ninth and tenth loan under the State’s Clean Water SRF Loan Program.
The loans are expected to be 30-year fixed rate loans, with the interest rate set by the SWRCB near the time of loan execution, with execution expected to occur as early as February 2023 . The loans will be payable from the net revenues of the Wastewater Enterprise, and will be secured on a parity l ien basis with the Wastewater Enterprise’s outstanding revenue bonds , two existing federal USEPA WIFIA loans, and the seven other Clean Water SRF loans that have been entered into with the SWRCB since 2015 by the Wastewater Enterprise.
4. Authorize Revenue Bonds for Wastewater Enterprise – Q3 2023 The Commission will be asked to approve a $775M Revenue Bond transaction for the Wastewater Enterprise during the third Quarter. The 2023 Wastewater Revenue Bonds are expected be sold as conventional fixed rate, 30-year bonds, and will be issued to refund outstanding Commercial Paper that has been issued to interim finance portions of the Wastewater Enterprise’s capital improvement program. Sale of the Bonds is expected to be closed by the end of the fiscal year.
5. Authorize Revenue Bonds for Water Enterprise – Q3 2023 It is anticipated the Commission will be asked to approve a $425M Water Revenue Bonds transaction during the third Quarter. The 2023 Water Revenue Bonds are expected to be sold as conventional fixed rate, 30-year bonds, and will be issued to refund outstanding Commercial Paper that has been issued to interim finance portions of the Water Enterprise’s capital improvement program.
Sale of the Bonds is expected to be closed by the end of the fiscal year June 2023 or early FY2024.
6. Authorize Revenue Bonds for Power Enterprise – Q4 2023 The Commission will be asked to approve a $110M Power Revenue bond transaction in the fourth Quarter of Fiscal Year 2023. The transaction will refund outstanding Commercial Paper providing interim funding of the Power Enterprise’s capital improvement program. Sale of the bonds is expected to close the first quarter of FY2023-24.
7. Approve Renewal or Replacement of Bank Credit Facilities for Wastewater Interim Funding Program and Power Commercial Paper Program, and CleanPowerSF Credit Agreement – Various Dates During FY 2022-23, the Commission will be asked to approve the renewal or replacement of several expiring bank credit facilities for the Water and Memo: Fiscal Year 2022-23 Capital Financing Plan
September 27, 2022
Wastewater Enterprise Interim Funding Programs and Power Commercial Paper Program.
The SFPUC plans to seek proposals through a competitive solicitation process from a pre-qualified pool of bank credit facilities. The solicitations will be for the renewal or replacement of the expiring credit facilities. The credit facilities may be either letters of credit or liquidity facilities that support a CP Program, or direct bank loans (i .e., revolving credit agreements). The below table summarizes the expiring bank credit facilities and when Commission action is anticipated to approve the renewal or replacement of each:
Summary of Expiring Bank Credit Facilities
7 Additionally, the SFPUC may be negotiating certain amendments to the existing CleanPowerSF $20M JP Morgan Credit Agreement. Among the proposed amendments would be a possible $20M increase to the Credit Agreement (to $40M total) to meet anticipated updated f inancial security requirements to be implemented by the California Public Utilities Commission in early 2023.
8. Authorize Remarketing or Refunding of 2018 Wastewater Revenue bonds – Q3 2023 to Q4 2024
Either in conjunction with the issuance of the 2023 Wastewater Revenue bonds or on a standalone basis, depending on prevailing market conditions, the 2018 Wastewater Revenue Bonds, Series C, will need to be remarketed or refunded prior to October 2023, but could be accomplished earlier if market conditions are advantageous. The bonds were issued with a 5-year fixed rate, with a first optional redemption date in April 2023 and a mandatory tender in October 2023. Sale of the remarketing or refunding bonds is expected to close by October 2023.
7 Preliminary; subject to change.
Description Enterprise/
Series Amount Expiration Commission
Action
Sumitomo Mitsui Bank
Letter of Credit
Power
Series A-2 $125M 3/2023 2/2023
Bank of America
Letter of Credit
Wastewater
Series A-2 $150M 4/2023 2/2023