An Introduction to Bonds
Presentation to the
Commission
Nikolai J. Sklaroff
Capital Finance Director
February 25, 2025
Agenda
1. SFPUC Debt Authority
2. Existing Debt Portfolio
3. Debt Issuance Plans
4. Relevant Policies
5. Bond Ratings
6. New Debt Issuance
7. Q&A
8. Further Information and Resources
2 Why Utilities Issue Debt
3 It’s Not Why You Might Think
- Public utility debt is fundamentally different than a ‘credit card’
Intergenerational Equity
- Current users don’t bear the full brunt of paying for assets to be used over several decades
- Debt prepayment is amortized over the useful life of the asset
Manage Rate Impacts of Large Capital Improvements
- Reduce significant rate increases
- Align rate increases with the useful life of the projects being financed
Advantages of Issuing Debt
4 The SFPUC accesses
‘advantaged financing’
Tax Exempt Bonds
Taxable Municipal Bonds
State Revolving Fund Loans
Federal Loans (like WIFIA) and Tax Credits /
Direct Pay Loans (like BABs)
The SFPUC Repays the
Obligations in Future Dollars
Bay Area Consumer Price Index (CP()
Annual Average Increase was 7.3%, 3.9%
and 4.0% in 2022, 2023 and 2024 according
to U.S. Bureau of Labor Statistics data
What is the real cost of repaying tax-exempt
debt issued with yields of between 3.00% to
5.00% locked in for 30 years?
SFPUC Capital Finance Uses Borrowing
to Make Needed Projects Possible Sooner and Lower Ratepayer Costs Debt helps SFPUC lock-in
construction costs, mitigating
the impact of future inflation
The California Construction Cost Index
shows construction costs increased 9.3% in
2023 and 9.4% in 2024.
What is the real cost of repaying tax-exempt
debt issued with yields of 3.00% to 5.00%
locked in for 30 years?
Debt Authority
• Legal authority granted by the
Commission and Board of
Supervisors to issue debt
(following slide)
• Establishes a maximum amount
of debt that can be issued by
respective enterprises, does not
obligate the SFPUC to issue debt
• Debt Authorization vs.
Appropriations
• Appropriations provide spending
authority for respective fiscal year
• Debt authority provides authority to
borrow for appropriated debt funded
projects 5
Legal Authority
• Proposition 13
• State Constitutional Debt Limit does not apply to enterprise debt, but Prop 218 imposes limits on rates and charges and a process for approving such rates
• Voter Approval
• City Charter
• BOS Authorization to Approve Revenue Bonds with Voter Approval (Section 9.107)
• Current Bonding Authority
• Proposition A (June 2018 Ballot) and Proposition E (November 2002 Ballot)
• City Charter Section 8B.124
• Notes, Commercial Paper or other forms of indebtedness approved by two-thirds of the BOS
• Ordinances effective 30 days after adoption and subject to Prop A and E Certificates
6 Debt Issuance Authority
• Each new Debt Issuance
is authorized by adoption
of a Commission
Resolution (pursuant to
authority of adopted BOS
financing ordinances)
• Actual Debt Issuance
depends on project
needs, Interim Funding
Program capacity and
market conditions
7 Comprehensive Planning Process
SFPUC conducts rolling annual long-term planning for
each Enterprise
– Allows for adaptive management
– Ensures long-term financial stability
– Addresses changed conditions impacting each enterprise – Results in dynamic capital planning
– Provides ability to project rates & charges and financial metrics Every February, the Commission adopts for each
enterprise:
– 10-Year Capital Plan
– 10-Year Financial Plan (including projected debt issuance plan) – Each enterprise also has a 2-year budget
Enterprise Debt Overview
9 *Includes only reimbursements that have been received. 0 1 2 3 4 5 6
Water
Wastewater
Power
Billions ($)
Borrowing by Enterprise
(as of February 1, 2025)
Public Market Revenue Bonds and Note Federal WIFIA Loans (Drawn) State SRF Loans (Drawn) NCREBs and QECB Certificates of Participation Commercial Paper (Drawn) Enterprise Debt Detail
10 *Includes only reimbursements that have been received.
Water Wastewater Power Total
Senior
Public Market Revenue Bonds and Note 4,496 3,396 279 8,171 Federal WIFIA Loans (Undrawn) - 668 - 668
Federal WIFIA Loans (Drawn) - 915 - 915
State SRF Loans (Undrawn) 169 55 - 224
State SRF Loans (Drawn)* 260 337 - 597
Subordinate
NCREBs and QECB - - 3 3
Certificates of Participation 86 23 12 120
Commercial Paper (Drawn) 274 - 137 411
5,285 5,392 431 11,108
Summary of Enterprise Debt ($ Million)
As of February 1, 2025
Debt Issuance Plans
• Projected Annual Par Amounts of Revenue Bond
Issuance by Enterprise from Commission Adopted 10-
Year Financial Plan, February 2025
• Assumes 30 year bonds with capitalized interest followed by level debt service, 6% borrowing rate.
11 ($M) FYE
2026
FYE
2027
FYE
2028
FYE
2029
FYE
2030
FYE
2031
FYE
2032
FYE
2033
FYE
2034
FYE
2035 Total
Water - $1,083 - - $1,045 - - $771 - - $2,899
Wastewater $931 - $1,733 - - - $1,739 - - $1,580 $5,982 Power - $496 - - $448 - - - $457 - $1,401
Total $931 $1,579 $1,733 - $1,493 - $1,739 $771 $457 $1,580 $10,282 Rating Agency Overview
• Who are they, what do they do, and how do
they do it?
• Ratings are assessed and assigned in
accordance with published rating
methodologies
12 SFPUC Enjoys High Ratings
13 ^Updated ratings available from Moody’s Investors Service (www.moody’s.com), S&P Global Ratings (www.spglobal.com) and Fitch Ratings (www.fitchratings.com).
†CleanPowerSF received an A2 issuer rating from Moody’s Investors Service in December 2020, however the CleanPowerSF Program currently does not have any debt outstanding
Long Term Credit Ratings
(Credit Outlook)
Moody’s
Investors Service
S&P
Global Ratings
Fitch
Ratings
Water
Enterprise
Aa2
(Stable)
AA-
(Stable)
--
Wastewater
Enterprise
Aa2
(Stable)
AA
(Negative)
--
Power
Enterprise
-- AA
(Stable)
AA-
(Stable)
CleanPowerSF† A2
(Stable)
-- --
14 Water Enterprise
Wastewater Enterprise
Power Enterprise
CleanPowerSF
*As of February 1, 2025
SFPUC Ratings*
Source of table: https://www.treasurer.ca.gov/cdiac/debtpubs/financing-guide.pdf SFPUC Credit Ratings
Changing Credit Landscape
• Moody’s Investors Services
• October 2024 - General
Obligation Bond Rating Lowered
from Aaa to Aa1 citing economic
impacts
• S&P Global Ratings
• December 2024 – General
Obligation Bond Rating Lowered
from AAA to AA+
• Negative Outlook
• Fitch Ratings
• April 2024 upgraded rating from
AA+ to AAA in December 2024 -
Reduced Outlook from Stable to
Negative
• Moody’s Investors Services
• January 2025 – Affirms A1 Rating
• Revised Outlook from Stable to
Positive
• S&P Global Ratings
• January 2025 – Raised long term
rating from A+ to AA-
• Rating is Stable
• Fitch Ratings
• January 2025 – Affirmed A+ rating
• Rating is Stable
Bond Covenants
Debt Service Coverage Policy
Indenture
Requirement
Policy
Target
Indenture Coverage1 1.25x 1.35x
Current Coverage1 1.00x 1.10x
Bond Covenants
(1)Indenture Coverage includes unappropriated fund balances. Current Coverage excludes unappropriated fund balances. Relevant SFPUC Policy Links:
SFPUC Debt Management Policy and Procedures - November 2019
Debt Service Coverage Policy - March 2017
Fund Balance Reserve Policy - February 2017
Capital Financing Policy - March 2017
City and County of San Francisco Debt Policy - May 2017 New Debt Issuance
• Types of Obligations
• Interim Financing/Commercial Paper Programs
• Revenue Bonds
• Water
• Wastewater
• Power
• State and Federal Loans
• State Revolving Fund Loans
• WIFIA Loans
• Other Programs
• Future: Alternative Financial Structures for Special Projects
17 Financial Team Members
• Role of Financial Advisors
• What is a “Municipal Advisor”
• What is an “IRMA” (Independent
Registered Municipal Advisor)
• Other Financing Team
Members
• Underwriters
• Attorneys: City Attorney’s Office, Bond Counsel, Tax Counsel, Disclosure Counsel, Other parties’ counsel.
• Team Members' Obligations to us
• Fiduciary
• Arms-length
18 Financial Team Members
19 Bond Underwriters
• Investment Banks
• Broker/Dealers and Bank Dealers
• Securities dealer which purchases
bonds from the issuer and resells
them to investors
• In doing so, the Underwriter
assumes a financial risk and
expects to make a profit on the
transaction
• The Underwriter does not have a
fiduciary responsibility to the
issuer, but rather works both for
the Issuer and for the investors
20 Method of Sale
• Competitive Sale or Public Bid
• Negotiated Sale
• Competitive RFQ/RFP
• Private Placements
• Bank Placement
• Considerations
• SFPUC Policies
• GFOA Best Practices
• Market Factors
• Refundings vs New Money
• Unique structures
• Rating considerations/risk factors
21 Offering and Other Documents
• Offering Documents
• Preliminary Official Statement
• Final Official Statement
• Offering Memorandum
• Commission Approved
Documents include:
• Preliminary/Final OS
• Trust Indenture
• Bond Purchase Contract
• Notice of Intention to Sell
• Official Notice of Sale
• Continuing Disclosure Certificate
• Additional refunding documents,
if applicable 22
Sustainable Financing
• ESG Disclosure
• Labeled Bonds
• Green Bonds
• Sustainability Bonds
• Green Bond Reports
• Advantages and considerations
• Regulatory Considerations
• Applicability of anti-fraud provisions
23 Bond Sale Process
Timeline SFPUC Activity
4-6 months before sale • Assemble Financing Team:
• Select municipal advisor
• Determine method of sale
• Issue RFP, if applicable
2-3 months before sale • Prepare offering documents
• Credit Rating Agency presentations
1-2 months before sale • Investor roadshow
• Finalize offering documents
• Commission Authorizes Bond Sale
<1 month before sale • Finalize structure based on market conditions • Post required notices
Day of Sale • Marketing and pricing of bonds
• Finalizing terms of sale and bond purchase
agreement (BPA)
• BPA mitigates interest rate risk to the SFPUC
during closing process
24 Closing Process
Timeline Activity
<2 Weeks after sale • Finalize official statement with pricing 2+ weeks after sale • Sign relevant certificates
• Bond Transaction Closes
• Bond Proceeds received by the SFPUC
• Within 30 days after sale, file notice with
the Board of Supervisors including the
final disclosure materials (Official
Statement)
1-2 months after sale • Present results of sale to the
Commission
25 SFPUC Official Statements
26 https://emma.msrb.org/IssueView/Details/P1418064
All Things Debt: SFPUC Website
27 https://sfpuc.org/about-us/reports/debt-management-and-disclosure-reports 28 Questions
Further Information
• California Debt Issuance and Administration Series for Elected Officials, published by the California Debt and Investment Advisory Commission https://www.treasurer.ca.gov/cdiac/seminars/elect-ed-landing.asp • City Charter Section 8B.124
https://codelibrary.amlegal.com/codes/san_francisco/latest/sf_charter/0- 0-0-845
• SFPUC on MSRB EMMA:
https://emma.msrb.org/IssuerHomePage/Issuer?id=6B9FF7C2B2B234BFE0 53151E6E0A1139
• SFPUC Debt Reports: https://sfpuc.org/about-us/reports/debt- management-and-disclosure-reports
• Investor Relations Page https://www.buysfwaterbonds.com/san-francisco- public-utilities-commission-bonds-ca/i3193
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