Financial Policy Review: Debt Service Coverage and Capital Financing Policies

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1 Services of the San Francisco Public Utilities Commission Financial Policy Review: Debt Service Coverage and Capital Financing Policies 2018 Water and Sewer Rates Study Citizens Advisory Committee February 21, 2017 Charles Perl, Deputy CFO 1

2 Agenda 1. Financial Policy Review Context 2. Debt & Capital Financing Context 3. Capital Financing Policy 1. Pros and Cons of Revenue vs Debt Funding 2. Policy Considerations 3. Peer Group Study Findings 4. Debt Service Coverage Policy 1. What is Debt Service Coverage? 2. Policy Considerations 3. Peer Group Study Findings 5. Discussion 2

3 Introduction Financial Policy Review Financial sustainability is a key goal of 2020 Strategic Plan Off-budget year allows the SFPUC to set fiscal guidance through the review of Commission-level policies Financial policy review will impact rates set during 2018 Water & Sewer Rate Study Financial policies represent best practices, and support: Prudent financial management Continuous, stable service during periods of volatility (i.e. drought, natural disaster, economic instability) Organizational accountability Consistent decision-making Strong bond ratings 3

4 Introduction Financial Policy Review: Timeline Financial advisors have completed a peer survey and recommendations to inform our decision-making Policy Fund Balance Reserves Policy Capital Financing Policy (New) Debt Service Coverage Policy (New) Debt Management Policies & Procedures Rates Policy Ratepayer Assurance Policy Advisory Bodies Review Dates CAC: January 17 RBOC: February 13 RFB: February 17 CAC: February 21 RBOC: March 3 RFB: March 10 RBOC: March 3 RFB: April 7 Commission Review Date February 28 March 28 April 25 RFB: April 7 May 23 4

5 Introduction Debt & Capital Financing Context The SFPUC has major 10-Year Capital Plans for all enterprises: Enterprise FY Water $ 1,316,893,000 Wastewater $ 5,617,676,000 Hetch Hetchy $ 1,012,691,997 SFPUC TOTAL $ 7,947,260,997 SFPUC Finance s goal is to fund these projects in a way that maximizes value and mitigates ratepayer impact We can pay for these through revenue or debt funding: Revenue funding = use of current rate revenues to pay for a project (aka Pay-as-you-go ) Debt funding = loans given to the SFPUC ( debt issued by the SFPUC ) to fund its capital projects 5

6 Capital Financing Policy Pros and Cons of Revenue vs Debt Revenue Funding: Generally used for projects with recurring and predictable funding requirements, i.e. repair and replacement (R&R) Saves money by eliminating financing costs and the need for reserves Can cause rate spikes and put pressure on affordability Causes current ratepayers to pay for the entire project Debt Funding: Generally used for major improvements and one-time large projects, such as a dam, with significant expenditure requirements and long useful lives Has added interest and reserve requirement costs to the ratepayer Enables a long payback period and more gradual rate increases Spreads the costs of a project with long-term benefits across generations (intergenerational equity) 6

7 Capital Financing Policy Peer Group Study Findings Average capital plan for Peer Group is $1.8B 14 agencies have policies that target specific funding mix between debt and revenue funding Most similarly rated agencies fund approximately 1/3 of their capital from revenues The revenue-funded portion of the SFPUC s current 10- Year Capital Plan is: 44% for Water 16% for Wastewater 18% for Hetch Hetchy Financial advisors recommend targeting revenue funding at minimum of 20% over planning period 7

8 Debt Service Coverage Policy What is Debt Service Coverage? Debt Service = annual payment of principal and interest on bonds issued by the SFPUC When we issue bonds, we make promises to the bondholders to meet certain financial targets so they can know we will able to pay them back An important metric is debt service coverage, which measures how much money is left to pay debt service after we have covered operating expenses RRRRRRRRRRRRRRRR EEEEEEEEEEEEEEEE = NNNNNN RRRRRRRRRRRRRRRR DDDDDDDD SSSSSSSSSSSSSS = DDDDDDDD SSSSSSSSSSSSSS CCCCCCCCCCCCCCCC Example calculation for FY Water Enterprise ($M) $532.2 $237.1 = $295.1 =

9 Debt Service Coverage Policy Policy Considerations Coverage of 1.0 means you pay for O&M, and then pay debt service, and then have no money leftover Why aim higher? If you are already close to 1.0 and then you get less revenue or more expenses than planned, you might drop below it and then you have to use reserves (or you can t pay your bills!) Extra money can either go to reserves or be used to pay for revenue-funded capital projects High coverage looks good to rating agencies, and if they give us a higher rating we can get lower interest rates on future debt Why aim lower? Collecting extra money means higher rates 9

10 Debt Service Coverage Policy Peer Group Study Findings Majority of agencies have coverage targets ranging from 1.10 to 1.60 Rating agencies look for 1.20 to 1.70 to maintain AA credit rating Current SFPUC practice is to target a minimum of 1.0 coverage; no formal policy Coverage in current 10-Year Financial Plan is: 1.11 to 1.28 for Water 1.27 to 2.98 for Wastewater 1.3 to for Hetch Hetchy Financial advisors recommend phasing in Debt Service Coverage Policy of

11 Discussion 11

SFPUC Debt Management. Eric Sandler CFO / AGM Business Services November 30, 2016

SFPUC Debt Management. Eric Sandler CFO / AGM Business Services November 30, 2016 SFPUC Debt Management Eric Sandler CFO / AGM Business Services November 30, 2016 Agenda Debt management overview 2016 AB refunding bonds 2 SFPUC Enterprise Debt Overview Summary of Enterprise Debt Programs