New Issue: MOODY'S ASSIGNS Aa3 RATING TO SAN FRANCISCO PUBLIC UTILITIES COMMISSION'S WATER REVENUE BONDS

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New Issue: MOODY'S ASSIGNS Aa3 RATING TO SAN FRANCISCO PUBLIC UTILITIES COMMISSION'S WATER REVENUE BONDS

Global Credit Research - 08 May 2012

APPROXIMATELY $4.7 BILLION IN DEBT AFFECTED SAN FRANCISCO PUBLIC UTILITIES COMMISSION, CA Water Enterprise

CA

Moody's Rating

ISSUE RATING

Water Revenue Bonds, Series 2012A Aa3

Sale Amount $584,000,000 Expected Sale Date05/09/12

Rating Description Revenue: Government Enterprise

Water Revenue Bonds, Series 2012B Aa3

Sale Amount $15,000,000 Expected Sale Date05/09/12

Rating Description Revenue: Government Enterprise

Water Revenue Refunding Bonds Series 2012D Aa3 Sale Amount $26,600,000

Expected Sale Date05/09/12

Rating Description Revenue: Government Enterprise

Water Revenue Refunding Bonds Subseries C-1 2012 Aa3 Sale Amount $24,200,000

Expected Sale Date05/09/12

Rating Description Revenue: Government Enterprise

Water Revenue Refunding Bonds Subseries C-2 2012 Aa3 Sale Amount $70,300,000

Expected Sale Date05/09/12

Rating Description Revenue: Government Enterprise

Moody's Outlook STA

Opinion

NEW YORK, May 08, 2012 --Moody's Investors Service has assigned an Aa3 rating to the Public Utilities

Commission of the City and County of San Francisco's (SFPUC) Water Revenue Bonds 2012 Series ABCD. Our outlook on the SFPUC's long-term, water enerprise ratings is stable. At this time, we have also affirmed the Aa3 rating on the Commission's outstanding water revenue debt.

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RATINGS RATIONALE

The rating assignment reflects the SFPUC's narrow but stable fiscal position, including low but steady debt service coverage levels. Our assessment of the commission's credit quality also includes the SFPUC's sound water supply, healthy projected rate increases, and generally strong service area. The bonds are secured by the SFPUC's pledge of net water revenues.

STRENGTHS

-Healthy supply of low cost water -Large and generally stable service area -Significant recent and projected rate increases

-Amendment to wholesale water rate-setting allowing for mid-year adjustment, for FY 2011-12 CHALLENGES

-Continued declines in water demand

-Significant rate increases needed to maintain lower than typical coverage levels -Substantial debt load with additional borrowing to come

DETAILED CREDIT DISCUSSION

NARROW BUT STABLE FISCAL POSITION CONSISTENT WITH EXPECTATIONS

Audited fiscal 2011 operating results provided 1.13 times coverage of total debt service by net revenues alone. This is consistent with management's projections of 1.15 times coverage by net revenues. Though a low level of coverage, this stabilization is a departure from the material decline in coverage by net revenues undergone in the previous two fiscal years. Fiscal 2011 debt service coverage inclusive of reserves, as permitted by the indenture, equaled a significantly stronger 1.96 times debt service.

The SFPUC has had to contend with a five year trend of declining water sales which is expected to moderate in the coming years. In response to this trend and significant capital needs, SFPUC has steadily raised rates, a pattern that that we anticipate will continue allowing the SFPUC to generate narrow but stable operating results.

Fiscal 2011 represented a solid rebound from the weak operations in fiscal 2010 as the SFPUC underwent a $30 million increase in total revenues while expenses fell by $16 million to produce the largest operating surplus since fiscal 2007.

SIGNIFICANT AND REGULAR RATE INCREASES SHOULD GENERATE STABLE THOUGH NARROW COVERAGE BY NET REVENUES ASSUMING FLAT WATER CONSUMPTION

As it has in the past, the SFPUC expects to continue to implement regular rate increases for both its retail and wholesale water customers. These increases should enable the utility to generate narrow but steady coverage by net revenues. This projection assumes that water consumption over the next several years remains flat relative to fiscal 2011. In the event that consumption is unexpectedly weak, SFPUC would likely adjust rates as needed to maintain adequate coverage as permitted by its wholesale water contract.

Retail water rates, which apply to City of San Francisco customers, are approved through 2014 including 12.5% in 2013 and 6.5% in 2014. Additional increases are projected but not approved through fiscal 2017. These includes increases of 15% in 2015 and 12.5% in fiscal 2016 and 2017. Water rates to the SFPUC's 27 wholesale

customers are also expected to rise by 11.4%, 7.2% 16.6% and 10.7% in each respective year from fiscal 2013 to 2016.

This rate management strategy results in projected, average debt service coverage by net water revenues of 1.29 times through 2017, a marginal improvement over the previous expectation of 1.26 times through 2016 during our last review. This includes an expected 1.32 times coverage in fiscal 2012. Coverage in the current fiscal year rises to 1.50 times including reserves and averages 1.50 times through 2017, with fiscal 2012 being the low point. The coverage level including reserves is still fairly weak for the rating level given than the median coverage level for Moody's rated water utilities approximates two times by net revenues alone. Though narrow, we anticipate that the SFPUC will maintain steady operations to produce results that do not materially differ from those described here.

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HIGHLY LEVERAGED SYSTEM WITH VERY LARGE CAPITAL PLAN AND SIZEABLE DEBT ISSUANCE STILL TO COME ; SOLID CAPITAL PLAN MANAGEMENT AND MODEST VARIABLE RATE DEBT

The SFPUC's overall debt load is a credit weakness with a high level of additional borrowing still to come. The SFPUC's debt ratio is very high at 127%, a mark well above the median for Moody's-rated water enterprises. The debt will remain significantly elevated given expected issuances of $553 million and $163 million in 2014 and 2015 respectively. Despite the significant size and scope of the capital plan, the SFPUC has generally kept its project schedule on time and on budget, which underscores the strength of the SFPUC's management team. The time and cost effectiveness of the capital management is more impressive given the size and complexity of many of the projects.

The SFPUC has $174 million in outstanding commercial paper. The CP is supported by to two liquidity facilities, one with JP Morgan (Aa1 rating under review for possible downgrade) and another with U.S. Bank (Aa2 Negative Outlook). Each of these facilities expire in June 2014. In the event of a failed remarketing, the CP would mature over a five year term, which would present a significant but likely manageable challenge for SFPUC given its current and projected cash position. The SFPUC also has a letter of credit from Bank of America (A2 rating under review for possible downgrade) . However, the SFPUC has not issued any CP backed by this LOC nor does it have any current plans to do so.

SOLID WATER SUPPLY POSITION DESPITE BELOW AVERAGE PRECIPITATION THUS FAR IN 2012 The SFPUC derives 85% of its water from the rain and snow runoff of the Sierra-Nevada Mountains. This runoff feeds the Tuolumne River and collects in the Hetch Hetchy reservoir. Various other Bay Area reservoirs provide the remainder of the system's water with only a minimal level of supply being produced by local groundwater. The Hetch Hetchy reservoir water is very clean and therefore requires only a minimal level of treatment. The quality of the water allows the SFPUC to be one of only a few large water systems that is exempt from federal filtration requirements, which allows the system to maintain low treatment costs. The reservoir benefitted from strong precipitation in 2011 that has bolstered the reservoir levels against below average precipitation in 2012. The SFPUC expects its reservoirs to be full by year's end. In addition to supplying water, the SFPUC generates hydroelectric power from water used to meet supply obligations and any excess water that flows into the Tuolumne River system. The SFPUC also operates the sewer system for the City of San Francisco. Future water demand is expected to grow at an average annual rate of less than 1% through 2030.

LARGE AND GENERALLY STABLE BAY AREA SERVICE TERRITORY

The SFPUC's greater Bay Area service area is large and encompasses approximately 2.5 million people including residents of the City of San Francisco. San Francisco's 800,000 residents represent the retail segment of the SFPUC's water sales activity. Nearly 70% of the SFPUC's customers are served by wholesalers who receive their water from the commission. Half of the SFPUC's 27 wholesale customers receive 100% of their water from the SFPUC, which helps to bring an element of stability and predictability to water sales revenue. These wholesalers are located in the counties of Alameda, Santa Clara, and San Mateo, which are generally areas of large and diverse economies with positive prospects for long term growth and stability. That said, in the near to mid-term, these areas are undergoing the impacts of the economic recession, which broadly includes elevated

unemployment, lower home prices, and decreased volumes of economic activity that have been recently showing signs of modest improvement.

LOWER THAN TYPICAL RATE COVENANT AND RESERVE REQUIREMENT

The SFPUC's rate covenant and reserve requirement continues to be lower than standard. The SFPUC rate covenant stipulates that rates must be sufficient to provide 1.25 times debt service coverage by net revenues and any available fund balances. This is materially weaker than the more standard provision that 1.25 times coverage be achieved by net revenues alone. The utility uses the less robust legal standard as a means to lessen the financial cost impact to ratepayers. Given the sometimes unpredictable demands of San Francisco ratepayers, this may be useful tactic in maintaining positive public relations and smoothing the path for future rate increases.

However, the provisions somewhat undermine bondholder security and lessen the credit quality of SFPUC's water system relative to other credits with a similar credit profile, but more standard legal stipulations.

OUTLOOK

The stable outlook reflects our expectation that despite narrow margins, the enterprise will exercise its ability to adjust rates and its budget to maintain an adequate fiscal position.

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WHAT COULD CHANGE THE RATING -UP

-Material and sustained improvement of debt service coverage by net revenues -Stabilization of water demand

-Significantly larger and sustained unrestricted reserves WHAT COULD CHANGE THE RATING-DOWN

-Continued deterioration in debt service coverage by net revenues -Material additional declines in water demand

KEY STATISTICS

Net working capital as % of current revenues: 54.1 Fiscal 2011 coverage by net revenues: 1.13 times

Fiscal 2011 coverage including unbudgeted balance: 1.96 times Projected fiscal 2012 coverage by net revenues: 1.32 times

Projected fiscal 2012 coverage including unbudgeted balance: 1.50 times Debt Ratio: 127%

The principal methodology used in this rating was Analytical Framework For Water And Sewer System Ratings published in August 1999. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Information sources used to prepare the rating are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources.

However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

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Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

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Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Analysts Michael Wertz Lead Analyst

Public Finance Group Moody's Investors Service Eric Hoffmann

Backup Analyst Public Finance Group Moody's Investors Service Contacts

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