Santa Fe, N.M., to seek purchase of water system with bond deal.

DENVER -- The city council of Santa Fe, N.M., last week unanimously passed a preliminary ordinance authorizing an $87 million bond issue that would allow the city to buy its water system from Public Service Co. of New Mexico.

Owning its own water system would give the city greater control over its growth, Santa Fe officials said. The purchase, already agreed to by both sides at a price of about $48 million, would end a century-long quest by the city to control its water supply.

A final vote by the city council is scheduled for June 29. The authorization would clear the way for an immediate financing thereafter, city officials said. City residents already voted in favor of the acquisition in May 1993.

"You can't develop and grow and approve subdivisions and annexation requests unless you've got water," said Fred Lopez, director of Santa Fe's finance management division. "The city's going to control growth in an orderly fashion. Water rates are already one of the highest in in Southwest."

In selling the water system to Santa Fe, Public Service Co. of New Mexico will be continuing its strategy of shedding lines of business that are not essential to power generation and delivery. Like other Southwest utilities, Public Service is struggling with financial commitments to large, expensive power-generating projects such as the Palo Verde Nuclear plant in Arizona.

The financing is scheduled even though the sale of the water utility has yet to be approved by the New Mexico Public Utilities Commission. Lopez said approval is not expected until December.

But the city and its financial advisers believe that interest rates are low now and may not last. Therefore, underwriters Smith Barney Inc. and Southwest Securities Inc. have devised a plan to sell covertible bonds that will be marked in July as general sales tax revenue bonds.

If the commission approves Santa Fe's request, Santa Fe will convert the bonds to specific revenue utility bonds. If the commission denies the request, the bonds will remain as general revenue pledges and be used for other city projects already in the public works program.

"We're interested in capping interest rates," Lopez said. "We feel interest rates are going up. Worst case scenario, if we don't get permission from the PUC to purchase the water system, we can always use that issue for our capital improvements program."

Chris Romer, a vice president at Smith Barney, said the deal has to be structured so the city can avoid the appearance of using the money as a hedge against higher interest rates. Such an appearance might result in the loss of the bonds' tax-exempt status, Romer said.

"We had to be very careful it's not a hedge," Romer said, adding that Santa Fe would pay "pretty much" book value for the water system, even though it has been a profitable operation for Public Service.

Negotiations began with Public Service asking $65 million for the system and Santa Fe countering with a $40 million offer before the parties settled on $48.2 million, Romer said.

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