California City Warns of Default on $13 Million in Bonds

The Northern California city of Hercules may default on $13 million it borrowed to upgrade its electrical system if bondholders don’t agree to tender the bonds at 90 percent of par value, according to the city manager.

Hercules, a city of 26,000 about 18 miles (29 kilometers) northeast of San Francisco, plans to retire the bonds this month following its agreement to sell its power system to PG&E Corp. (PCG)’s Pacific Gas & Electric unit for $9.5 million, Finance Director Nickie Mastay said in a statement.

The city’s public financing authority issued $13.2 million in bonds in 2010 to improve its power system and build a substation. The Hercules Municipal Utility project never made money for the municipality, City Manager Phil Batchelor said March 28 in a bondholder notice, because of lower-than-expected population growth. The city has covered debt service with unspent bond proceeds, he said.

“The financial drain of subsidizing the HMU and debt service on the bonds is undermining the city’s efforts to recover from a substantial structural deficit and avoid insolvency,” Batchelor said in the notice.

To contact the reporter on this story: James Nash in Los Angeles at jnash24@bloomberg.net

To contact the editors responsible for this story: Stephen Merelman at smerelman@bloomberg.net Pete Young, Jeffrey Taylor

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