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CITY COUNCIL AGENDA REPORT
City of Anaheim
PUBLIC UTILITIES DEPARTMENT
DATE: NOVEMBER 28, 2023
FROM: PUBLIC UTILITIES DEPARTMENT
SUBJECT: ELECTRIC AND WATER UTILITY REVOLVING CREDIT
AGREEMENT WITH WELLS FARGO BANK, N.A.
ATTACHMENT (Y/N): YES ITEM # 33
GOVERNMENT CODE § 84308 APPLIES: NO
RECOMMENDATION:
That the City Council, by Resolution:
1) Approve, authorize, and direct the execution, delivery, and performance of the Amended and Restated Revolving Credit Agreement (Agreement) between Wells Fargo Bank, National Association (Wells Fargo) and the City of Anaheim (City), including the execution, issuance, and delivery of the Electric System Notes and the Water System Notes in a maximum principal amount not to exceed $100 million; and
2) Authorize and direct the Mayor, City Manager, Public Utilities General Manager, the City Clerk, and other City officers, employees, or agents to take any and all actions necessary or advisable to consummate the transactions contemplated by the Agreement.
DISCUSSION:
At its meeting on October 25, 2023, the Public Utilities Board recommended that the City Council approve these actions.
Anaheim Public Utilities (APU) has maintained a $100 million revolving credit facility, otherwise known as a line of credit (LOC), with Wells Fargo since 2013. APU has historically used the LOC to augment its operating or capital reserves so that it would not need to keep large financial reserves and instead, maintain affordable customer rates. Following a competitive solicitation, the proposed five-year $100 million Agreement (Attachment 2) is recommended to replace the existing three-year LOC that expires on January 1, 2024. APU currently has no outstanding balance on the current LOC.
The current and proposed LOC is secured through utility rates and therefore limited to electric and water utility purposes only and is not available for other non-utility purposes such as General Fund operating or capital expenses. The new term will Electric and Water Revolving Credit Agreement with Wells Fargo Bank, N.A.
November 28, 2023
provide liquidity support through the end of 2028. APU has judiciously used the LOC in the past to accelerate APU’s exit from the San Juan Generation Station, a coal-fired power plant, and future uses contemplated include:
Covering APU’s costs of a large unforeseen event, such as infrastructure damage, or replacement energy or water costs caused by a large natural disaster or other catastrophic event;
Providing APU a capital bridge funding mechanism to allow for either grant reimbursements or optimal timing to issue bonds, when necessary, to take advantage of low interest rates as they arise, and not force APU to issue bonds at less than optimal times;
Providing additional liquidity to undergird APU’s credit ratings, currently at “AA+” for Water and “AA-” for Electric, which, in turn, minimizes borrowing costs for necessary reliability investments.
Using a Request for Proposal (RFP) process, APU requested bids for a revolving line of credit or similar instrument. Four firms responded to the RFP with various terms and pricing structures. The respondents included: Wells Fargo, JP Morgan Chase, PNC Bank, and Bank of America.
The current LOC provided by Wells Fargo has a three-year term with a 0.30% commitment fee. Wells Fargo’s bid to provide a five-year revolving LOC facility with a lower commitment fee ranked highest as a result of its favorable terms and pricing structure. Wells Fargo’s proposal of five years was the longest and least expensive of all proposals, and Wells Fargo has provided the LOC for the past eleven years with no issues associated with its implementation or usage during the term.
For context the proposals from the various banks are summarized in the table below and ordered based on commitment fee and price:
Bank Term Commitment Fee Tax-Exempt Draw Rate
Wells Fargo 5 years 0.27% 80% of SOFR + 0.64%
PNC Bank 2 Years 0.30% 80% of SOFR + 0.88%
Bank of America 3 Years 0.45% 80% of SOFR + 0.89%
JP Morgan Chase 5 years 0.55% 80% of SOFR + 1.27%
The Standard Overnight Financing Rate (SOFR) is a benchmark daily variable interest rate based on a calculation by the Federal Reserve (Fed) of various variable interest rates found in the repurchase market as established by the London Interbank Offered Rate (LIBOR) Act of 2022, is currently 5.31%. Based on the current SOFR, a tax- exempt draw on the proposed LOC would cost APU 4.90% (80% of SOFR + 0.64%) and would change as SOFR changes. The proposed LOC would also include a 0.27% fixed-rate commitment fee on any undrawn portion of the $100 million total capacity (capped at $270,000 per year), which is a 0.03% ($30,000) drop from the current LOC.
Wells Fargo will only charge the 0.27% on the available balance, so if APU draws money from the LOC Wells Fargo will charge the 80% of SOFR plus 0.64% rate and not the commitment fee.
Electric and Water Revolving Credit Agreement with Wells Fargo Bank, N.A.
November 28, 2023
Analysis and Mitigation of Financial Risks
Although the LOC has provided necessary flexibility over the past eleven years, APU conducted an in-depth analysis of potential risks associated with continuing a revolving LOC with a bank, as well as associated mitigation strategies. These risks include counterparty risk, renewal risk, and exposure to variable rate borrowing. The following is a brief explanation of how APU will mitigate these risks.
Counterparty Risk – A revolving LOC subjects APU to the credit worthiness of the financial institution providing the LOC. Should the financial institution become insolvent, APU could lose its access to liquidity if the LOC is terminated. APU weighed this risk in its evaluation of RFP bidders and selected Wells Fargo which is a highly rated domestic bank with credit ratings of A+/AA-/Aa2 from Standard and Poor’s, Fitch, and Moody’s, respectively.
Renewal Risk – This short-term funding option has a term of five years. APU recognizes the risk that at the end of the five-year term, market conditions may not be optimal for APU to seek a new LOC Therefore, APU will continue to monitor the market for financial options on an ongoing basis and, in particular, leading up to the LOC expiration date. Should APU determine that a new LOC is not advantageous, APU would seek to reduce any outstanding balance, should there be any, through a combination of other financing instruments with the intent to maintain financial health necessary to continue providing essential water and power services to the community. At all times, APU retains the right to repay the outstanding balance of this Agreement and significantly reduce its exposure to these risks with no pre-payment penalty.
Variable Interest Rate Risk – The outstanding balances of a short-term funding vehicle will carry interest rates that are variable in nature. Therefore, APU would be subject to changes in short-term interest rates. However, APU will not engage in any hedging program of these interest rates. Given that it is already prudent practice for utilities of APU’s size and nature to have an asset versus liability management plan, APU’s modest financial reserves would provide a natural hedge for any variable borrowing, as those funds are also at risk to short-term interest rates. In other words, as interest rates go up, earnings on financial reserves go up, offsetting a portion of the increased cost of the borrowings.
While APU is not in the business of predicting interest rates, it should be noted that the Fed has signaled it intends, for the foreseeable future, to keep short-term rates higher than it has in the past ten years as it continues to mitigate inflationary pressures. This posture by the Fed means that APU will carefully analyze any potential draw as compared to alternative options. However, access to LOC funds ensures that APU has ample liquidity to properly respond to the many challenges facing the utility industry.
As previously mentioned, APU reserves the right in the Agreement to repay any outstanding balance at any time.
Electric and Water Revolving Credit Agreement with Wells Fargo Bank, N.A.
November 28, 2023
Controls and Oversight
The LOC is secured by APU revenues and may be used only for utility purposes. There is a cap of $100 million on the Agreement, which is less than 10% of APU’s total on and off-balance sheet debt, which will therefore limit APU’s exposure to this type of variable rate debt.
In terms of expenditures that may require APU to use the LOC, capital projects are identified and budgeted through the City’s annual Capital Improvement Program (CIP) and subject to review and recommendation by the Public Utilities Board and approval by the City Council. APU would bring back to City Council for authorization any significant operating expenditures in excess of the approved budget with appropriate justification for a budget amendment resulting from an unforeseen emergency or catastrophic event. Power transactions are subject to internal risk management protocols developed in the aftermath of the Energy Crisis of the early 2000s to mitigate the potential for market manipulation.
APU recommends approval and seeks authorization to enter into the proposed Agreement with Wells Fargo for a revolving LOC as part of its overall strategy to maintain high quality service by investing in local infrastructure and preparing for unforeseen emergency situations, while maintaining utility rates that are affordable for customers. The LOC provides a hedging mechanism to maintain APU’s current liquidity, financial health, credit rating, and its ability to effectively and economically serve Anaheim’s customers.
IMPACT ON BUDGET:
Sufficient funds for the cost of the Agreement are included in APU’s Fiscal Year 2023/24 restricted budget. Funding for subsequent years is subject to City Council approval of budget appropriations.
Respectfully submitted,
Dukku Lee
Public Utilities General Manager
Attachments:
1. Resolution
2. Amended and Restated Revolving Credit Agreement
3. Revolving Credit Agreement