201 S. Anaheim Blvd.
Suite #1101
Anaheim, CA 92805
Tel: (714) 765-5173
www.anaheim.net
CITY COUNCIL AGENDA REPORT
City of Anaheim
PUBLIC UTILITIES DEPARTMENT
DATE: JULY 16, 2024
FROM: PUBLIC UTILITIES GENERAL MANAGER
SUBJECT: AUTHORIZE THE ISSUANCE OF NOT-TO-EXCEED
$380,000,000 AGGREGATE PRINCIPAL AMOUNT OF ANAHEIM
HOUSING AND PUBLIC IMPROVEMENTS AUTHORITY
REVENUE REFUNDING BONDS, SERIES 2024-A (ELECTRIC
SYSTEM) AND NOT-TO-EXCEED $65,000,000 AGGREGATE
PRINCIPAL AMOUNT OF ANAHEIM HOUSING AND PUBLIC
IMPROVEMENTS AUTHORITY REVENUE BONDS, SERIES
2024-A (WATER SYSTEM)
ATTACHMENT (Y/N): YES ITEM # 02-B
GOVERNMENT CODE § 84308 APPLIES: NO
RECOMMENDATION:
That the City Council, by Resolutions:
1) Authorize an issuance of not-to-exceed $380 million aggregate principal amount of Anaheim Housing and Public Improvements Authority (AHPIA) Revenue Refunding Bonds, Series 2024-A (Electric Utility Distribution System Refunding) (Electric Bonds) in accordance with the terms of the Indenture of Trust with AHPIA and the U.S. Bank Trust Company, National Association (Trustee); 2) Authorize an issuance of not-to-exceed $65 million aggregate principal amount of AHPIA Revenue Bonds, Series 2024-A (Water System Project) (Water Bonds) in accordance with the terms of the Indenture of Trust with AHPIA and the Trustee; 3) Approve the following documents in substantial form (collectively, the Bond Agreements):
a. Two Indentures of Trust with AHPIA and the Trustee, one each for the Electric Bonds and Water Bonds;
b. Two Installment Purchase Agreements with AHPIA, one each for the Electric Bonds and Water Bonds;
c. Two Purchase Contracts with AHPIA and Goldman Sachs & Co. LLC, as Underwriter, for the purchase and sale of the Electric Bonds and Water Bonds (collectively referred to as the Bonds);
d. Delivery of two Preliminary Official Statements, including their later Official Statements, one each for the Electric Bonds and Water Bonds; Authorize the Issuance of Not-to-Exceed $380,000,000 Aggregate Principal Amount of AHPIA Revenue Refunding Bonds, Series 2024-A (Electric System) and Not-to-Exceed $65,000,000 Aggregate Principal Amount of AHPIA Revenue Bonds, Series 2024-A (Water System)
July 16, 2024
e. Two Continuing Disclosure Agreements with the Trustee, one each for the Electric Bonds and Water Bonds, which require the City of Anaheim (City) to periodically provide certain financial information and operating data and notices of listed events;
f. A Dealer Manager Agreement with AHPIA and Goldman Sachs & Co.
LLC, as Dealer Manager, in connection with the tender for purchase or exchange of certain Bonds previously issued by AHPIA or the California Municipal Finance Authority (CMFA) for the City’s electric systems (collectively, the Prior Bonds);
g. Delivery of an Invitation to Tender Bonds by AHPIA and the City relating to the Prior Bonds;
h. A Remarketing Agreement with Goldman Sachs & Co. LLC, as Remarketing Agent, for the AHPIA Revenue Bonds, Series 2024-A (Water System Project);
i. A Reimbursement Agreement with AHPIA and Bank of America, N.A. providing for a letter of credit to support the Water Bonds; and j. A Fee Agreement with AHPIA and Bank of America, N.A. providing for the facility fee and other fees payable for commitments made under the Reimbursement Agreement; and
4) Authorize and direct the Mayor, City Manager, Finance Director, Public Utilities General Manager, Public Utilities Assistant General Manager – Finance and Energy Resources, and other City officers and officials to (a) execute and deliver the Bond Agreements with any de minimis changes that, as determined by the City Attorney’s Office, do not materially change the terms and conditions of the Bond Agreements and (b) take such actions as are necessary or advisable to complete the transactions contemplated by the Bond Agreements and to implement and administer the same.
DISCUSSION:
At its meeting on May 22, 2024, the Public Utilities Board recommended that the City Council approve these actions.
As a community-owned utility, Anaheim Public Utilities (APU) strives to provide electric and water service reliably, sustainably, and affordably for its customers. APU continues to make capital investments in Anaheim’s electric and water systems to maintain high service reliability, while financing such capital improvements through a combination of bond proceeds and cash flow generated from net operating revenue. This proactive strategy ensures that customer bills remain stable with increased service reliability.
Because current refinancing opportunities provide future interest rate savings while mitigating future interest rate risk, APU is proposing to refinance up to $380 million in older, more expensive debt. By refinancing this older debt, APU may save approximately $7.4 million in future interest payments, based on current market Authorize the Issuance of Not-to-Exceed $380,000,000 Aggregate Principal Amount of AHPIA Revenue Refunding Bonds, Series 2024-A (Electric System) and Not-to-Exceed $65,000,000 Aggregate Principal Amount of AHPIA Revenue Bonds, Series 2024-A (Water System)
July 16, 2024
conditions. The increased savings generated from the refinancings allow APU to continue investing in the replacement of its aging infrastructure before the end of its useful life when the cost to repair and/or replace increases and customer outages may last longer.
Additionally, this proposal includes approximately $65 million in capital investments for the water system, which include replacing aged pipelines to reduce the risk of costly pipeline repairs and improve service reliability, upgrading water pumping and regulating stations, and rehabilitating or replacing water system infrastructure including hydrants, valves, and water storage facilities.
Fitch and Standard Poor’s both rate the Anaheim Water Utility at AA+. Concurrently these two rating agencies have rated the Electric Utility at AA-, while Moody’s Investors Services has rated the Electric Utility at Aa3 (synonymous with a AA- rating). These investment grade ratings, along with near-term call options, help lower APU’s borrowing costs while providing valuable refinancing opportunities for future savings.
Electric Bonds Refinancing
APU proposes to refinance certain outstanding electric bonds through a tender offer.
APU has some outstanding debt that it can refinance for savings; however, they have yet to reach their call date (when refinancing can occur). A tender is a process where existing bond holders of these non-callable bonds may sell their bonds or exchange them for new bonds through a negotiated transaction. APU expects the tender to attract bond holders because most of the outstanding bonds contemplated include call dates one year from now, and bond holders may opt to reinvest their funds at a higher yield now versus a year from now when rates may decline. Based on current market conditions, refunding a conservative 20% of the bonds eligible for tender results in approximately $7.4 million in interest rate savings over the life of the bonds. Additionally, because of the high concentration of electric bonds callable in 2025, locking-in some of the savings now mitigates future interest rate risk. Candidates for the tender and refunding include the following electric bonds which are summarized briefly below:
2015-B: Issued as tax-exempt bonds for $92.9 million in 2015, these bonds mature in 2035 and have $49.1 million in principal remaining; the bonds refunded older, more expensive debt (1999 and 2007A) for $8.8 million in savings and financed $35 million in electric capital improvements.
2020-A: Issued as tax-exempt bonds for $59.2 million in 2020, these bonds mature in 2050 and have $56.5 million in principal remaining; these bonds financed various capital improvements including replacement of aged electrical transformers, switches, and direct buried cable.
2020-B: Issued as taxable bonds for $121.8 million in 2020, these bonds mature in 2034 and have $108.0 million in principal remaining; proceeds from these bonds refunded older, more expensive debt (2016A) for $57.6 million in interest savings. 2020-C: Issued as tax-exempt bonds for $42.3 million in 2020, these bonds mature in 2045 with principal payments beginning in 2037; these bonds refunded existing variable rate debt (2015-A) with fixed rate bonds to mitigate interest rate risk.
Authorize the Issuance of Not-to-Exceed $380,000,000 Aggregate Principal Amount of AHPIA Revenue Refunding Bonds, Series 2024-A (Electric System) and Not-to-Exceed $65,000,000 Aggregate Principal Amount of AHPIA Revenue Bonds, Series 2024-A (Water System)
July 16, 2024
2022-D: Issued as taxable bonds for $79.9 million in 2022, these bonds mature in 2033 and have $71.8 million in principal remaining; these bonds advance refunded older, more expensive debt (2017-B) for approximately $9.8 million in interest savings.
Water Bonds
APU proposes to issue new bonds in a not-to-exceed amount of approximately $65 million to proactively replace or upgrade aged water system infrastructure. APU utilizes bond funding periodically to supplement cash flow necessary for operations and maintenance activities. Such an approach is common in the utility industry and serves two main purposes: it ensures that customers who benefit from the newly constructed asset pay for their share of its use; and it helps mitigate rate impacts so that today’s customers do not pay a disproportionate cost for assets, especially in the case of pipelines that may have a useful life in excess of 50 years.
To minimize debt service costs, APU proposes to finance its water infrastructure improvements through issuing variable rate bonds. Because variable rate bonds are tied to short-term rates, which historically have lower interest rates than long-term rates, these bonds typically provide issuers with lower debt service costs but are subject to interest rate market conditions. Because financial experts anticipate interest rates will remain at current levels or drop, variable debt interest rate risk is deemed to be low to moderate.
APU evaluated issuing fixed against variable rate debt in today’s high interest rate environment. A variable rate issuance could reduce debt service costs by $730,000 annually or $22.1 million over the life of the bonds. The following table summarizes the differences between both financing options.
Bond Comparison 30-year Fixed
Rate Bond
30-year Variable
Rate Bond Difference
Interest Rate 4.32% 2.57% 1.75%
Average Annual Debt Service $3.6M $2.9M $0.7M
Gross Debt Service $110.0M $87.9M $22.1M
Redemption Options Callable after 5yrs Callable Anytime APU does not currently have any variable rate water bonds outstanding, so the proposed issuance would result in a portfolio where approximately a quarter of APU’s water bonds are tied to short-term interest rates. If approved, APU will continuously monitor interest rates and retains the option to call the variable rate bonds at any time. APU applied the same strategy in 2020 when interest rates dropped, calling the outstanding 2020-C electric variable rate bonds, and refinancing it as fixed rate bonds. Such a strategy minimizes interest costs while providing optionality to limit risk exposure.
Authorize the Issuance of Not-to-Exceed $380,000,000 Aggregate Principal Amount of AHPIA Revenue Refunding Bonds, Series 2024-A (Electric System) and Not-to-Exceed $65,000,000 Aggregate Principal Amount of AHPIA Revenue Bonds, Series 2024-A (Water System)
July 16, 2024
Summary
Moving approximately 1.5 billion gallons of water and 200 million kilowatt-hours of energy per month across a 50 square mile area requires a significant investment in infrastructure. APU works diligently to maintain a high level of service reliability by continually replacing aging infrastructure in a prioritized fashion to avoid having old pipes and electric equipment that could impact Anaheim’s economy and neighborhoods.
Reliable service is critical not only to residents and businesses, but to schools, hospitals, and City facilities that make Anaheim the vibrant community that it is. The recommendations reflect cost savings and new investments that will continue to keep utility services in Anaheim reliable, affordable, and sustainable.
IMPACT ON BUDGET:
Sufficient funds for issuance and debt service costs of the Bonds are included in APU’s Fiscal Year 2024/25 budget from restricted Water and Electric Utility Funds.
Respectfully submitted,
Dukku Lee
Public Utilities General Manager
Attachments:
Electric Documents
1. Resolution
2. Indenture of Trust
3. Installment Purchase Agreement
4. Purchase Contract
5. Preliminary Official Statement
6. Continuing Disclosure Agreement
7. Dealer Manager Agreement – Goldman Sachs & Co. LLC
8. Invitation to Tender Bonds
Water Documents
9. Resolution
10. Indenture of Trust
11. Installment Purchase Agreement
12. Purchase Contract
13. Preliminary Official Statement
14. Continuing Disclosure Agreement
15. Remarketing Agreement – Goldman Sachs & Co. LLC
16. Reimbursement Agreement – Bank of America, N.A.
17. Fee Agreement – Bank of America, N.A.