1 STAFF REPORT
DATE: January 10, 2023
TO: Justin Hess, City Manager
FROM: Dawn Roth Lindell, General Manager, Burbank Water and Power VIA: Stela Kalomian, acting Chief Financial Officer
BY: Evilia Waloejo, Financial Planning and Risk Manager S
UBJECT: Adoption of a Resolution to Issue Electric Revenue Bonds Not to Exceed $120 Million for Electric System Capital Investments
RECOMMENDATION
Adopt A RESOLUTION OF THE COUNCIL OF THE CITY OF BURBANK AUTHORIZING THE ISSUANCE OF NOT TO EXCEED $120,000,000 PRINCIPAL AMOUNT OF ITS BURBANK WATER AND POWER ELECTRIC REVENUE BONDS, SERIES OF 2023; APPROVING AND AUTHORIZING THE IMPROVEMENTS TO BE FINANCED THEREBY;
APPROVING THE ENGAGEMENT OF PROFESSIONAL SERVICES IN CONNECTION THEREWITH; APPROVING AND AUTHORIZING THE EXECUTION OF A SEVENTH SUPPLEMENTAL ELECTRIC REVENUE BOND INDENTURE; APPROVING THE FORM
AND AUTHORIZING THE DISTRIBUTION OF AN OFFICIAL STATEMENT FOR USE IN CONNECTION WITH THE SALE OF SUCH BONDS; APPROVING THE FORMS OF AND AUTHORIZING CERTAIN DOCUMENTS IN CONNECTION THEREWITH; AND
AUTHORIZING CERTAIN OTHER ACTIONS RELATING TO SUCH ISSUANCE (Attachment 1).
BACKGROUND
Electric Capital Projects and Infrastructure
For many years, the City of Burbank (city) has provided reliable electricity with competitive rates for the Burbank community. For the fiscal year ending June 30, 2022, Burbank Water and Power’s (BWP) availability rate was 99.997%.
BWP has
leaned on a strategy of predictive and preventive ca pital replacement and maintenance as a key part of this success. The last electric fund bond issuance was in 2010 to finance the replacement and upgrade of the electric distribution system and general plant.
Since then, the electric fund has avoided debt issuance and has funded its capital projects primarily through financial reserves. BWP is committed to continue replacing, upgrading, and modernizing the electric system infrastructure to support its reliability, sustainability, and POWER
2 affordability goals, as well as to support needs and electric demand associated with the city’s new development plan.
DISCUSSION
New Capital Projects and 2023 Electric Bond Issuance
Over the next few years, BWP needs to construct two substations and invest in renewable projects, in addition to continuing its modernization and efficiency efforts, which include the 4 kilovolts (kV) to 12kV conversion capital program. The estimated capit al spending of the electric fund over the next three years is approximately $160 million. In comparison, the electric fund capital expenditures were $81 million over the last 3 years , which was funded primarily by financial reserves. These projects will provide long-term benefits to ratepayers, and it is prudent to finance these projects through a bond issuance in accordance with the 2017 city’s Debt Management Policy, allowing BWP to phase- in rate increases over time.
Staff is proposing a 30-year, not to exceed $120 million, fixed-rate tax-exempt bonds to fund the capital expenditures, cost of issuance, and a debt service reserve fund.
Inflationary Pressure
BWP and utilities acros s the country are facing ongoing supply chain issues along with record-high inflationary pressure. In May 2022, the BWP Board and City Council approved a $15.3 million design-build contract to rebuild the Golden State substation. The price of the contract was an unexpectedly large increase from the 2017 estimate of $8.5 million due to unforeseen effects of the C OVID-19 Pandemic on the supply chain, industry demand, and inflation. The price increases are significant across the board. Some of the increases include a 112% increase in 12kV switchgear and miscellaneous protection and control equipment; a 71% increase in the average cost of solar per MWh; a 64% increase in the copper coils, and a 125% increase in plastic conduit. The bond issuance will help offset a portion of the rate pressures caused by inflation.
Debt Service Reserve
The debt service reserve (reserve) fund is designed to ensure full and timely payments to bondholders. This reserve fund provides additional security and reduces the risk premium or amount of interest desired by investors. The rating agencies view a reserve inclusion as an enhancement to t he credit of the bond issuance. Maintaining the electric fund’s outstanding credit rating is important as it provides the electric fund access to capital markets as needed to modernize and improve system efficiency and reliability at a low financing cost.
During the last bond issuance of $50 million in 2010, the electric fund set aside $2 million of the bond proceeds for the reserve. About $4 million of the $120 million bond proceeds will be set aside for the r eserve. A reserve will be positively viewed by rating agencies and investors which, in turn, enhances the credit quality of the new bonds.
Credit Rating
The electric fund maintains an AA - credit rating from Standard & Poor’s and Aa3 from Moody’s. This rating is an outstanding credit standard for the electric utility industry and is a significant achievement as it provides the electric fund access to capital markets as needed to modernize and improve system efficiency and reliability at a low financing cost.
Disclosure
A draft preliminary official statement (POS) for the bonds is attached as Attachment 6. The official statement is the primary disclosure document for investors in the 2023 electric bonds. 3 A POS will be circulated to potential investors prior to the pricing of the bonds. After the bonds have been priced, a final official statement will be circulated to investors. The POS is prepared by Jones Hall, serving the city as the disclosure counsel for this transaction.
The distribution of the POS by the city is subject to federal securities laws, including the Securities Act of 1933 and the Securities Exchange Act of 1934. These laws require the POS to include all facts that would be material to an investor in the bonds. Material information is information that there is a substantial likelihood that would have actual significance in the deliberations of the reasonable investor when deciding whether to buy or sell the bonds. In the resolution related to the bonds to be considered by the City Council (Attachment 1), the City Council will approve the POS and authorize staff, on behalf of the city, to certify that the POS is as of its date “deemed final” for purposes of federal securities law, i.e., and that it includes all facts that would be material to an investor except for certain pricing-related information (such as final principal amounts and interest rates) that will be added in the final official statement.
The Securities and Exchange Commission (SEC), the agency with regulatory authority over the city’s compliance with federal securities laws, has issued guidance as to the duties of the City Council with respect to its approval of the POS. In its “Report of Investigation in the Matter of County of Orange, California as it Relates to the Conduct of the Members of the Board of Supervisors” (Release No. 36761/January 24, 1996) (the “Release”), the SEC stated that, if a member of the City Council has knowledge of any facts or circumstances that an investor would want to know about prior to investing in the 2023 e lectric bonds, whether relating to their repayment, tax-exempt status, undisclosed conflicts of interest with interested parties, or otherwise, he or she should endeavor to discover whether such facts are adequately disclosed in the POS. In the release, the SEC stated that the steps that a member of the City Council could take include becoming familiar with the POS and questioning staff and consultants about the disclosure of such facts.
The key sections of the preliminary official statement are summarized below:
• “THE 2023 BONDS”: This section summarizes the key terms of the bonds, including payment dates and redemption provisions.
• “SECURITY AND SOURCES OF PAYMENT FOR THE 2023 BONDS”: This section summarizes key security terms, including the city’s pledge of electric net revenues, which is the sole source of funds to pay debt service on the bonds. • “THE ELECTRIC SYSTEM”: This section summarizes information about the e lectric system and e lectric net revenues, including power supply, costs of operating/maintaining the electric system, electric system rates and charges, the e lectric system capital improvement plan, and historical and projected debt service coverage. • “RISK FACTORS”: This section highlights the primary risks associated with the bonds, including regulatory issues and drought.
• “TAX MATTERS”: This section describes the tax-exempt nature of interest on the bonds.
FISCAL IMPACT
Currently, interest rates are below the historical average. As of November 29 , 2022, the interest rate for these bonds was 3. 52% compared to a historical average of 5.29%. The estimated average annual principal and interest payment for up to $120 million of bonds are $7.9 million based on a 4. 3% all-in interest rate and a maximum 30-year fixed rate tax - 4 exempt bond issuance. The principal and interest payment will result in an estimated one- time 4.5% impact on electric rates over the life of the bonds.
CONCLUSION
Staff requests that the Burbank City Council adopt the resolution approving the issuance of the 2023 electric bonds not to exceed $120 million for electric system capital investments and to authorize the approval and execution of certain documents in connection with such issuance in accordance with the resolution.
ATTACHMENTS
Attachment 1 – Resolution
Attachment 2 – Electric Revenue Bond Indenture
Attachment 3 – Seventh Supplemental Bond Indenture
Attachment 4 – Continuing Disclosure Agreement
Attachment 5 – Bond Purchase Agreement
Attachment 6 – Preliminary Official Statement