Revision to Agenda Item #10
Revisions were made to the staff report. Please see below for the changes.
Staff Report Changes
• Fiscal Impact section:
Last paragraph added and read as follows:
Per the City's Debt Management Policy, Policy No. CP-18-06, revised February 19, 2019, a calculation of debt burden must be performed relative to the General Fund. However, debt that is backed by the General Fund but expected to be paid out of other revenues may be deducted from this calculation, provided that the City has a demonstrated track record of collecting such revenues, net revenues after operating expenses provide reasonable coverage over debt service, and the City expects that the available revenues will be sufficient to cover debt service for the remaining life of the obligations. Therefore, this debt issuance passes the General Fund debt burden test as Victorville Municipal Utility Services ('VMUS") meets the criteria for payment of such debt.
Fiscal Impact:
The aggregate principal amount associated with the 2022 Bonds is not to exceed $60 million and a true interest cost not to exceed 5.00%. It is anticipated that the City will issue approximately $43.57 million Electric Revenue Bonds to refinance the 2007A Bonds, to generate $5 million in proceeds for the Capacity Expansion Project, to fund a Debt Service Reserve Fund, and to pay for Costs of Issuance. Based on the current interest rate environment and other reasonable assumptions (including the average interest rate for the 2007A Bonds through maturity), refinancing the outstanding 2007A Bonds is expected to generate estimated gross debt service savings of approximately $6.35 million, and net present value savings of approximately $824,000 (or 1.82% of the refunded bond amount). Aggregate annual debt service for the 2022 Bonds is expected to be $3.6 million on average in fiscal years 2023 through 2040 and $315,000 in fiscal years 2041 through 2052. Future budgets of the Electric System will incorporate annual debt payments and have been accounted for in the Cost of Service Study for the Electric System.
The 2022 Bonds will be limited obligations of the City secured by a pledge of net revenues of the Electric System and the other collateral pledged under the Indenture. If there is any amount withdrawn from the Bond Reserve Fund for the purpose of making a debt service payment, and the City does not replenish the Bond Reserve Fund with that amount from available Electric System funds within 30 days, an Authorized Representative of the City shall request that the City Council budget and appropriate that amount from any available funds of the City within 150 days. The failure of City Council to budget and appropriate any amount requested by an Authorized Representative of the City shall not constitute a default under the Indenture nor will there be any recourse to the City.
Per the City's Debt Management Policy, Policy No. CP-18-06, revised February 19, 2019. a calculation of debt burden must be performed relative to the General Fund. However, debt that is backed by the General Fund but expected to be paid out of other revenues may be deducted from this calculation, provided that the City has a demonstrated track record of collecting such revenues, net revenues after operating expenses provide reasonable coverage over debt service, and the City expects that the available revenues will be sufficient to cover debt service for the remaining life of the obligations. Therefore, this debt issuance passes the General Fund debt burden test as Victorville Municipal Utility Services ("VMUS) meets the criteria for payment of such debt.
Background:
In 2007, the City of Victorville, through the Victorville Joint Powers Financing Authority, issued its Variable Rate Lease Revenue Bonds ("2007A Bonds") in the amount of $83,770,000 for the purpose of financing and refinancing improvements to the VMUS Electric System. The May 1, 2007 Lease Agreement between the Victorville Joint Powers Financing Authority and the City of Victorville (the "Lease") designates certain City properties as security for the 2007A Bonds. These properties include City Hall, multiple City Parks, Fire Stations, the City Library, Victorville Police Station, and various City yards. The Lease requires the City and the Authority to obtain the consent of the Credit Entity, BNP Paribas, prior to modifying or taking action on any of the real property covered VICTO
Victorville Item Number: {{item.number}}
ALIFOR
City Council / Board of Directors
Written Communications
Meeting of: April 19, 2022
Submitted By:
John Mendiola, Finance Director / City Treasurer
Brenda Hampton, Director of Electric Utility Services
Subject:
Consideration of Resolution No. 22-036 authorizing the issuance and sale of City of Victorville Electric Revenue Bonds to finance the costs of certain improvements to, or necessary or convenient in connection with the use and operation of, the City's electric system and to refund certain outstanding bonds previously issued for those purposes Consideration for approval by the Victorville Joint Powers Financing Authority ("Authority") of a form of Bank Consent that provides BNP Paribas' consent, subject to certain terms and conditions, for the Trustee to send out an optional redemption notice to the owners of the 2007A Bonds
Recommendation:
That the Honorable City Council:
1. Adopt Resolution No. 22-036 authorizing the issuance and sale of City of Victorville Electric Revenue Bonds to finance the costs of certain improvements to, or necessary or convenient in connection with the use and operation of, the City's electric system and to refund certain outstanding bonds previously issued for those purposes; approving the forms and the execution and delivery of documents related to the issuance and sale of the bonds; and authorizing certain other actions in connection with the issuance and sale of the bonds
That the Victorville Joint Powers Financing Authority Board:
1. Approve the form of Bank Consent among the City, the Authority, and BNP Paribas (provider of an irrevocable direct pay letter of credit for the 2007A Bonds) that provides BP's consent for the Trustee to send out an optional redemption notice to owners of the 2007A Bonds and describes the terms and conditions under which this consent is given
Fiscal Impact:
The aggregate principal amount associated with the 2022 Bonds is not to exceed $60 million and a true interest cost not to exceed 5.00%. It is anticipated that the City will issue approximately $43.57 million Electric Revenue Bonds to refinance the 2007A Bonds, to generate $5 million in proceeds for the Capacity Expansion Project, to fund a Debt Service Reserve Fund, and to pay for Costs of Issuance. Based on the current interest rate environment and other reasonable assumptions (including the average interest rate for the 2007A Bonds through maturity), refinancing the outstanding 2007A Bonds is expected to generate estimated gross debt service savings of approximately $6.35 million, and net present value savings of approximately $824,000 (or 1.82% of the refunded bond amount). Aggregate annual debt service for the 2022 Bonds is expected to be $3.6 million on average in fiscal years 2023 through 2040 and $315,000 in fiscal years 2041 through 2052. Future budgets of the Electric System will incorporate annual debt payments and have been accounted for in the Cost of Service Study for the Electric System.
The 2022 Bonds will be limited obligations of the City secured by a pledge of net revenues of the Electric System and the other collateral pledged under the Indenture. If there is any amount withdrawn from the Bond Reserve Fund for the purpose of making a debt service payment, and the City does not replenish the Bond Reserve Fund with that amount from available Electric System funds within 30 days, an Authorized Representative of the City shall request that the City Council budget and appropriate that amount from any available funds of the City within 150 days. The failure of City Council to budget and appropriate any amount requested by an Authorized Representative of the City shall not constitute a default under the Indenture nor will there be any recourse to the City.
Per the City's Debt Management Policy, Policy No. CP-18-06, revised February 19, 2019, a calculation of debt burden must be performed relative to the General Fund. However, debt that is backed by the General Fund but expected to be paid out of other revenues may be deducted from this calculation, provided that the City has a demonstrated track record of collecting such revenues, net revenues after operating expenses provide reasonable coverage over debt service, and the City expects that the available revenues will be sufficient to cover debt service for the remaining life of the obligations. Therefore, this debt issuance passes the General Fund debt burden test as Victorville Municipal Utility Services ("VMUS") meets the criteria for payment of such debt.
Background:
In 2007, the City of Victorville, through the Victorville Joint Powers Financing Authority, issued its Variable Rate Lease Revenue Bonds ("2007A Bonds") in the amount of $83,770,000 for the purpose of financing and refinancing improvements to the VMUS Electric System. The May 1, 2007 Lease Agreement between the Victorville Joint Powers Financing Authority and the City of Victorville (the "Lease") designates certain City properties as security for the 2007A Bonds. These properties include City Hall, multiple City Parks, Fire Stations, the City Library, Victorville Police Station, and various City yards. The Lease requires the City and the Authority to obtain the consent of the Credit Entity, BNP Paribas, prior to modifying or taking action on any of the real property covered by the Lease, with the exception of routine maintenance activities. The encumbrance of these City facilities also makes the City ineligible for grant funds that require a deed restriction. As of May 1, 2022, the 2007A Bonds will be outstanding in the amount of $45,230,000 and have a final maturity of May 1, 2040. The 2007A Bonds are variable rate obligations, and currently the rate is subject to weekly reset, set by Stern Brothers, the Remarketing Agent, and supported by a Letter of Credit (LOC) Facility from BNP Paribas.
While in weekly mode, the 2007A Bonds are subject to optional redemption at par on any day without premium.
Victorville Municipal Utility Services (VMUS) currently provides electric service to customers located at the Southern California Logistics Airport ("SCLA") via a 34.5 kV California ("SCE") interconnection and distribution
service. This service is limited in its capacity, which can hinder VMUS' ability to support the increased demand and future growth of its customers and may hinder the ability to provide reliable power. The maximum distribution capacity under the terms of SCE's Wholesale Distribution Access Tariff ("WDAT") is 17.34 MW and the SCLA all-time high peak load of 15.33 MW was recorded last fiscal year. Using conservative load growth estimates, VMUS expects its system's peak load to exceed the capacity limits in the near term.
On March 19, 2019, the City Council adopted Resolution No. 19-010 approving the mid- year amendment to the 2018-2019 fiscal year budget. VMUS submitted two capital improvement projects for the buildout of a new 230KV substation and upgrades to the existing distribution system. These improvements are required in order to meet increased demand, supply future growth and provide reliable power.
On May 5, 2020, the City Council approved the execution of a combined system impact and facilities study with SCE to evaluate the requirements of the electrical system and three options were observed and provided. Of the three options, VMUS has selected the least costly option by expanding the current 34.5 kV system, which would increase the capacity from 17.34 MW to 40.36 MW and will be sufficient to serve the current and anticipated load over the next several years. If VMUS experiences substantial growth, due to new larger industrial customers, VUS may eventually proceed with the buildout of a new substation; however, expanding and constructing modifications to the existing
34.5kV system is adequate for current needs.
On March 9, 2021, the City Council conducted the first reading of Ordinance No. 2416 to add a new Chapter 3.66 to Title 3 (Revenue and Finance) of the Victorville Municipal Code, enabling the City to sell and issue revenue bonds for the purpose of financing or refinancing capital improvements and other certain costs for the City's various enterprises (e.g., electricity, natural gas, water, and wastewater). This ordinance put in place the procedures and mechanisms which allow the City to issue debt. Ordinance No. 2416 was adopted on March 16, 2021, and became effective on April 15, 2021.
On March 9, 2021, the City Council adopted Resolution No. 21-016 to reimburse the City of Victorville for certain capital expenditures from the proceeds of indebtedness.
On March 9, 2021, staff presented a comprehensive report detailing the Electric Infrastructure Capacity Expansion and Debt Refinancing.
Discussion:
It is anticipated that the City will issue approximately $43.57 million Electric Revenue onds to retinance the ?00/A Konds
Issuance. The aggregate principal amount associated with the 2022 Bonds is not to exceed $60 million and a true interest cost not to exceed 5.00%. Based on the current interest rate environment and other reasonable assumptions (including the average Interest rate for the 2007A Bonds through maturity), the City is able to achieve savings by refunding its 2007A Bonds. Issuing the 2022 Bonds to refinance the outstanding principal of the 2007A Bonds is expected to generate estimated gross debt service savings of approximately $6.35 million, and net present value savings of approximately $824,000 (or
1.82% of the refunded bond amount). The 2022 Bonds will be issued with fixed interest rates and will be secured by net revenues of the City's Electric System. The City will lock in long-term fixed rates enabling VMUS to reliably budget for debt service, eliminate the risk of variable rates and exposure to volatile market conditions, and unencumber City facilities. Additionally, by refunding the 2007A Bonds, the City will terminate its LOC Facility and Remarketing Agreement for the 2007A Bonds. Fees for the LOC Facility and Remarketing Agent totaled approximately $530,000 in fiscal year 2021 and are scheduled for increases on July 1, 2022, October 1, 2022, and January 1, 2023.
The 2022 Bonds will have a final maturity of 5/1/2052. The portion of the 2022 Bonds used to refund the 2007A Bonds will amortize in the same years as the existing 2007A Bonds. The true interest cost for the 2022 Bonds is estimated to be approximately 3.82% in the current market. Aggregate annual debt service for the 2022 Bonds is expected to be $3.6 million on average in fiscal years 2023 through 2040, and $315,000 in fiscal years 2041 through 2052. In accordance with California Government Code Section 5852.1, good faith estimates are provided with respect to the 2022 Bonds in Exhibit B.
As a result of tax due diligence, it was determined that approximately $10 million of taxable proceeds of the 2022 Bonds would be required to refund a portion of the 2007A Bonds. As a result, the 2022 Bonds will consist of a tax-exempt series (Series 2022A) and a federally taxable series (Series 2022B).
The resolution approves the financing plan outlined above, appoints and retains the financing team (Urban Futures, Inc. as Municipal Advisor; Stradling Yocca Carlson & Rauth as Disclosure Counsel; Orrick, Herrington & Sutcliffe as Bond Counsel; The Bank of New York Mellon Trust Company, N.A., as Trustee and Escrow Agent; and Goldman Sachs & Co., as Underwriter), and approves all documents and actions needed to authorize the issuance and sale of the 2022 Bonds, including the following substantially final form financing documents together with any changes or additions deemed advisable and approved by the City Manager or the City Treasurer:
Indenture - This document contains the terms under which the City may issue Electric Revenue Bonds, including the 2022 Bonds, and contains the definition and pledge of Revenues for Electric Revenue Bonds, Rights and Duties of the Trustee, remedies upon a detault in the payment of Electric Revenue Bonds, and final discharge of Electric Revenue Bonds and other related matters.
Supplemental Indenture - This document contains the terms of the 2022 Bonds to be issued under the Indenture, including payment and redemption provisions, the uses of the proceeds of the 2022 Bonds, the covenant relating to the appropriations request for General Fund available revenues to replenish draws on the Bond Reserve Fund, and other related matters.
Bond Purchase Agreement - This document contains the obligation of the underwriter to accept and pay for the 2022 Bonds, provided that all of the covenants and representations of the City are met and certain other conditions excusing performance by the underwriter do not exist.
Preliminary Official Statement - This is the City's document pursuant to which the 2022 Bonds will be offered for purchase by the public. This document must contain all facts material to the 2022 Bonds and the City (with certain permitted exceptions to be completed in the final Official Statement) and must not omit any such material facts. In accordance to the City's Debt Management Policy, the Disclosure Committee has reviewed the Preliminary Official Statement to determine the adequacy and accuracy of the disclosures therein and has completed its due diligence meeting.
Continuing Disclosure Certificate (included in the Preliminary Official Statement) - Agreement by City to provide certain annual reports to investors in order to allow the underwriter to comply with federal securities laws.
The Resolution authorizes Authorized Representatives of the City to execute and deliver, on behalf of the City, agreements and documents necessary to issue the 2022 Bonds, including the following document:
Bank Consent - Among the City, the Authority, and BNP Paribas (provider of an irrevocable direct pay letter of credit for the 2007A Bonds) that provides BP's consent for the Trustee to send out an optional redemption notice to owners of the 2007A Bonds and describes the terms and conditions under which this consent is given.
Additionally, since the Victorville Joint Powers Financing Authority is a party to the Bank Consent, staff is seeking Authority Board approval of the form of Bank Consent.
If the Resolution and financing documents are approved by the City Council and the Bank Consent is approved by the Authority Board, the sale of the 2022 Bonds is expected to be completed in May 2022. A portion of the proceeds of the 2022 Bonds will be held in an escrow account held by BNY Mellon, as Escrow Agent, and applied, along with additional funds on hand associated with the 2007A Bonds, to prepay the 2007A Bonds in June 2022. A portion of proceeds of the 2022 Bonds will be deposited into a project fund held by BNY Mellon as Trustee of the 2022 Bonds to pay for costs of the Capacity Expansion Project.
Staff remains available for any questions or comments.
Attachments: A. Resolution No. 22-036
B. Good Faith Estimates (Public Disclosures Relating to the Bonds)
C. Indenture
D. Supplemental Indenture
E. Bond Purchase Agreement
F. Preliminary Official Statement
G. Continuing Disclosure Certificate (included in Preliminary Official Statement)
H. Bank Consent