REPORT TO COUNCIL
SUBJECT
Title
Action on a Resolution Approving an Electric Revenue Bond Issuance Estimated at $130 Million Plus a 10% Contingency for a Total Amount not to Exceed $143 Million to Finance Capital Costs of the Electric System, Authorizing the Execution and Delivery of Related Documents, and Other Related Actions; and Approval of Related Budget Amendment
Report
COUNCIL PILLAR
Deliver and Enhance High Quality Efficient Services and Infrastructure
BACKGROUND
The City of Santa Clara’s Electric Utility, Silicon Valley Power (SVP), has provided reliable electric service for over 128 years and is experiencing significant continued growth. SVP has developed a City Council approved Capital Improvement Strategy to address near-term and long-term impacts from potential load growth and aged infrastructure to maintain system reliability. In 2021, SVP recorded a peak load of nearly 600 Megawatt (MW) and delivered approximately 4,100 Gigawatt-hours (GWh) to customers. In 2022, SVP’s recorded peak load increased to 702 MW, and energy delivery rose to 4,550 GWh. This represents an approximate 10% increase in energy delivery and represents the largest year-over-year growth in the last 30 years. In July 2024, SVP recorded a new peak load of 705 MW and continues to see increased energy consumption averaging 6% over the last three years since 2021 and delivered nearly 4,590 GWh of energy in 2023.
On September 28, 2021, City Council accepted SVP’s Three-Year System Growth Strategy Plan (RTC #21-871). The Three-Year System Growth Strategy Plan identified $300 million of proposed projects to install new facilities and replace aged infrastructure with higher capacity infrastructure where needed. On November 15, 2022, City Council accepted SVP’s System Expansion Plan report for the California Independent System Operator’s Transmission Planning Process FY2023/24 (RTC #22-1172). This report included a comprehensive list with $200 million of proposed projects for SVP’s System Growth Strategy during the study period, which is in addition to projects proposed in the Three-Year System Growth Strategy Plan. Combined, these reports include over $500 million of proposed projects required to serve a projected load of approximately 1,300 MW by 2032.
SVP evaluated the use of debt financing to fund some of the proposed projects. On May 9, 2023, the City Council adopted Resolution 23-9223 (RTC #23-104) which stated SVP’s intention to issue tax-exempt bonds to fund several capital projects, including:
• Kifer Receiving Station (KRS) Rebuild and Replacement;
• Scott Receiving Station (SRS) Rebuild and Replacement;
• Northern Receiving Station (NRS) Upgrades and Expansion;
• Northern Receiving Station (NRS)/Kifer Receiving Station (KRS) 115kV Transmission Line;
• Homestead Substation Rebuild; and
• Reconductoring and reconfiguration of transmission lines.
The attached Resolution authorizes documents and actions related to the issuance of Electric Revenue Bonds to finance a portion of the costs of the proposed projects and reimburse SVP for previously incurred costs related to these projects. The estimated proceeds are $130 million plus a 10% for a total amount not to exceed $143 million. Staff will bring a future resolution for Council Consideration in 2025 to finance the rest of the costs.
DISCUSSION
Staff developed a financing plan with the assistance of SVP’s financing team, PFM Financial Advisors LLC (municipal advisor) and Stradling Yocca Carlson & Rauth LLP (bond and disclosure counsel). This plan contemplates that two debt issuances be considered to complete three of the proposed projects with total current estimated costs of $376 million:
• Kifer Receiving Station (KRS) Rebuild and Replacement - estimated cost: $119 million;
• Scott Receiving Station (SRS) Rebuild and Replacement - estimated cost: $110 million; and
• Northern Receiving Station (NRS) Upgrades and Expansion - estimated cost: $147 million.
Two debt issuances are proposed based on SVP’s anticipated timeline for funding needs and to avoid carrying costs. Bond Issuance Number 1, which is the subject of this Report to Council, has a projected closing date in 2024 with estimated proceeds of $130 million to be used for design services, project management, material procurement expenses, and contingencies. It is important to note that City Council has approved the following procurement contracts for long-lead time items that were contingent on the approval of debt financing:
• On October 10, 2023, the City Council authorized an agreement with HD Hyundai for the Purchase of High Voltage Transformers (RTC #23-122) with a not to exceed amount of $60.6 million.
• On May 7, 2024, the City Council authorized the City Manager to Negotiate and execute an agreement for the Purchase of High Voltage Circuit Breakers (RTC #24-35) with a not to exceed amount of $38.0 million.
• On May 28, 2024, the City Council authorized the City Manager to Negotiate and execute an agreement for the Purchase of Switches and Transformers (RTC #24-435) with a not to exceed amount of $17.4 million.
Bond Issuance Number 2 will have a projected closing date in 2025 with estimated proceeds of $246 million to be used for construction, testing and commissioning, and close out expenses. The anticipated closing date is contingent upon completion of major design and material procurement milestones within the projects and accounts for unforeseen circumstances. Future Council action will be requested for approval of the second bond issuance.
Authorizing Resolution. The authorizing resolution (“Authorizing Resolution”) authorizes the City to issue electric revenue bonds (2024 Bonds), approves the related documents described below, and authorizes City staff to execute them; provided that,
1. The final terms of the 2024 Bonds do not exceed a maximum principal amount of $143 million;
2. The final maturity of the 2024 Bonds is not later than July 1, 2054;
3. The maximum coupon rate on any of the 2024 Bonds is not greater than 6.00%;
4. The true interest cost of the 2024 Bonds does not exceed 5.50%; and
5. The maximum aggregate net original issue discount at which such Series 2024 A Bonds may be sold shall not exceed 10%.
These amounts are set to provide the City with the flexibility to adjust the structuring of the 2024 Bonds as needed in the days leading up to the sale. The total amount of the bonds, the coupon rate, and the true interest cost may be lower than the authorized amounts.
Fourth Supplemental Electric Revenue Bond Indenture. In 2011, the City entered into its Electric Revenue Bond Indenture (Indenture) with the bond trustee that serves as trustee on behalf of the owners of bonds of the City’s Electric enterprise. The Fourth Supplemental Electric Revenue Bond Indenture (Supplemental Indenture) relating to the 2024 Bonds supplements the Indenture and provides the terms of the 2024 Bonds, including the principal and interest payment dates and the interest rates on the new 2024 Bonds. Under the Indenture and Supplemental Indenture, the City is obligated to set rates to provide adjusted net revenues sufficient in each year to cover 1.0 times the annual debt service on the City’s outstanding electric revenue bonds, including the 2024 Bonds, and any other debt of the Electric enterprise payable from adjusted net revenues of the Electric Enterprise in accordance with the Indenture. The Supplemental Indenture also includes amendments to the Indenture that are expected to become effective on or about the date of issuance of the 2024 Bonds. The amendments include administrative modifications as well as modifications relating to (1) the calculation of the rate covenant under the Indenture and the application of the Rate Stabilization Fund; and (2) the issuance of additional bonds or other debt of the Electric enterprise parity debt.
Continuing Disclosure Agreement. The Continuing Disclosure Agreement sets out the City’s obligation to provide the 2024 Bond owners and the larger municipal securities marketplace certain annual financial information, operating data, and notices regarding the status of the 2024 Bonds and the City’s Electric enterprise and finances. Under securities laws, the underwriters for the 2024 Bonds are required to obtain this commitment from the City to provide ongoing disclosure in connection with the City’s bonds.
Bond Purchase Contract. The Authorizing Resolution approves J.P. Morgan Securities LLC, RBC Capital Markets, LLC, and Siebert Williams Shank & Co., LLC as the underwriters (“Underwriters”) in connection with the negotiated sale of the 2024 Bonds by the City. The Bond Purchase Contract provides the terms and conditions under which the Underwriters agree to purchase the 2024 Bonds from the City for reoffering to the public and specifies the circumstances under which the Underwriters’ obligation may be terminated prior to delivery of the 2024 Bonds. The Authorizing Resolution provides that the discount (or compensation paid from the proceeds of the bond sale) to be paid to the Underwriters in connection with their purchase of the 2024 Bonds shall not exceed 0.30% of the aggregate principal amount of the 2024 Bonds to be purchased.
Preliminary Official Statement and Securities Laws. The attached preliminary official statement (“Preliminary Official Statement”) is the primary disclosure document for the 2024 Bonds and provides potential investors with information about the City and the Electric enterprise, the security and sources of payment for the 2024 Bonds, financial and operational information regarding the Electric enterprise, and outlines key risk factors for potential investors to consider.
The distribution of the Preliminary Official Statement by the City is subject to the federal securities laws, including the Securities Act of 1933 and the Securities Exchange Act of 1934. These laws require the Preliminary Official Statement to include all facts that would be material to an investor in the 2024 Bonds. Information is “material information” if there is a substantial likelihood it would have actual significance in the deliberations of a reasonable investor when deciding whether to buy or sell securities. The City’s Authorizing Resolution approves the Preliminary Official Statement, and delegates to staff the ability to (1) make additional changes, if needed, and (2) sign a certificate on behalf of the City that deems the Preliminary Official Statement substantially final for purposes of the federal securities laws. The Securities and Exchange Commission (SEC), the federal agency with regulatory authority over compliance with the federal securities laws, has indicated that, if a member of a legislative body like the City Council has knowledge of any facts or circumstances that an investor would want to know about prior to investing in securities like the 2024 Bonds, whether relating to the City, the electric enterprise and its financial status, undisclosed conflicts of interest with interested parties, or otherwise. The City Council should endeavor to discover whether such facts are adequately disclosed in the Preliminary Official Statement. The steps that a member of the City Council could take to fulfill this obligation include becoming familiar with the Preliminary Official Statement and questioning staff and other members of the financing team about the disclosure of such facts.
All of the documents have been presented for approval as to form and will contain certain blanks related to the terms that will be completed when the 2024 Bonds are priced (such as principal amount, interest rates, amortization, and redemption terms). These terms will be affected by market conditions existing on that day.
ENVIRONMENTAL REVIEW
The action being considered does not constitute a “project” within the meaning of the California Environmental Quality Act pursuant to section 15378(b)(4) of Title 14 of the California Code of Regulations as it is a fiscal activity which does not involve any commitment to a specific project that may result in a potentially significant physical impact on the environment.
FISCAL IMPACT
The recommended actions approved are part of the ongoing strategy of SVP to maintain reasonable and equitable electric rates. Based on a debt issuance with proceeds estimated at $143 million, inclusive of a 10% contingency, estimating 4.50% as the cost of long-term borrowing, and assuming a 30-year repayment period, annual debt service on this fixed rate issuance is approximately $8.0 million. As an alternative consideration, estimating 4.25% as the cost of long-term borrowing and assuming a 20-year repayment period, the annual debt service on this fixed rate issuance is approximately $9.7 million. Additional consideration will be given closer to issuance of the 2024 Bonds as to which is more favorable to keep stable rate increases. It is important to note the rate or cost of borrowing below are estimates, and actual rates will be market-driven and determined during the pricing of the 2024 Bonds.
|
Bond Type |
Rate |
Annual Payment |
Lifetime |
|
20-Year Fixed Rate |
4.25% |
$9,736,000 |
$194,720,000 |
|
30-Year Fixed Rate |
4.50% |
$7,981,000 |
$239,430,000 |
The amended FY 2024/25 Operating Budget, adopted by the City Council on June 25, 2024 (RTC #24-322), assumed proceeds of $143 million with a payment plan allowing for the use of proceeds to cover the first-year debt service payment. This plan provided SVP flexibility to manage and maintain adequate cash levels. Upon further review and coordination with the Finance Department, the plan was revised such that proceeds are not needed to cover the first year’s debt service payment.
A budget amendment is recommended to reflect the revised plan and recommend a transfer $9.8 million from available fund balance in the Electric Utility Operating Fund to the Electric Utility Debt Service Fund as described in the table below:
Budget Amendment
FY 2024/25
|
|
Current |
Increase/ (Decrease) |
Revised |
|
Electric Utility Fund (091) |
|
|
|
|
Transfers To |
|
|
|
|
Electric Utility Debt Fund |
$17,554,002 |
$9,800,000 |
$27,354,002 |
|
|
|
|
|
|
Fund Balance |
|
|
|
|
Unrestricted Ending Fund Balance |
$108,095,323 |
($9,800,000) |
$98,295,323 |
|
|
|
|
|
|
Electric Utility Debt Service Fund (491) |
|
|
|
Transfers From |
|
|
|
|
Electric Utility Fund |
$17,554,002 |
$9,800,000 |
$27,354,002 |
|
|
|
|
|
|
Expenditures |
|
|
|
|
Debt Service |
$17,554,002 |
$9,800,000 |
$27,354,002 |
Debt service payments would be made from net revenues, with the original repayment amounts included in SVP’s 10-year financial forecast. The debt repayments will be updated in the subsequent fiscal years’ budget during the next budget cycle.
COORDINATION
This report has been coordinated with the Finance Department and City Attorney’s Office.
PUBLIC CONTACT
Public contact was made by posting the Council agenda on the City’s official-notice bulletin board outside City Hall Council Chambers. A complete agenda packet is available on the City’s website and in the City Clerk’s Office at least 72 hours prior to a Regular Meeting and 24 hours prior to a Special Meeting. A hard copy of any agenda report may be requested by contacting the City Clerk’s Office at (408) 615-2220, email clerk@santaclaraca.gov <mailto:clerk@santaclaraca.gov> or at the public information desk at any City of Santa Clara public library.
RECOMMENDATION
Recommendation
1. That the City Council by Resolution:
a. Authorize issuance of the Electric Revenue Bonds, Series 2024 A subject to the terms set forth in the Authorizing Resolution;
b. Approve and authorize the City Manager or designee to execute the Fourth Supplemental Electric Revenue Bond Indenture, in substantially the form attached to this Report to Council;
c. Approve the following underwriters in connection with the Electric Revenue Bonds, Series 2024 A: J.P. Morgan Securities LLC, RBC Capital Markets, LLC, and Siebert Williams Shank & Co., LLC; and approve and authorize certain City officers or designees to execute the Bond Purchase Contract, in substantially the form attached to this Report to Council;
d. Approve the Preliminary Official Statement, in substantially the form attached to this Report to Council; and authorize (i) certain City officers or designees to execute a certificate to deem the Preliminary Official Statement substantially final, and (ii) the City Manager or designee to execute a Final Official Statement in substantially the form of the Preliminary Official Statement;
e. Authorize applicable City officers to modify the Fourth Supplemental Electric Revenue Bond Indenture, the Bond Purchase Contract, Preliminary Official Statement, and Final Official Statement to reflect the terms of the sale of the Electric Revenue Bonds, Series 2024 A, subject to any requirements and limitations contained in the Authorizing Resolution;
f. Approve and authorize the City Manager to execute the Continuing Disclosure Agreement, in substantially the form attached to this Report to Council, with such changes as the City Manager or the Director of Finance shall approve subject to any requirements and limitations contained in the Authorizing Resolution; and
g. Authorize certain City officers to execute all required agreements, documents, and certificates necessary to effect the sale and delivery of the Electric Revenue Bonds, Series 2024 A by the agreements and documents approved under the Authorizing Resolution; and to do any and all things and to execute and deliver such other agreements, documents and certificates in connection with the issuance and delivery of the Electric Revenue Bonds, Series 2024 A, subject to any requirements and limitations contained in the Authorizing Resolution; and
h. Authorize certain other actions set forth in the Authorizing Resolution, with the understanding that all required agreements and disclosure documents shall be subject to final approval as to form by the City Attorney.
2. Approve the following FY 2024/25 budget amendments:
a. In the Electric Utility Fund, increase the transfer to the Electric Utility Debt Service Fund and decrease the Unrestricted Ending Fund Balance in the amount of $9.8 million (five affirmative Council votes required for the use of unused balances); and
b. In the Electric Utility Debt Service Fund, increase the transfer from the Electric Utility Fund and increase the Debt Service appropriation in the amount of $9.8 million (five affirmative Council votes required to appropriate additional revenue).
Staff
Reviewed by: Manuel Pineda, Chief Electric Utility Officer
Approved by: Jovan D. Grogan, City Manager
ATTACHMENTS
1. Authorizing Resolution
2. Fourth Supplemental Electric Revenue Bond Indenture
3. Continuing Disclosure Agreement
4. Bond Purchase Contract
5. Preliminary Official Statement