BOARD AGENDA MEMORANDUM
Government Code § 84308 Applies: Yes ☐ No ☒
(If “YES” Complete Attachment A - Gov. Code § 84308)
SUBJECT:
Title
Adopt Resolutions Authorizing the Issuance of Water System Refunding Bonds, Refunding Notes, Revenue Certificates of Participation and Revenue Bonds in an Aggregate Not-To-Exceed Amount of $450 Million, and Approving the Execution and Delivery of Certain Documents and Certain Acts In Connection Therewith.
End
RECOMMENDATION:
Recommendation
A. Adopt the Resolution AUTHORIZING THE ISSUANCE OF WATER SYSTEM REFUNDING REVENUE BONDS AND NOTES AND REVENUE CERTIFICATES OF PARTICIPATION, AND APPROVING THE EXECUTION AND DELIVERY OF CERTAIN DOCUMENTS AND CERTAIN ACTS IN CONNECTION THEREWITH;
B. Adopt the Resolution AUTHORIZING THE ISSUANCE OF WATER SYSTEM REVENUE BONDS AND APPROVING THE EXECUTION AND DELIVERY OF CERTAIN DOCUMENTS AND CERTAIN ACTS IN CONNECTION THEREWITH; and
C. Authorize and direct the Chief Executive Officer, or their designee, and such other officers and staff of Valley Water, acting singly, to do any and all things, and to execute and deliver any and all documents, which such officers may deem necessary or advisable in order to consummate the sale and delivery of the Refunding Revenue Bonds, Refunding Revenue Notes, Revenue Certificates of Participation, and Revenue Bonds.
Body
SUMMARY:
Approval of staff recommendations will allow the Santa Clara Valley Water District (Valley Water) to issue an aggregate not to exceed principal amount of $450 million of debt obligations for the following purposes:
• (i) Issue Refunding Bonds to refund outstanding Commercial Paper Certificates, Series A (Tax-Exempt), Series B (Taxable), and Revolving Lines of Credit, Series C (Tax-Exempt) and Series D (Taxable) Certificates, issued to finance projects for the Water Utility System (the “outstanding short-term obligations”); (ii) issue Refunding Notes to refund the portion of outstanding Series 2023C-1 and Taxable Series 2023D Revenue Certificates of Participation (Water Utility System Improvement Projects) that mature in 2024, and fund capitalized interest; and (iii) issue Revenue Certificates of Participation (“Revenue COPs”) to acquire and/or construct, or reimburse the cost of the acquisition or construction of, certain Water Utility System (WU) capital improvements, and fund capitalized interest (Attachment 1 - Resolution);
• Issue Revenue Bonds to acquire and/or construct, or reimburse the cost of the acquisition or construction of, certain WU capital improvements, and fund capitalized interest (Attachment 2 - Resolution); and
• Pay costs of issuance.
Method of Sale
The Refunding Bonds, Refunding Notes, Revenue COPs, and Revenue Bonds (collectively, the “Obligations”) are recommended to be sold on a competitive basis, which is expected to result in the lowest overall cost of financing. Valley Water has issued multiple series of Water Utility debt obligations in recent years and investors are familiar with the WU credit structure such that a competitive sale in the current market is expected to be the most cost- effective method of sale. Staff will conduct a targeted outreach to small, local banks by sending direct emails to these banks to inform them of the pending competitive sale. Staff will be placing the Notice of Sale (Attachment 3) advertisements in the San Jose Post, El Observador, Chinese News, Vietnam Daily, as well as the Bond Buyer, the daily municipal bond newspaper, to ensure a broad and diverse audience of potential bidders are informed of the competitive sale. The Notice of Sale will specify minimum qualifications as follows: (1) the firm must be in compliance with the Valley Water Board of Directors’ Executive Limitation (EL) 4.7.7 and submit a proof of an Environmental, Social, and Governance (ESG) rating of medium or better (small local firms are exempt); and (2) the firm is currently qualified in the California State Treasurer’s Office underwriter pool.
Financing Plan
The financing structure of the Obligations are summarized in the table below. Note that Valley Water may issue Revenue Bonds and/or Revenue COPs but in any case, not in an amount that, including Refunding Bonds/Notes, exceeds $450 million.
|
|
Refunding Bonds |
Refunding Notes |
Revenue Bonds/ COPs |
|
Purpose |
Refund approximately $150-250 million of outstanding short-term interim obligations |
Refund $78.3 million of outstanding short-term interim certificates and fund capitalized interest |
Generate approximately $100-200 million of proceeds to fund future construction and/or acquisition of capital improvements and fund capitalized interest |
|
Repayment Term/Maturity |
30 years |
2 years |
30 years |
|
Debt Service |
Level, on an annual basis |
Interest capitalized; principal expected to be refunded at maturity |
Level, on an annual basis |
|
Security |
Net Water Utility System Revenues pursuant to the Parity Master Resolution |
The Obligations will be issued under Valley Water’s Water Utility System Parity Master Resolution (16-10), adopted on February 23, 2016 (as amended by Resolution No. 16-82, the “Parity Master Resolution”). The authority to issue the Refunding Bonds and Refunding Notes is provided for in Sections 53580-53589.5 of the California Government Code. Section 5 of the District Act provides Valley Water the authority to execute and deliver an Installment Purchase Agreement, which will secure any Revenue COPs issued, to be executed and delivered by the Santa Clara Valley Water District Public Facilities Financing Corporation (the “Financing Corporation”). The authority to issue any Revenue Bonds is provided for in Section 25.2 of the District Act and Sections 54300 et. seq. of the California Government Code.
Outstanding debt previously issued under the Parity Master Resolution (“Parity Debt”) is currently rated ‘AA+’ by Fitch Ratings (“Fitch”) and ‘Aa1’ by Moody’s Investors Service (“Moody’s), both one-notch below the highest possible ratings of ‘AAA’ and ‘Aaa,’ respectively. Staff will be requesting ratings for the Obligations from Fitch and Moody’s and anticipates receiving similar high-grade credit ratings for this transaction.
Board approval of the Resolutions does not commit Valley Water to a definite course of action with regard to any particular project and does not limit Valley Water in exercising any discretion following California Environmental Quality Act (CEQA) review of the project, including (i) considering other feasible alternatives and mitigation measures to avoid or minimize project impacts, (ii) making modifications deemed necessary to reduce project impacts, or (iii) determining not to proceed with one or more component of a project. Additionally, approval of the recommended actions does not obligate Valley Water to approve the construction of any of the projects.
Estimated Sources and Uses of Bond Proceeds
A conservative estimate of sources and uses of funds for the Obligations are set forth below. Board approval of the Resolutions would establish a not-to-exceed total principal amount of $450 million, although the distribution of the type of debt (e.g. COPs vs Revenue Bonds, short- vs. long-term debt, etc.) may be adjusted to reflect business needs and market conditions at time of issuance. Details of the true interest cost, finance charge, total proceeds, and payment amounts are provided in the “Good Faith Estimated Costs” section below.
|
|
Refunding Bonds and Notes |
Revenue Bonds |
Total |
|
Sources |
|
|
|
|
Principal Amount |
$ 242,715,000 |
$ 207,285,000 |
$ 450,000,000 |
|
TOTAL |
$ 242,715,000 |
$ 207,285,000 |
$ 450,000,000 |
|
|
|
|
|
|
Uses |
|
|
|
|
Repay Short-Term Obligations |
$ 228,300,000 |
$ 0 |
$ 228,300,000 |
|
New Project Funds |
0 |
205,937,729 |
205,937,729 |
|
Capitalized Interest |
13,238,412 |
350,000 |
13,588,412 |
|
Underwriters’ Fee* |
728,145 |
621,855 |
1,350,000 |
|
Costs of Issuance |
448,443 |
375,416 |
823,859 |
|
TOTAL |
$ 242,715,000 |
$ 207,285,000 |
$ 450,000,000 |
*Reflects a conservative assumption of underwriters’ fee that is subject to competitive bid of winning firm.
Good Faith Estimated Costs
Pursuant to California Government Code Section 5852.1, the good faith estimates are as follows: (1) the true interest cost is currently estimated to be 5.296% with an upper range of 7.961%; (2) the finance charge (which means the sum of all fees and charges paid to third parties) is estimated to be $2,173,859; (3) the “amount of proceeds” received by Valley Water (which is net of the finance charge) is estimated to be $434,237,729 with an upper range of $454,869,688; and (4) the “total payment amount” (which means the sum of all debt service payments to the final maturity) is estimated to be $850,085,654 with an upper range of $1,045,120,250.
The range of estimates provided above indicates the potential differences based on market conditions as of November 9, 2023, and an upper range of interest rates of 7% for tax-exempt and 9% for taxable debt. Actual results will differ depending on market conditions on the pricing dates which are expected to occur in May/June 2024.
Financing Documents
In addition to the Resolutions (Attachments 1-2) and Notice of Sale (Attachment 3), the following financing documents, in substantially final form, are attached for Board review: Indentures of Trust, Installment Purchase Agreement, Trust Agreement, and Continuing Disclosure Agreements (Attachments 4-7). The financing documents have been set up to allow the Obligations to be sold by either a competitive sale or negotiated sale. The method of sale for the Obligations shall be determined based on market conditions to ensure Valley Water can achieve the lowest overall cost of financing.
Issuance Costs
The estimated total costs of issuance in the amount of $823,859 will be paid from the proceeds of the debt issuances upon or shortly after closing:
|
Description |
Estimate |
|
Rating Fees (Fitch/Moody’s) |
$ 350,000 |
|
Bond Counsel |
205,000 |
|
Municipal Advisor |
160,000 |
|
Trustee |
30,000 |
|
Printing (Official Statement) |
10,000 |
|
News Outlets |
35,000 |
|
Contingency |
33,859 |
|
Total |
$ 823,859 |
Additionally, underwriting costs in the estimated amount of approximately $1,350,000 which is dependent on the amount bid for the Obligations will be retained at closing by the winning firm.
Financing Corporation Approval
Valley Water is required to cause any Revenue COPs, which evidence installment payments to be made by Valley Water under an Installment Purchase Agreement with the Financing Corporation, to be executed and delivered by the trustee. The Financing Corporation Board will be scheduled to consider and approve a resolution authorizing the Revenue COPs, as needed, shortly before or after returning to the Valley Water Board for approval of the Preliminary Official Statement and any other related items.
Financing Schedule
The January 9, 2024, meeting is for the Board to consider the approval of the financing plan and authorize staff to carry it out. Staff expects to return to the Board in April 2024 to seek approval of the primary offering/disclosure document (Preliminary Official Statement) that is provided to potential investors. A delay in the Financing schedule may be considered depending on the progress of the capital expenditures of the Water Utility, to be evaluated in spring 2024. The current anticipated financing schedule is summarized below:
|
Description |
Date/Month |
|
Valley Water Board Meeting - Financing Plan/Documents |
January 9, 2024 |
|
Financing Corporation Board Meeting |
April 2024 |
|
Valley Water Board Meeting - Preliminary Official Statement |
April 2024 |
|
Receive Credit Ratings |
May 2024 |
|
Post Preliminary Official Statement |
May 2024 |
|
Pricing |
May 2024 |
|
Closing |
June 2024 |
Preliminary Official Statement
As the primary securities offering document to potential investors, the Preliminary Official Statement (POS) contains all material information relevant to the Obligations and the security thereof. Staff will return to the Board with the POS after it has been drafted. Valley Water’s Board and executive team are responsible for ensuring that no material facts are omitted or misstated in the Preliminary Official Statement in accordance with federal securities laws and disclosure requirements outlined in the Valley Water Debt Management Policy (Attachment 8).
Community Bank Investments
Valley Water’s Board has implemented an innovative approach that promotes small, local bank participation in Valley Water’s financings and investments. The Board Executive Limitation (EL) 4.7.7 requires that Valley Water only engage with banks that have an Environmental, Social, and Governance (ESG) rating from at least one professional ESG research company of at least average/medium (or its equivalent); banks located within the nine Bay Area counties with total assets below $10 billion are exempt from this limitation. As a result of this policy, the following banking arrangements have been established:
• $20 million in Revolving Lines of Credit from three small, local California banks (Bank of San Francisco, Community Bank of the Bay, and First Foundation Bank) that support the short-term financing program.
• $51 million in deposits with various small, local banks.
• Three letters of credit issued by San Jose-based Technology Credit Union totaling $841,000 to meet the U.S. Army Corp’s financial assurance requirements for the operations of Upper Penitencia, Coyote Ridge, and Rancho Cañada de Pala Preserve watershed projects.
• Valley Water underwriting pool is limited to investment banks with ESG ratings of medium or better with exceptions for small, local California banks.
ENVIRONMENTAL JUSTICE IMPACT:
There are no Environmental Justice impacts associated with this item.
FINANCIAL IMPACT:
The estimated total costs of issuance in the amount of $823,859 plus underwriter’s fees of approximately $1,350,000 will be paid from the proceeds of the debt issuance. The operating budget includes sufficient funds for debt service costs for the Obligations in the Water Utility fund.
CEQA:
The recommended action does not constitute a project under California Environmental Quality Act (CEQA) because it does not have a potential for resulting in direct or reasonably foreseeable indirect physical change in the environment, as outlined in the State CEQA Guidelines, Section 15060(c)(2).
ATTACHMENTS:
Attachment 1: Resolution, Refunding Debt/Revenue COPs
Attachment 2: Resolution, Revenue Bonds
Attachment 3: Notice of Sale
Attachment 4: Refunding Revenue Bond Financing Documents
Attachment 5: Refunding Revenue Note Financing Documents
Attachment 6: Revenue Bond Financing Documents
Attachment 7: Revenue COP Financing Documents
Attachment 8: Debt Management Policy
UNCLASSIFIED MANAGER:
Manager
Darin Taylor, 408-630-3068