HomeMy WebLinkAboutAgenda Report - November 20, 1996 (87)CITY OF LODI COUNCIL COMMUNICATION
AGENDA TITLE: Tax-exempt Financing For Termination Payment of Power Supply Contract with
Washington Water Power Company.
MEETING DATE: November 20, 1996
SUBMITTED BY: Electric Utility Director
RECOMMENDED ACTION: That the City Council adopt the attached resolution authorizing tax-exempt
financing of the payment to Washington Water Power Company for termination
of the Northern California Power Agency (NCPA) - Washington Water Power
Company (WWP) power supply contract.
BACKGROUND: Due to changes in the electric power marketplace, the NCPA - WWP contract
became uneconomical and was cancelled. The City will realize an estimated
net present value savings of $300,000 to $800,000 depending on the market
value of capacity and transmission. The released share of the City's
California -Oregon Transmission Project (COTP) previously dedicated to WWP
power deliveries will now be used for the Seattle City Light power exchange
contract and other Northwest power transactions.
There is an opportunity to save an estimated additional $47,200 to $70,800 by financing the WWP termination
charge rather than paying from cash reserves. This savings results from the difference between taxable interest
rates for cash reserves and the tax-exempt borrowing rate over the next four and one-half years.
All above savings will offset bulk purchased power expenses.
FUNDING: Not applicable
Alan N. Vallow
Electric Utility Director
Prepared by Jack Stone, Director, Business Planning & Marketing
ANV/J LS/pn
Attachment
cc:
APPROVED
City Attorney
CITY MANAGER
HAUSERWDMIN\CTYCNCL\11-20-96.CC2 November 13, 1996
Executive Summary
NCPA has executed an agreement to terminate the power supply contract with Washington Water
Power Company (WWP) Termination of the power supply contract requires an upfront
termination payment to W WP. The termination payment can either be funded with the proceeds
from tax-exempt bonds issued by NCPA or from operating reserves of each of the participating
members.
Issuing tax-exempt bonds to fund the termination payment allows the participating members to
keep their operating reserves intact which they can invest at taxable rates that are significantly
higher than the tax-exempt borrowing rate.
The savings or positive arbitrage that accrues to the participating members by issuing tax-exempt
bonds and leaving their operating reserves invested. in taxable investments ranges from $400,000
to $600,000 on a present value basis (see revised savings analysis developed by NCPA stat.
In order for tax-exempt bonds to be issued, the governing boards of the participating members
must approve agreements modeled after existing NCPA agreements to unconditionally pay debt
service.
Due to the short duration of this proposed transaction (approximately 4.5 years) any delays
beyond a December 1, 1996 closing will reduce savings by approximately $25,000 per month.
Time, is therefore, of the essence. Attached are some key questions which the participants may
pose relative to the prvpvsed tax-exempt financing alternative.
BPA/WWP Contract Termination
Choices.-
A.
hoices:A. Pay $17,151,288 to W WP.
B. Kccp the $17,151.288 invested and float a $19,505,000 bond issue. Pay debt service
G.O.R. as it comes due, but keep the remaining balance invested. Assuming earnings on
the G.O.R. continue at approximately current rates, participants
will obtain all -in net p.v.
savings of approximately $400,000 to $600,000
Available
Bond Imanec Alternative
Share of
G.O.F. Balance
Share of Savings
Tcrmination Chre.
8/_31/1996**
Min.
Alamo& 11.000% $1,886,641
$11,309,557
$44,000 566,000
Hcaldsbnrg 1.8000/0 308,723
1,563,772
7,200 10,800
Lodi 11.800°/„ 2,023,852
15,775,097
47,200 70,8(1[)
Lornpoc 2.600%: 445,933
2,614,624
10,400 15,60
.Palo Alto 11.6000/0 1,989,550
5,392,280
46.400 69,600
Roscville 22.21x)% 3,807,587
3.036,448
88,800 133,200
Turlock 36.000%;. 6,174,463
2.396,447 (c)
144,000 216,00(}
Ukiah 3.000% 514,532
1.300.143
12.006 18,
100.000"/0 $17,151,288
$43,388,566
$40,000 $600,000
** Does not include FY 1994-95 Settlement expected to be
approx. $6 million plus.
(A) G OR. investments current avrg.
interest rate 6.:307% or bond equivalent yield of 5.827%
(B) If financed, Agency participants would obtain a cash savings out of the deal of between
5400,000 and $600,000 depending on how the bond escrow is invested.
(C) It appears, all members except for Turlock appear to have sufficient G.O.R. funds
available to fund direct payments if desired.
NCPA Staff Report to Member Agencies
Questions and Answers
1) Why issue bonds to fund the termination payment when cashreserves are available to make
the termination payment?
Cash reserves can be invested at taxable rates significantly higher than. the tax-exempt borrowing
rate generating positive arbitrage (risk free income) or cost savings for each agency participating
in the bond issue. Issuing bonds allows cash reserves to be saved`for other purposes such as costs
that cannot be paid for with tax-exempt bond proceeds. Maintaining healthy levels of cash
rescrves during this period of transition in the power industry is viewed favorably by the rating
agencies.
1) What are the responsibilities of each of the participating members in implementing the bond
issue?
Each governing board will have to approve a new or amended agreement drafted by bond counsel
unconditionally obligating them to pay their share of debt service on the bond issue with the same
rate covenant that already exists in other thud phase agreements. The general counsel for each
district will have to provide an opinion similar to the ones provided for other NCPA bond Issues.
Finally each member will have to provide continuing disclosure on their operations as they already
Have to do for other bond issues.
d) Will the additional debt increase our fixed power costs?
No, actually the tax-exempt bond issuance should decrease your annual fixed cost because the
earnings on your invested each reserves (not otherwise used to make the termination payment)
will be greater than the interest cost on the bond issue.
-i) Are the estimated savings from the tar -exempt bond issuance net of all costs?
yes. 'The estimated savings takes .into account all costs attendant to the issuance of bunds
including legal, financial advisory, underwriting, printing, insurance, initial trustee fees, and credit
ratings
S) Now will wdditiomd debt he viewed from an accounting pemspective7
The balance sheet will show additional short term debt (under 1 year) and long term debt (over 1
year) balanced by an equal amount of invested cash reserves that would otherwise have been
used to terminate the contract. The income statement will show earnings on the cash reserves
greater than the interest expense on the debt issued.
6) Now can you insure that the cash taxrrhle invesiments will generate more income than the tar -
exempt interest expenar (pmdtive arbitrage)?
By investing the cash reserves in taxable securities with an average life equal to or greater than the
tax-exempt bonds.
7) How can the .debt be eliminated before its final maturity?
The debt can be legally defeased at any time by setting up an escrow of US. Treasuries or State
and Local Government Securities (SLGS) pledged to pay the debt service on the bonds. The
yield on the escrow can not be above the bond or arbitrage yield there by precluding any future
positive arbitrage on the cash reserves invested in the escrow. The bonds can also be purchased in
the open market, which could be less costly than legally defeasinb the bonds.
RESOLUTION NO. 96-172
A RESOLUTION OF THE LODI CITY COUNCIL
APPROVING THE TAX-EXEMPT FINANCING FOR TERMINATION
PAYMENT OF POWER SUPPLY CONTRACT WITH
WASHINGTON WATER POWER COMPANY
BE IT RESOLVED, that the Lodi City Council hereby authorizes the tax-exempt
financing of the payment to Washington Water Power Company for termination of the
Northern California Power Agency (NCPA) - Washington Water Power Company (WWP)
power supply contract.
Dated: November 20, 1996
I hereby certify that Resolution No. 96-172 was passed and adopted by the Lodi
City Council in a regular meeting held November 20, 1996 by the following vote:
AYES: Council Members - Davenport, Mann, Sieglock and Warner (Mayor)
NOES: Council Members - None
ABSENT: Council Members - None
ABSTAIN: Council Members - Pennino
J IFER PERRIN
Clerk
96-172