In July 2017, the State Water Resources Control Board Division of Drinking Water (DDW) approved a new maximum contaminant level (MCL)
for the synthetic organic chemical TCP. The implementation schedule for the new regulation requires utilities to begin sampling for TCP in drinking water during the first quarter of 2018. DDW will require the City comply with the new regulation within the City’s domestic water system area.
The City currently estimates the initial capital costs alone for this mandatory treatment project will be approximately $55 million. While the water enterprise has a modest fund balance that has allowed us to order some of the items with longer lead times, the City domestic water enterprise will need to finance the remainder of the project.
In order for the water enterprise to borrow money the City needs to raise the water rates to generate sufficient annual cash flow to cover the new debt service payments as well as the increased operating costs associated with the increased treatment requirements to treat for the TCP contamination. A special water rate consultant was hired to calculate the rate increases required to meet the new cost obligations. The results of this rate study were provided to the Council at a workshop on July 19, 2017. The rate increases are being considered this evening under a separate agenda item.
The financing necessary for the project will be initiated in phases with the first phase requiring a bond issue of approximately $23,000,000. The bonds will be issued at a fixed interest rate with a term of 25 years. The annual debt services cost (principal and interest) for this first bond issue is currently estimated at $1.4 million per year.
Current litigation attempts to recover these costs are ongoing, but the outcome of that is unknown at this time. As a result, the bonds are being structured with a special call provision to allow the City the flexibility to pay off the bonds early without penalty if the City should receive proceeds from the current litigation.
Staff is requesting adoption of a resolution that approves the form and substance of several documents necessary to complete the borrowing transaction.
The resolution for your consideration effects the following:
- Approves the Master Trust Indenture;
- Approves the First Supplemental Trust Indenture;
- Approves a Preliminary Official Statement (POS);
- Approves a Bond Purchase Agreement;
- Approves a Continuing Disclosure Certificate; and
- Authorizes designated City staff to take additional actions necessary to complete the financing transaction.
Upon the approval of the resolution, the POS will be updated to include the rating agency information, and then the updated POS will be distributed to potential investors to solicit their interest in purchasing the bonds. The pre-sale activity by the underwriter usually runs for 10 days, at which time the bond underwriter will propose a final rate structure to the City based on the current market conditions. The City will, with assistance from our Financial Adviser and bond counsel, review the proposal and then the pricing of the bonds will be finalized by execution of the Bond Purchase Contract. We anticipate the pricing activity to take place in mid September with final closing and funding of the transaction to be completed by the end of September.