HomeMy WebLinkAbout2008/11/04 Item 9
CITY COUNCIL
AGENDA STATEMENT
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NOVEMBER 4, 2008, ltem~
ITEM TITLE:
RESOLUTION OF THE CITY COUNCIL OF THE CITY OF CHULA
VISTA REGARDING AMENDMENTS TO INDENTURES AND LOAN
AGREEMENTS RELATING TO OUTSTANDING INDUSTRIAL
DEVELOPMENT REFUNDING REVENUE BONDS OF THE CITY OF
CHULA VISTA ISSUED TO REFINANCE COSTS OF CERTAJN
ELECTRIC FACILITIES FOR SAN DIEGO GAS & ELECTRIC
COMPANY AND RELATED BOND INSURANCE TERMINATION AND
RELEASE AGREEMENT
SUBMITTED BY:
DIRECTOR OF FINANCE/TREASURER'-i7K
REVIEWED BY:
~
INTERIM CITY MANAGER 7 /
DEPUTY CITY MANAGER YV
4/STHS VOTE: YES D NO 0
SUMMARY
The Chula Vista City Council has the ability to issue tax-exempt bonds for large
industrial/manufacturing projects, Industrial Development Bonds (IDBs) are tax-exempt bonds,
which can raise funds for manufacturing businesses or energy development projects, On March
23, 2004, the City Council passed resolution 2004-093 authorizing the issuance and sale of up to
$686.4 million of IDBs to refund IDBs previously issued by the City of Chula Vista and the City
of San Diego to finance or refinance certain costs of gas and electric facilities for San Diego Gas
and Electric (SDG&E) resulting in the issuance of approximately $412.5 million in IDBs.
SDG&E has asked the City to accept certain amendments to the existing IDBs and to join
SDG&E in executing an agreement that will terminate certain bond insurance policies relating to
these lOBs,
RECOMMENDA nON
That Council adopt the resolution.
9-1
NOVEMBER 4, 2008, Item~
Page 2 of4
BOARDS/COMMISSION RECOMMENDA nON:
Not applicable.
DISCUSSION
San Diego Gas and Electric Company (SDG&E) has approached the City indicating its desire to
remarket previously issued Industrial Development Bonds (IDBs) without bond insurance. Prior
to any remarkcting drorts SDG&E believes it prudent that the bond Indentures and Loan
Agreements be amended in order to facilitate remarketing the IDBs as uninsured. The attached
letter from SDG&E explains the events and the reasons that have compelled them to make their.
request. This staff report provides a brief history of past City Council actions for the IDBs and
summarizes SDG&E's request along with a set of detlnitions at the end of the report. .
In April 1996, the City Council adopted Ordinance 2669 amending Chapter 3.48 of the Chula
Vista Municipal Code to permit the refinancing of regional utility projects upon a finding of City
bene tIt. The City Council also passed a resolution setting an issuance fee at 25 basis points (1/4
of I percent) of the principal amount, payable at the time of issue, plus costs. The fee was
subsequently increased to 35 basis points in an MOD between the City and SDG&E dated
October 12, 2004.
On September 11, 1998, the City of Chula Vista and SDG&E entered into a Letter of Agreement
granting Chula Vista exclusive rights to be the issuer of SDG&E's IDBs on the following
conditions:
1. The processing ofSDG&E's applications for IDBs is completed in a timely manner; and
2. Chula Vista's issuance charge is no more than 35 basis points (in addition to Chula
Vista's administrative costs related to bond issuance); and
3. Chula Vista charges no annual fee or costs; and
4. Chula Vista's Bond Counsel indicates that Chula Vista's involvement with respect to
each issue of IDBs is permissible under the then current tax laws and that it is not
necessary to obtain a Superior Court judgment in a validation action..
On March 23, 2004, the City Council passed resolution 2004-093 that authorized the issuance
and sale of up to $686.4 million of IDBs to refund IDBs previously issued by the City of Chula
Vista and the City of San Diego to finance or refinance certain costs of gas and electric facilities
for SDG&E. This action resulted in the City of Chula Vista issuing IDBs in 2004 and 2006 for
the benefit of SDG&E. In June 2004 $251.3 million in IDBs were issued and in September 2006
another $161.2 million was issued to refund two series of City of San Diego IDBs. Both the
2004 IDBs and the 2006 IDBs are secured by SDG&E's First Mortgage Bonds. In addition, the
2004 IDBs are insured by XL Capital Assurance and the 2006 IDBs are insured by Ambac
Assurance Corporation. The lOBs were issued as variable rate bonds in an auction rate mode.
The credit rating agencies (Moody's, S&P and Fitch) initially rated both the issues "AAA"
because the IDBs were insured. However, due to the mortgage meltdown the two bond
insurance companies' credit ratings were downgraded from their "AAA" status. The credit
downgrade on the insurers has made the IDBs less desirable for investors and accordingly
9-2
NOVEMBER 4,2008, Item 9
Page 3 of Z:f
SDG&E has had to pay above market rate interest in order to maintain investor interest in the
two IDB issues. Paying higher than market rate interest has caused SDG&E or Sempra Energy
to purchase and hold all of the 2004 and 2006 IDBs until they can be remarketed at more
favorable interest rates to new investors.
According to SDG&E, potential remarketing agents. for the 2004 and 2006 IDBs have indicated
that lower interest rates can be achieved without bond insurance. SDG&E has indicated that the
existing Indentures and Loan Agreements for the 2004 and 2006 IDBs specifically envision that
the initial Bond Insurance may be telminated upon direction from SDG&E. The bond insurers,
XL Capital Assurance and Ambac Assurance Corporation, both appear willing to cancel their
respective Insurance Policies. The Loan Agreements require SDG&E's First MOligage Bonds to
remain in place as long as the 2004 and 2006 IDBs remain outstanding. SDG&E has further
indicated that there is no requirement in the Indentures or the Loan Agreements that SDG&E
arrange for a substitute Credit Facility if the initial bond insurance for the 2004 and 2006 IDBs is
terminated.
SDG&E believes it would be possible to remarket the 2004 and 2006 bonds without amendments
to the Indentures and the Loan Agreements. However, to align the bond documents with the
remarketed IDBs' uninsured status, it would be useful to amend various other provisions of the
Indentures and Loan Agreements in anticipation of the termination of the XL Capital Assurance
and Ambac Assurance Corporation Policies (e.g. delete requirements of Bond Insurer consents
and exercise of remedies upon Default even after the Policies have been terminated).
SDG&E is proposing to amend and restate the Indentures and Loan Agreements to:
1. ClarifY that Bond Insurance is just one permitted type of Credit Facility.
2. Clarify that a person who provides a. Credit Facility with respect to fewer than all the
Bonds generally is to be treated as a Credit Provider only in respect of the Bonds covered
by the Credit Facility.
3. Clarity that any Credit Facility may be terminated at will by the Borrower (consistent
with the terms ofthat Credit Facility) other than as expressly specified in the Indenture or
the Loan Agreement.
4. Clarity that any person who once was a Credit Provider ceases to be treated as a Credit
Provider after its Credit Facility has been terminated.
5. Eliminate the requirement of a Credit Facility upon interest rate Adjustment Dates.
6. ClarifY that the Liquidity Facility requirement is optional once an Initial Credit Provider
ceases to provide a Credit Facility.
7. Clarify that Initial Credit Providers' project access and records examination rights are
limited to the periods their 9redit Facilities are in effect.
In addition, Ambac Assurance Corporation will require the City to execute agreements regarding
the termination of its bond insurance. .
Orrick, Herrington & SutclitIe LLP, Bond Counsel for the 2004 and 2006 IDBs, has advised that
Resolution 2004-093 confers legal authority upon the Director of Finance to approve proposed
amendments to the 2004 and 2006 Indentures and Loan Agreements and to execute and deliver
9-3
NOVEMBER 4,2008, Item q
Page 4 of ~
the proposed bond insurance termination and release agreement with Ambac Assurance
Corporation in respect of certain of the 2004 and 2006 IDBs. However, the Director of Finance
has requested guidance from the City Council before committing to exercise that existing
authority. The resolution that is recommended for approval would approve the Director of
Finance's exercise of existing authority to facilitate the above changes to the Indentures and
Loan Agreements and termination of the Policies issued by Ambac Assurance Corporation. The
City will receive an opinion of Bond Counsel regarding the due authorization,. execution and
delivery, and enforceability of the amendments and their compliance with the bond documents.
DECISION MAKER CONFLICT
Staff has reviewed the decision contemplated by this action and has determined that it is not site
specific and consequently the 500 foot rule found in California Code of Regulations section
I 8704.2(a)(I) is not applicable to this decision and that section 18707 would be applicable to this
decision.
FISCAL IMPACT
There is no fiscal impact to the General Fund as a result of the recommended action. Because
this is a remarketing effort, the City's usual issuance fee of 35 basis points is not applicable.
.
However, all reasonable City costs (staff time, legal fees) and indemnification against any other
costs incurred in connection with the proposed amendments will be paid by SDG&E.
ATTACHMENTS
I. Glossary of Terms
2. September 23, 2008 SDG&E Memo
3. March 23,2004 City Council Agenda Statement
Prepared by: Phillip Davis, Assistant Director, Finance Department
9-4
A TT ACHMENT I
GLOSSARY
Definitions Per the Industrial Dev~lopment Bond's Indenture of Trust
Borrower means San Diego Gas & Electric Company, a corporation organized under the laws of
the State of California, and its successors and assigns.
Credit Agreement means any agreement between the Borrower and any Credit Provider
pursuant to which any Credit Facility is provided to the Trustee.
Credit Facility means (i) any letter of credit, guarantee, insurance policy or standby purchase
agreement provided by a financial institution, (ii) any mortgage bonds, debentures or other debt
obligations of the Borrower or (iii) any other support or liquidity arrangement or security, if any,
provided by the Borrower.
Credit Provider means the provider of any Credit Facility.
Loan Agreement is between the City and the Borrower and relating to the loan of the proceeds
of the Bonds, as originally executed or as it may from time to time be supplemented or amended
Further Definitions Provided by Money-Zine.Com
Auction-Rate Sccurities are long-term, variable rate bonds, which are tied to short-term interest
rates. The interest rate on an auction-rate security is detennined via a Dutch auction and these
securities are typically sold in $25,000 denominations.
Dutch auction, also referred to as a descending price auction, determines the minimum interest
rate at which all bonds can be sold at par. This interest rate is referred to as the clearing rate, and
this rate of interest is paid on the entire issue up for bid during the upcoming period. The Dutch
auction itself takes place using a seven-step process:
I. Investors identify the par amount of securities they wish to purchase, and what they are
willing to pay for those securities.
2. Each dealer passes along these bids to an auction agent.
3.. The auction agent collects all of the bids from all the dealers participating in the auction.
4. The auction agent then sorts the bids in ascending rate order until a clearing rate is found.
5. Investors that bid a rate that was lower than or equal to the clearing rate are scheduled to
receive bonds.
6. The auction agent notifies each dealer of the auction results.
7. Dealers record and settle the bond trades on the next business day
9-5
" "
ATTACHMENT 2
~
~ Sernpra Energy'"
101 Ash Street
San Oieqo, CA 92101-3017
September 23,2008
Maria Kachadoorian
Director of Finance/Treasurer
City of Chula Vista
276 Fourth Avenue
Chula Vista, CA 91910
Re: SDG&E IDB Proposed Bond Docnment Amendments
Dear Ms. Kachadoorian:
On March 11, 2008, Marilyn Burke, then the director of corporate [mance at Sempra
Energy, sent you a letter providing the City of Chula Vista with background on events in
the credit markets, resulting impacts to SDG&E's insured IDBs and SDG&E's
subsequent plans to remarket those securities. As you lmow, Marilyn now works for an
unregulated affiliate ofSempraEnergy. I'm sending you this update afthe March 11,
2008 letter to reflect what has occurred since you, Marilyn, and I met in May of this year.
History
In June 2004, SDG&E refunded over $250 million of its industrial development bonds
through the City ofChula Vista. Series A through E, totaling $176.265 million principal
amount, are insured by XL Capital Assurance. These non-A.1\i!T bonds were placed into a
weekly Dutch auction rate mode with an initial interest rate of 0.90%. The $75 million,
Series F bonds are insured by Ambac Assurance Corporation. These 2004F Bonds are
subject to A.1\i!T, and were placed into a 28-day Dutch auction rate mode with an initial
interest-rate.ll.LLD 5.%
In September 2006, SDG&E arranged for the refunding of two series of City of San
Diego IDBs that had been issued for the benefit ofSDG&E by the $161.24 million Chula
Vista 2006 Series A, insured by Ambac Assurance Corporation. These non-AMT bonds
were placed into a weekly Dutch auction rate mode with an initial interest rate of3.20%.
All of the Chula Vista 2004 Bonds and 2006 Bonds are secured by SDG&E's first
mortgage bonds. All were initially rated "AAA" by Moody's, S&P and Fitch due to the
insurance wraps.
9-6
Recent Market Events
The major bond insurers' difficulties coincide with the continuing sub-prime mortgage
market meltdown. There are mounting losses in the mortgages that back up securities
that XL Capital, Ambac and other firms have insured. As the magnitude of this exposure
became more apparent, the credit rating agencies grew increasingly concerned over
whether XL Capital, Ambac and other bond insurers would have adequate equity capital
to weather their expected future losses on their sub-prime portfolios. Accordingly, many
bond insurers have had their credit ratings downgraded from "AAA" status. The current
ratings of our bond insurers are:
S&P Moody's Fitch
Ambac AA. Aa3 Not rated effective
Negative outlook Negative outlook 6/26/08
XL Capital A- Baal A
Negative outlook Negative outlook Stable outlook
Auction Rate Market Impact
Typical auction rate note C"ARN") investors relied on "AAA" insured ratings, so the
downgrades of Ambac, XL Capital and other bond insurers have made ARNs
undesirable. Nationwide, auctions are clearing at significantly higher interest rates than
vatiable rate demand bonds because ARNs are viewed as being more risky and less
liquid. Accordingly, rates have spiked dramatically for various issuers; if an auction fails
due to insufficient bidders, the interest rate will be a predefined "maximum rate" for that
auction period. Although none of the auctions failed, in early 2008 interest rates on the
2004 Bonds and the 2006 Bonds were significantly higher than SDG&E would expect to
pay for other fonns of secured tax-exempt debt. As a result, SDG&E was incuning
above mat-ket interest expense on the 2004 Bonds and 2006 Bonds.
SDG&E Initial Response
Because of concerns over the higher interest costs SDG&E would incur if the 2004.
Bonds and 2006 Bonds remained in the Auction Rate mode, SDG&E gave formal notices
of conversions from Auction Rate mode to a vVeekly Rate mode. The conversions took
place in March 2008. SDG&E or Sempra Energy has purchased and now holds all the
2004 Bonds and 2006 Bonds until they can be remarketed at more favorable interest rates
to TlP:winvestors
Remarketing of the 2004 Bonds and 2006 Bonds Would Be Facilitated By
Amendmeuts
Potential remarketing agents for the 2004 Bonds and the 2006 Bonds indicate lower
interest rates can be achieved without bond insurance. The existing Indentures and Loan
Agreements for the 2004 Bonds and for the 2006 Bonds specifically envision that the
initial Bond Insurance may be terminated upon direction from SDG&E. XL Capital and
Ambac both now appear willing to cancel their respective Insurance Policies.
9-7
The Loan Agreements require SDG&E's First Mortgage Bonds to remain in place as long
as the 2004 Bonds or the 2006 Bonds remain outstanding. But there is no requirement in
the Indentures or the Loan Agreements that SDG&E arrange for a substitute Credit
Facility if the initial Bond Insurance Policy for any selies of 2004 Bonds or 2006 Bonds
is terminated.
SDG&E believes it would be possible to remarket the converted 2004 Bonds and 2006
Bonds without amendments to the Indentures and Loan Agreements. However, to align
the bond documents with the remarketed Bonds' uninsured status, it would be useful to
amend various other provisions of the Indentures and Loan Agreements in anticipation of
the termination of the XL Capital Policies and Ambac Policies (e.g., delete requirements
of Bond Insurer consents and exercise of remedies upon Default even after the Policies
have been terminated).
We propose amending and restating the Indentures and Loan Agreements to:
1. Clarify that Bond Insurance is just one permitted type of Credit Facility;
2. Clarify that a person who provides a Credit Facility with respect to fewer than
all the Bonds generally is to be treated as a Credit Provider only in respect ofthe
Bonds covered by that Credit Facility;
3. Clarify that any Credit Facility may be terminated at will by the Bon-ower
(consistent with the terms of that Credit Facility), other than as expressly
specified in the Indenture or the Loan Agreement;
4. Clarify that any person who once was a Credit Provider ceases to be treated as a
Credit Provider after its Credit Facility has been terminated;
5. Eliminate the requirement of a Credit Facility upon interest rate Adjustment
Dates;
6. Clmify that Liquidity Facility requirement is optional once an Initial Credit
Provider ceases to provide a Credit Facility; and
7. Clarify that Initial Credit Providers' project access and records examination
lights are limited to the periods their Credit Facilities are in effect.
IlWouJ:d-be-usefui-to-pttt-lhese-ame11flments-iTlffi-effect-as-s0Bfr-as-resst[}I€~H:-th8--Git-y--is
amenable to these amendments, SDG&E will ask Orrick, Herrington & Sutcliffe LLP,
Bond Counsel, to prepare the documents needed to implement these amendments.
Please note that if the existing Bond Insurance Policies are terminated with respect to the
2004 Bonds and 2006 Bonds, SDG&E will remarket all the Bonds to the public with new
CUSIP numbers and new offering circulars.
9-8
Request to the City of Chula Vista
In summary, SDG&E is requesting approval of proposed amendments to the 2004 and
2006 Indentures and Loan Agreements.
Section 10 of Resolution 2004-093 authOlizes the Director of Finance to amend
documents and substitute credit enhancement for the 2004 Bonds and for the 2006 Bonds
without further authorization of the City Council. SDG&E believes this original
delegation to City staff is broad enough to implement the proposed amendments without
additional fOlmal action by the City Council. However, SDG&E would be pleased to
work with City staff on a supplemental City Council resolution acknowledging or
approving the proposed amendments if City staff believes that would be desirable.
SDG&E will pay any reasonable City costs incuned in connection with the review and
approval of the proposed amendments. SDG&E also will indenmify the City for any
other cost incuned as a result of or in connection with the proposed amendments. We
will provide an opinion of Bond Counsel that the amendments are authorized by the
existing Indentures and the Loan Agreements and will not adversely affect the tax-
exempt status of the outstanding Bonds.
Another brief meeting with you to discuss the above request as well as to introduce
Sempra's new director of corporate finance, Mark Roberge, would be helpful in keeping
this project on course. I will contact you directly to make the necessary anangements.
Sincerely yours,
~IJ.
I~
Gary H. Hayes
Corporate Finance Manager
Sempra Energy
cc: Mark Roberge
Dean Criddle
Dennis AtTiola
Ahmad Solomon
Charlie McMonagle
9-9
ATTACHMENT 3
ITEM TITLE:
COUNCil AGENDA STATEMENT
/]
Item ~
Meeting Date 3123/04
RESOLUTION OF THE CITY COUNCIL OF THE CITY OF
CHULA VISTA AUTHORIZING THE ISSUANCE AND SALE OF
NOT TO EXCEED $686,400,000 AGGREGATE PRINCIPAL
AMOUNT OF INDUSTRIAL DEVELOPMENT REFUNDING
REVENUE BONDS OF THE CITY OF CHULA VISTA TO
REFUND CERTAIN BONDS ISSUED BY THE CITY OF CHULA
VISTA AND THE CITY OF SAN DIEGO TO FINANCE COSTS
OF CERTAIN GAS AND ELECTRIC FACILITIES FOR SAN
DIEGO GAS & ELECTRIC COMPANY, AUTHORIZING THE
EXECUTION AND DELIVERY OF AN INDENTURE OF TRUST
AND A LOAN AGREEMENT PROVIDING FOR THE ISSUANCE
OF THE BONDS AND THE REPAYMENT OF THE LOAN OF
THE PROCEEDS THEREOF, RESPECTIVELY, AND RELATED
MATTERS
SUBMITTED BY: Director of Financ~
REVIEWED BY: City Manager~: \)J'" (4/Sths Vote: Yes _NolL)
In April 1996, the City Council adopted Ordinance 2669 amending Chapter 3.48 of the
Chula Vista Municipal Code to permit the refinancing of regional utility projects upon a
finding of City benefit. Council also passed a resolution setting an issuance fee at 25
basis points (1/4 of 1 percent) of the principal amount, payable at the time of issue,
plus costs.
On September 11, 1998, the City of Chula Vista and San Diego Gas & Electric
(SDG&E) entered into a Letter of Agreement grantingChula Vista exclusive rights to
be the issuer of SDG&E'slndustrial Development Revenue Bonds (IDBs) on the
following conditions:
a) the processing of SDG&E's applications for IDBs is completed in a timely
maflf1Bf~and
b) Chula Vista's issuance charge is no more than 25 basis points (in addition to
Chula Vista's administrative costs related to bond issuance); and
c) Chula Vista charges no annual fee or costs; and
d) Chula Vista's Bond Counsel indicates that Chula Vista's involvement with
respect to each issue of IDBs is permissible under the then current tax laws
9-10
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Page 2, Item :2..
Me~~E1ate=3f2B1tJ4
and that it is not necessary to obtain a Superior Court judgment in a validation
action.
SOG&E 'has requested that the City refund previously issued series of lOBs. This
Bond Resolution authorizes the issuance and sale of up to $686.4 million of lOBs to
refund lOBs previously issued by the City of Chula Vista and the City of San Diego to
. finance or refinance certain costs of gas and electric facilities for SOG&E.
The Chula Vista City Council has the ability to issue tax-exempt bonds for large
industrial/manufacturing projects. lOBs are tax-exempt bonds, which can raise funds
for manufacturing businesses or energy development projects.
RECOMMENDATION: Adopt the resolution, which authorizes the issuance and sale
from time to time of up to $686.4 million refunding lOBs to refinance a iike principal
amount of outstanding lOBs.
BOARDS/COMMISSIONS RECOMMENDATION: Not Applicable.
DISCUSSION:
The Resolution authorizes the issuance of up to $686,400,000 of refunding lOBs in
order to refund all or a portion of the outstanding lOBs issued by the City of Qhula
Vista and the City of San Diego for the benefit of SOG&E and its ratepayers in order to
generate interest savings. The lOBs will be sold at negotiated sales at such times as
SOG&E requests, which will depend on the interest rate market being favorable. The
Resolution would remain in effect for approximately 3 years.
Specifically, tonight's action:
" Finds that the refunding of the outstanding lOBs that financed or refinanced gas
and electric generation, transmission and distribution facilities throughout
SOG&E's service territory shall directly benefit the citizens of Chula Vista.
" Authorizes refunding lOBs to be issued in one or more series in an aggregate
principal amount not to exceed $686,400,000.
Approves the draft forms of Indenture of Trust, Preliminary Official Statement,
Bond Purchase Agreement, Loan Agreement and related documents providing for
Ule-terms-tof-issuaUC6-oUbalDBSrllSELOfJ nR rroceB.~andJ:b.e_[e.p-avmenUbereof
by SOG&E. and authorizes the Mayor and staff to execute all necessary bond
documents in final forms approved by the City Attorney.
FindinQ of Local Public Benefit
Pursuant to the Chula Vista Municipal Code ("CVMC") Chapter 3.48 the City is
authorized to issue lOBs for basic utilities to reduce the cost of providing such service
9.,;,..~1~)
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Page 3, Item
Meeting Date 3/231<J4
:(
and thereby reduce the rates of industrial, commercial and residential utility customers
within the City~ CVMC Section 3.48.10.0 specifically provides as follows:
Encouraging industrial and commercial development and the
provision of basic utilities pursuant to this chapter (1) will promote
health, safety and welfare of the city, including those public interests
enumerated above, and will improve the social, moral, economic and
physical condition of the community thereby, and (2) constitutes a
municipal affair of the city, a valid exercise of the police powers of the
city, and a public purpose in which the city has a peculiar and unique
interest.
The lOBs to be issued to refund the lOBs originally issued to finance gas and electric
generation, transmission and distribution facilities throughout SOG&E's service
territory, including Chula Vista, shall directly benefit the citizens of the City by reducing
the costs of providing utility service, thereby reducing a cost component in the rates to
be paid by industrial, commercial and residential utility customers within the City. This
would include rates paid by the City itself for its energy needs. Interest rate reductions
are passed on to customers through periodic costs of capital proceedings conducted
by the California Public Utilities Commission. These proceedings ensure that a
reduction to SOG&E's average debt cost is translated dollar for dollar into reduction to
the Company's revenue requirements, which determine the rates charged to
customers.
A list of the types of facilities underlying the financing is attached to this report as
Exhibit A.
Summary of Bond Documents
The draft transaction documents are substantially the same as the transaction
documents used by the City as issuer for previous lOB issues of this type. Copies of
the transaction documents are attached to this report as Exhibit B.
The Indenture of Trust is between the City of Chula Vista and the Trustee (U.S. Bank)
and provides that the Trustee will keep records of the lOBs issued, administer the lOB
prlJ.c.eiJrl~acQorrl;mr:A with thA I orlo-Agmernent'-:r:ac.eilIB_loarLtepayrn.e.o!s-lrom
SOG&E, and make the required payments to bondholders.
The Official Statement is a disclosure document that provides potential buyers of the
lOBs the information regarding how the proceeds will be used, what the source of the
repayment will be, a legal opinion of tax exemption, and a description of the legal
documents supporting the financial structure.
..., ~12
0< --;,..1
Page 4,ltem ~
MWfi~3T2'37e4
The Bond Purchase Aqreement is between the City of Chula Vista, SOG&E and the
underwriting team. By this agreement the City agrees to sell, and the Underwriters
agree to purchase, all of the lOBs issued at an agreed upon price and yield.
The Loan Aqreement is between the City of Chula Vista and SOG&E. It provides that
the City will loan the proceeds of the lOBs to SOG&E to repay the loans with respect
to the lOBs previously issued by the City of Chula Vista and the City of San Diego and
that the loan repayment amounts by SOG&E will be sufficient to pay the principal and
interest on the new lOBs issued. The Loan Agreement also establishes the City's
compensation as the issuer, and includes SOG&E's agreement to indemnify the City
against most risks arising from its role as issuer of the lOBs.
Bond Counsel and Special Counsel
The firmof Orrick, Herrington & Sutcliffe, LLP is bond counsel for the City as issuer in
connection with the issuance of the new lOBs. The bond counsel was selected based
on a longstanding involvement in SOG&E's prior lOB issuances. The firm of Jones
Hall was selected as special counsel to review transaction documents and to prepare
the City's required legal opinion. Jones Hall was selected to represent the City of
Chula Vista's interests based on its participation in previous lOBs issued and/or
refunded by the City of Chula Vista. SOG&E pays for all counsel, financial advisors
and bond issuing costs directly. Except for special legal counsel representing City
interests, SOG&E selects and recommends for Chula Vista approval all outside firms
that make up the financing team.
Bond Counsel has advised the City and SOG&E that (a) Chula Vista's involvement
with respect to each issue or refinancing is permissible under applicable laws, (b) a
Superior Court validation judgment confirmed the City's authority to issue lOBs for this
purpose, and (c) no additional Superior Court validation is required for the proposed
refinancings.
leqal and Financial Risks
In General
The City will not be obligated to gay the principal or interesLQ~ELillBs~or tn
discharge any other financial liability in connection with the proposed refundings,
except from and to the extent of revenues received from SOG&E or from any third-
party credit enhancer (for example, any bond insurer). This lOB issuance does not
directly impact the City's bonding capacity because there is no governmental
commitment to pay debt service on the lOBs in the event loan payments are not timely
made by SOG&E. In case of default, the City's credit rating should not be affected.
The lOBs are treated by the investors as conduit financing of the City, and payable
from the limited revenues received under the Loan Agreement. This is similar to the
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Page 5, Item
Meeting Dare-3123?02I
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issuance of Special Tax Bonds, where investors look only to the Special Tax
Revenues in a Community Facilities District to pay the bonds and not to the City to
make up shortfalls.
Specific Risks and Responsibilities of the City of Chula Vista as Conduit Issuer
of the Bonds
1. The lOBs are Limited Obliqations. . The lOBs are limited obligations of the City
payable from reveriues of the City received pursuant to the Loan Agreement.
The City ultimately is responsible for collection of SOG&E payments under the
Loan Agreement and remittance of these payments to bondholders. This
obligation is mitigated by the fact that the Bond Trustee will agree to perform
these functions on behalf of the City.
2. Tax Compliance Functions. The City and SOG&E each covenant to comply
with various sections of the Internal Revenue Code in connection with the lOBs,
regarding rebate payments. The City and SOG&E agree to undertake
compliance with certain provisions of the Internal Revenue Code and Treasury
Regulations with respect to the lOBs. This may include keeping detailed
records with regard to certain types of investments, performing rebate analyses
as necessary, making determinations with regard to investment contracts, and
filing or causing to be filed certain reports with the IRS. As necessary the City
can hire special counsel to assist with these functions and receive
reimbursement for the costs from SOG&E.
3. Representations and Warranties. In connection with its tax covenants, the City
makes various representations regarding the legal validity of its existence, its
authority to. issue the lOBs, restrictions on the use of lOB proceeds and
replacement proceeds, as well as representing that the lOBs will not be used
as an abusive arbitrage device. Most of the risks created by these statements
and mitigated by reliance on opinions of bond counsel and SOG&E indemnities.
Further, because the proposed lOBs will be refunding bonds (as opposed to
"new money" bonds), the obligation to track the use of proceeds and arbitrage
are not significant risk factors. This is because tax-exempt refunding bond
proceeds must be used within 90 days for the sole purpose of refunding
outstanding lOBs.
4,-AQmiJlistrative-~r:1GiiGr:1~1+Iel1d1+lel1ts-tG-tl:ie-lnd@nture,tl:1@-bGar:1-Agr@e1+I@l1t
and various other documents associated with the lOBs generally require the
City's approval. In addition, in consultation with SOG&E, the City may
determine whether the lOBs are to be held in book-entry or certificated form,
and may execute new and/or replacement bond certificates upon registration,
transfer, mutilation, destruction, theft or loss of the original lOB bond
certificates. Again, the City can hire special counselor other consultants to
assist with these functions and receive reimbursement for the costs from
SOG&E.
9-14
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Page 6, Item
fvleetlrlYDffie 3T2Ct7lJ4
2-
5. Litiqation Risk. If there is litigation in connection with the lOBs, or if the IRS
should audit the tax-exempt status of the lOBs, the City could incur legal and
other consultant expenses. Although the City is indemnified by the SOG&E for
such expenses, such indemnification provisions are subject to interpretation by
a court. Further, indemnification by SOG&E may not be financially feasible if
SOG&E at that time is insolvent. With respect to lOBs the City has already
issued or refunded for SOG&E, this risk already exists. Reducing the cost of
this debt through the refunding process somewhat reduces the risk of a
SOG&E default.
6. Reputation Risk. By attaching its name to the marketing and issuance of the
lOBs, the City implicitly warrants throughout the period that the lOBs are
outstanding that the lOBs have been validly issued and that interest on the
lOBs is tax-exempt. The City may suffer adverse reputational consequences
should this not be true, or if the SOG&E should default on its obligations in
connection with the lOBs. On the other hand, based on discussions with a
trusted financial advisor, given the limited obligation nature of the lOBs, a
default is not likely to have a material impact on the 'City's ability to issue
traditional debt.
FISCAL IMPACT:
Given current market conditions and SOG&E's debt portfolio, SOG&E believes that it
can refinance approximately $194 million of its outstanding lOBs in 2004. This would
result in:
Annualized customer rate reductions across SOG&E's
Service territory, including the City of Chula Vista
$4.5 million
Annualized City of Chula Vista customer rate reductions
(about 4.9% of total)
$ 221,860
City of Chula Vista revenues: up-front issuance fees
(0.25% of principal)
$ 485,000
The above assumes current tax-exempt bo.n.rLmarkeLc.onditioo8-remaio_io..-efIect
SOG&E's decision to refinance, as well as the savings realized, will ultimately be
determined by market conditions at the time of the transactions.
SOG&E will reimburse the City for any staff costs and administrative expenses
associated with this process whether or not Chula Vista ultimately issues the Bonds.
SOG&E also pays all legal counsel, financial advisors and bond issuing costs directly,
including counsel representing City of Chula Vista interests. Per the 25 basis points
set by Council, if the entire $686.4 million of lOBs are issued, the fee paid to the City
9-15
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Page 7, Item
Meeti~~23te4
;1
would be $1,716,000. Within the next 90 days, it is anticipated that SDG&E will refund
approximately $194 million in lOBs, which will generate $485,000 in issuance fees for
the City. This revenue would be deposited into the City's General Fund. Thereafter,
additional lOB issues are likely, but not guaranteed, and will occur at the discretion of
SDG&E.
Attachments
Resolution
Description of Financial Facilities (Exhibit A)
Bond Documents(Exhibit B)
. Indenture of Trust
. Preliminary Official Statement
. Bond Purchase Agreement
. Loan Agreement
9-16
d-'7
, ,
RESOLUTION NO.
RESOLUTION OF THE CITY COUNCIL OF THE CITY OF
CHULA VISTA REGARDING AMENDMENTS TO
INDENTURES AND LOAN AGREEMENTS RELATING TO
OUTSTANDING INDUSTRIAL' DEVELOPMENT
REFUNDING REVENUE BONDS OF THE CITY OF CHULA
VISTA ISSUED TO REFINANCE COSTS OF CERTAIN
ELECTRIC FACILITIES FOR SAN DIEGO GAS & ELECTRIC
COMP ANY AND RELATED BOND INSURAL'ICE
TERMINATION AND RELEASE AGREEMENT
WHEREAS, the City ofChuIa Vista (the "City") is authorized pursuant to its Charter and
Chapter 3.48 of the Municipal Code of the City (the "Municipal Code") to assist in financing or
refinancing utility facilities (located within and without the City); and
WHEREAS, the Municipal Code provides that the City may issue revenue bonds payable
exclusively from the revenues derived from such utility facilities in order to provide funds to
finance or refinance such facilities; and
WHEREAS, the Municipal Code provides that such revenue bonds shall be secured by a
pledge of the revenues out of which such bonds shall be payable; and
WHEREAS, the City Council previously adopted Resolution 2004-093 on March 23,
2004, authorizing the issuance and sale of up to $686,400,000 aggregate principal amount of its
Industrial Development Revenue Refunding Bonds (San Diego Gas & Electric Company) in one
or more series, and authorizing the execution and delivery of one or more indentures of trust and
one or more loan agreements in substantially the form presented to the City Council in
connection with such Industrial Development Revenue Refunding Bonds (San Diego Gas &
Electric Company); and
WHEREAS, pursuant to Resolution 2004-093, the City has previously issued its
Industrial Development Refunding Revenue Bonds (San Diego Gas & Electric Company) 2004
Series A, B, C, D, E and F (the "2004 Bonds") pursuant to an Indenture of Trust with U.S. Bank
National Association, dated as of June 1,2004 (the "2004 Indenture") and loaned the proceeds
thereof to San Diego Gas & Electric Company (the "Company") pursuant to a Loan Agreement,
dated as of June l, 2004 (the "2004 Loan Agreement") to refinance certain electricity generation,
transmission and distribution facilities located within and without the City; and
WHEREAS, pursuant to Resolution 2004-093, the City has previously issued its
Industrial Development Refunding Revenue Bonds (San Diego Gas & Electric Company) 2006
Series A (the "2006 Bonds") pursuant to an Indenture of Trust with U.S. Bank National
Association, dated as of September I, 2006 (the "2006 Indenture") and loaned the proceeds
thereof to the Company pursuant to a Loan Agreement, dated as of September 1,2006 (the "2006
Loan Agreement") to refinance certain electricity generation, transmission and distribution
facilities located within and without the City; and
OHS West:260416565.7
41897-11 SSHlDEC
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WHEREAS, the Industrial Development Refunding Revenue Bonds (San Diego Gas &
Electric Company) 2004 Series A, B, C, D and E Bonds (the "XL-Backed Bonds") presently are
insured by Financial Guaranty Insurance Policies (the "XL Policies") issued by XL Capital
Assurance Inc. ("XL"); and
WHEREAS, the Industrial Development Refunding Revenue Bonds (San Diego Gas &
Electric Company) 2004 Series F Bonds as well as the 2006 Bonds (together, the "Ambac-
Backed Bonds") presently are insured by Municipal Bond Insurance Policies (the "Ambac
Policies") issued by Ambac Assurance Corporation ("Ambac"); and
WHEREAS, one or more national credit rating agencies have downgraded XL and
Ambac and have placed XL and Ambac on credit watch with negative implications; and
WHEREAS, the Company has advised the City that the XL-Backed Bonds and the
Ambac-Backed Bonds could be remarketed to the general public In most or all interest rate
modes at lower costs to the Company if the XL Policies and Ambac Policies are terminated; and
WHEREAS, representatives of XL have indicated to the Company that XL is willing to
terminate the XL Policies, subject to certain conditions, without requiring any action by the City;
and
WHEREAS, representatives of Ambac have indicated to the Company that Ambac is
willing to terminate the Ambac Policies, subject to certain conditions, including that the
Company and the City execute a Termination and Release Agreement with respect to the Ambac
Policies, a form of which the Company has presented to the Director of Finance and the Director
of Finance has presented to the City Council (the "Termination Agreement"); and
WHEREAS, the Company purchased all the Ambac-Backed Bonds when the interest rate
period of those Ambac-Backed Bonds converted from an Auction Rate Period to a Weekly Rate
Period and when those Ambac-Backed Bonds were tendered for purchase pursuant the
iridentures under which the Ambac-Backed Bonds were issued; and
WHEREAS, the Company purchased all the XL-Backed Bonds when the interest rate
period of those XL-Backed Bonds converted from an Auction Rate Period to a Weekly Rate
Period and when those XL-Backed Bonds were tendered for purchase pursuant the indentures
under which the XL-Backed Bonds were issued; and
WHEREAS, the Company or its parent corporation, Sempra Energy, currently is the
beneficial owner of all the 2004 Bonds and all the 2006 Bonds; and
WHEREAS, the Company advises that remarketing of the XL-Backed Bonds to the
general public will be facilitated if the 2004 Indenture, the 2006 Indenture, the 2004 Loan
Agreement and the 2006 Loan Agreement are revised to provide clear procedures and other
provisions that are to apply once the XL Policies and Ambac Policies are terminated; and
OHS West:260416565,7
4\897.\\ SSHfDEC
9-18
WHEREAS, the Company has presented to the Director of Finance such amendments to
the 2004 Indenture, the 2006 Indenture, the 2004 Loan Agreement and the 2006 Loan Agreement
in the forms of "Amended and Restated Indentures of Trust" and "Amended and Restated Loan
Agreements", respectively, and the Director of Finance has presented these forms of documents
to the City Council; and
WHEREAS, the 2004 Indenture, the 2006 Indenture, the 2004 Loan Agreement and the
2006 Loan Agreement permit the City to amend the provisions therein subject to the
requirements set forth therein; and
WHEREAS, Resolution 2004-093 authorizes the Director of Finance to take actions
implementing amendments of the 2004 Indenture, the 2006 Indenture, 2004 Loan Agreement and
the 2006 Loan Agreement, and to execute the Termination Agreement, without turther
authorization from the City Council.
NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of Chula Vista
as follows:
SECTION 1. The. City Council hereby finds and determines that the foregoing recitals
are true and correct.
SECTION 2. The City Council hereby finds and determines that it would be prudent and
appropriate for the Director of Finance to exercise the authority previously granted to the
Director of Finance under Resolution 2004-093 to approve, execute and deliver the Amended
and Restated 2004 Indenture of Trust, the Amended and Restated 2006 Indenture of Trust, the
Amended and Restated 2004 Loan Agreement, the Amended and Restated 2006 Loan
Agreement and the Termination Agreement in substantially the forms presented to the City
Council and authorizes the Director of Finance to. execute the Termination Agreement in
substantially the same form as presented herewith and Director of Finance is directed to execute
the Termination Agreement.
SECTION 3. All resolutions or parts thereof in cont1ict herewith, if any (of which none
are known to the City) are hereby repealed to the extent of such cont1ict.
SECTION 4. This resolution shall become effective immediately.
Presented by:
Approved as to form:
- "J c"::'
Maria Kachadoorian
Director of Finance/Treasurer
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