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W n i E p E N E R G Y i L l F E RIVERSIDE PUBLIC UTILITIES Board Memorandum P U B L I C U T I L IT I E S BOARD OF PUBLIC UTILITIES DATE: March 4, 2011 ITEM NO: 9 SUBJECT: APPROVE THE ISSUANCE OF 2011 ELECTRIC AND WATER REFUNDING REVENUE BONDS ISSUE: Riverside Public Utilities(RPU)recommends issuing up to$145 million of Electric Refunding and $60 million Water Refunding Revenue Bonds to lower interest rate costs and reduce overall risks in its existing variable rate debt portfolio. RECOMMENDATIONS: That the Board of Public Utilities recommend that the City Council: 1. Approve the City's Financing Team; 2. Delegate to the City's Financing Team adjustments to the proposed structure for City Council approval; 3. Conduct a public hearing to consider the issuance of Electric and Water Refunding/Revenue Bonds of an amount estimated not-to-exceed $205 million; and 4. Authorize the City Manager,or his designee,to execute all documents related to these transactions. BACKGROUND: The Utility currently has outstanding approximately$256 million (principal amount)of Variable Rate Demand Obligations (VRDOs) in four separate series of revenue bonds. These were initially issued as Auction Rate Securities(AR5) in 2004 and 2005. As a result of the 2008 financial market meltdown,the AR5 experienced failed auctions. Many issuers (including the City) refunded ARS as VRDOs, while others used fixed rate bonds, leading to an expansion of the VRDO markets. VRDOs in conjunction with RPU's interest rate hedges(discussed below) have proven to be very effective in lowering the overall debt costs. VRDOs require additional credit enhancement (e.g., insurance or a bank letter of credit) to ensure timely payment to bondholders. In 2008, the City used Letters of Credit (LOC) provided by Bank of America/Merhll Lynch (BAML), at very attractive rates, which would require BAML to make debt service payments to bondholders should the City fail to make payment. The LOCs will expire on 4/2912011 and 5/13/2011 for the electric and water series respectively. BAML has verbally agreed to extend the electric LOCs until 511312011. Initially, the City anticipated renewing its existing LOCs. However, the large number of entities seeking to renew their expiring LOCs combined with the shri nking number of highly-rated banks offering this service has resulted in higher rates. Given the increased costs associated with LOC renewals, the Financing Team is proposing to restructure a portion of its variable rate debt obligations to mitigate various risk exposures and provide an overall lower cost of financing. These restructuring efforts must be completed by the dates when the LOCs expire. Interest Rate Hedge Agreements In addition to the low rates real¢ed using variable rate debt, in 2005, the City also executed interest rate hedge agreements in which the City receives 62.68° of LIBOR plus 12 basis point(which offsets/hedges the variable rate RPU pays to its bondholders) in exchange for fixed interest rates ranging between 3.1% and 3.2%. The Financing Team recommends maintaining the existing hedge agreements.