Proposed Implementation of Traditional Commercial Paper Program. Finance/Administration Committee November 24, 2015

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Claribel Robertson
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1 Proposed Implementation of Traditional Commercial Paper Program Finance/Administration Committee November 24, 2015

2 Agenda What is Commercial Paper ( CP ) Traditional vs Extendable CP Risks in Extendable CP Market Recommendation Next Steps 1

3 Proposed Financings for FY16 Category Description Issue/ Approximate Size Date of Board Action Pricing or Issuance Date Potential Market Opportunities 1. Authorization for opportunistic Water and Wastewater restructurings for derisking and fixed rate refundings Based on market opportunities 9/22/2014 TBD Administration of Existing Debt Portfolio 2. Implement traditional Commercial Paper program to refinance Water System Extendable Commercial Paper $360 million 11/24/ /2015 New Money Needs 3. Issue additional new money Wastewater Revenue Bonds $25 million 5/12/2015 6/2015 Note: Dates are approximate and subject to change. 2

4 Debt Composition Water System Total Debt Outstanding as of 6/30/15 Wastewater System Total Debt Outstanding as of 6/30/15 $2.7 Billion $424 Million Synthetic Fixed Rate Bonds $105.3MM 4% ECP $359.8MM 13% Loans $15.0MM 1% ECP $15.0MM 3% General Obligation $10.9MM 3% Traditional Fixed Rate Bonds $2,214.5MM 82% Traditional Fixed Rate $398.0MM 94% Traditional Fixed Rate Synthetic Fixed Rate ECP Loans 3

5 EBMUD Commercial Paper (contd.) District has had a CP program in place since 1988 o CP program is a continuous re-issuance of CP notes CP is a short-term promissory note o Subordinate to the District s revenue bonds o District CP generally sold with 30 to 90 day maturity o Minimum maturity 1 day o Legal maximum 270 days Maturing CP is generally rolled-over i.e. replaced by new CP at prevailing interest rates o New CP provides funds to repay investors holding maturing CP 4

6 EBMUD Commercial Paper (contd.) Commercial paper CP represents District s lowest available borrowing cost o Average interest rate in FY % 1.200% ECP Remarketing: Nominal Rate 1.000% 0.800% 0.600% 0.400% 0.200% 0.000% Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 5

7 Difference between Traditional and Extendable CP Key Issue: what if CP cannot be rolled over? ( failed remarketing ) o Traditional CP: Agreement with liquidity bank to lend District money to pay investors o Extendable CP (ECP): Investors hold the CP beyond its original maturity to a maximum 270 days at a penalty rate ECP structure developed during the 2008/09 credit crisis when liquidity became scarce and/or expensive Over the years District has had both traditional CP and ECP programs o District switched from traditional CP to ECP in

Comparison: Traditional vs Extendable CP ECP PRO: Lowest cost option o Average interest cost in FY15 0.

8 Comparison: Traditional vs Extendable CP ECP PRO: Lowest cost option o Average interest cost in FY % o No cost of liquidity facility Traditional CP Con: Higher cost due to liquidity facility fee o Average interest cost expected to be the same but o Projected cost of liquidity facility adds 0.32% Annual liquidity cost for $360 million facility: $1.2 million 7

9 Comparison: Traditional vs Extendable CP (contd.) ECP CON: Small investor base, changing market o Relatively young market undergoing significant changes New rating agency guidance creates credit challenges for investors: must record ECP at actual and 270 day maturities o Fewer than six investors for est. $2 billion ECP outstanding Investors have left the market; more may follow Investors may charge higher rates o News about one issuer could reverberate throughout market Traditional CP PRO: Larger investor base, stable market o Long-standing market less vulnerable to structural changes No critical news on the horizon o Over two-dozen investors for est. $35-60 billion traditional CP outstanding Steady demand for CP notes o Rates less subjective, more market driven Better suited to absorb news about individual issuers 8

10 Risks to District from ECP market Key Risk: Extendable CP cannot be rolled over o Small ECP investor base and changing market makes failed remarketing comparatively more likely o Failed remarketing could have severe liquidity and other consequences: Some or all of $375 million ECP outstanding might need to be repaid with cash Negative publicity could affect District interest cost Relatively little time to develop optimal response 9

11 Impact of ECP Risk: Water System Potentially substantial liquidity pressure Drought heightens significance of liquidity risk 500, , , , , , , , ,000 50,000 - ECP Outstanding Unrestricted Cash and Investments* Fiscal year end 2015 ($000) Includes: Rate Stabilization Fund, Working Capital Reserve, Self-Insurance Fund, Workers Compensation Fund, Vehicle Replacement Fund and Reserves for Capital Projects 10

Unrestricted Cash and Investments* Fiscal year end 2015 ($000) Includes: Rate Stabilization Fund, Working

12 Impact of ECP Risk: Wastewater System Modest potential liquidity pressure Less vulnerable to challenges posed by drought 100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 - ECP Outstanding Unrestricted Cash and Investments* Fiscal year end 2015 ($000) Includes: Rate Stabilization Fund, Working Capital Reserve, Self-Insurance Fund, Workers Compensation Fund, Vehicle Replacement Fund and Reserves for Capital Projects 11

13 Recommendation Replace Water System ECP with traditional CP Keep Wastewater ECP o Retain option to replace with traditional CP should conditions warrant 12

14 Next Steps Staff seeks Board authorization for issuance of Commercial Paper Notes, Bank Agreements, and related documents 13

15 Questions 14

16 FY15 Power Sales Report November 24, 2015

17 Overview Power Sales Authority FY15 Power Sales Results FY15 Accomplishments FY16 Plan FY16 Next Steps

18 Power Sales Authority Board Resolution delegated staff the authority to sell/buy power Requires monthly reporting of sales vs plan Requires annual Power Sales Report

19 FY15 Power Sales Results Budget: $5.7M Plan: $3.5M Actual: $2.2M

20 FY11 to FY15 Revenue & Runoff Runoff (TAF) Total Generation (MWh) Average Price $/MWh Revenue FY ,013 $45 $2.24M FY ,694 $42 $1.38M FY ,409 $37 $3.58M FY ,743 $30 $4.54M FY11 1, ,837 $29 $8.08M

21 Achievements Sale of Renewable Energy Credits increased revenue $243,000 Completed 10-year SMUD contract 10-year contract with MCE 5-year contract with Shell Energy

22 New MCE Contract 10-year Term, effective July 1, 2015 Hourly market price Purchase up to 120,000 MWh/calendar year MCE option to purchase additional MWh REC Pricing $10/REC up to 90,000 MWh $7/Rec Greater than 90,000 MWh

23 Shell Energy Contract 5-year Term, effective Jan 1, 2016 Non binding, no minimum sales quantity Hourly market price REC Pricing $5/REC up to 50,000 MWh $6.50/REC greater then 50,000 MWh 2016 Resource Adequacy sales, $120,000

24 FY16 Planned Revenue Assumptions 65 percent exceedance year (510 TAF) Average energy price of $43/MWh Restore Pardee Reservoir volume FY16 Power Sales Planned Revenue: $2.0M Budgeted Revenue: $3.5M

25 FY16 Next Steps Explore other REC and energy sales opportunities Secure 2017 Resource Adequacy sales

26 Food Waste Program Update Finance/Administration Committee November 24, 2015

27 Agenda Harvest Power Project Update City of Oakland Update Recology Project Update Facility O&M Approach Next Steps 2

28 Harvest Power Project Status of Negotiations District and Harvest Power staff have reached agreement on a Term Sheet Contract drafting continues Staff is targeting bringing the full project contract for Board consideration in January Construction would begin in April

29 Harvest Power Project Financial Terms - Capital District to provide all capital funding and own all buildings and equipment HP to provide $4.8M CEC grant District to receive a prioritized annual Capital Recovery Payment prior to distribution of net revenues Payment to cover 65% of capital, amortized over 20 years at 4% 65% is based on District debt funding policy Remainder of capital paid back through net revenues Capital includes: HP project capital Site improvement capital to be contracted by the District Future capital for asset replacement 4

30 Harvest Power Project Financial Terms Revenue After costs and fees are paid, net revenue will be split 85% to District, 15% to HP After full District capital has been recovered (estimated Year 9), revenue split shifts 77.5% to District, 22.5% to HP Baseline of 190 tons/day Break even point (NPV = 0) at 100 tons/day 5

31 Harvest Power Project Financial Waterfall Tipping Fee Revenues CNG Revenue + Env. Attributes Harvest CEC Grant PROJECT EBMUD Capital Facility Design and Construction Cost Harvest O&M Costs e.g. HP direct labor Harvest O&M Fixed Fee $350k/yr includes technical support, procurement of feedstock and CNG contracts, overhead Direct Project O&M Costs e.g. energy, chemicals, District labor EBMUD Capital Recovery Annual payment = 65% of capital at 4% over 20 yrs Net Revenue Share HP = 15% then 22.5% District = 85% then 77.5% 6

32 Harvest Power Project Financial Summary EBMUD Harvest Project Initial Capital Costs Site Improvements -$7.0 ** -$7.0 Processing Facilities -$25.0 ** -$25.0 CEC Grant $4.8 ** $4.8 Grant Management Fee -$0.25 ** -$0.25 Total Capital Costs -$27.5 ** -$27.5 Net Revenue Gross Revenue $140.0 Operating Costs -$75.3 Harvest O&M Fixed Fee* -$5.8 Total Net Revenue $58.9 Revenue Sharing Revenue Share $53.3 $5.6 Maintenance Capital Maintenance Capital -$2.4 $0.0 -$2.4 Net Present Value Net Present Value 4%) $23.4 $5.6 $29.0 * For the purpose of NPV calculation, assume HP Fee = costs, yet there is some portion of OH and profits built in. 7

4 xxxx $30 Millions $20 $10 $0 -$10 2017 2018 2019 2020 2021 2022 2023 2024 2025

33 Harvest Power Project Cumulative Revenues $80 $70 $60 $50 $40 EBMUD Net Revenue $57.3 Harvest Revenue $17.2 Cumulative Project Revenue $74.4 xxxx $30 Millions $20 $10 $0 -$ $20 -$30 -$40 8

34 Harvest Power Project Contract Term Initial Contract Term is 10 years District has discretion to extend in two 5-year increments Automatic 5-year extensions if project is financially successful Cumulative net revenue to EBMUD is consistent with or exceeds modeled projections 9

35 Harvest Power Project Risk Overview To better address the unique risks associated with different types of work, risk-related provisions have been broken into phases: Design-build (DB) Operations Key terms for each phase have been outlined and key risks and mitigation strategies identified 10

36 Harvest Power Project Risk Terms DB Phase Liquidated damages for schedule delays and performance issues up to 15% of project cost ($3.8 M) 10% retainage 5% letter of credit Performance Bond comprised of dualobligee bonds from major subcontractors Limit of liability equal to project cost ($25 M) Excludes indemnity obligations 11

37 Harvest Power Project Risk Terms Ops Phase Liquidated damages for performance issues equal to HP Fee plus 50% of Net Revenue Share ($12.9 M) Limit of liability equal to HP Fee plus 75% of Net Revenue Share ($15 M) Accrued over life of project Excludes indemnity obligations 12

38 Harvest Power Project Risks and Mitigations Risk Mitigation Measures Residual Risk Failure to design facilities within design parameters District will review designs prior to payments Change orders caused by design errors and omissions are the responsibility of HP Professional Liability Insurance Performance Bonds from designer and integrator provide more coverage than typical design-bid-build District has ability to not accept facility and/or apply LDs Low Schedule delays Equipment does not meet performance standards LDs capture up to 3 months of delay HP has financial incentive not to lose Oakland If schedule delays combined with performance issues exceed LD cap, District may be required to expend capital to address Capital is recouped in the waterfall District can balance not accepting facility until performance corrected or accepting non-performance and receiving LDs Medium Medium 13

39 Harvest Power Project Risks and Mitigations Risk Mitigation Measures Residual Risk Project not completed (variety of reasons noncompliance with permitting, bankruptcy, bad acting) EBMUD to complete and call on Performance Bonds HP incentivized to complete to begin collecting revenue in the operating phase Liquidated damages up to cap Low Facility not operating to specifications due to equipment failure Operating costs greater than anticipated Liquidated damages Warranty Equipment replacement costs recouped in waterfall EBMUD approval of budget, with additional approval if costs exceed 5% of budget Cap on HPA labor Operating shortfalls recouped as soon as revenue available Liquidated damages for not meeting performance metrics Ability to terminate if successive years of shortfall Low Medium 14

Harvest Power Project Project Schedule Sep 2014: City Contract Award to WMAC Aug 2015: EBMUD-WMAC Subcontract Executed Nov 2015: Discuss Schedule Extension w/city July 1, 2016: EBMUD food waste

40 Harvest Power Project Project Schedule Sep 2014: City Contract Award to WMAC Aug 2015: EBMUD-WMAC Subcontract Executed Nov 2015: Discuss Schedule Extension w/city July 1, 2016: EBMUD food waste facility in-service date Apr 2015: EBMUD issued RFP for preprocessing services Facility Planning, Design, Constr n Contingent Upon City Approval of Schedule Extension Request Jun 2015: EBMUD-Harvest MOU Finalized Jan 2016: EBMUD-Harvest Contract (to be finalized) 15

41 Harvest Power Project Preliminary Design Services Agreement In July 2015, the Board authorized a Preliminary Engineering Services Agreement ($261k) with HP Continued facility design engineering and permitting work by HP is required to meet the extended City of Oakland startup schedule ahead of full contract Contract Amendment (~$600k) for Board consideration on consent calendar this afternoon 16

42 City of Oakland Update Staff has initiated discussions with City of Oakland staff regarding extension process Drafting formal Remedial Plan Requesting outside date of December 31, 2017 Ability to accept waste upon notification of readiness Meeting with WMAC in next few weeks WMAC contract defines Start-up Period (during which they will handle waste) as through July 1,

Recology Project Update Contract approved by Board

installing the Extrusion Press Expect pilot

information for press-only material (without

Bag Opener Screens Extrusion Press Dynamic Cyclone

43 Recology Project Update Contract approved by Board on October 13, 2015 Recology is currently installing the Extrusion Press Expect pilot project deliveries in next few weeks Collect information for press-only material (without polisher) to inform long-term project development Bag Opener Screens Extrusion Press Dynamic Cyclone Hydrocyclone Digesters MSW Press at Recology SF Polisher at EBMUD MWWTP 18

44 Facility O&M Approach District forces to operate 3 of 4 new Food Waste Facilities Recology Polisher - District Harvest Power Preprocessing Harvest Harvest Power Dewatering District Harvest Power CNG District Discussions continue with 444 Do not currently have alignment on Preprocessing O&M 19

45 Facility O&M Approach (cont.) Risks associated with Preprocessing are fundamentally different than other facilities External Oakland deadline Lack of experience handling collected material Potential for Vectors Odors Permit compliance issues Financial consequences Decreased revenue WM liquidated damages District is holding HP accountable through all the risk protection mechanisms outlined Significant value in maintaining clarity and alignment 20

46 Next Steps Board to consider HP Preliminary Engineering Services Agreement Amendment Continue discussions with City of Oakland staff and WM regarding schedule extension Begin Recology pilot project in early December Continue contract negotiations with Harvest and finalize contract (target Board consideration in January 2016) 21

Proposed Implementation of Traditional Commercial Paper Program. Board of Directors November 24, 2015

Proposed Implementation of Traditional Commercial Paper Program Board of Directors November 24, 2015 Agenda What is Commercial Paper ( CP ) Traditional vs Extendable CP Risks in Extendable CP Market Recommendation