PISMO BEACH COUNCIL AGENDA REPORT

Transcription

1 PISMO BEACH COUNCIL AGENDA REPORT SUBJECT/TITLE: FINANCING ALTERNATIVES FOR THE FIVE CITIES LIFT STATION REPLACEMENT PROJECT AND THE SLUDGE DEWATERING PROJECT RECOMMENDATION: Direct City staff to pursue financing for the Five Cities Lift Station Replacement and Sludge Dewatering Improvement projects through the State of California, State Water Resources Control Board, Clean Water State Revolving Fund, Water Recycling Funding Program. EXECUTIVE SUMMARY: The City of Pismo Beach is evaluating various financing options for the Five Cities Lift Station Replacement project ( Lift Station ) and the Sludge Dewatering Improvements project ( Dewatering ). In anticipation of these two major projects, the City incorporated a new annual expense related to the financing of the two projects into its long-term financial projections and approved wastewater rates. The City hired NHA Advisors to provide financial advice and quantitative analysis on the financing options for both projects. Based on the cost and weighing the risks, City staff recommends that the City pursue financing for the Lift Station and the Dewatering projects. The Projects Five Cities Lift Station Replacement The Five Cities Lift Station pumps sewage from North Beach Campground, Five Cities Drive businesses, Pismo Coast Village, as well as several of the mobile home parks on Highway 1 to the Addie Street Lift Station, where it is then pumped to the Wastewater Treatment Plant. This lift station is being replaced since it is over 50 years old, located in a flood plain, and in the Caltrans Right of Way without an easement. Further, the existing lift station is unable to deliver the future buildout flows and the existing wet well is undersized for the existing pumps. The Five Cities Lift Station Project consists of the replacement of the existing 1960 s vintage above-grade lift station with a submersible wet well lift station and installation of approximately 2,300 lineal feet of 8-inch diameter force main sewer pipe. The alignment of the force main sewer pipe from the lift station will head northwest along Dolliver/Hwy 1, cross the Cypress Bridge over Pismo Creek, and tie into the existing Addie Street force main pipe on Addie Street. Sludge Dewatering Improvements The City s Sludge Dewatering Improvements Project refers to the wastewater treatment plant s sludge handling and treatment process. The sludge handling and treatment process is essential for effective dewatering of the wastewater system solids. The existing belt press is almost 30 years old and has reached the end of its useful life. Page 1

2 Without this equipment, the plant would have to ultimately shut down because there would be no means for dewatering the solids which build up in the plant for disposal. The Sludge Dewatering Improvements project at the City of Pismo Beach Wastewater Treatment Plant (WWTP) consists of new processes and facilities including a new rotary drum thickener and screw press housed in a new building. The rotary drum thickener will serve for thickening of the waste-activated sludge produced at the plant. The new screw press will serve to dewater the waste-activated sludge into dewatered cake solids that will be transferred to hauling bins via a shafted screw conveyor. Analysis of Financing Options The City hired NHA Advisors to provide financial advice and quantitative analysis on the financing options for both projects. In addition, NHA Advisors has provided assistance in reaching out to the State Water Resources Control Board to begin initial conversations to understand the program and the lengthy application process. On September 3, 2013, the City Council approved the Water and Wastewater Rate Study, which meets the State s water conservation measures and approves water and wastewater rates to support operations and various capital projects. Two of these capital projects were projected to be financed beginning in FY for 30 years at a rate of 5%, with typical issuance costs and a debt service reserve associated with a traditional public offering for a wastewater revenue bond. The financial analysis evaluated this option and a few other options to determine which financing instrument is the most cost effective for the City and to weigh the risks associated with those options. Conclusion and Recommendation Based on the analysis, the Wastewater Enterprise Fund would be able to support the debt service costs and meet coverage requirements for all options. Because the City has the flexibility to start the project during FY to allow for the timing risk (SRF approval can take a minimum of 6 months) and there are significant savings associated with the SRF program, staff recommends that the City Council direct staff to pursue financing for the Lift Station and the Dewatering projects. FISCAL IMPACT: There is no direct fiscal impact with directing staff to pursue the SRF financing option. There are costs associated with applying for the SRF program, which are included in the Wastewater Enterprise Fund budgeted project costs. These costs are associated with filling out the technical and environmental SRF applications. The technical application is lengthy and requires details on the technical specifications of the projects. The environmental application includes CEQA requirements, cultural resource study, federal endangered species evaluation, historical review, flood plain management, and a number of other Federal environmental acts that the projects must comply with. Council has approved $54,878 for a contract with WSC, Inc. subcontracted to Corollo Engineers to complete various aspects of the technical and environmental application Page 2

3 for the Dewatering project. A proposal with WSC, Inc. for these applications for the Lift Station project is expected to come before Council shortly, pending Council s direction. ALTERNATIVES: 1. Direct staff to pursue other financing options. ATTACHMENTS: 1. Financial Analysis Memo from NHA Advisors and Attachments Prepared by: Nadia Feeser, Administrative Services Director Meeting Date: April 1, 2014 City Manager Approval: Page 3

4 Attachment 1 MEMORANDUM To: Nadia Feeser From: Craig Hill Eric Scriven Date: March 21, 2014 RE: City of Pismo Beach, Lift Station/Sludge Dewatering Sewer Projects, Financing Alternatives Background The City of Pismo Beach (the City ) is evaluating various financing options for the Five Cities Lift Station ( Lift Station ) and the Sludge Dewatering Improvements ( Dewatering ). In anticipation of these two major projects, the City has incorporated a new annual expense related to the financing of the two projects into its long term financial projections and approved sewer rates. NHA Advisors has been engaged by the City to provide financial advice and quantitative analysis on the financing options for both projects. Project Details Lift Station The Five Cities Lift Station Project consists of the replacement of the existing 1960 s vintage above grade lift station with a submersible wet well lift station and installation of approximately 2,300 lineal feet of 8 inch diameter force main sewer pipe. The projected cost for this Lift Station is estimated to be $1,692,800. Design for the Lift Station is nearly complete and construction could commence within 1 3 months (i.e. April/May). The construction/draw down schedule for this project is presented in the following table. Month Lift Station Portion of Project Cost 11% 18% 23% 21% 17% 10% Total Draws Draw Amount $186, , , , , ,280 $1,692,800 Page 4

5 CITY OF PISMO BEACH, LIFT STATION/SLUDGE DEWATERING SEWER PROJECTS, FINANCING ALTERNATIVES MARCH 21, 2014 Dewatering The Sludge Dewatering Improvements Project refers to the wastewater treatment plant s sludge handling and treatment process. The sludge handling and treatment process is essential for effective dewatering of the wastewater system solids. The projected cost for this improvement is $3,484,500. Design has commenced and the project could begin construction by late summer/early fall Dewatering Month Portion of Project Cost Draw Amount 1 3% $104, % 174, % 174, % 174, % 418, % 418, % 522, % 522, % 348, % 348, % 174, % 104,535 Total Draws $3,484,500 Sewer Rate Study In April 2013, the City completed a comprehensive water and wastewater system rate study ( Rate Study ). As noted above, with respect to the wastewater system, the rate study contemplated that the Lift Station and Dewatering projects would require capital financing. The rate study factored in the financing of these projects into the recommended five year rate increases. The financing assumptions included a 30 year amortization, level payment structure, a 5.00% interest rate, typical issuance costs and a debt service reserve associated with a traditional public offering for a sewer revenue bond. The Rate Study estimated that the Lift Station project would cost $1,655,000 and the Dewatering improvements would require $3,750,000 (see page of Rate Study). The estimated annual payment produced by these assumptions was $377,300 (page 34, Table 13, line 30 of Rate Study). Based upon the five annual rate increases of 5.50% shown in Table 13, it is estimated that approximately 11% of the cumulative 26.5% of increases were dedicated to covering the projected new bonds debt service. The projected coverage table from the Rate Study is shown below: Rate Study Debt Service $377,300 $377,300 $377,300 $377,300 Rate Study Coverage 231% 237% 255% 272% PAGE 2 Page 5

6 CITY OF PISMO BEACH, LIFT STATION/SLUDGE DEWATERING SEWER PROJECTS, FINANCING ALTERNATIVES MARCH 21, 2014 Capital Financing Options The City has two primary financing options to fund the Lift Station and Dewatering projects. They include a State of California, State Water Resources Control Board, Clean Water State Revolving Fund, Water Recycling Funding Program ( State Revolving Fund or SRF ) or a publicly offered sewer revenue bond issued directly by the City. A third option of a direct bank loan ( Private Placement ) is not feasible given the required term of years (the shorter amortization would violate coverage requirements given the projected sewer rates). A summary of the two funding options is shown below. SRF Loan (20 Year) SRF Loan (30 Year) Sewer Revenue Bond Funding Amount $5,282,000 $5,250,000 $5,390,000 Average Interest Rate 2.10% 2.10% 4.50% Amortization Period 20 Years 30 Years 30 Years Annual Payment $330,000 $240,000 $330,000 Total Payments $6,525,000 $7,170,000 $9,845,000 Reserve Requirement $330,000* $240,000* N/A Financing Costs $100,000 $100,000 $165,000 * For State SRF loans, any debt service reserve requirement must be funded with non loan proceeds or cash from sewer enterprise fund. It would be anticipated that the Bond would not require a reserve as no reserve was required for the 2012 Sewer Revenue Bond issuance. See Exhibit 1 for details on each of the financing options. Net Revenue Coverage Requirement Based on the initial scenarios as shown above, the City s ability to meet the coverage requirement (for all debt obligations of the Sewer Enterprise Fund) in the Rate Study is achievable. Our initial analysis indicates that even under the bond scenario with the highest interest rate, the coverage targets can still be met Rate Study Debt Service $377,300 $377,300 $377,300 $377,300 Rate Study Coverage 231% 237% 255% 272% SRF 20 Year Debt Service $325,922 $324,407 $327,829 $326,083 SRF 20 Year Coverage 247% 254% 273% 292% SRF 30 Year Debt Service $236,922 $241,276 $240,483 $239,648 SRF 30 Year Coverage 283% 288% 311% 332% Bond 30 Year Debt Service $329,570 $328,565 $326,425 $330,195 Bond 30 Year Coverage 246% 253% 273% 290% PAGE 3 Page 6

7 CITY OF PISMO BEACH, LIFT STATION/SLUDGE DEWATERING SEWER PROJECTS, FINANCING ALTERNATIVES MARCH 21, 2014 Advantages/Disadvantages of Financing Options Timing/Uncertainty The City is in a good position to control the timing of the construction for both projects. Given the status of the design, engineering and bid documentation, the City can start the process of soliciting construction bids within a short period of time. The City should expect to have financing approvals in place prior to receiving or awarding any construction bid. SRF The SRF loan process will allow for bidding of projects but not the beginning of construction if SRF loan proceeds are to be used. Final project approval will ensure all project costs are eligible for payment from SRF proceeds. Given this constraint, the timing of any project construction must be deferred until final SRF approvals are in place. Current estimates for application approval are estimated to be a minimum of 6 months (dependent on application information requests and review). Sewer Revenue Bond The City controls the issuance of any sewer revenue bond with a typical process taking 6 10 weeks through funding. The award of a construction contract should not be done until any sewer revenue bond has been sold into the capital markets (but can be done before actual funding is delivered to the City). In the event there are eligible project costs that have already been incurred by the City, they can be reimbursed with bond proceeds upon funding. Interest Rate/Cost of Funds The City is currently working under a project scenario that includes lower construction cost estimates as well as financial terms. It is anticipated that the impact on the expenditures and coverage requirements will be improved given these facts. SRF The SRF loan establishes an interest rate based on the State s cost of borrowing at each issuance date (the larger State bond). The loan rate is defined as 50% of the cost of the State bond and stays in place until the next bond issuance (a subsidized rate). It is expected that the City should qualify for the current loan rate of 2.10%. Sewer Revenue Bond The market for tax exempt revenue bonds changes every day and will be locked on the day that the underwriter goes to the investor groups to sell the bonds. There is no certainty that the City will achieve an interest rate currently available today but the flexibility in timing does provide the City with one mitigating tool (if rates begin to rise or construction costs are projected to increase, the City could accelerate the bond financing). The City currently maintains a very high credit rating on its sewer revenue bonds ( AA ). Execution Risk Municipalities experiences working with the State to reach agreement on various financing documents can be profoundly different depending on the particular nuances of existing bond documents. As City staff is aware, the State has increasingly become reluctant to amend its standard financing documentation to accommodate various borrowers. There is the risk that even after lengthy negotiation that no satisfactory agreement may be reached. Construction Price Risk In the event that the City will not accept and award construction bids until 100% of the financing is secured for the Lift Station and Dewatering projects, the City is exposed to construction price risk. Construction Pricing Analysis If the City has the option of executing a construction contract now, but for the fact that it must wait until the State SRF loan is complete, any price increases would directly diminish the economic benefit of the lower loan rate to the City when comparing PAGE 4 Page 7

8 CITY OF PISMO BEACH, LIFT STATION/SLUDGE DEWATERING SEWER PROJECTS, FINANCING ALTERNATIVES MARCH 21, 2014 alternatives. For example, assume that the City could lock in a fixed contract price today of $5.177M, but instead opted to wait to finalize the SRF. If potential bids increase by $2.2M, the City would be worse economically with the need for a larger loan amount which would create an annual debt service higher than the projected bond debt service. Our initial analysis indicates that the benefit of pursuing the 30 Year State SRF loan is approximately $1.45M (the bonding capacity of the differential between the 2.1% SRF rate and the 4.50% bond market rate). In the event cost estimates started to increase, this differential would be taken into consideration to determine the appropriate financing structure. Summary Based on our quantitative analysis, the City is: able to meet the cash flow pro forma as projected in the Rate Study under all financing scenarios assuming project costs below initial estimates in the Rate Study has the flexibility in timing to work through the State SRF application process prior to beginning construction (or risk no reimbursement for portion already started) can execute on a public offering quickly (and still meet coverage projections) in the event the State SRF loan program is delayed or comes with conditions unacceptable to the City Unless there is a compelling reason to begin the bid and construction within the next 6 9 months, the City should proceed with the State SRF loan application process and request a 30 year amortization of the loan amount at approval. While there will be greater interest paid over time, the cash flow impact on the Sewer Enterprise Fund and the sewer rates will be minimized and the facilities will be paid by all future ratepayers over the useful life of the equipment. If there is a philosophical reason to pay for the two projects over the shorter 20 year term, there will be more pressure on the sewer rates to rise sooner and reduced flexibility to construct projects on a payas you go basis. PAGE 5 Page 8

9 CITY OF PISMO BEACH, LIFT STATION/SLUDGE DEWATERING SEWER PROJECTS, FINANCING ALTERNATIVES MARCH 21, 2014 ATTACHMENTS 20 Year State SRF Loan Financing 30 Year State SRF Loan Financing 30 Year Public Offering (Sewer Revenue Bond) PAGE 6 Page 9

10 $5,282,000 City of Pismo Beach 2014 Wastewater Project SRF Loan - 20 Year Total Issue Sources And Uses Dated 07/01/2014 Delivered 07/01/ SRF (20 Yr) - De- Watering 2014 SRF (20 Yr) - Lift Station Summary SOURCES OF FUNDS Par Amount of Bonds $3,552, $1,730, $5,282, Planned Issuer Equity contribution 220, , , TOTAL SOURCES $3,772, $1,837, $5,610, USES OF FUNDS Costs of Issuance 67, , , Deposit to Debt Service Reserve Fund (DSRF) 220, , , Deposit to Project Construction Fund 3,484, ,692, ,177, Rounding Amount , , TOTAL USES $3,772, $1,837, $5,610, Aggregate 3/20/2014 5:43 PM Page 10

11 $5,282,000 City of Pismo Beach 2014 Wastewater Project SRF Loan - 20 Year Aggregate Debt Service DATE 2014 SRF (20 Yr) De- Watering 2014 SRF (20 Yr) Lift Station TOTAL 07/01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , Total $4,386, $2,137, $6,523, Par Amounts Of Selected Issues 2014 SRF (20 Yr-De-Watering 3,552, SRF (20 Yr-Lift Station 1,730, TOTAL 5,282, Aggregate 3/20/2014 5:43 PM Page 11

12 $5,282,000 City of Pismo Beach 2014 Wastewater Project SRF Loan - 20 Year Debt Service Schedule Date Principal Coupon Interest Total P+I 07/01/ /01/ /01/ /01/ , % 110, , /01/ , % 106, , /01/ , % 101, , /01/ , % 97, , /01/ , % 92, , /01/ , % 87, , /01/ , % 82, , /01/ , % 77, , /01/ , % 72, , /01/ , % 66, , /01/ , % 61, , /01/ , % 55, , /01/ , % 50, , /01/ , % 44, , /01/ , % 38, , /01/ , % 32, , /01/ , % 26, , /01/ , % 19, , /01/ , % 13, , /01/ , % 6, , Total $5,282, $1,241, $6,523, Yield Statistics Bond Year Dollars $59, Average Life Years Average Coupon % Net Interest Cost (NIC) % True Interest Cost (TIC) % Bond Yield for Arbitrage Purposes % All Inclusive Cost (AIC) % IRS Form 8038 Net Interest Cost % Weighted Average Maturity Years 2014 SRF (20 Yr) Issue Summary 3/20/2014 5:43 PM Page 12

13 $5,282,000 City of Pismo Beach 2014 Wastewater Project SRF Loan - 30 Year Total Issue Sources And Uses Dated 07/01/2014 Delivered 07/01/ SRF (30 Yr) - De- Watering 2014 SRF (30 Yr) - Lift Station Summary SOURCES OF FUNDS Par Amount of Bonds $3,552, $1,730, $5,282, Planned Issuer Equity contribution 161, , , TOTAL SOURCES $3,713, $1,808, $5,522, USES OF FUNDS Costs of Issuance 67, , , Deposit to Debt Service Reserve Fund (DSRF) 161, , , Deposit to Project Construction Fund 3,484, ,692, ,177, Rounding Amount , , TOTAL USES $3,713, $1,808, $5,522, Aggregate 3/20/2014 5:43 PM Page 13

14 $5,282,000 City of Pismo Beach 2014 Wastewater Project SRF Loan - 30 Year Aggregate Debt Service DATE 2014 SRF (30 Yr) De- Watering 2014 SRF (30 Yr) Lift Station TOTAL 07/01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , Total $4,823, $2,348, $7,171, Par Amounts Of Selected Issues 2014 SRF (30 Yr-De-Watering 3,552, SRF (30 Yr-Lift Station 1,730, TOTAL 5,282, Aggregate 3/20/2014 5:43 PM Page 14

15 $5,282,000 City of Pismo Beach 2014 Wastewater Project SRF Loan - 30 Year Debt Service Schedule Part 1 of 2 Date Principal Coupon Interest Total P+I 07/01/ /01/ /01/ /01/ , % 110, , /01/ , % 108, , /01/ , % 105, , /01/ , % 102, , /01/ , % 99, , /01/ , % 96, , /01/ , % 93, , /01/ , % 90, , /01/ , % 87, , /01/ , % 84, , /01/ , % 81, , /01/ , % 77, , /01/ , % 74, , /01/ , % 71, , /01/ , % 67, , /01/ , % 63, , /01/ , % 60, , /01/ , % 56, , /01/ , % 52, , /01/ , % 48, , /01/ , % 44, , /01/ , % 40, , /01/ , % 36, , /01/ , % 32, , /01/ , % 27, , /01/ , % 23, , /01/ , % 19, , /01/ , % 14, , /01/ , % 9, , /01/ , % 4, , Total $5,282, $1,889, $7,171, SRF (30 Yr) Issue Summary 3/20/2014 5:43 PM Page 15

16 $5,346,000 City of Pismo Beach 2014 Wastewater Project Wastewater Revenue Bond - 30 Year Total Issue Sources And Uses Dated 07/01/2014 Delivered 07/01/ Bond (30 Yr) - De- Watering 2014 Bond (30 Yr) - Lift Station Summary SOURCES OF FUNDS Par Amount of Bonds $3,596, $1,750, $5,346, TOTAL SOURCES $3,596, $1,750, $5,346, USES OF FUNDS Total Underwriter's Discount (0.750%) 26, , , Costs of Issuance 84, , , Deposit to Project Construction Fund 3,484, ,692, ,177, Rounding Amount , , TOTAL USES $3,596, $1,750, $5,346, Aggregate 3/21/2014 5:03 AM Page 16

17 $5,346,000 City of Pismo Beach 2014 Wastewater Project Wastewater Revenue Bond - 30 Year Aggregate Debt Service DATE 2014 Bond (30 Yr) De- Watering 2014 Bond (30 Yr) Lift Station TOTAL 07/01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , /01/ , , , Total $6,622, $3,224, $9,846, Par Amounts Of Selected Issues 2014 Bond (30 Y-De-Watering 3,596, Bond (30 Y-Lift Station 1,750, TOTAL 5,346, Aggregate 3/21/2014 5:03 AM Page 17

18 $5,346,000 City of Pismo Beach 2014 Wastewater Project Wastewater Revenue Bond - 30 Year Debt Service Schedule Part 1 of 2 Date Principal Coupon Interest Total P+I 07/01/ /01/ /01/ /01/ , % 240, , /01/ , % 236, , /01/ , % 232, , /01/ , % 228, , /01/ , % 223, , /01/ , % 218, , /01/ , % 214, , /01/ , % 208, , /01/ , % 203, , /01/ , % 198, , /01/ , % 192, , /01/ , % 186, , /01/ , % 179, , /01/ , % 172, , /01/ , % 166, , /01/ , % 158, , /01/ , % 151, , /01/ , % 142, , /01/ , % 134, , /01/ , % 125, , /01/ , % 116, , /01/ , % 107, , /01/ , % 97, , /01/ , % 87, , /01/ , % 76, , /01/ , % 64, , /01/ , % 53, , /01/ , % 40, , /01/ , % 27, , /01/ , % 14, , Total $5,346, $4,500, $9,846, Bond (30 Yr) Issue Summary 3/21/2014 5:03 AM Page 18