City of Napa

Water Revenue
Refunding Bonds

  • Designed a rate covenant with a natural disaster  provision
  • Provided clear distinction between operating costs brand earthquake-related repairs
  • Refunding resulted in more than $8.6 million of cash flow savings
Project Highlights

The South Napa earthquake caused significant damage to the City’s water conveyance system. For the City to move forward on the refunding of its outstanding water revenue bonds, NHA Advisors needed to address the treatment of earthquake-related repair expenses. Normally, replacement of water pipeline is treated as a capital expense. However, both GASB rules and the original bond documents implied that these costs should be classified as an operating expense, therefore, reducing the bond coverage calculation.

Understanding emergency disaster repairs and their impact on expenditures required a creative new rate covenant. If repairs are treated as an operating expense, net revenues would decrease significantly and trigger forced rate increases, even if the City has cash reserves to fund the repair projects. NHA worked with bond counsel to develop a rate covenant that adjusts for natural disaster repair costs if the City has sufficient funds to cover repair costs.

Further complicating the matter was the timing of FEMA reimbursements, which do not always show up in the same fiscal year as the repair expenses. NHA resolved this issue by showing separate line items in the coverage analysis for earthquake-related repairs and reimbursements, allowing potential investors to clearly see the earthquake’s unique, short-term impact on the water utility’s cash flows.

The City received a “AA-” rating from Standard & Poor’s on the bonds with the innovative rate covenant and no debt service reserve. The refinancing generated more than $8.6 million of cash flow savings to the City’s water fund and rate payers, including $2 million of upfront savings for budgetary flexibility and other capital projects.

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