Notes on EID Rate Covenant presentation and discussion

January 11, 2010 meeting of EID Finance, Rates and Charges Committee
Presentation by attorney Doug Brown, senior partner in Stradling Yocca Carlson & Rauth
Notes by Paul Raveling

Summary notes:

• If the proposed rate increase is approved EID can operate under the budget adopted at the end of November.
   
  
• The key legal agreement is the District's Rate Covenant with bondholders. This requires that the budget for each fiscal year yield net revenues of at least 125% of bonded indebtedness.
   
  
• As a result of the upcoming Proposition 218 hearings EID could in theory choose to do no rate increase or a reduced rate increase. If it does, it will have to adopt a new budget promptly that cuts $13 million or it will default on its Rate Covenant.
   
  
• The most likely result of default is that bondholders will sue for a writ of mandamus, forcing EID to comply with its Rate Covenant. Complying with the Rate Covenant can be satisfied by any combination of raising rates and reducing costs. Default will aslo have very substantial adverse impact on EID credit ratings, limiting ability to borrow and significantly increasing cost of credit.
   
  
• Costs have already been cut "to the bone". It appears that EID has pushed hard to avoid raising rates in recent years and is now in a position of having cost reduction no longer be an option.
   
  
• With lower likelihood, results can be more severe. One legal possibility is for bondholders to demand immediate payment in full on bonds. A particularly severe result would be for the state to seize control of EID.
   
  
• A minimal rate increase to comply with the Rate Covenant appears to be about 30% for the next fiscal year. This would leave no margin for error:  If the budget was good but end-of-year actual financial results fail to comply with the Rate Covenant there are other consequences.  These are less severe than those for an affirmative default (deliberately budgeting too little), but the result would still be costly to EID in terms of ability to secure low-rate financing, especially for short-term debt.