LOS ANGELES — Hercules, Calif., officials said the city may default on electric system revenue bonds if a tender offer fails to draw enough buyers.
The city agreed to retire the bonds as part of a $9.5 million deal struck with investor-owned utility Pacific Gas & Electric in May 2013 to buy the city's Hercules Municipal Utility.
If the tender offer is successful, the city will use money from the sale to pay off the HMU bonds.
The offer period ends at 5 p.m. EDT on March 28.
If the tender offer fails, it is likely the city will default on the Series 2010 Refunding bonds as early as Aug. 1, 2014, city officials said in a release Tuesday.
The city launched the tender offer on March 5 for $13 million in par of revenue bonds issued in two series in 2010 that were used to fund improvements to the city owned and operated utility. The city is offering to purchase the bonds for 90% of the par value.
The release put out by the city said that the bonds are currently rated CCC-plus by Standard & Poor's. When in fact, an S&P spokesman said the rating agency removed its credit watch and suspended the city's rating on June 28, 2013.
The city utility began providing electric service to residents in 2003, but it never made a profit, according to a letter Phil Batchelor, city manager, sent to bondholders.
It does not generate enough revenue to cover its operating expenses and debt service for the HMU bonds.
A cooperation agreement in the bond documents stipulates that the general fund be used to cover shortfalls in bond payments. To date, debt service has been paid via a combination of city subsidies and bond proceeds initially intended to finance improvements, according to city officials.
The city does not have sufficient funds to continue subsidizing the HMU nor does it intend to advance general fund monies to cover any shortfalls, city officials said in a release. Once the bond proceeds from the 2010 issues are spent, they said, the bonds from that series will default.
"The financial drain of subsidizing the HMU and debt service on the bonds is undermining the city's efforts to recover from a substantial structural deficit and to avoid insolvency," Batchelor wrote in his letter.
The utility shortfalls were only one of several financial problems that have battered the city of 26,000 northeast of San Francisco in recent years.
