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Staff Report PREPARED BY: MATT MORLEY PARKS AND PUBLIC WORKS DIRECTOR Reviewed by: Town Manager, Town Attorney, and Finance Director 110 E. Main Street Los Gatos, CA 95030 ● 408-354-6832 www.losgatosca.gov TOWN OF LOS GATOS COUNCIL AGENDA REPORT MEETING DATE: 12/20/2016 ITEM NO: 7 DATE: DECEMBER 7, 2016 TO: TOWN COUNCIL FROM: LAUREL PREVETTI, TOWN MANAGER SUBJECT: AUTHORIZE THE TOWN MANAGER TO EXECUTE A SUBORDINATION AGREEMENT WITH RIVER CITY BANK IN CONJUNCTION WITH THE CREDIT AGREEMENT TO PROVIDE FINANCING FOR THE SILICON VALLEY CLEAN ENERGY (SVCE) AUTHORITY RECOMMENDATION: Authorize the Town Manager to execute a subordination agreement with River City Bank in conjunction with the Credit Agreement to provide financing for the Silicon Valley Clean Energy (SVCE) Authority. BACKGROUND: On February 2, 2016 the Town Council approved the Town participation in a regional Joint Powers Authority (JPA) called Silicon Valley Clean Energy (SVCE). The goal of SVCE is to act as the electricity procurement authority for all participating jurisdictions, taking over this role from Pacific Gas & Electric (PG&E). This allows for greater flexibility in the electricity purchased, with a focus on reducing Green House Gas (GHG) emissions and increasing the amount of renewable energy purchased beyond what PG&E can provide. The Council also approved the allocation of $150,000 as the proportionate share of startup costs for SVCE, with the commitment that SVCE would repay the startup costs by March 31, 2020. To date the Town has contributed $100,000 to the startup costs. The additional $50,000 was anticipated to cover the share of costs for any jurisdiction(s) that did not join the JPA; however, all jurisdictions have joined and those funds were not needed. As the $50,000 amount was not appropriated by the Town, no budget action has needed to occur with respect to those funds and they remain in the General Fund. PAGE 2 OF 3 SUBJECT: AUTHORIZE THE TOWN MANAGER TO EXECUTE A SUBORDINATION AGREEMENT WITH RIVER CITY BANK IN CONJUNCTION WITH THE CREDIT AGREEMENT TO PROVIDE FINANCING FOR THE SILICON VALLEY CLEAN ENERGY (SVCE) AUTHORITY DECEMBER 7, 2016 S:\COUNCIL REPORTS\2016\12-20-16\07 Subordination Agreement for SVCE\07 Staff Report FINAL.docx 12/15/2016 10:19 AM MM BACKGROUND (cont’d): Councilmember Rennie was appointed as the Town’s representative on the JPA Board and since its inception SVCE has continued to move towards the goal of distributing green electricity. The current schedule calls for implementation in three phases, with the first phase beginning in April, 2017. DISCUSSION: SVCE has identified the need for up to $2.0 million in a Non-Revolving Line of Credit (NRLOC) for pre-launch activities and up to an $18.0 million Revolving Line of Credit (RLOC) to fund reserves and negative cash flow associated with power supply acquisition. Initially, it was anticipated that the member agencies may need to provide some form of limited guarantee to the selected bank, as has been the case for all other CCEs. River City Bank (RCB), however, required guarantees for only $2.0 million associated with the NRLOC. The agencies of Sunnyvale, Mountain View, Gilroy and the County of Santa Clara have agreed to provide this guarantee. The Credit Agreement with RCB requires each agency agree to subordinate the repayment for their share of the initial contribution, totaling $2.7 million, until the LOC is retired. Both RCB credit facilities are projected to be repaid by SVCE within 12 months of operations. The SVCE Board approved RCB banking services in September and approved the Credit Agreement on November 9, 2016. In order for RCB to make funds available post entering power supply agreement in January 2017, it is necessary for all member agencies to approve the subordination agreement. Future SVCE Activities In January, SVCE will begin distributing notifications of the upcoming switch of PG&E customers to SVCE. This is an opt out process, with the end result fairly transparent to the customer as billing and distribution will continue to be provided by PG&E. This is also the time that customers will be able to opt for a different mix of energy. SVCE will b e offering a base level called GreenSmart that is 50% renewable and 100% carbon free. There will also be a second option called GreenPrime which will be 100% renewable and 100% carbon free. GreenSmart will achieve modest savings to the current PG&E rates while GreenPrime will be at a premium to PG&E rates. Staff anticipates bringing a discussion of this item to the Council for the January PAGE 3 OF 3 SUBJECT: AUTHORIZE THE TOWN MANAGER TO EXECUTE A SUBORDINATION AGREEMENT WITH RIVER CITY BANK IN CONJUNCTION WITH THE CREDIT AGREEMENT TO PROVIDE FINANCING FOR THE SILICON VALLEY CLEAN ENERGY (SVCE) AUTHORITY DECEMBER 7, 2016 S:\COUNCIL REPORTS\2016\12-20-16\07 Subordination Agreement for SVCE\07 Staff Report FINAL.docx 12/15/2016 10:19 AM MM DISCUSSION (cont’d): 31, 2017 priority setting session so that costs associated with the program can be evaluated with other potential priorities. At the February 7, 2017 Council meeting, staff will provide a staff report with the recommended selection and all municipal accounts will switch to SVCE in the first phase in April 2017. CONCLUSION: Staff recommends that the Town Council Authorize the Town Manager to execute a subordination agreement with River City Bank in conjunction with the Credit Agreement to provide financing for the Silicon Valley Clean Energy (SVCE) Authority. COORDINATION: This report has been coordinated with the Town Attorney and the Finance Department. FISCAL IMPACT: There is no fiscal impact as a result of this action. Attachment: 1. Subordination Agreement SUBORDINATION AGREEMENT River City Bank (the “Lender”) and the other parties signatories hereto (each, a “Subordinated Creditor” and collectively, the “Subordinated Creditors”), agree, effective November 15, 2016, as follows: Section 1. Background and Purpose. 1.1 The Lender is making loans to Silicon Valley Clean Energy Authority, a public agency formed under the provisions of the Joint Exercise of Powers Act of the State of California, Government Code Section 6500 et. seq. (the “Obligor”), pursuant to that certain Credit Agreement dated as of the date hereof (as modified, amended, restated or replaced from time to time, the “Senior Loan Agreement”). The loans are evidenced by a Non-Revolving Promissory Note in the original principal balance of $2,000,000 (“Non-Revolving Note”) and a Revolving Credit Promissory Note in the original principal balance of $18,000,000 (together with the Non-Revolving Note, the “Senior Notes”). The Obligor is currently indebted to the Subordinated Creditors as set forth on Exhibit A attached hereto and incorporated herein (as the same may be amended, modified or refinanced, “Subordinated Debt”). The Lender and the Subordinated Creditors desire to enter into this Agreement to effectuate the subordination of the Subordinated Debt to the Senior Debt (as defined below). Capitalized terms used, but not otherwise defined, in this Subordination Agreement shall have the meanings ascribed to them in the Senior Loan Agreement. Section 2. Subordination. 2.1 Each Subordinated Creditor hereby irrevocably subordinates, in accordance with the terms hereof, the payment and performance of the Subordinated Debt by the Obligor to it, to the prior payment and performance in full of all of the obligations specified in the Senior Loan Agreement and the Senior Notes (collectively, the “Senior Debt”). Each Subordinated Creditor acknowledges that it has been represented by counsel in connection with the transactions that are the subject of this Subordination Agreement. This Subordination Agreement shall be effective as to a Subordinated Creditor when such Subordinated Creditor signs this Subordination Agreement and execution by all Subordinated Creditors is not a condition to such effectiveness. 2.2 Under no circumstances will the Senior Debt be deemed to have been paid in full unless and until such time as, and when used in this Subordination Agreement with respect to the Senior Debt, the words “paid in full,” “payment in full,” and similar phrases shall mean that, the Lender has received payment, in immediately available funds, of 100% of all outstanding Senior Debt, and all of the Lender’s obligations to extend credit under the Senior Loan Agreement have terminated. ATTACHMENT 1 2.3 The Subordinated Debt is subordinated in right of payment to the Senior Debt in accordance with this Agreement. Each Subordinated Creditor agrees to make appropriate entries in its books and records and stamp all Subordinated Debt documents evidencing the Subordinated Debt with the following legend: “The indebtedness evidenced by this instrument is subordinated to the prior payment in full of the Senior Debt (as defined in the Subordination Agreement hereinafter referred to) pursuant to, and to the extent provided in, the Subordination Agreement effective as of November 15, 2016 by the maker hereof and payee named herein in favor of River City Bank.” Section 3. Payments. 3.1 Until the payment in full of the Senior Debt, without the prior written consent of the Lender (which consent the Lender may refuse to give for any or no reason), under no circumstances will any Subordinated Creditor, directly or indirectly, take any action to enforce payment of or to collect the whole or any part of the Subordinated Debt or enforce any of the rights and remedies available to the Subordinated Creditor, other than in the manner and to the extent permitted by Section 4 hereof, or ask, demand, take or receive any collateral, mortgages or other security from the Obligor in respect of the Subordinated Debt. Any amou nts paid by the Obligor to a Subordinated Creditor in violation of the terms of this Subordination Agreement shall be held by such Subordinated Creditor in trust and promptly paid over to the Lender for application to the Senior Debt in accordance with the Senior Loan Agreement. 3.2 Notwithstanding anything to the contrary contained in this Subordination Agreement, each Subordinated Creditor agrees that it will not, without the Lender’s prior written consent (which the Lender may refuse to give for any or no reason), directly or indirectly permit the modification or amendment of any of the terms or provisions, as they exist on the date hereof, of the note reflecting the Subordinated Debt (“Subordinated Note”), to the extent that any such modification or amendment would (a) result in any increase in the amount of the Subordinated Debt, (b) increase the amount, or accelerate the due date, of any payment or distribution in respect of the Subordinated Debt. Section 4. Allowable Payments. 4.1 Subject to other applicable provisions of this Subordination Agreement, including, without limitation, those contained in Section 5 hereof, without the Lender’s prior written consent, the Obligor may not make, and a Subordinated Creditor may not accept from the Obligor, any payment in respect of the Subordinated Debt. 4.2 Notwithstanding anything to the contrary in this Subordination Agreement, the Obligor may set-off against amounts payable in respect of Subordinated Debt under the circumstances set forth or referenced in any documentation of such Subordinated Debt. Section 5. Readjustment. Each Subordinated Creditor further agrees that, upon any distribution of the assets or readjustment of the indebtedness of the Obligor, whether by reason of liquidation, composition, bankruptcy, arrangement, receivership, assignment for the benefit of creditors, or any other action or proceeding involving the readjustment of all or any of the Subordinated Debt, or the application of the property of the Obligor to the payment or liquidation thereof, the Lender, in any such instance, shall be entitled to receive payment in full of the Senior Debt prior to the payment of all or any part of the Subordinated Debt. Section 6. Bankruptcy Issues. To the extent that the Obligor makes a payment to the Lender, which payment(s) (or any part thereof) subsequently are voided, invalidated, declared to be fraudulent or preferential, set aside, or required to be repaid to a trustee, receiver, or any other person or entity pursuant to Chapter 11 of Title 11 of the United States Code (11 U.S.C. § 101 et seq.) (the “Bankruptcy Code”), any other bankruptcy act, state or federal law, common law or equitable cause (“Insolvency Law”), then, to the extent any such payment(s) or proceeds are repaid by the Lender, the Senior Debt (or the part that was intended to be satisfied) will be revived for all purposes of this Subordination Agreement and will continue in full force and effect, as if such payment or proceeds had not been received by the Lender. Section 7. Waivers. Each Subordinated Creditor hereby waives until the Senior Debt is paid in full any and all rights at law or in equity to subrogation, reimbursement or set off or any other rights which such Subordinated Creditor may have or hereafter acquire against the Obligor in connection with or as a result of such Subordinated Creditor’s execution, delivery and/or performance of this Subordination Agreement. Section 8. Attorney-In-Fact. Each Subordinated Creditor irrevocably appoints the Lender as its attorney-in-fact, with full power of substitution, in either the Lender’s name or such Subordinated Creditor’s name, to do the following (but the Lender shall have no obligation to do so): (a) endorse and collect all checks, drafts, other payment orders and instruments representing or included in, any payment, dividend or distribution relating to, the Subordinated Debt or any Collateral securing the Subordinated Debt; (b) take any action to enforce, collect or compromise any of the Subordinated Debt; (c) exercise any other right, remedy, privilege or option of such Subordinated Creditor pertaining to any Subordinated Debt or Subordinated Debt documents; (d) take any actions or institute any proceedings that the Lender determines to be necessary or appropriate to collect or preserve the Subordinated Debt or any Collateral for the Subordinated Debt; (e) execute in the name of or otherwise authenticate on behalf of such Subordinated Creditor any record reasonably believed necessary or appropriate by the Lender for compliance with laws, rules or regulations applicable to any Subordinated Debt or any Collateral for the Subordinated Debt, or in connection with exercising the Lender’s rights under this Agreement; and (f) execute and file claims, proofs of claim or other documents, and to take any other action regarding all or any part of the Subordinated Debt necessary or appropriate to insure payment to and receipt by the Lender of all payments, dividends and other distributions on account of the Subordinated Debt, instruments evidencing the Subordinated Debt, or any Collateral for the Subordinated Debt. This appointment is irrevocable and coupled with an interest and shall survive the dissolution or disability of such Subordinated Creditor. Notwithstanding the foregoing, the Lender shall not be liable to any Subordinated Creditor for any failure (i) to prove the existence, amount, or circumstances of the Subordinated Debt; (ii) to exercise any right related to the Subordinated Debt; or (iii) to collect any sums payable on or distributions attributable to, the Subordinated Debt. Section 9. Representations and Warranties. Each Subordinated Creditor represents and warrants to the Lender as follows: (a) the execution, delivery and performance of this Agreement and each of the Subordinated Debt documents now outstanding (true and complete copies of which have been furnished to the Lender) have been duly authorized by all necessary action, are within the power and authority of the Subordinated Creditor and do not and wi ll not (i) contravene the articles, charter, bylaws, partnership agreement, operating agreement, regulations or other organic documents, if any, establishing or governing such Subordinated Creditor, any applicable law or governmental regulation or any contractual restriction binding on or affecting such Subordinated Creditor or any of their respective properties, (ii) result in or require the creation of any lien upon or with respect to any of such Subordinated Creditor’s properties or (iii) violate the rights of any person or entity; (b) this Agreement and each of the Subordinated Debt documents are legal, valid and binding obligations of such Subordinated Creditor, enforceable against such Subordinated Creditor in accordance with their respective terms except as limited by bankruptcy, insolvency or other laws of general application relating to the enforcement of creditors’ rights and by general equitable principles; (c) there exists no default, event of default, or event which with the passage of time, the giving of notice or both may result in a default or event of default under the Subordinated Debt or any Subordinated Debt documents or any event or occurrence that gives a Subordinated Creditor the right to terminate a commitment, refuse to make an advance, accelerate a maturity with or without notice or the passage of time; and (d) if such Subordinated Creditor is an entity, that entity is and will remain duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, organization or formation and in good standing in the jurisdictions in which it is doing business. Each Subordinated Creditor further represents and warrants to the Lender as follows: (A) such Subordinated Creditor owns and holds the Subordinated Debt now outstanding free and clear of any lien that has not been disclosed in writing by such Subordinated Creditor to the Lender; (B) such Subordinated Creditor is now solvent, the execution, delivery and performance of this Agreement will benefit such Subordinated Creditor directly or indirectly and such Subordinated Creditor has and will receive fair and reasonably equivalent value for the obligations undertaken in this Agreement; (C) such Subordinated Creditor has (1) without reliance on the Lender or any information received from the Lender and based upon the documents and information such Subordinated Creditor deems appropriate, made an independent investigation of the transactions contemplated by this Agreement and the Borrower, the Borrower’s business, assets, operations, prospects and condition, financial or otherwise, and any circumstances that may bear upon those transactions, the Borrower or the obligations and risks undertaken in this Agreement with respect to the Senior Debt; (2) adequate means to obtain from the Borrower on a continuing basis information concerning the Senior Debt and the Lender has no duty to provide to such Subordinated Creditor any information; (3) full and complete access by and through the Borrower to the Lender’s loan documents; (4) not relied and will not rely upon any representations or warranties of the Lender not embodied in this Agreement or any acts taken by the Lender (including but not limited to any review by the Lender of the affairs of the Borrower) prior to or after the date of this Agreement; (D) such Subordinated Creditor is the sole holder of the Subordinated Debt with full power to make the subordinations set forth in this Agreement; and (E) such Subordinated Creditor has not made or permitted any assignment or transfer, as security or otherwise, of the Subordinated Debt, any Subordinated Debt documents or of any of the Collateral securing the Subordinated Debt, and such Subordinated Creditor shall not do so except in favor of the Lender as long as this Agreement remains in effect. Section 10. Successors and Assigns. This Subordination Agreement immediately shall be binding on each Subordinated Creditor and on its heirs, representatives and assigns, and shall inure to the benefit of the Lender and its successors and assigns. Whenever reference is made in this Subordination Agreement to the Obligor, such term shall include any successor or assign of the Obligor, including, without limitation, a receiver, trustee, or debtor or debtor -in- possession under the Bankruptcy Code. Section 11. Notices. Any notice required or permitted hereunder shall be given in writing by personal delivery, by overnight delivery through a recognized courier service, by certified U.S. mail, or by telecopier (fax) (i) as to a Subordinated Creditor, by giving such notice to such Subordinated Creditor at the address set forth below such Subordinated Creditor’s signature hereon, and (ii) as to the Lender, by giving such notice to the Lender at the address set forth below its signature hereon. All such notices shall be deemed to have been received on the date given, except that any such notice given by overnight delivery will be deemed to have been received on the next business day after such notice was delivered to such a carrier for delivery, and any such notice given by certified U.S. mail will be deemed to have been received three days after such notice was deposited in the U.S. mails, postage prepaid. Section 12. Governing Law. THIS SUBORDINATION AGREEMENT SHALL BE GOVERNED BY CALIFORNIA LAW (WITHOUT REGARD TO ANY JURISDICTION’S CONFLICT OF LAWS PRINCIPLES). EACH SUBORDINATED CREDITOR AND THE LENDER EACH WAIVES TRIAL BY JURY WITH RESPECT TO ANY ACTION, CLAIM, SUIT OR PROCEEDING IN RESPECT OF OR ARISING OUT OF THIS SUBORDINAT ION AGREEMENT. This is a “Subordination Agreement” within the meaning of Section 510(a) of the Bankruptcy Code and shall be interpreted and construed accordingly in any proceeding under the Bankruptcy Code. Section 13. Counterparts. This Agreement may be executed in any number of counterparts with the same effect as if the parties had all signed the same document. All counterparts shall be construed together and shall constitute one agreement. [Remainder of this Page Intentionally Left Blank] {2149277.DOCX;4} SIGNATURE PAGE TO SUBORDINATION AGREEMENT IN WITNESS WHEREOF, the undersigned has caused this Subordination Agreement to be executed as of the Effective Date. City of Campbell By: Name: Title: Address for notice and service of process: City of Cupertino By: Name: Title: Address for notice and service of process: City of Gilroy By: Name: Title: Address for notice and service of process: (Signature Blocks Continue on Following Pages) {2149277.DOCX;4} SIGNATURE PAGE TO SUBORDINATION AGREEMENT City of Los Altos By: Name: Title: Address for notice and service of process: Town of Los Altos Hills By: Name: Title: Address for notice and service of process: Town of Los Gatos By: Name: Title: Address for notice and service of process: (Signature Blocks Continue on Following Pages) {2149277.DOCX;4} SIGNATURE PAGE TO SUBORDINATION AGREEMENT City of Monte Sereno By: Name: Title: Address for notice and service of process: City of Morgan Hill By: Name: Title: Address for notice and service of process: City of Mountain View By: Name: Title: Address for notice and service of process: (Signature Blocks Continue on Following Pages) {2149277.DOCX;4} SIGNATURE PAGE TO SUBORDINATION AGREEMENT County of Santa Clara (Unincorporated Area) By: Name: Title: Address for notice and service of process: City of Saratoga By: Name: Title: Address for notice and service of process: City of Sunnyvale By: Name: Title: Address for notice and service of process: (Signature Blocks Continue on Following Page) {2149277.DOCX;4} SIGNATURE PAGE TO SUBORDINATION AGREEMENT RIVER CITY BANK, as Lender By: Name: Title: Address for notice and service of process: River City Bank 2485 Natomas Park Drive, Suite 100 Sacramento, CA 95833 Attention: Fax: (916) {2149277.DOCX;4} Exhibit A Lender Total Amount City of Campbell $ 100,000 City of Cupertino $ 520,000 City of Gilroy $ 100,000 City of Los Altos $ 100,000 Town of Los Altos Hills $ 25,000 Town of Los Gatos $ 100,000 City of Monte Sereno $ 25,000 City of Morgan Hill $ 100,000 City of Mountain View $ 520,000 County of Santa Clara (Unincorporated Area) $ 520,000 City of Saratoga $ 100,000 City of Sunnyvale $ 520,000 Total $2,730,000 {2149277.DOCX;4} ACKNOWLEDGMENT Silicon Valley Clean Energy Authority, a public agency formed under the provisions of the Joint Exercise of Powers Act of the State of California, Government Code Section 6500 et. seq. (the “Company”), acknowledges receipt of a copy of the Subordination Agreement by and between River City Bank (the “Lender”), and the cities, towns and counties parties thereto (each a “Subordinated Creditor”), dated as of November ____, 2016 (as amended from time to time, the “Subordination Agreement”), and agrees that: (a) it will not: (i) except to the extent permitted by the Subordination Agreement, pay any of the Subordinated Debt until the p ayment in full of the Senior Debt, (ii) provide any security or collateral for any of Subordinated Debt until the payment in full of the Senior Debt, or (iii) take or omit from taking any action that would cause a breach of the Subordination Agreement; (b) neither the Company nor any of its successors or assignees, by operation of law or otherwise, is a party to the Subordination Agreement, and neither the Company nor any of its successors or assignees will have: (i) any right in, or to enforcement of, the Subordination Agreement as against the Lender or a Subordinated Creditor, (ii) any claim of damage if the Lender or a Subordinated Creditor defaults under the Subordination Agreement, or (iii) any right to object to any amendment, modification, or supplement to, or any restatement or replacement of, the Subordination Agreement that is agreed upon by a Subordinated Creditor and the Lender; and (c) none of the provisions of the Subordination Agreement limit or impair the Lender’s rights against the Company or its successors and assigns or any of their respective obligations, indebtedness, or liabilities to the Lender under the Senior Loan Agreement, any related documents, or otherwise. All capitalized terms used in this Acknowledgment that are defined in the Subordination Agreement and not otherwise defined in this Acknowledgment have the meanings specified in the Subordination Agreement. IN WITNESS WHEREOF, the Company has executed and delivered this Acknowledgement to the Lender as of the Effective Date. Silicon Valley Clean Energy Authority By: Name: Title: