HomeMy WebLinkAboutCOUNCIL - AGENDA ITEM - 04/05/2022 - SECOND READING OF ORDINANCE NO. 034, 2022, APPROPR Agenda Item 5
Item # 5 Page 1
AGENDA ITEM SUMMARY April 5, 2022
Utilities-Broadband
STAFF
Chad Crager, Connexion Executive Director
Molly Reeves, Manager, FP&A
Travis Storin, Chief Financial Officer
David Lenz, FP&A Director
Lance Smith, Utilities Strategic Finance Director
John Duval, Legal
SUBJECT
Second Reading of Ordinance No. 034, 2022, Appropriating Prior Year Reserves from the Light and Power
Fund for Use in the Connexion Account to Complete the Connexion System Construction and Customer Ramp
Up and Providing for Future Cost Recovery.
EXECUTIVE SUMMARY
This item has been moved to Discussion.
This Ordinance, unanimously adopted on First Reading on March 1, 2022, appropriates prior year reserves from
the Light & Power Fund for use in completing the Connexion system construction and customer ramp up.
Updated construction cost and timing estimates were completed in late 2021 which indicated a funding need of
approximately $20 million to build out the network by mid-2022. Staff has evaluated the financing options
available to meet this funding need and proposes to use $20 million from available Light & Power reserves to
allow for completion of the network buildout. These funds will be reimbursed to the Light & Power Fund (including
interest) from the cash flows generated by the Connexion operations. Staff met with the Council Finance
Committee on February 4, 2022 and received support for this proposal.
The Ordinance has been amended between first and second reading to reflect that this appropriation will not
lapse at the end of this fiscal year since it is an appropriation for a capital project. Article V, Section 11 of the
City Charter provides that Council may designate in an ordinance making an appropriation for a capital project
that such appropriation does not lapse at the end of the fiscal year but continues until the capital project is
completed. This designation for a non-lapsing appropriation was inadvertently not included in the Ordinance on
first reading.
STAFF RECOMMENDATION
Staff recommends adoption of the Ordinance on Second Reading.
ATTACHMENTS
1. First Reading Agenda Item Summary, March 1, 2022 (w/o attachments) (PDF)
Agenda Item 15
Item # 15 Page 1
AGENDA ITEM SUMMARY March 1, 2022
Utilities-Broadband
STAFF
Chad Crager, Connexion Executive Director
Travis Storin, Chief Financial Officer
David Lenz, FP&A Director
Lance Smith, Utilities Strategic Finance Director
John Duval, Legal
SUBJECT
First Reading of Ordinance No. 034, 2022, Appropriating Prior Year Reserves from the Light and Power Fund
for Use in the Connexion Account to Complete the Connexion System Construction and Customer Ramp Up
and Providing for Future Cost Recovery.
EXECUTIVE SUMMARY
The purpose of this item is to request appropriation of prior year reserves from the Light & Power Fund for use
in completing the Connexion system construction and customer ramp up. Updated construction cost and timing
estimates were completed in late 2021 which indicated a funding need of approximately $20 million to build out
the network by mid-2022. Staff has evaluated the financing options available to meet this funding need and
proposes to use $20 million from available Light & Power reserves to allow for completion of the network buildout.
These funds will be reimbursed to the Light & Power Fund (including interest) from the cash flows generated by
the Connexion operations. Staff met with the Council Finance Committee on February 4, 2022 and received
support for this proposal.
STAFF RECOMMENDATION
Staff recommends adoption of the Ordinance on First Reading.
BACKGROUND / DISCUSSION
Assumptions Update
The Connexion team, along with Atlantic Engineering Group (AEG), and On Trac, continue to build and install
Connexion fiber throughout the community. With initial construction starting in 2019, it is anticipated that AEG
will be complete with construction by summer 2022 and that the project will remain on target with fiber available
to all premises by the end of 2022.
New neighborhoods continue to be offered Connexion service on a weekly basis. To date, Connexion is seeing
a 31% residential take rate (measured in neighborhoods with service available for at least 90-days.) This
penetration is above the 28% previously noted in the original business plan to achieve timely bond payback.
While build progress and residential take rate are at or above target, previous financial modeling was overly
aggressive on multiple dwelling unit (MDU) build-out and commercial availability. Connexion has steady interest
from these business types, and each brings a challenge for implementation. For 2022, Connexion has secured
Colorado Boring as a dedicated resource to provide fiber to MDUs. Fort Collins has over 500 MDUs and
Connexion has set a target of installing at least 150 in 2022.
ATTACHMENT 1
COPY
Agenda Item 15
Item # 15 Page 2
The updated modeling includes additional boring costs on the fiber network, the dedicated costs for MDU
buildouts, additional premises to be served in the market and updated operating and installation costs reflecting
actual results to date. The primary assumption changes also include an increase in residential take rate to 35%
from 28%, a decrease in commercial take rate from 45% to 28% and full absorption of the market by end of 2024
versus by the end of 2022 previously.
Funding Requirements and Financing Options
The current project estimate to complete is $143 million. Spending through December 2021 totals $115 million.
The Connexion project currently has $123 million available ($117 million appropriated plus a re-deployment of
operating budget funds of approximately $6 million). The resulting funding need is approximately $20 million.
Staff has evaluated various financing options available to provide the sourcing for the $20 million requirement.
The primary options considered were using Light and Power (L&P) reserves with reimbursement, additional bond
issuances (either stand-alone Connexion needs or combined with L&P needs), or combinations of the two. Other
options initially considered were utilization of L&P reserve balances without reimbursement, bank financing,
General Fund backfill, and a do-nothing approach. The primary options considered (including the benefits and
drawbacks of each alternative) are shown below.
Debt Overview
Although Connexion and L&P maintain separate financial books of record for management and transparency
purposes, they are legally a single Electric Utility Enterprise. The existing bonding is issued under this structure
and ultimately L&P revenues provide financial backing if Connexion cash flows are insufficient to pay back its’
obligations (this is similar in structure to other regional municipalities’ broadband operations – Longmont,
Loveland, Estes Park). Therefore, utilization of L&P reserves must consider the financial needs, capacity, and
outlook of the L&P entity in order to avoid negatively impacting L&P ratepayers.
The table below highlights the anticipated L&P rate increases, capital improvement plan (CIP) and debt issuance
needs of L&P over the next ten years. Proposed rate increases are driven to a large degree by the need to
cover increased wholesale power costs. The capital plan includes a new substation, replacement billing system
and a potential East Mulberry annexation. L&P contemplates a debt issuance of $41 million as part of their
planning in 2023. L&P currently has no debt outstanding for their own purposes.
COPY
Agenda Item 15
Item # 15 Page 3
L&P had $23 million in available reserves (after required and appropriated amounts were deducted) at the end
of 2020. 2021 reserve increases are expected to be approximately $19 million, which will leave them with
approximately $42 million of current reserve availability.
Connexion has $130 million in outstanding debt from the bonds issued in 2018 by the Electric Utility Enterprise.
The terms of the bonds provided for semi-annual payments in June and December of each year. The payments
are interest only until December 2022 when the first principal repayment begins. The repayment schedule was
structured to increase the payments over time to align with the construction phase of the project and ramp-up of
customer acquisition. $20 million of available borrowing capacity remains under the original voter approved
initiative amount of $150 million.
Financing Recommendation
Staff is recommending financing Option 1 - using available L&P Reserves. The pursuit of this funding solution
best balances the needs and timing of Connexion funding requirements, maintains flexibility for future L&P
financing requirements, and enables the ability to move forward at full speed with the network buildout and
sales/marketing efforts. It best maintains the ability for Connexion to meet its future debt obligations and provide
security for L&P ratepayers in the longer term. The interest rate paid to L&P for the use of reserve balances will
be the greater of the current investment earnings rate on existing reserve balances or the 10-year AA- bond rate.
Specifics of the funding arrangement will include:
• Draw down as needed to meet cash requirements
• Reimbursement of L&P reserves w/ all excess available cash from Connexion operations
• Interest paid into L&P reserves (computed on outstanding carrying balance)
Reserve Borrowing Draws:
• 1st draw required: Q2 2022
• December 2022 projected balance: $11 million
• Maximum estimated need: $20 million by Dec 2024
• Reimbursement: Completed on or by Jan 2029
• Total Interest incurred: $3 million
CITY FINANCIAL IMPACTS
The updated results of the financial modeling of Connexion operations, including the utilization of Option 1 –
using L&P Reserves, for the ten-year period out to 2031 are detailed below. Of note are the ramp-up of total
revenues in the 2022-25 timeframe, the significant cash flow before financing beginning in 2025, and the
accumulation of cash (total cash flow per year) starting in 2029 after paying back the reserves used. Also
highlighted is the maximum reserve use of $20 million at year-end 2024.
COPY
Agenda Item 15
Item # 15 Page 4
A major consideration of our evaluation of financing options for the additional $20 million capital need was the
impact to our overall debt position and bonding capability. Two key measures in this regard are the debt
coverage ratio (DCR) and Debt Capacity. Debt coverage ratio is a measure of our ability to pay back our annual
debt service, expressed as ratio of net pledged revenues (essentially net operating cash flows) divided by debt
service payments. The combined Connexion/L&P ratio at year end 2022 is projected to be 3.5. This indicates
we have 3.5 times the net revenues to cover our debt payments.
Debt capacity is a measure of how much additional debt we could “afford” at various DCR’s and bond terms
(years). There is sufficient room to take on additional potential debt (above the existing Connexion bond
borrowings and planned L&P $41 million needs) to fund other potential projects or initiatives. The table below
reflects combined L&P/Connexion data.
A number of scenarios and sensitivities were analyzed as part of the financial evaluation. The table below shows
our current estimate and three alternative views: the original business plan take-rates, a breakeven bond
payback scenario and an additional capital overrun case. The estimated funding need, reimbursement
timeframe, cumulative cash in 2042 (when original bonds are paid off) and the interest expense incurred on the
new funding are the key measures evaluated. Long-term cash position is most sensitive to long-term take-rates
and the underlying costs of providing services at those levels.
COPY
Agenda Item 15
Item # 15 Page 5
The following is a summary of the project funding:
Prior Appropriated Funds $122,808,249
Funds to be Appropriated with this Action $20,000,000
Total Available Project Funds $142,808,249
The Interim City Manager has also determined that this appropriation is available and previously unappropriated
from the Light and Power Fund and will not cause the total amount appropriated in the Fund to exceed the
current estimate of actual and anticipated revenues and all other funds to be received in the Fund during this
fiscal year.
BOARD / COMMISSION RECOMMENDATION
Staff met with Council Finance Committee (CFC) on February 4, 2022. CFC provided their support for the
recommended action.
Staff also met with the Energy Board (EB) on February 10, 2022. The planned appropriation request was
reviewed and the EB voted 6-1-1 in support of the proposal.
ATTACHMENTS
1. Energy Board Minutes (excerpt) (PDF)
2. Council Finance Committee Minutes (excerpt) (PDF)
3. Powerpoint Presentation (PDF) COPY
-1-
ORDINANCE NO. 034, 2022
OF THE COUNCIL OF THE CITY OF FORT COLLINS
APPROPRIATING PRIOR YEAR RESERVES FROM
THE LIGHT AND POWER FUND FOR USE IN THE
CONNEXION ACCOUNT TO COMPLETE THE CONNEXION
SYSTEM CONSTRUCTION AND CUSTOMER RAMP UP AND
PROVIDING FOR FUTURE COST RECOVERY
WHEREAS, the City is currently in the fourth year of building and installing fiber-optic
based telecommunication facilities throughout Fort Collins (the “Project”) to be operated by
Connexion, the City’s telecommunication services division within the City’s Electric Utility as
established in Article VIII in Chapter 26 of the City Code (“Connexion”); and
WHEREAS, Connexion has already begun to provide and will continue to provide
telecommunication services to the City’s residents who subscribe to such services, which
services include broadband Internet, telephone and cable television services; and
WHEREAS, the City Council has previously appropriated almost $123 million to fund
the construction of the Project; and
WHEREAS, the current estimate of the total cost to complete the Project is
approximately $143 million, and based on this an additional $20 million is needed to complete
the Project; and
WHEREAS, this Ordinance appropriates this additional $20 million from the prior year
reserves available in the Light and Power Fund for use in the Connexion Account, a subdivision
of the Light and Power Fund, to be expended from the Connexion Account to complete the
Project ; and
WHEREAS, this appropriation benefits the public health, safety and welfare of the
residents of Fort Collins and serves the utility purpose of completing the Project to provide
telecommunication services throughout Fort Collins; and
WHEREAS, Article V, Section 9 of the City Charter permits the City Council, upon the
recommendation of the City Manager, to make supplemental appropriations by ordinance at any
time during the fiscal year such funds for expenditure as may be available from reserves
accumulated in prior years, notwithstanding that such reserves were not previously appropriated;
and
WHEREAS, the Interim City Manager has recommended the appropriation described
herein and determined that this appropriation is available and previously unappropriated from the
prior year reserves in the Light and Power Fund and will not cause the total amount appropriated
in the Light and Power Fund to exceed the current estimate of actual and anticipated revenues
and all other funds to be received in the Fund during this fiscal year.; and
WHEREAS, Article V, Section 11 of the City Charter authorizes the City Council to
-2-
designate in the ordinance when appropriating funds for a capital project, that such appropriation
shall not lapse at the end of the fiscal year in which the appropriation is made, but continue until
the completion of the capital project; and
WHEREAS, the City Council wishes to designate the appropriation herein for the Project
as an appropriation that shall not lapse until the completion of the Project.
NOW, THEREFORE, BE IT ORDAINED BY THE COUNCIL OF THE CITY OF
FORT COLLINS as follows:
Section 1. That the City Council hereby makes and adopts the determinations and
findings contained in the recitals set forth above.
Section 2. That there is hereby appropriated from prior year reserves in the Light and
Power Fund the sum of TWENTY MILLION DOLLARS ($20,000,000.00) for use in the
Connexion Account, a subdivision of the Light and Power Fund, to be expended from the
Account for the completion of the Project.
Section 3. That it is City Council’s intent, and direction to the City Manager and the
City’s Financial Officer, that this amount appropriated be reimbursed annually to the Light and
Power Fund in the amount the Connexion revenues collected exceed Connexion’s expenses and
debt obligations for that fiscal year, together with an interest factor which is the greater of the
Light and Power Fund’s average investment earnings for its reserve balance for that year or the
average ten-year AA bond rate for that year, until this appropriated amount with such interest has
been paid in full, which payment in full is to be completed on or before January 1, 2029. In
addition, when the City Manager is setting under City Code Section 26-573 Connexion’s rates,
fees and charges for furnishing telecommunication facilities and services to its subscribers, the
City Manager shall do so taking into consideration this reimbursement of the Light and Power
Fund as provided in this Section 3.
Section 4. That the appropriation herein for the Project is hereby designated, as
authorized in Article V, Section 11 of the City Charter, as an appropriation that shall not lapse at
the end of this fiscal year but continue until the completion of the Project.
Section 45. That it is also the City Council’s intent that, in the event the City or the
Electric Utility Enterprise hereafter issues any bonds or incurs any other financial obligation to
be used to reimburse the Light and Power Fund for the Connexion’s expenditure of this
appropriation for the Project, this Ordinance is intended to be a declaration of “official intent” to
reimburse these expenditures within the meaning of Treasury Regulation §1.150-2.
Introduced, considered favorably on first reading, and ordered published this 1st day of
March, A.D. 2022, and to be presented for final passage on the 5th day of April, A.D. 2022.
__________________________________
Mayor
-3-
ATTEST:
_______________________________
City Clerk
Passed and adopted on final reading on the 5th day of April, A.D. 2022.
__________________________________
Mayor
ATTEST:
_______________________________
City Clerk