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HomeMy WebLinkAboutAgenda - Mail Packet - 2/27/2018 - Special Council Finance Committee Agenda - February 27, 2018Finance Administration 215 N. Mason 2nd Floor PO Box 580 Fort Collins, CO 80522 970.221.6788 970.221.6782 - fax fcgov.com AGENDA Special Council Finance Committee February 27, 2018 11:00 am - noon CIC Room - City Hall 1. Broadband Debt Issuance 60 minutes T. Storin Council Finance Committee & URA Finance Committee Agenda Planning Calendar 2018 RVSD 02/08/18 ck Feb 12P th P Utility LTFP Review – 4 Utilities 60 min L. Smith CRISP Project Cost 30 min C. Workman Broadband Debt Issuance 20 min T. Storin URA Feb 27P th Broadband Debt Issuance 60 min T. Storin URA Mid-Town Project Review 30 min J. Birks Mar 19P th City Fund Implementation 30 min M. Beckstead N. Bodenhamer Vine/Lemay – Financing Alternatives 30 min C. Crager M. Beckstead KFCG Expiration 30 min G. Sawyer Metro District Policy 30 min P. Rowe URA April 16P th Oakridge Fee Waiver Request 20 min S. Beck-Ferkiss DDA Credit Line Renewal 30 min M. Robenalt URA County IGA – URA TIF Evaluation Process 30 min J. Birks Future Council Finance Committee Topics: BFO Assumption Review - May Phase II Fee Discussions – Development Review Fees & Wet Utilities KFCG Expiration Future URA Committee Topics: Annual URA District Updates – Anticipate memo format COUNCIL FINANCE COMMITTEE AGENDA ITEM SUMMARY Staff: Mike Beckstead, CFO Travis Storin, Accounting Director Lance Smith, Utilities Finance Strategic Date: February 27, 2018 SUBJECT FOR DISCUSSION 2018 Light & Power Revenue Bonds, Series A and B EXECUTIVE SUMMARY Staff is preparing to bring forward ordinances for first reading on March 20 for the following: • Issuance of 2018 Light & Power Revenue Bonds • Defeasance of 2010 Light & Power Revenue Bonds • Appropriation of proceeds for construction of a municipal retail broadband network Subject to change and as currently structured, bonds will be issued in gross for $141.9 million, which will cover issuance costs of $0.9 million, establishment of a capitalized interest fund of $13.8 million, and project proceeds of $127.2 million. Proceeds are split into separate tax-exempt and taxable series. Tax-exempt bonds have certain requirements to maintain their exempt status, including: • A reasonable expectation to spend 85% of the exempt proceeds within a 3 year window • A limitation on proceeds funding private use of up to 10% • A limitation on “bad money”, or the use of proceeds for working capital, of 5% of the issuance. The bonds are structured with a 25 year maturity and allow for early redemption beginning in year 10, or mid-2028. Debt service at the currently contemplated terms is presented as follows: In addition, existing Light & Power bonds of $5.3 million will be defeased by placing cash reserves into an irrevocable escrow account. Doing so will satisfy bond covenants limiting the ability to pledge net revenues toward the 2018 bond issuance. Proceeds of the bonds will repay the $1.8 million short-term loan made from the General Fund earlier in 2018. Defeasance of the 2010 bonds will forfeit approximately $400,000 in Qualified Energy Conservation Bond subsidies, which will be repaid to Light and Power reserves from bond proceeds. The bond ordinance will be brought forward as a parameters ordinance, allowing for a reasonable range of market scenarios in the weeks that elapse between second reading and pricing of the bonds. Staff recommends multiple external rating agencies to review the issuance in March and April, and pricing and distribution to take place in May after second reading of the ordinance April 3. GENERAL DIRECTION SOUGHT AND SPECIFIC QUESTIONS TO BE ANSWERED Does the Finance Committee support proceeding to first reading on March 20, 2018? BACKGROUND/DISCUSSION For reference, below is the broadband implementation timeline, including the milestones on bond issuance: Within the bond issuance milestone above are the below key dates: ATTACHMENTS Attachment 1: Slide deck Light & Power Revenue Bonds February 27 2018 2 Overview Current structure: • $141.9M Revenue Bonds issued by L&P, netting $127.2M • Backed by revenue & rate making of L&P & current debt capacity • Series A – $87.4M Tax Exempt – 3 year spend requirement; Series B – $39.8M Taxable • Includes $8.2M capital to be sequestered for additional market share or annexation • 25 year maturity at 3.9% net interest cost; payments deferred 30 months • Early redemption (call) feature beginning in year 10 3 Overview (continued) Current structure: • Defeasance of existing Light and Power debt ($5.3M) • $1.8M is included with 2018 budget • Remaining $3.5M would have been funded from reserves in 2019-2020 • Reimbursement of 1) General Fund $1.8M appropriation plus interest and 2) Forfeited QECB subsidies ($0.4M) • All terms subject to change through date of pricing 4 Bonding Key Dates 12/28 RFP for Underwriting team 01/26 Underwriter selections 02/08 Initial drafts and due diligence: ordinances and prelim. official stmt. 02/27 Finance Committee 03/07; 03/08 Rating agency reviews (Fitch and S&P, respectively) 03/20; 04/03 First and second readings: bond ordinance, defeasance, and appropriation 04/15 ~ 04/27 On-site follow-up with S&P (date is TBD) 05/01 Post Official Statement online 05/15 Final Pricing 05/24 Projected closing and delivery of proceeds Completed: In Progress: Key components of process: • Underwriting • Ratings • Sales and Distribution 5 6 Debt Issuance Process: Underwriting • Negotiated Sale and public offering rather than Auction Method and/or private placement. Preferred method for large and complex bond issuances. Underwriters are selected in advance and partner on structure. • Syndicated Model: City has selected three underwriters. One is awarded Senior Manager and the others co-manage. Syndicated model assists with pricing for City, risk management for underwritings • Criteria for selection were: a) issuance cost most favorably to the City, b) willing to buy bonds with own capital, c) support of rating agency process, d) local retail presence, and e) ability to market. 7 Debt Issuance Process: Ratings • Secured by Light & Power revenue. Light and Power is currently S&P AA-. • Targeting ratings from multiple rating agencies, which can lower interest cost. • Rating process will take place on-site with Fort Collins leadership. Focus is on electric utility, City operations, local community, and Broadband business plan. • Difference in AA category vs. A can be 10-15 basis points, a present value of $1.2M to $1.8M at current rates 8 Debt Issuance Process: Distribution and Sales • Underwriting syndicate and staff are evaluating local distribution channels • Current structure issues $1,000 denominations rather than traditional $5,000 • Options include a retail-only order period in advance of institutional sales (mutual funds, insurance companies, etc.). • This can increase access to residents who wish to invest while potentially lowering the City’s cost. • Institutional sales still paramount to success Term Summary: Use of Proceeds 9 Series 2018A (Tax-exempt) Series 2018B (Taxable) Total Project Fund $87,433,000 31,562,000 $118,995,000 Sequestered capital for annexations and/or market share - 8,200,000 8,200,000 Capitalized Interest Fund 9,537,735 4,285,910 13,823,645 Cost of Issuance 580,267 277,090 857,357 Total $97,551,002 $44,325,000 $141,876,002 10 Annual Debt Service Interest Rate Activity 11 0.00 1.00 2.00 3.00 4.00 5.00 2013 2014 2015 2016 2017 2018 Yield to Maturity (%) Municipal and Corporate AA Rated 20 Year Maturity Bond Yields US Corporate AA+, AA, AA- 20YR Moody's Municipal Bond Yield AA 20 YR Possible 40-50 bps difference between now and pricing 5/15 pricing date Term/Maturity Considerations Staff recommends 25 year term with early redemption option at 10 years, whereas business case assumed 15 year term. Factors for consideration include: 1) Flexibility if market share is slow; annual debt service $4-5M less 2) With market share, creates positive cashflow sooner that could be used for success or annexation 3) Helps with debt service coverage and satisfying additional bonds test in 2023 12 Expanding to 25 year term with call option maximizes flexibility Impacts to L&P Debt Service Coverage 13 Measurement Debt Service Coverage Ratio Staff practice for Light & Power 2.00 Bond covenant 1.25 Rating Stress Test 1.29 Projected ratio for life of bonds* 3.65 ~ 5.50 *Assumes: 1. Rate increases previously presented in Light & Power long-term plan 2. 2023 bonding of $20M at 10 years for electric system Utilizes existing debt capacity through 2022, then Broadband revenues will cover Assumptions Comparison 14 Measure Business Plan Current Term 15 years 25 year w/ 10 yr. call Yields (exempt/taxable) 4.0% / 5.0% 3.8% / 4.0% Principal: Exempt / Taxable / Total $64.0M / $58.0M / $122.0M $39.8M / $87.4M / $127.2M Full annual debt service $14.7M $10.2M First cashflow positive year Year 6 Year 5 Years to positive net cash 14 years 14 years Questions and Comments 15 • Does Finance Committee support proceeding with first reading on 3/20?