Memorandum

City of Lawrence

City Manager’s Office

 

TO:

David L. Corliss, City Manager

 

FROM:

Diane Stoddard, Assistant City Manager

 

CC:

Cynthia Wagner, Assistant City Manager

 

Date:

 

June 30, 2010

RE:

Resolution of Intent to Issue up to $18 million in Qualified Energy Conservation Bonds and/or Recovery Zone Facility Bonds for Bowersock Mills and Power Company

 

Please place on the July 6, 2010 agenda the following item for the City Commission’s consideration:

 

Consider a Resolution of Intent to Issue up to $18 million in Qualified Energy Conservation Bonds and/or Recovery Zone Facility Bonds for Bowersock Mills and Power Company’s Proposed Hydroelectric Power Plant

 

Background:

The City of Lawrence has received a request from Bowersock Mills and Power Company to issue Industrial Revenue Bonds (IRBs) for its new hydroelectric power plant on the north side of the Kansas River.  The financing will enable the project to borrow money at a lower interest rate than traditional financing. 

 

Any bonds issued by the City for this project will be structured as IRBs. IRBs may be issued by the City to finance certain private activities.  The City will simply be a conduit for the bond issuance, since private companies cannot directly issue these financial instruments.  All principal and interest payments on IRBs are the responsibility of the company to repay and the bond documents make clear that in no way is the City pledging any of its revenue to repay bondholders (see Section 7 of the Resolution of Intent).

 

The IRBs may be designated as either Qualified Energy Conservation Bonds or Recovery Zone Facility bonds, in order to lower to effective interest rate to the company.

 

Qualified Energy Conservation Bonds (QECBs) are a relatively new type of bond created by the Energy Improvement and Extension Act of 2008 and expanded by the American Recovery and Reinvestment Act of 2009.  QECBs are taxable bonds issued by a State or local government to finance one or more “qualified conservation purposes.” Although QECBs are taxable bonds (i.e., the interest paid on the bonds is subject to federal income tax), QECBs provide either (1) a Federal income tax credit to bond holders on quarterly credit allowance dates or (2) a Federal income tax subsidy payment equal to 70% or less of the applicable interest rate on the bonds. The Federal income tax credit or the subsidy payment results in the Federal government paying a significant portion of the interest on the QECB. This means that theoretically the Company will pay a lower net interest rate on the principal amount borrowed than on a comparable taxable or tax-exempt bond.  

 

Allocations of QECBs were made to certain cities and counties, and directly to all states.  On June 10, 2010, the City of Lawrence received from the Kansas Department of Commerce an allocation of $8,721,000 of QECBs to be used for the Bowersock project.     

 

Recovery Zone Facility Bonds (RZFBs) are another relatively new type of bond created by the American Recovery and Reinvestment Act of 2009.  RZFBs are tax-exempt bonds (i.e., the interest paid on the bonds is excluded from income for federal income tax purposes).  Allocations of these bonds were made directly to cities and counties. 

 

Section 6 of the Resolution provides that the City will assist Bowersock as necessary to apply for a RZFB allocations from the State of Kansas.  The potential RZFB allocation from the statewide allocation should not negatively affect Berry Plastic’s desire to receive an additional allocation of the same funds.  Staff understands from visiting with State officials that the most important key for the State in making allocations for RZFBs this round is how secure the financing is, as the State wishes to ensure all bonds allocated are issued by the end of December. Each project will be weighed on its own merits. Additionally, if no state allocation of RZFBs are made to Bowersock, Bowersock will need to decide if it wishes to proceed with the issuance of the $8,721,000 of QECBs alone. Staff understands from visiting with Bowersock officials that it does plan to proceed with QECB issuance, even if no RZFB allocation is made.

 

The City recently adopted a new IRB policy, which serves as policy guidance for this request.  The City’s policy indicates support for projects which meet economic development goals of the City, incorporate environmental sustainability, and provide other public benefits to the community.  The IRB policy calls for a $1,000 application fee from the company and that the company pay for all costs of issuance associated with the bond transaction.  Bowersock has paid the required $1,000 application fee.   

 

Resolution of Intent:

The City Commission is requested to adopt a Resolution of Intent to issue up to $18 million of IRBs for this project.  The Resolution is the first step in the bond issuance process, but does not commit the City to issue any bonds.  Before bonds may be issued, the Commission will be required to adopt an ordinance authorizing the issuance of IRBs.  The purpose of the Resolution of Intent is to (1) evidence the City’s intent to work with Bowersock to consider a future financing, and (2) if the IRBs are ultimately approved by the Commission, enable Bowersock to finance certain expenditures paid prior to the date the IRBs are issued. 

 

Before the Commission may consider an ordinance formally authorizing the issuance of the IRBs, Bowersock will need to complete several legal and practical steps.  Section 4 of the Resolution sets forth several conditions regarding future consideration by the City.  First, Bowersock needs to receive authorization from the Federal Energy Regulatory Commission that the project would result in energy conservation.  Second, Bowersock would need to secure a long-term take or pay contract for the sale of the power to an entity with an investment grade credit rating in order to provide security for bond holders and make the bonds marketable.  Alternatively, Bowersock may provide guarantees or other security for the bonds that would enable the bonds to be marketable.  Third, the City, Bowersock and the purchaser of the bonds would need to agree on mutually acceptable terms for the bonds.    

 

Section 7 of the Resolution indicates that the bonds will be repaid solely from revenues derived from Bowersock and that the bonds do not constitute a general obligation of the City.  

 

Next Steps:

Should the conditions of the Resolution be met and Bowersock able to identify a purchaser of the bonds that is willing and able to complete the financing, the City Commission will consider in the future an ordinance that would actually authorize the bond issuance. 

 

Requested Action:

Approve Resolution 6890, indicating the intent of the City of Lawrence to issue up to $18 million in Qualified Energy Conservation Bonds and Recovery Zone Facility Bonds for Bowersock Mills and Power Company’s Proposed Hydroelectric Power Plant, subject to certain conditions and authorize the City Manager to sign an engagement letter with Gilmore & Bell as the City’s bond counsel.