HomeMy WebLinkAboutFIN-09-150 - Subordination Letter - KW Hydro - Smart MetersREPORT
REPORT TO:
Councillor B. Vrbanovic, Chair, and Members of
the Finance and Corporate Services Committee
DATE OF MEETING:
November 16, 2009
SUBMITTED BY:
Dan Chapman, General Manager of Financial Services & City
Treasurer
PREPARED BY:
Dan Chapman, General Manager of Financial Services & City
Treasurer
WARD(S) INVOLVED:
All
DATE OF REPORT:
October 21, 2009
REPORT NO.: FIN-09-150
SUBJECT:
Subordination Letter - Kitchener-Wilmot Hydro Inc.
RECOMMENDATION:
THAT the General Manager of Financial Services be authorized to deliver a letter to
Infrastructure Ontario agreeing to subordinate the City of Kitchener’s interest in Kitchener-
Wilmot Hydro Inc.’s debt to Infrastructure Ontario’s proposed smart meter program loan to
Kitchener-Wilmot Hydro Inc., as outlined in report FIN-09-150
BACKGROUND:
Kitchener-Wilmot Hydro is currently arranging for loan financing through Infrastructure Ontario
to fund the smart meter program. As a standard term of financing, IO requires a subordination
letter from the City.
REPORT:
Kitchener-Wilmot Hydro (Hydro) is in the process of obtaining approximately $10 million in loan
financing from Infrastructure Ontario (IO) to fund Hydro’s smart meter program. This program is
legislated by the Ontario Ministry of Energy and requires that all residential homes and small
business shall be outfitted with smart meters by 2010.
As a standard term of financing, IO requires a subordination letter from the City which allows
IO’s loan to rank equally with the existing unsecured credit facility provided by Bank of Montreal.
In May, 2002 the City of Kitchener provided a subordination to the Bank of Montreal to facilitate
Hydro obtaining a letter of credit to meet the security posting requirements of the Independent
Electricity Market Operator. The Bank of Montreal has agreed to allow IO’s debt to rank equally
with the Bank’s.
Hydro has advised that the proposed subordination letter would assist the utility in reducing
financing costs by avoiding financial covenants which may otherwise by imposed by IO.
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The provision of a subordination is contemplated in the Promissory Note between the City and
Hydro which states:
“The payment of the Principal amount and all interest on this Promissory Note is subordinated to
debt issued by Kitchener Wilmot Hydro from time to time to a financial institution or other third
party for the purposes of Kitchener-Wilmot Hydro and the City of Kitchener shall execute such
documents as may reasonably be required by Kitchener Wilmot Hydro to evidence the
subordination”.
In reviewing this request, City staff obtained updated debt/equity ratio projections taking into
consideration the proposed loan, relative to the prescribed ratio. Assuming the $10 million
dollar IO debenture is in place for 2010, Hydro’s long term debt would increase to $86.96
million. The projected rate base is $164 million. Therefore Hydro’s 2010 capital structure would
be 53% debt and 47% equity. The 2010 deemed capital structure is 60% debt (4% is deemed
short term) and 40% equity. Hydro has additional debt capacity remaining of approximately 7%
or $11 million in 2010.
The additional financial risk to the City associated with the subordination of the City’s notes
relative to the IO loan is reasonable in light of Hydro’s current debt/equity ratio, the ability of
Hydro to recover debt service costs associated with the program through utility rates, and
Hydro’s record of financial and operating performance.
FINANCIAL IMPLICATIONS:
None
ACKNOWLEDGED BY:
Dan Chapman, General Manager of Financial Services & City
Treasurer
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