Electric System Revenue Refunding Notes, Series 2015 Hamiltons - PowerPoint PPT Presentation

Electric System Revenue Refunding Notes, Series 2015

Hamilton’s commitment to producing green energy lead to a strategic partnership with American Municipal Power Inc (AMP) and the opening of the Meldahl Hydroelectric Plant on the Ohio River. Sixty days after its successful opening, the City of Hamilton sold 48.6% of its stake in Greenup for $139 million, which paid off all of the debt the City owed on Greenup.

The Greenup Hydroelectric Plant Opening in 1982, Greenup is a water-powered plant in Portsmouth on the Ohio River. It has a total 70 megawatts of generating capacity.

“ Hamilton generates more electricity than its customers use. Excess is sold to PJM Interconnection, the group managing the electric grid serving 13 states, including Ohio ” and Washington, D.C - Journal-News, 2014

How We Did It Exploration Analysis Discovery

We explored traditional financing option through the market using our credit rating with Standard & Poor’s (A -) and with Moody’s (A3). What we discovered was a $2.2 million pay -off benefit with a monthly interest expense savings of $309k. We also considered the impact of an OMAP financial enhancement.

OMAP What is s OM OMAP? • The Ohio Market Access Program • Credit enhancement program • Lowers borrowing costs on short-term notes • Leverages State’s high short -term credit rating Benef nefit its • S&P assigns highest short-term rating (SP-1+) to all notes issued under OMAP • Strengthened credit quality • Lowers costs of borrowing • Improves marketability • Limits renewal risk for short-term notes

S& S&P P Mun unicipa icipal l Rat atings ings Standard & Poor’s Municipal Short -Term Note Ratings SP-1 Strong capacity to pay principal and interest. SP-2 Satisfactory capacity to pay principal and interest. SP-3 Speculative capacity to pay principal and interest.

De Debt bt An Analy lysis sis We explored financing with OMAP Enhancement. The overlay would reduce the City’s risk exposure. We leveraged the financial strength of the State and it’s credit rating to make it easier to go to market for financing options. Our pay-off benefit increased to $2.4 million and our monthly interest expense savings rose to $340k.

Outcomes Decision-making Financial Security Greenup Proceeds

Outcomes We decided to take advantage of the savings we would gain through the OMAP program. The City was able to Finance Option Amount Type take advantage of OMAP Enhancement $2,159,317 Pay-Off Benefit the State’s SP -1+ Traditional Method* $1,986,524 Pay-Off Benefit rating, lowering the Difference $172,793 Additional Benefit interest expense. Finance Option Amount Type OMAP Enhancement $343,015 Monthly Interest Expense Savings Traditional Method* $321,426 Monthly Interest Expense Savings Difference $21,589 Additional Monthly Savings *Assumes $25,000 less in Principal (OMAP fee) and a rate 25 bps more than the .48% rate achieved utilizing OMAP (.68%)

Greenup Proceeds The sale of 48.6% of Greenup Hydroelectric Plans yielded $139 million. The proceeds were used as follows: Amount Activity $98 million Greenup 2002 Revenue Bonds $4 million Electric BANs $37 million Fund Balance* * $15m is pledged to buy a GO BAN in compliance with the City’s investment policy

Limited Tax General Obligation Refunding Bonds, Series 2015

2013 GO Bond Issue 2013 13 Bo Bonds ds Use e of Funds nds • Property Acquisition for South Hamilton Crossing • Three Neighborhood Splash Pads • Grant to the Consortium for Ongoing Reinvestment Efforts Fund (CORE) • Capital Improvement Program for the Hamilton Parks Conservancy 2013 13 Bo Bond d Featur atures es • Variable interest rate exposure within a range, relatively high floor for variable rate: • Initial Term: 3.29% + (H.15 10-year interest rate swaps rate – 2.88%); Minimum Rate: 3.25%; Maximum Rate: None • Final Term: 3.29% + (H.15 10-year interest rate swaps rate – 2.88%); Minimum Rate: 3.25%; Maximum Rate: 7.00%

2013 GO Bond Issue Benef nefit it of f Direct ct Purch chase se Draw Down Bonds ds • Flexibility on receiving proceeds • The spending requirements took two years to complete • Reduce negative carry as proceeds could be provided just in time • Ease of execution • No credit ratings • No disclosure document (Official Statement) • Opportunity to realize relatively low short-term interest rate exposure New Re Revenu enue e Source ce fo for Debt bt Servic vice * $1/Mwh Adder Fee from the new Meldahl hydro and 48.6% of the Greenup hydro – Roughly $650,000 annually

Bond Restructuring Considerations 2015 Re Refu fundi nding ng Bonds ds • Rates being near historical lows presented an opportunity to lock-in low fixed rates • The rate structure on the 2013 Bonds only provided for a minimum rate of 3.25% • Eliminating interest rate risk • Creating budget certainty going forward • Ease of execution – maintaining same Lender • Lower Execution Costs than traditional refinancing • Structuring flexibility • Optimal optional redemption provisions • Mitigating Risks associated with bank direct purchase terms • Material Adverse Change

Results 2015 Re Refu fundi nding ng Bonds ds • Efficient execution • Fixed interest rate providing certainty going forward: • 3.45% Coupon • Optional redemption provisions allow for par call at anytime • Limited to no standard bank loan language exposure to the City • Material Adverse Change • Yield protection

Appendix: Private Placement – Documents and Business Terms

Documentation Typical financing documents can include the following: • Master Trust Indenture and related Supplemental Agreements • Loan Agreement • Bond Resolution

Business and Legal Terms  The terms of bank financings can be more restrictive than the terms of traditional bond offerings → it is crucial to carefull y review the bank documents with counsel  Common business and legal areas for review and consideration with management and counsel: Annual Financial Covenants – definitions, testing frequency • Consideration – attempt to match existing covenant structure, as appropriate; to avoid any potential confusion have lenders provide a calculation of the proposed covenants based on most recent audited financial statements Additional Debt Tests and Permitted Liens – terms, definitions • Consideration – attempt to match existing ABT and permitted liens, as appropriate Note, permitted liens are a crucial part of future financial flexibility and must be carefully reviewed by the borrower and counsel Loan Security – parity debt or is additional security proposed • Consideration – attempt to match existing security structure, as appropriate. Seek to not allow right of set off if the borrower maintains deposits or other accounts with the bank Most Favored Nations – more restrictive terms provided to other lenders will also be provided to this lender; could cause acceleration in other debt obligations • Consideration – seek to remove Material Adverse Change – concern is about ongoing Material Adverse Change (MAC), not MAC as a condition precedent to closing • Consideration – seek to remove ongoing MAC; note, rating agencies have expressed concern over ongoing MACs (subjective business term that could cause acceleration)

Business and Legal Terms Increased Cost Provisions – lenders ability to pass on costs due to changes in tax rules or regulatory environment which increases costs to the lender • Consideration – first, seek to remove; second, attempt to limit scope (e.g., any costs passed on must be applied to entire portfolio (not just one borrower); third, attempt to create a time buffer for when the costs are passed to borrower (allows borrower to refinance before penalty takes place) Loan Rate – is the fixed rate based on the bank’s cost of funds • Consideration – periodically monitor the loan rate to make sure the funding formula does not change between the time the term sheet is signed and the loan rate is set Pre-payment Penalty – carefully review the prepayment calculation • Consideration – attempt to create a pre-payment calculation that the borrower can calculate independently → those based on the bank’s cost of funds may expose the borrower to some uncertainty Acceleration Terms – understand situations that would permit the lender to accelerate the loan • Consideration – Other than payment, bankruptcy, and judgment defaults, seek to maximize cure rights or time before the bank can exercise its right to accelerate Additional Business Requirements – Is the bank requiring the borrower to transfer its banking business as a condition to the loan • Consideration – Make sure the banking fees are on market terms and understand whether the funds can be invested or if they must remain on deposit. Depending on volume, understand the opportunity cost of this requirement