PRESENTATION ON PROMISSORY NOTE For Public Meeting of October 15, 2019 1
CORPORATE STRUCTURE Town of Cobourg Holdings Inc. The Corporation of the Town of Cobourg is the majority shareholder of Holdco with the Township of Cramahe (Colborne) owning one share Lakefront Utilities Inc. (LUI) Lakefront Utility Services Inc. (LUSI) LUSI is a non-regulated services company which provides services to Municipalities LUI is the regulated electric utility that related to the design, operation & distributes electricity maintenance of water systems & high- speed dedicated data systems. 2
5 LUI DIRECTORS 3
WHAT DO WE DO? Incorporated electric distribution company serving customers in Cobourg and Colborne Obtain bulk power from IESO/Generators using Hydro One transmission system, step down the voltage & distribute to individual customers at their meters Levy charges to customers on behalf of IESO, Hydro One, OEB plus cost of our local distribution (approx. 22% of bill) Own and operate local distribution network including associated buildings, property, transformers, distribution wires, poles etc. 4
OUR REGULATORY FRAMEWORK Ontario Energy Board (OEB) strictly governs LUI activities Requires arms length from municipality Approves customer rates under Cost of Service Rate Application (COS) process every 5 years Approves interest rates on debt eligible for recovery at time of COS Provincial Scorecard comparison of performance of all utilities (on LUI website) 5
WHY IS THERE A $7 MILLION DEBT? Province required: Town to transfer $14 million in electrical distribution assets to an incorporated for-profit company prior to 2002 Town’s compensation to be in the form of 50% interest-bearing debt ($7M loan) and 50% equity ($7M shares) Town to have no further direct role in operation of electric utility Town formed HOLDCO with LUI as subsidiary to provide required arms length mechanism for equity but holds $7M debt directly – Promissory Note. 6
WHAT IS THE PROMISSORY NOTE? Loan mechanism to ensure Town has right to have $7M repaid while earning annual interest on outstanding balance Note has no term or amortization schedule to provide maximum flexibility to LUI on timing of repayment Interest rate as set by OEB 7
WHAT IS THE ISSUE? 2006 amendment to note locked in interest at 7.25% (OEB rate at time) vs current (now 3.72%) During LUI’s 2016 COS application, discrepancy in rates raised as issue – OEB Decision & Order (Slide 8) LUI is an outlier – other utilities have updated their promissory note to the OEB deemed rate For LUI: Difference in interest rates reduces bottom line Restricts flexibility to pay off principal on debts, re-invest in infrastructure or provide dividends Return on equity under-stated on Provincial Scorecard 8
OEB DECISION & ORDER EB-2016-0089 DATED DECEMBER 8 TH 2016 OEB has directed that renegotiation of debt is management decision between shareholder and utility – but customers should not pay for difference between 3.72% and 7.25% and that matter be resolved before next rebasing rate application. Page 1, Paragraph 6: The one unresolved issue was the appropriate long-term debt rate applicable to Lakefront Utilities` affiliated debt (i.e. the debt it has with its shareholder, the Town of Cobourg). Page 6, Paragraph 6: While Lakefront Utilities may continue to pay Cobourg 7.25% interest rate on the $7M principal debt under the current terms of the promissory note, shareholders (not ratepayers) will bear the cost of the difference between the 7.25% and 3.72%. 9
TIMING Next COS application is due April 2021 for rates effective January 2022 but requires considerable staff preparation time starting in early 2020. Council decision is time sensitive in order to: Meet both LUI and HOLDCO schedules for finalizing budgets (January 1 – December 2020) Advise the Town on any budgetary implications of cashflows to the Town for its own 2020-2021 budget, Enable LUI’s consideration of alternative financing approaches to the debt held under the Promissory Note well in advance of the next COS application 10
IMPACT OF RATE CHANGE Town – Receives fair interest rate with 5-year updates Customers – No effect on rates LUI – Increased flexibility in application of revenues 11
IMPACT ON TOWN OF COBOURG • $507,500 – interest Current • $260,400 – Proposed interest 12
WHAT IS RECOMMENDED? Approval of September 18, 2019 Town Treasurer’s (Acting CAO) report Amendment to section in Promissory Note dealing with interest to read as in May 17, 2019 letter from Holdco: INTEREST RATE: The per annum rate being the Deemed Interest Rate established by the Ontario Energy Board at the time of LUI’s Cost of Service Rate Applications as applicable to the Borrower for long- term affiliate debt. 13
RESULTS Promissory note – deemed interest rate established by OEB Annual interest = $260,400 – effective January 1, 2020 Annual update to Shareholder 14
QUESTIONS? 15
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