City to purchase $6.5 million Powellink bond

Posted 6/17/10

“Powellink will now be owned by the city,” said City Administrator Zane Logan. “We won't have a 20-year mortgage.”

Using $6.5 million in enterprise reserve funds to purchase the bond, which had a 20-year payoff, the city …

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City to purchase $6.5 million Powellink bond


Under new agreement, city will own network 18 years earlyEighteen years ahead of the original schedule, the city of Powell will own the fiber-optic network, Powellink.The decision came Monday after the Powell City Council unanimously voted to authorize an agreement to purchase the $6.5 million bond held by private investors.

“Powellink will now be owned by the city,” said City Administrator Zane Logan. “We won't have a 20-year mortgage.”

Using $6.5 million in enterprise reserve funds to purchase the bond, which had a 20-year payoff, the city is expected to acquire ownership June 15. The transaction includes signed agreements between the city, the Northwest Joint Powers Board and TCT West, Logan said.

The city invests its enterprise reserve funds — such as electric and water reserves — in various ventures. Around $6.9 million currently is invested in WyoStar, a local government investment pool for Wyoming cities and towns. In the past year, Powell leaders have watched as dwindling interest rates offer dismal returns on investments.

“Our return is very, very small,” Logan told councilmen during a work session Monday.

While the city's investments only received 0.8 percent interest rates or lower, the Powellink bond held by private investors in New York is expected to generate a steady 2 percent interest rate return to the city.

Last fall, Logan said he and City Finance Director Annette Thorington started asking, “When those investments are seeing .8 percent or lower, and Powellink is seeing 2 percent or more, why aren't we investing in ourselves, our community?”

City officials decided to invest $6.5 million, currently held in WyoStar, in the Powellink bond, anticipating steadily increasing interest rates.

“Our main concern is that it's safe — and it is safe,” said Mayor Scott Mangold.

State statute stipulates what municipalities can use reserves to invest in — and it prohibits them from investing in risky ventures, he noted. After looking at the legality of acquiring the Powellink bond, “the attorney general himself said it was legal,” Mangold said.

“We wouldn't be doing this if we didn't think it was the right thing to do financially,” Logan said. “If we did see a significant risk, we wouldn't be doing it. This is the best way for us to get the best rate on our reserves.”

“We're hardly getting any return on our funds,” Mangold said. “We're putting our money to work in this bond … it's an opportunity we certainly couldn't pass up.”

In the current WyoStar investments, the city earned $4,000 on its $6.9 million for the month of May, according to Thorington. By comparison, in May 2010, TCT had 460 customers, which would have provided the city with a monthly net return of $11,657 on the Powellink investment.

Under the new agreement, Powellink will become a fifth enterprise for the city, joining the electric, water, waste water and sanitation enterprises. The other four enterprises will loan Powellink the $6.5 million, and payments from service providers using Powellink — such as TCT — will go back to the enterprises to pay off the loan.

Revenue generated from Powellink will be divided proportionately, based on how much each division loans Powellink.

For example, if the electric fund pays 50 percent of the $6.5 million bond, it will receive 50 percent of the returns each month. Using July projections that the city will receive $12,164 from TCT's rental of the network, the electric fund would receive a $6,082 repayment for the month.

Logan said the city is still determining the funding model of how much money will come from each enterprise reserve fund.

About six months ago, the city began private negotiations with TCT West, the anchor service provider that had agreed to provide the first six years of exclusive service during the network's developing years (see related story). The city also began discussions with Global Leveraged Capital, the primary private investor holding the $6.5 million bond.

Original agreements were finalized in 2006 and financed in 2008. In the original contract, TCT agreed to pay rental fees (referred to as wholesale transport charges) to the city of Powell for exclusive use of the fiber-optic network. TCT's payments went directly toward paying off the bond. TCT also assumed financial risk in the original agreement, so if its rental payments fell short of the necessary principal payments, they would make up the difference.

TCT's rental payments for use of the network — and revenue from any other service providers that use Powellink — will now go directly toward the city's investment.

Logan said he believes the new agreement will help Powell during a difficult economic climate. The state cut its funding of cities and towns this year, and sales tax revenues are down.

“We're trying to help ourselves and not be dependent on the state,” he said. “The Legislature is saying cities need to take care of themselves, and I like to think that Powell is doing that.”

Network now open to other service providers

Under a new agreement, TCT West will no longer have exclusive use of the fiber-optic network, Powellink.

The city plans to purchase the $6.5 million Powellink bond currently held by a private investor, and in a new agreement with TCT, the telecommunications company will give up the six-year exclusivity of the network it had under the original agreement made in 2006.

TCT has been using Powellink for a year and a half, so the company is forsaking about four years of exclusive use of the network.

Upon final agreements expected to close this month, Powellink could be open to other service providers as early as July 1, said City Administrator Zane Logan.

Opening up the network to more service providers will help increase the city's return on the Powellink investment, Logan said.

Currently, TCT has a little more than 450 subscribers. By paying monthly rental rates (or wholesale transport charges) for use of the system, the net return to the city will be about $11,404 per month. As the network adds customers, the return will increase.

At 450 subscribers, TCT has a market penetration rate of between 20 and 25 percent, TCT President Chris Davidson told the Powell City Council Monday.

TCT will continue to oversee operations and maintenance of Powellink. The city of Powell will pay TCT 25 percent of the wholesale transport charge to reimburse the company for maintaining the network.

Logan said TCT has expertise and the personnel to maintain the network that the city does not have.

During a work session Monday, Davidson said TCT supports the agreement, which is expected to take effect June 15.