HomeMy WebLinkAbout1974
PRELIMINARY WORK REPORT {
ON
VARIOUS ALTERNATIVE METHODS
OF
I
FINANCING CAPITAL IMPROHMENTS
BY THE
TEXAS MUNICIPAL POWER POOL
i i
April, 1974
FIRST SOUT11WEST COMPANY
Investment Bankers
Dallas, Texas
I
i
f
r
OUTLINE
A
Paqe
1. Introduction 1
II. Allocation of Estimated Pool Capital Expenditures 2
1974-1985
i
III. IRS Code, Section 1.103-7 Industrial Development Bonds 3
IV. Financing Alternate Summaries
i
A. Alternate I - Existing Authority 5
B. Alternate II - Create new Authority 8
C. Alternate III - Non-Profit Cor Ovation 10
D. Alternate IV - Joint Financing 12
E. Alternate V - Present Practicer, 14
F. Alternate VI - Classical Utility 16
G. Alternate VII - One Member Finances 18
i
i
11
j
i
I
I
r : IV 4W r
t
1
INTRODUCTION
The Texas Municipal Power Pool presently constitutes the Cities of
Bryan, Denton, Garland and Greenville (all Texas cities) and Brazos Electric
Power Cooperative (a Texas non-profit corporation), who have joined together
in a Joint venture to "effect investment and operating economies by pooling
the use of reserve electric capacity in their respective systems" (Power
Pool Agreement, 1963), Since 1963, this joint venture has provided its
members with economical methods of minimizing peak power requirements;
however, in recent months it has become evident that the continuation of
the existing organization may not be sufficient or economical in meeting
future power requirements, This report has been prepared for the purpose
of presenting the requirements, restrictions and various alternate methods
of financing future capital improvements by and for the Puol.
Hereinafter are presented:
(1) An Allocation of Estimated Pool Capital Expenditures for
the years 1974 through 1985,
(2) A brief summary of the limits on financing as presented in
t the IRS Code, Section 1,103-7, and
(3) Summaries of seven possible financing alternatives which
could be utilized by the Pool.
1
It should be noted that each of the alternates herein presented assumes
the participation by the BEPC in the output, ownership and financing of ,
the facilities wherever possible,
The views, assumptions acd financing alternates presented in this report
should be considered solely for the purposes of discussion and further
study and are therefore very tentative and brief in nature.
9
i
I ~ 1
f
E
r
z 1111
m
O b OI ~•N~~~.t J am.,. 10 f m
n(O to to m 10 LD m ml,n
n (nAv1N^., t•1 N N(1)N N N (D ~I ~IJVV d
~ vn V V• J In U. A W N--. V l0 (D J V t [n A Y
a 3
x n ad 0 eu• I to IN Ul cnwronw oaom-•
N g b h la b N I n m'n ut ut A Ot N +I y
y N O OOOODUp OCJOOO rr h
n1Gf-' d~-h O pOO VOOO OOOOU
O fyo N V 3, h I V `A
I~oanZ''N(li t0 9O0+W V1lND O1Au co ,A~A ,O0 J
q w avo ae %A r 1
ry y -n, v r+Y a
O ON P'Oax NC
Y hk NV + tm ~ O 1111--~AV bWO,DV W-J
I. V O d p, tP N W IO t0 co V t+ V 0 a
~na0o 0 000000000000 0
hn~ n~ 0 OOOOOOOOOOOa h <
ryDD b-~dhG
1', N N~ N m V 'J O N co 0 co co r. -~O C
M Hw IV x 044
M Y 6V W (TAO OOO D IO Nj 6W' W
N w ro OO Ot VWW Vt In (O OI O DO3 '-I 0
ne ~w a p a
nJ
w A W
O O V1 tnu,Vt tD (IDA VNT VN Cf
~ Y -J ~ O N O yP 00iO pp A O i0 ~ <i D -1
O IO O 0 0 0 0 0 0 0 0 0 0 0 0 rV $
~ N O OOO 000000000 ry~ymy(
' V ~ I9 $ IA N
N N d 7 4•I J,+3
NO 0 NN N co WW WWW co Ch
O $ b VOOO-+-'-~ pIVOV T!w KVfD n
~ko 83 OO V IO W OoO V V1 -I V, 0' A6H
OOWV,DOV NUtA N4 0-E 6. ~I O:O
Mp GGN J O10~q
Y X N b'1 cl V A
vw O IiONWNWAi>•-~VN O b O
o
n Cl
N O'o 0 0 0 a OOO n -+o
~ o. o 0w~oOO~ y r
'f N A W N W W w A. W W A O d (3D 6
N Y
le -3 ~J OOO ANN 0 ~Oi 01N I y~~•'C
Yi LOOS e( i3 J 'j
Ip UI ~ ID IVVI
iH~ I .J
N
a 1A II
o N W N m lh A A
I e iwvotDN.lv~oowto
u IIr
0 iN LJ, `W A LD b L"J g V A
O 00000 OO OO 1'F
~ a OcOOOOOOOOOo
o A utAA A AA AAN W th C
7 A NOtW w w
NW AA00 w~K
+ N OOt NtD OWNONONID D
ae oou, o+tDmoCnmoto~ c p
b`
O N1n 00-x, lnNO tOAW WIJ
O W 00 (.I~NWOtmw y
w OOOO AOUIWW VrO VI ~O ~ `J
N O 0 0 0 0 0 0 0 0 0 0 0 0 N O.
O 0 0 0 0 0 0 0 Q0 0 0 0 Cw
J
N CO~yy
~ O NVI IDNV WNOV,W AW duw+
O NV,O V,AI~ VENN 'Ott
'i i ~ ~ W V O N O N~ V V Oil
I ~ r
I 1
i
IRS CODE, SECTION 1.103-7 INDUSTRIAL DEVELOPMENT BONDS
1
The provisions of IRS Code, Section 1.103-7 limit the contractual
powers of the Brazos Electric Power Cooperative as relate to the tax- a
exemption of any debt issued for the constructing of the proposed facilities.
The BEPC cannot contract directly with the Pool for more than 25% of the
Project on a take-or-pay basis, as Section 1.103-7 (b)(5) states, in part:
"Trade or business test and security interest test
w th respect to certain output contracts. i The use
6y one or more non-exempt persons of a major portion J
of the subparagraph (5) output of facilities such 1
as electric energy, gas or water facilities constructed,
reconstructed, or acquired, with the proceeds of
an issue satisfies the trade or business test and
the security int,arest test if such use has the
effect of transferring to nonexempt persons the
benefits of ownership of such facilities, and the
burdens of paying the debt service on governmental
obligations used directly or indirectly to finance
such facilities, so as to constitute the indirect
use by them of a major portion of such proceeds.
Such benefits and burdens are transferred and a
major portion of the proceeds of an issue is used
indirectly by the users of the subparagraph (5)
output of such a facility which is owned and oper-
ated by an exempt person where--
(a)(1)One nonexempt person agrees pursuant to a
contract to take, or to take or pay for, a major
portion (more than 25 percent) of the subparagraph
(5) output (within the meaning of subdivision (ii)
of this subparagraph) of such a facility (whether
or not conditional upon the production of such output)
or (2) two or more nonexempt persons, each of which
pays annually a guaranteed minimum payment exceed-
ing 3 percent of the average annual debt service
with respect to the obligations in question, agree,
pursuant to contracts, to take, or to take or pay
for, a major portion (more than 25 percent) of the
subparagraph (5) output of such a facility (whether
or not conditioned upon the production of such
output), and
(b) Payment made or to be made with respect to
such contract or contracts by such nonexempt person
or persons exceeds a major part (more than 25 per-
cent) of the total debt service with respect to
I such issue of obligations."
i
i
i 3
I
i
i
1W . # i VW% V, -.r. or -..q
It should be noted, however, that Section 1.103-7 (c) Example 13 1
would allow the BEPC to contract (but not on a take-or-pay or guaranteed
basis) with the individual Cities involved for up to 25% of their respec-
tive share of the Project. This procedure would have the effect of giving
the BEPC approximately 43.75% of the power available from the Project.
The restrictions resulting from Section 1.103-7 are present in most
of the financing alternatives hereinafter presented and is referred to
as The "IRS 1.103-7 (b)(5) Restriction."
I
r
y
s
7
I
4
i
I
i
i
f
- ------„-w
•
r
1
' TEXAS MUNICIPAL PUblER POOL ~
► Financing Alternate Summary
~ I, Alternate a; I ~
II. Method: Utilize existing Authority ar District with generating powers to
finance development.
III, Authority (if any;
IV. Brief Description of Procedure: The Pool would ~Jtilize an exempt
third party (an existing Authority or District) as a financing
vehicle for the planned facilities. This third party ti~rauld issue
' debt secured by a contract with the Pool whereby the Pool guarantees
_ the debt service of the third party's debt issued for this purpose. •
The facilities would be operated by the Pooi under the provisions of
an operating agreement with the third party. The members of the
Pool would contract with the Pool to purchase their proportionate
share of the po~~rer generated, on a take-or-pay basis, at a rate
sufficient to (1) pay all contract payments of the Pool to the
third party, and (2) pay all operation and maintenance expenses of ~
the facilities. It should be noted that "IRS 1.103-7 (b)(5)
' Restriction" applies. Prevailing case law indicates that the pay-
. ments made to tf~e Pooi by the participating entities would be opera-
tion and maintenance expenses of their respective electric systems.
V, Tax Exemption:
'A, Debt - Assuming that {1) the third part is an ex?mpt entity,
' and {2) that the "IRS 1.103-7 {b~(5) Restriction"
is complied with, the interest on the debt issued
under this method would be tax-exempt.
B. Facilities and Revenues It is assumed that the facilities
and revenues would be exempt from ad valorem, sales
and/or franchise taxes as long as it is owned by the
exempt third party; ho~~rever, 1f and when the racilities
revert to the owners hi of the Pool members (after
retirement of the debt this exemption may terminate
with respect to BEPC.
VI. Ownershi~of Facilities:
A. During Period Debt Outstanding - Third party
B. After Debt Retired - Pooi members (undivided?)
VII. Advantages:
A.'~ Docs not require near legislation to institute
Q. Provides tax exemption en debt interest
C. Provides tax exemption on facilities and revenues as long
as debt is outstanding
D. Facilities are operated by one entity (pool)
5
I
I
{
SUMMARY, Alternate N1
i
VIII. Disadvantages:
A. Nigher interest costs 1
a. Financing procedure is contplex
C, Facilities, with respect to BEPC, are probably not tax
D. Facilities after Owned i by mthirdfparty while debt is outstanding
F
' I
i
i
r
6
I
I
1
I
jFV
TEXAS MUNICIPAL POWER POOL
Proposed Organizational Chart
ALTERNATE I
EXISTING AUTHORITY 1
1. Finance generating and trans-
mission facilities
Contract payments to pay capital
_m and Administrative costs
TEXAS MUNICIPAL POWER POOL
1. Wholesale generation, trans-
mission and sale of power
2. Operate generating and trans-
mission facilities
Supervision Power Contract payments to
and I finance TMPP payments
Management to Authority & operations
i
i POWER POOL MEMBERS
1. Retail power sales
r 2. Local distribution
3. Local operations
I
3li 7
I~
I
I
1
I
F
I
5
1
TEXAS MUNICIPAL P014ER POOL
Financing Alternate Summary
1. Alternate II
II, Method: Seek creation of a new Authority or District to finance
development.
III. Authority Jif an :
IV. Brief Description of Procedure: The Pool would seek legislation to
create an Authority or a District (Authority) similar to the Nebraska
Public Power District or the Power Authority of the State of New York.
This Authority would.be empowered to plan, finance, acquire, construct,
own, operate and maintain electric generating units and plants,
electric transmission lines and other electric facilities for the
benefit of its members and customers, whether public or private.
Additionally, the Authority will be defined as an entity which is
an agency and subdivision of the State, The "Pool" would become the
Authority, The Authority would finance, own and operate the planned
facilities, The members and/or customers of the Authority would
contract with it for their proportionate share of the power generated
on a take-or-pay basis, at a rate sufficient to (1) pay the debt
requirements of the Authority, and (2) pay all operation and main-
tenance expenses of the facilities, It should be noted that "IRS
1.103-7 (b)(5) Restriction" applies, Prevailing case law 'ndicates
that the payments made to the Authority by the participati::g entities
would be operation and maintenance expenses of their respective
electric systems.
V. Tax EV-06-t- xenption:
Assuming that the "IRS 1,103-7 (b)(5) Restriction"
is complied with, the interest on the debt issued under
this method would be tax-exempt
B. Facilities and Reven+aes - Since the facilities are to oe owned
and operated by an exempt entity (the Authority), the
- facilities and revenues would be exempt from ad valorem,
sales and/or franchise taxes
VI. Ownership of Facilities:
T A. `During Period Debt Outstanding - Authority
8, After Debt Retired - Authority
VII. Advantages;
A, Facilities operated by one entity (Authority)
B, Average interest costs
C. Financing procedure is relatively simple
D. Provides tax exemption on debt interest
1. Provides tax exemption on facilities and avenues
F. Facilities mined by Authority
VIII. Disadvantages:
W k~gi~iies new legislation
8
i
TEXAS MUNICIPAL POWER POOL
Proposed Organizational Chart
ALTERNATE II
- AUTHORITY OR DISTRICT
1. Wholesale generation, trans-
mission and sale of power
2. Finance generation and trans-
mission facilities
3. Operate generation and trans-
mission facilities
I
Supervision Power Contract payments to
and finance TMPP capital
Management and operations
i
POWER POOL MEMBERS
i
1. Retail power sales
2. Local distribution
3. Local operations
I
I
I
I
}
1
t
9
I I
I
i
{
I
TEXAS MUNICIPAL. POWER POOL ~
Financing Alternate Summary
I. Alternate N: III I
II. Method: Utilize a Non-Profit Corporation to finance development
III. Author qy if an : Revenue Ruling 63-20 i
' IV, Brief Description of Procedure: The Pool would create a Nan-Profit
Corporation MCorp under the provisions of Revenue Ruling 63-20.
This Corp would be empowered to finance, own and operate certain
electric facilities for the benefit of its joint co-owners--the
members of the Pool (See Article 1435a, Sec, 1, VATCS). The members
of the Pool mould then contract with the Corp for their proportionate
share of the power generated on a take-or-pay basis, at a rate suf-
ficient to (1) pay the debt requirements of the Corp, and (2) pay all
operation and maintenance expenses of the facilities. It should be
noted that "IRS 1.103-7 (b)(5) Restriction" applies. Prevailing
case law indicates that the payments made to the Corp by the Pool
members would be operation and maintenance expenses of their respec-
tive electric systems.
V. Tax Exemption: „
A. Debt - Assuming that the "IRS 1.103-7 (b)(5) Restriction"
is complied with, the interest on the debt would be
tax-exempt
B. Facilities and Revenues - Since the facilities are operated
by a Non-Profit Corporation, facilities and revenues would
be subject to ad valorem and franchise taxes and perhaps
sales tax (Memo-EMM-p.13)
VI. Ownershi _of Facilities:
A, During Period Debt Outstanding - Corporation
B. After Debt Retired - Municipal pool members (not BEPC,
Rule #4 of Revenue Ruling 63-20)
VII, Adyvaan~taLees :
A, Does not require new legislation to institute
B. Facilities operated by one entity (^orp)
C, The financing procedure is relatively simple
D. Provides tax exemption on debt interest
s
VIII, Disadvantag_es_:
- ILL Sher interest costs
F D. Facilities and revenues not tax-exempt
C. Ownership of facilities reverts to municipal Pool member
(not BEPC) on retirement of debt
10
I
TEXAS MUNICIPAL POWER POOL
Proposed Organizational Chart
ALTERNATE III
CORPORATION
1: Wholesale generation, trans-
mission and sale of power
2. Finance generation and trans-
mission facilities
3. Operate generation and trans-
mission facilities
Supervision Power Contract payments to
f and finance Corp capital
Management and operations
I
POWER POOL MEMBERS
1. Retail power sales
j 2. Local distribution
3. Local operations
I 9
I
11
i
I
I
v
TEXAS MUNICIPAL POWER POOL
Financing Alternate Summary 1
I. Alternate N: IV
II. Method: Pool members Jointly finance development through issuance of their
own debt
III, Authority if any: Article 1435a, VATCS
IV. Brief Description of Procedure: Each of the Pool members would issue their
own debt and ;coin tggetFler to construct the facilities, The pool would then
operate the facilities for the common benefit of the members. The members
would contract with the Pool to pay their proportionate share of the
operation and maintenance of the facilities. Each member would pay its own
debt service from the revenue derived from the operation of its electric
system, Payments to the Pool for its operation and maintenance charges
would be operation and maintenance charges of each member's electric system.
V. Tax~Exem Exemption; ~
A. Debt -
1. Municipal Pool members - interest tax-exempt
2. BEPC - interest taxable
B. Facilities and Revenues -
1, Municipal Pool members - Tax-exempt
2. BEPC - same status as present
VI. Ownership of Facilities:
A. During Period Debt Outstanding - Pool members (Jointly)
' B. After Debt Retired - Pool members (jointly)
VII. Advantages:
A. Does not require new legislation to institute
B. Facilities are operated by one entity (Pool)
C. Interest costs relatively lower (especially municipal pool members)
0. Financing procedure is simple
E. Provides tax exemption for municipal Pool members
VIII. DisadvantUes:
A, Interest costs to BEPC may be higher
B. Does not provide tax exemption for BEPC
C. Ownership of facilities is fragmented
~ r 1
I
I
12
9
TEXAS MUNICIPAL POWER POOL
Proposed Organizational Chart
ALTERNATE IV
TEXAS MUNICIPAL POWER POOL
1, Wholesale generation, trans-
mission and sale of power
2. Operate generation and trans-
mission facilitles
Supervision Power Contract payments to Capital Funds
and pay TMPP operations
Manag ment
POWER POOL MEMBERS
nce generating and trans-
73-Local ide capital funds to
lon facilitles 1
it il power sales
distribution
l operations
{
j
I
t
g
i I
13
~ I
I
t
TEXAS MUNICIPAL. POWER POOL ~
Financing Alternate Summary
I, Alternate V
II. Method: Continuation of present practices
III. Authority if VA: Power Pool Agreement
IV. Brief Description of Procedure: Each of the Pool members finances, J
owns an3 operates its respective generating facilities, transmission 1
lines, substations and other terminal facilities that interchange
with othej~ Pool :~ystems. Under the terms of the Power Pool Agreement,
the Pool members agree to sell surplus power to other members, when
available, at a specified price. In return, each Pool member has
the right to purchase Supplemental, Emergency or Maintenance energy
from the other Pool members, as required and as available, at a
specified rate. Payments by one Pool member to another for the
purchase of po:gerare operation and maintenance expenses of the
j purchasing member's electric system.
j V. Tax Exemption:
Debt -
1. Municipal Pool members - interest tax-exempt
2. BEPC - interest taxable
B. Facilities and Revenues -
1. Municipal Pool members - Tax-exempt
2. BEPC - same status as present
VI. <anershi of facilities:
2- ur ng Period es t Outstanding - Pool members (individually)
B. After Debt Retired - Pool members (individually)
VII. Advantages:
~A, Does not require new legislation to institute
B, Interest costs relatively lower (especially municipal Pool
members)
C. Financing procedure is simple
D. Provides tax exemption for municipal Pool members
- VIII. Disadvantages:
A. Operations are fragmented
B. Interest costs to BEPC may be higher
C. Does not provide tax exemption for BEPC
D. Ownership of facilities is fragmented
i
I
I
I
14
i
i
TEXAS MUNICIPAL POWER POOL
Proposed Organizational Chart
ALTERNATE V
TEXAS MUNICIPAL POWER POOL
1. Organizational structure to facilitate
interchange of power
- I
Supervision Coordination of power sales
and and purchases
Management
I
i
POWER POOL ME14BERS
1. Finance generating and trans-
mission facilities
2. Retail power sales
3. Local distribution
A. Local operations
5, Wholesale power sales to other
members
Wholesale Power Sales
and Purchases
i
15
I
i
, _ ~ # r - ..s....- Fes' ~ - -
I
' TEXAS MUNICIPAL POWER POOL
Financing Alternate Summary
I. Alternate N: vi
11. Method: Classical utility operation
III. Authority if an :
Iv. Brief Description of Procedure: The Pool, as an agency of the State, would f
finance, own and operate tliee ectric facilities in the same manner in 1
which a City operates a Water and Sewer System with the Pool members as its
customers. It would sell power to the members on a demand basis at rates
calculated to pay its debt service, operation and maintenance expenses and
a certain amount of coverage of debt service requirements, There would be
1 no take-or-pay contract(s) and therefore "IRS 1.103 (b)(5) Restriction"
would not apply. Prevailing case law indicates that the payments made 'to
the Pool by the participating entities would be operation and maintenance
expenses of their respective electric systems
V. Tax Exemption:
Debi; - interest tax-exempt
B. Facilities and Revenue - tax-exempt
VI. Ownership of Facilities:
A Mr-fn9 Period Debt Outstanding - Pool
B. After Debt Retired - Pool
VII. Advantages:
A. Facilities operated by one entity (Pool)
B. Financing procedure is relatively simple
C. Provides tax exemption on debt interest
D, Provides tax exemption on facilities and revenues
E. Facilities owned by Pool
VIII, Disadvantaces:
A, Would probably require new legislation to make Pool agency of the
State
B. Higher interest costs
C. Would require debt service requirements coverage
t
16
1
I
TEXAS MUNICIPAL POWER POOL
Proposed Organizational Chart
ALTERNATE VI
TEXAS MUNICIPAL POj:R POOL
1•, Wholesale generation, transmission
and sale of power to Pool members
and others
2. Finance generation and transmission
facilities
3. Operate generation and transmission
facilities
4, Supervise and manage facilities
Appointment Power Payment for demand
of governing Power Payments for
power purchased at
body rates established demand power
by TMPP purchased at
rates established
by TMPP
POWER POOL MEMBERS CUSTOMERS
1, Retail power sales 1. Retail power sales
2• Local distribution 2,
3, Local operations Local distribution
3, Local operations
f
Ii
t f I7
I I
i
I
4
i
TEXAS MUNICIPAL POWER POOL
Financing Alternate Summary
1. Alternate N; VII
II. Method: One municipal member finances entire project with
Partici- pation Agreement
III. Authority if anyj_: Article 1435(a) VATCS
IV. Brief Description of Procedure: One of the municipal members of i
the Pool would finance and operate the proposed facilities. The
financing would be accomplished by the municipal member issuing its
subordinate lien debt and the other members of the Pool then con-
tracting with the financing member for their proportionate share
of the power generated on a take-or-pa basis at a rate sufficient
to pay their proportionate share of (1) The debt requirements of
debt issued for the facilities and (2) The operation and maintenance
of the facilities, (See Longview--Joseph Schlitz Brewing Co.--for
similar financing,) It is possible that the payments made by the
non-financing members of the Pool might be considered as lease-
purchase payments thereby giving them ownership of their portion
of the facilities whe,) the debt is retired. It should be noted
that "IRS 1.103-7 (b)(5) Restriction" applies, Prevailing case
law indicates that the payments made by the non-financing Pool
` members would be operation and maintenance expenses of their respec-
tive electric systems.
V. Tax Exemption:
-77 Debt - Assuming that the "IRS 1,103-7 (b)(5) Restriction"
is complied with, the interest on the debt would be tax-
exempt
i B. Facilities and Revenues -
1. Financing Member - tax exempt
2. Other Members - unknown
VI. Ownership of Facilities:
A. During Period Debt Outstanding - Financing member
B. After Debt Retired -
VII, Advantages:
A. Does not require new legislation to institute
B. Facilities operated by one entity (financing member)
C. The financing procedure is relatively simple
D, Loaner interest costs
F E. Provides tax exemption on debt service
1
VIII. Disadvantages,
A. Uncertainty in relation to ownership
B. Lack of control on part of non-financing Pool members
C. Financial impact on financing City would be great
I
IB
~ j
i
s
f
4
i I
TEXAS MUNICIPAL POWER POOL
Proposed Organizational Chart
ALTERNATE U.II
FINANCING POOL MEMBER
1. Wholesale generation, transmission
and sale of power
i 2. Finance generation and transmission
facilities
3. Operate generation and transmission
facilities
A. Retail power sales i
5. Local distribution
{ 6. Local operations
I
7
Power Contract payments
to pay proportionate
costs of financing
and operating facil-
ities
NONf ING POOL MEMBERS
power sales
2. distribution
3. operations
5
1
i
~ 19
f