Report to: General Committee Date of Meeting: June 12, 2006

SUBJECT: PowerStream Head Office Financing

PREPARED BY: Mark Visser, Manager of Strategy, Innovation & Investments, Corporate Services

RECOMMENDATION:

THAT the Town of Markham assist in the funding of PowerStream’s new head office by allowing PowerStream to defer the next eight quarterly interest payments (July 2006 to April 2008) on the existing promissory notes that are scheduled to be paid to the Town of Markham for an initial period of 5 years.

AND THAT this recommendation be forwarded to the PowerStream Inc. Board of Directors for their consideration.

1. Purpose 2. Background 3. Discussion 4. Financial 5. Environmental

6. Accessibility 7^. Engage ^21st 8. Affected Units 9. Attachment(s)

BACKGROUND:

A new corporate head office is being built for PowerStream at an approximate cost of $23 million. For this analysis, we will assume that the shareholders would finance 77% of the $23 million building, which meets PowerStream’s stated financing needs.

In February 2006, a resolution coming out of the Niagara-on-the-Lake PowerStream Inc. Board of Directors meeting stated that “management be directed to work with Shareholders’ staff to investigate financing options, …, and that the Shareholder advise of their decision to proceed with this option by May, 2006”.

On May 23, 2006, the following information was approved by the Markham Enterprises Corporation Board of Directors and recommended to bring a report to the Town of Markham Council.

OPTIONS/ DISCUSSION:

The Town of Markham currently holds $68 million of promissory notes issued by PowerStream at an annual interest rate of 5.58%. This equates to approximately $3.8 million of annual interest to the Town (paid in quarterly installments).

Initial Proposal

To fund the $23 million new building, the initial financing option that was proposed by PowerStream was to issue an additional promissory note to MEC. The proposed promissory note would have a 5.58% annual rate of return with renewal periods every five years. At each renewal period, the interest rate would be subject to change in order to reflect current market conditions and the deemed interest rate as prescribed by the Ontario Energy Board (OEB).

In accordance with The Municipal Act, the Town of Markham cannot have any additional debt or promissory notes with PowerStream. Therefore the additional promissory note would have to be between MEC and PowerStream, and the resulting interest income to MEC would be treated as taxable income. As a result, the pre-tax interest of 5.58% would net to approximately 3.63% after-tax, which may not be the best investment opportunity for MEC.

Recommended Option

Section 7.2 of the current promissory note between PowerStream and the Town of Markham states that “in the event that payment of principal or interest thereon is delayed, whether due to the above mentioned conditions of subordination or not, all outstanding amounts (including interest on unpaid interest) will continue to accrue interest at the rate set out in section 2.1 (5.58%) hereof until such time that the payments are remedied”.

Therefore, it is possible under the structure of the current note for the Town to help fund the new building and earn 5.58% without being subject to taxes while being fully compliant with the Municipal Act. This could be done if the Town agrees to let PowerStream defer the “primary” interest payments (on the $68 million promissory note) payable to the Town for the next 8 quarters. This would equate to approximately $7.6 million that the Town could allow PowerStream to use to fund the new building. Based on the wording of the current promissory note, these deferred payments would be subject to a 5.58% interest “penalty” (secondary interest).

The funding of the new office building would be as follows (all figures rounded):

Source	$	%
PowerStream	$5,300,000	23%
Markham	$7,600,000	33% (43% of shareholder’s total)
Vaughan	$10,100,000	44% (57% of shareholder’s total)
Total	$23,000,000	100%

In order for PowerStream to effectively manage cash flows, it is recommended that once the primary interest of $7.6 million has been fully accumulated (July 2006 to April 2008), it then be deferred for a period of five years (April 2008 to April 2013). During the first 2 years (June 2006 to April 2008), the Town would only be receiving the 5.58% secondary interest. As of July 2008, the Town would once again receive the primary 5.58% interest on the $68 million promissory note as well as continuing to receive the secondary interest on the deferred $7.6 million.

The Town would receive the following secondary interest payments on the deferred $7,573,868.14:

Year	Jan 1	Apr 1	Jul 1	Oct 1	Total
2006	-	-	-	$13,279.00	$13,279.00
2007	$26,703.93	$39,256.49	$52,683.00	$66,540.93	$185,184.34
2008	$79,965.86	$91,360.55	$105,365.99	$106,523.86	$383,216.26
2009	$106,523.86	$104,208.13	$105,365.99	$106,523.86	$422,621.84
2010	$106,523.86	$104,208.13	$105,365.99	$106,523.86	$422,621.84
2011	$106,523.86	$104,208.13	$105,365.99	$106,523.86	$422,621.84
2012	$106,523.86	$104,208.13	$105,365.99	$106,523.86	$422,621.84
2013	$106,523.86	$104,208.13	-	-	$210,731.99

The deferred primary interest on the original promissory note would be due in a lump sum payment ($7,573,868.14) to the Town on April 1, 2013. At this time, the Town can decide to call upon the $7.6 million or the Town and PowerStream can decide to renew the arrangement depending on the terms and conditions of the existing promissory note.

While it is the Town’s intention to have this agreement last until 2013, it would be possible for the Town to call upon the money at an earlier date if needed. Based on the wording of the existing promissory note, “the Town may at any time…accelerate payment…without penalty, by way of written notice to PowerStream no less than 90 days in advance…(as long as) such repayment will not negatively affect the credit rating of PowerStream”.

FINANCIAL CONSIDERATIONS:

The 5.58% annual return is approximately 108 basis points higher than a seven year Ontario bond (as at May 31, 2006). Therefore, for every $1 million invested in a promissory note, an additional $10,800 in interest will be earned each year. After 2 years worth of interest payments are fully retained by PowerStream (i.e. $7.6 million), the additional interest earned by the Town (vs. a 7-year Ontario Bond) would be $410,000 over a five year period.

It is important to note that allowing PowerStream to defer 8 quarters of scheduled interest payments ($7.6 million) would not negatively affect the Town in any way. The PowerStream interest is used to fund different reserves (Life Cycle, Land Acquisition). Whether the Town actually receives the money now or in five years, the recognition of interest revenue would be accounted for in a consistent manner. As such, the outstanding interest payments would simply be recorded as an interest receivable rather than cash.

Therefore, it is recommended that the Town of Markham assist in the funding of PowerStream’s new head office by allowing PowerStream to defer the next eight quarterly interest payments (July 2006 to April 2008) on the existing promissory notes that are scheduled to be paid to the Town of Markham for an initial period of 5 years.

RECOMMENDED

BY: ________________________ ________________________

Barb Cribbett, Andy Taylor

Treasurer Commissioner of Corporate Services