Council on Development Finance s2

COUNCIL ON DEVELOPMENT FINANCE

June 27, 2016

PUBLIC HEARING 424

THOSE PRESENT:

Mr. Andrew Lubin, Chairman Ms. Kimberly Cruz Honorable Nancy Cook Ms. Patty Cannon Mr. Richard Rowland Mrs. Leilani Decena-Shepherd Mr. Jack Riddle Christina Dirksen Mr. Fred Sears Mrs. Jodie Green Rep. Bryon Short Mr. Tim McLaughlin Ms. Richelle A. Vible Mrs. Amber Mudri Director Bernice Whaley Mr. Joe Zilcosky Mr. Lawrence Lewis, DAG

ALSO PRESENT:

Kraft Heinz – Shelley Kaiser, Plant Controller, Dover Plant Justin Cressler, Plant Manager, Dover Plant Melinda McGuigan, EDIS Company

St. Francis – Bernard Citerone, Chief Financial Officer Michael Polnerow, Vice President, Medical Affairs and Chief Medical Officer Tom McGonigle, Drinker, Biddle & Reath Michael DeNote, Drinker, Biddle & Reath

Erin Innes, OMB Art Jenkins, COO Paul L. Calistro, West End Neighborhood House

LOCATION: Buena Vista Conference Center

TIME: 9:00 a.m.

CALL TO ORDER:

The meeting was called to order at 9:00 a.m. by Council Chairman Mr. Andrew Lubin, on Monday, June 27, 2016.

OLD BUSINESS:

Mr. Lubin made a motion that the minutes of the May 23, 2016 Council on Development Finance meeting be approved as presented. The motion was seconded and then adopted by unanimous vote.

NEW BUSINESS:

The Kraft Heinz Company (“Kraft” or the “Applicant”) – The Applicant is requesting a $131,130 Performance Grant from the Delaware Strategic Fund, based on the creation of 28 new CDF Minutes June 27, 2016 Page 2 full-time permanent Delaware positions. The Applicant is also requesting a Capital Expenditure Grant from the Delaware Strategic Fund up to $1,050,000, which is up to 3% match of qualified capital expenditures up to $35,000,000 for the redevelopment of its current facility in Dover, Delaware.

Mr. Joe Zilcosky, DEDO’s Kent County Business Development Leader, presented the request to the Council. He explained that the project will relocate the current bread making operations from Maryland to the company’s current manufacturing facility in Dover, Delaware. This move will create at least 28 new full-time jobs that will pay over $23 an hour, plus overtime and benefits. Mr. Zilcosky stated that the bakery will supply products for Stove Top Stuffing and Shake’N Bake products.

Mr. Zilcosky mentioned that the July 2015 Kraft merger with HJ Heinz Company made it the fifth largest food and beverage manufacturer in the world, as well as the third largest in the United States. He said Kraft Heinz has over $27 billion in sales and is expected to create $1.5 billion in savings per year by 2017. He also stated that the company recently closed seven North American plants in order to save costs.

Ms. Kimberly Cruz, DEDO’s Business Finance Specialist, presented the financial status of this project. In reviewing the company’s 10K Annual Reports for 2013 to 2015 and the 10Q Quarterly Report for the quarter ending April 3, 2016, she reported that the merger will primarily benefit the United States and Canadian segments of the organization. She informed the Council that in FY15, Kraft Heinz realized a pre-tax savings of approximately $125 million. She concluded the integration program will result in $1.9 billion in pre-tax costs with approximately 60% reflected in costs and products sold. She reported that for 2015 Kraft’s net sales of food and beverage were $18.3 billion, of which its operating income was $2.6 billion. She added that the company yielded a 14% operating profit margin and a bottom line of $266 million net loss attributable to common shareholders. She stated that Kraft remained financially sustainable and demonstrated operational improvements between 2014 and 2015, of which Kraft reported a 68% increase in net sales and operating income, and more than tripled its total asset base. In the first quarter of FY16, Ms. Cruz noted that Kraft posted net income of $738 million on net sales of $6.8 billion, which yielded an 11% net profit margin.

Next, Mr. Justin Cressler, the Plant Manager at Kraft’s Dover production site, discussed the competitive nature of the project. He said there is fierce competition when it comes to distribution, safety, cost, quality of service, and deliverables.

Lastly, Mr. Zilcosky recommended the Council to approve a total funding request of $1,181,130, of which $131,130 come from the Strategic Fund Performance Grant and $1,050,00 from the Strategic Fund Capital Expenditure Grant.

The CDF Chairman opened the floor to questions and comments.

Mr. Jack Riddle asked what the company plans on doing with its current bakery production site in Maryland. Mr. Cressler said the future of the plant is unclear; however, it would like another company to take over the location.

In a follow-up question, Mr. Riddle asked what will happen to the current employees of the Maryland facility. Mr. Cressler responded that all Maryland personnel and new employees will have the same opportunity to apply for the Delaware location. CDF Minutes June 27, 2016 Page 3 Mr. Fred Sears asked Kraft Heinz representatives why they chose the Dover location for expansion and not the other Kraft sites. Mr. Cressler’s reply included several reasons: (1) the Dover plant produced great results over the years; (2) the Dover location has an established production line; (3) Dover is a mature business that makes a large margin; and (4) Kraft has a close partnership with the state of Delaware.

When Mr. Sears inquired about the challenges of transporting raw materials to the Delaware site, Mr. Cressler responded that the new location will alleviate past difficulties. He said instead of transporting bread by truck, they will transport flour, which will produce less traffic into the Delaware facility.

Mr. Cressler said that although existing product sales are currently flat, there are plans for the bakery to produce new products.

Ms. Richelle Vible asked about Kraft’s employee recruitment strategies. Mr. Cressler explained that the minimum requirement will be a high school education, preferably with a manufacturing background. He also disclosed that Kraft partnered with Delaware Technical Community College, in conjunction with an employment training program called Delaware WONDER (Work Opportunity Networks to Develop Employment Readiness), that provides potential new employees 128 hours of CBT (Computer Based Training) in manufacturing.

Chairman Lubin restated the applicant’s funding request and called for a motion.

Motion Made By: Senator Nancy Cook Seconded By: Mr. Fred Sears

Chairman Lubin asked if there were any public comments and there were none.

MOTION: After duly considering, inter alia, the nature of the business, its competitive situation in Delaware, its location, the employment and other requirements under applicable statutory and regulatory provisions, the Council made the following findings: (i) the Project will contribute to maintaining or providing gainful employment of the citizens of the State, (ii) the Project will serve a public purpose by contributing to the prosperity, health or general welfare of the State; (iii) the Project will require a capital investment of at least $20,000, which funds, including the grant proceeds, will be available or expended on the date on which The Delaware Economic Development Authority disburses the requested grant funds; (iv) the grant will effectuate the purposes of Chapter 50, Subchapter IV of Title 29 of the Delaware Code, and (v) the Applicant is a financially responsible person to the extent required by statute and has not been convicted of a major labor law violation or other illegal conduct involving moral turpitude by any agency or court of the federal government or agency or court of any state in the two-year period immediately prior to the approval of the Applicant’s application for assistance, the Council shall recommend to Mrs. Bernice Whaley, Chairperson, The Delaware Economic Development Authority, approval of a Delaware Strategic Fund Performance grant in an amount not to exceed One Hundred Thirty One Thousand One Hundred Thirty Dollars ($131,130), based on the creation of 28 new full-time permanent Delaware positions, and a Delaware Strategic Fund Capital Expenditures grant in an amount not to exceed One Million Fifty Thousand Dollars ($1,050,000), or a Three Percent (3%) match of qualified capital expenditures up to Thirty Five Million Dollars ($35,000,000) for CDF Minutes June 27, 2016 Page 4 the redevelopment of its current facility in Dover, Delaware to be disbursed from the Delaware Strategic Fund for the Project, contingent upon the approval remaining in effect through and including June 26, 2017.

Approved By Vote of 7 to 0.

St. Francis Hospital (“St. Francis” or the “Applicant”) – The Applicant is requesting consideration of the application of St. Francis Hospital to amend its existing loan to a conversion loan which would convert the loan to a grant and require certain capital expenditure and employment levels.

Before the hearing officially started, Ms. Richelle Vible recused herself from the hearing due to conflict of interest, as she is the Executive Director of Catholic Charities.

CDF Chairman, Andrew Lubin, announced to the committee that he received a letter from former Secretary of Labor, John McMahon, in support of the project.

DEDO’s Director of Intergovernmental Relations and Special Projects, Ms. Patty Cannon, began her presentation of the St. Francis Project by stating that it was first introduced to DEDO in 2007. She stated that St. Francis followed through with its commitment to serve more people and provide more services to the community. However, she revealed to the committee that most of the hospital’s patients are uninsured or on Medicaid, which is contrary to other medical facilities in Delaware, of which the majority of those patients have employer-sponsored health insurance. According to Ms. Cannon, other hospitals are getting 50 to 70 cents on the dollar, whereas St. Francis is getting significantly less. She expressed that although St. Francis serves more people and provides more services, it does not reflect in the hospital’s profit. She said that over the years, St. Francis has maintained jobs and paid significant wage taxes to the state of Delaware and the city of Wilmington. Ms. Cannon stressed that it would decimate the city and the state if the hospital closed its doors. In the past, the hospital was able to cut costs through the volunteer efforts of nuns. Ms. Cannon said the hospital withheld and paid a total of $15,691,868 for personal income tax to the state of Delaware and $4.5 million for wage taxes to the city of Wilmington, which totals over $20 million to the state and city since the original loan agreement in 2007. In addition, she reported that there has been over $70 million in capital expenses since 2007. She pointed out that St. Francis currently commits to 475 permanent full-time jobs and based on the quarterly Unemployment Insurance wage records, it has consistently employed between 900 and 1,000 people, of which many work under 30 hours a week and do not meet DEDO’s definition of a full- time employee. DEDO’s Business Finance Specialist, Ms. Kimberly Cruz presented St. Francis’ financial analysis. She prefaced by stating that DEDO staff reviewed St. Francis Healthcare’s internal financial statements, which included the financial data for St. Francis Hospital for fiscal years 2014 and 2015, and for the past eleven months, ending May 2016. She also said that she reviewed, audited, consolidated financial statements for Trinity Health, which is the hospital’s parent company. According to Ms. Cruz’ evaluation, she reported that in 2015, St. Francis HealthCare continued to implement strategies to enhance its financial sustainability by growing its revenue by 13%, coupled with a 61% increase in cash and cash equivalents, and a 6% increase in working capital. She informed the Council that St. Francis had a healthy current ratio of 1.7 and improvement in its debt service coverage ratio from -2.5 to 1.3. Despite these improvements, Ms. Cruz reported that the hospital experienced operating losses and negative operating margins, which were posted CDF Minutes June 27, 2016 Page 5 for fiscal years 2014 and 2015; a key factor was the hospital’s persistent increase in labor costs, which constituted half of the total expenses for fiscal years 2014 and 2015 and increased by 9% over that period. She also analyzed the 11 months of 2016. With one month remaining in the fiscal year, she noted the trend was similar to the prior two fiscal years, with year-to-date total operating revenue tracking over budget. She stated that salaries and wages were also tracking over budget and a negative operating profit margin was currently posted. She mentioned that St. Francis Healthcare is 100% owned by Trinity Health. She disclosed Trinity Health’s financial statements, which revealed that it is financially viable with adequate levels of liquidity, strong working capital levels, and the ability to service its debt. She affirmed that Delaware Economic Development Authority’s (DEDA) security position is secured, with the corporate guarantee from Trinity Health, in addition to the standard payment recapture provisions. Ms. Cruz emphasized that the impact of the loss of the 475 jobs associated with this project, on Delaware’s gross domestic product is estimated to be $83,159,906. Therefore, DEDO staff is recommending a conversion of the Delaware Strategic Fund Loan to a Performance Grant, based on the retention of an average of 475 jobs through June 30, 2019. St. Francis’ legal counsel, Tom McGonigle of Drinker, Biddle & Reath, advised the Council that the loan was made almost nine years ago, a particularly challenging time for the hospital. He explained that the loan helped financially stabilize the facility and retain jobs.

He mentioned that the hospital has a new management team and attained a new corporate parent, Trinity Health. With these changes, he said the hospital put together a plan for sustainability and viability.

He detailed the plan with a couple of key components. He said the first goal is to continue providing quality care. According to Mr. McGonigle, the quality of care at St. Francis is excellent. He said the quality indicators at Centers for Medicare & Medicaid Services (CMS) are high and/or higher than surrounding hospitals.

He said the second goal is to increase patient volume at the hospital, which he believes can be achieved by recruiting and retaining top quality physician groups. According to Mr. McGonigle, St. Francis’ third goal is to attract quality physicians with necessary investments. He described one particular investment: a new electronic medical records system, also known as EMR. He said Trinity is committed to funding it, which he suspects will end up costing around $20 million.

He further emphasized the positive economic and social impact St. Francis has on the city of Wilmington. He reiterated that over 1,000 part-time and full-time jobs, in a city that has one of the highest levels of unemployment in the state. Mr. McGonigle said St. Francis has provided an extraordinary amount of charitable care to the local community. An example of this is a mobile outreach program, which he describes as a mobile doctor’s office that visits some of the state’s poorest communities. He alluded that these investments will have a positive impact to the state of Delaware and the city of Wilmington. He argued that over the next 12 years, the return, in terms of state tax revenues, will be very good, but he added that the return to the community will be even better. Michael Polnerow, Vice President, Medical Affairs and Chief Medical Officer of St. Francis Hospital, stated that since Trinity acquired the hospital, the stability of the management team has been extraordinary. He said it makes a huge difference in the confidence of the physicians that they are trying to recruit. CDF Minutes June 27, 2016 Page 6 He described Trinity as a very large healthcare system, the second largest faith-based healthcare system in the country, with currently with 92 hospitals. He said it has a complex system of quality metrics, which are aligned with the CMS ratings system. He explained that there are seven hospitals within the Trinity network in the mid-Atlantic region, of which St. Francis has the highest cumulative quality scores.

He portrayed St. Francis as a full-service hospital, with newly developed relationships with many of the most well-respected physician groups in the area, including the city’s largest urology, neuro-enterology, orthopedics, EMT and surgical groups in the community. He said the surgical group provides the hospital surgical coverage, as well as a surgical team for trauma. He mentioned that it has an alliance with Thomas Jefferson University Hospital, as well as the VA Hospital, in providing oncologic services to the community.

He added that St. Francis is in the process of applying for a Level III Trauma Designation, which it expects to hear about this week, and CMS has recently rated the hospital’s home health services with a 5-star rating. He explained that only 3% of home health services in the country are given a 5-star rating and St. Francis is one of them. He touted its nationally recognized perinatal program, its OB-GYN practices and its Program of All-inclusive Care for the Elderly (PACE) program, which provides aid services and all-inclusive care to the elderly. He claimed that Trinity has the largest PACE program nationally and St. Francis has the only PACE program in the state.

He explained that before Trinity purchased St. Francis, physician groups left without confidence in the hospital. He conveyed that its continued growth and recruitment of quality physicians are critical to its future success.

Bernard Citerone, Chief Financial Officer for St. Francis Hospital, said that over the last three years, there have been signs of financial stability with margin improvements and profitable patient service programs. Due to the fact that its’ acute care business serves the Medicaid and uninsured populations, profit margins are low. He believes St. Francis’ future is bright because of the following:

1. The addition of new health services for its patients; 2. The financial success of the PACE program. (The development of a second location is in the future); 3. The financial success of the award-winning home health program; and 4. The success of the hospital’s ambulance service.

Despite this, he said all of the above are smaller segments of St. Francis’ business. He stressed that the hospital is working hard to grow those programs and other alternative activities. The Chairman opened the meeting for questions and comments, Mr. Rowland asked Ms. Cannon why DEDO awarded a loan to St. Francis in 2007, when the agency knew they were unable to pay it back. Ms. Cannon replied that the Council in 2007 was extremely hopeful the economy would improve and there might be a chance that St. Francis would be able repay the loan. Mr. Rowland reminded Ms. Cannon that in 2014, DEDO presented to the CDF a business case to restructure St. Francis. He stated that we had anticipated being repaid on a restructured basis. Ms. Cannon said that St. Francis became an HMO for Medicare patients. She responded that hospital officials welcomed Medicare patients into its PACE program and provided them with any services they needed. But she said a good percentage of them became chronically ill and battled CDF Minutes June 27, 2016 Page 7 several medical conditions at a time, with all their money going towards medical bills. Because PACE and other programs were new, DEDO decided to wait a couple of years to see if the hospital will become profitable. She said that over the past 10 years, St. Francis has demonstrated innovative efforts to become more profitable and yet continue to service the community. She pointed out that St. Francis pays an estimated $20 million in state and city wage taxes. Ms. Cannon said that if the original business case was set up as a Performance Grant, based on the Personal Income Tax (PIT) estimate and a 50% job retention, the hospital would have doubled what DEDO asked them to pay back in 2007. Ms. Cruz said that a payment was made in November 2013. Ms. Cannon added that it was a no interest loan. Mr. Riddle asked if Trinity agreed to be responsible for its debts when it purchased the hospital. Ms. Cruz affirmed that Trinity Health is providing a corporate guarantee.

Mr. Riddle asked if St. Francis has bonds and he inquired what the hospital’s responsibility is if it defaults in any of its statutory obligations. St. Francis’ CFO confirmed that it has bonds; however, Trinity’s debt structure is different because St. Francis’ debt became an intercompany debt. Mr. Citerone disclosed that the hospital is currently $115 million in debt and its debt service coverage was 1.3. Based on his 25 years of experience in the medical industry, Mr. Riddle commented that the rate may be acceptable in business world, but not in the hospital world. Mr. Citerone also said the hospital has corporate allocations, which are costs pushed down to the hospital. Ms. Canon added that if the hospital closed its doors, the financial impact to state would be up to $83 million. The CFO clarified the number of employees at St. Francis. He said that while the 475 full-time employees satisfy the Full Time Employment (FTE) on site, the hospital’s equivalent full-time FTEs differ because they have a well over 900 part-timers. In reference to the success of St. Francis’ ambulatory service, Michael Polnerow, Vice President, Medical Affairs and Chief Medical Officer for St. Francis, said that the ambulance service does not result in more patients being admitted to the hospital. Delaware’s Deputy Attorney General, Mr. Lawrence Lewis asked if Trinity will guarantee a claw back should employment levels and capital expenditures levels are not achieved by the designated time period. The CMO for St. Francis confirmed that there will be a claw back both with respect to employment levels and the capital investment into the EMR system. He said although the required capital expenditure is $8 million, he thinks it will be closer to $20 million. Cabinet Secretary, DEDO Director Bernice Whaley complimented DEDO’s great job of presenting the St. Francis business case. She agreed that St. Francis Hospital is very important to the city of Wilmington. She also acknowledged that this decision is setting a precedent. So, she expressed that the committee’s careful consideration is of great value. Mr. Riddle requested to put on the record the types of financial support and considerations, given to other Delaware hospitals, specifically Nanticoke, Beebe, Bay Health, and Christiana. Secretary Whaley addressed the issue by saying that DEDO worked with only two other hospitals, Bay Health and Nanticoke. She stated that Bay Health was a performance-based grant, while Nanticoke was a 2009 loan that went through some amendments. She added that Nanticoke’s loan was for $4,489,729.32. She said there was a forbearance period and the no- interest loan was modified in 2010, with payments starting July 1, 2010. She said there was another forbearance period, from September 2011 through September 2012 and in 2014, the hospital reinstated the DEDO loan with a USDA loan. She noted that the current balance is $3,302,552. CDF Minutes June 27, 2016 Page 8 The Chairman asked the Council how they would like to proceed with the St. Francis application. He urged them to consider the information presented, along with the comments and the concerns made by the panel. He also advised members to reflect on this precedent-setting case, which happens to fall during Nanticoke’s forbearance period. He reminded them that Nanticoke is meeting its financial obligations and commitments. He also pointed out St. Francis and Trinity’s enthusiasm about the project and confidence to make the type of capital investments that is expected. Mr. Lubin asked the Council if they would consider extending forbearance for a period of three years, observe the type of investment that will take place, and then return to Council to determine where or how to should proceed with the St. Francis application. The Chairman asked for a motion and a second to amend the Council’s decision with the inclusion of Mr. Sears’ recommendations. Mr. Sears believed the Chairman’s suggestion was a reasonable request. He recalled the loan provided to Nanticoke was precedent because it was the first nonprofit hospital ever considered for a loan conversion. He added that if St. Francis’ request is honored, it would be like turning the grant into a charge-off, which usually involves retrieving collateral. Mr. Sears moved that the Council extend the loan for 36 months, with the hopes the hospital will be in a better financial position. The Chairman clarified Mr. Sears’ recommendation by referring back to the original comments requiring St. Francis to make capital improvements of a minimum of a proposed $8 million and with the retention of 475 employees. He mentioned to extend the interest-free loan through June 30, 2019 for evaluation. Mr. Sears amended his motion consistent with the Chairman and councils clarification. The amended motion was seconded by Mr. Rowland. After this motion was duly made and seconded, Mr. Lubin asked the public for comments.

Mr. Paul L. Calistro, the Executive Director of West End Neighborhood House and President of Cornerstone West Community Development Corporation, said he both lived and worked in the Wilmington community for over 25 years and is representing a group of 27 not-for-profits and civic associations located on the west side of Wilmington. He informed the Council that the west side of Wilmington, which represents about 20% of the entire city, is at a tipping point. He said that the west side is still a viable part of the city because many of the employees who work at St. Francis live in that community. He said that his organization invested over $60 million of state, federal, local money in that community to make sure it’s viable from a housing perspective. In addition, he said a sister agency is in the process of investing $100 million into that community. He said the committee’s investment, grant or loan is a small portion, but an important portion of the overall investment strategy for viability. He also acknowledged that he worked with Mr. Sears for 25 years. He said that he understands about making precedence. But he urged the Council, to reconsider its decision. He said that St. Francis is largest employer in the area and is a critical piece in the city’s viability.

Tom McGonigle of Drinker, Biddle & Reath added that St. Francis competes for resources with 92 other hospitals within the Trinity Health System. Therefore, he said the Council’s decision will be a difficult conversation with the parent company and a tougher issue for St. Francis.

Mr. Lubin thanked Mr. McGonigle for his comments. He clarified that this motion is only a recommendation to the secretary of DEDO. He said from a fiduciary point-of-view, that is the committee recommendation and advice.

MOTION: After duly considering, inter alia, the nature of the business, its competitive situation in Delaware, its location, the employment and other requirements under applicable statutory and regulatory provisions, the Council made the following CDF Minutes June 27, 2016 Page 9 findings: (i) the Project will contribute to maintaining or providing gainful employment of the citizens of the State, (ii) the Project will serve a public purpose by contributing to the prosperity, health or general welfare of the State; (iii) the Project will require a capital investment of at least $20,000, which funds, including the grant proceeds, will be available or expended on the date on which The Delaware Economic Development Authority disburses the requested grant funds; (iv) the grant will effectuate the purposes of Chapter 50, Subchapter IV of Title 29 of the Delaware Code, and (v) the Applicant is a financially responsible person to the extent required by statute and has not been convicted of a major labor law violation or other illegal conduct involving moral turpitude by any agency or court of the federal government or agency or court of any state in the two-year period immediately prior to the approval of the Applicant’s application for assistance, the Council shall recommend to Mrs. Bernice Whaley, Chairperson, The Delaware Economic Development Authority, of a modification of the original strategic fund loan to extend by way of forbearance the obligation of St. Francis to meet its financial obligations to DEDO until June 30, 2019 for an additional 36 months. The obligation will continue at 0% interest and St. Francis will retain an average of 475 full-time jobs through that period and make a capital investment of a minimum of $8 million.

Approved By Vote of 6 to 0.

ADJOURNMENT The meeting adjourned at 10:00 a.m. Respectfully submitted, Leilani Decena-Shepherd, Portfolio Administrator LDS cc: Members of the Council on Development Finance Director Bernice Whaley Lawrence Lewis, DAG

The next CDF meeting is scheduled for Monday, September 26, 2016 at 9:00 a.m. at the Haslet Armory on 122 Martin Luther King Jr. Blvd. South in Dover, DE.