This Preliminary Official Statement and information contained herein are subject to change, completion or amendment without notice. These securities may not be sold nor may offers to buy be accepted prior to the time the Official Statement is delivered in final form. Under no circumstances shall this Preliminary Official Statement constitute an offer to sell or the solicitation of any offer to buy, nor shall there be any sale of these securities in any jurisdiction in which such offer, solicitation or sale would be unlawful. obligations that may be issued or incurred in the future, solely by a pledge of and a first lien on the Net Revenues of Revenues Net “ the on lien first a and of pledge a by Cleveland PublicPowerandtheSpecialFundsestablishedunderIndenture,allasmorefullydescribedherein. See solely future, the in incurred or issued be may that obligations secured undertheIndenture,onaparitywithotherSeriesofOutstandingBondsandAdditional parity (the “City”)andU.S.BankNationalAssociation,Cleveland,Ohio,asTrustee“Trustee”),arepayable from and or aboutJune__,2018. The Series2018Bondsare expected tobeavailablefordeliverythroughthefacilities ofDTC,NewYork,on other conditions.Certainlegal matterswillbepasseduponfortheUnderwriters bytheircounsel,TuckerEllisLLP. certain to and Counsel, Bond Ohio, Cleveland, LLP, (US) Boggs Patton Squire of opinions legal approving of receipt OR INTERESTONTHESERIES2018BONDS. HAVE EXCISESORTAXESLEVIEDBYTHECITYFOR THEPAYMENTOFPRINCIPALORANYPREMIUM OBLIGATIONS OF THE CITY AND THE HOLDERS OF SERIES 2018 BONDS WILL NOT HAVE THE RIGHT TO SOURCES DESCRIBEDINTHISOFFICIALSTATEMENT. THESERIES2018BONDSARENOTGENERAL Purpose ofIssue.” NEW ISSUE-BOOK-ENTRYONLY corporations. Foramorecompletediscussionofthetaxaspects,see“TAXMATTERS”herein. franchise tax.InterestontheSeries2018Bondsmaybesubjecttocertainfederaltaxesimposedonly corporate the of base worth net the and institutions, financial of capital equity total the of basis the on levied tax state and localtaxation,excepttheestatetax,domesticinsurancecompanydealersinintangibles Ohio all from exempt are Bonds 2018 Series the of, disposition other or exchange sale, the on made profit minimum tax(applicableonlytotaxableyearsbeginningbeforeJanuary1,2018),and(ii)intereston,any of acorporation’sadjustedcurrentearningsforpurposesof,andthusmaybesubjectto,the corporate alternative of the federal alternative minimum tax; however, interest on the Series 2018 Bonds is included in the calculation is excludedfromgrossincomeforfederaltaxpurposesandnotanitemofpreference compliance withcertaincovenantsandtheaccuracyofrepresentations,interestonSeries2018Bonds 2018 Bonds.See“ registered owners of the Series 2018 Bonds shall mean Cede & Co., and shall not mean the Beneficial Owners of the Series long as Cede & Co., asnominee for DTC, is the registered owner of the Series 2018 Bonds, referenceshereinto owners or (“DTC”). Purchasers of beneficial interests in the Series 2018 Bonds will not receive delivery of the Series 2018 Bonds. So be registeredinitiallyinthenameofCede&Co.,asnomineeforTheDepositoryTrustCompany,NewYork, York 2018 Bonds”)willbeissuedonlyasonefullyregisteredbondofeachmaturityunderabook-entrysystem, andwill Dated: Dateofdelivery herein. See“T Bonds, toCede&Co.,asnomineeforDTC.TheSeries2018Bondsaresubjectredemptionpriormaturitydescribed and oneachMay15Novemberthereafter. maturity schedule,interestrates,andpriceoryields.InterestontheSeries2018BondswillbepayableNovember 15,2018 * Preliminary, subject to change. S Academy Securities ecurity The Series 2018 Bonds are issued pursuant to the Indenture (as defined herein) between the City of Cleveland, Ohio Cleveland, of City the between herein) defined (as Indenture the to pursuant issued are Bonds 2018 Series The The Series2018Bondsareofferedwhen,asandifissued andreceivedbytheUnderwritersaresubjectto THE SERIES2018BONDSARESPECIALOBLIGATIONS OFTHECITY,PAYABLESOLELYFROM In theopinionofSquirePattonBoggs(US)LLP,BondCounsel,underexistinglaw(i)assumingcontinuing The Series2018Bondsarebeingissuedtorefundcertain OutstandingBonds.See“ The $47,345,000*CityofCleveland,OhioPublicPowerSystemRevenueRefundingBonds,Series2018(the“Series The principaloftheSeries2018Bondsispayable,solongasCede&Co.registeredowner The Series2018Bondswillbedatedthedateofdelivery. Theinsidefrontcovercontainsinformationconcerningtheir
and S The dateofthis OfficialStatementisJune__, 2018,andtheinformationspeaks onlyasofthatdate. he ources S A eries ppendix
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PRELIMINARY OFFICIAL STATEMENT DATED JUNE 6, 2018 Public PowerSystemRevenueRefundingBonds,Series2018 P ayment
D–B onds Siebert Cisneros Shank&Co.,L.L.C.
ook for –Terms.” -E
the ntry B
CITY OF CLEVELAND, OHIO onds O nly OFFICIAL STATEMENT . ” S ystem $47,345,000* .” Barclays Due: November15,asshownontheinsidefrontcover
The Williams CapitalGroup,L.P. Ratings: See“RATINGS”herein I ntroduction S&P: AppliedFor -Authorizationand Moody’s: A3
$47,345,000* City of Cleveland, Ohio Public Power System Revenue Refunding Bonds, Series 2018
MATURITY SCHEDULE
Maturity Principal Interest (November 15) Amount* Rate Price Yield CUSIP†:186398
2018 $130,000 2019 1,000,000 2020 1,000,000 2021 3,655,000 2022 3,775,000 2023 3,955,000 2024 4,160,000 2025 1,510,000 2026 1,590,000 2027 1,670,000 2028 1,755,000 2029 1,840,000 2030 1,930,000 2031 2,030,000 2032 2,130,000 2033 2,235,000 2034 2,350,000 2035 2,465,000 2036 2,590,000 2037 2,720,000 2038 2,855,000
* Preliminary, subject to change. † CUSIP numbers have been assigned by an independent company not affiliated with the City and are included solely for the convenience of the holders of the Series 2018 Bonds. The City is not responsible for the selection or uses of these CUSIP numbers, and no representation is made as to their correctness on the Series 2018 Bonds or as indicated above. The CUSIP number for a specific maturity is subject to being changed after the issuance of the Series 2018 Bonds as a result of various subsequent actions including, but not limited to, a refunding in whole or in part of such maturity or as a result of the procurement of secondary market portfolio insurance or other similar enhancement by investors that is applicable to all or a portion of certain maturities of the Series 2018 Bonds.
CITY OF CLEVELAND, OHIO CLEVELAND PUBLIC POWER
MAYOR CITY COUNCIL PRESIDENT FRANK G. JACKSON KEVIN J. KELLEY
DEPARTMENT OF FINANCE Director of Finance SHARON DUMAS
DEPARTMENT OF PUBLIC UTILITIES Director of Public Utilities ROBERT DAVIS
Commissioner of the Division of Cleveland Public Power IVAN HENDERSON
DEPARTMENT OF LAW Director of Law BARBARA A. LANGHENRY
TRUSTEE U.S. BANK NATIONAL ASSOCIATION Cleveland, Ohio
BOND COUNSEL SQUIRE PATTON BOGGS (US) LLP Cleveland, Ohio
CO-FINANCIAL ADVISORS
GOVERNMENT CAPITAL MANAGEMENT, L.L.C. Rutherford, New Jersey
PHOENIX CAPITAL PARTNERS Philadelphia, Pennsylvania
REGARDING THE USE OF THIS OFFICIAL STATEMENT
This Official Statement does not constitute an offering of any security other than the Series 2018 Bonds. No person has been authorized by the City or by Barclays Capital Inc., Academy Securities, Inc., Siebert Cisneros Shank & Co., L.L.C. or The Williams Capital Group, L.P. (together, the “Underwriters”) to give any information or to make any representation other than that contained in this Official Statement, and if given or made such other information or representation must not be relied upon as having been given or authorized by the City or the Underwriters. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy, and there shall not be any sale of the Series 2018 Bonds by any person in any jurisdiction in which it is unlawful to make such offer, solicitation or sale.
Any statements made in this Official Statement which involve matters of opinions or estimates, whether expressly stated to be such, are made as such and not as representations of fact or certainty, and no representation is made that any of those statements have been or will be realized. Information in this Official Statement has been derived by the City from official and other sources and is believed by the City to be accurate and reliable. Information other than that obtained from official records of the City has not been independently confirmed or verified by the City, and its accuracy is not guaranteed.
The information and expressions of opinion contained herein are subject to change without notice. Neither the delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, give rise to any implication that there has been no change in the affairs of the City since the date hereof.
This Official Statement contains statements which, to the extent they are not recitations of historical fact, constitute “forward-looking statements.” The words “estimate,” “project,” “anticipate,” “expect,” “intend,” “believe,” and similar expressions are intended to identify forward-looking statements. A number of factors affecting the City’s financial results could cause actual results to differ materially from those stated in the forward-looking statements.
U.S. Bank National Association, by acceptance of its duties as Trustee under the Indenture has not reviewed this Official Statement and has made no representations as to the information contained herein, including but not limited to, any representations as to the financial feasibility or related activities.
The Underwriters have provided the following sentence for inclusion in this Official Statement. The Underwriters have reviewed the information in this Official Statement in accordance with and as part of their responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriters do not guarantee the accuracy or completeness of such information.
THE COVER PAGE CONTAINS CERTAIN INFORMATION FOR QUICK REFERENCE ONLY. IT IS NOT A SUMMARY OF THIS ISSUE. INVESTORS MUST READ THE ENTIRE OFFICIAL STATEMENT TO OBTAIN INFORMATION ESSENTIAL TO THE MAKING OF AN INFORMED INVESTMENT DECISION.
IN CONNECTION WITH THE OFFERING OF THE SERIES 2018 BONDS, THE UNDERWRITERS MAY OVER ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF SUCH SERIES 2018 BONDS AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
THE SERIES 2018 BONDS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND THE INDENTURE HAS NOT BEEN QUALIFIED UNDER THE TRUST INDENTURE ACT OF 1939, IN RELIANCE UPON EXEMPTIONS CONTAINED IN SUCH ACTS. THE REGISTRATION OR QUALIFICATION OF THE SERIES 2018 BONDS IN ACCORDANCE WITH APPLICABLE PROVISIONS OF SECURITIES LAWS OF THE STATES IN WHICH THE SERIES 2018 BONDS HAVE BEEN REGISTERED OR QUALIFIED AND THE EXEMPTION FROM REGISTRATION OR QUALIFICATION IN OTHER STATES CANNOT BE REGARDED AS A RECOMMENDATION THEREOF. NEITHER THESE STATES NOR ANY OF THEIR AGENCIES HAVE PASSED UPON THE MERITS OF THE SERIES 2018 BONDS OR THE ACCURACY OR COMPLETENESS OF THIS OFFICIAL STATEMENT. ANY REPRESENTATION TO THE CONTRARY MAY BE A CRIMINAL OFFENSE.
i
TABLE OF CONTENTS
Page No. INTRODUCTION ...... 1 General ...... 1 City of Cleveland and Cleveland Public Power ...... 1 Authorization and Purpose of Issue ...... 1 Security and Sources of Payment for the Series 2018 Bonds ...... 2 Terms ...... 2 Availability of Documents; Continuing Disclosure ...... 2 Concerning This Official Statement ...... 3 SECURITY AND SOURCES OF PAYMENT FOR THE BONDS ...... 3 Sources of Payment...... 3 Outstanding Indebtedness ...... 3 Bond Service Reserve Fund ...... 4 Rate Covenant ...... 5 Additional Bonds ...... 5 Additional Debt ...... 5 Power Capacity Obligations ...... 6 Amendment of the Indenture ...... 6 Bankruptcy and Fiscal Emergency Act ...... 7 THE SERIES 2018 BONDS ...... 8 Terms ...... 8 Redemption Provisions ...... 8 PLAN OF REFUNDING ...... 9 SOURCES AND USES OF FUNDS ...... 10 DEBT SERVICE REQUIREMENTS ...... 11 THE CITY OF CLEVELAND ...... 12 Introduction ...... 12 City Government ...... 12 Financial Matters ...... 12 CLEVELAND PUBLIC POWER ...... 13 Overview and History ...... 13 Organizational Structure and Management ...... 14 Key Management Personnel ...... 15 Mission and Strategic Planning ...... 17 Membership in AMP...... 17 CPP OPERATIONS ...... 18 Service Area and Customers ...... 18 Customer Sales and Revenues ...... 20 Existing Electric Facilities ...... 21 Capital Improvement Projects ...... 21 Capacity Expansion Program ...... 21 Power Supply ...... 22 Current Power Supply ...... 22 Generation Projects ...... 22 Power Capacity Obligations ...... 25 Power Resources Plan ...... 26 Energy Efficiency Programs ...... 28 CPP Transmission Arrangements ...... 28
Financial Operations ...... 29 Management Discussion of Results of Operations ...... 30 Electric Rates and Charges ...... 30 Competition with CEI ...... 31 Marketing ...... 32 Competitive Advantages ...... 33 Comparison of Typical Electric Bills...... 33 Billing and Collection Procedures ...... 35 Employees and Employee Relations; Staffing ...... 35 LITIGATION ...... 36 Customer Challenges to EAC/EEA Rates ...... 36 FACTORS AFFECTING CPP AND ELECTRIC UTILITIES GENERALLY ...... 37 Federal Legislative and Regulatory Matters ...... 37 State Legislative and Regulatory Matters ...... 43 Cyber-Security ...... 45 LEGAL MATTERS ...... 45 TAX MATTERS ...... 46 Risk of Future Legislative Changes and/or Court Decisions ...... 47 Original Issue Discount and Original Issue Premium ...... 48 INDEPENDENT AUDITORS ...... 49 RATINGS ...... 49 FINANCIAL ADVISORS ...... 49 UNDERWRITING ...... 49 CONTINUING DISCLOSURE AGREEMENT ...... 50 CONCLUDING STATEMENT ...... 52
APPENDIX A – ECONOMIC AND DEMOGRAPHIC INFORMATION CONCERNING THE CITY OF CLEVELAND ...... A-1 APPENDIX B – SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE ...... B-1 APPENDIX C – FORM OF OPINION OF BOND COUNSEL ...... C-1 APPENDIX D – BOOK ENTRY ONLY SYSTEM ...... D-1
ii
OFFICIAL STATEMENT
$47,345,000* City of Cleveland, Ohio Public Power System Revenue Refunding Bonds, Series 2018
INTRODUCTION
General
This Official Statement provides information with respect to the issuance by the City of Cleveland, Ohio of $47,345,000* aggregate principal amount of its Public Power System Revenue Refunding Bonds, Series 2018 (the “Series 2018 Bonds”).
This Introduction is not a summary of this Official Statement. It is only a brief description of and guide to, and is qualified by, more complete and detailed information contained in the entire Official Statement, including the cover page and appendices thereto and the documents summarized or described therein. A full review should be made of the entire Official Statement. The offering of the Series 2018 Bonds to potential investors is made only by means of the entire Official Statement.
City of Cleveland and Cleveland Public Power
The City of Cleveland, Ohio (the “City”), a municipal corporation and political subdivision of the State of Ohio (the “State”), is located in northeast Ohio and is the second largest city in the State. For a more extensive discussion of the City, see “The City of Cleveland” herein and “APPENDIX A - ECONOMIC AND DEMOGRAPHIC INFORMATION CONCERNING THE CITY OF CLEVELAND” hereto.
The City owns and operates a public power system under the name Cleveland Public Power (“Cleveland Public Power” or “CPP”). Cleveland Public Power supplies electricity to residential, commercial, industrial, and governmental users, primarily within the City. The City establishes rates and charges for the power and services furnished by CPP and performs all functions necessary for its operation. For a more extensive discussion of CPP, see “Cleveland Public Power.”
Authorization and Purpose of Issue
The Series 2018 Bonds are issued under and secured by an Amended and Restated Trust Indenture (Sixth Supplemental Trust Indenture) dated as of August 17, 2006 (the “Amended and Restated Trust Indenture”), as supplemented by the Fourteenth Supplemental Trust Indenture dated June ___, 2018 (the “Fourteenth Supplemental Indenture” and, together with the Amended and Restated Indenture and all other supplements thereto, the “Indenture”). The Series 2018 Bonds are issued pursuant to Ordinance No. 1363-17 passed on November 20, 2017 by the Council of the City and pursuant to a Certificate of Award authorized thereunder (together, the “Bond Legislation”). The Series 2018 Bonds, together with the Existing Bonds (as defined under the heading “Security and Sources of Payment for the Bonds - Outstanding Indebtedness” herein) and any Additional Bonds (as defined in the Indenture) that may be issued in the future, are herein collectively referred to as the “Bonds.” All Bonds are issued under Article
* Preliminary, subject to change.
1
XVIII of the Constitution of the State, the laws of the State, the City Charter (the “Charter”) and Codified Ordinances of the City.
The proceeds of the Series 2018 Bonds will be used (i) to currently refund $______aggregate principal amount of the City’s Public Power System Revenue Bonds, Series 2008A (the “Series 2008A Refunded Bonds”), (ii) to currently refund $______aggregate principal amount of the City’s Public Power System Revenue Bonds, Series 2008B-1 (the “Series 2008B-1 Refunded Bonds”, and together with the Series 2008A Refunded Bonds, the “Refunded Bonds”), and (iii) to pay costs of issuance of the Series 2018 Bonds and of refunding the Refunded Bonds.
The Refunded Bonds are more fully described under “Plan of Refunding.” See also, “Sources and Uses of Funds.”
Security and Sources of Payment for the Series 2018 Bonds
The Series 2018 Bonds are payable from the Net Revenues of Cleveland Public Power and the Special Funds established under the Indenture and are secured under the Indenture by a pledge of and a first lien on such Net Revenues and Special Funds, all as more fully described herein and therein. THE SERIES 2018 BONDS ARE NOT GENERAL OBLIGATIONS OF THE CITY, AND BONDHOLDERS DO NOT HAVE ANY RIGHT TO HAVE ANY EXCISES OR TAXES LEVIED BY THE CITY FOR PAYMENT OF PRINCIPAL OF OR ANY PREMIUM AND INTEREST ON THE SERIES 2018 BONDS. For a description of the security and sources of payment of the Series 2018 Bonds, including without limitation the City’s rate covenant, see “The Series 2018 Bonds” and “Security and Sources of Payment for the Bonds.”
Terms
The Series 2018 Bonds will be issued initially only in book-entry form, and will be dated the date of delivery, will bear interest at the rates set forth on the inside cover page hereof, payable as set forth on the front cover page hereof, and will mature in the years and in the principal amounts set forth on the inside cover page hereof.
The Series 2018 Bonds will be issued in authorized denominations of $5,000 and any integral multiple thereof (the “Authorized Denominations”).
Availability of Documents; Continuing Disclosure
Prior to issuance and delivery of the Series 2018 Bonds, copies of the Indenture may be obtained, at the cost of the requesting party, at the offices of the City’s Department of Finance, 601 Lakeside Avenue, Cleveland, Ohio 44114; thereafter copies will be available for inspection at the corporate trust office of the Trustee. Prior to the initial issuance and delivery of the Series 2018 Bonds, questions regarding this Official Statement or other inquiries regarding the Series 2018 Bonds may be directed to Barclays, 745 7th Avenue, 19th Floor, New York, NY 10019.
The offering of the Series 2018 Bonds is subject to the continuing disclosure requirements of Rule 15c2-12 (the “Rule”) issued by the Securities and Exchange Commission. Pursuant to the Rule, the City has undertaken, for the benefit of the holders and beneficial owners of the Series 2018 Bonds, to furnish certain annual financial and operational information and to give notice of certain material events to the MSRB. Failure by the City to provide such disclosure is not an event of default under the Indenture. The City has complied with continuing disclosure agreements with respect to its Outstanding Bonds, except as set forth herein under the heading “CONTINUING DISCLOSURE AGREEMENT.”
2
Concerning This Official Statement
All financial and other information presented in this Official Statement relating to the City has been provided by the City from its records, except for information expressly attributed to other sources. The presentation of information is intended to show recent historic information and is not intended to indicate future or continuing trends. No representation is made that past experience, as shown by that financial and other information, will necessarily continue or be repeated in the future.
This Official Statement should be considered in its entirety, and no one subject discussed should be considered less important than any other by reason of its location in the text. Reference should be made to laws, reports or documents referred to in this Official Statement for more complete information regarding their contents. The description of the Series 2018 Bonds and the Indenture are qualified by reference to such documents in their entirety.
References to provisions of Ohio law, whether codified in the Ohio Revised Code (the “Revised Code”) or uncodified, or of the Ohio Constitution, or the Charter or Codified Ordinances of the City are references to current provisions. Those provisions may be amended, repealed or supplemented from time to time.
As used in this Official Statement, the term “debt service” means principal of and premium, if any, and interest on the obligations referred to; “County” means the County of Cuyahoga, Ohio; and “State” or “Ohio” means the State of Ohio. Capitalized terms used but not defined in this Official Statement shall have the meanings ascribed thereto in the Indenture. See “SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE – Certain Definitions” in APPENDIX B.
SECURITY AND SOURCES OF PAYMENT FOR THE BONDS
Sources of Payment
The Series 2018 Bonds are issued pursuant to the Indenture and are payable from, and secured under the Indenture, on a parity with other Series of Outstanding Bonds, solely by a pledge of and first lien on the Net Revenues of Cleveland Public Power and the Special Funds established under the Indenture, as hereinafter described. See “APPENDIX B - SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE - Pledge of Net Revenues; Application of Revenues; Special Funds.”
THE SERIES 2018 BONDS ARE NOT GENERAL OBLIGATIONS OF THE CITY, AND THE HOLDERS OF THE SERIES 2018 BONDS DO NOT HAVE ANY RIGHT TO HAVE ANY EXCISES OR TAXES LEVIED BY THE CITY FOR PAYMENT OF THE PRINCIPAL OF OR ANY PREMIUM AND INTEREST ON THE SERIES 2018 BONDS.
Outstanding Indebtedness
Prior to the issuance of the Series 2018 Bonds and the refunding of the Refunded Bonds, there will be a total of $202,172,880 in Bonds outstanding, comprised of $83,592,880 aggregate principal amount (which includes $27,902,880 of Capital Appreciation Bonds at their original principal amount at issuance) of the City of Cleveland, Ohio Public Power System Revenue Bonds, Series 2008 (the “Series 2008 Bonds”), $76,885,000 aggregate principal amount of the City of Cleveland, Ohio Public Power System Taxable Revenue Refunding Bonds, Series 2014 (the “Series 2014 Bonds”), and $41,695,000 aggregate principal amount of the City of Cleveland, Ohio Public Power System Revenue Refunding Bonds, Series 2016 (the “Series 2016 Bonds”) (collectively, the “Existing Bonds”), each of which are
3 secured by a pledge of or lien on the Net Revenues and the Special Funds (as defined in the Indenture) of Cleveland Public Power. See also “SOURCES AND USES OF FUNDS – DEBT SERVICE REQUIREMENTS.”
Bond Service Reserve Fund
The Series 2018 Bonds will not be secured by the Bond Service Reserve Fund. The City does not intend to supply or fund any additional debt service reserve fund with respect to the Series 2018 Bonds.
The Series 2008B-1 Bonds and the Series 2008B-2 Bonds (together, the “Series 2008B Bonds”), the Series 2014 Bonds and the Series 2016 Bonds are also not secured by the Bond Service Reserve Fund; however, the Series 2008B Bonds are secured by a special reserve fund as described below.
The outstanding Series 2008A Bonds are secured by the Bond Service Reserve Fund. On April 22, 2008, MBIA Insurance Corp. (“MBIA Corp.”) issued its Debt Service Reserve Fund Surety Bond numbered 17230R4 (the “Existing Reserve Fund Surety Bond”) in connection with the issuance of the Series 2008A Bonds.
The Series 2008B Bonds are secured by a special reserve fund separate from the common Bond Service Reserve Fund (the “2008B Reserve Fund”). MBIA Corp. also issued Debt Service Reserve Fund Surety Bond numbered 509332 (the “2008B Reserve Fund Surety Bond”) on April 22, 2008 to fund the 2008B Reserve Fund.
On February 18, 2009, MBIA Inc., the parent holding company of MBIA Corp., announced that it had established a new U.S. public finance financial guarantee insurance company within the MBIA Inc. group by restructuring MBIA Corp. and its subsidiaries through a series of transactions (the “Transactions”). As part of the Transactions, (i) the stock of MBIA Insurance Corp. of Illinois (which, effective March 19, 2009 was renamed National Public Finance Guarantee Corporation “National”), an existing public finance financial guarantee insurance subsidiary of MBIA Corp., was transferred to a newly established intermediate holding company, National Public Finance Guarantee Holdings, Inc. (“National Holdings”), also a subsidiary of MBIA Inc.; and (ii) effective January 1, 2009, MBIA Corp. ceded to National all of MBIA Corp.’s U.S. public finance business, including the Existing Reserve Fund Surety Bond and the 2008B Reserve Fund Surety Bond, pursuant to that certain Amended and Restated Quota Share Reinsurance Agreement between MBIA Corp. and National (the “Reinsurance Agreement”). All of the policies reinsured by National under the Reinsurance Agreement are deemed covered policies (each a “Covered Policy”). The Existing Reserve Fund Surety Bond and the 2008B Reserve Fund Surety Bond are Covered Policies. The Reinsurance Agreement provides a cut-through provision enabling the holder of a Covered Policy to make a claim for payment directly against National. In addition, National has also issued second-to-pay policies for the benefit of the holder of a Covered Policy, granting such policyholder the right to make a claim directly against National if MBIA Corp. did not honor such claim. Further, all Covered Policies are administered by National on behalf of MBIA Corp. pursuant to the Administrative Services Agreement between National and MBIA Corp. dated as of February 17, 2009.
National does not accept any responsibility for the accuracy or completeness of this Official Statement or any information or disclosure contained herein, or omitted herefrom, other than with respect to the accuracy of the information regarding the Existing Reserve Fund Surety Bond, the 2008B Reserve Fund Surety Bond and National set forth under this subheading “Bond Service Reserve Fund.” Additionally, National makes no representation regarding the Series 2018 Bonds or the advisability of investing in such Series 2018 Bonds.
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Rate Covenant
The City covenants in the Indenture that it will at all times charge such rates and fees for the products and services of Cleveland Public Power, and it will so restrict Operating Expenses, in each Fiscal Year so that Adjusted Net Revenues will be at least an amount equal to 125% of the Bond Service Charges and Parity Swap Obligations required to be paid in such Fiscal Year. For details regarding remedies in the event of the City’s failure to achieve this level of coverage, see “SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE - Rate Covenant” in APPENDIX B.
Additional Bonds
The City may issue additional bonds (“Additional Bonds”) payable from Net Revenues of Cleveland Public Power and secured by the Indenture on a parity with the Outstanding Bonds (including the Series 2018 Bonds) for the purpose of paying costs of construction, installation or acquisition of additions, extensions, renewals, replacements, alterations, betterments, or other capital improvements to Cleveland Public Power (“Capital Costs”) or refunding any Outstanding Bonds. The Indenture permits Additional Bonds to be issued only if certain requirements and conditions are met, including the requirement that, except as described below, no Additional Bonds may be issued unless the Director of Finance or a Consulting Engineer (as defined in the Indenture) provides a certificate to the effect that Test Revenues (i.e., Adjusted Net Revenues, which have been further adjusted to reflect (i) any increase in the rates of Cleveland Public Power which became effective during or subsequent to the applicable period but prior to the delivery of the Additional Bonds and (ii) Adjusted Net Revenues projected to be realized by the City as a result of the improvements to be financed by the Additional Bonds), for any 12 consecutive months of the 24 months immediately preceding the month in which the Additional Bonds are to be delivered, are not less than 125% of the maximum annual Bond Service Charges to be payable on all Bonds to be outstanding after the issuance of the Additional Bonds. Additional Bonds may be issued without such a certificate if the Additional Bonds are to be issued (i) to pay Capital Costs, provided that the City’s Director of Finance certifies that Adjusted Net Revenues for any 12 consecutive months of the 24 months immediately preceding the month in which the Additional Bonds are to be delivered are not less than 125% of the maximum annual Bond Service Charges to be payable on all Bonds to be outstanding after the issuance of the Additional Bonds, or (ii) to refund any Outstanding Bonds, provided that the maximum annual Bond Service Charges to be payable on all Bonds to be outstanding after the issuance of the Additional Bonds will not exceed 110% of the maximum annual Bond Service Charges payable on all Bonds outstanding prior to the issuance of the Additional Bonds. The foregoing tests are hereinafter referred to as the “Additional Bonds Test.” For a discussion of the provisions of the Indenture relating to the issuance of various types of Additional Bonds and the application of the Additional Bonds Test, the rate covenant and the Reserve Requirement to such Additional Bonds, see “SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE - Additional Bonds, Other Parity Debt and Subordinated Debt” in APPENDIX B.
Additional Debt
Other Parity Debt. The Indenture permits the City to issue or incur forms of debt other than Additional Bonds payable from the same sources as, and secured on a parity of lien with, the Series 2018 Bonds, for the purpose of paying Capital Costs, provided that, for all purposes of the Indenture, such other parity debt is to be treated as though it were in the form of Additional Bonds, as though the holders thereof were holders of Additional Bonds, and as though the debt service charges thereon were Bond Service Charges, and provided further that prior to the issuance or incurrence thereof, the Trustee (i) shall have received the same certifications with respect thereto as the Trustee would be required to receive were such other parity debt in the form of Additional Bonds, (ii) shall have determined that the contracts, agreements or other instruments evidencing or relating to such other parity debt reflect and are consistent
5 with the requirements of the Indenture (including, without limitation, the requirement that the Trustee be vested with the same authority with respect to, and on behalf of the owners of, such other parity debt as the Trustee would have were such other parity debt in the form of Additional Bonds), and (iii) shall have evidenced such determination by executing, as a required signatory, all such contracts, agreements or other instruments. See “SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE - Additional Bonds, Other Parity Debt and Subordinated Debt” in APPENDIX B.
Subordinated Debt. The Indenture permits the City to issue or incur debt subordinate to the Series 2018 Bonds (“Subordinated Debt”) for any lawful purpose of Cleveland Public Power, the debt service charges on which (“Subordinated Debt Service Charges”) shall be payable out of the Subordinated Debt Service Fund established under the Indenture. The payment of Subordinated Debt Service Charges may be secured by a security interest in, lien on and pledge and assignment of the moneys on deposit in, the Subordinated Debt Service Fund, which security interest, lien, pledge and assignment shall be subject and subordinate to the prior and senior security interest therein, lien thereon, and pledge and assignment thereof granted to the Trustee under the Indenture to secure the payment of Bond Service Charges. For purposes of the Indenture, the principal of and interest on any general obligation debt issued by the City for the benefit of Cleveland Public Power prior or subsequent to the issuance of the Series 2018 Bonds shall constitute Subordinated Debt Service Charges and may be paid from Net Revenues which would otherwise be required to be deposited in the Subordinated Debt Service Fund but which may be paid to or for the account of the City for the payment of such principal and interest in accordance with the Indenture. The City has no such general obligation debt outstanding.
Power Capacity Obligations
The Indenture permits the City to incur certain obligations as “Power Capacity Obligations,” which may, if certain conditions are met, constitute Operating Expenses, other parity debt, or Subordinated Debt. See “APPENDIX B - SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE - Power Capacity Obligations” and “CPP OPERATIONS - Generation Projects.” CPP’s contracts with American Municipal Power, Inc. for certain projects are considered Power Capacity Obligations and constitute Operating Expenses. See “CPP OPERATIONS - Generation Projects.”
Amendment of the Indenture
The City seeks to have the Fourteenth Supplemental Indenture amend the definition of Operating Expenses in the Original Indenture as previously amended and supplemented to cause the Indenture to include the additional wording underlined in the definition below (the “Proposed Amendment”):
“Operating Expenses” means all expenses incurred by the Issuer in connection with the operation and maintenance of Cleveland Public Power, including, without limitation, payments made under power contracts, other than pursuant to Power Capacity Obligations, for energy or capacity and payments made by the Issuer pursuant to Power Capacity Obligations to the extent that Section 1.07 hereof provides that such payments shall constitute Operating Expenses, but excluding from such expenses: (a) any allowance for depreciation and amortization and any accrued unfunded pension and other post-employment benefit liabilities, (b) Interest payments on any fixed indebtedness or any capitalized lease obligations, (c) expenditures for any improvements to Cleveland Public Power, which expenditures are not shown as or included in operating expenses in the financial statements for Cleveland Public Power prepared in accordance with Section 5.02(h) hereof, (d) payments made for Bond
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Service Charges or into the Bond Service Reserve Fund, and (e) losses on the sale or disposition, not in the ordinary course of business, of investments or capital assets, including, without limitation, the Generating Facilities.”
The purpose of the Proposed Amendment is to prevent Statement No. 68 of the Governmental Accounting Standards Board and resulting changes in generally accepted accounting principles related to the accounting treatment of accrued unfunded pension and other post-employment benefit liabilities from causing changes in the manner in which Net Revenues are computed under the Indenture for purposes of the rate covenant and the Additional Bonds test. For a discussion concerning GASB Statement No. 68, see “APPENDIX A – ECONOMIC AND DEMOGRAPHIC INFORMATION CONCERNING THE CITY OF CLEVELAND – Pension Obligations.”
For a description of the provisions of the Indenture related to Supplemental Indentures and amendments to the Indenture, see “SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE - Amendments and Supplemental Indentures” in APPENDIX B. If the Proposed Amendment becomes effective pursuant to the provisions of the Indenture that permit the City and the Trustee, without the consent of, or notice to, any of the Bondholders, to enter into indentures supplemental to the Indenture to amend any provision of the Indenture, provided that such amendment will not adversely affect the rating then assigned to any Outstanding Bonds by any Rating Agency, then the Proposed Amendment will be effective on and as of the same date as the Fourteenth Supplemental Indenture. In the event that those requirements for amendment of the Indenture by that means are not met at the time of the issuance of the Series 2018 Bonds, then the Proposed Amendment shall become effective only if and when an addendum to the Fourteenth Supplemental Indenture shall have been executed and delivered by the City and the Trustee signifying that the conditions have been met for the Proposed Amendment to be made pursuant to the provisions of the Indenture permitting amendments with the consent and approval of fifty-one percent (51%) in aggregate principal amount of the Bonds then Outstanding. Upon the issuance and delivery of the Series 2018 Bonds, the Series 2018 Bonds shall constitute ______% of all the Bonds then Outstanding.
By purchase of any of the Series 2018 Bonds or any book-entry interest therein, the purchaser as the registered owner of the Series 2018 Bonds or book-entry interest shall be deemed to have consented to the Proposed Amendment. Such consent shall be binding on all subsequent Holders of Series 2018 Bonds. Pursuant to the Fourteenth Supplemental Indenture, the Trustee is appointed as the agent of the Holders of the Series 2018 Bonds for purposes of any notice required to be given under the Indenture regarding the Proposed Amendments, and the Holders of the Series 2018 Bonds have granted an irrevocable proxy authorizing and directing the Trustee to consent to the Proposed Amendment.
Bankruptcy and Fiscal Emergency Act
The enforceability of and security for debt obligations, including the Series 2018 Bonds, of Ohio municipalities, including the City, are subject to the provisions of Chapter 9 of Title 11 (the “Bankruptcy Code”) of the United States Code and other laws affecting creditors’ rights generally. Chapter 9 of the Bankruptcy Code relates to the adjustment of debts of a state’s political subdivisions, public agencies, and instrumentalities (“eligible entities”), such as the City. Under certain circumstances, an eligible entity may initiate a case under Chapter 9 without prior notice to or consent of its creditors, which case may result in material and adverse modification or alteration of the rights of its secured and unsecured creditors, including holders of its bonds and notes. Ohio Revised Code Section 133.36 requires the taxing authority of any subdivision to obtain the approval of the State Tax Commissioner prior to filing a petition for bankruptcy; provided, however, that no taxing subdivision is permitted, pursuant to Section
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133.36, to “scale down, cut down or reduce the principal sum of its securities, except that interest thereon may be reduced in whole or in part.”
Chapter 118 of the Ohio Revised Code (the “Fiscal Emergency Act”) provides methods for dealing with fiscal emergencies of municipal corporations in Ohio. The Fiscal Emergency Act applies only to those municipal corporations whose financial condition is determined to constitute a fiscal emergency condition. The Ohio General Assembly has also added the categories of Fiscal Watch and Fiscal Caution to provide early warning to public entities whose fiscal policies or budgetary conditions, if not corrected, could lead to a fiscal emergency determination.
If a fiscal emergency condition is determined to exist, the municipality is subject to State oversight through a Financial Planning and Supervision Commission (the “Commission”), which is assisted by certified public accountants engaged by the Commission. The municipality must develop and submit a detailed financial plan for approval or rejection by the Commission showing the actions to be taken by the municipality to eliminate existing fiscal emergency conditions, to avoid future fiscal emergency conditions, and to restore the municipality’s ability to market long-term debt obligations under generally applicable State laws.
The City Director of Finance has reviewed the applicable portions of the Fiscal Emergency Act. Based upon the Director of Finance’s understanding of the Fiscal Emergency Act, the Director of Finance is of the opinion that no circumstances exist at the City that will cause a fiscal emergency condition to be determined to exist under the Fiscal Emergency Act.
THE SERIES 2018 BONDS
Terms
The Series 2018 Bonds will mature on November 15 in the years and in the respective principal amounts, will bear interest at the rates and will be payable on the dates and at the place and in the manner described on the cover and inside cover pages of this Official Statement. Interest will be payable on May 15 and November 15 of each year, beginning November 15, 2018. The Series 2018 Bonds will be dated their date of delivery and will bear interest from that date until the principal amount has been paid.
Redemption Provisions
Optional Redemption. The Series 2018 Bonds are subject to redemption prior to maturity on or after November 15, 20__, at the option of the City, in whole or in part on any date in any order of maturity, as directed by the City, and by lot in such manner as the Director of Finance may determine within a maturity, from any money available therefor, at the redemption price of par plus accrued interest to the redemption date.
[Mandatory Sinking Fund Redemption. The Series 2018 Bonds maturing in ____ are subject to mandatory sinking fund redemption at a redemption price equal to 100% of the principal amount redeemed plus accrued interest at the redemption date on each November 15 in the years and principal amounts as follows:
Principal Year Amount]
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PLAN OF REFUNDING
The Series 2018 Bonds are being issued (i) to currently refund the Refunded Bonds and (ii) to pay costs of issuing the Series 2018 Bonds and refunding the Refunded Bonds. The Refunded Bonds consist of the following outstanding Bonds:
Refunded Refunded Aggregate Principal Bonds Maturity Amount Refunded
Public Power System Revenue Bonds, Series 2008A (the “Series 2008A Refunded Bonds”)
Public Power System Revenue Bonds Series 2008B-1 (the “Series 2008B-1 Refunded Bonds”)
A portion of the net proceeds of the Series 2018 Bonds will be deposited in an escrow fund (the “Escrow Fund”) created pursuant to an escrow agreement, dated as of the date of delivery of the Series 2018 Bonds (the “Escrow Agreement”), between the City and U.S. Bank National Association, acting as escrow trustee (the “Escrow Trustee”). Such moneys so deposited in the Escrow Fund will be sufficient to pay all scheduled principal, interest and applicable redemption premium (if any) on the Refunded Bonds. The balance of the net proceeds of the Series 2018 Bonds will be applied to the payment of the costs of issuance of the Series 2018 Bonds.
The Refunded Bonds will be called for redemption on ______, 2018 at a redemption price of 100.00% of the principal amount redeemed, plus interest accrued to the redemption date.
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SOURCES AND USES OF FUNDS
The table below shows the approximate sources and uses of funds from the Series 2018 Bonds:
Sources
Principal Amount of Series 2018 Bonds $47,345,000.00* Original Issue Premium Total Sources $ Uses Deposit to Escrow Fund $ Costs of Issuance1 Total Uses $
1 Costs of issuance of the Series 2018 Bonds include Underwriters’ discount and legal, financial advisor, trustee, escrow agent and printing expenses. See also “UNDERWRITING”, herein.
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* Preliminary, subject to change.
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DEBT SERVICE REQUIREMENTS
The following table sets forth the principal, interest, and total debt service requirements for the Series 2018 Bonds and the total debt service requirements for all other Outstanding Bonds.
Bond Year Series 2018 Series 2018 Series 2018 Debt Service on Ending Bonds Bonds Bonds Other Outstanding Total Debt November 15 Principal Interest Debt Service Bonds1 Service1 2018 $16,590,119 2019 16,592,419 2020 16,593,619 2021 17,912,819 2022 17,913,969 2023 17,912,094 2024 17,911,375 2025 17,910,075 2026 17,913,225 2027 17,908,725 2028 17,908,400 2029 17,911,175 2030 17,910,950 2031 17,911,925 2032 17,913,050 2033 17,908,225 2034 17,911,650 2035 17,910,851 2036 17,911,759 2037 17,910,250 2038 17,910,750
TOTAL $372,177,423
1Prior to the refunding of the Refunded Bonds. Totals may not sum due to rounding.
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THE CITY OF CLEVELAND
Introduction
The City is a municipal corporation and political subdivision of the State of Ohio. It is located on the southern shore of Lake Erie and is the county seat of Cuyahoga County in northeastern Ohio. The City was incorporated as a village in 1814 and became a city in 1836. For a more extensive discussion of the City, see “ECONOMIC AND DEMOGRAPHIC INFORMATION CONCERNING THE CITY OF CLEVELAND” in APPENDIX A.
City Government
The City operates under and is governed by the Charter, which was first adopted by the voters in 1913 and has been and may be further amended by the voters from time to time. The City is also subject to certain general State laws that are applicable to all cities in the State. In addition, under Article XVIII, Section 3 of the Ohio Constitution, the City may exercise all powers of local self-government and may exercise police powers to the extent not in conflict with applicable general State laws. The Charter provides for a mayor-council form of government.
Legislative authority is currently vested in a 17-member Council. The terms of Council members and the Mayor are four years. All Council members are elected from wards. The current terms of the Mayor and Council members expire on January 3, 2022. The Council fixes compensation of City officials and employees and enacts ordinances and resolutions relating to City services, tax levies, appropriating and borrowing money, licensing and regulating businesses and trades, and other municipal functions. The presiding officer is the President of Council, who is elected by the City Council members. Kevin J. Kelley was elected President of Council for the term beginning January 1, 2018.
Pursuant to the City Charter, City Council is required to divide the City into wards based on the City’s population. Currently, there are 17 wards in the City.
The City’s chief executive and administrative officer is the Mayor who is elected by the voters for a four-year term. On November 7, 2017, Frank G. Jackson was re-elected Mayor of the City for a fourth term beginning January 1, 2018. Prior to assuming office as Mayor, Mr. Jackson served as President of Council from January 2002 through December 2005 and as Ward 5 Council Member since 1989. The Mayor may veto any legislation passed by Council. A veto may be overridden by a two-thirds vote of all members of the Council.
The Charter establishes certain administrative departments and the Council may establish divisions thereof or additional departments. The Mayor appoints all of the directors of the City’s 12 departments.
CPP’s electric rates are fixed by the Board of Control of the City and are subject to approval by City Council. The Board of Control consists of the Mayor and 12 directors of City departments. CPP’s electric rates are not subject to regulation by Public Utilities Commission of Ohio (“PUCO”) or any other State agency.
Financial Matters
The responsibilities for the City’s major financial functions are vested in the Director of Finance. The Director of Finance is responsible for preparing and implementing the City’s current Operating Budget and Capital Improvement Plan, collecting the City’s revenues, and procuring the City’s goods and
12 services and making payments therefor. The Director of Finance is also responsible for maintaining an effective system of internal accounting control, which includes the maintenance of a centralized accounting system and the supervision of the City’s internal audit staff. Preparation and issuance of the City’s internal and external financial reports are supervised by the Director of Finance.
The Director of Finance for the City is Sharon A. Dumas. Ms. Dumas served as Assistant Director of Finance for Budget and Capital from October 13, 2003 until her appointment as Director of Finance on March 29, 2006. Prior to joining the City of Cleveland Finance Department, Ms. Dumas worked as Assistant Director of Community Development for the City. Ms. Dumas also served as Finance Director for the City of East Cleveland, Ohio from 1988 to 1994. Ms. Dumas holds a Masters of Accounting and Financial Information Systems from Cleveland State University and has over thirty years of experience in private and public sector accounting. In addition, Ms. Dumas was named the Interim Chief of Staff on December 4, 2017. She remains in her position as Director of Finance.
James T. Hartley was named an assistant finance director in April 2007 and, in addition, has served as acting City Treasurer or City Treasurer since April 2008. Prior to accepting his current positions, Mr. Hartley was the Chief Investment Officer for the Ohio Treasurer of State from 1999 until 2007. As a member of the Treasurer’s senior staff, he was responsible for overseeing and directing the State’s investment program, including the State Operating Fund, STAR Ohio Local Government Investment Pool, and the State Tobacco Settlement Funds.
James E. Gentile, CPA, returned to the City as Controller in February 2002 and has also served as an assistant finance director since 2006. Prior to accepting the position, Mr. Gentile was Deputy Auditor for the Auditor of State’s Office since 1995 where he planned and supervised audits of cities, school districts and other local government agencies. From 1991 through 1995, he was employed by the City as an accountant and, in his final year, as Acting City Controller.
Elizabeth C. Hruby has served as the City’s debt manager since 1996. She is the Assistant Secretary to the Sinking Fund Commission. She has been employed by the City since 1982 when she began as a Budget Analyst in the Office of Budget and Management. She was promoted to Operating Budget Manager in 1987 and was responsible for the development and monitoring of the City’s annual operating budget. From January 7, 2002 until April 1, 2002, Ms. Hruby served as interim Director of Finance for the City.
CLEVELAND PUBLIC POWER
Overview and History
The City’s Department of Public Utilities (the “Department”) operates the Division of Cleveland Public Power (“CPP”) for the purpose of supplying electric energy to customers located primarily in the City. Under the Constitution of the State and the Charter of the City, the City has authority to own, operate and regulate CPP, and in connection therewith, to acquire property, construct facilities, provide electric energy throughout the service area and perform other necessary functions to operate and maintain CPP.
The City commenced electric utility operations in 1906. Between 1906 and 1910 it acquired two small electric distribution systems in conjunction with the annexation of the Villages of Collinwood and South Brooklyn. CPP’s principal competitor is The Cleveland Electric Illuminating Company (“CEI”), an operating company of FirstEnergy Corp. (“FirstEnergy”), which provides retail service to virtually the entire geographical area of the City, including the areas served by CPP. The first 138 kV synchronous
13 interconnection with CEI was installed in 1975, and three additional interconnections have been added since that time. CPP shut down most of its generating units in 1977 and secured transmission wheeling rights across the CEI system, enabling CPP to serve its customers primarily through less costly purchased power contracts with outside suppliers. Today, CPP serves its customers primarily through wholesale power purchases and interests in several generating plants through its membership in American Municipal Power, Inc., a nonprofit corporation comprised of municipal utilities in Ohio and six other states. The balance of CPP’s power and energy requirements are satisfied largely through CPP’s combustion turbine generating units and six diesel-fired generating units.
In the early 1990s, CPP initiated a system expansion program that included the construction of over 30 miles of 138 kV transmission lines, six new distribution substations and an expanded distribution network primarily in areas not previously served by CPP. This program increased CPP’s geographical coverage from about 35% to approximately two-thirds of the City and added over 26,000 new customers. Today, CPP serves over 73,000 customers.
Organizational Structure and Management
CPP is one of four divisions that comprise the City’s Department of Public Utilities. The other three divisions are Water, Water Pollution Control, and Fiscal Control. Each division is revenue generating, except for the Division of Fiscal Control, which provides accounting, cash management and other financial services to the other three divisions.
CPP’s finance, public relations, human resources and information technology functions have been centralized at the Department level. Oversight of these functions is provided by several Assistant Directors.
CPP is managed by the Commissioner of Cleveland Public Power (the “Commissioner”), who, like all other commissioners of the City, is appointed pursuant to the rules of the Cleveland Civil Service Commission as provided by the City’s Charter. This mechanism provides continuity of management for CPP despite changes in City administration. The Commissioner supervises all generation facilities, substations, and transmission and distribution systems, prepares policy and procedural recommendations and implements all programs undertaken by CPP.
Within the division, CPP’s operations are divided into seven sections under the oversight of one Deputy Commissioner, three Assistant Commissioners and several key managers. The Deputy Commissioner for Customer Care, Marketing and Sales oversees Marketing and Sales, Customer Service and Collections, and the Meter Service Center. The Assistant Commissioner of Operations has oversight over all repair and construction crews, electricians, trouble dispatch, facilities management, and the East Side and West Side Service Centers. The Assistant Commissioner of Engineering is responsible for distribution and transmission system planning, program management, environment and safety, and engineering process management. The Assistant Commissioner of Sales and Marketing oversees CPP’s sales and marketing activities and initiatives at the division level. The Assistant Manager for Application Development/Technology Support oversees IT services at the division level including the CPP website, CPP’s customer information system functionality, and IT billing.
In addition, CPP utilizes services from the City’s Department of Finance and Department of Law.
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Key Management Personnel
DIRECTOR OF PUBLIC UTILITIES – Robert L. Davis was appointed director of the Department of Public Utilities in May 2015. In this role, Director Davis is responsible for the management and oversight of more than 1,800 employees and a budget of more than $603 million. He is also responsible for all operations within the divisions of Cleveland Public Power, Cleveland Water, Cleveland Water Pollution Control, and Utilities Fiscal Control, as well as the Citywide Office of Radio Communications and Cleveland’s public access channel, TV20. Director Davis has a strong foundation of both administrative and hands-on experience having risen through the ranks throughout his 32-year career as a utility professional. He holds a Bachelor of Science degree from West Virginia University and a Class IV Water License.
ASSISTANT DIRECTOR - Jason A. Wood was appointed to serve as the Department’s chief of public affairs in November 2011. Mr. Wood is responsible for communications, legislation, community outreach and government affairs for the Department, and oversees marketing for Cleveland Public Power. Mr. Wood holds a Doctor of Philosophy in Political Science (PhD) from the University of Cincinnati, a Master of Applied Politics from the University of Akron and a Bachelor of Political Science and Economics from Kent State University.
ASSISTANT DIRECTOR - Frank M. Badalamenti has been serving as the chief financial officer for the Department of Public Utilities since May 2015. Prior to that appointment, Mr. Badalamenti was an assistant finance director for the City from July 2014 to April 2015. Previously Mr. Badalamenti was Chief Financial Officer for the Department of Public Utilities from May 2012 to June 2014. Mr. Badalamenti was the Manager of Internal Audit for the City from October 1999 to April 2012. Prior to working for the City, Mr. Badalamenti served in the United States Air Force for 20 years in various financial operational capacities.
ASSISTANT DIRECTOR - Hernando Harge is responsible for all human resource management, including HR administration, hiring and staffing, labor relations, training and development, performance management, compensation and benefits and organizational planning and development to ensure compliance with regulations concerning occupational health and safety. Mr. Harge has over 20 years of human resources and labor relations experience, working at the Ohio Lottery Commission, the City, and the American Federation of State, County, and Municipal Employees union (AFSCME). Mr. Harge is a graduate of John Hay High School (CMSD) and Central State University where he earned his Bachelor’s Degree in Business Administration.
ASSISTANT DIRECTOR - Mark Lasic was appointed the Department’s chief information officer in July 2014. In that role, Mr. Lasic oversees the department’s information technology services including CPP’s customer information system, online payment functions and website. Prior to joining the City, Mr. Lasic served as the Director of IT for EDR Media for 10 years. He has broad experience in defining, strategizing, and aligning technology investments with the strategic and business goals of organizations. Prior to EDR Media, he was employed by ABB Inc. as an Engineering Manager, where he managed the development of new technologies and supported the deployment of complex industrial control systems in the United States, Europe and Asia. Mr. Lasic holds a Master of Engineering from Case Western Reserve University and a Bachelor of Mechanical Engineering from Cleveland State University.
COMMISSIONER - Ivan L. Henderson was appointed Commissioner of Cleveland Public Power in October 2006 after 19 years of experience in the utility industry. Mr. Henderson earned a Bachelor of Science degree in electrical engineering and a Master of Business Administration from Bradley University. His energy career began in 1988 at the Central Illinois Light Company (Ameren) in Peoria,
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Illinois where he served first as an electric distribution engineer and later in corporate sales for large commercial and industrial customers. After earning a law degree in 1997 from Case Western Reserve University, Mr. Henderson held positions in private practice and in the City’s Law Department, where he worked to establish the City’s first electric aggregation program. In 2001, Mr. Henderson joined WPS Energy Services, Inc., a Wisconsin-based competitive electric and natural gas marketing company, and served as the company’s Manager of Regulatory Affairs until his appointment as Commissioner of CPP. He has been a member of the Ohio bar since 1998.
DEPUTY COMMISSIONER - Joy A. Perry was appointed Deputy Commissioner of Customer Care, Marketing and Sales in January 2001 and oversees marketing and sales, customer service and collections, and the Meter Service Center. Ms. Perry led CPP’s efforts in creating CPP’s Strategic Business Plan and Strategic Marketing Plan. She was recently assigned to head CPP’s Energy Efficiency and Conservation section and also manages several CPP alternative energy initiatives. Prior to joining CPP, Ms. Perry was employed for over 24 years in the energy industry with East Ohio Gas Company, advancing to the executive position of District Operation Manager. Ms. Perry has been an associate consultant and a part-time instructor teaching management development for over five years. Ms. Perry holds a Bachelor’s Degree in Management/Marketing from David N. Myers College and a Master of Science/MBA in Organization Development and Analysis from Case Western Reserve University Weatherhead School of Management.
ASSISTANT COMMISSIONER - Robert M. Bonner was appointed Assistant Commissioner of Engineering in December 2006 after managing CPP’s engineering section since May 1998. Mr. Bonner joined the City in 1996 and brings over 30 years of technical, marketing, and management experience to his position. Prior to joining CPP, Mr. Bonner gained valuable experience as an electric utility electrical engineer. Mr. Bonner has held numerous senior-level marketing and management positions. Mr. Bonner holds a Bachelor of Science in Electrical Engineering from Hampton University.
ASSISTANT COMMISSIONER - Richard Barton was appointed Assistant Commissioner of Operations in August 2007 after serving as CPP’s Manager of Operations since February 2005. Mr. Barton has 42 years of experience with the City of Cleveland including 39 years with Cleveland Public Power in positions including Commissioner, Deputy Commissioner, and Assistant Commissioner. During his tenure with CPP, Mr. Barton has had direct responsibility for such areas as customer service, information technologies, marketing, rate design, and budget. Mr. Barton holds a Bachelor of Arts Degree in Communications from Cleveland State University.
ASSISTANT COMMISSIONER - Christine Leyda was named Assistant Commissioner of Sales, Marketing and Public Relations in May 2008. Ms. Leyda joined CPP in January 2007 after over 20 years of private-sector service in the areas of customer service and marketing. Her experience includes management of a 400-person airline sales call center. She has served on the board for Commercial Real Estate Women and was Secretary, Vice President, and President of the Greater Cleveland Real Estate Organizations. Ms. Leyda earned a Bachelor’s Degree in Elementary Education from Cleveland State University.
ASSISTANT MANAGER FOR APPLICATION DEVELOPMENT/TECHNOLOGY SUPPORT - Keith Monson has served in this position since May 2009. In this role, Mr. Monson implements department IT policy and oversees CPP’s information technology services including CPP’s customer information system, online payment functions and CPP’s web site. During his 33 years with CPP, Mr. Monson has served in many information technology roles including programmer, systems analyst, operations supervisor, and most recently as Manager of Information Systems. Mr. Monson helped design and program CPP’s original computer network and customer information and billing system and has been
16 instrumental in all CPP technology initiatives during his tenure. Mr. Monson holds a Bachelor’s Degree in Computer Science from Cleveland State University.
ADMINISTRATIVE MANAGER – Katherine Zvomuya has served as senior regulatory compliance manager since March 2018. Ms. Zvomuya joined CPP in November 2013 from the City of Cleveland Law Department. Her responsibilities as compliance manager include maintaining CPP’s compliance with all NERC standards. Her experience includes six years in the City of Cleveland Law Department in the Code Enforcement Section. She also served as a Judicial Staff Attorney for four years in Cuyahoga County. Ms. Zvomuya earned a Bachelor’s Degree in Public Policy from Syracuse University. She also earned a Juris Doctorate from Cleveland-Marshall College of Law.
Mission and Strategic Planning
As a municipally-owned utility, CPP’s mission is to improve the quality of life in the City by providing reliable, affordable energy and energy services to the residents and businesses of the City. In recent years, as part of planning efforts designed to promote the enhancement of CPP revenues and the development of stable, long-term power supplies, CPP has focused on (i) enhancing infrastructure to increase customer capacity and improve reliability and (ii) increasing the diversification of its power supply.
The primary aim of the first goal was to improve CPP’s market penetration, while maintaining high system reliability. CPP’s Capacity Expansion Program (the “Capacity Expansion Program”) has expanded and will further expand CPP’s distribution capacity through: (i) the construction of a fourth interconnection with CEI, (ii) the expansion of a downtown electrical substation, and (iii) the construction of a new 138 kV transmission line segment. The resulting increased system capacity is intended to enable CPP to expand its customer base and enhance system reliability. See “CPP OPERATIONS – Capacity Expansion Program.” CPP intends to continue its strategy of targeting the more profitable commercial and industrial customers with a follow-up emphasis on the addition of new residential customers.
The second goal recognized that CPP has historically been very market-dependent, purchasing the vast majority of its power from the wholesale market. As an example, CPP purchased 95% of its electric requirements from the wholesale market in 2011. Since that time, CPP has fulfilled its commitment to developing a long-term power supply portfolio with diversity of fuel sources, increased supplies of renewable energy, and more local sources of generation. CPP’s generation resource commitments include two AMP hydroelectric projects (a total of 5 generating stations), a local wind project, AMP Fremont Energy Center natural gas-fired generating plant and participation in the Prairie State Energy Campus coal-fired project. This commitment to long-term generation represents approximately 47% of CPP’s supply portfolio in 2016 and beyond, leaving only 53% of its energy requirements subject to changes in the wholesale market. For additional information, see “CPP OPERATIONS - Generation Projects.”
With the previous goals nearing completion, CPP’s primary focus currently is on improving its competitive position, especially with respect to CEI. Key initiatives in order to accomplish this strategic plan include competitive pricing flexibility, distribution system capacity utilization, cost reductions and efficiency improvements, strategic marketing, debt restructuring, and a revised approach to procurement of future remaining electric requirements.
Membership in AMP
An important CPP resource is CPP’s membership in American Municipal Power, Inc. (“AMP”), a non-profit wholesale power supplier and provider of services to its members. CPP is the largest member
17 of AMP, which is comprised of 135 municipal electric systems and one joint action agency serving a total of over 645,000 customers in Ohio, Kentucky, Pennsylvania, Michigan, Virginia, West Virginia, Delaware, Maryland and Indiana. CPP has a master services agreement with AMP through which CPP acquires a large portion of its purchased power. AMP member services include power supply planning, safety training, technical and financial services, business development and community outreach. AMP has developed and financed various generation projects for its members including several projects in which CPP is participating. See “CPP OPERATIONS - Generation Projects.” AMP also monitors and actively participates in state and federal legal and regulatory matters and advises members of developments in diverse areas such as regulation of wholesale power and transmission markets, utility finance, environmental regulation, and other matters that impact municipal utilities. Through its membership in AMP, CPP also receives the services of the Ohio Municipal Electric Association (“OMEA”), AMP’s legislative arm, which advances public power interests in state and federal legislative and regulatory forums. CPP is also a member of OMEA and pays separate annual dues.
CPP OPERATIONS
Service Area and Customers
According to the most recent census estimates, the City’s population is approximately 388,072 persons with a total of approximately 216,000 residential dwelling units and 11,000 commercial units. The CPP distribution system covers approximately 60% of the geographical area of the City of Cleveland, primarily on the east side. In 2017, the top ten retail customers accounted for 17.23% of CPP’s revenue, with the largest retail customer being The Medical Center Company, which accounted for 8.52% of CPP’s revenue. CPP also provides electricity to most of the City’s municipal facilities which include major accounts such as the City’s water pumping stations and street and traffic lighting. City municipal customers account for 17.76% of CPP’s revenue.
The following table sets forth CPP’s ten largest retail customers for the calendar year 2017 plus the City. Collectively, City accounts and these ten retail customers accounted for 34.99% of the operating revenues of CPP and approximately 39.83% of the total kilowatt hours (“kWh”) sold by CPP for such 12- month period. CPP typically contracts with non-residential retail customers for terms of five to ten years. In 2012, CPP signed a new five-year contract with The Medical Center Company, a tax-exempt distribution entity that provides electricity, steam, and chilled water to its member institutions including University Hospitals and Case Western Reserve University. CPP and The Medical Center Company recently extended the electric service contract to December 31, 2019.
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CPP’S LARGEST RETAIL USERS (CALENDAR YEAR 2017)
Metered Sales Percentage Consumption Revenue of Sales Customer (Mkwh) ($000) Revenue City of Cleveland Division of Water 135,330 $14,844 7.73% Street & Traffic Lights 67,195 13,912 7.25% All Other 41,185 5,348 2.79% Subtotal City of Cleveland 243,710 34,104 17.76%
Retail Users The Medical Center Company 238,261 $16,367 8.52% Cargill, Inc. 32,669 3,851 2.01% Northeast Ohio Regional Sewer District – Easterly(1) 25,634 2,384 1.24% FirstEnergy Stadium 17,896 2,293 1.19% Cleveland Thermal - Lakeside Avenue 15,244 1,948 1.01% Dave’s Supermarkets 12,553 1,426 0.74% Northeast Ohio Regional Sewer District – Westerly(1) 14,302 1,342 0.70% Cuyahoga County Juvenile Justice Center 11,573 1,262 0.66% United States Postal Service 11,208 1,163 0.61% Cleveland Metroparks Zoo 9,515 1,046 0.54% Subtotal - 10 Largest Retail Customers 388,855 33,082 17.23%
Total - City and Top 10 Retail 632,565 $67,186 34.99%
______Source: Division of Fiscal Control - unaudited (1) The Easterly and Westerly plants have separate contracts with CPP.
Nearly all of CPP’s customers are located within City limits. However CPP does serve a small number of customers in adjacent suburbs and is permitted by the Ohio Constitution to sell surplus electricity outside the City’s corporate limits in an amount up to 50 percent of the amount sold within the municipality subject to some additional limitations.
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Customer Sales and Revenues
In 2017, CPP served approximately 73,000 customers. Of this amount, 88.5% were residential customers, 9.9% were commercial and industrial customers, and 1.6% were protective lighting, street lighting and traffic signal customers. The following table sets forth CPP’s active customer count by rate classification for each calendar year since 2012:
CLEVELAND PUBLIC POWER ACTIVE CUSTOMER COUNT BY RATE CLASSIFICATION
Classification 2012 2013 2014 2015 2016 2017 Residential 65,078 64,922 64,336 64,046 63,590 64,917 Small Commercial 6,006 6,071 6,135 6,200 6,295 6,406 Large Commercial 832 838 827 828 835 832 Industrial 20 22 23 22 22 24 Large Industrial 1 1 1 1 1 1 Protective Lighting 1,170 1,176 1,166 1,152 1,142 1,145 Street Lighting 2 2 3 3 3 6 Traffic Signal 1 1 1 7 17 32 Total 73,110 73,033 72,492 72,259 71,905 73,363
Source: Division of Fiscal Control - unaudited
In terms of energy sales volume, the industrial customers represent 37.5% of the total sales, followed by commercial and residential customers at 34% and 24%, respectively. The following table sets forth CPP’s sales by rate classification for each calendar year since 2012:
CLEVELAND PUBLIC POWER SALES BY RATE CLASSIFICATION (MWH)
Classification 2012 2013 2014 2015 2016 2017 Residential 415,340 407,585 399,023 388,539 395,439 376,326 Small Commercial 102,649 103,555 106,403 104,729 105,444 104,704 Large Commercial 421,036 423,303 429,480 444,953 441,587 433,132 Industrial 341,453 352,361 369,402 363,166 348,092 357,025 Large Industrial 258,191 255,565 235,013 236,545 243,775 238,261 Protective Lighting 11,238 11,332 11,425 11,381 11,410 11,471 Street Lighting 65,311 64,944 64,960 64,806 64,786 64,794 Traffic Signal 2,351 2,351 2,375 2,379 2,373 2,401 Total 1,617,570 1,620,997 1,618,081 1,616,498 1,612,906 1,588,114
Source: Division of Fiscal Control - unaudited
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Commercial customers comprise the largest share of revenue at 36.3%, followed by industrial customers at 28.2%, and residential customers at 27.1%. The following table sets forth CPP’s revenue by rate classification for each calendar year since 2012:
CLEVELAND PUBLIC POWER REVENUES BY RATE CLASSIFICATION ($000)
Classification 2012 2013 2014 2015 2016 2017 Residential $47,281 $48,653 $50,557 $51,427 $52,795 $52,016 Small Commercial 12,605 13,052 14,181 14,801 14,553 14,878 Large Commercial 44,743 46,524 51,015 54,809 54,037 54,871 Industrial 30,188 32,274 36,882 38,123 35,835 37,804 Large Industrial 16,194 13,381 13,055 15,974 17,681 16,381 Protective Lighting 1,835 1,882 2,021 2,122 2,055 2,127 Street Lighting 12,172 12,387 13,097 13,504 13,414 13,652 Traffic Signal $198 207 235 251 249 260 Total $165,216 $168,360 $181,043 $191,011 $190,619 $191,989
Source: Division of Fiscal Control - unaudited
Existing Electric Facilities
CPP owns and operates transmission and distribution facilities that operate at 138-kV, 69-kV, 13.8-kV, 11.5-kV, and 2.3-kV. CPP owns approximately 50 miles of 138 kV and 69 kV transmission lines, over 900 miles of distribution lines, four interconnections with CEI, and 33 distribution substations. CPP also owns three 16.2 megawatt (“MW”) combustion turbine generators and leases six 1.825 MW diesel generating units, which are used for peak load and emergency purposes. CPP is connected to CEI at four 138kV interconnection locations: in the north from FirstEnergy’s Lake Shore Plant; in the south from FirstEnergy’s Inland Substation; in the east from FirstEnergy’s Nottingham substation; and in the west from FirstEnergy’s Clinton substation.
Capital Improvement Projects
CPP expects to spend $23 million for capital improvements in 2018 and $14 million in 2019. CPP anticipates that the costs of these capital improvements will be paid from existing bond proceeds and internally generated funds. Projects in the capital budget include construction of building improvements, substation and other distribution improvements, improvements to CPP information systems, and vehicle purchases. In addition, the City anticipates issuing general obligation bonds to finance the purchase and installation of LED streetlights throughout the City. The anticipated cost of this implementation is $25.5 million, of which $25 million will be paid for with the proceeds of such bonds. Cleveland Public Power will oversee the implementation of these lights for the City.
Capacity Expansion Program
CPP’s Capacity Expansion Program, which includes three major components, was designed to support and improve the CPP electric system reliability and, through increasing system capacity by 80 MW, provide for future load growth opportunities. This program includes the addition of a fourth 138 kV interconnection with the FirstEnergy transmission system (the “Fourth Interconnect”), which was energized in 2011; the extension of the southern 138 kV transmission system (the “Southern Project”); and the expansion of the Lake Road 11.5 kV Substation and the 11.5 kV system downtown (the “Lake Road Project”). In 2008, CPP issued the Series 2008B-1 Bonds to fund the Capacity Expansion Program.
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The Lake Road Project includes the construction of a duct line and feeder cables to the 11th Street Substation. The re-feeding of the 11th Street Substation will increase capacity in this area of the downtown and along the corridor between the Lake Road Substation and the 11th Street Substation. In addition, a new step-up substation known as the South Marginal Substation is complete. It provides capacity from the 11.5kV distribution system located downtown to a portion of the 13.8 kV distribution system situated east and southeast of downtown. The Lake Road Project is nearly complete.
Construction is complete on the Southern Project. The Southern Project includes the recently completed modification of the Ridge Road Substation to create a ring bus to support the new 138 kV transmission loop which will run from the Ridge Road Substation to the Pofok Substation. CPP has successfully partnered with the City, Cuyahoga County, and the Ohio Department of Transportation to combine the construction of an underground segment of the transmission line with a roadway project. The overhead portion of the 138 kV transmission line will complete the loop and was recently bid out for construction. This is scheduled for completion by the first quarter in 2019.
Power Supply
CPP’s power supply portfolio is comprised of resources that provide reliable and competitively priced power and energy to its customers. CPP obtains a significant portion of its power through short- term, intermediate-term, and long-term contracts with a variety of wholesale market-based suppliers. The terms of these market-based contracts are generally staggered and the quantities vary. In recent years, CPP has also committed to a significant number of generation resources with intent to stabilize long-term power supply costs, diversify fuel sources, increase supplies of renewable energy, and establish more local sources of generation.
Current Power Supply
CPP participates in a diverse mix of resources including coal-fired, natural gas-fueled, hydroelectric, bioenergy, solar, and wind generation. Participation in many of these resources is through CPP’s membership in AMP including: the Prairie State Energy Campus coal-fired generation project, AMP Hydro Phase 1 units (Cannelton/Smithland/Willow Island) and Phase 2 units (Meldahl/Greenup), AMP Fremont Energy Center (“AFEC”) combined cycle facility, and the Blue Creek Wind Project. All of the five AMP hydroelectric projects are in commercial operation. Additionally, CPP has allocations of power from two New York Power Authority hydroelectric projects and several behind-the-meter resources including the Collinwood bioenergy generator, CV Kinsman solar, CPP-owned diesel generators, and the West 41st Street/Collinwood Combustion Turbines (“CT”s). For 2017, about 20% of CPP’s energy was supplied from renewable sources including hydroelectric, wind and bioenergy, and CPP has voluntarily pursued renewable goals which are consistent with the Ohio state-mandated Renewable Portfolio Standard (“RPS”) targets applicable to investor-owned utilities (“IOUs”).
CPP’s power supply portfolio is also made up of a variety of market energy purchases of various sizes, terms, and delivery locations. These market purchases, often referred to as “block power” purchases because of their standard market types, are often procured as part of CPP’s current market purchases, including block power purchased around-the-clock (7x24) and weekday peak periods (5x16). These blocks can be procured by AMP on CPP’s behalf with the cost plus a service charge directly passed through to CPP. Alternatively, CPP has the option to contract directly with third parties.
Generation Projects
CPP has chosen to pursue generation projects in order to (i) diversify its power supply portfolio and increase use of renewable energy, (ii) secure long-term stable sources of power, (iii) explore local
22 generation opportunities where transmission congestion costs are mostly avoided, and (iv) mitigate the costs of meeting its resource adequacy obligations. With regard to the last purpose, see “FACTORS AFFECTING CPP AND ELECTRIC UTILITIES GENERALLY – Federal Legislative and Regulatory Matters – Transmission and Energy Market Matters – Participation in PJM Energy and Capacity Markets” below.
The generation projects through AMP in which CPP participates are Blue Creek Wind, AMP Fremont Energy Center, AMP Hydro Phase 1/Phase 2, and Prairie State. In addition to these projects through AMP, CPP participates in or intends to participate in two additional projects, including Brooklyn Solar and LEEDCo. The following sections describe these projects.
Blue Creek Wind Project
In June 2012, CPP entered into an agreement with AMP to purchase 10 MW of energy, capacity and Renewable Energy Credits (“REC’s”) from the Blue Creek Wind Project. The 304 MW Blue Creek Wind Project was developed, and is owned, by Iberdrola Renewables, LLC and is located in northwestern Ohio in Van Wert and Paulding counties. The project began commercial operation in June 2012. AMP purchases up to 54 MW from the project on behalf of its members through a Renewable Wind Energy Power Purchase Agreement with Blue Creek Wind Farm, LLC.
AMP Fremont Energy Center
AMP and two of its member agencies in Michigan and Virginia own the AMP Fremont Energy Center (“AFEC”), a 707 MW natural gas-fired combined cycle generating plant in Fremont, Ohio. Of the 707 MW, 544 MW is available as an intermediate power source during on-peak hours, and an additional 163 MW of duct-firing is available for use during peak demand times. AMP purchased the facility in 2011 from FirstEnergy Generation Corporation and completed construction and commissioning. The plant went into commercial operation in January 2012. CPP, through a membership participation agreement with AMP, has entitlement to approximately 79 MW of intermediate and peaking power output from AFEC.
AMP Hydro Projects
In December 2007, CPP entered into an agreement with AMP to purchase 35 MW of hydroelectric power from three planned AMP run-of-the-river hydroelectric projects (“AMP Hydro Phase 1”) to be constructed on the Ohio River. These include both the Cannelton and Smithland projects in Kentucky, as well as the Willow Island project in West Virginia.
The Cannelton project is located on the Kentucky south shore of the Ohio River at the existing U.S. Army Corps of Engineers Cannelton Locks and Dam. The Cannelton project includes three 29.3 MW bulb-type generators with a combined capacity of 88 MW. In addition to the powerhouse and other equipment, the project includes a 1,000-foot transmission line to the point of interconnection. The first unit of the Cannelton Project entered commercial operation in January 2016, the second unit entered commercial operation in March 2016 and the third entered commercial operation in June 2016.
The Smithland project is located at the existing U.S. Army Corps of Engineers Smithland Navigation Locks and Dam. The plant’s configuration and equipment is similar to Cannelton’s, but includes three 25.3 MW bulb-type generators with a total capacity of 76 MW and a two mile transmission line to the point of interconnection. Smithland entered full commercial operation in August 2017.
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The Willow Island project in West Virginia is located at the existing U.S. Army Corps of Engineers Willow Island Lock and Dam. The plant design and technology is similar to the other two projects but includes two 22 MW generators with a total capacity of 44 MW. The project includes a 1.6 mile transmission line to the point of interconnection. The first unit at the Willow Island Project entered commercial operation in January 2016 and the second unit entered commercial operation in February 2016.
Together these projects are expected to produce 191 MW, of which 35 MW is allocated to CPP. AMP has obtained licenses from the Federal Energy Regulatory Commission (“FERC”) to construct and operate the three run-of-the-river hydroelectric generation stations. The FERC Licenses for the Cannelton Project, the Smithland Project and the Willow Island Project expire on May 31, 2041, May 31, 2038 and August 31, 2039, respectively.
In March 2010, CPP executed agreements with AMP to participate in two additional AMP run- of-the-river hydroelectric projects (“AMP Hydro Phase 2”) on the Ohio River. The first is the Meldahl Project, a 105 MW three-unit hydroelectric generation facility located on the Kentucky side of the Ohio River. The Meldahl Project entered commercial operation on April 12, 2016.
The second project is the Greenup Project, an existing 70 MW plant owned by the City of Hamilton, Ohio. In connection with development of the Meldahl Project, Hamilton agreed to sell and AMP agreed to purchase a 48.6% undivided ownership interest in the Greenup Project within 60 days after the Meldahl Project was placed in commercial operation. AMP acquired that interest on May 11, 2016. CPP has contracted to receive 15 MW from the Meldahl-Greenup Projects, for a total of 50 MW (when combined with AMP Hydro Phase 1) from the five AMP hydroelectric projects.
Prairie State Energy Campus
AMP has a 23% ownership interest in the Prairie State Energy Campus in Illinois, a pulverized coal plant consisting of two generating units with a total rating of 1,582 MW. AMP is entitled to 368 MW as an owner of the facility in partnership with public power agencies and cooperatives in Illinois, Indiana, Kentucky, and Missouri. The project is a “mouth-of-the mine” project that includes entitlement to 200 million tons of coal reserves in an adjacent coal mine. The project was developed by Peabody Energy and went into commercial operation in 2012. CPP purchases 25 MW from the Prairie State project through a participation agreement with AMP.
Brooklyn Solar
Brooklyn Solar involves developing a solar photovoltaic electric generating system having a nameplate generating capability not greater than four megawatts peak. This project is located in Brooklyn, Ohio with a connection to Cleveland Public Power’s system. All of the project’s output will provide power to County owned buildings. This system is planned to begin commercial operation in the fall of 2018. This project will involve behind the meter generation that will not be sold in the PJM markets.
LEEDCo
LEEDCo is developing an electrical generation project comprised of offshore wind-powered turbine-generators with an aggregate nominal generating capability up to 20 megawatts and related onshore electrical equipment. This project, which will be located 8 miles north of Cleveland, in Lake Erie, will consist of behind the meter generation into the Cleveland Public Power system. City of Cleveland is obligated to purchase 25% of the project output in any hour, not to exceed 6.8 MWH. With
24 the permitting still in process, the timeline to start construction begins in 2021 with the projected commercial operation to start by the end of that same year.
Power Capacity Obligations
The contracts with AMP for all of the hydroelectric projects, as well as the Prairie State Energy Campus and the AMP Fremont Energy Center, are take-or-pay contracts that require payment regardless of the availability of project power. Such obligations are considered “Power Capacity Obligations” under the Indenture and are payable as Operating Expenses if an independent consultant delivers a certificate to the Trustee stating certain required conclusions. Such certificates have been delivered for each of the AMP projects described above. See “APPENDIX B - SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE - Power Capacity Obligations.”
The following table illustrates CPP’s system requirements along with the sources and costs of CPP’s power supply resources in 2017.
SUMMARY OF CPP 2017 ENERGY SUPPLY Demand Energy Millions Power Purchases MW % of kWh's % AMP NERA 55 19% 374 22% AMP 2x16 0 0% 21 1% AMP 5x16 13 5% 43 3% AMP 7x24 36 13% 315 19% NYPA 16 6% 107 6% AMP PRST 13 4% 210 12% AMP AFEC 72 25% 370 22% AMP BLCR 0 0% 27 2% AMP Hydro 21 7% 142 8% AMP Meldahl 3 1% 42 2% AMP Greenup 3 1% 22 1% Solar 0 0% 1 0% Collinwood BioEnergy 1 0% 4 0% Total* 233 82% 1,678 99% PJM Market 52 18% 11 1% SUBTOTAL - NET POWER 285 100% 1,689 100% PURCHASES
GENERATION COMBUSTION TURBINE 7 0% 1 0%
TOTAL - POWER SUPPLY (CONTRACTS AND GENERATION) 292 100% 1,690 100.0%
Source: AMP 2017 Cleveland Summary Note: System peak demand (291.6 MWH) was experienced on July 21, 2017
*Totals may not foot due to rounding.
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Power Resources Plan
In addition to the Generation Projects discussed above, CPP has several long term power supply resource agreements. These agreements are explained in more detail below.
Collinwood BioEnergy Generator. In August 2011, CPP entered into a 10-year Power Purchase & Sale Agreement with Collinwood Bioenergy, LLC for the energy, capacity and environmental credits from the 1.3 MW bioenergy facility. The facility converts anaerobic digester gas to electricity and is installed on the CPP system.
CPP Peaking Generation. CPP leases combustion turbine generators and leases six diesel generators for a total of 27 MW, all of which are used for peak load and emergency purposes. These units operate as peaking units and for back-up purposes and normally operate fewer than 100 hours per year.
CV Kinsman. In December 2012, CPP entered into a 20-year Power Purchase & Sale Agreement with both CV Kinsman, LLC and the Cuyahoga Metropolitan Housing Authority (CMHA), a CPP retail customer, to purchase the electricity generated by a 1 MW solar facility which is located on a site owned by CMHA. Under the agreement, CPP purchases energy from the solar facility, up to the quantity necessary to serve the requirements of the CMHA, and CPP includes the solar kilowatt hours in the energy charges billed to CMHA. The charge to CMHA for supply is based on the price charged to CPP for the solar energy and CPP’s standard rates for energy supplied to meet the remaining requirements.
New York Power Authority (“NYPA”). CPP receives an allocation of 11.9 MW from NYPA’s Niagara Project under a contract which expires in 2025, and 1.2 MW from NYPA’s St. Lawrence Project under a contract which expires in 2032. CPP is currently negotiating with NYPA to extend the St. Lawrence contract. For the purposes of the projections set forth below, it is assumed that the St. Lawrence Project contract will be extended beyond 2032.
CPP continuously monitors the markets for favorable conditions to secure additional capacity and energy for CPP’s future power requirements. CPP solicits power supply proposals that give CPP flexible choices as to term and amount of capacity and energy to be scheduled. Depending on CPP’s future requirements, CPP may purchase the additional capacity and energy on a seasonal, monthly, annual or multi-year basis.
The following tables forecast CPP’s future capacity/energy needs and resources. This representation of a power resources plan for CPP is a mixture of generation resources as well as market purchases, as previously discussed under “Power Supply”. CPP is in discussions with other power suppliers to supply the balance of its future energy needs that are identified as un-contracted below.
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CAPACITY REQUIREMENTS AND RESOURCES (MW)
Actual Projected 2017 2018 2019 2020 2021 2022 Requirements Capacity Obligation 291.6 289.2 292.3 295.5 298.8 302.1
Resources Generation Resources Fremont 79.1 79.1 79.1 79.1 79.1 79.1 Prairie State 24.9 24.9 24.9 24.9 24.9 24.9 AMP Hydro CSW 35.0 35.0 35.0 35.0 35.0 35.0 AMP Meldahl 9.0 9.0 9.0 9.0 9.0 9.0 AMP Greenup 6.0 6.0 6.0 6.0 6.0 6.0 Collinwood BioEnergy 1.3 1.3 1.3 1.3 1.3 0.0 Blue Creek 10.0 10.0 10.0 10.0 10.0 10.0 NYPA 16.0 13.0 13.0 13.0 13.0 13.0 CV Kinsman Solar 1.0 1.0 1.0 1.0 1.0 1.0 Brooklyn Solar 0.0 0.0 4.0 4.0 4.0 4.0 LEEDCO 0.0 0.0 0.0 0.0 0.0 12.0 CPP Peaking Generation 24.4 10.8 10.8 10.8 10.8 10.8 Total Generation 206.7 190.1 194.1 194.1 194.1 204.8 Resources Purchased Capacity 103.9 97.2 95.0 37.0 20.0 20.0 Blocks Load Following 0.0 1.9 0.0 0.0 0.0 0.0 System Capacity 310.6 289.2 289.1 231.1 214.1 224.8 Capacity Surplus / 19.0 0.0 -3.2 -64.4 -84.7 -77.3 (Deficit) Capacity Surplus / 6.5% 0.0% -1.1% -21.8% -28.4% -25.6% (Deficit) Percentage
Note: MW values presented in the table above are represented in Installed Capacity (ICAP) terms.
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ENERGY REQUIREMENTS AND RESOURCES (GWH)
Actual Projected 2017 2018 2019 2020 2021 2022
Annual Energy 1,689.9 1,718.7 1,727.3 1,709.3 1,736.0 1,758.2
Fremont 369.6 325.8 300.0 301.8 310.7 297.5 Prairie State 209.8 205.4 203.6 204.5 202.4 202.1 AMP Hydro CSW 142.0 177.8 177.8 177.8 177.8 177.8 AMP Meldahl 42.1 47.6 47.6 47.6 47.6 47.6 AMP Greenup 22.2 23.5 23.7 22.5 24.2 24.2 Collinwood BioEnergy 3.6 3.6 3.6 3.6 3.6 3.6 Blue Creek 27.1 26.3 26.3 26.3 26.3 26.3 NYPA 107.2 73.5 73.5 73.5 73.5 73.5 CV Kinsman Solar 1.2 1.2 1.2 1.2 1.2 1.2 CPP Peaking Generation 0.4 0.4 0.4 0.4 0.4 0.4 Diesel Units 0.4 0.4 0.4 0.4 0.4 0.4 Brooklyn Solar 0.0 0.7 4.9 4.9 4.9 4.9 LEEDCO 0.0 0.0 0.0 0.0 9.8 33.3 Total Generation 925.7 886.2 862.9 864.5 882.7 892.7 Resources Purchased Blocks 753.5 714.8 704.2 324.1 175.2 175.2 Load Following 0.0 231.5 0.0 0.0 0.0 0.0 Net Market Purchases/Sales 10.8 -113.7 160.2 520.7 678.1 690.3 Total Resources 1,689.9 1,718.7 1,727.3 1,709.3 1,736.0 1,758.2
Energy Efficiency Programs
CPP is currently evaluating whether to participate in an energy efficiency and conservation program administered by AMP. CPP has offered energy efficiency programs to CPP customers in the past, either through internally generated programs or through AMP. CPP currently has a mobile application called “My CPP” that offers power saving strategies to customers. In the future, CPP’s energy efficiency program will be administered using the “My CPP” application.
CPP Transmission Arrangements
CPP imports all of its wholesale power purchases through the transmission network owned by American Transmission Systems, Inc. (“ATSI”), the FirstEnergy transmission subsidiary serving CEI. CPP and ATSI coordinate transmission operations through an Interconnection Agreement. The ATSI tariffs are administered by PJM Interconnection, a Regional Transmission Organization (“RTO”) that has functional control over the ATSI system and the transmission systems in all or parts of 13 states and the District of Columbia. CPP has been a PJM member since 2011. In addition to administering the rates and terms for basic transmission service, the PJM tariff includes schedules for certain related or “ancillary” services such as scheduling, energy imbalance, and operating reserves. PJM also operates regional energy markets in which CPP participates. See “FACTORS AFFECTING CPP AND ELECTRIC UTILITIES GENERALLY - Federal Legislative and Regulatory Matters.”
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Financial Operations
CPP’s revenues and expenses for the five years ended December 31, 2017, together with debt service coverage for such periods, are set forth in the following table. Information for the five years ending December 31, 2016 was derived from audited financial statements of CPP.
CLEVELAND PUBLIC POWER SUMMARY OF HISTORICAL REVENUE, EXPENSE, AND DEBT SERVICE ($000)
2013 2014 2015 2016 2017 Audited Audited Audited Audited Unaudited Revenue Operating Revenue[1] $170,342 $181,843 $192,861 $192,967 $194,904 Interest Income 59 37 73 246 284 Total Revenue $170,401 $181,880 $192,934 $193,213 $195,188 Operating Expense Purchased Power[2] 100,929 115,923 123,799 124,909 123,374 Operations 21,338 20,688 24,638 24,979 27,354 Maintenance 18,849 17,504 17,713 16,703 17,195 Total Operating Expense $141,116 $154,115 $166,150 $166,591 $167,923 Available for Debt Service $29,285 $27,765 $26,784 $26,622 $27,379 Debt Service Requirements $22,477 $18,844 $17,910 $17,914 $17,902
Debt Service Coverage Ratio 1.30 1.47 1.50 1.49 1.52
Additional Expense/(Income) Depreciation 18,171 18,354 18,511 18,319 19,555 Interest Expense and Amortization 9,955 9,418 9,984 9,680 8,689 Other Expense/ (Income) 1,688 (3,995) (604) (1,864) (3,002) Capital/Other Contributions (386) - - - - Total Additional Expense $29,428 $23,777 $27,891 $26,135 $25,242 Net Income/(Loss) before Other Contributions ($143) $3,988 ($1,107) $487 $2,137
[1] Includes revenues from sales of electricity, as well as other miscellaneous charges.
[2] Includes capacity costs, transmission, and ancillary services.
Source: Division of Fiscal Control – unaudited
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Management Discussion of Results of Operations
The Summary of Revenues and Expenses above reflects the results of past operations and is not necessarily indicative of results of operations for any future period. Please note the 2017 financial information is unaudited, and may change.
Operating Revenues. Operating revenues increased a cumulative 14.4% from $170.3 million to $194.9 million during the five-year period of 2013 through 2017. This represents a compound average annual increase of 3.4% per year. The average revenue received per kWh of electricity sold increased from 10.51 cents in 2013 to 12.27 cents in 2017, or an increase of 1.76 cents per kWh. This represents a cumulative increase of 16.7%, or a compound average annual increase of 3.9% per year. Since CPP’s base rates did not change during this period, this increase in the average rate charged per kWh was primarily attributable to the increases in the cost of purchased power, which is passed through to CPP customers through a variable Energy Adjustment Charge.
Expenses. The average cost of purchased power including transmission and ancillary costs (expressed per unit of retail sales) increased from 6.23 cents per kWh in 2013 to 7.77 cents per kWh in 2017. This represents a cumulative 24.7% increase, or a compound average annual increase of 5.7% per year.
From 2013 to 2017, the average operations and maintenance expenses per unit of electricity sales increased from 2.48 cents per kWh in 2013 to 2.81 cents per kWh in 2017. This represents a cumulative 13.3% increase, or a compound average annual increase of 3.2%.
Change in Net Assets. The change in net assets has ranged from negative $1.1 million to positive $4.0 million from the period of 2013 to 2017. In 2013, operating expenses totaled $21.3 million, compared to $27.3 million in 2017. The rise in these costs is primarily attributed to increased pension expense associated with the implementation of GASB Statement No. 68, along with increases in costs for services provided by other City of Cleveland divisions. For a more detailed discussion concerning the implementation of GASB Statement No. 68, see “APPENDIX A – ECONOMIC AND DEMOGRAPHIC INFORMATION CONCERNING THE CITY OF CLEVELAND – Pension Obligations.” Maintenance expenses have decreased from $18.8 million in 2013 to $17.2 million in 2017. CPP has steadily reduced these outlays through a combination of increased efficiencies and a decrease in labor costs.
Other Items. In early 2001, Ohio Electric Choice legislation created a new kilowatt-hour excise tax on electric power distributed to end users of electricity in the State by both investor-owned and municipal utilities. For municipal utilities, the State law requires the utility to remit the tax receipts to the municipality’s General Fund. Accordingly, the City’s General Fund received 100% of the tax receipts. Recent City ordinances have authorized 50% of excise tax proceeds to be returned to CPP from the period of 2014 to 2017. The revenue related to the excise tax totaled $3.0 million in 2017.
In addition, CPP maintains a fund of approximately $5.0 million in previous receipts that remains earmarked for debt reduction and capital improvements.
Electric Rates and Charges
As stated earlier, CPP’s electric rates are fixed by the Board of Control of the City and are subject to approval by City Council.
CPP has nine rate classifications in effect: Residential, small commercial, large commercial, industrial, optional large industrial, capacity enhancement incentive, street lighting, protective lighting
30 and traffic signal service. The rates in these classifications were approved by City Council and became effective in 1983, with the exception of the optional large industrial rate established in February 1995 and capacity enhancement incentive rate in March 2008. The rates for all of the service classifications are administered in accordance with the City Council approved ordinances.
CPP’s rate schedules include a fixed base rate portion, with demand charges, kilowatt-hour charges, reactive charges, or per fixture charges, depending on the rate schedule. Where rate schedules provide for demand or kilowatt-hour charges, those charges are based upon a declining block fixed rate. Summer rates are charged on bills rendered during the five months June through October and winter rates are charged during the seven months November through May. The rate schedules also provide for an Energy Adjustment Charge (“EAC”), which adds the cost of fuel, power production, and purchased power costs to the base rate portion of the bill.
In 2014, the City adopted new legislative rate authority designed to enhance CPP’s competitiveness and ability to attract and retain commercial and industrial customers. The new rate authority provides increased flexibility to CPP to offer discounted rates to new commercial customers and some existing customers if certain criteria are satisfied. These criteria are designed to allow CPP to target new customers of a specific size and usage characteristics and to retain existing customers that are approaching the end of their service contracts. Additionally, the rate authority allows CPP, through use of deferrals, to levelize the monthly Energy Adjustment Charge to facilitate more stable electric bills for CPP customers.
In 2018, CPP engaged in a cost of service and rate study with an outside firm. CPP believes that the results of the study will be presented to Council before the end of the year. Any changes to the electric rates and charges will need to be approved by Council and the Board of Control before implementation.
Competition with CEI
Since CPP was established in 1906, consumers in areas served by CPP have had the choice of two full-service electricity providers, each providing bundled distribution and generation service through separate distribution systems. With the institution of deregulation of the IOUs in Ohio effective January 1, 2001, the investor-owned companies retained their exclusive territories for distribution service but alternative generation suppliers gained the right to sell generation service to the IOU’s customers using the local utility’s distribution facilities to deliver the power.
FirstEnergy’s generation subsidiary, FirstEnergy Solutions (“FES”), has historically been the dominant generation supplier in the region. FES has been significantly less active in the retail generation market in recent years, however, reflecting FirstEnergy’s stated intention to concentrate more on its regulated transmission and distribution operations, shifting away from deregulated generation sales. The FES generation facilities, which are largely composed of older coal-fired and nuclear plants, have struggled to compete in the PJM wholesale market against newer generation resources, which include more efficient gas fired plants and renewable energy from wind turbine farms.
On March 31, 2018, FES filed for bankruptcy protection, as FirstEnergy has been unsuccessful, to date, in its attempts to transition the FES generation back to a regulated environment or to obtain additional funding subsidies through both the Ohio legislative and Federal regulatory approval process. FirstEnergy has announced that FES, which is the legal owner, will continue to operate its generation plants on an indefinite basis, but they will be sold or closed, unless additional funding is obtained.
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The FES bankruptcy process may impact the competitive generation environment in the CEI service area, as FES intends to sell off its retail contracts, which cover nearly 1 million customers, to other potential buyers, which may include investor groups and power companies.
Marketing
Because of the overlapping service areas of CPP and CEI, CPP’s potential customers are either new customers for electric service or existing customers of CEI. Accordingly, CPP’s ability to attract new customers is heavily dependent on its ability to compete directly with CEI based on, among other things, rates, system reliability, power restoration times, and customer service.
CPP continues to be successful in attracting and retaining commercial and industrial customers. CPP has been particularly successful in winning accounts for new downtown and lakefront developments, especially new residential projects and office-to-apartment conversions. In 2017, CPP brought on eight new residential apartment/condo buildings. The total number of these new residential units exceeds 1,485. In the fourth quarter of 2018, CPP will energize The Quarter apartment complex adding 194 residential units. In addition to the new residential accounts, in 2018 CPP will be bringing on large commercial accounts including the Cuyahoga County Justice Center, Cuyahoga County Medical Examiner, Cuyahoga County various satellite offices, as well as government offices in the City of Brooklyn. CPP was able to expand the geographical service area into the City of Brooklyn with the addition of these accounts. CPP believes that it has been successful in competing head-to-head with CEI for large commercial and industrial customer accounts within CPP’s service area because of its competitive rates, customer service, power restoration times, and reliability of service.
CPP continues an advertising and community relations campaign designed to support the entire range of marketing efforts conducted by CPP. CPP’s advertising campaign utilizes a variety of media, community festivals and exhibits.
While customers can and do switch between CPP and CEI, CPP has gained more customers from CEI than it has lost to CEI every year for more than 30 years. The table below shows a breakdown of those gains for the past six years.
CPP NET GAIN (LOSS) OF CEI METERS
2012 2013 2014 2015 2016 2017 Gain from CEI 441 533 436 548 522 557 Loss to CEI -76 -55 -215 -211 -140 -143 Net Gain 365 478 221 337 382 414
Source: Cleveland Public Power - Operations Section – unaudited
CPP’s sales have showed greater stability during the recent recession than the sales of FirstEnergy or Ohio as a whole. The decline in total sales between 2007 and 2009 was greater than 8% for Ohio and 7% for FirstEnergy, however only 3% for CPP. In 2013, FirstEnergy sales were still down 4% while CPP’s sales recovered nearly to 2007 levels. CPP attributes this sales stability to the increase in the number of new commercial customers, which offset the decline in consumption by consumers in general.
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Competitive Advantages
CPP has consistently maintained competitive rates for residential and commercial customers. CPP places great emphasis on reliability and customer service. In terms of service restoration after storms, CPP’s customer service program and response time to customer inquiries are superior to those of CEI. Based on comparative information developed by CPP, CPP’s average time to reconnect customers following power outages is substantially below that of CEI. Following major storms, CPP completes service restoration to CPP customers and then, upon request, lends mutual aid to help reconnect CEI customers that are out of service.
Based on current and projected market conditions, CPP believes it will be able to stay competitive through its strategy to expand distribution capacity and diversify its energy portfolio by acquiring interests in base load and renewable generation resources and by replacing expiring power contracts with lower priced contracts now available in the market. See “CPP OPERATIONS - Power Resources Plan.”
Comparison of Typical Electric Bills
The PUCO has prepared the Ohio Utility Rates Survey on a monthly basis since 2010. The table below compares a typical average CEI electric bill from that survey with an average CPP bill for the same consumption:
CLEVELAND PUBLIC POWER BILL COMPARISON CPP VS. CEI RESIDENTIAL BILL COMPARISON - 750 KWH
CPP CPP CPP ($) CEI ($) Savings ($) Savings (%) 2010 90.75 96.55 5.80 6.01 2011 91.05 96.83 5.78 5.97 2012 90.39 93.64 3.25 3.47 2013 94.82 94.93 0.11 0.12 2014 95.56 97.87 2.32 2.37 2015 104.53 103.91 (0.61) (0.59) 2016 99.48 97.92 (1.55) (1.59) 2017 109.04 98.76 (10.28) (10.41)
Source: CEI Data extracted from monthly PUCO ‘Ohio Utility Rate Surveys’ CPP Data is average monthly bills rendered between 2010 and 2017
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CLEVELAND PUBLIC POWER BILL COMPARISON CPP VS. CEI COMMERCIAL BILL COMPARISON - 1,000 KW, 300,000 KWH
CPP CPP CPP ($) CEI ($) Savings ($) Savings (%) 2010 32,634.76 37,834.42 5,199.66 13.74 2011 32,471.69 36,787.01 4,315.32 11.73 2012 31,895.09 34,171.65 2,276.56 6.66 2013 33,026.09 35,376.02 2,349.93 6.64 2014 36,001.90 35,650.89 (351.00) (0.98) 2015 37,909.39 38,938.27 1,028.88 2.64 2016 37,012.79 37,301.79 289.00 0.77 2017 38,473.29 35,937.06 (2,536.23) (7.06)
Source: CEI Data extracted from monthly PUCO ‘Ohio Utility Rate Surveys’ CPP Data is average monthly bills rendered between 2010 and 2017
CLEVELAND PUBLIC POWER BILL COMPARISON CPP VS. CEI INDUSTRIAL BILL COMPARISON - 20,000 KW, 6,000,000 KWH
CPP CPP CPP ($) CEI ($) Savings ($) Savings (%) 2010 624,603.94 624,330.53 (273.41) (0.04) 2011 632,378.32 560,527.67 (71,850.65) (12.82) 2012 609,810.00 497,354.02 (112,455.98) (22.61) 2013 632,730.00 527,709.68 (105,020.32) (19.90) 2014 668,054.65 564,064.98 (103,989.67) (18.44) 2015 703,287.99 654,976.65 (48,311.34) (7.38) 2016 666,874.33 594,732.58 (72,141.76) (12.13) 2017 718,153.65 578,679.13 (139,474.52) (24.10)
Source: CEI Data extracted from monthly PUCO ‘Ohio Utility Rate Surveys’ CPP Data is average monthly bills rendered between 2010 and 2017
Note: In the Official Statement for the City’s Series 2014 Public Power System Revenue Bonds, the City changed the tabular presentation of rate comparisons from the presentation it had used in Official Statements for prior series of Public Power System Revenue Bonds. As a result of changes in the regulatory framework for the electrical industry in Ohio and consequent changes in the rate structure utilized by CEI, the updating of the tables that the City included in prior Official Statements became difficult or impossible to achieve in a manner that the City could reasonably represent to be objective and reliable. By using the tables that it presented in the 2014 Official Statement, the City was able to present the relevant information with data derived from objective and independent PUCO surveys reflecting the current regulatory structure and market factors and to do so in a manner consistent with the following table headed “Comparison of Electric Bills in 8 Major Ohio Cities.” In the interest of providing information that the City can represent to be consistent, objective and reliable, the City has ceased to update the pre- 2014 tables and will continue to update only those tables that were included in the 2014 Official Statement.
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The table below compares average electric bills during 2017 from CPP and various utilities within Ohio for the same consumption:
CLEVELAND PUBLIC POWER COMPARISON OF ELECTRIC BILLS IN 8 MAJOR OHIO CITIES
Residential Commercial Industrial
1,000 kW 20,000 kW 750 kWh 300,000 kWh 6,000,000 kWh
Akron $ 99.42 $32,970.42 $564,899.26 Canton 101.50 31,710.47 447,067.69 Cincinnati 91.75 26,793.30 413,429.79 Cleveland (CEI) 98.76 35,937.06 578,679.13 Cleveland (CPP) 109.04 38,473.29 718,153.65 Columbus 96.43 28,927.31 413,848.55 Dayton 84.45 24,434.01 461,730.95 Toledo 100.49 34,162.10 541,456.04 Youngstown 99.42 32,970.42 564,899.26
Note: Cleveland CPP data is for average bills rendered in 2017 (sourced from Division of Fiscal Control – unaudited).
Other data extracted from 2017 ‘Ohio Utility Rate Surveys’ (sourced from PUCO website).
Billing and Collection Procedures
Residential and commercial customers are billed monthly. Unpaid accounts are deemed delinquent 30 days after the billing date. Customers with past due balances above a threshold amount are sent two notices that the account must be paid immediately to avoid disconnection of electric service. If the account remains unpaid, or a payment plan is not arranged, electric service is subject to termination. Service can be restored by paying the outstanding balance in full or a partial payment with a payment plan. A customer who fails to make the required payments under the plan is subject to termination of services in accordance to CPP policies.
Employees and Employee Relations; Staffing
CPP adjusts its staffing level annually to reflect business conditions. In 2018, CPP’s budget includes funding for 298 (283 full-time and 15 part-time) employees.
Employee benefits include medical insurance and contributions to the State of Ohio Public Employees Retirement System (“OPERS”), a statewide public employee retirement program. The City’s contribution to OPERS is based upon salary level. For more information on the City’s employees and pension obligations, see “APPENDIX A - ECONOMIC AND DEMOGRAPHIC INFORMATION CONCERNING THE CITY OF CLEVELAND.”
A total of nine labor unions represent a majority of CPP’s employees. Over half of CPP’s employees are in job classifications represented by Local 39 of the International Brotherhood of Electrical Workers. Like nearly all of the City’s labor contracts, the contracts with Local 39 and the other labor
35 unions expired on March 31, 2016. The parties are currently in negotiations for new three-year collective bargaining agreements.
CPP utilizes outside contractors to perform certain functions. These include: turbine maintenance, tree trimming, grounds maintenance, snow removal, and some elements of vehicle maintenance and repair.
LITIGATION
To the knowledge of the appropriate officials of the City, no litigation or administrative action or proceeding is pending or threatened restraining or enjoining, or seeking to restrain or enjoin, the issuance, sale or delivery of the Series 2018 Bonds or the pledge of the Net Revenues to pay debt service on the Series 2018 Bonds, or in any way contesting or affecting the validity or enforceability of the Bond Legislation, the Indenture and the Series 2018 Bonds or the powers or authority of the City with respect thereto or challenging the City’s right to own or operate CPP. The City will deliver a certificate to that effect to the Underwriters of the Series 2018 Bonds at the time of original delivery of the Series 2018 Bonds to the Underwriters.
The City is a party to various legal proceedings seeking damages or injunctive or other relief generally incidental to CPP’s operations, including the legal proceedings discussed in more detail below. These various legal proceedings are not directly related to the Series 2018 Bonds or the security for the Series 2018 Bonds. If decided adversely to CPP, however, money judgments rendered in such proceedings for damages, if not otherwise satisfied by CPP, could have an indirect effect on CPP since judgment creditors of CPP may seek a levy of execution against properties of CPP. The ultimate disposition of these proceedings is not now determinable. It is the opinion of the City’s Director of Law, based upon her present understanding and knowledge of these proceedings, that the disposition of these proceedings, individually or in the aggregate, will not result in liabilities in an amount which, in the opinion of the City’s Director of Finance, would have a material adverse effect on the Series 2018 Bonds, the security for the Series 2018 Bonds or the operations of CPP. The City is also party to legal proceedings unrelated to CPP’s operations. The City Charter requires that each account of a public utility of the City, including CPP, be kept separate and distinct from one another as well as from other City accounts. Accordingly, no assets of CPP may be used for legal proceedings unrelated to CPP’s operations.
Customer Challenges to EAC/EEA Rates
There were three related actions against the City involving CPP which were pending in the Cuyahoga County Court of Common Pleas: Clint Yoby, et al. v. City of Cleveland, Case No. CV-15- 852708; Mary Paul v. City of Cleveland, Case No. CV-15-856437; and Tremont Scoops, LLC et al. v. City of Cleveland, Case No. CV-16-867896. In each of these cases, the plaintiffs sought certification of a class on behalf of all CPP customers from 1984 to the present who were charged an Energy Adjustment Charge (“EAC”) which included an Environmental and Ecological Adjustment (“EEA”). The three cases were consolidated into the Yoby proceeding, and the Court certified the class proposed by the plaintiffs. The plaintiffs claim that CPP incorrectly assessed to its customers EEA charges by including inappropriate costs in the computation of those charges, thereby overcharging customers. The plaintiffs ask that the aggregate amount of the allegedly inappropriate overcharges be paid to customers as damages, plus interest and attorney fees. The plaintiffs have asserted that CPP’s actions constitute breaches of contract and fraud.
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The City has denied all of plaintiffs’ claims and has vigorously defended, and intends to continue to vigorously defend, against these claims. The consolidated case has not been scheduled for trial, but, on April 17, 2018, the trial judge held oral arguments on the cross-motions for summary judgment which had been filed by the parties. The ultimate disposition of this consolidated proceeding is not now determinable, and at this time it is unclear what monetary amount the plaintiffs will ultimately claim as damages or the impact an adverse determination with respect to the allegations described might have on CPP. The City’s Director of Law believes, based upon her review of the allegations and her present understanding and knowledge of these proceedings, that (1) the EAC’s CPP assessed to its customers at all times were authorized by and in compliance with the formulae established by the City’s Codified Ordinance §523.21; (2) all of the EEA’s assessed to CPP’s customers at all times were authorized by and in compliance with the authority granted to CPP by the City’s Codified Ordinance §523.17; (3) plaintiffs have not put forth any evidence in support of their fraud claim; (4) under Ohio law, the scope of judicial review available for municipal utility rate administration is limited; and (5) a four-year statute of limitations applies to plaintiffs’ claims, substantially limiting any possible recovery.
FACTORS AFFECTING CPP AND ELECTRIC UTILITIES GENERALLY
The electric utility industry is undergoing pervasive and fundamental changes. These changes include, but are not limited to: increased competition, in both wholesale and retail markets, for the sale of electricity generation services; a perceived need for significant construction of new transmission facilities in many parts of the country; uncertainty about the future availability and cost of various types of fuel used for electricity generation; initiatives promoting the greater use of demand response, energy efficiency and renewable resources to meet the growing need for electricity; concerns about climate change and related impacts on resource planning; policies favoring the use of “smart grid” technologies; concerns about cyber-security and the vulnerability of electric systems to electronic intrusion; calls for action aimed at enhancing the “resiliency” of the electricity supply network; and expected increases in long-term costs of producing and transmitting electricity.
CPP cannot predict what effects these factors may have on its business operations and financial condition. The following sections of this caption provide brief discussions of some of these factors. However, these discussions do not purport to be comprehensive or definitive, and the matters discussed are subject to change subsequent to the date hereof.
Federal Legislative and Regulatory Matters
Congress and FERC have sought to promote competition in the electric utility industry through a number of legislative and regulatory initiatives. Pursuant to these initiatives, FERC has adopted regulations that govern, among other things: (i) the provision of “open access” transmission service by transmission owners, pursuant to which market participants may obtain transmission service generally on the same terms and conditions as a transmission owner provides to itself; (ii) the formation and operation of Regional Transmission Organizations (“RTOs”), which are independent entities voluntarily formed by transmission-owning utilities to operate (through “functional control”) their transmission facilities, and the operation of centralized markets for energy, capacity and other services by RTOs; (iii) interconnection with generators; and (iv) participation in regional and inter-regional transmission planning processes. Collectively, these initiatives have effected significant changes in the structure and operation of wholesale electricity markets and the regulation of services provided in those markets.
FERC’s initiatives in these areas continue to evolve. In addition, the terms of the transmission and energy market tariffs under which CPP receives service are subject to frequent modification and
37 ongoing regulatory review. These factors create a measure of commercial uncertainty for market participants, including CPP.
Transmission and Energy Market Matters.
PJM. CPP is a member of PJM Interconnection, LLC (“PJM”), an RTO headquartered in eastern Pennsylvania that coordinates the movement of wholesale electricity in all or parts of 13 states, including Ohio, and the District of Columbia. CPP has been a transmission-owning member of PJM since June 1, 2011, when ATSI and the ATSI zone transferred from the Midcontinent Independent System Operator, Inc. (“MISO”) to PJM.
ATSI’s move from MISO to PJM gave rise to a number of issues involving, among other things, ATSI’s liability for the costs of certain MISO “multi-value” transmission projects (“MVPs”) that were approved before the effective date of ATSI’s exit. On May 19, 2016, FERC denied rehearing of its earlier order ruling that ATSI was not required to pay MISO MVP charges for such projects. On July 15, 2016, MISO and the MISO transmission owners petitioned for federal court review of FERC’s orders, and, on June 21, 2017, the federal court denied their petition. MISO and the MISO transmission owners did not seek review by the U.S. Supreme Court, effectively ending the litigation over ATSI’s responsibility for costs of the MVPs approved before ATSI’s exit from MISO. On a related issue, FERC issued an order on July 13, 2016 allowing MISO to assess an MVP usage charge on energy exported from MISO to PJM. Various parties, including AMP, requested rehearing of that order. Those requests for rehearing remain pending before FERC.
CPP became a party to the PJM Transmission Owners Agreement effective June 1, 2011, at which time PJM assumed functional control over the transmission facilities owned and physically operated by CPP. CPP now receives transmission service for its load and resources under the terms of PJM’s Open Access Transmission Tariff. FERC’s regulations require that a transmission-owning utility that is not subject to FERC’s jurisdiction (such as CPP) but that receives services under an open access tariff must be prepared to offer reciprocal transmission service on non-discriminatory terms. If the non- jurisdictional utility declines to provide reciprocal service, it can be barred from receiving service under the open access tariff. Because CPP has placed its transmission facilities under PJM’s functional control, reciprocal service over CPP’s facilities is available under the PJM Open Access Tariff.
On August 26, 2016, FERC issued an order directing all PJM Transmission Owners, including CPP, to show cause why they should not be required to modify their planning procedures for local transmission upgrades (referred to as “supplemental projects”) to ensure that those processes are open and transparent with opportunities for stakeholder input, as required by FERC’s regulations. CPP filed a response to the order on October 25, 2016, in which CPP stated that its planning processes satisfy the indicated requirements. On February 15, 2018, FERC issued an order in which it accepted (subject to further changes) certain tariff revisions filed by PJM and the PJM transmission owners, intended to enhance the planning process for supplemental projects. FERC also determined that all PJM Transmission Owners planning supplemental projects must comply with the modified tariff provisions. A request for rehearing of the February 15, 2018 order is pending before FERC. CPP cannot predict the outcome of this matter but does not expect it to have a material impact on CPP’s operations.
Participation in PJM Energy and Capacity Markets. CPP participates in the energy, capacity and ancillary services markets operated by PJM and is subject to the tariff provisions and business practices governing the operation of those markets. CPP’s costs of securing power to meet its customers’ needs are determined in significant measure by the market and administrative mechanisms FERC has approved for establishing prices in the PJM-operated markets.
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PJM operates “day ahead” and “real time” markets for energy. Energy prices are determined based on so-called “Locational Marginal Prices,” which reflect the costs of providing an additional increment of energy to a particular location on the grid taking into account the effects of transmission congestion. Energy prices in PJM fluctuate over time based on weather, generating unit availability, and other operating conditions.
In addition, pursuant to the Reliability Assurance Agreement Among Load Serving Entities in the PJM Region, each PJM member with load-service responsibilities, including CPP, must acquire capacity resources sufficient to meet its capacity obligation as determined by PJM. The cost of capacity acquired for this purpose is determined through auctions that PJM conducts to secure capacity three years in the future. This mechanism, known as the Reliability Pricing Model (“RPM”), is used to secure sufficient amounts of electric generation to meet regional capacity needs.
CPP mitigates the costs of meeting its PJM capacity obligation by participating in resources developed by AMP that are offered into PJM’s capacity auctions. The rules governing these auctions, the eligibility of resources to offer into the auctions, and the prices at which resources may offer are subject to review by FERC. These rules have been modified in various respects since their initial adoption and can be expected to change further as issues are addressed. Changes in these rules can affect the costs that CPP and other load-serving entities incur to meet their PJM capacity obligations, as well as the amount of cost mitigation provided by resources in which CPP has elected to participate. CPP cannot predict the outcome of these matters but does not expect that increased PJM capacity prices would materially affect CPP’s ability to meet its obligations.
ATSI Transmission Expenditures. FirstEnergy has adopted a business strategy called “Energizing the Future” that is focused on growth through investments in its regulated transmission and distribution operations. The centerpiece of this strategy is a plan to upgrade and expand the transmission system owned by FirstEnergy’s “Regulated Transmission” segment (of which ATSI is the largest component). The program began in 2014 and will continue through at least 2021. From 2014 through 2017, FirstEnergy invested $4.4 billion on grid improvement projects, and it is planning to invest an additional $4.0 - 4.8 billion from 2018 through 2021. FirstEnergy has stated that, looking beyond 2021, it has identified $20 billion in additional grid enhancement projects across its 24,500 mile transmission system.
FirstEnergy’s transmission expenditures pursuant to its “Energizing the Future” investment plan have caused the transmission rates charged by ATSI through PJM to increase, and CPP expects that the expenditures projected to be made by FirstEnergy will cause ATSI’s transmission rates to continue to increase over time, possibly by a substantial amount. CPP cannot predict the outcome of this matter but does not expect that the increase in transmission rates that would result from FirstEnergy’s projected transmission expenditures will materially affect CPP’s ability to meet its obligations.
FERC Jurisdiction. As a municipally owned electric utility system, CPP is exempt from FERC’s rate regulation authority under Part II of the Federal Power Act. Certain provisions of the Energy Policy Act of 2005 (“EPAct2005”), however, expressly apply to public power systems and subject some of those utilities to the limited jurisdiction of FERC for specific purposes. For example, EPAct2005 provides for the adoption of mandatory electric reliability standards applicable to all owners and operators of “bulk electric system” facilities, including publicly owned electric utilities. See “FACTORS AFFECTING CPP AND ELECTRIC UTILITIES GENERALLY - Federal Legislative and Regulatory Matters - Reliability Matters” below. Another section requires “unregulated transmitting utilities,” including public power systems, to provide open access to their transmission systems under rates, terms, and conditions that are comparable to what those utilities apply to themselves and that are not unduly discriminatory. This section makes it clear, however, that FERC is not authorized to require a municipal utility to join a regional transmission organization or to take actions that would violate private-use rules governing tax-exempt bonds.
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EPAct2005 also bars energy market manipulation by any entity, including a municipally owned electric utility if that entity’s conduct is in connection with a FERC-jurisdictional transaction. FERC has adopted regulations implementing these provisions of EPAct2005.
Consideration of PURPA Standards. EPAct2005 also amended the Public Utility Regulatory Policies Act of 1978 (“PURPA”) to require that all electric utilities (including municipal utilities) consider implementing new standards intended to encourage energy conservation and promote the interconnection of customer-owned generators, including renewable energy resources. Based on its consideration of the standards, the City determined to adopt interconnection standards, net metering standards, and an Alternative Energy Portfolio Standard that would require CPP to supply 25% of its power sold to customers by 2025 using specified advanced energy resources.
The Energy Independence and Security Act of 2007 (“EISA”) further amended PURPA to require consideration of additional new standards, including standards addressing integrated resource planning, rate design modifications to promote energy efficiency investments, and encouragement of “smart grid” technologies and investment. The EISA requires the City to initiate its consideration of the EISA standards no later than the time of CPP’s next rate case. The Cleveland City Council has approved an independent rate study which may, depending on the findings, result in CPP initiating a rate case. If so, CPP will take steps to comply with the EISA requirements in connection with that case.
A number of industry members and members of Congress have urged FERC to modify its regulations to relax certain of the obligations imposed on electric utilities by PURPA. FERC has not yet taken such action. CPP cannot predict the outcome of this matter.
Environmental Matters. Owners and operators of electric generating plants are subject to a number of federal statutes and related state implementation plans that govern power plant emissions and effluents, including the Clean Air Act (“CAA”) and the Clean Water Act (“CWA”). Depending on the outcome of proceedings and the manner in which the U.S. Environmental Protection Agency (“USEPA”) and the states implement these requirements, the future costs of compliance to the owners of affected generating plants may be substantial. In general, utilities that own generating plants subject to these requirements recover the costs of their compliance through charges to customers. These requirements, however, have caused some utilities to retire generating plants early where the costs of compliance were viewed as rendering the energy produced by those plants too expensive to be competitive. A number of generating plants in the PJM region have been retired or are expected to be retired for this reason.
Climate Change and Regulation of Greenhouse Gases. This section provides a brief summary of certain actions taken or under consideration regarding the regulation and control of greenhouse gases (“GHGs”) that have the potential to impact the AMP hydro facilities in which CPP participates.
Limitations on emissions of GHGs, including CO2, create significant exposure for electric fossil- fuel-fired generation facilities. In October 2015, the USEPA issued rules regulating CO2 emissions from various classes of electric generating units (“EGUs”). The goal of the rules, which were issued under section 111(d) of the Clean Air Act (“CAA”), was to reduce CO2 emissions from existing power plants by 32 percent from 2005 levels by 2030. The rules for existing generation, known as the Clean Power Plan, would not directly regulate GHG emissions by specific EGUs, but instead would impose state-by-state caps on aggregate GHG emissions, allowing states to develop their own methods to comply with their emissions cap.
USEPA’s rules limiting GHG emissions were expected to have very significant implications for the electric utility industry and for electricity consumers, in terms of both direct and indirect cost impacts and on the reliability of electricity supplies, while providing increased opportunities for renewable
40 energy. In particular, the limitations outlined in the Clean Power Plan, or alternative GHG regulations, were expected to provide opportunities for hydropower assets. In addition to recognizing hydropower as a renewable, the final rule allowed for new hydropower projects and incremental upgrades to existing facilities to be eligible to create Emission Rate Credits under rate-based compliance scenarios.
Following USEPA’s adoption of its Clean Power Plan rule, a number of states, coal companies and coal-dependent utilities sued to block the implementation of the rule, arguing that USEPA had exceeded its authority under the CAA. On February 9, 2016, the United States Supreme Court voted to place a stay on the rule’s implementation not only for the period of consideration of the rule before the U.S. Court of Appeals but also through the final judgment by the Supreme Court on the merits of challenges to the Clean Power Plan. The stay of the rule had the effect of suspending the pending deadlines for states to submit their Clean Power Plan compliance plans to USEPA.
On January 20, 2017, Donald J. Trump was inaugurated as the forty-fifth President of the United States, and on February 17, 2017, Edward Scott Pruitt was confirmed as the fourteenth Administrator of the USEPA. President Trump signed an executive order on March 28, 2017 directing USEPA to review the Clean Power Plan. On October 10, 2017, USEPA issued a notice of proposed rulemaking that would, if adopted, repeal the Clean Power Plan. In the notice, the USEPA proposes a change in the legal interpretation as applied to section 111(d) of the CAA on which the Clean Power Plan was based. Under the interpretation proposed in the notice, the Clean Power Plan exceeds the USEPA’s statutory authority and would be repealed. USEPA also stated in the notice that it has not determined the scope of any potential rule under CAA section 111(d) to regulate GHG emissions from existing EGUs, and, if it will issue such a rule, when it will do so and what form that rule will take. The public comment period on USEPA’s proposed rule expired on April 26, 2018. In a separate but related docket, USEPA issued on December 28, 2017 an advance notice of proposed rulemaking to solicit information on systems of emission reduction that are in accord with the legal interpretation discussed in the CPP repeal proposal and information on potential compliance measures and state planning requirements.
The City is unable to predict at this time whether mandatory GHG emissions limitations will be imposed, the impact on CPP, or, more broadly, the impacts of any such limitations on the costs and reliability of wholesale electricity supplies. Impacts specific to AMP Hydro Phase 1 projects would be determined by the specific state plans adopted by Ohio and the AMP participants’ other states, either on their own or in conjunction with other states in the region, to implement any mandated limitations and trading platforms. Although the City is unable to predict the outcome of these matters, the potential impacts of mandatory GHG emissions limitations on CPP, AMP and/or the AMP participants could be material. See “CPP OPERATIONS – Generation Projects – AMP Hydro Projects.”
Cross-State Air Pollution Rule. USEPA has adopted regulations that require states to reduce power plant emissions that contribute to ozone and/or fine particle pollution in other states (the “Cross- State Air Pollution Rule”, or “CSAPR”). In April 2014, the U.S. Supreme Court generally upheld the EPA’s authority under the CAA to establish the regulatory structure underpinning CSAPR, and implementation of the plan began in 2015. In September 2016, the USEPA finalized an update to the CSAPR that addresses the transport of ozone pollution in the eastern United States during summer months. The update rule mandates further reductions in emissions of nitrogen oxides from power plants in 22 states in the eastern United States, including Ohio, starting in May 2017.
Mercury and Air Toxics Standards. In 2011, the USEPA adopted regulations (known as the “Mercury and Air Toxics Standards” or “MATS” rule) that limit emissions of mercury and particulate matter by existing and new coal and oil-fired generating units of 25 MW or greater. In 2015, the U.S. Supreme Court decided that, in adopting the MATS rule, the USEPA committed error by failing to consider compliance costs in deciding whether to regulate power plant emissions under the Clean Air Act.
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On remand, the USEPA issued a “final finding” in April 2016 that, taking costs into account, it is appropriate and necessary to set standards for emissions of air toxics from coal- and oil-fired power plants. USEPA’s analysis showed that any retirements resulting from MATS would not adversely impact the ability of the power sector to meet demand for electricity.
RICE NESHAP. Effective April 2013, USEPA adopted a final rule known as the National Emissions Standards for Hazardous Air Pollutants for Stationary Reciprocating Internal Combustion Engines (“RICE NESHAP”). These standards regulate and limit emissions of air pollutants from stationary reciprocating internal combustion engines and impose various maintenance and record-keeping responsibilities. These engines are commonly used to generate electricity and to power pumps and compressors. The six diesel generators that CPP currently leases from AMP are subject to this regulation but the combustion turbine generators owned by CPP are not. The diesels have been retrofitted with emissions control equipment that enables CPP to use the generators for up to 300 hours per year for peak shaving, demand response and emergency purposes. CPP does not foresee a material loss of revenue due to the regulation.
Water Quality and Waste Disposal. Various water quality regulations, the majority of which are the result of the federal CWA and its amendments, apply to the operators of electric generating plants. Individual states in many cases also have water quality standards applicable to the operations of generating plants.
The disposal of hazardous waste from electric generating plants is subject to federal and state hazardous waste regulations adopted pursuant to the Toxic Substances Control Act and the Resource Conservation and Recovery Act, both adopted in 1976, and the Comprehensive Environmental Response, Compensation, and Liability Act of 1980. In addition, in December 2014, the USEPA adopted regulations governing the disposal of coal combustion residuals (“CCR”) from electric generating plants. The regulations, which became effective in October 2015, establish nationally applicable minimum criteria for the safe disposal of CCR in landfills and surface impoundments. New surface impoundments must meet certain technical criteria before any CCR is deposited. Existing CCR surface impoundments and CCR landfills are subject to implementation timeframes established in the regulations for the individual technical criteria. Several parties filed for judicial review of the CCR rule, and, in June, 2016, the U.S. Court of Appeals for the District of Columbia Circuit remanded four provisions of the rule back to the USEPA for further consideration. On March 1, 2018, USEPA proposed four changes to the CCR rule that would address the remanded provisions. These proposed changes would: (1) clarify the type and magnitude of non-groundwater releases that would require a facility to comply with some or all of the corrective action procedures set forth in USEPA’s regulations in meeting their obligation to clean up the release; (2) add boron to the list of constituents that trigger corrective action and potentially the requirement to retrofit or close a CCR unit; (3) determine the requirement for proper height of woody and grassy vegetation for slope protection; and (4) modify the alternative closure provisions. USEPA also is proposing six provisions that establish alternative performance standards for owners and operators of CCR units located in states that have approved CCR permit programs or are otherwise subject to oversight through a permit program administered by USEPA. Finally, USEPA is proposing to allow the use of CCR in the construction of final cover systems for CCR units that are closing with waste-in-place. The public comment period for USEPA’s proposed revisions to the CCR rule expired on April 30, 2018.
Impacts on CPP. The impact of these environmental initiatives and requirements on CPP finances and operations cannot be determined at this time. Because CPP does not presently generate any substantial portion of its own power supply (see “CLEVELAND PUBLIC POWER - Overview and History” and “CPP OPERATIONS - Power Supply”), CPP does not expect such requirements to have a direct material adverse impact on its financial condition or operations. The requirements could impose costs on generating plant owners, however, or force the early retirement of plants that may affect price levels in
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PJM markets from which CPP obtains a portion of its power requirements, and also may impact AMP generating projects in which CPP is a participant. These impacts may be offset to some extent through CPP’s participation in AMP hydroelectric and wind power resources. See “CPP OPERATIONS – GENERATION PROJECTS” above. CPP is unable to ascertain whether or when any new environmental laws or regulations will be imposed, or what impact, if any, such requirements might have on CPP, prices in the PJM markets, or the electric utility industry generally.
Reliability Matters. Pursuant to Section 215 of the Federal Power Act, the North American Electricity Reliability Corporation (“NERC”) has developed, and FERC has approved, electric reliability standards with which the owners of facilities that are part of the “bulk electric system” must comply. NERC delegates authority for enforcing the mandatory reliability standards to eight regional entities, one of which, ReliabilityFirst, is charged with enforcing the standards in much of the Midwest, including Ohio. NERC has the authority to impose (subject to FERC review) substantial financial penalties on entities that fail to comply with applicable reliability standards.
CPP is responsible for compliance with reliability standards applicable to a Distribution Provider and a Transmission Owner. CPP is subject to periodic audit for its compliance with the applicable standards. CPP was audited by ReliabilityFirst in September 2016. The audit identified one potential violation. CPP then provided evidence of its compliance with the relevant reliability standard to ReliabilityFirst. ReliabilityFirst subsequently determined that the possible violation posed minimal risk to the reliability of the Bulk Power System and that it had been appropriately mitigated by CPP. No further action by ReliabilityFirst in connection with the September 2016 audit is anticipated.
Because PJM exercises functional control over CPP’s transmission facilities (see “FACTORS AFFECTING CPP AND ELECTRIC UTILITIES GENERALLY - Federal Legislative and Regulatory Matters - Transmission and Energy Market Matters - PJM” above), PJM is responsible for complying, for CPP’s transmission facilities, with the reliability standards applicable to Transmission Operators. PJM periodically audits entities that physically operate the transmission facilities under its functional control to ensure PJM complies with the Transmission Operator standards. PJM conducted such an audit of CPP in October 2014 and found no violations.
State Legislative and Regulatory Matters
Customer Choice in Ohio. In 1999, the Ohio State Legislature passed legislation to implement electric industry restructuring in Ohio beginning January 1, 2001. The law required IOUs such as CEI to provide unbundled services and open their systems to competition for retail electric generation services. This legislation did not require the restructuring of municipal utilities. In order to foster market development, from 2001 to 2008 FirstEnergy rates were governed by a series of transition plans that provided for recovery of transition costs and regulatory assets, capped generation rates and partially froze distribution rates.
In 2008, the Ohio Legislature enacted Sub. Senate Bill 221, which required each IOU to initially file a standard service offer in the form of a cost-based “Electric Security Plan” (“ESP”). The utilities could thereafter either continue with ESPs or apply for approval of a “Market Rate Option” that would allow market-based rates for generation. The PUCO approved three successive ESPs for FirstEnergy covering the period of 2008 to May 31, 2016. The plans required FirstEnergy to utilize competitive auctions to acquire the generation supply necessary for the standard service offer to be made available to customers who did not purchase generation from an alternative supplier. The new rates provided for recovery of energy efficiency and other costs and reflected a comprehensive restructuring of CEI’s tariff.
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In August 2014, FirstEnergy filed an application with the PUCO for approval of a fourth ESP that would have taken effect June 1, 2016 for a three-year period. The proposed plan would maintain the key elements of the prior plans, such as setting generation rates through an auction process, fixing most base distribution rates at current levels, and granting subsidies for economic development and energy efficiency. The plan also introduced a new component, a 15-year “Economic Stability Program,” which called for FirstEnergy’s Ohio utilities to purchase the output of several FirstEnergy Ohio generating plants under a power purchase agreement with FirstEnergy's unregulated generation subsidiary FirstEnergy Solutions. The Ohio companies would then sell the power into the PJM wholesale energy and capacity markets and customers would receive either a credit or a charge depending on whether there is a profit or a loss from the sales. The PUCO ultimately approved an eight-year ESP incorporating the Economic Stability Program.
The FirstEnergy plan was successfully challenged at FERC, which rescinded a waiver of restrictions on transactions between the affiliated companies and ruled that the proposed power purchase agreement would be subject to FERC review and approval. In response, FirstEnergy filed a revised plan at the PUCO that maintained the customer credit/charge approach but eliminated the wholesale power transaction with FES, instead measuring the customer’s profit or loss by using the generation costs, output and revenues modeled in the PUCO proceeding as proxies for the plants' actual market performance. In an October 2016 ruling, the PUCO rejected FirstEnergy’s revised plan, approving instead implementation of a Distribution Modernization Rider (“DMR”) recommended by PUCO staff that would generate revenue of $204 million per year for three years. The Commission stated that this plan would accomplish the primary purpose of maintaining the financial health of FirstEnergy and assisting the company in accessing the capital markets. The Commission estimated the increase will cost a 750 kWh residential customer about $3.00 per month.
The PUCO decision did not grant the requested economic support for FirstEnergy’s generation operations, however, and in a recent earnings call FirstEnergy announced it would seek legislation permitting FirstEnergy to transition back to a regulated generation status that also recognizes the environmental benefits of FirstEnergy’s baseload nuclear generation. FirstEnergy will seek to complete the transition over the next 12 to 18 months. FirstEnergy’s proposal will likely face strong opposition from FirstEnergy’s competitors and consumer groups who fear the move will eliminate competition and increase electric rates.
The 2008 Ohio legislation also set renewable portfolio standards applicable to IOUs. The legislation required that, by the end of 2025, at least 25% of the kilowatt hours supplied to consumers be generated from specified advanced energy sources, 50% of which must come from renewable resources, and half of the renewables must be sited in Ohio. S.B. 221 also required the state commission to develop rules to require that energy efficiency measures satisfy in excess of 22% of demand by 2025. In 2014, however, the Ohio Legislature passed Senate Bill 310, which froze energy efficiency and renewable energy requirements at current levels until 2017.
In April 2017, the Ohio Legislature introduced identical legislation (i.e., House Bill 178 and Senate Bill 128) which would create a zero-emissions nuclear (ZEN) resource program. This program would provide compensation for the clean power that is generated by an electric distribution utility’s (EDU) nuclear plants, therefore subsidizing the nuclear plants, which have struggled to compete in Ohio’s PJM wholesale market. The legislation includes a very intricate methodology for compensating the EDU based on the zero-emissions credits purchased by an EDU with a percentage of their total electric sales to end users over a two-year period.
The proposed legislation from both the House and Senate has stalled in committee, as Ohio legislators have received criticism of the legislation from multiple sources, such as the PJM, consumer
44 advocates, and gas-fired generation facilities. Critics believe that the legislation, if passed, would subsidize the nuclear plants and would threaten fair competition in Ohio energy markets.
In connection with efforts to provide financial support for coal-fired and nuclear generating plants, the Secretary of the U.S. Department of Energy issued a notice of proposed rulemaking on September 28, 2017. The notice proposed that FERC exercise its statutory authority to impose rules on Commission-approved independent system operators (ISOs) and RTOs to ensure that certain reliability and resilience attributes of electric generation resources are fully valued. The proposed rule would allow for the recovery of costs of fuel-secure generation units frequently relied upon to make the electric grid “reliable and resilient,” even in centralized markets that rely on market-based pricing. The Secretary directed FERC to take final action on the proposal within 60 days or, in the alternative, to issue the rule as an interim final rule immediately, with provision for later modifications after consideration of public comments. FERC issued a notice inviting public comment on DOE’s proposed rule on October 2, 2017.
On January 8, 2018, FERC issued an order terminating the proceeding that was initiated to address the DOE Secretary’s proposed rule. FERC found that the record had not satisfied the threshold statutory requirement of demonstrating that the RTO/ISO tariffs are unjust and unreasonable. In lieu of the Secretary’s proposed rule, FERC initiated a new proceeding to evaluate the resilience of the bulk power system in the regions operated by RTOs and ISOs. FERC’s order directed each RTO and ISO to submit to the Commission within 60 days information on certain resilience issues and concerns identified in the order to enable FERC to examine the resilience of the bulk power system. The RTOs and ISOs submitted their information to FERC on March 9, 2018. FERC invited interested parties to submit comments on the RTO/ISO submittals by May 9, 2018. No further action has been taken by FERC in this proceeding, and CPP cannot predict the outcome of the matter.
Cyber-Security
Cyber-security is an increasingly important issue. CPP is currently in compliance with all applicable North American Electric Reliability Corporation Critical Infrastructure Protection Standards and actively works to maintain such compliance. CPP will continue to allocate funds in its budget for monitoring cyber threats and to monitor security and risk management on a regular basis.
LEGAL MATTERS
Certain legal matters incident to the issuance of the Series 2018 Bonds are subject to the approving legal opinion of Squire Patton Boggs (US) LLP whose legal services as Bond Counsel have been retained by the City. The form of such opinion is attached hereto as APPENDIX C.
In its capacity as Bond Counsel, Squire Patton Boggs (US) LLP has participated in the preparation of and has reviewed those statements (except any financial or statistical information) in this Official Statement pertaining to the Series 2018 Bonds, the Indenture and the tax status of the Series 2018 Bonds contained under the captions “THE SERIES 2018 BONDS,” “SECURITY AND SOURCES OF PAYMENT FOR THE BONDS,” “TAX MATTERS,” and in APPENDIX B and APPENDIX C. Bond Counsel has not participated in the preparation of, and has not been retained to pass upon, other information in this Official Statement.
Certain legal matters will be passed upon for the City by its Director of Law. Certain legal matters will be passed upon for the Underwriters by their counsel, Tucker Ellis LLP.
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TAX MATTERS
In the opinion of Squire Patton Boggs (US) LLP, Bond Counsel, under existing law: (i) interest on the Series 2018 Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986, as amended (the “Code”), and is not an item of tax preference for purposes of the federal alternative minimum tax; however, interest on the Series 2018 Bonds is included in the calculation of a corporation’s adjusted current earnings for purposes of, and thus may be subject to, the corporate alternative minimum tax (applicable only to taxable years beginning before January 1, 2018); and (ii) interest on, and any profit made on the sale, exchange or other disposition of, the Series 2018 Bonds are exempt from all Ohio state and local taxation, except the estate tax, the domestic insurance company tax, the dealers in intangibles tax, the tax levied on the basis of the total equity capital of financial institutions, and the net worth base of the corporate franchise tax. Bond Counsel expresses no opinion as to any other tax consequences regarding the Series 2018 Bonds.
The opinion on federal tax matters will be based on and will assume the accuracy of certain representations and certifications, and continuing compliance with certain covenants, of the City contained in the transcript of proceedings and that are intended to evidence and assure the foregoing, including that the Series 2018 Bonds are and will remain obligations the interest on which is excluded from gross income for federal income tax purposes. Bond Counsel will not independently verify the accuracy of the City’s certifications and representations or the continuing compliance with the City’s covenants.
The opinion of Bond Counsel is based on current legal authority and covers certain matters not directly addressed by such authority. It represents Bond Counsel’s legal judgment as to exclusion of interest on the Series 2018 Bonds from gross income for federal income tax purposes but is not a guaranty of that conclusion. The opinion is not binding on the Internal Revenue Service (“IRS”) or any court. Bond Counsel expresses no opinion about (i) the effect of future changes in the Code and the applicable regulations under the Code or (ii) the interpretation and the enforcement of the Code or those regulations by the IRS.
The Code prescribes a number of qualifications and conditions for the interest on state and local government obligations to be and to remain excluded from gross income for federal income tax purposes, some of which require future or continued compliance after issuance of the obligations. Noncompliance with these requirements by the City may cause loss of such status and result in the interest on the Series 2018 Bonds being included in gross income for federal income tax purposes retroactively to the date of issuance of the Series 2018 Bonds. The City has covenanted to take the actions required of it for the interest on the Series 2018 Bonds to be and to remain excluded from gross income for federal income tax purposes, and not to take any actions that would adversely affect that exclusion. After the date of issuance of the Series 2018 Bonds, Bond Counsel will not undertake to determine (or to so inform any person) whether any actions taken or not taken, or any events occurring or not occurring, or any other matters coming to Bond Counsel’s attention, may adversely affect the exclusion from gross income for federal income tax purposes of interest on the Series 2018 Bonds or the market value of the Series 2018 Bonds.
Interest on the Series 2018 Bonds is included in the calculation of a corporation’s adjusted current earnings for purposes of, and thus may be subject to, the federal corporate alternative minimum tax (applicable only to taxable years beginning before January 1, 2018). In addition, interest on the Series 2018 Bonds may be subject to a federal branch profits tax imposed on certain foreign corporations doing business in the United States and to a federal tax imposed on excess net passive income of certain S corporations. Under the Code, the exclusion of interest from gross income for federal income tax purposes may have certain adverse federal income tax consequences on items of income, deduction or
46 credit for certain taxpayers, including financial institutions, certain insurance companies, recipients of Social Security and Railroad Retirement benefits, those that are deemed to incur or continue indebtedness to acquire or carry tax-exempt obligations, and individuals otherwise eligible for the earned income tax credit. The applicability and extent of these and other tax consequences will depend upon the particular tax status or other tax items of the owner of the Series 2018 Bonds. Bond Counsel will express no opinion regarding those consequences.
Payments of interest on tax-exempt obligations, including the Series 2018 Bonds, are generally subject to IRS Form 1099-INT information reporting requirements. If a Series 2018 Bond owner is subject to backup withholding under those requirements, then payments of interest will also be subject to backup withholding. Those requirements do not affect the exclusion of such interest from gross income for federal income tax purposes.
Bond Counsel’s engagement with respect to the Series 2018 Bonds ends with the issuance of the Series 2018 Bonds, and, unless separately engaged, Bond Counsel is not obligated to defend the City or the owners of the Series 2018 Bonds regarding the tax status of interest thereon in the event of an audit examination by the IRS. The IRS has a program to audit tax-exempt obligations to determine whether the interest thereon is includible in gross income for federal income tax purposes. If the IRS does audit the Series 2018 Bonds, under current IRS procedures, the IRS will treat the City as the taxpayer and the beneficial owners of the Series 2018 Bonds will have only limited rights, if any, to obtain and participate in judicial review of such audit. Any action of the IRS, including but not limited to selection of the Series 2018 Bonds for audit, or the course or result of such audit, or an audit of other obligations presenting similar tax issues, may affect the market value of the Series 2018 Bonds.
Prospective purchasers of the Series 2018 Bonds upon their original issuance at prices other than the respective prices indicated on the inside cover pages of this Official Statement, and prospective purchasers of the Series 2018 Bonds at other than their original issuance, should consult their own tax advisors regarding other tax considerations such as the consequences of market discount, as to all of which Bond Counsel expresses no opinion.
Risk of Future Legislative Changes and/or Court Decisions
Legislation affecting tax-exempt obligations is regularly considered by the United States Congress and may also be considered by the State legislature. Court proceedings may also be filed, the outcome of which could modify the tax treatment of obligations such as the Series 2018 Bonds. There can be no assurance that legislation enacted or proposed, or actions by a court, after the date of issuance of the Series 2018 Bonds will not have an adverse effect on the tax status of interest or other income on the Series 2018 Bonds or the market value or marketability of the Series 2018 Bonds. These adverse effects could result, for example, from changes to federal or state income tax rates, changes in the structure of federal or state income taxes (including replacement with another type of tax), or repeal (or reduction in the benefit) of the exclusion of interest on the Series 2018 Bonds from gross income for federal or state income tax purposes for all or certain taxpayers.
For example, the recent federal tax legislation that was enacted on December 22, 2017 reduces corporate tax rates, modifies individual tax rates, eliminates many deductions, repeals the corporate alternative minimum tax (for taxable years beginning after December 31, 2017) and eliminates tax- exempt advance refunding bonds, among other things. Additionally, investors in the Series 2018 Bonds should be aware that future legislative actions may increase, reduce or otherwise change (including retroactively) the financial benefits and the treatment of all or a portion of the interest on the Series 2018 Bonds for federal income tax purposes for all or certain taxpayers. In all such events, the market value of the Series 2018 Bonds may be affected and the ability of holders to sell their Series 2018 Bonds in the
47 secondary market may be reduced. The Series 2018 Bonds are not subject to special mandatory redemption, and the interest rates on the Series 2018 Bonds are not subject to adjustment, in the event of any such change in the tax treatment of interest on the Series 2018 Bonds.
Investors should consult their own financial and tax advisers to analyze the importance of these risks.
Original Issue Discount and Original Issue Premium
Certain of the Series 2018 Bonds (“Discount Bonds”) may be offered and sold to the public at an original issue discount (“OID”). OID is the excess of the stated redemption price at maturity (the principal amount) over the “issue price” of a Discount Bond. The issue price of a Discount Bond is the initial offering price to the public (other than to bond houses, brokers or similar persons acting in the capacity of underwriters or wholesalers) at which a substantial amount of the Discount Bonds of the same maturity is sold pursuant to that offering. For federal income tax purposes, OID accrues to the owner of a Discount Bond over the period to maturity based on the constant yield method, compounded semiannually (or over a shorter permitted compounding interval selected by the owner). The portion of OID that accrues during the period of ownership of a Discount Bond (i) is interest excluded from the owner’s gross income for federal income tax purposes to the same extent, and subject to the same considerations discussed above, as other interest on the Series 2018 Bonds, and (ii) is added to the owner’s tax basis for purposes of determining gain or loss on the maturity, redemption, prior sale or other disposition of that Discount Bond. The amount of OID that accrues each year to a corporate owner of a Discount Bond is included in the calculation of the corporation’s adjusted current earnings for purposes of, and thus may be subject to, the federal corporate alternative minimum tax (applicable only to taxable years beginning before January 1, 2018). A purchaser of a Discount Bond in the initial public offering at the issue price (described above) for that Discount Bond who holds that Discount Bond to maturity will realize no gain or loss upon the retirement of that Discount Bond.
Certain of the Series 2018 Bonds (“Premium Bonds”) may be offered and sold to the public at a price in excess of their stated redemption price at maturity (the principal amount). That excess constitutes bond premium. For federal income tax purposes, bond premium is amortized over the period to maturity of a Premium Bond, based on the yield to maturity of that Premium Bond (or, in the case of a Premium Bond callable prior to its stated maturity, the amortization period and yield may be required to be determined on the basis of an earlier call date that results in the lowest yield on that Premium Bond), compounded semiannually. No portion of that bond premium is deductible by the owner of a Premium Bond. For purposes of determining the owner’s gain or loss on the sale, redemption (including redemption at maturity) or other disposition of a Premium Bond, the owner’s tax basis in the Premium Bond is reduced by the amount of bond premium that is amortized during the period of ownership. As a result, an owner may realize taxable gain for federal income tax purposes from the sale or other disposition of a Premium Bond for an amount equal to or less than the amount paid by the owner for that Premium Bond. A purchaser of a Premium Bond in the initial public offering who holds that Premium Bond to maturity (or, in the case of a callable Premium Bond, to its earlier call date that results in the lowest yield on that Premium Bond) will realize no gain or loss upon the retirement of that Premium Bond.
Owners of Discount and Premium Bonds should consult their own tax advisors as to the determination for federal income tax purposes of the existence of OID or bond premium, the determination for federal income tax purposes of the amount of OID or bond premium properly accruable or amortizable in any period with respect to the Discount or Premium Bonds, other federal tax consequences in respect of OID and bond premium, and the treatment of OID and bond premium for purposes of state and local taxes on, or based on, income.
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INDEPENDENT AUDITORS
The audited financial statements of the City of Cleveland, Department of Public Utilities – Division of Cleveland Public Power for the year ending December 31, 2016 were filed with the Municipal Securities Rulemaking Board under its Electronic Municipal Market Access System (“EMMA”) at https://emma.msrb.org/ and are included by specific reference thereto into this Official Statement. The financial statements are also included in the audit reports of the State Auditor for the City, located at www.ohioauditor.gov. The audited financial statements are public records, no consent to their inclusion is required, and no bring down procedures have been undertaken by the Auditor of State since their date. The City continues to maintain an internal audit function and an active external audit committee.
The City filed the 2017 financial audit of the City, including financial statements of the City of Cleveland, Department of Public Utilities – Division of Cleveland Public Power, with the Auditor of State within the 150 days after the end of the fiscal year as required by State law.
RATINGS
In connection with the delivery of the Series 2018 Bonds, Moody’s Investors Service, Inc. (“Moody’s”) and S&P Global Ratings (“S&P”) are expected to assign the Series 2018 Bonds their ratings of “A3” and “___” respectively. Such ratings reflect only the views of such organizations and any desired explanation of the significance of such ratings should be obtained from the rating agency furnishing the same, at the following addresses: Moody’s Investors Service, Inc., 7 World Trade Center, 250 Greenwich Street, New York, New York 10007; S&P Global Ratings, 55 Water Street, New York, NY 10041. Generally, a rating agency bases its rating on the information and materials furnished to it and on investigations, studies and assumptions of its own. There is no assurance such ratings will continue for any given period of time or that such ratings will not be revised downward or withdrawn entirely by the rating agencies, if in the judgment of such rating agencies circumstances so warrant. Any such downward revision or withdrawal of such ratings may have an adverse effect on the market price of the Series 2018 Bonds.
A securities rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time.
FINANCIAL ADVISORS
The City has retained Government Capital Management, L.L.C. and Phoenix Capital Partners, LLP (the “Financial Advisors”) in connection with the issuance of the Series 2018 Bonds. The Financial Advisors are not obligated to undertake, and have not undertaken to make, an independent verification or to assume the responsibility for the accuracy, completeness or fairness of the information contained in this Official Statement. Government Capital Management, L.L.C. and Phoenix Capital Partners, LLP are independent financial advisory firms and are not engaged in the business of underwriting, trading or distributing municipal or other public securities.
UNDERWRITING
The Underwriters have agreed, subject to certain conditions, to purchase the Series 2018 Bonds from the City. The Underwriters will be obligated to purchase all the Series 2018 Bonds, if any are purchased, at an aggregate purchase price equal to $______(equal to their aggregate principal
49 amount, plus original issue premium of $______, less Underwriters’ discount of $______).
The Underwriters are purchasing the Series 2018 Bonds for purposes of resale. The Underwriters have furnished the information in this Official Statement pertaining to the public offering prices of the Series 2018 Bonds and have participated in the preparation of portions of this Official Statement. The public offering prices of the Series 2018 Bonds may be changed from time to time by the Underwriters, and the Underwriters may allow concessions from the public offering prices to certain dealers. None of the Series 2018 Bonds will be delivered by the City to the Underwriters unless all of the Series 2018 Bonds are so delivered.
In the ordinary course of their various business activities, the Underwriters and their respective affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (which may include bank loans and/or credit default swaps) for their own account and for the accounts of their customers and may at any time hold long and short positions in such securities and instruments. Such investment and securities activities may involve securities and instruments of the City.
The Underwriters and their respective affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, principal investment, hedging, financing and brokerage activities. The Underwriters and their respective affiliates have, from time to time, performed, and may in the future perform, various investment banking services for the City for which they received or will receive customary fees and expenses.
CONTINUING DISCLOSURE AGREEMENT
The City has entered into an agreement (the “Continuing Disclosure Agreement”) for the benefit of the holders and beneficial owners of the Series 2018 Bonds:
(1) to send audited annual financial statements for its Department of Public Utilities - Division of Cleveland Public Power and certain financial information and operating data including information of the types set forth herein (i) under the caption “SECURITY AND SOURCES OF PAYMENT FOR THE BONDS - OUTSTANDING INDEBTEDNESS”; (ii) in the table “DEBT SERVICE REQUIREMENTS”; and (iii) in the tables “CPP’S LARGEST RETAIL USERS,” “CPP CUSTOMER COUNT BY RATE CLASSIFICATION”, “SALES BY RATE CLASSIFICATION,” “SUMMARY OF HISTORICAL REVENUES, EXPENSES AND DEBT SERVICE,” “CPP NET GAIN OF CEI METERS,” and “BILL COMPARISONS - CPP VS. CEI” under the caption “CLEVELAND PUBLIC POWER” on or before the last day of September following the end of each fiscal year of the City, or, in the case of the audited financial statements, if not then available, to provide unaudited financial statements and to supply audited financial statements, when available, to the Municipal Securities Rulemaking Board (the “MSRB”) through its Electronic Municipal Market Access system (“EMMA”);
(2) to provide to EMMA, in a timely manner not in excess of ten business days after the occurrence thereof, notice of the following events, pursuant to the requirements of the Rule: (A) if material: (i) non-payment related defaults; (ii) modifications to rights of Holders or Beneficial Owners of the Series 2018 Bonds; (iii) Bond calls; (iv) release, substitution or sale of property securing repayment of the Series 2018 Bonds; (v) consummation of a merger, consolidation or acquisition involving an obligated person or the sale of all or substantially all of the assets of the obligated person, other than in the ordinary course of business, or the entry into a definitive agreement to undertake such an action or the termination
50 of a definitive agreement relating to any such actions, other than pursuant to its terms; or (vi) appointment of a successor or additional trustee or the change of name of a trustee; and (B) regardless of materiality: (i) principal and interest payment delinquencies; (ii) unscheduled draws on debt service reserves reflecting financial difficulties; (iii) unscheduled draws on credit enhancements reflecting financial difficulties; (iv) substitution of credit or liquidity providers, or their failure to perform; (v) adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax status of the Series 2018 Bonds, or other material events affecting the tax status of the Series 2018 Bonds; (vi) tender offers; (vii) defeasances; (viii) rating changes; or (ix) bankruptcy, insolvency, receivership or similar event of the obligated person;
(3) to provide to EMMA in a timely manner notice of a failure by the City to provide annually the information required in (1) above; and
(4) to provide to EMMA notice of any change in the standards set forth in the next paragraph applied in the preparation of the audited annual financial statements for its Department of Public Utilities - Division of Cleveland Public Power or any change in the City’s fiscal year, in either case accompanied by an explanation of how to compare the financial information provided by the differing accounting standards or fiscal years.
The Department of Public Utilities - Division of Cleveland Public Power annual financial statements for each fiscal year shall be prepared in accordance with the standards followed in preparation of the Department of Public Utilities - Division of Cleveland Public Power’s 2016 Financial Statements, which standards are in conformity with the effective generally accepted accounting principles (“GAAP”) for government units, which may be changed to reflect changes in GAAP from time to time and audited by an independent accounting firm, but only if audited financial statements are otherwise available.
The City believes that it has complied in all material respects with its previous continuing disclosure undertakings under the Rule during the past five years, but the City notes the following instances of noncompliance, including: (i) it did not file or did not file on a timely basis event notices relating to certain changes to ratings assigned to the insurers of insured bonds or to the underlying ratings, (ii) it filed event notices 17 days late relating to ratings upgrades for both its outstanding water revenue bonds and subordinate water revenue bonds received on August 9, 2017, (iii) it filed certain annual reports on June 30 of each year, which at times was one or two days later than the 180th day following the end of the fiscal year of the City, (iv) it filed certain annual reports on July 30 or July 31 of each year, which at times was one or two days later than the 210th day following the end of the fiscal year of the City, (v) it did not file a statement every year that Continental/United Airlines’ annual reports were available on the SEC’s EDGAR website, (vi) certain annual reports filed by the City were not properly matched with all required CUSIP numbers, (vii) it amended one page on its 2013 Airport Annual Filing to add a column of information regarding enplaned passengers that was mistakenly excluded on the original version, (viii) it mistakenly omitted the required “CPP Net Gain of CEI Meters” table from its CPP Annual Filings for Fiscal Years 2010-2013, and (ix) it mistakenly omitted certain required information from the “Debt Service Requirements and Pledged Taxes” table in filings related to the Income Tax Receipts Obligations and the “Total Restricted and Unrestricted Income Tax Receipts” table in filings related to the Series 2008 Subordinate Lien Unrestricted Income Tax Bonds for Fiscal Years 2010-2013, which omissions were corrected in the City’s 2014 Annual Filings for those bonds. In addition, the City has notified Continental/United Airlines about the necessity of posting on EMMA the availability of its annual reports pursuant to United’s continuing disclosure agreements as an obligated person that were entered into with the trustee of the City’s airport revenue bonds. The foregoing description of instances of non-compliance by the City with continuing disclosure undertakings should not be construed as an
51 acknowledgment that any such instance was material. The City has reviewed the current requirements of the Rule and adopted procedures to ensure full compliance with the Rule.
A failure by the City to comply with the Continuing Disclosure Agreement will not constitute an Event of Default under the Indenture (although holders will have any available remedy at law or in equity).
Except as described in the Continuing Disclosure Agreement, the provisions of the Continuing Disclosure Agreement will create no rights in any other person or entity.
CONCLUDING STATEMENT
To the extent that any statements made in this Official Statement involve matters of opinion or estimates, whether or not expressly stated to be such, they are made as such and not as representations of fact or certainty, and no representation is made that any of such statements have been or will be realized. Information in this Official Statement has been derived by the City from official and other sources and is believed by the City to be accurate and reliable. Information other than that obtained from official records of the City has not been independently confirmed or verified by the City, and its accuracy is not guaranteed.
The information and expressions of opinion herein are subject to change without notice and neither the delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, give rise to any implication that there has been no change in the affairs of the City since the date hereof.
Neither this Official Statement nor any statement that may have been or that may be made orally or in writing is to be construed as or as part of a contract with the original purchasers or subsequent owners of the Series 2018 Bonds.
This Official Statement has been duly prepared and delivered by the City and executed for and on behalf of the City by its Director of Finance, its Director of Public Utilities and the Commissioner of Cleveland Public Power.
CITY OF CLEVELAND, OHIO
By: Director of Finance
By: Director of Public Utilities
By: Commissioner of Cleveland Public Power
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APPENDIX A
ECONOMIC AND DEMOGRAPHIC INFORMATION CONCERNING
THE CITY OF CLEVELAND
In the 2010 Census classifications, the City was in the Cleveland-Elyria-Mentor Metropolitan Statistical Area (“MSA”), which consists of Cuyahoga (the “County”), Geauga, Lake, Lorain and Medina counties. In 2010, the MSA had a population of 2,077,240, ranking it the 28th largest metropolitan area (out of 366) in the United States. The City was also in the Cleveland-Lorain-Elyria Primary Metropolitan Statistical Area (“PMSA”), which consisted of the counties of Ashtabula, Cuyahoga, Geauga, Lake, Lorain and Medina and the Cleveland-Akron Consolidated Metropolitan Statistical Area (“CMSA”), which consisted of eight northeast Ohio counties until June of 2003 when the U.S. Census Bureau ceased using the PMSA and CMSA distinctions.
Population
Set forth below are population statistics from the U.S. Bureau of the Census for the City, the County, the PMSA, the CMSA and the State for each decade from 1970 to 2000 and for the City, the County, the MSA and the State for 2010 and estimated for 2017.
Year City County PMSA/MSA CMSA State
1970 750,879 1,720,300 2,418,809(a) 2,999,811 10,657,423 1980 573,822 1,498,400 2,277,681(a) 2,834,412 10,797,604 1990 505,616 1,412,140 2,201,994(a) 2,859,644 10,847,115 2000 478,403 1,393,978 2,250,871(a) 2,945,831 11,363,543 2010 396,815 1,280,122 2,077,240(b) N/A 11,536,504 2017-est 385,525 1,248,514 2,077,271(b) N/A 11,658,609
(a) Indicates population for the PMSA. (b) Indicates population for the MSA.
Source: U.S. Bureau of the Census.
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Employment
The following table compares estimated employment and unemployment statistics (annual averages) for the City, the County and the MSA, including comparisons with unemployment rates for the State and the United States.
EMPLOYMENT STATISTICS(a)
Employed Unemployed Unemployment Rate Year City County MSA City County MSA City County MSA Ohio U.S.
2009 159,800 571,100 972,500 18,900 54,500 91,200 10.6 8.7 8.6 10.3 9.3 2010 148,800 577,900 964,100 17,900 53,800 87,900 10.8 8.5 8.4 10.3 9.6 2011 147,900 576,000 964,200 15,900 47,200 76,400 9.7 7.6 7.3 8.8 8.9 2012 148,200 577,200 967,600 14,100 42,000 67,700 8.7 6.8 6.5 7.4 8.1 2013 147,400 574,500 965,500 14,300 43,300 70,600 8.8 7.0 6.8 7.5 7.4 2014 148,400 577,700 972,700 12,700 38,600 62,400 7.8 6.2 6.0 5.8 6.2 2015 148,300 577,400 974,100 10,400 31,500 51,400 6.3 5.0 4.8 4.9 5.3 2016 148,200 577,200 973,900 11,100 33,300 54,400 7.6 5.4 5.3 5.0 4.9 2017 147,600 575,100 972,700 11,700 35,800 58,400 7.4 5.9 5.7 5.0 4.4 2018(b) 150,200 585,300 976,400 9,300 28,400 49,500 5.8 4.6 4.8 4.3 3.9
(a) Rounded to the nearest hundred. (b) As of April, 2018.
Source: Ohio Department of Job & Family Services, Labor Market Information Division. City and County estimates are NOT seasonally adjusted.
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The following table indicates the distribution of employee classifications in the MSA for the years 2012 through 2017 and as of April 2018:
DISTRIBUTION OF EMPLOYEES BY SECTOR (AMOUNTS IN 000’S) 2012 2013 2014 2015 2016 2017 2018(a) Goods Producing Industries Mining, Logging, Construction 33.4 34.1 35.2 35.8 35.9 36.4 36.5 Primary Metal 8.7 8.8 8.7 8.4 7.1 7.0 7.2 Fabricated Metal 27.7 27.5 27.9 27.9 26.6 27.1 28.2 Transportation Equipment 12.2 12.6 12.5 12.8 13.5 13.4 13.7 Other 74.4 74.9 74.9 75.6 73.9 74.0 75.4 Total Goods Producing Industries 156.4 157.9 159.2 160.5 157.0 157.9 161.0
Service Producing Industries Transportation & Public Utilities 29.8 30.3 30.2 30.9 31.3 31.0 31.7 Wholesale Trade 49.6 49.4 50.2 51.1 51.5 52.1 54.6 Retail Trade 101.2 101.8 101.3 101.6 102.1 99.9 99.1 Finance, Insurance & Real Estate 62.9 62.8 64.9 65.0 65.2 66.6 65.9 Health Services 161.6 164.0 163.0 166.1 169.4 165.9 166.6 Other Services 321.7 327.3 334.2 335.5 341.9 347.6 345.8 Federal Government 18.5 18.3 18.3 18.6 18.9 19.1 19.2 State Government 7.0 6.9 7.3 7.2 7.3 7.4 7.8 Local Government 107.9 107.6 108.2 108.8 109.9 110.1 109.9 Total Service Producing Industries 860.2 868.4 877.6 884.8 897.5 899.7 900.6
Total 1,016.6 1,026.3 1,036.7 1,045.3 1,054.5 1,057.6 1,061.6
Goods Producing Percentage 15.4% 15.4% 15.4% 15.4% 14.9% 14.9% 15.2% Service Producing Percentage 84.6% 84.6% 84.6% 84.6% 85.1% 85.1% 84.8%
(a) As of April, 2018. Source: Ohio Department of Job & Family Services, Labor Market Information Division.
The following table indicates the per capita income for the County, the MSA, the State, and the United States for the years 2007 through 2016.
PER CAPITA INCOME Year County MSA Ohio U.S. 2007 $40,700 $39,800 $35,488 $39,821 2008 42,302 41,122 36,681 41,082 2009 39,938 39,057 35,610 39,376 2010 39,971 39,401 36,355 40,277 2011 42,645 42,075 38,816 42,461 2012 44,933 44,034 40,269 44,282 2013 44,889 44,297 40,687 44,493 2014 47,087 46,295 42,164 46,464 2015 48,506 47,783 43,587 48,190 2016 50,023 48,968 44,876 49,246
Source: U.S. Bureau of Economic Analysis.
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The income per household in the City and the County is estimated to be distributed as set forth in the following table:
City County Income and Benefits(a) # Households % Households # Households % Households Less than $10,000 34,604 20.7% 57,923 10.8% $10,000 to $14,999 17,278 10.3% 33,997 6.4% $15,000 to $24,999 27,683 16.6% 64,787 12.1% $25,000 to $34,999 20,792 12.4% 58,884 11.0% $35,000 to $49,000 22,434 13.4% 71,556 13.4% $50,000 to $74,999 22,098 13.2% 89,052 16.7% $75,000 to $99,999 10,338 6.2% 56,998 10.7% $100,000 to $149,999 7,752 4.6% 57,923 10.8% $150,000 to $199,999 2,048 1.2% 20,308 3.8% $200,000 or more 2,040 1.2% 23,131 4.3%
(a) In 2016 inflation-adjusted dollars. Source: U.S. Census Bureau Selected Economic Characteristics in the United States 2012-2016.
The U.S. Census Bureau also estimates that 36.0% of the people in the City and 18.5% of the people in the County have incomes that fall below the poverty level.
Corporate Headquarters
Listed below are 13 corporations (representing 12 different industries) among the Fortune 1000 largest corporations of 2017 (ranked by worldwide revenues) that have headquarters in the County.
CORPORATIONS HEADQUARTERED IN COUNTY AMONG FORTUNE’S TOP 1000 Within the 1,000 Largest U.S. Corporations Ranked by Revenues
Rank Company Major Products 112 Progressive Insurance 190 The Sherwin Williams Company* Paints & Chemicals 256 Parker Hannifin Corp Hydraulic Components 412 KeyCorp* Financial Services 465 TravelCenters of America National Travel Center Chain 662 TransDigm Group, Inc.* Aircraft Components 748 Medical Mutual of Ohio* Health Care Insurance 751 Hyster-Yale Materials Handling Industrial Machinery 757 Aleris International Metals 804 Lincoln Electric Holdings Industrial Equipment 810 Applied Industrial Technologies Inc.* Industrial Components 867 Cleveland-Cliffs, Inc.* Iron Ore, Mining 939 Nordson Industrial Machinery
Source: 2018 Fortune Directory of the Largest U.S. Corporations. *Headquartered in the City.
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Home Values, Housing Units and Home Sales
The 2016 estimated median values of owner-occupied homes in the City, the County and the MSA were $66,800, $126,700, and $146,100, respectively, compared with $129,900 in the State and $178,600 in the United States. The number of housing units within the City for the nine-year period from 2008 to 2016 decreased by 1.32%, from 215,413 to 212,568, compared with a decrease of 0.05% for the County, from 620,500 to 617,533. (All figures in this paragraph are derived from the U.S. Bureau of the Census.) In recent years, as part of the City’s community development initiatives, the City has provided financial assistance to nonprofit and for-profit developers to stimulate new housing construction in the City and made additional efforts to address increased foreclosures. See “Housing and Neighborhood Development” below.
Listed below are sale price summary statistics for the City and the County, respectively.
HOUSING SALES STATISTICS 2013-2017 City County Year Number of Sales Average Sales Price Number of Sales Average Sales Price
2013 2,809 $59,737 13,674 $139,950 2014 3,761 54,548 16,021 129,634 2015 3,266 67,280 15,672 144,206 2016 4,847 59,368 20,198 135,046 2017 4,705 76,458 19,495 156,622
Source: The County
Building Permits
The following table shows information concerning the filing with the County of building permits for construction and demolition and the net assessed valuation (not the actual construction or demolition cost) of those building permits as determined by the County, for the City by class:
2013 2014 2015 2016 2017 # of Assessed # of Assessed # of Assessed # of Assessed # of Assessed Permits Value(a) Permits Value(a) Permits Value(a) Permits Value(a) Permits Value(a)
Commercial 786 $157,917 758 $153,627 889 $87,635 944 $104,940 852 $129,979 Industrial 154 8,858 105 4,403 103 2,401 96 2,692 79 6,450 Exempt 381 713 318 427 1,175 2,541 561 90 1,252 1,244 Public Utility 0 0 0 0 2 0 2 0 0 0 Residential 4,330 13,622 4,907 7,853 5,884 7,015 5,924 8,179 5,014 10,467 Total: 5,651 $181,110 6,088 $166,310 8,053 $99,592 7,527 $115,901 7,197 $148,140
(a) In thousands. Source: The County
Utilities
The MSA is well served with adequate and reliable water and energy resources. The principal source of water in the MSA is Lake Erie, the twelfth largest lake in the world. The principal provider of potable water in the County is the City’s Division of Water. A large amount of fresh water is available to the area for its foreseeable needs. The two principal providers of electric energy in the MSA are the
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City’s Cleveland Public Power and the Cleveland Electric Illuminating Company, a wholly-owned electric utility operating as a subsidiary of FirstEnergy Corp. Sewer services in the MSA are provided by the Northeast Ohio Regional Sewer District.
Transportation
The City is a major regional center for economic and commercial activity and is served by diversified transportation facilities. There is immediate access to six United States’ highways and seven interstate highways. The Cleveland Innerbelt Modernization Plan focused on improving safety, reducing congestion and traffic delays, and modernizing interstate travel along I-71, I-77 and I-90 through downtown Cleveland. This investment by the State of Ohio rehabilitated and reconstructed the Innerbelt Freeway system – including construction of two new bridges to carry I-90 traffic – and addressed operational, design, safety and access shortcomings that severely impacted the ability of the Innerbelt Freeway system to meet the transportation needs of Northeast Ohio. The Ohio Department of Transportation (“ODOT”) constructed a new westbound Innerbelt Bridge in the fall of 2013. ODOT also demolished the old Innerbelt Bridge and completed construction of the new eastbound bridge in October 2016. This two bridge system accommodates the more than 138,000 vehicles that cross the bridge each day. ODOT reports that the total cost for the construction of the two bridges was approximately $573 million.
In the fall of 2014, ODOT commenced construction on its Opportunity Corridor Project, a three- mile, approximately $331 million road project that is designed to improve the transportation system and support planned economic development within the City in the areas between I-490/I-77 and University Circle. The Opportunity Corridor encompasses nearly 1,000 acres on the City’s southeast side and is anchored by University Circle and the Cleveland Clinic. In addition to transportation benefits, it is anticipated that the Opportunity Corridor Project will bring new economic development and new jobs to the community. The Opportunity Corridor Project supports an economic development plan of the City and Greater Cleveland Partnership for the area through enhanced mobility, direct access to freeways and the University Circle area, new frontage for potential development, improved visibility and improved multi-modal access. The Opportunity Corridor Project is being funded in part by bonds issued by the Ohio Turnpike and Infrastructure Commission. The Opportunity Corridor Project is divided into three stages: the first stage commenced in the fall of 2014; the second stage commenced in the spring of 2016; and the third stage is expected to commence in 2018 with a targeted completion in 2021.
Cleveland Hopkins International Airport (“Hopkins”) is the primary commercial service airport for northeastern Ohio. Hopkins is situated approximately ten miles southwest of the downtown area and is accessible via highway from multiple directions. In addition, heavy rail rapid transit service to Hopkins is also provided from downtown by the Greater Cleveland Regional Transit Authority (“RTA”). Hopkins is owned by the City and operated by the City’s Department of Port Control. As of December 2017, Hopkins was served by eight major carriers, 13 domestic regional airlines, one regional international airline, three scheduled charter airlines, and five all cargo airlines.
Hopkins’ approximately 935,000 square foot terminal complex includes a multi-level terminal building and four concourse buildings which support 63 jet gates and 33 commuter aircraft parking positions. Due to the announcement by United Airlines (“UAL”) in February 2014 that UAL would significantly reduce service at Hopkins, Concourse D was closed on June 4, 2014 and all of UAL’s operations were consolidated in Concourse C. There are three runways at Hopkins. The Airport completed a $69 million FAA-funded Air Traffic Control Tower and Terminal Radar Approach Control Facility in 2015, equipped with the latest technology—allowing the airport to seamlessly integrate with the FAA’s move toward a Next-Generation (or “NextGen”) Air Transportation System. The tower is one element in a coordinated program of airfield safety improvements. In July 2016, the Airport completed
A-6 its $42 million terminal modernization project, which included a new canopy over the upper roadway system to shield the departure area curb front from inclement weather, garage improvements, ticketing lobby renovation to include higher ceilings, revolving doorways, valet staging areas, signage and other aesthetic and ancillary improvements at the lower roadway passenger pick-up areas.
Burke Lakefront Airport (“Burke”), which also is City-owned and operated, has two parallel runways on 480 acres adjacent to downtown Cleveland. Burke recorded 50,789 terminal operations in 2017, the majority by air taxi operators serving business activity in the City, and the remainder almost entirely by corporate and private general aviation aircraft operators. In 2016, Burke commenced a multiyear improvement project.
The Port of Cleveland (the “Port”) is an interlake and international shipping center located on the shores of Lake Erie and the Cuyahoga River. The Port primarily handles steel and bulk commodities and is a heavy lift port which is favorable for such items as automobile manufacturing equipment, presses and raw and finished steel and factory components. There are approximately 20,273 jobs supported by the maritime activities of the Port, with $1.4 billion in total personal income and local consumption. The Port averages 13 million tons of cargo per year.
Norfolk Southern and CSX chose the City as their gateway to the Northeast and Midwest after the respective railroads restructured the rail systems following the acquisition of Conrail.
The City is also served by the RTA. The RTA owns and operates a public mass transit system, providing transportation to a 457 square mile service area which includes 59 municipalities, one of which is the City.
Financial Services
The City is a regional financial center and is the headquarters for the Fourth District Federal Reserve Bank, serving Ohio, the western portion of Pennsylvania and portions of Kentucky and West Virginia.
Education
Within the County are 13 public and private two-year and four-year colleges and universities, including, among others, Case Western Reserve University, John Carroll University, Cleveland State University, Cuyahoga Community College, Baldwin Wallace University, Notre Dame College, Ursuline College, the Cleveland Institute of Music, and the Cleveland Institute of Art.
Health Care
There are over 20 hospitals, including acute care and private psychiatric hospitals, in the County. Among these institutions are the Cleveland Clinic Foundation, University Hospitals Health System, and the MetroHealth System, all headquartered in the City.
Recreation and Entertainment
The City is noted for its many cultural institutions, including the internationally acclaimed Cleveland Orchestra and the Cleveland Museum of Art, the latter of which completed a $350 million renovation and expansion project in late 2013. The project included refurbishing historic galleries and adding 35,000 square feet of gallery space, which opened in stages. Theaters and entertainment centers include Playhouse Square (a complex of eight theaters and performance venues, currently with seating for
A-7 over 10,000), Public Auditorium, Karamu House, and Severance Hall. Other cultural institutions include the Cleveland Play House, Great Lakes Theater, Cleveland Public Theater, Apollo’s Fire (the Cleveland Baroque Orchestra), Verb Ballet, and Dance Cleveland.
The Rock and Roll Hall of Fame and Museum, a 150,000 square foot facility located at North Coast Harbor, opened in 1995 and has attracted more than 11 million visitors to date. The Rock Hall is in the midst of a multiyear and multimillion dollar renovation project. The City hosted the Rock and Roll Hall of Fame inductions in April of 2018. Future induction ceremonies will be held in the City every other year. The 2018 induction ceremony drew thousands of visitors and was expected to result in approximately $16 million in spending.
The Great Lakes Center for Science and Technology, located on North Coast Harbor next to the Rock and Roll Hall of Fame and Museum, opened in July 1996. With more than 400 hands-on exhibits and a six-story Omnimax theater, the Center gives visitors the chance to explore science, environment and technology and their relationships to the Great Lakes.
Other museums in the City include Museum of Contemporary Art Cleveland, Cleveland Botanical Gardens, Cleveland Museum of Natural History, Dunham Tavern Museum, and the Cleveland History Center. Recreational facilities in the City include the 18,800-acre Metropolitan Park System, Cleveland Metroparks Zoo, Wade Park, Rockefeller Park, Cultural Gardens, Lakefront State Park and, outside the City, the Cuyahoga Valley National Park. The Cleveland Metroparks Zoo opened its $4.1 million Rosebrough Tiger Passage in June 2016 and is scheduled to open its $4.5 million Asian Highlands exhibit the summer of 2018. The Crawford Auto Aviation Museum, part of the Cleveland History Center, reopened in January 2013 after a $4 million renovation. In the fall of 2017, the Cleveland Children’s Museum reopened in the historic Stager-Beckwith mansion in the Midtown neighborhood after a $10.3 million renovation, giving the museum four times the space as its former location.
Professional sports are available to area residents at various facilities located in the City’s downtown. FirstEnergy Stadium (previously known as Cleveland Browns Stadium), located on the lakefront in downtown Cleveland on the same site as the former Cleveland Municipal Stadium, was completed in August 1999 and is the home of the National Football League’s Cleveland Browns. The facility consists of an open-air stadium with approximately 68,000 seats. In addition to NFL football, the facility is suitable for major league soccer and open-air concerts.
The Gateway Sports Complex, located in the central business district of the City, includes Progressive Field (home of the American League’s Cleveland Indians), Quicken Loans Arena (home of the National Basketball Association’s Cleveland Cavaliers, the American Hockey League’s Cleveland Monsters, and the Arena Football League’s Cleveland Gladiators), and a parking garage.
Progressive Field, which opened in April 1994, is an open air, natural turf baseball stadium with a current seating capacity for approximately 36,000 people. Quicken Loans Arena, which opened in October 1994, is a multi-functional, indoor facility for sporting and entertainment events and seats approximately 20,000 people. The Gateway common areas consist of approximately 13 acres and include Gateway Square, an area for outdoor entertainment and activities. A $140 million renovation of Quicken Loans Arena began in September of 2017.
The City’s various facilities and downtown development have allowed the City to accommodate several major national events. The City hosted the 2016 Republican National Convention in July 2016, with an estimated 50,000 attendees. The City also hosted the 2014 Gay Games which featured more than 35 sports, band and choral competitions and community and cultural events and more than 10,000
A-8 participants from more than 65 countries. In addition, the City hosted the National Senior Games in July 2013, with over 10,000 registered athletes and had a total attendance of approximately 65,000.
Downtown and Other Economic Development
The City continues to focus its strategies on identified clusters of regional strength including health technology, paints and coatings, lighting and electrical, information technology, automotive and automotive related, aerospace, and banking and finance. Retention efforts include two visitation programs: the Cleveland Industrial Retention Initiative for all manufacturers, distribution and related supply chain businesses and a specific downtown stakeholders’ visitation program through Downtown Cleveland Alliance. Oatey Co., a long time Cleveland manufacturer of plumbing products with locations around the world, built a new 43,500 square foot headquarters building in Cleveland’s Emerald Corporate Park, which opened in October 2016.
Investment in Cleveland’s educational institutions continues. Cleveland State University recently opened Washkewicz Hall, its new $60 million engineering building in December 2017. Cuyahoga Community College has undertaken a major construction and renovation project across all four of its campuses. This includes a $6 million addition and renovation of its Advanced Technology and Training Center at the Metropolitan Campus downtown.
One of the central focus areas is the Health Tech Corridor, a three-block wide transit-oriented development running from Cleveland State University to University Circle, encompassing 1,600 acres. The Health Tech Corridor includes three colleges and universities and three major hospitals. In 2014, RTA completed a new transit station in University Circle on Cedar Avenue and completed construction of a new transit station on Mayfield Road in August 2015. These stations complement RTA’s Health Line transportation system by connecting it to the City’s heavy rail system, with direct access to the airport, and providing better connectivity to the City’s second “downtown.” The Health Line was key in the retention of Dealer Tire in the City’s Midtown area. Dealer Tire opened their new Headquarters at the Victory Center in mid-2017, keeping their 450 employees in the City. They intend to add over 100 jobs in the next three years. The area also continues to provide a location for incubated health technology companies like Abeona, which broke ground in October of 2017 on its private gene manufacturing facility (one of 10 in the United States) in the Health Tech corridor.
Hemingway Development and University Hospitals purchased a ten acre brownfield site that the City assembled and cleaned up. University Hospitals is developing another Health Technology Campus to be anchored by University Hospital’s 40,000 square foot Rainbow Center for Women and Children which is expected to open in July of 2018. Hemingway also broke ground in 2016 on a 60,000 square foot speculative tech center. Construction is expected to be completed in 2018, with much of the space preleased. Dave’s Supermarkets is currently constructing a new flagship 60,000 square foot grocery store on an adjacent site. This will provide a major retail amenity to the Corridor, as well as the surrounding neighborhoods. A new Hilton Tru hotel is under construction in the area to meet the rising demand from the medical and technology developments in the corridor.
A development team of First Interstate Properties, Ltd. and Petros Development Corp. recently opened One University Circle, a new 28-story residential tower in University Circle, five miles east of downtown in the vicinity of the Cleveland Clinic, Case Western Reserve University and many of the City’s cultural institutions. Midwest Development Partners and the Coral Company are preleasing Centric, a seven story mixed use complex consisting of first floor office and retail and 272 residential units, with expectations of occupancy in August of 2018. The two projects represent a total investment in the University Circle area of over $180 million.
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In 2013, the Cleveland Clinic demolished a block of buildings across from its campus to make way for a new medical school in partnership with Case Western Reserve University. Originally planned as a 165,000 square foot medical education building, the project has now been expanded to become a Health Education Campus in excess of 485,000 square feet and a cost over $515 million. The project broke ground on October 1, 2015 and is expected to be completed in mid-2019. The Cleveland Clinic opened its $276 million 377,000 square foot Taussig Cancer Center in March of 2017. The Clinic is converting the former Cancer Center building into the 120,000-square-foot new home of Cleveland Clinic Children’s outpatient facility. The $20 million renovated facility is expected to open in the fall of 2018.
In 2015, Integrated CC LLC, as the developer, commenced construction of the 276-room all service Holiday Inn Cleveland Clinic located on the Cleveland Clinic Campus. The hotel has a full service restaurant and lounge. The hotel is designed to serve the public and the families of overnight patients at the Cleveland Clinic. The $45 million project was financed with bonds issued by the Cleveland-Cuyahoga County Port Authority. The hotel opened for business in May 2016.
In 2014, MetroHealth Medical Center announced its campus transformation project. As part of the multiyear project, MetroHealth opened its $86 million Critical Care Pavilion in 2016. A 1,500-space parking garage is expected to be completed in 2018. A new hospital and other buildings are in the design process, with construction expected to commence in the spring of 2019 on the new hospital. The total cost for all phases of the campus transformation is anticipated to be approximately $1 billion.
The County’s $465 million Convention Center and Global Center for Health Innovation project in the City’s downtown was completed in 2013. The project included an integrated facility for (i) exhibition space and showrooms for medical devices and equipment and related functions (the Global Center for Health Innovation) and (ii) exhibition, tradeshow and conference facilities, meeting rooms and related functions. Plug and Play, a Silicon Valley-based startup accelerator, has partnered with The Cleveland Clinic and Jumpstart to launch healthcare startups. The companies will be housed in 10,000 square feet of the Global Center for Health Innovation, where Plug and Play has made a three-year commitment to provide mentorship to high-tech startups.
A $260 million Hilton convention center hotel, funded through bonds issued by the County, opened in mid-2016 in time for the Republican National Convention. The 30-story, 650-room Hilton was built on the site of the former County administration building, which was razed in early 2014. Several other hotels were also completed in time for the Republican National Convention. They include the 481- room Westin, which opened in the spring of 2014; the 150-room Metropolitan, which opened in the fall of 2014; the 120-room Kimpton Schofield which opened in March 2016, and the 180-room Drury Plaza Hotel, which opened in April 2016.
Explorys, a Cleveland Clinic incubated software company, was purchased by IBM which intends to keep the company in the City and plans to add 100 new jobs to its current workforce. They are in the process of constructing a new headquarters in the City at the intersection of East 105th Street and Cedar Avenue, along the Opportunity Corridor.
Stark Enterprises purchased two buildings and a surface parking lot in the City’s downtown and has announced plans to create a 2.6 acre site that will become “nuCLEus”, a $250 million development that will include 500 residential units, 200,000 square feet of office space, 130,000 square feet of retail space, two new parking garages and a new hotel.
The $275 million Cleveland Flats East Development Project Phase I was completed in 2013. This project consisted of an approximately 476,000 square foot, 18-story office tower, an approximately 530-space parking garage, a 150-room Aloft hotel, and approximately 31,000 square feet of restaurant
A-10 and retail space. The $146 million Phase II included 243 apartments and 80,000 square feet of ground floor restaurant and retail as well as 48,000 square feet of entertainment space. A 1,200 linear foot river walk has been completed and provides access to the riverfront. The Phase II grand opening was held in October 2015. The Metroparks has opened a seasonal water taxi service that connects both sides of the river with plans to connect in the future to a lakefront beach at Wendy Park, furthering the tourist draw to this area.
The Ohio City neighborhood continues to grow and be a destination for residents and tourists. The neighborhood includes the City-owned West Side Market, the oldest continually operating market in the country, which recently celebrated its 100th anniversary. The West 25th Street Lofts Project created 83 loft style apartments and some rooftop penthouse units, as well as 9,100 square feet of commercial space. The last of the apartments were completed in December of 2016. Total project cost was over $60 million. Abode Modern Lifestyle Developers has assembled four acres of land with hopes of constructing a $40 to $50 million new mixed use development. The area has seen more than $15 million in new investment to redevelop over 198,000 square feet of vacant or underutilized mixed use space, including historic renovations and some new construction. The Snavely Group’s $60 million mixed-use, mixed- income development known as “The Quarter” began construction in October 2016. The success of Ohio City investments has led to development moving along the retail corridor on Lorain Avenue, with investors buying buildings from West 25th Street to West 50th Street with a variety of retail and commercial projects that include microbreweries, a home brewing supplier, an organic grocery store, restaurants and a shuffle board club. Many of the buildings are renovating long vacant apartments over the first floor retail space as the Ohio City housing market continues to draw new residents from all income levels looking to be in this walkable, transit-oriented community. In 2018, groundbreaking is scheduled on another mixed-use development on a nearby site on Detroit Avenue.
The Detroit Shoreway neighborhood adjacent to Ohio City is also enjoying an arts and entertainment resurgence. The Cleveland Public Theater and Capital Theater were joined in 2015 by a new performing arts venue, the Near West Theatre. The Templin Bradley, a 30-unit mixed income apartment building with both market rate and low-income units, opened in June 2015.
Housing and Neighborhood Development
The City continues to implement strategies to position the City and its neighborhoods to capitalize on future opportunities. The City has identified areas (i) where significant needs must be addressed, (ii) where need and market potential overlap, (iii) where scattered site rehabilitation will be sustainable, and (iv) where the City can create new housing opportunities, particularly for very low income households. In these target areas, the City has focused market-building and stabilization efforts, specifically focused on demolition, housing renovation and land reutilization.
Housing
The City’s housing strategy embodies the core principles of creating healthy mixed-income neighborhoods of choice while preserving and expanding housing opportunities for low and moderate income households. The City has used its funds to develop homes and apartments for low income families and for seniors, and to continue the City’s long term commitment to preserving the existing stock of HUD-assisted rental housing.
All housing development supported by City funding, including tax abatement, complies with the City’s Green Building Standards, which were updated and re-issued in June of 2016. The standards further the City’s commitment to both green building and the ongoing development of quality housing,
A-11 particularly for low and moderate income families. The City’s Green Building Standards incorporate national standards such as LEED and Enterprise Community Partners’ Green Community Standards.
Large scale housing projects recently completed include: The Edge, a 237 unit building providing premium student housing, The Garfield Building, a 130 unit building that opened in the fall of 2017, and The Residences at Leader, a 224 unit renovated building. The Standard Building, a renovation project creating 277 apartments and four penthouse apartments, opened in January of 2018. Affordable housing projects completed in 2017 include: Hough Heritage Apartments, a 60-unit new construction apartment building for low-income seniors near the Cleveland Clinic and a new mixed use market rate development; Phase 2 of Sankofa Village, a new construction project of 50 affordable townhouse-style homes in a mixed-income community to replace obsolete public housing units; The Commons at West Village, a 66- unit permanent supportive housing apartment building serving chronically homeless people; and Lofts at Lion’s Mills, which created 36 units of affordable housing in an adaptive use of a commercial building.
Overall, the downtown housing market has remained strong. The Downtown Cleveland Alliance reported that an additional 805 units came onto the market in 2017. The Schofield Residences opened in May of 2016, containing 52 high-end units attached to a 128-room boutique hotel. The Beacon is expected to open its 187 unit building in 2019. The conversion of the Cleveland Athletic Club into 166 apartments is underway.
In April of 2018, Playhouse Square foundation broke ground on the Lumen at Playhouse Square apartment complex. The $135 million project will feature a 34-story building with more than 300 units. The project replaces a parking lot, but will add a 550 parking space garage. The project is expected to be completed in 2020.
Another City focus is the renovation and new construction of single family housing. These efforts resulted in the completion and sale of 122 homes. Renovated homes in the City supported by City funding or tax abatement had a median sale price of $135,916, while the median new home sales price, for new homes receiving similar support, was $335,834. City programs also assisted people with maintaining or repairing their homes.
The City has also partnered with experienced non-profit housing developers and service providers to create permanent supportive housing units for chronically homeless persons with disabilities. Through the Housing First Initiative, over 600 units of such housing have been developed since 2006. Housing First’s building management staff and supportive services staff work together to serve residents providing the support they need to remain housed and achieve other life goals. Funding for the most recent project supported by the City, Emerald Alliance X, was secured in 2016 to allow construction to commence in 2016 for 60 permanent supportive housing apartments in the Lee-Miles neighborhood.
Habitat for Humanity has continued to expand its affordable home ownership model, renovating 37 homes in 2016 and 2017.
In 2017, the City continued efforts to assist people in avoiding foreclosure and staying in their homes. A partnership with the Cleveland/Cuyahoga County Office of Homeless Services and other partners, continued to assist residents threatened with the loss of housing.
Neighborhood Transformation Initiative
In 2017, the City introduced several new programs as part of the Neighborhood Transformation Initiative, a multi-faceted approach to economic development, housing stabilization, and wealth creation in neighborhoods that have traditionally not seen investment. Beginning in the Glenville neighborhood
A-12 north of University Circle, the programs will help to leverage private investment and stabilize market values while creating wealth and opportunity for neighborhood residents. Programs include a $44 million mixed-use development fund, a collaboration between the City, Capital Impact Partners, and four local banks (Huntington, Key, PNC, Fifth Third) that will provide traditional lending in communities where it has not been available, Homeowner Down Payment Assistance, which will leverage high Loan-to-Value mortgages to help set and stabilize the single-family homeowner and rehab markets, and a Critical Home Repair program that will help improve living conditions and home values for existing residents. In addition, the Initiative will also fund a retail incubator program that will help residents start innovative new businesses to serve their community and partnerships with local non-profit providers to help drive entrepreneurship and business development programs into under-served communities.
Demolition
The City has continued an aggressive pursuit of demolition or renovation of distressed properties that have proliferated as a result of foreclosures. In 2017 the City razed 551 condemned structures at the cost of $4.26 million. Between 2006 and 2017, the City razed 9,359 condemned structures at a cost in excess of $72 million.
These demolitions position the City to be able to eliminate blight and strategically assemble land and to begin site preparation in anticipation of a stronger economy. The local strategies for the re-use of vacant land have been broad, have involved many partners and have been innovative. Those ongoing efforts have been particularly focused on urban gardens and agricultural programs. The City uses Community Development Block Grant funds to contract with The Ohio State University Extension Program to administer the Summer Sprout Community Garden Program, which now includes more than 50 acres at 194 gardens and 3,380 gardeners in all wards of the City. The gardens donated 14,413 pounds of produce to the local food banks and hunger programs in 2016.
Land Reuse
The City’s 40-year old ‘Land Bank’ continues to actively acquire tax foreclosed vacant property to be assembled for redevelopment. Over the past few years, over 600 parcels have been sold to homeowners as yard expansions, to developers and nonprofit organizations to create market-rate and low- income housing units, to support expansion of existing businesses and institutions, and to establish permanent sites for urban agriculture.
In recent years, the City has promoted temporary reuse of vacant property in its Land Bank – particularly for urban agriculture and urban farming. Repurposing vacant urban land into productive community gardens and urban farms makes the City’s neighborhoods more vibrant and sustainable. Specifically, urban agriculture is a means of addressing food deserts, promoting healthy eating, supporting principles of sustainability, and encouraging community engagement and participation.
The nationally-recognized Re-Imagining Cleveland Pilot Program encouraged the redevelopment of land bank property as green space, urban agriculture sites, and residential side yards. This program piloted new policies and procedures for vacant land management, including long-term leases and subsidized access to the City’s water system. It invested nearly $1.4 million in NSP-1 and NSP-2 funding to fund 63 greening and urban agriculture sites and 73 side yard expansions.
The most significant large-scale urban farming initiative is the 28-acre Urban Agriculture Innovation Zone. City-owned vacant land in this area is leased for several urban agriculture programs, including a market farm incubator operated by The OSU Extension.
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Brownfield Redevelopment
The City is committed to the elimination of vacant and condemned houses and commercial structures and has identified seven priority areas for potential economic growth. Hundreds of structures have been demolished in these areas to clear and assemble sites for redevelopment. These priority areas were selected because of their proximity to highways and existing infrastructure and the opportunity for economic growth. The City’s brownfield redevelopment efforts, in partnership with the County, have resulted in the assessment of over 1,150 acres at over 180 sites throughout the City in the last eight years.
Since 2011, the City’s Industrial-Commercial Land Bank facilitated the following reclamation efforts:
• The former Tops grocery store at Superior and Lakeview was taken into the Industrial Commercial Landbank as a deed in lieu of foreclosure action. The property was marketed to a local developer who has created the Shops at Garrett Square attracting a Save-a-Lot and the first Ohio location for Forman Mills. The City and the developer share in the profits from the sale or lease of the outlots. The project has created over 85 jobs to date.
• The former General Motors Fisher Auto Body facility on Coit Road underwent years of environmental remediation and remained vacant. The City worked with Forest City Enterprises to complete the environmental evaluation of the site. A No Further Action Letter (“NFA”) was issued in 2013. Quasar, a bio-digester facility, has purchased five acres in the northern section of the 25 acre site and has completed the City’s first biodigester, creating a sustainable asset available to many businesses to turn waste into power.
• Demolished and remediated the 22-acre Midland Steel property, securing an NFA. The City is currently marketing the site.
• Worked with The Great Lakes Towing Company, the largest tug boat operator on the Great Lakes, to expand their operation and include ship building using a $200,000 EPA Cleanup Grant for redeveloping additional space for their expansion. The City submitted the grant close-out report in 2013. The City and its partners are working with the EPA under the Great Lakes Restoration Initiative to address contamination in the Old River Channel.
• Worked with a local Community Improvement Corporation to use beneficial re-use strategies to redevelop a 60 acre parcel of land that was the former coke plant owned by ArcelorMittal. Fifteen acres were sold to ODOT, and 6.5 acres are under contracts for an industrial equipment supplier. Multiple developers are interested in the remainder of the site.
• Using $10 million in HUD 108 and Brownfield Economic Development Initiative funds, financed the construction of a cooperatively-owned greenhouse on almost 10 acres in Cleveland’s Central neighborhood. The greenhouse employs neighborhood residents and grows fresh produce for market and local food banks. The greenhouse opened in early 2013 and currently has over 20 employees.
• Secured over $3 million in funding through the Clean Ohio for the assessment and remediation of the Miceli Dairy Company expansion site. The remediation of the site
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enabled Miceli to complete its $20 million plant expansion including a new welcome center on almost 25 acres of brownfield property.
• Conducted asbestos abatement at the former Warner Swasey facility to prepare the site for redevelopment. The abatement of the facility, located at the prime corner of East 55th and Carnegie, was funded by over $1.1 million in USEPA Revolving Loan Funds through the County and the State. Asbestos abatement was completed in 2013, and the City is currently marketing the site with an interested developer performing due diligence.
• Ohio EPA approved an Urban Setting Designation Study for the City. As a result, costs to remediate property in the City are now significantly decreased.
• Secured $3 million in Clean Ohio funding to support the remediation of the Flats Phase II site, enabling the development of the waterfront entertainment and residential district.
Pension Obligations
Present and retired employees of the City are covered under two statewide public employee retirement (including disability retirement) systems. The Ohio Police and Fire Pension Fund (“OP&FPF”) is applicable to uniformed members of the police and fire departments. All other City employees are covered by the Ohio Public Employees Retirement System (“OPERS”).
OPERS currently reports 346,959 active contributing accounts statewide. The number of active members included in the plan for the City as of April 2018 was approximately 5,530. Employees covered by OPERS contribute at a statutory rate of 10.0% of earnable salary or compensation, and the City contributes 14.0% (actuarially established for OPERS) of the same base. The City’s contribution to OPERS for the year ending December 31, 2017 was approximately $37,106,000.
OP&FPF covers approximately 2,280 City full-time police and fire department employees and currently reports over 27,000 active accounts statewide. Police and fire employees contribute at a statutory rate of 12.25%. The City currently contributes 19.5% for police personnel and 24.0% for fire personnel. The City’s contribution to OP&FPF for the year ending December 31, 2017 was approximately $33,283,000.
For further information on these pension plans, see the financial statements of the City located at www.ohioauditor.gov. Financial and other information for OPERS and OP&FPF can also be found on the respective website for each retirement system including its Comprehensive Annual Financial Report.
With the implementation of Governmental Accounting Standards Board (“GASB”) Statement No. 68, “Accounting and Financial Reporting for Pensions - an Amendment of GASB Statement No. 27”, GASB Statement No. 69 “Government Combinations and Disposals of Government Operations”, and GASB Statement No. 71, “Pension Transition for Contributions Made Subsequent to the Measurement Date - an Amendment of GASB Statement No. 68”, which significantly revised accounting for pension costs and liabilities, as of December 31, 2016, the City had a substantial net pension liability reported and explained in the Notes to the Fiscal Year 2016 Financial Statements. For reasons discussed below, and as further discussed in the Fiscal Year 2016 Financial Statements, many end users of the City’s financial statement will gain a clearer understanding of the City’s actual financial condition by adding deferred inflows related to pension and the net pension liability to the reported net position and subtracting deferred outflows related to pension.
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As described in the Fiscal Year 2016 Financial Statements of the City under “Management’s Discussion and Analysis – Government-Wide Financial Analysis”, GASB standards are national and apply to all government financial reports prepared in accordance with generally accepted accounting principles, including those of the City. When accounting for pension costs, GASB Statement No. 27 focused on a funding approach. This approach limited pension costs to contributions annually required by law, which may or may not be sufficient to fully fund each plan’s net pension liability. The newly implemented GASB Statement No. 68 takes an earnings approach to pension accounting. GASB notes that pension obligations, whether funded or unfunded, are part of the “employment exchange” – that is, the employee is trading his or her labor in exchange for wages, benefits, and the promise of a future pension. GASB noted that the unfunded portion of this pension promise is a present obligation of the government, part of a bargained-for benefit to the employee, and should accordingly be reported by the government as a liability since they received the benefit of the exchange.
However, the City is not responsible for certain key factors affecting the balance of this liability. In Ohio, the employee shares the obligation of funding pension benefits with the employer. Both employer and employee contribution rates are capped by State statute. A change in these caps requires action of both Houses of the General Assembly and approval of the Governor. Benefit provisions are also determined by State statute. The employee enters the employment exchange with the knowledge that the employer’s promise is limited not by contract but by law. The employer enters the exchange also knowing that there is a specific, legal limit to its contribution to the pension system. In Ohio, there is no legal means to enforce the unfunded liability of the pension system as against the public employer. State law operates to mitigate/lessen the moral obligation of the public employer to the employee, because all parties enter the employment exchange with notice as to the law. The pension system is responsible for the administration of the plan.
The City’s current employer contributions to OPERS and OP&FPF have been treated as current expenses and are included in the City’s operating expenditures, except to the extent that they are paid from the proceeds of a Police and Fire Pension levy collected by the City.
OPERS and OP&FPF are two of five statewide public employee retirement systems created by and operating pursuant to Ohio law, all of which currently have unfunded actuarial accrued liabilities. The General Assembly has the power to amend (and in the past has amended) the format of those systems and could revise rates or methods of contributions to be made by the City and its employees to OPERS and/or OP&FPF and could also revise benefits or benefit levels. In 2012, the General Assembly passed five separate pension reform bills intended to assist each of the five retirement systems in addressing its unfunded actuarial accrued liabilities. The bills passed with respect to OPERS and OP&FPF provided for (i) no change in the City contribution rates with respect to its employees’ earnable salaries, (ii) no change in OPERS employee contribution rate, and (iii) an increase in the OP&FPF employee contribution rate from 10% to 12.25% in annual increments of 0.75% in July of each of the years from 2013 through 2015. With certain transition provisions applicable to certain current employees, the bills increased minimum age and service requirements for retirement and disability benefits, revised the calculation of an employee’s final average salary on which pension benefits are based to include the five highest years (rather than the three highest years), provided for OPERS pension benefits to be calculated on a lower, fixed formula, changed provisions with respect to future cost-of-living adjustments to limit those adjustments to the lesser of any increase in the Consumer Price Index or three percent, and made other changes. The OP&FPF bill also authorized the OP&FPF board to further adjust member contribution rates or further adjust age and service requirements after November 1, 2017, if, after an actuarial investigation, the board determines that an adjustment is appropriate.
Federal law requires City employees hired after March 31, 1986 to participate in the federal Medicare program, which requires matching employer and employee contributions, each being 1.45% of
A-16 the wage base. Otherwise, City employees who are covered by a State retirement system are not currently covered under the federal Social Security Act. OPERS and OP&FPF are not now subject to the funding and vesting requirements of the federal Employee Retirement Income Security Act of 1974.
Employees
As of April 19, 2018, the City had approximately 7,071 full-time employees, 659 part-time employees, and 224 seasonal employees. Thirty-one bargaining units represent approximately 5,610 employees. The larger units, together with the approximate number of employees represented by those units, include the American Federation of State, County and Municipal Employees, Local 100 (1,154); Cleveland Police Patrolmen’s Association (1,239); the International Association of Firefighters (760); Municipal Foreman and Laborers Union (492); Teamsters Local 507 (346); and the Fraternal Order of Police (274). There have been no significant labor disputes or work stoppages within the City in the last 32 years.
The City’s three-year labor agreements with its labor unions expired on March 31, 2016. Negotiations are still in process with a number of unions on new three-year contracts. Until new contracts are approved, the previous contracts remain operational. Once new contracts are approved and entered into, any changes in pay under the new contracts may be retroactive to the expiration of the prior contracts. Non-union employees may receive the same wage increases as those negotiated with the various unions. There are approximately sixteen collective bargaining units that have already executed new contracts, which will expire on March 31, 2019.
City Council by ordinance establishes schedules of salaries, wages and other benefits for City employees. Generally, the terms of these ordinances have been the product of negotiations with representatives of the employees or bargaining units, and increases in economic benefits have normally been provided on an annual basis.
Chapter 4117 of the Revised Code (the “Collective Bargaining Law”), establishes procedures for, and regulates, public employer-employee collective bargaining and labor relations for the City and other state and local governmental units in Ohio. The Collective Bargaining Law creates a three-member State Employment Relations Board (the “SERB”), which administers and enforces the Collective Bargaining Law. Among other things, the Collective Bargaining Law: (a) creates rights and obligations of public employers, public employees and public employee organizations with respect to labor relations; (b) defines the employees it covers; (c) establishes methods for (i) the recognition of employees and organizations as exclusive representatives for collective bargaining and (ii) the determination of bargaining units; (d) establishes matters for which collective bargaining is either required, prohibited, or optional; (e) establishes procedures for bargaining and the resolution of disputes, including (i) negotiation, (ii) mediation and (iii) fact finding; and (f) permits all covered employees to strike, except certain enumerated classes of employees, such as police and fire personnel.
Disputes with employees who are prohibited from striking are to be resolved by binding arbitration starting with best offer, on an issue-by-issue basis. In the event that a legal strike presents a clear and present danger to the public health or safety, the appropriate Ohio court of common pleas may issue a temporary restraining order against the strike for a period not to exceed 72 hours, and in such a case the employer may request authorization of the SERB to enjoin the strike beyond the period of the temporary restraining order. The SERB determines whether a clear and present danger to public health or safety exists, and if it so determines, the court of common pleas issuing the temporary restraining order has jurisdiction to enjoin the strike for a period of 60 days after the expiration of the temporary restraining order or when agreement is reached, whichever occurs first. Thereafter, no court has jurisdiction to issue injunctions or other orders, and a strike may be resumed at the end of the 60-day period. The law
A-17 established certain employers, employee and employee organization unfair labor practices and remedies for unfair labor practices.
Police and Fire Overtime
The City compensates the members of the City’s police and fire departments at a rate of one and one-half times the regular rate of pay for overtime and holidays worked. It has been the City’s practice that, for each one hour unit of overtime or holiday time worked, those employees receive one hour of pay at their regular rate and, at the discretion of the employee, one-half hour of pay at the regular rate or a credit of one-half hour of compensatory time for which they will be paid, to the extent that time is not used as vacation time, at their then current rate of pay upon termination of employment because of death, retirement, resignation, layoff or dismissal. A collective bargaining agreement between the City and the Cleveland Police Patrolmen’s Association provides that employees may request payment of all or part of their compensatory time in money, and that if the requests exceed the total budgeted amount, the requests will be paid on a pro rata basis. Similar agreements have been reached with the Association of Cleveland Firefighters and the Fraternal Order of Police. The total estimated amount of the City’s liability for accumulated compensatory time as of December 31, 2017 was $39,064,000, and that amount is unfunded. That amount was calculated based on the employees’ then existing regular rate of pay. The rate of pay used to determine any cash payments made upon retirement or other termination or upon the request of the employee will be the rate of pay in effect at the time of such determination. The City has budgeted $6,000,000 for payment in 2018 of accrued overtime and other separation benefits anticipated to be payable in connection with retirements. The City has budgeted $625,000 in 2018 for deferred overtime payments requested by employees.
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APPENDIX B
SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE
Certain Definitions
“Additional Bonds” means any Bonds authorized and issued pursuant to any Supplemental Indenture entered into after the Amended and Restated Trust Indenture.
“Adjusted Net Revenues” means, for any period, the Revenues for such period net of the Operating Expenses for such period, but with the Revenues for such period adjusted so as to exclude therefrom: (i) any proceeds from the sale or disposition, not in the ordinary course of business, of capital assets, except that Revenues shall not be adjusted to exclude therefrom such proceeds in an amount equal to the costs incurred by the Issuer in connection with such sale or disposition, and except further that Revenues shall not be adjusted to exclude such proceeds if payable to the Issuer in substantially equal installments over a period of at least ten (10) years; and (ii) interest earned on any moneys on deposit in the Construction Fund or the Renewal and Replacement Fund.
“Assumed Amortization Period” means the period of time specified in paragraph (a) or paragraph (b) below, as selected by the Director of Finance:
(a) Five (5) years; or
(b) The period of time, exceeding five (5) years, set forth in a written opinion delivered to the Issuer, of an investment banker selected by the Issuer and experienced in underwriting indebtedness of the character of the Bonds, as being not longer than the maximum period of time over which indebtedness having comparable terms and security issued or incurred by similar Issuers of comparable credit standing would, if then being offered, be marketable on reasonable and customary terms.
“Assumed Interest Rate” means the rate per annum (determined as of the last day of the calendar month next preceding the month in which the determination of Assumed Interest Rate is being made) set forth in an opinion delivered to the Issuer of an investment banker selected by the Issuer and experienced in underwriting indebtedness of the character of the Bonds, as being not lower than the lowest rate of interest at which indebtedness having comparable terms, security and federal tax status amortized on a level debt service basis over a period of time equal to the Assumed Amortization Period, and issued or incurred by similar issuers of comparable credit standing would, if being offered as of such last day of the calendar month, be marketable on reasonable and customary terms; provided that such rate shall be neither (a) lower than the rate specified in the “Revenue Bond Index” published in The Bond Buyer, or successor index, as in effect on the date of such opinion, nor (b) higher than the highest rate permitted by law at which such Bonds could be sold on said day.
“Auditor” means the Auditor of the State of Ohio or an independent certified public accountant or a firm of independent certified public accountants of recognized standing, licensed by, or permitted to practice in, the State, designated by the Issuer.
“Authorized Denominations” means with respect to any series of Bonds, the denominations provided in the Supplemental Indenture creating such series of Bonds.
“Balloon Bonds” means any Bonds, or notes issued in anticipation thereof, (a) 25% or more of the principal payments of which are due in a single year, excluding any such principal payments that are
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subject to mandatory sinking fund requirements in a prior year, or (b) 25% or more of the principal of which may, at the option of the holder or holders thereof, be redeemed at one time.
“Bond Anticipation Notes” means any notes issued in anticipation of the issuance of a Series of Additional Bonds.
“Bond” or “Bonds” means one or more of the Series 2008 Bonds, the Series 2010 Bonds, the Series 2014 Bonds, the Series 2018 Bonds and Additional Bonds.
“Bondholder” or “holder of Bonds” means any person in whose name a Bond is registered.
“Bond Purchase Agreement” means, as to any Series of Bonds, the Bond Purchase Agreement between the Issuer and the Original Purchaser of such Series of Bonds, approved in or pursuant to the applicable Series Bond Legislation.
“Bond Registrar” means the Trustee acting as bond registrar under the Indenture.
“Bond Reserve Requirement” or “Reserve Requirement” means an amount equal to the maximum Bond Service Charges required to be paid in any subsequent Fiscal Year on the Bonds secured thereby, or with respect to a Series of Additional Bonds, in a Supplemental Indenture.
“Bond Service Charges” means, for any applicable time period, the principal (including any Mandatory Sinking Fund Installments), interest, and redemption premium, if any, required to be paid by the Issuer on the Bonds during such period. In determining Bond Service Charges for any period or date, Mandatory Sinking Fund Installments required to be paid during such period or on such date shall be included, and principal maturities for which, and to the extent, Mandatory Sinking Fund Installments were or are to be paid in a prior period or on a prior date shall be excluded.
“Bond Service Fund” means the Bond Service Fund established under Section 4.01 of the Indenture.
“Bond Service Reserve Fund” means the Bond Service Reserve Fund established under Section 4.01 of the Indenture.
“Bond Year” means, with respect to the Bonds of any Series, the annual period (or such shorter period from the date of issuance of such Bonds) provided for the computation of the Rebate Amount for the Bonds of such Series under Section 148(f) of the Code.
“Book Entry Form” or “Book Entry System” means a form or system in or under which (i) the beneficial right to the Bonds of any Series and the Bond Service Charges on the Bonds of such Series may be transferred only through a book entry, and (ii) physical Bond certificates in fully registered form are issued by the Issuer only to a Depository or its nominee as registered owner, with the Bonds “immobilized” in the custody of the Depository, and the book entry maintained by a person or persons other than the Issuer or the Trustee being the record that identifies the owners of beneficial interests in the Bonds of such Series and the Bond Service Charges on the Bonds of such Series.
“Book Value” or “book value” means, as used herein with respect to property, facilities or assets of Cleveland Public Power, the gross book value of such property, facilities or assets.
“Capital Costs” means all costs of the construction, installation or acquisition of additions, extensions, renewals, replacements, alterations, betterments and any other capital improvement to or of
B-2 any part of Cleveland Public Power, including, without limitation, costs of issuance of any Bonds issued to provide funds to pay any part of the cost thereof, including fees and expenses of counsel, financial advisors, feasibility consultants, consulting engineers, and accountants, the costs of any demolitions or relocations necessary in connection therewith, and any equipment, machinery, apparatus, furnishings, paving, grading, excavation, blasting, removals or any other incidental work or appurtenance, and of all or any real or personal property, rights-of-way, easements, franchises or any other property interests, deemed by the Issuer to be necessary or useful or convenient therefor, and also including, without limitation, to the extent properly attributable to Cleveland Public Power:
(a) obligations incurred for labor and materials and payments made to contractors, builders and materialmen in connection with construction, installation or acquisition of any part of Cleveland Public Power, and for the restoration of property damaged or destroyed in connection with such construction or installation;
(b) fees and expenses of the Trustee, the Bond Registrar and any Paying Agents during the construction, installation or acquisition of any improvement financed by any Series of Bonds, the cost of surety bonds to secure moneys in the Construction Fund, payments, taxes on other governmental charges lawfully levied or assessed during construction or on any property acquired, and premiums on insurance, if any, during such construction, installation or acquisition;
(c) fees and expenses for studies, surveys and reports, engineering, testings, estimates of costs and revenues, preparation of plans and specifications and inspecting or supervising construction, installation or acquisition, as well as for the performance of all other duties of engineers, architects or other experts in connection with the acquisition, construction, installation, extension, renewal or improvement of Cleveland Public Power;
(d) expenses of administration properly chargeable to the acquisition, installation, construction, reconstruction, renewal, extension, or improvement of Cleveland Public Power, including legal expenses and fees, financing charges, costs of audits and fiscal advice and all other items of expense not elsewhere in this definition specified, incident to the acquisition, construction, installation, reconstruction, renewal, extension or improvement of Cleveland Public Power, including costs of the acquisition of real estate, easements, licenses, franchises and rights- of-way therefor, including costs of abstracts of title and title insurance, and including interest accruing on any Series of Bonds during such period of time as shall have been certified from time to time by the Consulting Engineer as necessary to construct, install or acquire any improvement of Cleveland Public Power financed by such Series of Bonds and any charges of the Trustee and the Paying Agent with respect to the payment of such interest;
(e) the premium on any municipal bond insurance policy, any other Credit Support Payment Obligation, and any amount payable by the Issuer for or under an Interest Rate Hedge Agreement;
(f) any obligation or expense heretofore or hereafter expended or incurred by the Issuer and any amounts heretofore or hereafter advanced by the Issuer for any of the foregoing purposes;
(g) amounts reasonably necessary to pay current Operating Expenses during such period of time as shall have been certified from time to time by the Consulting Engineer as necessary to construct, install or acquire any improvement of Cleveland Public Power financed by any Series of Bonds; and
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(h) any fees, expenses or costs incurred in connection with the issuance of Bonds for the purpose of Refunding any Outstanding Bonds.
“Certificate of Award” means as to any Series of Bonds, the Certificate of Award authorized to be executed with respect to such Series of Bonds in or pursuant to the applicable Series Bond Legislation.
“Clerk” means the Clerk of the Issuer’s Legislative Authority or the person acting as such pursuant to authorization by the Legislative Authority.
“Cleveland Public Power” means the entire electric utility system of the Issuer, including all real estate and rights in real estate now or hereafter owned by the Issuer in connection therewith, the transmission and distribution facilities thereof, all additions, extensions, replacements, alterations and improvements at any time made or acquired with respect thereto, all machinery, equipment and supplies used in connection therewith, and all other properties forming a part thereof.
“Code” means the Internal Revenue Code of 1986, as amended.
“Construction Fund” means the Construction Fund established under Section 4.01 of the Indenture.
“Consulting Engineer” means such duly licensed independent engineer or engineering firm as may from time to time be selected by the Issuer and satisfactory to the Trustee as consulting engineer for Cleveland Public Power.
“Credit Provider” means, with respect to a series of Bonds, the provider of credit enhancement or liquidity support, if any, for such series of Bonds specified in the applicable Supplemental Indenture.
“Credit Provider Payment Obligations” means amounts payable by the Issuer to Credit Providers with respect to credit enhancement or liquidity support other than as Bond Service Charges, including, without limitation, providers of any instrument funding all or part of the Bond Reserve Requirement.
“Crossover Amount” means the amount of money and Escrow Securities which are on deposit in a Crossover Escrow Account and which, together with investment income thereon, are held as provided in the definition of “Crossover Refunded Bonds.”
“Crossover Date” means, when used with respect to any particular Crossover Refunding Bonds and Crossover Refunded Bonds, the date on which the Crossover Amount on deposit in a Crossover Escrow Account shall be used to retire all such Outstanding Crossover Refunded Bonds for which such Crossover Escrow Account was established.
“Crossover Escrow Account” means an escrow account in which a Crossover Amount is deposited.
“Crossover Escrow Deposit Agreement” means an escrow deposit agreement under which a Crossover Escrow Account is created and administered.
“Crossover Refunded Bond” means any Bond deemed to be Crossover Refunded; any one or more of the Bonds shall be deemed to have been Crossover Refunded and shall be deemed to be Crossover Refunded Bonds if:
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(a) The Trustee shall have received and shall hold in trust for and irrevocably committed thereto, moneys sufficient, or
(b) The Trustee shall have received and shall hold in trust for and irrevocably committed thereto, Escrow Securities which are certified by an independent certified public accountant to be of such maturities, irrevocably established redemption dates or irrevocably established repurchase dates (if such Escrow Securities are subject to a repurchase agreement) and interest payment dates, and to be of such principal amounts or irrevocably established redemption prices and to bear such interest, which together with any moneys to which reference is made in paragraph (i) above, without the need for further investment or reinvestment of either the principal amount thereof or the interest earnings therefrom (which earnings are to be held likewise in trust, except as provided herein), will be sufficient:
(c) for the payment of all principal of and premium, if any, on such Crossover Refunded Bonds as the same become due, whether at their maturity or redemption dates or otherwise, as the case may be, or if a default in payment shall have occurred on any maturity or redemption date, then for the payment of all principal of and premium on such Crossover Refunded Bonds to the date of the tender of payment; provided, that if any of those Crossover Refunded Bonds are to be redeemed prior to the maturity thereof, notice of that redemption shall have been duly given or irrevocable provision shall have been duly made for the giving of that notice and
(d) for the payment of interest (in whole or in part) on any Crossover Refunding Bonds, the proceeds of which were, in whole or in part, deposited in such Crossover Escrow Account, or both. Prior to the Crossover Date, the Crossover Amount may be pledged as security for the Crossover Refunding Bonds, the Crossover Refunded Bonds, or both. The moneys and proceeds of such Escrow Securities shall, to the extent needed, be used for the foregoing purposes or used to reimburse a provider of credit enhancement for amounts advanced by it for the foregoing purposes.
“Crossover Refunding” means an advance refunding in which Crossover Refunding Bonds are issued to refund Crossover Refunded Bonds and in which a Crossover Amount is deposited in a Crossover Escrow Account.
“Crossover Refunding Bonds” means Bonds, to the extent that any proceeds from the sale thereof shall, upon deposit in a Crossover Escrow Account, constitute a Crossover Amount.
“Defaulted Interest” means the interest on any Bond which is payable, but which is not punctually paid or duly provided for, on any Interest Payment Date, together with any interest due on such overdue interest.
“Depository” means any securities depository that is a clearing agency under federal law operating and maintaining, with its participants or otherwise, a Book Entry System to record beneficial ownership of bonds or bond service charges, and to effect transfers of bonds, in Book Entry Form, and includes and means initially The Depository Trust Company (a limited purpose trust company), New York, New York.
“Director of Finance” means the Director of the Department of Finance of the Issuer.
“Director of Law” means the Director of the Department of Law of the Issuer.
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“Director of Public Utilities” means the Director of the Department of Public Utilities of the Issuer.
“Eligible Investments” means and includes any of the following:
(a) Government Obligations and Government Certificates.
(b) Obligations issued or guaranteed by any of the following:
(i) Federal Home Loan Bank System,
(ii) Export-Import Bank of the United States,
(iii) Federal Financing Bank,
(iv) Government National Mortgage Association,
(v) Federal Home Loan Mortgage Company,
(vi) Federal Housing Administration,
(vii) Private Export Funding Corp,
(viii) Federal National Mortgage Association,
(ix) Federal Farm Credit Bank, and
(x) Resolution Funding Corporation, or
(xi) Rural Economic Community Development Administration (formerly, Farmers Home Administration),
or any indebtedness issued or guaranteed by any instrumentality or agency of the United States;
(c) Pre-refunded municipal obligations rated in the highest rating category by at least two Rating Agencies and meeting the following conditions:
(i) (A) such obligations are not to be redeemed prior to maturity or the Trustee has been given irrevocable instructions concerning their call for redemption, and (B) the issuer of such obligations has covenanted not to redeem such obligations other than as set forth in such instructions;
(ii) such obligations are secured by Government Obligations or Government Certificates that may be applied only to interest, principal, and premium payments on such obligations;
(iii) the principal of and interest on such Government Obligations or Government Certificates (plus any cash in the escrow fund with respect to such pre- refunded obligations) are sufficient to meet the liabilities of the obligations;
(iv) the Government Obligations or Government Certificates serving as security for the obligations are held by an escrow agent or trustee; and
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(v) such Government Obligations or Government Certificates are not available to satisfy any other claims, including those against the trustee or escrow agent.
(d) Direct and general long term obligations of any State or municipality of the United States of America, or the District of Columbia (a “State”), to the payment of which the full faith and credit of such State or municipality is pledged and that are rated in either of the two highest rating categories by at least two Rating Agencies.
(e) Direct and general short term obligations of any State or municipality, to the payment of which the full faith and credit of such State or municipality is pledged and that are rated in one of the two highest rating categories by at least two Rating Agencies.
(f) Interest bearing demand or time deposits with, or money market deposits issued by state banks or trust companies or national baking associations that are members of the Federal Deposit Insurance Corporation (“FDIC”). Such deposits or interests must be (i) continuously and fully insured by FDIC, (ii) if they have a maturity of one year or less, with or issued by banks that are rated in one of the two highest short term rating categories by at least two Rating Agencies, (iii) if they have a maturity longer than one year, with or issued by banks that are rated in one of the two highest rating categories by at least two Rating Agencies, or (iv) fully secured by Government Obligations and Government Certificates. Such Government Obligations and Government Certificates must have a market value at all times at least equal to the principal amount of the deposits or interests. The Government Obligations and Government Certificates must be held by a third party (who shall not be the provider of the collateral), or by any Federal Reserve Bank or depository, as custodian for the institution issuing the deposits or interests. Such third party shall have a perfected first lien in the Government Obligations and Government Certificates serving as collateral, and such collateral is to be free from all other third party liens.
(g) Repurchase agreements, (i) the maturities of which are 30 days or less or (ii) the maturities of which are longer than 30 days and not longer than one year, provided the collateral subject to such agreements are marked to market daily, and in either case are entered into with financial institutions such as banks or trust companies organized under State law or national banking associations, insurance companies, or government bond dealers reporting to, trading with, and recognized as a primary dealer by, the Federal Reserve Bank of New York and a member of the Security Investors Protection Corporation, or with a dealer or parent holding company, in each case which is rated investment grade (“A” or better) by at least two Rating Agencies. The repurchase agreement shall be in respect of Government Obligations and Government Certificates or obligations described in paragraph (b), exclusive of accrued interest, and shall be maintained in an amount equal to at least 104% of the amount invested in the repurchase agreements. In addition, the provisions of the repurchase agreement shall meet the following additional criteria:
(A) the third party (who shall not be the provider of the collateral) has possession of the repurchase agreement securities and the collateral securities;
(B) failure to maintain the requisite collateral levels will require the third party having possession of the securities to liquidate the securities immediately unless additional cash and/or acceptable securities are transferred;
(C) the third party having possession of the securities has a perfected, first priority security interest in the securities; and
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(D) the securities must be valued weekly, marked to market at the current market price plus accrued interest.
(h) Federal funds or bankers’ acceptances with a maximum term of one year of any bank which has an unsecured and unguaranteed obligation rating of “Prime 1” or “A3” or better by Moody’s and “A 1” or “A” or better by S&P.
(i) Money Market accounts of any state or federal bank, or bank whose holding parent company is, rated in the top two short term or long term rating categories by at least two Rating Agencies.
(j) Investment agreements, the issuer of which is rated in one of the two highest rating categories, by at least two Rating Agencies.
(k) Star Ohio, the Ohio Subdivision’s Investment Fund created and administered by the Treasurer of the State pursuant to Section 135.45 of the Ohio Revised Code.
(l) Any other lawful investment, the making of which will not adversely affect the rating (other than any rating based upon credit enhancement or liquidity support provided by any Credit Provider other than the Issuer, which shall not be taken into account for purpose of this clause) then assigned to any Outstanding Bonds by any Rating Agency, and will have the consent of any Credit Provider entitled to consent thereto.
“Escrow Securities” means: (i) Government Obligations and Government Certificates; and (ii) Eligible Investments of the character described in clause (b) of the definition of “Eligible Investments” that are, at the time of investment, rated in the highest rating category by at least two Rating Agencies; provided, however, that obligations of the character described in clauses (i) and (ii) hereof shall constitute Escrow Securities only if such obligations shall not be subject to redemption prior to their stated maturities or irrevocable redemption date other than at the option of the holder thereof, except that obligations of the character described in clause (i) hereof which are subject to redemption prior to their stated maturity at the option of the issuer on a specified date or dates shall constitute Escrow Securities if the conditions to their constituting Escrow Securities set forth in the Indenture are met.
“Event of Default” means any of the events defined as and declared to be Events of Default under the Indenture or as described herein under “-Events of Default and Remedies.”
“Event of Full Funding” means the circumstance that exists when the amount on deposit in the Bond Service Reserve Fund at least equals the aggregate Bond Service Charges remaining payable on the then Outstanding Bonds through their respective Principal Retirement Dates.
“Excess Earnings” means, with respect to the Bonds of any Series, an amount equal to the excess of: (i) the aggregate amount earned from the date of issuance of such Bonds on all nonpurpose investments in which gross proceeds of such Bonds are invested (other than Investments attributable to an excess described in this clause), over (ii) the amount that would have been earned if such nonpurpose investments were invested at a rate equal to the yield on such Bonds. Excess Earnings shall be determined in accordance with Section 148(f) of the Code and the applicable Treasury Regulations (final, temporary or proposed) thereunder. As used in the definition of Excess Earnings, the terms “gross proceeds,” “nonpurpose investments” and “yield” have the meanings assigned to them for purposes of Section 148 of the Code.
“Excess Earnings Investment Income” means any income attributable to Excess Earnings.
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“Fiscal Year” means a period of twelve consecutive months commencing on the first day of January of any year and ending on the last day of December of the same calendar year, both inclusive, or such other consecutive twelve month period as hereafter may be established as the fiscal year of the Issuer for budgeting and accounting purposes, to be evidenced, for purposes of the Indenture, by a certificate of the Director of Finance filed with the Trustee.
“Fourteenth Supplemental Indenture” means the Fourteenth Supplemental Trust Indenture, dated June ___, 2018, which constitutes the Supplemental Indenture under which the Series 2018 Bonds are issued.
“Generating Facilities” means the Issuer’s Lake Road generating station, including the real property on which such generating station is situated, and all equipment forming a part thereof.
“Government Certificates” means (in the case of governmental obligations) evidences of ownership of proportionate interest in future interest or principal payments of Government Obligations, including depository receipts thereof. Investments in such proportionate Interest must be limited to circumstances wherein (i) a bank or trust company acts as custodian and holds the underlying Government Obligations; (ii) the owner of the investment is the real party in interest and has the right to proceed directly and individually against the obligor of the underlying Government Obligations; and (iii) the underlying Government Obligations are held in a special account, segregated from the custodian’s general assets, and are not available to satisfy any claim of the custodian, any person claiming through the custodian, or any person to whom the custodian may be obligated.
“Government Obligations” means direct and general obligations of, or obligations the timely payment of principal and interest on which are unconditionally guaranteed by, the United States of America.
“Indenture” means the Amended and Restated Trust Indenture (Sixth Supplemental Indenture) dated as of August 17, 2006, as the same has been and may further be duly supplemented, amended or modified from time to time in accordance with the provisions thereof.
“Interest Payment Dates” means, as to any Series of Bonds, the dates specified as Interest Payment Dates in or pursuant to the Series Bond Legislation authorizing the issuance thereof.
“Interest Rate Hedge Agreement” means an interest rate swap, an interest rate cap or other such arrangement obtained by the Issuer, in accordance with State law in effect at the time, with the goal of (i) lowering the effective interest rate to the Issuer on Bonds, (ii) hedging the exposure of the Issuer with respect to its obligations on Bonds against fluctuations in prevailing interest rates; (iii) otherwise reducing risk (including, without limitation, in addition to interest rate risk, tax risk or liquidity renewal risk) or otherwise managing exposure to changing markets (including, without limitation, in advance of issuances of Bonds); (iv) achieving a more appropriate matching of its assets and liabilities; and (v) otherwise pursuing an optimal capital structure.
“Issuer” means the City of Cleveland, Ohio, a municipal corporation and political subdivision of the State of Ohio.
“Legislative Authority” means the Council of the Issuer.
“Mandatory Redemption Dates” means, as to the Term Bonds of any Series, the dates specified in or pursuant to the applicable Series Bond Legislation as the dates on which such Term Bonds are to be redeemed through the application of Mandatory Sinking Fund Installments.
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“Mandatory Sinking Fund Installments” means amounts required in or pursuant to any Series Bond Legislation to be deposited in the Bond Service Fund for purposes of retiring, on a Mandatory Redemption Date, principal of Term Bonds which, according to their stated maturities, are due and payable, if not called for prior redemption, on a subsequent date.
“Mayor” means the Mayor of the Issuer.
“Net Revenues” means, for any period, the Revenues for such period net of the Operating Expenses for such period.
“Operating Expenses” means all expenses incurred by the Issuer in connection with the operation and maintenance of Cleveland Public Power, including, without limitation, payments made under power contracts, other than pursuant to Power Capacity Obligations, for energy or capacity and payments made by the Issuer pursuant to Power Capacity Obligations to the extent that Section 1.07 of the Indenture provides that such payments shall constitute Operating Expenses, but excluding from such expenses: (a) any allowance for depreciation and amortization, (b) Interest payments on any fixed indebtedness or any capitalized lease obligations, (c) expenditures for any improvements to Cleveland Public Power, which expenditures are not shown as or included in operating expenses in the financial statements for Cleveland Public Power prepared in accordance with Section 5.02(h) of the Indenture, (d) payments made for Bond Service Charges or into the Bond Service Reserve Fund, and (e) losses on the sale or disposition, not in the ordinary course of business, of investments or capital assets, including, without limitation, the Generating Facilities. For a description of the City’s proposed amendment to the definition of “Operating Expenses,” see “SECURITY AND SOURCES OF PAYMENT FOR THE BONDS – Amendment of the Indenture.”
“Optional Earliest Redemption Date” means, as to any Series of Bonds, the date, if any, specified as the Optional Earliest Redemption Date for such Series of Bonds in or pursuant to the applicable Series Bond Legislation.
“Optional Redemption Prices” means, as to any Series of Bonds, the redemption prices (expressed as percentages if the principal amount), if any, at which the Issuer may elect to redeem Bonds of such Series other than by mandatory redemption through application of Mandatory Sinking Fund Installments.
“Ordinary Services” and “Ordinary Expenses” mean, respectively, those services normally rendered and those expenses normally incurred by a trustee under instruments similar to the Indenture.
“Original Purchaser” means, as to any Series of Bonds, the person or persons identified as such in or pursuant to the applicable Series Bond Legislation.
“Outstanding Bonds” or “Bonds Outstanding” or “Outstanding” as applied to Bonds, means, as of any date, all Bonds which have been authenticated and delivered, or are then being delivered, by the Trustee under the Indenture except:
(a) Bonds surrendered for and replaced upon exchange or transfer, or cancelled because of payment or redemption, at or prior to such date;
(b) Bonds for which sufficient money has, prior to such date, been deposited with the Trustee for the payment, redemption or purchase for cancellation thereof (whether upon or prior to the maturity or redemption date of any such Bonds), or which are deemed to have been paid and discharged pursuant to the provisions of the Indenture; provided that if such Bonds are to be
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redeemed prior to their maturity, notice of such redemption shall have been duly given or arrangements satisfactory to the Trustee shall have been made therefor, or waiver of such notice satisfactory in form to the Trustee shall have been filed with the Trustee;
(c) Bonds in lieu of which others have been authenticated (or payment, when due, of which has been made) without replacement thereof under the Indenture; and
(d) For purposes of any consent or other action to be taken by the holders of a specified percentage of Bonds hereunder or under the Indenture, Bonds held by or for the account of the Issuer.
“Parity Swap Obligations” means any payments under Interest Rate Hedge Agreements that are secured by a pledge of Net Revenues on a parity with the pledge of Net Revenues that secures the Bonds.
“Paying Agents” means, as to any Series of Bonds, the Trustee and any other financial institutions or trust companies designated as paying agencies or places of payment for Bonds of such Series in or pursuant to the applicable Series Bond Legislation, and their successors designated pursuant to the Indenture.
“Person” or “persons” means natural persons, firms, associations, corporations and public bodies.
“Power Capacity Obligation” means any contractual obligation of the Issuer to make payments for power or energy irrespective of the Unavailability (as hereinafter defined) of such power or energy, but only if and to the extent that such obligation is payable from the Revenues. If a contract obligates the Issuer to make payments both for available power or energy and Unavailable (as hereinafter defined) power or energy, then only the Issuer’s obligation thereunder to make payment for Unavailable power or energy shall constitute a Power Capacity Obligation. As used in this paragraph, “Unavailability” means unavailability, and “Unavailable” means unavailable, for a period in excess of ninety days.
“Predecessor Bond” means, with respect to any particular Bond, every previous Bond evidencing all or a portion of the same debt as that evidenced by such particular Bond.
“Principal Retirement Dates” means, as to any Series of Bonds, the dates on which Bonds of such Series are to be retired (whether at their stated maturity or on Mandatory Redemption Dates), as specified in or pursuant to the applicable Series Bond Legislation.
“Principal Retirement Schedule” means, as to any Series of Bonds, the schedule of the principal amount of the Bonds of such Series to be retired on the Principal Retirement Dates in accordance with their stated maturities or to be redeemed by mandatory redemption on the Mandatory Redemption Dates, as specified in or pursuant to the applicable Series Bond Legislation.
“Project” means, as used in any Series Bond Legislation authorizing the issuance of a Series of Bonds to pay Capital Costs, the construction or acquisition of capital improvements to Cleveland Public Power to be financed in whole or in part with the proceeds of Bonds of such Series.
“Purchase Price” means, as to any Series of Bonds, the aggregate amount specified in or pursuant to the applicable Series Bond Legislation as the Purchase Price of the Bonds of such Series, together with any premium and accrued Interest on the aggregate principal amount of the Bonds of such Series from their date to the date of their delivery to the Original Purchaser.
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“Rating Agency” or “Rating Service” means Moody’s Investors Service, Inc. or S&P Global Ratings, and their respective successors and assigns, and any other nationally recognized rating service that at the time provides a rating on any Outstanding Bonds.
“Rebate Amount” means the aggregate of the Excess Earnings and the Excess Earnings Investment Income, or such lesser amount payable under Section 148(f) of the Code.
“Rebate Fund” means the Rebate Fund established under to Section 4.01 of the Indenture.
“Refunding” means, with respect to any Outstanding Bonds, either the refunding or advance refunding of such Bonds.
“Regular Record Date” means (i) for any interest payment for which the Interest Payment Date occurs on the first (1st) day of a month, the fifteenth (15th) day of the month next preceding the month in which such Interest Payment Date occurs; (ii) for any interest payment for which the Interest Payment Date occurs on the fifteenth (15th) day of a month, the last business day of the month next preceding the month in which such Interest Payment Date occurs; and (iii) for any interest payment for which the Interest Payment Date occurs on a date other than the first (1st) or fifteenth (15th) day of a month, the fifteenth (15th) calendar day before such Interest Payment Date.
“Reimbursement Agreement” means, with respect to a Series of Bonds, any agreement or agreements between one or more Credit Providers and the Issuer under or pursuant to which credit enhancement or liquidity support for such Series of Bonds is issued or provided, which agreement sets forth the respective obligations of the Issuer and of such one or more Credit Providers.
“Renewal and Replacement Fund” means the Renewal and Replacement Fund established under Section 4.01 of the Indenture.
“Renewal and Replacement Fund Required Balance” means such amount as may be determined, from time to time, in the sole discretion (except to the extent that the Indenture limits such discretion) of the Director of Public Utilities, to be a reasonable and prudent reserve to provide for the cost of repair or replacement of capital assets of Cleveland Public Power which the Director of Public Utilities determines are required to be repaired or replaced, whether on a routine or emergency basis, in order to maintain Cleveland Public Power in good working order.
“Revenue Fund” means the Revenue Fund established under Section 4.01 of the Indenture.
“Revenues” means all fees, rates, rents, charges and other income derived or to be derived by or for the account of the Issuer from the ownership or operation of Cleveland Public Power, including, without limitation, any interest earned on any moneys on deposit in the Revenue Fund and any Special Fund, but excluding customer deposits and any other deposits subject to refund until such deposits become the property of the Issuer, and further excluding any interest earned on any moneys on deposit in the Rebate Fund.
“Series” means all of the Bonds authenticated and delivered pursuant to any Series Bond Legislation, regardless of variations in maturity, interest rate or other provisions.
“Series 2008 Bonds” means, together, the Issuer’s Public Power System Refunding Revenue Bonds, Series 2008A, dated as of April 22, 2008, and issued in the original principal amount of $21,105,000, and the Issuer’s Public Power System Revenue Bonds, Series 2008B, dated as of April 22, 2008, and issued in the original principal amount of $72,607,880.25.
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“Series 2010 Bonds” means the Issuer’s Public Power System Refunding Revenue Bonds, Series 2010, dated as of September 8, 2010, and issued in the original principal amount of $23,915,000.
“Series 2014 Bonds” means the Issuer’s Public Power System Taxable Refunding Revenue Bonds, Series 2014, dated as of October 30, 2014, and issued in the original principal amount of $76,885,000.
“Series 2018 Bonds” means the Issuer’s Public Power System Revenue Refunding Bonds, Series 2018, dated June ___, 2018, and issued in the original principal amount of $47,345,000*.
“Series Bond Legislation” means the ordinance of the Legislative Authority authorizing the issuance of any Series of Bonds and constituting a part of the Indenture or the Supplemental Indenture securing such Series.
“Series 2018 Bond Legislation” means Ordinance No. 1363-17 passed on November 20, 2017, a copy of which is incorporated into the Fourteenth Supplemental Indenture, which together constitute the Series Bonds Legislation for the Series 2018 Bonds.
“Special Funds” means, collectively, the Bond Service Fund, the Bond Service Reserve Fund, the Subordinated Debt Service Fund, the Renewal and Replacement Fund, the System Enhancement Fund, and the Construction Fund, including any accounts or subaccounts therein, but not the Rebate Fund or any account or subaccount therein.
“Special Record Date” means any date fixed as a Special Record Date pursuant to and in accordance with Section 2.03 of the Indenture.
“Specified Interest Rates” means, as to any Series of Bonds, other than Variable Rate Bonds, such interest rate or rates which the Bonds of such Series shall bear as specified in or pursuant to the applicable Series Bond Legislation.
“State” means the State of Ohio, one of the United States of America.
“Subordinated Debt” means any obligation or evidence of indebtedness issued or incurred by the Issuer as described in the Indenture and herein under “-Additional Bonds, Other Parity Debt and Subordinated Debt – Other Subordinated Debt.” “Subordinated Debt” may include, without limitation, obligations of the Issuer with respect to Interest Rate Hedge Agreements that are not Parity Swap Obligations.
“Subordinated Debt Service Charges” means, for any applicable time period, the principal (including any mandatory sinking fund installments) of, interest and any premium on, or other payment of Subordinated Debt required to be paid by the Issuer during such period.
“Subordinated Debt Service Fund” means the Subordinated Debt Service Fund established under Section 4.01 of the Indenture.
“Successor Bond” means, with respect to any particular Bond, every subsequent Bond evidencing all or a portion of the same debt as that evidenced by such particular Bond.
* Preliminary, subject to change.
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“Supplemental Indenture” means any supplemental trust indenture entered into pursuant to and in accordance with the Indenture, amending, supplementing or otherwise modifying the Indenture.
“System Enhancement Fund” means the System Enhancement Fund established under Section 4.01 of the Indenture.
“Term Bonds” means any Bonds of any Series maturing on a Term Maturity Date, the principal of which is subject to payment by mandatory redemption prior to stated maturity through the application of Mandatory Sinking Fund Installments.
“Term Maturity Date” or “Term Maturity Dates” means, as to any Series of Bonds, such date or dates on which Bonds of such Series which are Term Bonds, mature at their stated maturities, as specified in or pursuant to the applicable Series Bond Legislation.
“Trustee” means the Trustee designated as such in the Indenture, and any successor Trustee as determined or designated under or pursuant to the Indenture.
“Variable Rate Bond” means any Bond not bearing interest throughout its term at a Specified Interest Rate, but rather at a rate which varies from time to time based upon a formula or other method of determination set forth in the applicable Series Bond Legislation.
Creation of Trust
In order to secure first, the payment of (i) Bond Service Charges and the performance and observance by the City of all the covenants and conditions contained in the Indenture and the Bonds, and (ii) any Parity Swap Obligations and the performance and observance of and compliance with the terms of the Interest Rate Hedge Agreement giving rise thereto; second, the payment of Credit Provider Payment Obligations and the performance and observance of and compliance with the terms of the Reimbursement Agreement giving rise thereto; and third, the payment of the debt service charges on Subordinated Debt and the performance and observance of and compliance with the terms of the instruments evidencing Subordinated Debt giving rise thereto, the City pledges and assigns to the Trustee the Net Revenues and all the moneys and investments at any time in the Special Funds.
Pledge of Net Revenues; Application of Revenues; Special Funds
The Indenture requires that the following funds be established and maintained so long as any Bonds remain outstanding: the Revenue Fund, the Bond Service Fund, the Bond Service Reserve Fund, the Subordinated Debt Service Fund, the Renewal and Replacement Fund, the System Enhancement Fund and the Construction Fund. The Indenture also requires the establishment of a Rebate Fund (as hereinafter defined) in accordance with the Code, but the Rebate Fund does not constitute a Special Fund, and the amounts on deposit in the Rebate Fund therein are not pledged to or available for the payment of Bond Service Charges.
The Revenue Fund, the System Enhancement Fund, the Renewal and Replacement Fund and the Construction Fund are to be held by the City in one or more separate deposit accounts, except when invested in accordance with the Indenture, and irrespective of whether any such Fund is held in a separate deposit account each such Fund shall have separate accounting records kept for it. The Bond Service Fund, the Bond Service Reserve Fund and the Subordinated Debt Service Fund are to be held by the Trustee in one or more separate deposit accounts, except when invested in accordance with the Indenture, and irrespective of whether any such Fund is held in a separate deposit account, each such Fund shall have separate accounting records kept for it. In no event are any Revenues or amounts on deposit in any
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Special Fund to be commingled with other moneys or investments of the City. All the Special Funds (i.e., the Bond Service Fund, the Bond Service Reserve Fund, the Subordinated Debt Service Fund, the Renewal and Replacement Fund, the System Enhancement Fund and the Construction Fund), including any moneys on deposit and investments therein and earnings thereon, are to be held in trust for the Bondholders and, except as otherwise provided in the Indenture, are to be applied solely for the payment of Bond Service Charges or for the optional redemption price for Bonds. The following is a summary of the requirements of the Indenture with respect to deposits to and application of moneys and investments in the Revenue Fund, the Special Funds, and the Rebate Fund.
Construction Fund
The proceeds of any Bonds issued to pay Capital Costs (other than any portion of such proceeds representing interest accrued on such Bonds from their date to the date of their delivery or any portion to be deposited in the Bond Service Reserve Fund or any other Special Fund) shall be deposited in and credited to the Construction Fund. Moneys on deposit in the Construction Fund shall be used only to pay Capital Costs, except that, in the event the amount on deposit in the Bond Service Fund is insufficient for the payment of Bond Service Charges as and when due and the amount then on deposit in the System Enhancement Fund, the Subordinated Debt Fund and the Bond Service Reserve Fund is insufficient to make up such deficiency, then the Indenture requires that the City withdraw from the Construction Fund such amounts as may be necessary to make up such deficiency and transfer such amounts to the Trustee for deposit in the Bond Service Fund.
Revenue Fund
The Indenture requires that the City cause all Revenues to be deposited promptly in the Revenue Fund. In each month, after first paying all current Operating Expenses and next reserving in the Revenue Fund an adequate reserve for the payment of Operating Expenses, the City is required to pay the balance in the Revenue Fund as follows:
First: To the Trustee for deposit in the Interest Payment Account in the Bond Service Fund, on or prior to the twenty-fifth (25th) day of each month, an amount not less than the amount which, if deposited in each of the six (6) months next preceding the next Interest Payment Date, would, together with the moneys then on deposit in the Bond Service Fund and available for such purpose, suffice to pay interest falling due on the Bonds on the next succeeding Interest Payment Date;
Second: To the Trustee for deposit in the Principal Payment Account in the Bond Service Fund, on or prior to the twenty-fifth (25th) day of each month, an amount not less than the amount which, if deposited in each of the twelve (12) months next preceding the next Principal Retirement Date, would, together with the moneys then on deposit in the Bond Service Fund and available for such purpose, suffice to pay the principal of the Bonds payable on the next succeeding Principal Retirement Date whether by payment at the stated maturity or by mandatory redemption in accordance with the Principal Retirement Schedule);
Third: To the Trustee for deposit in the Bond Service Reserve Fund: (i) in the event that, at any time, the balance in the Bond Service Reserve Fund shall have been reduced or otherwise determined to be below the Bond Reserve Requirement, other than as a result of an increase in the Bond Reserve Requirement resulting from the issuance of a Series of Additional Bonds, then on or prior to the twenty-fifth (25th) day of each of the next twelve (12) succeeding months, an amount which, if deposited in each of said twelve (12) months, would cause the balance in the Bond Service Reserve Fund to be restored to the Bond Reserve Requirement reduced by the
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aggregate of any subsequent deposits required to be made to the Bond Service Reserve Fund pursuant to subclause (ii) below); and (ii) unless the applicable Series Bond Legislation shall provide otherwise, on or prior to the twenty-fifth (25th) day of each of the next sixty (60) months following the month in which any Series of Additional Bonds is authenticated and delivered, an amount which, if deposited in each of said sixty (60) months, would, together with any deposits required to be made pursuant to subclause (i) above, cause the balance in the Bond Service Reserve Fund to equal the Bond Reserve Requirement, if any, applicable to such Additional Bonds;
Fourth: To the Trustee for deposit in the Subordinated Debt Service Fund, on the twenty-fifth (25th) day of each month, the amount, if any, required to pay any Subordinated Debt Service Charges coming due during the next succeeding calendar month and/or to make any deposits to any reserve account in the Subordinated Debt Service Fund required to be made during the next succeeding calendar month pursuant to the terms of any Subordinated Debt; provided, however, that any amount otherwise required to be so deposited for the payment of Subordinated Debt Service Charges payable on general obligation debt issued by the Issuer for the benefit of Cleveland Public Power shall not be deposited in the Subordinated Debt Service Fund, but rather shall be paid directly to or for the account of the Issuer;
Fifth: To the Renewal and Replacement Fund, in the event that, at any time, the balance in the Renewal and Replacement Fund shall have been reduced below the Renewal and Replacement Fund Required Balance, then on or prior to the twenty-fifth (25th) day of each of the next twenty- four (24) succeeding months, an amount which, if deposited in each of said twenty-four (24) months, would cause the balance in the Renewal and Replacement Fund to be restored to the Renewal and Replacement Fund Required Balance;
Sixth: To the System Enhancement Fund, as soon after the end of each Fiscal Year as practicable but in no event later than the last day of February of the following year, the budgetary balance in the Revenue Fund as of the end of the preceding Fiscal Year, after reserving in the Revenue Fund an adequate reserve for the payment of Operating Expenses.
Bond Service Fund
Moneys in the Bond Service Fund are to be used solely for the purpose of paying Bond Service Charges as and when due. In the event that the moneys in the Bond Service Fund are insufficient for the payment of any Bond Service Charges as and when due, then the moneys in the other Special Funds shall be withdrawn therefrom, transferred to the Bond Service Fund and applied to the payment of such Bond Service Charges, and for that purpose, the other Special Funds shall be drawn upon in the following order: the System Enhancement Fund, the Subordinated Debt Service Fund, the Bond Service Reserve Fund and the Construction Fund.
Bond Service Reserve Fund
Moneys in the Bond Service Reserve Fund are to be used solely for the purpose of making up a deficiency in the Bond Service Fund for the payment of Bond Service Charges on Bonds secured therein as and when due in the event that the amounts in the System Enhancement Fund, the Renewal and Replacement Fund and the Subordinated Debt Service Fund are not adequate to make up such insufficiency fully.
If an Event of Full Funding has occurred and is continuing, the balance in the Bond Service Reserve Fund is to be transferred to the Bond Service Fund.
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Subordinated Debt Service Fund
Any moneys in the Subordinated Debt Service Fund not required to be withdrawn therefrom to make up any insufficiency in the Bond Service Fund for the payment of Bond Service Charges as and when due are to be applied to the payment of Subordinated Debt Service Charges as and when due and to the maintenance of any reserve account in the Subordinated Debt Service Fund required to be maintained pursuant to the terms of any Subordinated Debt.
The principal of and interest on any general obligation debt issued or to be issued by the City for the benefit of Cleveland Public Power constitute Subordinated Debt Service Charges. Amounts necessary for the City to pay such principal and interest, which amounts would otherwise be required to be deposited in the Subordinated Debt Service Fund, are to be paid directly to the City and applied by the City solely to the payment of such principal and interest as and when due, but until so applied, such amounts paid to the City are subject to the requirement that they be transferred to the Bond Service Fund to make up any insufficiency of the amounts therein for the payment of Bond Service Charges as and when due.
Renewal and Replacement Fund
Any moneys in the Renewal and Replacement Fund not required to be withdrawn therefrom to make up any insufficiency in the Bond Service Fund for the payment of Bond Service Charges as and when due are to be applied to the payment of the cost of the repair or replacement of capital assets of Cleveland Public Power which the Director of Public Utilities determines are required to be repaired or replaced, whether on a routine or on an emergency basis, in order to maintain Cleveland Public Power in good working order.
System Enhancement Fund
Any moneys in the System Enhancement Fund not required to be withdrawn therefrom to make up any insufficiency in the Bond Service Fund for the payment of Bond Service Charges as and when due may be applied to any lawful purpose of Cleveland Public Power.
Rebate Fund
A Rebate Fund is established and ordered to be maintained, as required by the Code, as a separate deposit account (except when invested as hereinafter provided) in the custody of the Trustee.
Within five days after the end of each Bond Year for each Series of Bonds (which are not taxable bonds), and within five days after the date on which all Outstanding Bonds of such series are paid or deemed paid in full, the City shall calculate the Rebate Amount as of the end of that Bond Year or the date of such final payment and deliver its determinations in writing to the Trustee. The Trustee may rely upon the City’s calculation of the Rebate Amount, provided that the Trustee receives from the City a verification of the accuracy of such computations by a firm of independent certified public accountants or an opinion of nationally recognized bond counsel that such computations are in compliance with the Code. The Indenture requires the Trustee, on behalf of and at the written direction of the City, to pay to the United States from moneys then on deposit in the applicable account in the Rebate Fund, the Rebate Amount at the times and in the amounts required under Section 148(f) of the Code.
At the written request of the City, any moneys held as part of the Rebate Fund shall be invested or reinvested by the Trustee in Eligible Investments. At no time shall any funds constituting gross proceeds of any Series of Bonds be used in any manner as would constitute failure of compliance with the Code.
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If at any time the City has received a written opinion of nationally recognized bond counsel that failure to comply with the Rebate Fund requirements would not adversely affect the exclusion of interest on the Bonds from gross income for federal income tax purposes, the City may discontinue compliance with such requirements to the extent set forth in such opinion.
Investment of Fund Moneys
Moneys held as part of the Revenue Fund or any Special Fund shall be invested in Eligible Investments, as specified by the City’s Director of Finance, of such type, amount and maturity that the moneys invested will be available to make payments from the Revenue Fund and the Special Funds at the times and in the amounts required. Such investments shall be deemed at all times a part of the Fund from which the investment was made, and any profit realized therefrom, other than the interest earned thereof shall be credited, and any losses resulting therefrom shall be charged, to the Fund from which the investment was made. Any interest earned on any moneys or investments in the Revenue Fund or Special Fund, other than the Bond Service Reserve Fund, shall be credited to and deposited in the Fund in which it was earned; any interest earned on any moneys or investments in the Bond Service Reserve Fund shall be credited to and remain in the Bond Service Fund.
Investments in any Special Fund shall be valued at the market value thereof exclusive of accrued interest. The Trustee shall compute the amounts held in the Bond Service Reserve Fund within thirty (30) days of the end of each fiscal year and shall inform the City in writing of the result of such computation prior to the end of such fiscal year.
Bond Service Reserve Fund and Reserve Requirement
The Indenture provides (subject to the provisions thereof with respect to Credit Facilities as hereinafter defined and described) that a balance shall be maintained in the Bond Service Reserve Fund in the custody of the Trustee for the benefit of the Bondholders that hold Bonds secured by the Bond Service Reserve Fund equal in amount to the Bond Reserve Requirement, being the maximum Bond Service Charges required to be paid in any subsequent fiscal year on the then Outstanding Bonds secured thereby. In the event the Bond Reserve Requirement increases as the result of the issuance of Additional Bonds, the Indenture permits the City to fund increases either from the proceeds of such Additional Bonds or through equal monthly installments to the Bond Service Reserve Fund over the next sixty months following the month of issuance of such Additional Bonds. For a description of the treatment of Additional Bonds which are not secured by the Bond Service Reserve Fund, see “Additional Bonds, Other Parity Debt and Subordinated Debt” herein.
The City may in lieu of depositing or maintaining cash or Eligible Investments in the Bond Service Reserve Fund for Bonds secured thereby, obtain a policy of municipal bond insurance or a bank letter or line of credit (a “Credit Facility”) from a Qualified Credit Facility Provider (as hereinafter defined) in order to cause the amount on deposit therein to equal the Bond Reserve Requirement for such Bonds. The Credit Facility must (i) be issued for the benefit of the holders of all Bonds secured thereby, (ii) provide coverage for the full amount of the Bond Reserve Requirement for such Bonds and (iii) upon demand of the Bondholders or the Trustee on their behalf provide for the same amounts at the same times as would otherwise be permitted to be withdrawn from the Bond Service Reserve Fund. “Qualified Credit Facility Provider” means: (i) with respect to any Credit Facility consisting of a policy of municipal bond insurance, any issuer of policies of insurance insuring the timely payment of debt service on governmental obligations such as the Bonds, provided that a Rating Agency (defined in the Indenture as any service or services providing a rating on the Bonds) would rate the bonds fully insured by a standard policy issued by that issuer in its highest rating category for such obligations; and (ii) with respect to any Credit Facility consisting of a letter or line of credit, any bank, provided that a Rating Agency would rate
B-18 the Bonds in its highest rating category for such obligations if the letter or line of credit proposed to be issued by such bank secured the timely payment of the entire principal of the Bonds and of the interest thereon. For purposes of the Indenture, and amount insured or secured under a Credit Facility issued by a Qualified Credit Facility provider and fulfilling the other requirements described in this paragraph is deemed to be an amount on deposit in the Bond Service Reserve Fund.
Additional Bonds, Other Parity Debt and Subordinated Debt
Additional Bonds Test. The City may issue additional bonds (“Additional Bonds”) payable from Revenues of Cleveland Public Power and secured by the Indenture on a parity with the Series 2018 Bonds for the purpose of (i) paying Capital Costs or (ii) refunding Outstanding Bonds. The Indenture permits Additional Bonds to be issued only if certain requirements and conditions are met, including the requirement that, except as described below, no Additional Bonds shall be issued unless the Director of Finance or a Consulting Engineer provides a certificate to the effect that Test Revenues (i.e., Adjusted Net Revenues which have been further adjusted to reflect (i) any increase in the rates of Cleveland Public Power which became effective during or subsequent to the applicable period but prior to the delivery of the Additional Bonds and (ii) any additional Adjusted Net Revenues projected to be realized by the City as a result of the improvements to be financed by the Additional Bonds) for any twelve (12) consecutive months of the twenty-four (24) months immediately preceding the month in which the Additional Bonds are to be delivered, are not less than one hundred twenty five percent (125%) of the maximum annual Bond Service Charges to be payable on all Bonds to be outstanding after the issuance of the Additional Bonds. Additional Bonds may be issued without such a certificate if the Additional Bonds are to be issued (i) to pay Capital Costs, provided that the Director of Finance certifies that Adjusted Net Revenues for any twelve (12) consecutive months of the twenty-four (24) months immediately preceding the month in which the Additional Bonds are to be delivered are not less than one hundred twenty five percent (125%) of the maximum annual Bond Service Charges to be payable on the Bonds to be outstanding after the issuance of the Additional Bonds, or (ii) to refund any Outstanding Bonds, provided that the Director of Finance certifies that the maximum annual Bond Service Charges to be payable on all Bonds to be outstanding after the issuance of the Additional Bonds will not exceed one hundred ten percent (110%) of the maximum annual Bond Service Charges payable on all Bonds outstanding prior to the issuance of the Additional Bonds. The foregoing tests are hereinafter referred to as the “Additional Bonds Test.”
Other Parity Debt. The Indenture provides for the City’s issuing or incurring forms of debt other than Additional Bonds payable from the same sources as and secured on a parity of lien with, the Bonds for the purpose of financing Capital Costs or refunding or securing other obligations issued for that purpose, provided that, for all purposes of the Indenture, such other parity debt shall be treated as though it were in the form of Additional Bonds, as though the holders thereof were holders of Additional Bonds, and as though the debt service charges thereon were Bond Service Charges, and provided further that prior to the issuance or incurrence thereof, the Trustee shall have received the same certifications with respect thereof as the Trustee would be required to receive were such other parity debt in the form of Additional Bonds and shall have determined that the contracts, agreements or other instruments evidencing or relating to such other parity debt reflect and are consistent with the requirements of the Indenture (including, without limitation, the requirements that the Trustee be vested with the same authority with respect to, and on behalf of the holders of, such other parity debt as the Trustee would have were such other parity debt in the form of Additional Bonds), which determination shall be evidenced by the Trustee’s executing, as a required signatory, all such contracts, agreements or other instruments.
Parity Swap Obligations. If the Issuer enters into an Interest Rate Hedge Agreement to simulate a fixed rate of interest on Variable Rate Bonds, or a variable rate of interest on fixed rate Bonds, or for any other purpose that results in the creation of an effective variable rate of interest with respect to fixed rate Bonds, then the Issuer may secure the portion of the payment obligations of the Issuer thereunder that
B-19 represents the equivalent of interest on the notional amount of the Interest Rate Hedge Agreement with a pledge of the Net Revenues on a parity with the pledge thereof that secures the Bonds.
Reserve Requirement. In connection with any issuance of Additional Bonds, the City may, in the applicable Supplemental Indenture, provide that no deposit to the Bond Service Reserve Fund shall be made for or with respect to such Additional Bonds, in which case: (i) the holders of such Additional Bonds shall have no right or entitlement to have any portion of the Bond Service Charges on such Additional Bonds paid from amounts in the Bond Service Reserve Fund, (ii) the lien of and pledge on the Bond Service Reserve Fund shall not extend to or be for the benefit of the holders of such Additional Bonds, and (iii) the Bond Service Charges on such Additional Bonds shall not be taken into account in determining the Reserve Requirement.
In the event that the Supplemental Indenture applicable to an issue of Additional Bonds provides as described in the preceding paragraph, then such Supplemental Indenture may also provide for the creation of a special reserve fund solely for such Additional Bonds, separate from the Bond Service Reserve Fund and may provide for the deposit therein, at the time of issuance or in one or more subsequent deposits thereto, of an amount specified in the applicable Supplemental Indenture as the required reserve for such Additional Bonds, or may require the City to provide a municipal bond insurance policy, a bank letter or line of credit, or any other form of credit or liquidity facility to enhance the security for such Additional Bonds in lieu of a funded reserve fund. If the Supplemental Indenture applicable to such a Series of Additional Bonds so provides for such a special reserve fund and further requires that deposits be made thereto from Net Revenues at any time, then such deposits may be made only from moneys remaining in the Revenue Fund on the last day of a month before any required deposits to the Subordinated Debt Service Fund, or into any other Special Fund into which such moneys may be deposited after any required deposits to the Subordinated Debt Service Fund.
If the Supplemental Indenture applicable to a Series of Additional Bonds provides for no reserve fund, or for a special reserve fund as permitted by the preceding paragraph, then such Supplemental Indenture shall also provide that the amount of any defaulted principal of or interest on such Series of Bonds that would have been timely paid had the Bond Reserve Requirement for such Bonds been fully funded in the Bond Service Reserve Fund shall be paid only from moneys remaining in the Revenue Fund on the last day of a month before any required deposits to the Subordinated Debt Service Fund, or into any other Special Fund into which such moneys may be deposited after any required deposits to the Subordinated Debt Service Fund.
Subordinated Debt. The Indenture permits the City to issue or incur Subordinated Debt for any lawful purpose of Cleveland Public Power, the Subordinated Debt Service Charges of which shall be payable out of the Subordinated Debt Service Fund established under the Indenture. The payment of Subordinated Debt Service Charges may be secured by a security interest in, lien on and pledge and assignment of the moneys on deposit in, the Subordinated Debt Service Fund, which security interest, lien, pledge and assignment shall be subject and subordinate to the prior and senior security interest therein, lien thereon, and pledge and assignment thereof granted to the Trustee under the Indenture to secure the payment of Bond Service Charges. For purposes of the Indenture, the principal of and interest on any general obligation debt issued by the City for the benefit of Cleveland Public Power constitute Subordinated Debt Service Charges and may be paid from Net Revenues which would otherwise be required to be deposited in the Subordinated Debt Service Fund but which may be paid to or for the account of the City for the payment of such principal and interest in accordance with the Indenture.
Credit Provider Payment Obligations may be secured on a basis senior to Subordinated Debt but subordinate to Bond Service Charges and Parity Swap Obligations. Power Capacity Obligations, or
B-20 portions thereof, may constitute Subordinated Debt to the extent that payments thereof do not constitute Operating Expenses and to the extent that they do not constitute other parity debt.
Variable Rate Bonds. In the event that all or any portion of any Series of Additional Bonds have been issued as or are proposed to be issued as Variable Rate Bonds, then in order to compute the Bond Service Charges on such Additional Bonds for the purposes of the Indenture, the following rules shall apply:
(i) For the purpose of determining compliance with the Rate Covenant (as defined herein) for any period prior to the date of calculation, the rate of interest borne by any Outstanding Variable Rate Bonds shall be deemed to be the actual weighted average rate of interest in effect thereon during such period.
(ii) For the purpose of determining whether Additional Bonds that are to be Variable Rate Bonds may be issued in compliance with the Additional Bonds Test, and for the purpose of determining the amount of the Reserve Requirement attributable to such Variable Rate Bonds, the rate of interest to be borne by such Variable Rate Bonds shall be deemed to be the Assumed Interest Rate.
(iii) For the purpose of determining whether any outstanding Variable Rate Bond is deemed paid and discharged for purposes of the Indenture, such Variable Rate Bond shall be deemed to bear interest at the maximum rate of interest such Variable Rate Bond may bear pursuant to the Supplemental Indenture applicable thereto.
Notwithstanding the foregoing, in the event that two Series of Additional Bonds are issued as Variable Rate Bonds with the rate of interest on one Series to be fixed periodically by auction and with the rate of interest on the other Series to be the balance resulting from the subtraction of the auction set rate from a constant number, with the result that the City pays a fixed rate on such two Series of Additional Bonds as a whole, then for purposes of the rate covenant, the Additional Bonds Test and the Bond Reserve Requirement, the interest rate on such two Series of Additional Bonds shall be the resulting fixed rate just described.
Capital Appreciation Bonds. Regarding any Additional Bonds that are or are proposed to be issued as Capital Appreciation Bonds, for the purpose of (i) determining compliance with the Rate Covenant for a period prior to the date of calculation, (ii) determining whether Additional Bonds, regardless of whether they are to be Capital Appreciation Bonds, may be issued in compliance with the Additional Bonds Test when any Capital Appreciation Bonds are outstanding, (iii) determining whether Additional Bonds that are to be Capital Appreciation Bonds may be issued in compliance with the Additional Bonds Test, and (iv) determining the amount of the Reserve Requirement attributable to such Capital Appreciation Bonds, the Bond Service Charges on such Additional Bonds shall include the Appreciated Principal Amounts at maturity.
Credit Enhancement. In the event that the payment of Bond Service Charges on all or any portion of any Series of Bonds are to be insured or secured by a municipal bond insurance policy or a bank line or letter of credit or other credit enhancement or liquidity support, then the Supplemental Indenture with respect to such Bonds may contain such provisions as are necessary and appropriate to reflect (i) the time at which and manner in which amounts paid or drawn under such policy, letter of credit or other credit enhancement or liquidity support shall be applied to the payment of Bond Service Charges, (ii) the rights to be granted to the Credit Provider for payment by the Issuer of Credit Provider Payment Obligations, provided that no Credit Provider shall be granted a right to payment of Credit Provider Payment Obligations from or security interest in the Net Revenues or the amounts on deposit in the
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Special Funds prior or superior to or on a parity with such right and security interest granted to the Trustee for the benefit of the Bondholders under the Indenture, (iii) the rights, if any, to be granted to the Credit Provider to approve amendments to the Indenture, to instruct or request the Trustee to exercise remedies or to take any other action under the Indenture on behalf of, in lieu of, or as subrogee for, the holders of such Bonds, or (iv) any other terms or conditions relating to such policy, letter of credit or other credit enhancement or liquidity support not contrary to or inconsistent with the Indenture.
Credit Providers
In addition to the Net Revenues payable into the Special Funds and other amounts, proceeds, moneys, investments, rights, and interests pledged and assigned by the Issuer to the Trustee under the Indenture to secure the payment of the Bond Service Charges on the Bonds, the Supplemental Indenture for any series of Additional Bonds may provide for a credit support instrument applicable to such series of Bonds or certain maturities of such series of Bonds without any requirement that the security or protection afforded by such credit support instrument extend or apply to the Bonds of any other series or any other maturities within such series of Bonds. Provided that the credit support instrument is in full force and effect and the Credit Provider has made all payments and met its obligations under the credit support instrument and is not in any insolvency proceedings, then the Supplemental Indenture for any series of Bonds to which any such credit support instrument applies may include provisions permitting the Credit Provider to act as, or in the place of, the holders of such Bonds for the purposes and on the terms and conditions set forth in such Supplemental Indenture.
Power Capacity Obligations
Payments by the Issuer of or pursuant to any Power Capacity Obligation will constitute Operating Expenses only if, prior to the Issuer’s entering into the contract or agreement creating such Power Capacity Obligation the Issuer furnishes to the Trustee a certificate of the Consulting Engineer which includes or states the following:
(a) A schedule of the amounts of such Power Capacity Obligation that the Consulting Engineer estimates will be payable by the Issuer in each Fiscal Year, setting forth the assumptions on which such projections are based.
(b) A schedule of the projected Net Revenues for each of the first five (5) Fiscal Years during which Power Capacity Obligations may be payable by the Issuer, based upon (i) the rates and charges of Cleveland Public Power then in effect or any revision in such rates and charges to take effect during the period of the projections for which all necessary legislative or administrative action has previously been taken in order for such revision to take effect, (ii) the assumption that payments of or pursuant to the proposed Power Capacity Obligation in the amounts projected in the schedule required under (a) above will be included in Operating Expenses and paid from the Revenue Fund, and (iii) such other assumptions as the Consulting Engineer deems reasonable.
(c) The conclusion that the projected Net Revenues set forth in the schedule required under (b) above will, in each of said five (5) Fiscal Years, be at least one hundred twenty-five percent (125%) of the Bond Service Charges on all then Outstanding Bonds payable in the respective Fiscal Year.
In the event that the requirements for the inclusion of any Power Capacity Obligation in Operating Expenses are not met, such Power Capacity Obligation may (i) constitute other parity debt if
B-22 the related requirements are met, (ii) constitute Subordinated Debt if the related requirements are met, or (iii) be payable from the System Enhancement Fund.
Any portion of any payment of any Power Capacity Obligation representing payment for power or energy actually available will constitute and be included in Operating Expenses.
Rate Covenant
The City covenants in the Indenture that it will at all times charge such rates, fees and charges for the use or purchase of the products, output or services of Cleveland Public Power, and will so restrict Operating Expenses so that in each fiscal year Adjusted Net Revenues will be at least an amount equal to one hundred twenty-five percent (125%) of the Bond Service Charges and Parity Swap Obligations on the Bonds required to be paid in such fiscal year.
The City further covenants in the Indenture that if the audited financial statements of Cleveland Public Power for any fiscal year indicate that the Adjusted Net Revenues for such fiscal year were less than one hundred twenty-five percent (125%) of the Bond Service Charges and Parity Swap Obligations required to have been paid in such fiscal year, then the City shall promptly retain the Consulting Engineer to make a written report setting forth recommendations as to revisions to the rates, fees and charges for the use or purchase of the products, output or services of Cleveland Public Power and/or revisions to the methods of operation of Cleveland Public Power which, if followed, would result in the City’s achieving the ratio between annual Adjusted Net Revenues and annual Bond Service Charges and Parity Swap Obligations (estimated for that purpose) required under the above-described rate covenant. The City further covenants that, promptly upon its receipt of such recommendations, subject to applicable restrictions or requirements imposed by law, and subject further to the good faith determination by the Director of Public Utilities that such recommendations, in whole or in part, are in the best interests of Cleveland Public Power, the City shall revise its rates, fees, and charges and/or its methods of operation in accordance with such recommendations. If the Director of Public Utilities determines not to comply with any or all of such recommendations, he shall file with the Trustee a certificate setting forth such determination not to comply and stating in reasonable detail the reasons therefor. If the City complies with the recommendations of the Consulting Engineer in all material respects, subject to applicable restrictions or requirements imposed by law, or if the City fails so to comply only to the extent that the Director of Public Utilities shall have determined, and the Trustee shall have agreed, that compliance would not be in the best interests of Cleveland Public Power, the City shall be deemed to have complied with the rate covenant for such fiscal year, and the City’s failure to achieve the required ratio in such fiscal year shall not constitute an Event of Default under the Indenture, provided that the ratio between Adjusted Net Revenues and Bond Service Charges and Parity Swap Obligations for such fiscal year shall have been at least one hundred ten percent (110%). Furthermore, if the Consulting Engineer determines that the City’s failure to achieve the required ratio in such fiscal year was attributable to any change in any legal or governmental requirements, regulations or policies applicable to Cleveland Public Power or to the rates and charges for the use thereof, or if the Consulting Engineer determines that no reasonable change in the City’s rates, fees, and charges or methods of operation may be expected to result in the City’s achieving the required ratio, then the City shall be deemed to have complied with the rate covenant for such fiscal year, and the City’s failure to achieve the required ratio in such fiscal year shall not constitute an Event of Default under the Indenture, provided that the ratio between Adjusted Net Revenues and Bond Service Charges and Parity Swap Obligations for such fiscal year shall have been at least one hundred ten percent (110%).
With respect to the rate covenant, debt service charges on Subordinated Debt are not included in Bond Service Charges.
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Other Protective Covenants
The City makes several other covenants in the Indenture for the protection of Bondholders including without limitation, the following:
Maintenance, Repair and Replacement
The City will cause Cleveland Public Power to be kept in good repair and good operating condition, provided that the City is under no obligation to bring the Generating Facilities up to or maintain them in a good operating condition, and from time to time the City may undertake additions, remodeling, modifications, and improvements to Cleveland Public Power subject to terms and conditions of the Indenture.
In the event of damage or partial or total destruction of any part of Cleveland Public Power other than the Generating Facilities, the City will commence immediately and proceed continuously and with all practicable dispatch to repair, replace or rebuild the damaged or destroyed property, but only from the Revenues and/or the proceeds of any insurance with respect to such property, if and to the full extent necessary to restore Cleveland Public Power to good operating condition. The City has no obligation under the Indenture to repair, replace or rebuild the Generating Facilities if they are damaged or partially or totally destroyed.
Maintenance of Ownership and Lien
Except as permitted in the Indenture, the City will not sell or otherwise dispose of all or any part of Cleveland Public Power or create or permit to be created any debt, lien or charge thereof or make any pledge or assignment of or create any lien or encumbrance upon the Net Revenues or any Special Fund other than the lien thereon and pledge and assignment thereof under the Indenture and other than Permitted Encumbrances.
The Indenture permits the City to sell, transfer or otherwise dispose of property or facilities of Cleveland Public Power having an aggregate book value in excess of five percent (5%) of the book value of the total assets of Cleveland Public Power only if (i) the proceeds from such sale or disposition are so applied to and are sufficient for the payment and discharge of all Outstanding Bonds, or (ii) the proceeds therefrom are to be applied to the payment and discharge of less than all the Outstanding Bonds and the Consulting Engineer certifies to the Trustee that (a) the property or facilities proposed to be sold or disposed of are not essential to the City’s continued operation of Cleveland Public Power in accordance with the Indenture, (b) the proposed sale or disposition will not materially adversely affect Cleveland Public Power or the Net Revenues, and (c) the proposed sale or disposition will not impair the City’s ability to fulfill its rate covenant under the Indenture, or (iii) the proceeds are deposited in the Construction Fund and applied to the payment of Capital Costs and the Consulting Engineer certifies as set forth in (ii) above.
Accounts and Financial Statements
The City will keep true and proper records and accounts of the financial transactions of Cleveland Public Power. As soon as available, but in any event within two hundred seventy (270) days after the end of each fiscal year, the City will deliver to the Trustee a copy of an annual report for Cleveland Public Power including financial statements for such fiscal year, accompanied by an opinion thereon of independent certified public accountants of recognized standing to the effect that such financial statements were prepared in accordance with generally accepted accounting principles consistently
B-24 applied, and that the audit performed in connection therewith was made in accordance with generally accepted auditing standards.
Events of Default and Remedies
The following constitute Events of Default under the Indenture:
(a) Interest on any Bond shall not be paid when and as the same shall have become due and payable;
(b) Principal of or any premium on any Bond shall not be paid when and as the same shall have become due and payable, whether at the stated maturity thereof or by redemption or acceleration or pursuant to any mandatory redemption requirements;
(c) The Net Revenues for any fiscal year shall be insufficient to satisfy the City’s rate covenant in the Indenture, unless the City shall have taken such remedial actions as meet the conditions set forth in the Indenture for such insufficiency not to constitute an Event of Default under the Indenture;
(d) The City shall fail to perform or observe any other covenant, agreement or condition on the part of the City contained in the Indenture or in the Bonds, which failure shall have continued for a period of ninety days after written notice, by registered or certified mail given to the City by the Trustee, specifying the failure and requiring the same to be remedied, which notice may be given by the Trustee, but shall be given by the Trustee upon the written request of the holders of not less than twenty-five percent in aggregate principal amount of the Bonds then outstanding; provided that the Trustee may agree in writing to an extension of an additional ninety days prior to the expiration of such ninety-day period; and
(e) The City shall file a petition or commence a proceeding under any applicable bankruptcy, insolvency, reorganization or other similar law, shall consent to the entry of an order for relief in an involuntary case under any such law, or shall consent to the appointment of or taking of possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator (or similar official) of the City or any substantial part of its property, or shall make any general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due or shall take any action in furtherance of the foregoing.
Upon the occurrence of an Event of Default, the Trustee may, and upon the written request of the holders of not less than twenty-five percent (25%) in aggregate principal amount of the Bonds outstanding, the Trustee shall, declare the principal of all Bonds then outstanding (if not then due and payable), and the interest accrued thereon, to be due and payable immediately, and thereupon such principal and interest shall become and be immediately due and payable, subject to the provisions of the Indenture for rescission of such declaration upon the City’s payment of all Bond Service Charges due and payable other than as a result of such declaration and the City’s having cured all existing Events of Default. Any acceleration of the Bonds or any annulment thereof shall be subject to the prior written consent of any Credit Provider (if it has not failed to comply with its payment obligations under the credit support instrument).
Upon the occurrence and continuation of an Event of Default, the Trustee may, with or without declaring the principal of and interest accrued on all Outstanding Bonds to be due and payable as described above, pursue any available remedy to enforce the payment of Bond Service Charges or to remedy any Event of Default, and if requested to do so by the holders of at least twenty-five percent
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(25%) in aggregate principal amount of the Bonds then outstanding and having been indemnified in accordance with the Indenture, the Trustee shall exercise such of the rights and powers conferred by the Indenture as the Trustee, being advised by counsel, shall deem most effective to enforce and protect the interests of the Bondholders.
The holders of sixty-six and two-thirds percent (66-2/3%) in aggregate principal amount of the Bonds then outstanding shall have the right, at any time, to direct the Trustee’s method and place of conducting all proceedings to execute any remedy in connection with the enforcement of the terms and conditions of the Indenture provided, that such direction shall not be otherwise than in accordance with the provisions of laws and of the Indenture, that the Trustee shall be indemnified in accordance with the Indenture, and that the Trustee shall have the right to decline to follow any such direction which in its opinion would be unjustly prejudicial to the holders of the Bonds who are not parties to the direction.
In the event that the moneys in the Special Funds, applied in the order set forth in the Indenture are insufficient to pay the Bond Service Charges on any Bond when due, then such moneys, together with any other moneys which are or become available for such purpose, whether through the exercise of remedies under the Indenture or otherwise, shall be applied to the payment of Bond Service Charges in accordance with the Indenture.
The Trustee may, in its discretion, waive any Event of Default and rescind any declaration of maturity of principal, and the Trustee shall do so upon the written request of the holders of either (i) at least fifty-one percent (51%) in aggregate principal amount of the Bonds outstanding with respect to which an Event of Default in the payment of Bond Service Charges existed, or (ii) at least twenty-five percent (25%) in aggregate principal amount of the Bonds then outstanding, provided that no Event of Default consisting of a failure to pay Bond Service Charges as and when due shall be waived unless the City shall have paid all Bond Service Charges due and payable other than as a result of a declaration of the maturity of the principal of all Bonds then outstanding, and the City shall have cured all existing Events of Default.
Amendments and Supplemental Indentures
The City and the Trustee, without the consent of the Bondholders, may enter into Supplemental Indentures and other instruments evidencing the existence of a lien not inconsistent with the Indenture for the purpose of correcting ambiguities or inconsistencies in the Indenture, granting additional rights to the Trustee, subjecting additional revenues to the lien of the Indenture, adding to the covenants of the City, evidencing any succession of the City with respect to Cleveland Public Power, or providing for the issuance of Additional Bonds.
In addition, the City and the Trustee, without the consent of the Bondholders, may enter into Supplemental Indentures for the following purposes: (i) to permit the issuance of coupon Bonds and to permit fully registered Bonds to be exchanged for coupon Bonds if, in the opinion of nationally recognized bond counsel, then applicable law would permit the issuance of Bonds in coupon form without loss of the exclusion from gross income for federal income tax purposes of interest on the Bonds; (ii) to provide for the issuance, registration and transfer of Bonds through a Book-Entry System; (iii) to cause the Indenture to comply with any applicable federal securities law or federal tax law; and (iv) to make any other change to insert any provision into or delete or amend any provision of the Indenture, provided that such insertion, deletion or amendment will not adversely affect the rating (other than any rating based upon credit enhancement or liquidity support provided by any Credit Provider other than the Issuer, which shall not be taken into account for purpose of this clause) then assigned to any Outstanding Bonds by any Rating Agency, and will have the consent of any Credit Provider entitled to consent thereto.
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With the consent of the holders of not less than fifty-one (51%) percent in aggregate principal amount of the Bonds then outstanding, the City and the Trustee may enter into Supplemental Indentures modifying, altering, amending, adding to or rescinding any of the terms or provisions of the Indenture. Except with the consent of the holders of each Bond affected thereby, however, no such Supplemental Indenture may (a) extend the maturity of the principal of, or the interest on, any Bond, (b) reduce the principal amount of a Bond, (c) change the rate or extend the time of payment of interest on a Bond, (d) change any premium payable on redemption of a Bond, or (e) reduce the amount or extend the time of any payment of any Mandatory Sinking Fund Installment. No Supplemental Indenture may permit a privilege or priority of any Bonds over any other Bonds, or reduce the aggregate principal amount of the Bonds required for consent to a Supplemental Indenture or for requests or directions to the Trustee regarding exercise of remedies, without the consent of the holders of all Bonds then outstanding.
For a description of the City’s proposed amendment to the definition of “Operating Expenses,” see “SECURITY AND SOURCES OF PAYMENT FOR THE BONDS – Amendment of the Indenture.”
Defeasance
When the City shall have caused all the Bonds to be paid and discharged and shall have made provision for the payment of all other sums payable by the City under the Indenture, then the Indenture shall cease, terminate and become null and void, and the Trustee shall release the Indenture and cancel and discharge the lien thereof.
For purposes of the Indenture, all the Outstanding Bonds of one or more series shall be deemed to have been paid and discharged if:
(a) the Trustee and the Paying Agents shall hold, in trust for and irrevocably committed thereto, sufficient moneys, or
(b) the Trustee shall hold, in trust for and irrevocably committed thereto, Escrow Securities which an independent public accounting firm of national reputation certifies to be of such maturities and interest payment dates and to bear such interest as will be, without further investment or reinvestment of either the principal amount thereof or the interest earnings therefrom (likewise to be held in trust and committed, except as hereinafter described), sufficient, together with moneys referred to in (a) above, for the payment, at their maturity redemption or due date, as the case may be, of all Bond Service Charges thereon to the maturity, redemption or due date, as the case may be, or if default in such payment shall have occurred on such date, then to the date of the tender of such payment; provided, that if any of such Bonds are to be redeemed prior to the stated maturity thereof, notice of such redemption shall have been duly given or irrevocable provision satisfactory to the Trustee shall have been duly made for the giving of such notice, which provision, however, shall be subject to change as to the date or dates specified for such redemption described in the next paragraph hereof. Any moneys so held by the Trustee may be invested by the Trustee, but only in Escrow Securities the maturities or redemption dates of which, at the option of the Trustee, shall coincide as nearly as practicable with, but not later than, the time or times at which said moneys will be required for the aforesaid purposes. Any income or interest earned by, or increment to, the investments so held shall, to the extent determined from time to time by the Trustee to be in excess of the amount required to be held by it for such purposes, be transferred to the City free and clear of the lien of the Indenture, pursuant to instructions by the Director of Finance.
In the event that any Government Obligations which are subject to redemption prior to their stated maturity date at the option of the City on a specified optional redemption date or dates (any such
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Government Obligations being hereinafter referred to as “Redeemable Government Obligations”) are proposed to be included among or to comprise the Escrow Securities to be held by the Trustee as described in the preceding paragraph, then such Redeemable Government Obligations shall constitute Escrow Securities and may be so held if the accounting firm which renders the certification required as described in the preceding paragraph expressly states therein that its conclusion as to the sufficiency of the Escrow Securities to be so held is based upon the assumption that such Redeemable Government Obligations will be paid and discharged or redeemed either at their respective stated maturity dates or on their respective optional redemption dates, but that such conclusion is and will remain true and valid irrespective of whether the payment and discharge or redemption of any such Redeemable Government Obligations occurs at their respective stated maturities or at any of their respective optional redemption dates, and that such conclusion is not based on the assumption that any proceeds from either the payment and discharge or redemption of any such Redeemable Government Obligations will be reinvested by the Trustee. If any Redeemable Government Obligations are included in the Escrow Securities as described in the preceding sentence, and if any such Redeemable Government Obligations are redeemed at the option of the City prior to their respective stated maturities, the Trustee shall reinvest the proceeds from such redemption in Escrow Securities (including, without limitation, other Redeemable Government Obligations) as directed by the Director of Finance, but in accordance with the requirements described in the preceding paragraph. If any Bonds deemed to have been paid and discharged under the Indenture are to be redeemed prior to the stated maturity thereof on a specified option redemption date or dates and irrevocable provision shall have been made for the giving of notice of such redemption as described in the preceding paragraph, but such notice shall not yet have been given, and if any Redeemable Government Obligations included in the Escrow Securities are redeemed or are irrevocably called for redemption by the City prior to their respective stated maturities, then the City may, by written instruction to the Trustee, specify an available redemption date or dates for the Bonds to be so redeemed different from the date or dates previously specified, provided that the moneys and Escrow Securities held by the Trustee at the time (including any such moneys from and Escrow Securities purchased with the proceeds from such redemption of Redeemable Government Obligations) fulfill the requirements described in the preceding paragraph, applied on the basis of such newly specified redemption date or dates.
For purposes of determining whether any Variable Rate Bonds shall be deemed to have been paid and discharged prior to the maturity, redemption or due date, as the case may be, of all Bond Service Charges thereon, the interest to come due on such Variable Rate Bonds on or prior to the maturity, redemption or due date thereof, as the case may be, shall be assumed to be the maximum rate of interest permitted to be borne thereby pursuant to the terms thereof; provided, however, that if on any date, as the result of any such Variable Rate Bonds having borne interest at a rate less than such maximum rate for any period, the total amount of moneys and Escrow Securities remaining on deposit with the Trustee for the payment of interest on such Variable Rate Bonds exceeds the maximum amount thereof yet to come due, then the Trustee shall, pursuant to the instruction of the City’s Director of Finance, transfer such excess to the City free and clear of the lien of the Indenture.
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APPENDIX C
FORM OF OPINION OF BOND COUNSEL ON SERIES 2018 BONDS
June ___, 2018
To: Barclays Capital Inc. as Representative of the Underwriters
City of Cleveland, Ohio
U.S. Bank National Association, as Trustee
We have served as bond counsel to our client the City of Cleveland, Ohio (the Issuer) in connection with the issuance by the Issuer of its $47,345,000* Public Power System Revenue Refunding Bonds, Series 2018 (the Series 2018 Bonds), dated the date of this letter.
The Series 2018 Bonds are issued pursuant to Article XVIII of the Constitution of the State of Ohio, Ordinance No. 1363-17, duly passed by the Council of the Issuer on November 20, 2017 (the Bond Legislation), and the Fourteenth Supplemental Trust Indenture dated June ___, 2018 (the Fourteenth Supplement), which amends and supplements the Amended and Restated Trust Indenture (Sixth Supplemental Indenture) dated as of August 17, 2006, each between the Issuer and U.S. Bank National Association, as trustee, as previously amended and supplemented (collectively, the Indenture). Capitalized terms not otherwise defined in this letter are used as defined in the Indenture.
In our capacity as bond counsel, we have examined the transcript of proceedings relating to the issuance of the Series 2018 Bonds, a copy of the signed and authenticated Series 2018 Bond of the first maturity, the Indenture and such other documents, matters and law as we deem necessary to render the opinions set forth in this letter.
Based on that examination and subject to the limitations stated below, we are of the opinion that under existing law:
1. The Series 2018 Bonds and the Indenture are valid and binding obligations of the Issuer, enforceable in accordance with their respective terms.
2. The Series 2018 Bonds constitute special obligations of the Issuer, and the principal of and interest on (collectively, debt service) the Series 2018 Bonds, together with debt service on any other obligations issued and outstanding on a parity with the Series 2018 Bonds as provided in the Indenture, are payable from and secured solely by the Net Revenues and Special Funds established under the Indenture. The payment of debt service on the Series 2018 Bonds is not secured by an obligation or pledge of any money raised by taxation and the Series 2018 Bonds do not represent or constitute a general obligation or a pledge of the faith and credit of the Issuer, the State of Ohio or any of its political subdivisions.
* Preliminary, subject to change.
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3. Interest on the Series 2018 Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986, as amended (the Code) and is not an item of tax preference for purposes of the federal alternative minimum tax; however, interest on the Series 2018 Bonds is included in the calculation of a corporation’s adjusted current earnings for purposes of, and thus may be subject to, the corporate alternative minimum tax (applicable only to taxable years beginning before January 1, 2018). Interest on, and any profit made on the sale, exchange or other disposition of, the Series 2018 Bonds are exempt from all Ohio state and local taxation, except the estate tax, the domestic insurance company tax, the dealers in intangibles tax, the tax levied on the basis of the total equity capital of financial institutions, and the net worth base of the corporate franchise tax. We express no opinion as to any other tax consequences regarding the Series 2018 Bonds.
The opinions stated above are based on an analysis of existing laws, regulations, rulings and court decisions and cover certain matters not directly addressed by such authorities. In rendering all such opinions, we assume, without independent verification, and rely upon (i) the accuracy of the factual matters represented, warranted or certified in the proceedings and documents we have examined, and (ii) the due and legal authorization, execution and delivery of those documents by, and the valid, binding and enforceable nature of those documents upon, any parties other than the Issuer.
In rendering those opinions with respect to treatment of the interest on the Series 2018 Bonds under the federal tax laws, we further assume and rely upon compliance with the covenants in the proceedings and documents we have examined, including those of the Issuer. Failure to comply with certain of those covenants subsequent to issuance of the Series 2018 Bonds may cause interest on the Series 2018 Bonds to be included in gross income for federal income tax purposes retroactively to their date of issuance.
The rights of the owners of the Series 2018 Bonds and the enforceability of the Series 2018 Bonds and the Indenture are subject to bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or transfer, and other laws relating to or affecting the rights and remedies of creditors generally; to the application of equitable principles, whether considered in a proceeding at law or in equity; to the exercise of judicial discretion; and to limitations on legal remedies against public entities.
No opinions other than those expressly stated herein are implied or shall be inferred as a result of anything contained in or omitted from this letter. The opinions expressed in this letter are stated only as of the time of its delivery and we disclaim any obligation to revise or supplement this letter thereafter. Our engagement as bond counsel in connection with the original issuance and delivery of the Series 2018 Bonds is concluded upon delivery of this letter.
Respectfully submitted,
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APPENDIX D - BOOK-ENTRY ONLY SYSTEM
The following information concerning DTC and DTC’s book-entry only system has been obtained from sources that the City believes to be reliable, but the City takes no responsibility for its accuracy.
The Series 2018 Bonds will be prepared as fully registered Series 2018 Bonds and when delivered all Series 2018 Bonds will be registered in the name of Cede & Co., as nominee of the Depository Trust Company, New York, New York (“DTC”).
The following information concerning DTC and DTC’s book-entry system has been obtained from DTC and contains statements that are believed to describe accurately DTC, the method of effecting book-entry transfers of securities distributed through DTC and certain related matters, but neither the City, the Port Authority nor the Trustee takes any responsibility for the accuracy of such statements.
The Depository Trust Company (“DTC”), New York, NY, will act as securities depository for the Series 2018 Bonds. The Series 2018 Bonds will be issued as fully-registered securities registered in the name of Cede & Co. (DTC’s partnership nominee) or such other name as may be requested by an authorized representative office. One fully-registered certificate will be issued for each maturity of the Series 2018 Bonds, in the aggregate principal amount of such issue, and will be deposited with DTC.
DTC, the world’s largest securities depository, is a limited-purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing agency” registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments from over 100 countries that DTC’s participants (“Direct Participants”) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants’ accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect Participants”). DTC has an S&P rating of AA+. The DTC rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com.
Purchases of Series 2018 Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Series 2018 Bonds on DTC’s records. The ownership interest of each actual purchaser of each Bond (“Beneficial Owner”) is in turn to be recorded on the Direct and Indirect Participants’ records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Series 2018 Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not
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To facilitate subsequent transfers, all Series 2018 Bonds deposited by Direct Participants with DTC are registered in the name of DTC’s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Series 2018 Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Series 2018 Bonds; DTC’s records reflect only the identity of the Direct Participants to whose accounts such Series 2018 Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Series 2018 Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Series 2018 Bonds, such as redemptions, tenders, defaults, and proposed amendments to the Series 2018 Bonds. For example, Beneficial Owners of Series 2018 Bonds may wish to ascertain that the nominee holding the Series 2018 Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the Bond Registrar and request that copies of the notices be provided directly to them.
Redemption notices shall be sent to DTC. If less than all of the Series 2018 Bonds within an issue are being redeemed, DTC’s practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed.
Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to the Series 2018 Bonds unless authorized by a Direct Participant in accordance with DTC’s MMI procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the State as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.’s consenting or voting rights to those Direct Participants to whose accounts the Series 2018 Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy).
Redemption proceeds, distributions, and dividend payments on the Series 2018 Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC’s practice is to credit Direct Participants’ accounts upon DTC’s receipt of funds and corresponding detail information from Issuer or Agent, on payable date in accordance with their respective holdings shown on DTC’s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in “street name,” and will be the responsibility of such Participant and not of DTC, Agent, or Issuer, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, distributions, and dividend payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of Issuer or Agent, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants.
DTC may discontinue providing its services as depository with respect to the Series 2018 Bonds at any time by giving reasonable notice to the City and the Trustee. Under such circumstances, in the
D-2 event that a successor depository is not obtained, Security certificates are required to be printed and delivered.
Issuer may decide to discontinue use of the system of book-entry-only transfers through DTC (or a successor securities depository). In that event, Security certificates will be printed and delivered to DTC.
The information in this section concerning DTC and DTC’s book-entry system has been obtained from sources that Issuer believes to be reliable, but Issuer takes no responsibility for the accuracy thereof.
The Series 2018 Bonds are transferable only upon the Register maintained by the Trustee upon surrender of the Series 2018 Bonds to be transferred together with a written instrument satisfactory to the Trustee executed by the Owner or his authorized attorney. Upon transfer, the Trustee will provide, in the name of the transferee, a new Series 2018 Bond of the same maturity in the same aggregate unpaid principal amount as the surrendered Series 2018 Bonds.
The City and the Trustee may deem and treat the registered holders of the Series 2018 Bonds as the absolute owners thereof for all purposes, and neither the City nor the Trustee will be affected by any notice to the contrary.
Transfer of Book Entry Interests in the Series 2018 Bonds
The rights of owners of book entry interests in the Series 2018 Bonds and the manner of transferring or pledging those interests is subject to applicable state law. Owners of book entry interests in the Series 2018 Bonds may want to discuss the manner of transferring or pledging their book entry interest in such Series 2018 Bonds with their legal advisors.
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