PROVO -- Questions about the much-discussed iProvo deal? Hint: it's all about the money.
The Provo Municipal Council met Tuesday with city officials and the leaders of the fiber-optic network owner Broadweave Networks and Veracity Communications to discuss the proposed merger between the two companies and the city's involvement in that merger.
Broadweave CEO David Moon and Veracity CEO Drew Peterson have asked the city to defer about a third of the monthly bond payments for the next 18 months. The payment the city makes will stay the same, however, which means $82,000 will come out of city coffers every month for the next 18 if this is approved. The Municipal Council in a work session Tuesday asked lots of questions and pored through paperwork but largely kept their opinions to themselves. They left with plans to see nonpublic cash flow projections for the merging company and a week in which to make up their minds.
The following are some of the answers they heard at the meeting Tuesday.
Q: Where is the money coming from to make up the $82,000 that the city would pay?
A: The city would take money from its energy reserve fund, which earns about 1 percent interest in a state pool fund, and move it into a telecommunications debt services fund. Every month, $82,000 will join with the merged company's $195,505 to make the monthly bond payment.
Q: Will Provo get its money back?
A: Yes, if Veracity Networks can continue adding customers and make the payments for the next seven years. Under the original agreement, Broadweave made a monthly payment of $277,505 starting in July 2008 and running through June 2027 to pay for the $40 million bond. The proposed debt schedule will allow the company to make payments of $195,505 for 18 months, starting in September and running through February 2011. The payment will then revert to the original amount for two years, and in March 2013 the monthly payment will jump to $302,505. That payment rate will continue through October 2019, after which it will again revert to the original amount for the remainder of the note.
Provo finance director John Borget said the city will end up getting $2,012,247 in return for the $1,476,000 it pays out in the coming 18 months.
Q: What benefits will the city of Provo get from this deal?
A: Energy director Kevin Garlick said the energy fund has the healthiest balance in the city, and he believes this is a good use of those resources, particularly with the proposed rate of return. He plans to apply for a grant for a smart grid initiative, which requires matching funds from the city and will bring technology to customers.
"This is a decision from the council on whether it makes sense," he said.
Other officials, including Mayor Lewis Billings and several council members, have said they believe this is the best option to keep Broadweave able to continue running iProvo.
Q: What are the potential risks?
A: The contract contains a number of clauses to give Provo some cushion should Broadweave default on payments. Assistant city attorney Ryan Wood said the $6 million surety, or the promise of money put up by five investors, can be used to make the monthly bond payment until there is about $1.7 million left, or six months of payments at $277,505 a month. If the surety gets to that point or Broadweave goes bankrupt, Provo can take the network back and keep the surety to make those payments, although Provo still will own a fiber-optic network and not be able to provide the services, according to state law.
If Provo chooses to foreclose at the six-month mark, the city gets half of that surety, Wood said. That still leaves Provo with the network.
Also, council attorney Neil Lindberg said, the city would have a greater loss if it had to reacquire the network before that money was paid back.
Municipal Council members also were concerned that Provo wouldn't be as protected under the new company. All the details of the merger are not public information, so many asked questions about the guarantor and its assets. Currently, Broadweave Inc. owns three networks, including Broadweave of Provo. Should the company default and the city go after its assets to recover costs, all three of those subsidiaries are fair game.
"Our goal is to preserve what we have now," Wood said.
Veracity, however, doesn't want all of its networks and customers in that same arena, so the reorganization will happen in such a way that Broadweave still will remain a limited liability corporation under a parent company. Should Provo seek to recover costs, Veracity's networks and its customer contracts that are not in Provo or that were acquired before the merger and are on the iProvo network are off-limits, according to the amended contract.
Peterson of Veracity estimated that about 200 customers not on iProvo will move either some or all of their services to the iProvo network and become collateral, although those Veracity customers already on the iProvo network will not count. One can see why this is getting complicated.
"To define it by customer is a difficult, difficult question," he said.
Q: What are the proposed changes to the agreement Broadweave had with the city?
A: According to the city's documents, the contract, if approved, will change the payment schedule, update details such as corporate locations and investor information and clarify the formula used to determine the 6-month trigger point for the surety. That formula takes into account the monthly payments made, but it will not take into account the lesser amount, which would leave Provo with a smaller surety if that trigger point was reached. Moon and Peterson declined to go into greater detail on the actual structure of the new company because it is a private corporation.
Q: Why does the city have to approve the merger?
A: It doesn't. As two private corporations, Broadweave and Veracity are accountable to their shareholders, not the city government. However, because of Broadweave's debt relationship with the city of Provo -- each month, it pays $277,000 to Provo, who still holds the bond on the iProvo fiber-optic network -- and because the merged company will need a reprieve on making those payments in full for the next 18 months, they're working with the city government.
Q: Why did this come up now?
A: The Municipal Council in its budget intent statements asked for a contingency plan in case the city had to reacquire iProvo. That deadline was the end of August, and as the administration worked with Broadweave not only on a contingency plan but also on ways to keep the company and the network solvent, the merger talk began.
Chief Administrative Officer Wayne Parker said he and other members of the administration and energy department have met with Moon multiple times and discussed other alternatives, focusing on ways to strengthen Broadweave's financial position. However, once they knew of the possibility of a merger with Veracity, most of the energy went into that.
"The strengthening of the private partner is, in our mind, clearly the best option," Parker said, adding the team believed this would best accomplish what the council wanted as a contingency plan for dealing with iProvo. "We haven't spent really any time on any other option since then."
Q: What happens if the Municipal Council doesn't approve the changes?
A: Moon said they have met with city officials and discussed other options, but none were as hopeful as this merger. Ideally, he said, the financial strength of Veracity and the economies of scale that come from using the same resources and administration to meet the needs of a larger group of people will help the corporation get the necessary capital to expand more quickly, which is how the cash flow will come.
"It's not quite enough, and that's why we're coming to the city," Moon said; he and other Broadweave investors have tried to raise capital in other ways, but he said investors are not comfortable with the amount of debt the company has.
The merger most likely will not move forward without this help from the city, participants have said, at which point Moon and other Broadweave investors will continue to work with the city and/or another contingency plan will be formulated.
Q: What happens next?
A: The Municipal Council will address this issue at its meeting at 7 p.m. Tuesday at the City Center, 351 W. Center St. The council will hold a public hearing on the interfund loan. For more information on the interfund loan, the amended contract and the two corporations, go to the city's Web site at www.provo.org.
• Heidi Toth can be reached at (801) 344-2556 or htoth@heraldextra.com.
Posted in Provo on Wednesday, August 26, 2009 12:00 am Updated: 12:08 pm. | Tags: Provo, Broadweave, Veracity, Iprovo, Telecommunications
© Copyright 2009, Daily Herald, Provo, UT | Terms of Service and Privacy Policy
