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HomeMy WebLinkAbout17 163 the municipality of kincardine business case study: bruce telecom as a municipal services corporation by-law THE CORPORATION OF THE MUNICIPALITY OF KINCARDINE KBT 6,244. II/ ' K1N6P��\� CAL OF BY-LAW NO. 2017 - 163 BEING A BY-LAW TO ADOPT THE BUSINESS CASE STUDY: BRUCE TELECOM AS A MUNICIPAL SERVICES CORPORATION WHEREAS pursuant to the Municipal Act 2001, S.O. 2001, c.25, as amended Section 8 (1) and 9 provide that the powers of a municipality under this or any other Act shall be interpreted broadly so as to confer broad authority on the municipality to enable the municipality to govern its affairs as it considers appropriate and to • enhance the municipality's ability to respond to municipal issues and has the capacity, rights, powers and privileges of a natural person for the purpose of exercising its authority under this or any other Act; AND WHEREAS Section 203 of the above noted Act authorizes a municipality to establish corporations; AND WHEREAS Ontario Regulation 599/06, Municipal Services Corporations, Section 6 states that a municipality shall adopt a business case study before it establishes a corporation; AND WHEREAS a business case study for the conversion of Bruce Telecom from a municipal service board to a municipal services corporation structure was presented at the July 24, 2017 Council meeting; AND WHEREAS Council has determined that it is advisable that the Municipality of Kincardine Business Case Study: Bruce Telecom as a Municipal Services Corporation be adopted; • NOW THEREFORE the Council of The Corporation of the Municipality of Kincardine ENACTS as follows: 1. That the Municipality of Kincardine adopt the Municipality of Kincardine Business Case Study: Bruce Telecom as a Municipal Services Corporation attached hereto as Schedule 'A' and forming part of this by- law. 2. This by-law shall come into full force and effect upon its final passage. 3. This by-law may be cited as the "The Municipality of Kincardine Business Case Study: Bruce Telecom as a Municipal Services Corporation By-law". READ a FIRST and SECOND TIME this 6th day of December, 2017. READ a THIRD TIME and FINALLY PASSED this 6th day of December, 2017. — • Mayor Clerk This is Schedule "A" to By-Law No:DOI---163 passed the (n day of i nrnter 201-3- The Municipality of Kincardine Business Case Study: Bruce Telecom as a Municipal Services Corporation 1. Introduction 1 (a) History 1 (b) Current Considerations 1 2. Objectives 1 3. Mandate 2 4. Guiding Principles 2 5. Alternatives 2 (a) Status Quo-Baseline Operations,No Growth 2 (b) Growth Strategy under Current Structure 3 (c) Growth Strategy under MSC Structure 3 6. Governance, Proposed Structure 3 (a) Shareholder Rights 4 (b) Independence of the Board 4 7. Public Accountability 4 8. Financial 5 9. Conclusion 5 1. Introduction Bruce Telecom has been the incumbent telecommunications company for much of Bruce County for over 100 years. Bruce Telecom's operations include home telephone, television and wireline broadband internet and wireless services. Its incumbent territory includes the towns of Kincardine, Tiverton, Port Elgin and Paisley as well as surrounding rural areas. (a) History The Bruce Municipal Telephone System("BMTS")was originally established in 1911 as a subscriber-owned municipal telephone system under a predecessor of the Telephone Act (Ontario). After this legislation was repealed, BMTS continued to be owned and operated by the former Bruce Township. On September 13, 2006, a municipal services board("Bruce Telecom")was established by The Municipality of Kincardine ("Kincardine")which has since carried on the BMTS business. In 2014, Kincardine attempted to sell the assets of Bruce Telecom to Bragg Communications Incorporated,but because approval was not forthcoming from the Competition Bureau, the sale was not completed. (b) Current Considerations Kincardine has been considering its business objectives for Bruce Telecom, and confirms its commitment to pursuing a strategy of growth for Bruce Telecom. This business case study examines the potential conversion of Bruce Telecom from a municipal services board to a municipal services corporation("MSC") as an avenue to achieve such growth. 2. Objectives Bruce Telecom has operated in Bruce County for more than 100 years. Its business continues to be a strong economic contributor to the citizens of Kincardine. Kincardine has determined that it would be in the best interests of its citizens to grow the business of Bruce Telecom,rather than maintain current operations. Maintaining the status quo may result in declining returns over time essentially amounting to a harvesting strategy. A growth strategy will require investment in Bruce Telecom. If such investment were to be made directly by Kincardine, this would likely come as increased debt or the guarantee of third party debt. In any event, such financing would affect Kincardine's overall municipal financing ratios and under certain circumstances,may not be feasible. The risk element of the growth strategy would also rest directly with Kincardine. Operating Bruce Telecom as a MSC enables the financing to be conducted directly by the corporation and with the associated covenants and liabilities separate and shielded from Kincardine. The risk profile associated with the necessary investment for a growth strategy would be contained in the MSC, again separate from Kincardine. - 2 - The corporation structure will enable a governance framework whereby the MSC directors will hold an unequivocal fiduciary duty to the MSC. The corporate structure thus may free directors from the pressures of making decisions based on political factors that may contradict the interest of the corporation. The corporate structure therefore enables a longer term focus on growth of the Bruce Telecom business, from which Kincardine would be shielded from the associated risk and financial pressures, while enjoying the potential for increased return and dividends. 3. Mandate Operating BruceTelecom's business through a MSC will facilitate achieving the goals of growth. The MSC mandate would include Board appointments consistent with the operation of the MSC being a separate entity. 4. Guiding Principles Directors and officers of a corporation have a fiduciary duty to act in the best interests of the corporation. The MSC will be owned by Kincardine, and so there will be an interrelationship between corporate and municipal laws. There will also be an expectation that the objectives of the MSC be supportive of Kincardine's objectives. In this context,the operations of the MSC and Kincardine will be governed by the following principles: (i) The MSC board of directors will follow reporting and approval requirements set out in a shareholder declaration issued by Kincardine. (ii) Independent and experience/skills-based board — the Board of the MSC will be marked by industry and skills based experience and independence. The Board will be made up solely of independent directors, meaning that councillors and staff of Kincardine would not be eligible to serve as directors. (iii) Comprehensive measurement of returns — shareholder measurement and returns will be based on profit levels and market share growth. 5. Alternatives Kincardine considered various strategic options, including maintaining the status quo,pursue growth under the current structure of the municipal services board or pursue growth under a corporate structure,namely, a municipal services corporation. (a) Status Quo—Baseline Operations,No Growth This strategic option involves maintaining current base line operations, without a proactive growth strategy. The main business objective in this approach is a continued harvesting of the asset, which would most likely involve declining returns until the winding up of the business. - 3- While conversion to a MSC would facilitate governance objectives, the associated costs for a harvesting of declining returns would not be justified. (b) Growth Strategy under Current Structure Pursuing growth will involve an expansion of current operations,which will require additional financing. Any new financial obligation of Bruce Telecom will become a new financial obligation of Kincardine under the current structure. Kincardine could support the additional financial requirements for a growth strategy by guaranteeing new third party debt or by making an equity contribution payment to Bruce Telecom. This would impact Kincardine's overall borrowing capacity/financial position throughout the implementation of the strategy. (c) Growth Strategy under MSC Structure Under a MSC structure, the MSC could raise financing on its own without a municipal guarantee and separate from the municipality. As a separate body corporate,the MSC's liabilities would be isolated from Kincardine. The MSC would be the entity that enters into loan or other financing agreements, and the entity responsible for the associated borrower covenants. In addition, a MSC structure would enable equity contribution by a minority investor or a joint venture partner which would facilitate hedging risk, increasing scale and scope economies as well as other potential strategic benefits to drive growth. 6. Governance, Proposed Structure The proposed structure involves establishing an MSC structure comprising a holding company and two operating subsidiaries. All of the common voting shares in each of the two operating subsidiaries would be held by a parent holding company, which in turn will be wholly-owned by Kincardine. A holding company structure is being adopted to enable future business growth. The assets of Bruce Telecom will be transferred to the operating subsidiaries. Municipality of Kincardine 100% ownership Parent Holding Company Bruce Telecom I Bruce Telecom II Inc. (non-taxable) (taxable) -4- As a corporation, a board ("Board")of directors would need to be appointed for the MSC. Kincardine, as sole shareholder,would set the size of the Board and appoint the directors. Under this corporate structure, the Board would be charged with oversight over management of the business but would be required to seek shareholder approval over fundamental matters, as required under corporate statute and as may be set out in a shareholder declaration. Management would be charged with the day to day operations of the business but would be required to obtain board approval for major decisions. (a) Shareholder Rights As sole voting shareholder, Kincardine would determine what matters it considers to be so fundamental that the Board must obtain its approval before undertaking any such actions. Such matters, particularly if not already found in the applicable corporate statute, would be set out in a shareholder declaration and as examples, may include items such as divestiture of the shares of the MSC, share issuances or the introduction of a new equity investor or joint venture partner. (b) Independence of the Board A key advantage to the MSC structure is the ability to appoint directors who are independent from the municipality. The MSC structure enables a focus on industry business experience as qualifications for Board members. The Board's fiduciary responsibility would be to the MSC, and as such, the directors would be guided by what is in the best interest of the corporation, free from the pressures of immediate political issues. 7. Public Accountability Corporate statutes require that corporations conduct an annual general meeting("AGM"). At the AGM, the voting shareholders will appoint the slate of directors and receive the financial statements. Operating as a MSC, Kincardine would also expect Bruce Telecom to report to council on major business developments or events. The expected reporting obligation would be set out in a shareholder declaration issued by Kincardine to the MSC. Reporting and communications between the MSC and its sole voting shareholder, Kincardine, would be shareholder communications as provided under corporate statute, and thus, subject to confidentiality and not conducted in public council meetings. Kincardine may also receive such information in the context of municipal council proceedings as appropriate, including in camera but subject to the requirements of the Municipal Act. - 5- 8. Financial Bruce Telecom currently provides Kincardine with regular annual dividends. However, maintaining status quo operations under the current structure will not increase dividend potential, and declining returns over time are likely. A strategic focus on growth will be more likely to generate increased returns and thus, dividends, over time. However, increased investment in the business will be required for such growth to be realized. Like with any investment, there is inherent risk in this strategy. Operating the business under a corporate structure means the risk-reward dynamic can be contained to the MSC,rather than housed in the municipality. As a MSC, Bruce Telecom would be able to borrow money in its own right, and would not need to rely on the municipality to do so. The MSC may be more readily understood than the municipal services board by the business community,thereby increasing the potential of new equity investors as another avenue to obtain financing to support business plans implementing a growth strategy. 9. Conclusion Bruce Telecom has operated in Bruce County for more than 100 years. Its business continues to be a strong economic contributor to the citizens of Kincardine. Kincardine has determined that it would be in the best interests of its citizens to grow the business of Bruce Telecom, rather than continue with a status quo or harvesting approach. A growth strategy will require investment in Bruce Telecom. If such investment were to be made directly by Kincardine, this would affect Kincardine's overall financing ratios and under certain circumstances,may not be feasible. The risk element of the growth strategy would rest directly with Kincardine. Operating Bruce Telecom as a MSC enables the financing and risk profile associated with a growth strategy to be contained in a corporation, separate from Kincardine. The corporate structure will enable a governance framework whereby the MSC board may have a higher degree of independence. Directors would not be required to make decisions for political purpose as their fiduciary duty would be to the corporation.