Terasen Legacy Fund Opportunity

In 2018, as a result of a lease-in, lease-out agreement with BC Gas (now Terasen Gas), the City of Kelowna is projected to receive a net benefit of approximately $20 million. This agreement, known in Kelowna as the Legacy Fund Opportunity, will create a legacy fund to benefit the citizens of the day, likely funding a major capital project or new initiative.
 
The Legacy Fund Opportunity, signed in November 2001, arose out of an existing BC Gas Franchise Agreement that was in place since 1957. A key component of the franchise agreement was an option for the City to buy-out the existing natural gas distribution system within the municipal boundary.

The City recognized the buy-out clause represented an asset with undefined, potential value to Kelowna's taxpayers. Extensive discussions and negotiations over a two-year period led to an agreement with BC Gas which would see: 

• the City entering into a 35-year capital lease with BC Gas for the natural gas distribution system within the municipality's boundary, paying $47.5 million as rent due under the lease,
• the City borrowing $49.3 million to prepay the lease and for transaction costs, and
• the City leasing back the operation of the distribution system to BC Gas through a 17-year operating lease with annual payments made to the City (used to pay down the loan).

At the end of the 17-year period, BC Gas will choose to cancel the capital lease and make a termination payment to the City of $24.4 million or negotiate a new operating lease for an additional 18 years. Under the latter scenario, no termination payment would be made, but the annual revenue payments from BC Gas to the City would add up to greater than the termination payment. The revenue from either option represents the City's Legacy Fund.

The City, as a level of government, is not subject to corporate income tax and the stream of lease revenue payments are not taxed in the City's hands. The City's ability to borrow funds at favourable rates through the Municipal Finance Authority allows it to capitalize on the interest rate spread differential when compared to debt carried by BC Gas.

In addition, the City of Kelowna will benefit with every new municipality that completes similar agreements with BC Gas. The City invested substantially in the formation of the agreement and a payment will be made to Kelowna with each new community that uses the Kelowna template. The City of Vernon has recently mirrored the City of Kelowna's lease-in, lease-out agreements.

The City of Kelowna was undeterred by the significant financial investment, extensive communication requirements and the complexity of the agreements. To date, the transaction revenues are greater than had been projected in the early years of the transaction.