Taxable Lease Revenue Bonds
(Pantex Plant Administrative Support Complex Project), Series 2016
The Pantex transaction was structured by MCM as a Public, Public, Private Partnership (“P4”). That is, local governments act as issuer, owner and lessor of a project leased to the federal government as lessee and a private developer contracts with the local government to design, build and operate the facility on behalf of the local government. The P4 structure is designed to eliminate the costs that a private developer would require as a return on its investment and to qualify under Office of Management and Budget (“OMB”) Circular A-11, Appendix B as an operating lease which for federal budget purposes scores only the current year’s lease payments. Where Department of Energy (“DOE”) P4s are concerned there is an added complexity given that the lessee, or in some cases sub lessee, is an M&O Contractor charged with operating the relevant DOE lab or complex on behalf of the DOE. This creates issues surrounding the “assignment of claims” common to federal lease transactions and potential bankruptcy exposure to the M&O Contractor. Finally, the transaction is structured to receive a high investment grade credit rating and to be securitized and sold in the capital markets pursuant to a SEC Rule 144A offering in order to obtain the lowest possible cost of funding. MCM believes this structure achieves the lowest possible lease cost to the federal government and U.S. taxpayers.
The Panhandle Economic Development Corporation, Texas (the “Issuer”), is a public nonprofit corporation of the State of Texas, and an instrumentality of the City of Panhandle, Texas (the “City”). Pantex ASC, LLC (the “Borrower”), is a special purpose, limited liability company created by the Issuer for the sole purpose of financing the Project and leasing the Project to the M&O Contractor. Lawler Wood Pantex, LLC, a Tennessee Limited Liability Company is the developer of the Project (the “Developer”).
The Pantex Plant in Carson County, Texas (the “Pantex Plant”), is the nation’s primary nuclear weapons assembly and disassembly facility and its mission is to ensure the safety, security and reliability of the nation’s nuclear stockpile. The Pantex Plant is located between Amarillo, Texas and the City. The Pantex Plant is owned by the United States Department of Energy (the “DOE”) and is administered by DOE’s National Nuclear Security Administration (the “NNSA”). The Pantex Plant is managed and operated by Consolidated Nuclear Security, LLC, a Delaware limited liability company (the “M&O Contractor”), formed by Bechtel National, Inc.; Lockheed Martin Services, Inc.; ATK Launch Systems, Inc. and SOC LLC, with Booz Allen Hamilton, Inc. as teaming subcontractor.
The Project includes the design, construction and development of a new administrative support complex facility to provide space for mission and administrative support and related services for the Pantex Plant (the “Project”). The Project will be located south of the Pantex Plant on property acquired from Texas Tech University and will include approximately 342,800 square feet of space for approximately 1,100 administrative personnel that currently work in 52 separate buildings at the Pantex Plant. The Project will include office space, an auditorium, a cafeteria and a medical clinic. There will be no handling of radiological or nuclear materials at the Project. The Project will be leased to the M&O Contractor pursuant to the Facility Lease and will be used by the M&O Contractor in its ongoing activities at the Pantex Plant pursuant to the M&O Contract. The Project (a) supports NNSA Strategic Vision and Ten Year Site Plan goals; (b) is expected to eliminate significant deferred maintenance; (c) will enhance recruitment and retention of and improve quality of life and work environment for employees; and (d) provide consolidation for efficient personnel collaboration.
The Developer will develop the Project pursuant to a Development Agreement with the Borrower. The Developer will enter into a Guaranteed Maximum Price Design-Build Agreement with Turner Construction Company for design and construction of the Project. After completion of the Project, the Developer will provide operation and maintenance support for the Project under a Facility Management Agreement, between the Borrower and the Developer, acting as facility manager. The Developer will also perform certain other obligations of the Borrower under an Asset Management Agreement, between the Borrow and the Developer, acting as asset manager.
To finance the Project $107,718,000 principal amount of Taxable Lease Revenue Bonds (Pantex Plant Administrative Support Complex Project), Series 2016 (S&P rated ‘A1’) were sold at an interest rate of 3.985% per annum. The Series 2016 Bonds have a stated maturity of July 15, 2048, and are subject to amortizing principal payments each January 15 and July 15, beginning January 15, 2019. As a result of the amortizing principal payments, the Series 2016 Bonds are expected to have an average maturity of approximately 20 years.
The Borrower will lease the Project to the M&O Contractor pursuant to a Lease Agreement (the “Facility Lease”). Under the Facility Lease, the M&O Contractor is required to pay annually scheduled rent (the “Base Rent”) in equal monthly installments, commencing on the Rental Obligation Commencement Date. Base Rent is intended to be sufficient to pay the scheduled principal and interest payments on the Series 2016 Bonds. In addition to the Base Rent, the M&O Contractor is obligated to pay Operating Rent, which includes all costs and expenses of the Borrower associated with the ownership or control of the Project. Under the Facility Lease, the obligation to pay Base Rent and Operating Rent is not subject to counterclaim, deduction, defense, deferment or setoff. Base Rent and Operating Rent will be payable from government funds provided by the United States Treasury and deposited in a special account established with SunTrust Bank for payment of allowable reimbursable costs under the M&O Contract and a Financing Protocol. Pursuant to an Acknowledgment, Subordination, Non Disturbance and Attornment Agreement (the “SNDA”), the DOE acknowledges, among other things, that the DOE has consented to the execution of the Facility Lease by the M&O Contractor.
The completion of the project by the guaranteed completion date, which is 21 months from closing for the Series 2016 Bonds, is subject to various construction risks, responsibility for many of which have been assumed by the Design Builder.
In 2005, the MCM team while engaged at a another firm, successfully structured and financed two facilities totaling approximately 550,000 square feet at the NNSA’s Y-12 Complex near Oak Ridge, Tennessee (the “Y-12 Project”). The structure and financing of the Y-12 Project is substantially similar to the structure and financing of the Pantex Project. The Developer and Design Builder were also the developer and design-build contractor for the Y-12 Project. The Y-12 Project was financed by the issuance of $154,360,000 aggregate principal amount of The Industrial Development Board of the City of Oak Ridge, Tennessee’s Taxable Lease Revenue Bonds, Series 2005.