DISCLAIMER

 

PUBLIC WORKS AND UTILITIES COMMITTEE


08-043-O


ORDINANCE NO. __________


AN ORDINANCE AUTHORIZING REDEVELOPMENT AGREEMENT WITH MINNESOTA POWER PERTAINING TO DULUTH STEAM DISTRICT NO. 2 AND THE SALE OF CERTAIN PROPERTY, RIGHTS AND INTERESTS AS AUTHORIZED THEREIN.

CITY PROPOSAL:

The city of Duluth does ordain:

     Section 1.  That the city hereby designates the property described below as being surplus to the city’s future needs and hereby declares its intention to alienate its interest in same.

     Section 2.  That, upon recommendation of the director of public works and utilities, the council has determined that it is appropriate to sell the below-described property to Minnesota Power, a division of Allete, Inc., as herein provided for without competitive bidding pursuant to the authorization of Section 2-177 of the Code because the property and easements involved are located on or appurtenant to property owned by said company and because said company is the only viable entity that could reasonably acquire and operate said property and easements.

     Section 3.   That the proper city officials are hereby authorized to enter into that certain redevelopment agreement, a copy of which is on file in the office of the city clerk as Public Document No. __________, with Minnesota Power, a division of Allete, Inc., authorizing the sale of property and easements therein described for the total sum of $2,500,000 and to execute all documents necessary with regard to said conveyance including the following:

     (a)  Conveyance of equipment as described on Exhibit C to said redevelopment agreement and any city-owned equipment appurtenant thereto;

     (b)  Relinquishment of any right, title or interest of the city in the Hibbard property as defined in said redevelopment agreement;

     (c)  Termination of the management agreement as described on Exhibit E to said redevelopment agreement;

     (d)  Conveyance of those easements as described on Exhibit B to said redevelopment agreement;

     (e)  Execution of that indenture of sale, easement termination and modification of common area agreement substantially in the form of Exhibit F to said redevelopment agreement;

     (f)   Execution of a permit assignment substantially in the form of Exhibit D to said redevelopment agreement;

     (g)  Execution of an assignment and assumption agreement pertaining to any steam service agreements in substantially the form of Exhibit G to said redevelopment agreement.

     Section 4.  That the amount paid to city pursuant to this ordinance shall be paid into General Fund 100.

     Section 5.  This ordinance shall take effect 30 days from and after its passage and publication.


PW&U/ATTY


STATEMENT OF PURPOSE:  The purpose of this ordinance is to declare city-owned property, easements and rights related to the Duluth Steam District No. 2 as surplus to the city’s current and future needs and to authorize their conveyance to Minnesota Power at market price.


The city first acquired its interest in the property in question as part of the development program for the Lake Superior Paper Industries project in West Duluth. In 1985, Minnesota Power partnered with Pentair, Inc., a paper manufacturing company and the city to develop a super calendarized paper manufacturing facility on Central Avenue. As part of the development, MP conveyed two of the existing boiler units and other property rights in the then-dormant Hibbard Station located on the St. Louis River to the city which updated and refurbished those boilers and added other equipment to create a facility capable of producing steam to power the new paper mill. A second customer was added when Superior Recycled Fibers Industry, a paper recycling facility, was added. And to the extent that there was excess steam capacity available, MP has purchased that steam and used it for electrical power generation.


A steam facility cooperative, Duluth Steam District No. 2, was created to operate the facility and a management agreement was entered into pursuant to which Minnesota Power provided management and operations services for the facility. Since its creation the district has paid all operating and maintenance costs of the district from revenues generated by the sale of steam and in addition all of the public’s capital costs, in the form of bonds, have been fully retired.


The district’s steam generation facilities were old when the district was created, having been previously used by MP for years for electrical generation before being retired prior to the creation of the district. The updating and refurbishing work done in about 1985 is now over 20 years old and the entire district steam generating system is in need of replacement, the cost of which is estimated to run into the multi-millions of dollars. As the purpose for the public ownership of the facilities was to facilitate an economic development project, the LSPI development, and that purpose has been accomplished, the question was raised as to whether there was a current public purpose in continuing public ownership and additional investment in the district facilities or whether the current needs could be better served by conveying the facilities to the private sector with the requirement that the steam needs of the district continue to be met.


After considerable study, staff came to the conclusion that the city’s best interests would be best served if the facility could by sold to the private sector but only if the city received reasonable compensation for the property. It was also determined, because of the location of the assets and the fact that they were integrally related to MP’s existing property and generating facilities, that the only logical purchaser would be MP. Therefore, the city had an appraisal done of the property and property rights involved and entered into negotiations with MP for the sale of the assets. The valuation of the assets was a very challenging proposition because of the uniqueness of the property being appraised, because there was only one possible user and because of the age and condition of the equipment. Therefore, a price was negotiated with MP which took into account all of these factors.


What this redevelopment agreement does is to “unwind” the part of the 1985 development agreements pertaining to the steam generation facilities while guarantying that adequate steam will be kept available for the LSPI and SRFI operations for the foreseeable future and relieving the public from the necessity of making a substantial investment in the continued operation of the district.


The proceeds of the sale will be deposited in the general fund as undesignated, unreserved funds and applied to raising those funds to acceptable levels.