Title
Financing for Construction (NB)
This item is related to financing for costs of acquisition and construction.
Explanation
We have a current need to fund for Costs of Acquisition and Construction for up to the next two years. Our recommendation, in consultation with Public Financial Management (PFM), our Financial Advisor, is to issue up to $180 million of tax-exempt or taxable debt to fund a portion of these construction costs through fixed-rate bonds.
The Utilities System Commercial Paper Notes, Series D represent a portion of our outstanding variable-rate debt. Given the current interest rate environment, we also recommend converting this debt to a fixed rate in order to "lock in" current low interest rates on this outstanding debt through the issuance of fixed-rate bonds.
For the financing described above, the optimal structure will depend on market conditions existing at the time of execution. At this time, it is not absolutely clear which type of financing structure will be best for us. The American Recovery and Reinvestment Act, passed earlier this year, created a new kind of taxable municipal bond that provides for a 35% interest subsidy paid by the Federal government to the issuer of the taxable municipal bond. The net interest cost, after accounting for the 35% subsidy payment, can be significantly lower than interest rates on traditional tax-exempt bonds. We recommend that staff and our Financial Advisor continue to monitor the market to select the best structuring alternative.
GRU staff and our Financial Advisor recommend that the transaction referred to above be accomplished through a negotiated sale of those bonds. The use of a negotiated sale will allow us to adapt to changing market conditions and employ either tax-exempt or taxable bonds. A negotiated sale also allows for a more extensive investor education and marketing process. While credit market conditions have improved since earlier this year, investors are still very credit sensitive. We have been advised by our Financial Advisor that the marketing process afforded by a negotiated sale will allow GRU to take full advantage of our superior credit ratings.
It is recommended that JP Morgan serve as Senior Manager. JP Morgan has continued to bring significant value to the Utility in the form of solid recommendations for financing opportunities concerning this bond deal and other financing considerations. In addition, upon the advice of our Financial Advisor, we can appoint additional Co-Managers as appropriate, if their addition will enhance the distribution of the bonds.
Since all of the terms of the proposed financing have not yet been determined, the approval of the final terms of the bonds to be issued and the sale thereof is not being sought at this time; rather, Utility staff will seek City Commission approval of those bonds on or about September 3, 2009 (which approval may be in the form of a delegation to the General Manager of the authority to determine, within pre-approved limits, the actual principal amount, interest rates and other terms and provisions of the bonds, similar to what the City Commission has approved for several previous Utility financings).
The Clerk of the Commission, the General Manager or other Authorized Officers of the City (as defined in the Utilities Bond Resolution) may be required to take certain other actions and hire certain other professionals to proceed with this transaction. Therefore, we recommend that these officials be authorized to take such other actions as may be necessary or desirable to proceed with the transaction in accordance with this City Commission authorization.
Recommendations
The City Commission: 1) Authorize the financing of up to $180 million of new money for payment of Costs of Acquisition and Construction (capital projects) through the issuance of fixed-rate bonds; 2) Authorize the conversion of approximately $14 million of the taxable Utilities System Commercial Paper Notes, Series D to a fixed rate through the issuance of fixed-rate bonds; 3)Approve the selection of JP Morgan as Senior Manager for the bonds referenced in 1 and 2 above and authorize the appointment of additional Co-Managers if, upon the advice of Public Financial Management (PFM), our Financial Advisor, doing so would enhance the distribution of the bonds; and 4) Authorize the Clerk of the Commission, the General Manager and other Authorized Officers to execute such documents as may be necessary or desirable to proceed with the transactions authorized in 1 and 2 above, subject to approval of the Office of the City Attorney as to form and legality, and to take such other actions as may be necessary or desirable to proceed with these transactions in accordance with this City Commission authorization.
Fiscal Note
Issuing new money debt, and converting current variable rate debt, at historically low rates will help manage future debt service costs.
Drafter
Prepared by Jennifer L. Hunt, Utilities Chief Financial Officer
Reviewed by Raymond O. Manasco, Jr., Utilities Attorney
Submitted by Robert E. Hunzinger, General Manager