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File #: 050199    Version: 0 Name: Financing for Construction, Refunding of 96As, and Refunding of Commercial Paper (NB)
Type: Discussion Item Status: Passed
File created: 7/25/2005 In control: General Manager for Utilities
On agenda: Final action: 7/25/2005
Title: Financing for Construction, refunding of 96As, and refunding of commercial paper (NB)
Title
Financing for Construction, refunding of 96As, and refunding of commercial paper (NB)
Explanation
In 1996, the City issued its Utilities System Revenue Bonds, Series 1996A to refund previously outstanding Utilities System Revenue Bonds and to finance certain of the Utility's capital projects.  As a result, the portion of the 96A Bonds that financed capital projects is advance refundable (i.e., we could issue refunding debt today), but the portion that refunded previously outstanding Bonds is not advance refundable (i.e., we are not able to issue refunding debt until 90 days prior to the first call date for the 96A Bonds, which is October 1, 2006).  Since interest rates are lower now than in 1996 when the 96A Bonds were issued, we can refinance (refund) these Bonds with new debt and save substantial monies for our ratepayers over time.  Thus, for the advance refundable portion of these Bonds, as soon as we are ready to proceed with the financing, we could issue either fixed-rate bonds or variable-rate bonds that are converted synthetically to a fixed rate through the use of a "floating-to-fixed" interest rate swap.
 
Since interest rates are at near historical lows, with the assistance of our Financial Advisor, Morgan Stanley, we are monitoring various options to refund this debt.  If we knew that interest rates were going to stay the same or lower, we would wait until July 2006 to issue fixed-rate bonds to refund the debt.  However, future interest rates are unknown, so we could take advantage of significant known savings now, through the use of a "synthetic forward refunding" structure whereby we would enter into a "forward-starting" interest rate swap that "locks-in" today's low rates but does not become effective until a future date on which we would issue variable-rate bonds.  While there is a small premium for locking in rates now with a forward-starting interest rate swap, the known benefits may more than offset the potential costs of rates increasing.
 
We have a current need to fund for Costs of Acquisition and Construction for up to the next three years.  Given that interest rates are near historical lows and there are savings in issuance costs due to the other financing components, we also recommend issuing new debt for this purpose.  Our recommendation, in consultation with our Financial Advisor, is to issue up to $175 million of debt to fund a portion of these construction costs, either as fixed-rate bonds, as variable-rate bonds or as variable-rate bonds that are converted synthetically to a fixed rate through the use of a "floating-to-fixed" interest rate swap.
 
The Utilities System Commercial Paper Notes, Series C and 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, either through the issuance of fixed-rate bonds or through the use of a "floating-to-fixed" interest rate swap.
 
In the case of each of the financing components described above, the optimal structure will depend on market conditions existing at the time of execution.  Thus, since it is not absolutely clear which type of financing structure is best for us, we recommend that staff and our Financial Advisor continue to monitor the market to select the best alternative at the time of pricing.
 
GRU staff and our Financial Advisor recommend that any of the transactions referred to above that entail the issuance of bonds be accomplished through a negotiated sale of those bonds.  It is recommended that Goldman Sachs and Bear Stearns serve as Co-Senior Managers.  Goldman Sachs and Bear Stearns have continued to bring significant value to the Utility in the form of solid recommendations for financing opportunities, familiarity with our bond resolution, and innovative work concerning future debt structures.  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.
 
In the event that GRU staff and Financial Advisor determine that a synthetic fixed-rate financing (i.e., a variable-rate bond issue coupled with a "floating-to-fixed" interest rate swap) would be more beneficial than a traditional fixed-rate bond issue, we recommend that one or more "floating-to-fixed" interest rate swaps be negotiated with Goldman Sachs and/or Bear Stearns, who also would serve as underwriter and remarketing agent or broker-dealer for the variable-rate debt.
 
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 these transactions.  Therefore, we recommend that these officials be authorized to take such other actions as may be necessary or desirable to proceed with the transactions in accordance with City Commission authorization and delegation.
Recommendations
The City Commission: 1) Authorize the refunding of the Utilities System Revenue Bonds, Series 1996A through the issuance of either fixed-rate bonds or variable-rate bonds that are converted synthetically to a fixed rate through the use of a "floating-to-fixed" interest rate swap; 2) Authorize the financing of up to $175 million of new money for payment of Costs of Acquisition and Construction (capital projects) through the issuance of either fixed-rate bonds, variable-rate bonds or variable-rate bonds that are converted synthetically to a fixed rate through the use of a "floating-to-fixed" interest rate swap; 3) Authorize the conversion of the Utilities System Commercial Paper Notes, Series C to a fixed rate either through the issuance of fixed-rate bonds or through the use of a "floating-to-fixed" interest rate swap to convert this debt synthetically to a fixed rate; 4) Authorize the conversion of the Utilities System Commercial Paper Notes, Series D to a fixed rate either through the issuance of fixed-rate bonds or through the use of a "floating-to-fixed" interest rate swap to convert this debt synthetically to a fixed rate; 5) Approve the selection of Goldman Sachs and Bear Stearns as Co-Senior Managers for the bonds referenced in 1 through 4 above and authorize the appointment of additional Co-Managers if, upon the advice of Morgan Stanley, our Financial Advisor, doing so would enhance the distribution of the bonds; 6) Authorize the negotiation of one or more "floating-to-fixed" interest rate swaps with Goldman Sachs and/or Bear Stearns if the financing team determines that it is most beneficial to the Utility to synthetically fix the interest rates on one or more of the transactions authorized in 1-4 above; and 7) Authorize the Clerk of the Commission, the General Manager and other Authorized Officers to execute such documents as may be necessary to proceed with the transactions authorized in 1-6 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 advisable to proceed with these transactions in accordance with this City Commission authorization.
Fiscal Note
There will be substantial present value savings that will accrue to our ratepayers from the refunding in years 2005 through 2026.  Additionally, issuing new money debt at historically low rates will help hold down future debt service costs.  
Drafter
Prepared by: Jennifer L. Hunt, Utilities Chief Financial Officer
Submitted by: Michael L. Kurtz, General Manager
 
 
 



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