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...
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