Minutes 03/27/1979 - Laserfiche WebLink

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-2- This analysis assumes 7% inflation rate and 7% interest. It should be noted that the shortfall difference between 6% inflation, 7% interest and 7% inflation, 7% interest is not significant to the conclusions set forth in this analysis. 3. This analysis assumes 50-year bonds which will require a Charter change. FINDINGS: Both the Beck Report and the Committee Report do not consider four sources of revenue explained by Mr. Stach and Mr. Craigie, that can be used to offset the probable shortfall: 1. I ntere st Earned on Construction Funds: The bond s might be sold on July 1, 1982. The plant would be under construction for 21 years. The construction funds of $34.2 million would be paid out over the 21 years and interest will be earned on the unspent funds. I t is anticipated that the interest earned will be greater than the interest paid on the bonds. This is called a gross arbitrage profit, and should produce a net gain to the City during the 21 year construction period of approximately $642,000. 2. I nterest Earned on Capitalized I nterest Funds: The Capitaiized Interest Funds are the part of the bond issue used to pay interest on the bonds from the time the bonds are issued until the plant goes on line. These funds will amount to $2.2 million and will be paid out over the 21 year construction period. Interest will be earned on the unspent funds and will be at least 1.5 per- centage points greater than the interest paid on the bonds, producirg a net gain to the City during the 21 year construction period of approximately $73,000. 3. Interest Earned on Debt Service Reserve Fund: Beck estimated a Reserve Fund of $2,485,000 and interest earned on the Reserve Fund equal to interest paid on the bonds. Mr. Stach and Mr. Craigie feel that the size of the Reserve Fund estimated by Beck is conservative, and they recommend increasing the Fund to $5 million. This money can be conservatively invested at 2 percentage points greater than the interest paid on the bonds which will produce a net gain to the City of about $100,000 per year for the life of the bond issue. The Debt Service Reserve Fund Bonds will come due in the final year of the bond issue and will be paid with the principal from the invested funds; therefore, as I see it, it is a relatively risk-free investment. 4. Deferred Principal Payments: The Citizens Committee contemplated that the first year of debt service not include a principal payment. Mr. Craigie and Mr. Stach suggest delay of principal payments for eight years, until January 1, 1993. They estimate this will reduce debt payment s by about $225,000 per year for each of the first eight years. I understand this procedure will require a Charter change. When the above four factors are plugged into a cash-flow forecast along with the negative assumptions of (1) 7% inflation, 7% interest, and (2) 1985 "demand cost" of $100/kw, the cost of producing our own power is greater than the cost of purchasing power from APCo for the first five years. The deficits are as follows: DEFICITS $( 656,000) ( 525,000) ( 386,000) ( 238,000) ( 78,000) $(1,883,000) Year 1 Yea r 2 Year 3 Year 4 Year 5 Total