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Report on Investment Strategy for the Commercial Paper Program

Item 7. Report on Investment Strategy for the Commercial Paper Program. January 3, 2008. Vernon D. Evans Vice President for Finance/ Treasurer. Agenda. General features of Commercial Paper Notes Overview of the current program New borrowing under this program Investment Strategy

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Report on Investment Strategy for the Commercial Paper Program

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  1. Item 7 Report on Investment Strategy for the Commercial Paper Program January 3, 2008 Vernon D. Evans Vice President for Finance/ Treasurer

  2. Agenda • General features of Commercial Paper Notes • Overview of the current program • New borrowing under this program • Investment Strategy • Arbitrage Rebate Regulations 2

  3. Tax-Exempt Commercial Paper Program • One of the lowest cost, most versatile short term instruments in the marketplace • Used as funding vehicle for short lived assets (e.g., equipment) or as interim construction funding for long lived capital programs • Each issue of Commercial Paper is individually priced on the basis of its maturity • Each issue must mature within 270 days, but can be continually rolled for the term of the program • A draw on the Letter of Credit (LOC) provided by the highest rated commercial bank pays principal and interest at each maturity • Authority repays the LOC draw from proceeds of new roll of CP, or from its net revenues 3

  4. Commercial Paper Has Always Provided the Lowest Cost of Funds 4

  5. Authority’s Current Program • $49.3 million currently outstanding • $250 million authorized • Letter of Credit, provided by Lloyds Bank TBS, expires on September 1, 2014 • A British bank with the highest credit ratings from all three rating agencies • The best trading profile of any LOC provider according to a variety of market traders who were canvassed on their views • Lloyd’s aggressive bid: 17.25 basis points (utilized) and 8 basis points (unutilized). A basis point is 1/100 of a percent • Commercial Paper Notes are subordinate in lien to our current senior, fixed rate bonds 5

  6. Commercial Paper Program: Proposed Uses • Proposed uses include: • Refinancing of $50 million of expiring CP until permanent debt is issued in early 2008 • $125 million of interim funding of Capital Improvement Projects • A portion ($75 million) may remain outstanding to provide a “revolving credit line” • Commercial Paper will be retired from proceeds of permanent, fixed rate bonds as they are issued 6

  7. Commercial Paper $40 Million - New Borrowing 7

  8. Investment Strategy • Within compliance of US Treasury (Internal Revenue Service) rules, the Authority is allowed to borrow funds at tax-exempt rates and reinvest these funds in advance of actual construction spending. • Authority currently can borrow commercial paper at 3.25% and invest the proceeds at 4.5%. • Less additional letter of credit fees of 9 basis points (.09%), investment management fees of 8 basis points (.08%), and other cost of issuance • Potential to earn a spread of 1.00 to 1.10% • On an average balance of $20 million of bond proceeds during the next six month period, the Authority could earn approximately $100,000 to $110,000 of net revenue during this period. • This investment revenue will be used to offset a portion of the overall project costs. 8

  9. Arbitrage Rebate Regulations • This practice is subject to very strict IRS arbitrage guidelines • 6 Month Spending Exception - All proceeds are spent within a six month period beginning on the issue date • 18 Month Spending Exception - Fifteen percent (15%) of the proceeds are spend within 6-months, 60% are spent within 12 months, and 100% are spent within 18 months • 2 year Spending Exception - At least 75% of the “available construction proceeds” are to be used for construction expenditures and are spent as follows: • a. 6 months 10% • b. 12 months 45% • c. 18 months 75% • d. 24 months 100% • Available construction proceeds is generally calculated as the amount received from the underwriters from selling bonds to the public, earnings thereon, less amounts (if any) deposited in a reasonably required reserve and amounts applied to issuance costs. 9

  10. Investment StrategyConservative Approach • The Authority’s risk is that it fails to meet the spending exception rules either due to project delays or delayed payments • The Authority must have a high degree of certainty regarding project startup and completion of construction work • Our policy is to limit excessive borrowing to protect against unanticipated events Current cash flow forecasts indicate that $40 million will be spent in six months VS The 18 Month Spending Exception that mandates the 15% or $6 million be spend by six months and $24 million spent by one year Conclusion : The Authority should easily be able to meet this standard • A failure to meet the IRS standard will result in the Authority rebating to the IRS any excess investment earnings to the US Treasury 10

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