PFM Asset Management Structures Historic Project Fund for Municipal Electric Authority of Georgia
PHILADELPHIA, Sept. 13 /PRNewswire/ — As the country’s municipal and private utilities turn again to building alternate energy sources for future power needs, they are faced with a daunting and uncertain financial marketplace. It is in this environment that an experienced and reliable investment advisory firm can make a considerable difference in the large, complex transactions that fund these new technologies. Such was the case earlier this year when the Municipal Electric Authority of Georgia (MEAG Power) turned to PFM Asset Management LLC for assistance in creating and executing an investment strategy for approximately $2.5 billion in net proceeds from MEAG Power’s financing for the expansion of its share of the Vogtle nuclear power project. Through good planning, effective execution, and access to the cash/short duration fixed income markets, PFMAM helped its client invest the bond proceeds to further fund the project’s construction costs.
The addition of Vogtle Units #3 and #4 to the existing project site in eastern Georgia is expected to be the first new nuclear project in several decades. “This was an historic event,” explains Jim Fuller, MEAG Power’s Chief Financial Officer. “It’s the largest single new power project financing in the history of the municipal market. The complexity of this financing, in addition to the challenging market in which MEAG Power found itself, made this project one that required a broad spectrum of investment experience and talent,” he added.
“We believe that PFMAM made a major contribution to this effort,” said PFMAM Managing Director Steve Faber in describing PFMAM’s strategy. “We were able to work on a number of paths simultaneously,” he explained. “We performed break-even analyses for a number of investment horizons to help frame the value of current investment options related to historical market conditions and to explore the value inherent in the slope of the yield curve. Additionally, we worked with the client to look at MEAG Power’s investment policy which governed the investment of the bond proceeds.”
The most significant challenge to developing a prudent investment strategy was that the construction draw schedules extended for seven years, while the typical investment horizon for most project funds is two to three years. Given the historically low long-term investment rates at the time, MEAG Power was faced with a potential negative carry on the reinvestment side. Financing with Build America Bonds (BABs) provided an extremely attractive, low-cost financing opportunity. However, the same low interest rate environment presented challenges on the investment side because it was necessary for MEAG Power to invest those funds for the entire term of a longer than normal construction schedule.
“MEAG Power was already a capable and sophisticated investor, with average invested balances well in excess of $1 billion,” Faber continued. “Where PFM was able to add value was first in creating interest rate models using various time frames and interest rate scenarios. We did not want to implement a strategy based on a market call,” he continued. “Most market observers expected interest rates to rise and present better opportunities for higher investment rates. But waiting for rates to rise, leaving funds in cash earning near 0% could be risky to MEAG Power. Our approach in working with MEAG Power was determined more by sensitivity analysis – defining the quantitative impact of differing investment strategies rather than making a market prediction in such an uncertain environment. Actually,” Steve Faber mused, “we spent as much time analyzing potential changes in interest rates as we did in structuring the portfolio. Fortunately, we were working with a client who shared our strong analytic focus, and a capacity to evaluate and understand the analysis. In the end, the team concluded that interest rates would have to rise faster and higher coming out of the current recession than they had after previous economic downturns, in order to justify keeping a significant amount of money in a short, cashlike position. There was nothing at the time that provided a clear signal of an impending economic rebound, so the less risky strategy was to invest more fully than most of us had originally anticipated.”
“PFM Asset Management has a fully-staffed trading desk, and once investment decisions were made, we were able to look at less actively traded securities that are not always available to individual purchasers,” he went on. “This also allowed MEAG Power to avoid the potentially negative impact that such a sizeable fund could have on market prices.”
Mike Mace, PFM Group’s Managing Director heading up the Financial Advisory aspect of this relationship, talks about the results. “The way PFM structured these transactions allowed MEAG Power to take full advantage of the significant benefits associated with the BABs program, and addressed the timing and funds matching issues. This was a real collaborative effort between MEAG Power, with their significant in-house expertise, PFM as Financial Advisors counseling on the bond transaction, and then PFMAM creating and helping to execute a well reasoned investment strategy,” he concluded. “We are very gratified that MEAG Power recognized PFM’s experience and investment expertise, and allowed us to make a major contribution to their success.”
PFM Asset Management LLC currently has $35.7 billion in assets under management for state and local governments and non-profit institutions, and provides non-discretionary advice for an additional $2.2 billion in fixed income securities.
This information arises out of a specific engagement. It is not intended to provide specific advice or specific recommendations. The results will vary significantly depending upon the size and structure of each fund, permitted investments, prevailing market conditions at the time of the structuring and procurement process, and other events or circumstances beyond the control of PFM Asset Management LLC. Past performance does not necessarily reflect and is not a guaranty of future results.
SOURCE The PFM Group