Frequently Asked Questions
GRU estimates an 8 to 10 percent drop in electric rates as a result of purchasing GREC, moving us closer to our goal of being in the middle of the pack for all Florida utilities. Our main priority continues to be lowering rates for our customers, and we view this as a crucial step in the right direction. This projected decrease has no bearing on the 2% electric base rate increase in GRU’s proposed FY18 budget.
GRU pays GREC $75 million a year, whether the plant operates or not. GRU expects to pay GREC approximately $2.1 billion over the next 27 years. If GRU purchases the facility, we have an opportunity to refinance at historically low interest rates and potentially save more than $650 million over the life of the contract. These savings will help move our rates to the middle of the pack for all Florida utilities, GRU’s immediate goal.
GRU proposes purchasing the biomass plant for $750 million, financed through 30-year utility system revenue bonds. If interest rates go above 50 basis points, GRU can terminate the deal.
GRU and GREC are in arbitration over $8 million in charges GRU’s attorneys are confident the company is contractually justified in withholding. This is the primary dispute among a handful of others. If GRU and GREC close on the purchase prior to arbitration, the arbitration proceedings would stop. If they don’t, the arbitration proceedings will continue.
The original contract signed in April 2009 and subsequent “Equitable Adjustment” added in 2011 did not undergo sufficient public scrutiny. GRU is adamant about giving our customers every opportunity to vet any new contract negotiated between GRU and GREC. To assure the public has a voice and is aware of GRU’s dealings in this matter, we will advertise and host at least two public forums.
Since the City Commission hired GM Ed Bielarski in June 2015, Bielarski has been committed to enforcing GRU’s legal rights under the existing power purchase agreement, thereby protecting GRU customers from unnecessary charges. This has not come without a fight. GRU currently is in arbitration with GREC over millions of dollars in fees GRU has full legal support in withholding.
GRU management, city and company attorneys have thoroughly investigated whether the current contract can be voided. To this point, we have not found legal justification for voiding the contract based on how it was executed.
GRU GM Ed Bielarski will continue to enforce GRU’s rights under the existing power purchase agreement and work toward moving electric rates to the middle of the pack for all Florida utilities. By keeping GREC on pause much of last year and using more affordable sources of power, GRU saved millions of dollars and avoided raising customer electric base rates.
Yes, GRU will have an opportunity to conduct an independent inspection of the facility prior to finalizing the purchase.
The Navigant Report is an independent assessment and evaluation of the long-term power purchase agreement entered into between GRU and Gainesville Renewable Energy Center. The report was commissioned by the City Commission in 2014 and released April 2015.
GREC does not have employees at the facility. GREC has a contract with NAES Corporation to operate the plant. It is too early to determine how many NAES employees would transfer to GRU, if any. We will assess at a later date.
GRU has identified and mitigated risks, been open and transparent about its motives and will continue to meet with the public, City Commission and UAB while this process is ongoing. Please see Ed Bielarski’s presentation to the UAB for a more detailed analysis of associated risks and how GRU will overcome them. The greatest risk to GRU and its customers is inaction, as the company stands to pay $2.1 billion over the next 27 years, whether it uses GREC or not.
The Navigant Report is as close to a forensic audit as can be expected considering the lack of any charges legal counsel can uncover. The State Attorney and state Department of Treasury have all rejected legal action, making a forensic audit no more than a second Navigant Report. On May 17, 2017, the Gainesville Office of the City Auditor presented the City Commission with a report recommending not to proceed with a forensic audit. Read the report and associated appendix.
Goldman Sachs conducted an analysis of the benefits of purchasing GREC, given a variety of assumptions. Goldman Sachs’ reports supported the internal GRU analysis that initiated discussions with GREC.
Interest rate swaps were not originally anticipated in the transaction. In order to optimize the financing GRU’s financial advisor, PFM working in conjunction with both Bank of America and Goldman Sachs developed a synthetic fixed rate vehicle of approximately $ 150 million (20% of the overall borrowing. This synthetic fixed rate vehicle will save GRU significant borrowing costs. GRU management made presentations to both the UAB and the City Commission (and had PFM Managing Director, Chris Lover deliver a very detailed explanation of the pros and cons of this financing vehicle and we also had PFM’s SWAP advisor on the phone) and received approval from both bodies to proceed with this financing option.
It is customary to use a blend of fixed and variable interest rates in utility financing in order to take advantage of short-term rates, which are usually variable. The mix is typically 80/20, fixed to variable. GRU’s favorable circumstances enable us to blend an extremely low short-term variable rate with a fixed long-term rate and save millions of dollars. GRU has planned an 85/15, fixed-to-variable mix.
After optimization, the financing plan is a debt portfolio of 65% fixed, 20% synthetic fixed and 15% variable rate bonds. Financing the bonds with 100% fixed rate bonds would be more costly and leave important advantages GRU has in its financial structure under-utilized.
GRU General Manager Ed Bielarski and his team hold discussions with GREC President Jim Gordon and his staff over mutually beneficial opportunities. One such opportunity initiated GRU to propose a memorandum of understanding (MOU) regarding a potential GREC purchase.
Regarding the non-disclosure agreement, upon further consideration, we believe the NDA created unnecessary obligations of confidentiality and has not served to produce a mutually agreeable purchase document. In addition, as evidenced by public concerns, we believe the NDA has created a perception of secrecy. Therefore, we terminated the NDA on March 14.
Until GRU purchases GREC, the company spends almost $212,000 a day for the right to have the biomass plant available for service. That is the “rent” we pay for the plant, which will not be mitigated until we buy the facility.
The last time GRU negotiated with GREC it was done outside the public eye. The City Commission authorized the former general manager and his staff to take up to one year to negotiate a power purchase agreement (PPA) for the City Commission’s approval. The negotiation resulted in a redacted PPA with unfavorable terms for GRU.
This time, not only is the final memorandum of understanding (MOU) public, but so are the 15 draft MOUs negotiated since Feb. 16 and the general manager’s email communications with GREC. The MOU is not redacted and can be viewed at whybuygrec.com along with our draft asset purchase agreement.
On May 17, 2017, the Gainesville Office of the City Auditor presented the City Commission with an independent evaluation of the asset purchase agreement, providing yet another safeguard. Read the evaluation and coordinating appendix.
The MOU is designed with several customer protections, starting with interest-rate risk.
Our greatest concern is interest rates will rise between now and closing, so we have negotiated a cap on the interest rate GRU would pay. If the 30-year U.S. Treasury index increases 50 basis points above the index as of the execution of the agreement (2.93 percent), GRU can simply walk away from the deal.
Likewise, if we bring a contract to the City Commission in four months and the Commission finds it unacceptable, GRU will walk away from the deal. In that regard, the contract will not be redacted, and it will be viewable by the public.
GRU also retained the right to inspect the facility prior to closing the transaction. As a condition of the bond issuance, GRU will retain an independent engineer who will perform an extensive analysis of the plant and financial proforma which will be shared with investors in an Offering Memorandum. Rating agencies will rate the bond’s credit as a final assurance that the transaction is sound.
Finally, GRU’s position in the negotiations is protected by an exclusivity arrangement, through which no other party can negotiate with GREC.
Based on reverse financial engineering of GREC’s situation, the $2.1 billion GRU would pay GREC over the next 27 years is worth between $721 million and $820 million, at a 4.24 percent and 7.38 percent weighted average cost of capital (WACC), respectively. In other words, we believe the power purchase agreement (PPA) is worth between $721 and $819 million to GREC in today’s dollars. $750 million is at the midpoint of that calculation.
GRU isn’t paying GREC any more money. Instead of paying GREC $2.1 billion over the next 27 years, GRU would be paying them $750 million today and financing the facility at approximately 3.5 percent. In future dollars, that’s approximately $1.25 billion, a savings of $850 million in future dollars. GREC would be swapping the opportunity for $750 million today as compared to $2.1 billion over time, and GRU would be swapping $2.1 billion over time for $1.25 billion over time. GRU comes out way ahead.
GRU would still save hundreds of millions of dollars even if the plant never runs again. GRU is buying out the power purchase agreement (PPA) and receiving the plant as additional value. The savings come from buying out the PPA. That doesn’t mean the plant isn’t valuable, but because getting out of the PPA creates so much value, anything else is a bonus.
The Independent Engineer’s report concludes that the plant is a valuable generating asset for GRU.
In the 131 days we estimated it would take to receive a decision, GRU would have paid GREC more than $27 million in “rent,” which is more than the $7.4 million we have withheld, plus the potential of almost $10 million in additional claims.