2011 Annual Report - USNH Financial Services - University System ...

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USNH 2011 ANNUAL REPORTNew Hampshire Health and Education Facilities Authority (NHHEFA)BondsNHHEFA is a public body corporate and an agency of the State of New Hampshire whoseprimary purpose is to assist New Hampshire not-for-profit educational and health careinstitutions in the construction and financing (or refinancing) of related facilities. NHHEFAachieves this purpose primarily through the issuance of bonds. Since 1989 all USNH bondshave been issued through NHHEFA. None of USNH’s NHHEFA bonds provide for a lien ormortgage on any property. USNH is obligated under the terms of the NHHEFA bonds to makepayments from revenues received from certain housing, dining, union, recreational, and otherrelated revenue generating facilities. The state is not liable for the payment of principal orinterest on the NHHEFA bonds, nor is the state directly, indirectly or contingently obligatedto levy or pledge any form of taxation whatsoever or to make any appropriation for theirpayment. USNH is in compliance with all covenants specified in the NHHEFA bonds, the mostrestrictive of which is maintenance of a debt-service coverage ratio, as defined, of at least 1.1to 1. A description of each NHHEFA bond issuance follows:Series 2001 BondsOn March 1, 2001 NHHEFA issued $151,210,000 of Revenue Bonds, University System of NewHampshire Issue, Series 2001 (2001 Bonds). A portion of the 2001 Bonds was refunded by theSeries 2005B Bonds described below. The remainder of the Series 2001 Bonds ($41,395,000)that was current was refunded on June 23, 2011, by the Series 2011B Bonds described below,and was fully redeemed as of July 25, 2011.Series 2002 BondsOn April 2, 2002 NHHEFA issued $42,715,000 of Refunding Revenue Bonds, University Systemof New Hampshire Issue, Series 2002 (2002 Bonds), shown above net of unamortized originalissue premium. Proceeds from the 2002 Bonds were used to complete an advance refundingin the form of an “in-substance defeasance” of bonds originally issued in 1992. Interest is duesemi-annually at fixed effective rates of 5.1% to 5.3%. Principal is due annually through July 1,2020. The bonds are callable on July 1, 2012.Series 2005A BondsOn January 20, 2005 NHHEFA issued $65,000,000 of Revenue Bonds, University System ofNew Hampshire Issue, Series 2005A (2005A Bonds), shown above net of unamortized originalissue discount. Proceeds from the 2005A Bonds were used to partially finance constructionof student fee-supported facilities on USNH campuses at Durham, Keene and Plymouth. The2005A Bonds are multi-modal, were initially issued in 35 day variable auction rate mode, wereconverted to seven day variable auction rate mode in January 2006, were converted again todaily variable rate demand bonds in March 2008, and subsequently remarketed as two issues(Series 2005A-1 and 2005A-2) in March 2009 with no change in terms. Between March 2009and February 2011 USNH provided daily self-liquidity coverage for the Series 2005A Bonds. Atthat time the entire outstanding principal was classified as a current liability in accordance withGASB Interpretation No. 1, Demand Bonds Issued by State and Local Governmental Entities. InMarch 2011, USNH entered into a five-year standby bond purchase agreement (SBPA) relatedto this issue. At that time, the future years portion of principal payments due were reclassifiedto long-term debt. The SBPA requires a debt coverage ratio of 1:1 along with continuingdisclosures. The agreement also provides for escalating fees in the event of a downgradebelow A+/A1 and mandatory default for a downgrade below Baa3/BBB-. Principal paymentsare due annually through July 1, 2035. The associated variable interest rates at June 30, 2011and 2010 were 0.04% and 0.20%, respectively.Series 2005B BondsOn August 1, 2005 NHHEFA issued $97,360,000 of Refunding Revenue Bonds, University Systemof New Hampshire Issue, Series 2005B (2005B Bonds), shown above net of unamortized originalissue discount. Proceeds from the 2005B Bonds were used to complete an advance refundingin the form of an “in-substance defeasance” of $87,480,000 of the 2001 Bonds. The proceedsof the 2005B Bonds were placed in an escrow fund and invested in government obligationswith scheduled maturities which, when combined with interest thereon, will be used to makerequired interest and principal payments until the redemption date of the refinanced bondson July 1, 2011. The 2005B Bonds are multi-modal, were initially issued as seven day variablerate demand bonds, and were subsequently converted to daily variable rate demand bonds inApril 2008. A two-year standby bond purchase agreement is currently in place through March2012. The SBPA requires a debt coverage ratio of 1:1 along with continuing disclosures. Theagreement also provides for escalating fees in the event of a downgrade below A+/A1 andmandatory default for a downgrade below Baa3/BBB-. Because the current SBPA expires inless than one year, the total outstanding principal is classified as a current liability as of June30, 2011 in accordance with GASB Interpretation No. 1, Demand Bonds Issued by State and LocalGovernmental Entities. The associated variable interest rates at June 30, 2011 and 2010 were0.04% and 0.20%, respectively. Principal is due annually through July 1, 2033.Series 2006B-2 BondsOn January 26, 2007 NHHEFA remarketed $60,000,000 of University System of New HampshireIssue, Series 2006B Bonds as the University System of New Hampshire Issue, Series 2006B-2Bonds (2006B-2 Bonds), changing the variable rate to an all-in fixed rate of 4.1%. Theremarketing generated a premium of $4,046,000, which will be amortized to interest incomeover the remaining term of the bonds. Principal is due annually through July 1, 2036, with a calldate of July 1, 2016.Series 2007 BondsOn February 6, 2008 NHHEFA issued $46,570,000 of Taxable Revenue Bonds, University Systemof New Hampshire, Series 2007 (2007 Bonds), shown above net of original issue discount.Proceeds from the 2007 Bonds were used to finance ECOLine, the landfill gas pipeline projectdesigned to provide up to 85% of the UNH Durham campus’ heating, cooling and electricityneeds with renewable energy. Interest is due semi-annually at a fixed rate of approximately5.0%. All principal is due upon expiration of the bonds on July 1, 2018.Series 2009A BondsOn March 25, 2009, NHHEFA issued $105,650,000 of Revenue Bonds, University System ofNew Hampshire Series 2009A (2009A Bonds), net of premium. The majority of the proceedsof the 2009A Bonds were used to fully refund the USNH Series 2006A and 2006B-1 Bonds. Theremaining funds, $24,444,000, are being used to finance the construction and renovation ofstudent-related, revenue-producing projects at the three residential campuses. The 2009ABonds were issued in four “bullet” maturities at fixed coupon rates ranging from 4.0% to 5.5%.A portion of the coupons mature in 2014, 2016, and 2020, with the remainder maturing on July1, 2023. Interest is due semi-annually, and principal is due at the maturity date of each bullet.Series 2011A BondsOn June 23, 2011, NHHEFA issued $6,000,000 of Revenue Bonds, University System of NewHampshire Series 2011A (2011A Bonds), shown above net of unamortized original issuepremium. The funds are being used to finance student housing, dining and recreation facilityrenovation projects at the three residential campuses. Interest on the 2011A Bonds is duesemi-annually at a fixed rate of approximately 5.0%. All principal is due upon expiration of theBonds on July 1, 2021.Series 2011B BondsOn June 23, 2011, NHHEFA issued $42,570,000 of Revenue Bonds, University System of NewHampshire Series 2011B (2011B Bonds) in variable rate demand mode, to current refund thefixed rate 2001 Bonds shown above, net of deferred loss. The refunding followed the exerciseof the Series 2001 interest rate swaption (described in Note 9). The net proceeds of the 2011BBonds were placed in an escrow fund and held in cash to be used to make required interestand principal payments until July 25, 2011, the redemption date of the defeased 2001 Bonds.The 2011B Bonds are multi-modal, and were issued as daily variable rate demand bonds. Afive-year standby bond purchase agreement is currently in place through June 2014. The SBPArequires a debt coverage ratio of 1:1 along with continuing disclosures. The agreement alsoprovides for escalating fees in the event of a downgrade below A+/A1 and mandatory defaultfor a downgrade below Baa3/BBB-. The associated variable interest rate at June 30, 2011 was0.08%. Principal is due annually beginning July 1, 2012 through July 1, 2033.Capital leasesOn April 30, 2004, USNH entered into a capital lease agreement to finance $18,387,000 ofequipment for UNH’s utility cogeneration facility. The related lease principal and interestpayments are due quarterly through June 2025 at a fixed interest rate of 4.5%. Other leasesrelate to various property and capital equipment acquisitions. Terms range from monthly toannual payments over 3 to 20 years, with fixed interest rates between 4.0% and 7.0%.Long-term debt obligations are scheduled to mature as follows using the associated fixed,estimated synthetic fixed, and expected variable rates in effect as of June 30, 2011 over theremaining term of individual issuances ($ in thousands):Fiscal Year Principal) Interest Total)2012 $ 96,370) $ 20,386 $ 116,756)2013 8,188) 19,785 27,973)2014 7,973) 19,410 27,383)2015 29,752) 18,716 48,468)2016 8,708) 17,141 25,849)2017-2021 150,279) 68,341 218,620)2022-2026 74,219) 33,618 107,837)2027-2031 34,850) 17,787 52,637)2032-2036 38,690) 6,655 45,345)2037-2041 3,525) 176 3,701)Plus: recognized deferred lossand unamortized discounts/premium, net452,554)7,918)222,015-674,569)7,918)Total $460,472) $222,015 $682,487)30
USNH 2011 ANNUAL REPORTState of NH general obligation bondsThe state, through acts of its legislature, provides funding for certain major plant facilitieson USNH campuses. The state obtains its funds for these construction projects from generalobligation bonds, which it issues from time to time. Debt service is funded by the generalfund of the state, which is in the custody of the State Treasurer. The state is responsible forall repayments of these bonds in accordance with bond indentures. USNH facilities are notpledged as collateral for these bonds and creditors have no recourse to USNH. Accordingly,the state’s debt obligation attributable to USNH’s educational and general facilities is notreported as debt of USNH. As construction expenditures are incurred by USNH on state-fundededucational and general facilities, amounts are billed to the state and recorded as State of NewHampshire capital appropriations.9. Deferred obligations - interest rate swapsUSNH has entered into interest rate swap and swaption transactions in conjunction withselected debt issues previously discussed in Note 8.Series 2005B swapIn conjunction with the issuance of the Series 2005B Bonds, USNH entered into a floating-tofixedinterest rate swap agreement. The notional amount of the swap is tied to the outstandingbalance of the bonds. The purpose of the swap agreement is to synthetically fix the all-ininterest rate on the underlying debt. Under the terms of the swap USNH makes fixed rateinterest payments to the swap counterparty and receives a variable rate payment based on63% of one month LIBOR plus 29 basis points. The inception-to-date average all-in rate was3.8% and 3.9% as of June 30, 2011 and 2010, respectively. USNH intends to hold the swapcontract to maturity. The all-in synthetically fixed rate is expected to be approximately 3.8%over the life of the debt.Series 2011B swapIn conjunction with the issuance of the Series 2011B Bonds and the exercise of the Series 2001swaption, USNH entered into a floating-to-fixed interest rate swap agreement. The notionalamount of the Series 2011B floating-to-fixed rate swap is tied to the outstanding balance ofthe 2011B Bonds. The purpose of the swap agreement is to synthetically fix the all-in interestrate on the underlying debt. Under the terms of the swap, USNH will make fixed rate interestpayments to the swap counterparty and receive a variable rate payment based on 67% of onemonth LIBOR. USNH intends to hold the swap contract to maturity. The all-in syntheticallyfixed rate is expected to be approximately 4.92% over the life of the debt.The related activity for the years ended June 30, 2011 and 2010 was as follows ($ in thousands):2010 2010 2011 2011Balance Additions Change in Balance Additions Change in BalanceJune 30, 2009 (Retirements) Fair Value June 30, 2010 (Retirements) Fair Value June 30, 2011Series 2001 swaption $ (5,445) $ - $ $ (2,741) $ (8,186) $ 7,934) $ 252 $ -)Series 2005A swap (7,696) - (2,750) (10,446) - 1,868 (8,578)Series 2005B swap (5,460) - (3,874) (9,334) -) 1,869 (7,465)Series 2011B swap -) - - -) (8,893) 231 (8,662)Total deferred obligations $(18,601) $ - $ (9,365) $(27,966) $ (959) $ 4,220 $(24,705)All of the above derivative instruments meet the criteria established by GASB Statement No.53 for effective hedges as of June 30, 2011 and 2010. Accordingly, the related obligations arecarried as deferrals in the statement of net assets. Offsetting deferred receivable balancesrelated to the swaps are included in other assets. The balances above represent the amountUSNH would be required to pay to terminate the swaps using the associated notional amountsand closing interest rates as of June 30, 2011 and 2010. The specific objectives and terms ofeach derivative are described below.Series 2001 swaptionUSNH entered into a swaption agreement on December 15, 2006 that gave the counterparty,Morgan Stanley, the option to require USNH to enter into a swap agreement at the call dateof the 2001 Bonds, July 1, 2011. The swaption was exercised by the counterparty and the newswap agreement (Series 2011B swap) became effective July 1, 2011 as described below. Theobjective of the swaption was to reduce USNH’s effective interest rate on the related Series2001 debt. The remaining swaption liability ($2,211,000) is a component of long-term debt andis being amortized to interest income over the remaining term of the 2011B Bonds.Series 2005A swapIn conjunction with the issuance of the Series 2005A Bonds, USNH entered into a floating-tofixedinterest rate swap agreement. The notional amount of the swap is tied to the outstandingbalance of the 2005A Bonds. The purpose of the swap agreement is to convert the floatingvariable rate on the 2005A Bonds to a synthetic fixed rate. Under the terms of the swap, USNHmakes fixed rate interest payments to the swap counterparty and receives a variable ratepayment based on 67% of one month LIBOR. The inception-to-date average all-in fixed ratewas 3.9% as of June 30, 2011 and 2010. USNH intends to hold the swap contract to maturity.When combined with the self-liquidity commitment for the bonds described above, the all-insynthetically fixed rate is expected to be approximately 3.9% over the life of the debt.10. Commitments and contingenciesUSNH is self-insured for a portion of certain risks, including workers’ compensation, employeelong-term disability, and certain student health insurance claims. The related liabilitiesrecorded in the financial statements are developed by management based upon historicalclaim data, and in the opinion of management are expected to be sufficient to cover the actualclaims incurred. General liability insurance, property insurance, and other insurance coveragesprovide for large claims incurred. Settlements below the relevant deductible amounts arefunded from unrestricted net assets.USNH makes expenditures in connection with restricted government grants and contracts,which are subject to final audit by government agencies. Management is of the opinion thatthe amount of disallowances, if any, sustained through such audits would not materially affectthe financial position, results of operations, or cash flows of USNH.USNH is a defendant in various legal actions arising out of the normal course of its operations.Although the final outcome of such actions cannot presently be determined, management is ofthe opinion that the eventual liability, if any, will not have a material effect on USNH’s financialposition, results of operations or cash flows.During 2010, USNH was providing self-liquidity for the 2005A Bonds as discussed in Note 8.USNH was required to maintain 1.5 times coverage of the bonds outstanding in same-dayliquid investments ($91,200,000 at June 30, 2010) to insure payment to bondholders in theevent the bonds are not successfully remarketed. A standby bond purchase agreement wasput in place in 2011 as described in Note 8 which removed this requirement.31
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