The Long Island Power Authority plans to sell Build America Bonds for 2011 capital needs by the end of this year to take advantage of the program before it expires or changes.

LIPA approved the marketing of up to $490 million of taxable or tax-exempt bonds at a board meeting Thursday. Up to $250 million of the bonds will be new money BABs for next year’s capital program.

Though Congress may extend the popular taxable bond program, the 35% interest rate subsidy issuers receive from the U.S. Treasury will likely be reduced.

“We’re trying to make use of the BABs program before it expires at the end of the year,” said LIPA chief financial officer Herb Hogue. “We’re just doing it about six months early because of the opportunities in the marketplace.”

The authority hasn’t set a date for the bond sale and it’s at least a month away, Hogue said. The underwriter and structure of the deal have not been determined.

Public Financial Management Inc. is LIPA’s financial adviser and Hawkins Delafield & Wood LLP is bond counsel.

The authority is currently updating its capital plan as it crafts next year’s budget proposal. Last year, LIPA projected that it would spend $313 million on capital projects in 2011.

Since 2001, the utility has sold $3.37 billion of new-money and $3.54 billion of refunding bonds, according to Thomson Reuters. It has approximately $10.1 billion of debt outstanding.

The authority owns and operates the electric transmission system in Nassau and Suffolk counties as a well as a small part of Queens, serving 1.15 million customers. LIPA also owns an 18% stake in the Nine Mile Point 2 nuclear power plant in upstate New York. The bonds are secured by net revenue from LIPA’s retail electric system.

Moody’s Investors Service rates the authority’s outstanding senior-lien electric system general revenue bonds A3 and Standard & Poor’s rates them A-minus. Both assign them stable outlooks. In April, Fitch Ratings upgraded LIPA’s senior debt to A with a stable outlook from A-minus with a negative outlook, citing its strong financial performance, fiscal management, and independent rate setting authority.

The bond resolution authorized LIPA senior management to enter into swaps. Hogue said the swap language was standard in their authorizations to give them flexibility and didn’t mean they intended to enter in any in this transaction.

Since the financial meltdown in 2008, issuers have been largely averse to new swaps after paying hefty termination fees to unwind derivatives. LIPA acknowledged that swap transactions carried risks related to counterparties, termination, credit enhancement, termination, market conditions, and other factors in the authorizing resolution for the bonds, but concluded they could still be beneficial.

The risks “would be manageable, would be reasonable in relation to the potential savings, and can be mitigated without undue net loss to the authority,” the resolution stated.

Peter Shapiro, managing director for Swap Financial Group LLC, said issuers have been taking a closer look at basis swaps. In a basis swap, the borrower sells fixed-rate debt and enters into a swap paying the Securities Industry and Financial Markets Association swap index rate while receiving a percentage of the London Interbank Offered Rate.

“Basis swaps today are unusually attractive especially on the long end of the curve,” Shapiro said. “But the key issue to remember is that the whole world has gone through an extraordinary period of risk aversion and anything that is complex, anything that strays from the plain vanilla is often viewed in a very harsh light, almost regardless of merits.”

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