Investment Policy and Debt Service Forward Deposit Agreement. June 2015

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Christopher Brendan Price
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1 Investment Policy and Debt Service Forward Deposit Agreement June 2015

2 SECTION 1 Investment Policy

3 2014 INVESTMENT POLICY CHANGES Fund Liquidity Fund Claims-Paying Fund Tax Status Taxable Tax-Exempt Taxable Tax-Exempt Purpose Funds and surplus that are the first moneys to be used to pay claims after an event, and also can be used to pay operating expenses on an ongoing basis Tax-exempt pre-event bond proceeds and other moneys required to be invested in taxexempt instruments; Citizens will use these monies to pay claims after an event or to pay principal and / or interest payments on pre-event bonds on as needed basis Funds that will be used to pay claims post-event after Citizens has expended all moneys in the Liquidity Fund; only moneys eligible for investment in taxable instruments will be deposited in this fund Tax-exempt pre-event bond proceeds and other moneys required to be invested in taxexempt instruments; Citizens will use these moneys to pay claims after an event, typically after it has spent all funds in the Liquidity Fund and a major portion of the Taxable Claims-Paying Fund Credit Quality (Long- Term) Corporates / Treasuries / Municipals (Non-AMT) Must be rated by at least two of three rating agencies (Moody's, S&P, and/or Fitch) and must have minimum ratings of Baa1/BBB+/BBB+ (Moody's/S&P/Fitch) for the financial and non-financial sectors 50% / 50% / N/A Must be rated by at least two of Must be rated by at least two of three rating agencies (Moody's, three rating agencies (Moody's, S&P, and/or Fitch) and must have S&P, and/or Fitch) and must minimum ratings of A3/A-/A- have minimum ratings of (Moody's/S&P/Fitch) Baa1/BBB+/BBB+ (Moody's/S&P/Fitch) for the financial and non-financial sectors 100% Municipal (non-amt) Securities 65% / 35% / N/A Must be rated by at least two of three rating agencies (Moody's, S&P, and/or Fitch) and must have minimum ratings of A3/A-/A- (Moody's/S&P/Fitch) 100% Municipal (non-amt) Securities Maximum Final Maturity 3 years and 6 months 3 years and 6 months 7 years and 1 month 5 years and 1 month for preevent bonds issued prior to 2015 and 6 years and 1 month for Series 2015A pre-event bonds Dollar Weighted Average Maturity 397 days 397 days 4 years 3 years Current Portfolio $2.1 billion N/A $6.1 billion $3.4 billion 1-Year Total Return (June 2014 May 2015) 0.57% N/A 1.38% 0.31% 2

4 2014 INVESTMENT POLICY CHANGES DIVERSIFICATION AND DURATION Diversification Changed minimum ratings from A3/A-/A- to Baa1/BBB+/BBB+ for the financial sector (consistent with the non-financial sector) with a maximum total limit of 10% and a limit of 1% per issuer Increased corporate floating rate instrumentsfrom 20% to 25% Increased limit on corporate securities from 60% to 65% for the taxableclaims-paying portfolio Duration Change Increased the overall dollar-weighted average maturity of the taxable liquidity fund from 365 days to 397 days and from 42 months to 48 months for the taxable claims-paying fund Increased the maximum permitted final maturity of the taxable liquidity fund from 39 months to 42 months securities with maturitiesbetween 24 monthsand42 monthsmay notexceed 25% Increased the maximum permitted final maturity of the taxable claims-paying fund from 61 months to 85 months securities with maturities between 61 months and 85 months may not exceed 10% 3

5 2015 PROPOSED INVESTMENT POLICY CHANGES Fund Liquidity Fund Claims-Paying Fund Tax Status Taxable Tax-Exempt Taxable Tax-Exempt Purpose Funds and surplus that are the first moneys to be used to pay claims after an event, and also can be used to pay operating expenses on an ongoing basis Credit Quality (Long- Term) Corporates / Treasuries / Municipals (Non-AMT) Maximum Final Maturity Must be rated by at least two of three rating agencies (Moody's, S&P, and/or Fitch) and must have minimum ratings of Baa1/BBB+/BBB+ (Moody's/S&P/Fitch) for the financial and non-financial sectors 50% / 50% / N/A Tax-exempt pre-event bond proceeds and other moneys required to be invested in taxexempt instruments; Citizens will use these monies to pay claims after an event or to pay principal and / or interest payments on pre-event bonds on as needed basis Must be rated by at least two of three rating agencies (Moody's, S&P, and/or Fitch) and must have minimum ratings of A3/A-/A- (Moody's/S&P/Fitch) 100% Municipal (non-amt) Securities Funds that will be used to pay claims post-event after Citizens has expended all moneys in the Liquidity Fund; only moneys eligible for investment in taxable instruments will be deposited in this fund Must be rated by at least two of three rating agencies (Moody's, S&P, and/or Fitch) and must have minimum ratings of Baa1/BBB+/BBB+ (Moody's/S&P/Fitch) for the financial and non-financial sectors 65% / 35% / N/A 3 years and 6 months 3 years and 6 months 10 years Tax-exempt pre-event bond proceeds and other moneys required to be invested in taxexempt instruments; Citizens will use these moneys to pay claims after an event, typically after it has spent all funds in the Liquidity Fund and a major portion of the Taxable Claims-Paying Fund Must be rated by at least two of three rating agencies (Moody's, S&P, and/or Fitch) and must have minimum ratings of A3/A-/A- (Moody's/S&P/Fitch) 100% Municipal (non-amt) Securities 5 years and 1 month for preevent bonds issued prior to 2015 and 6 years and 1 month for Series 2015A pre-event bonds Dollar Weighted Average Maturity 397 days 397 days 5 years 3 years Current Portfolio $2.1 billion N/A $6.1 billion $3.4 billion 1-Year Total Return (June 2014 May 2015) 0.57% N/A 1.38% 0.31% 4

6 PROPOSED TAXABLE INVESTMENT POLICY CHANGES DIVERSIFICATION AND DURATION Diversification Increase the maximum total limit of 10% to 20% for Baa1/BBB+/BBB+ securities and increase the limit from 1% to 1.5% per issuer The increased limit of minimum rating criteria will provide additional portfolio diversification and will also provide incremental yield of approximately 0.10% on 20%, or $426 million, of the taxable liquidity fund, and 0.16% on 20%, or over $1.2 billion, of the taxable claims-paying fund, for a total incremental return of approximately $1.1 million Duration Change Increase the overall dollar-weighted average maturity from 48 months to 60 months for the taxable claimspaying fund Increase the maximum permitted final maturity of the taxable claims-paying fund from 85 months to 120 months securities with maturities between 85 months to 120 months may not exceed 20% Based on an investment of 20% of the market value of the taxable claims-paying fund, or over $1.2 billion, the potential incremental return is approximately 0.23%, or approximately $2.8 million The Fed is not expected to increase interest rates until the third quarter of 2015 or early 2016 and this will allow Citizens to take advantage of the steepness of the yield curve Incremental Benefit The proposed changes in aggregate would generate approximately $4.0 million of incremental return on the total portfolio 5

7 INTEREST RATES Interest rates have been falling sharply, in some cases into negative territory, since the European Central Bank last year introduced measures meant to spur the economy in the eurozone, including cutting its own deposit rate Many economists are betting on the Federal Reserve to increase rates in September, which would be the beginning of a slow and methodical increase in rates with a subsequent increase not expected until possibly mid-2016 Current Treasury rates are significantly lower than their historical averages with the 3-year, 5-year, 7-year, and 10-year lower than their 10-year averages by 44%, 28%, 24%, and 26%, respectively Treasury Rates Over 5 Years Treasury Yield Curve 4.00% 3.00% 3.50% 2.50% 3.00% 2.50% 2.00% 2.00% 10-Year 1.50% 7-Year 1.50% 1.00% 5-Year 3-Year 1.00% 0.50% 2-Year 0.50% 0.00% 1-Year Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun % 1-Year 2-Year 3-Year 5-Year 7-Year 10-Year 6

8 INVESTMENT PORTFOLIO RETURNS (MAY 31, 2015) Fund Current Portfolio Amount ($MM) 1-Year Total Return 1-Year Income Return Taxable Liquidity $2, % 0.581% Taxable Claims-Paying $6, % 1.255% Tax-Exempt Claims Paying $3, % 1.096% Total/Average $11, % 1.086% Fund Current Portfolio Amount ($MM) 3-Year Average Total Return 3-Year Average Income Return Taxable Liquidity $2, % 0.585% Taxable Claims-Paying $6, % 1.186% Tax-Exempt Claims Paying $3, % 1.089% Total/Average $11, % 1.048% 7

9 SECTION 2 Debt Service Forward Deposit Agreement

10 OVERVIEW Outstanding Series 2009A, 2010A, 2011A, and 2012A Bonds have required monthly sinking fund deposits for principal and interest that need to be made with Regions, the indenture trustee ( Trustee ) The deposits are required to be made in the amount of 1/6 of the next interest payment and 1/12 of the next principal payment due on the respective series of bonds Recent increases in short-term interest rates present an opportunity to significantly enhance interest earnings on those monthly deposits above the negligible level earned from the Trustee Indenture allows for the funds to be invested in a forward deposit agreement ( FDA ) FDA enables Citizens to earn a higher fixed rate by moving out on the yield curve and capturing a higher fixed rate of return over the life of the agreement for the monthly deposits Fixed rate is materially higher than either overnight Trustee rates (approximately 0.02%) or short-term 6-month rates for serially invested deposits (i.e. current 6-month Treasury rates are approximately 0.15%) 9

11 SELECT CHARACTERISTICS OF A FORWARD DEPOSIT AGREEMENT Provider delivers an eligible Citizens security each month to Trustee Trustee exchanges cash deposit to purchase the security, resulting in clear ownership of each security by Trustee on behalf of Citizens Par amount of delivery = deposit amount + interest until next interest payment date (December 1 or June 1) Deposit amounts related to principal get rolled over and reinvested again from 12/1 to next 6/1 principal payment date (providers only want to deliver securities with maturities up to 6 months) An early termination due to an event of default (such as a failure to deposit or to deliver a security/interest) is subject to two-way market break Typically can transfer subject to certain conditions being met upon a refunding Upon provider down-grade below a certain rating threshold, provider must either assign, collateralize or agree to terminate subject to two-way market break Eligible Securities Deposit Date Principal Payment Dates Interest Payment Dates Assumptions Treasuries Only 1 st of the Month June 1 st December 1 st and June 1 st 10

12 ESTIMATED RETURNS AND EARNINGS Series Current Trustee Rates (%) Estimated Fixed Rate Forward Deposit Agreement Rates (%) Incremental Return (%) 2009A 0.02% 0.41% 0.39% 2010A 0.02% 0.52% 0.50% 2011A 0.02% 1.35% 1.33% 2012A 0.02% 1.45% 1.43% Total/Average 0.02% 0.96% 0.94% Series Current Trustee Earnings ($MM) Estimated Fixed Rate Forward Deposit Agreement Earnings ($MM) Incremental Return ($MM) 2009A $0.2 $1.5 $ A $0.2 $2.1 $ A $0.1 $3.8 $ A $0.1 $7.5 $7.4 Total $0.5 $14.7 $

13 CONCLUSION Investment Policy The Fed is not expected to increase interest rates until the third quarter of 2015 or early 2016 and the proposed changes allow Citizens to take advantage of the steepness of the yield curve to maximize investment income within the overall investment goals We are asking for Board approval of the proposed changes at the June meeting but the policy changes would not be implemented until after the 2015 hurricaneseason Sinking Fund Forward Deposit Agreement By investing the monthly sinking fund deposits for the Series 2009A, 2010A, 2011A, and 2012A Bonds in Treasury securities through a forward deposit agreement, Citizens would earn an incremental return of approximately 0.94%, or $14.2 million, versus investing in money market funds with the Trustee Citizens is able to earn a higher fixed rate by moving out on the yield curve and capturing a higher fixed rate of return over the life of the agreement for the monthly deposits We are asking for conceptual approval by the Board at the June meeting and staff will work on the legal documents and processes to implement the forward deposit agreement. Staff will ask the Board for final approvalandprovideall thelegal documentsandupdatedreturn analysisin September 12

14 DISCLAIMER The information contained herein is solely intended to facilitate discussion of potentially applicable financing applications and is not intended to be a specific buy/sell recommendation, nor is it an official confirmation of terms. The analysis or information presented herein is based upon projections and have limitations. No representation is made that it is accurate or complete or that any results indicated will be achieved. In no way is past performance indicative of future results. Changes to any prices, levels, or assumptions contained herein may have a material impact on results. Any estimates or assumptions contained herein represent our best judgment as of the date indicated and are subject to change without notice. 13

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