Florida Municipal Power Agency. Executive Committee. Taylor Swaps Workshop

Transcription

1 Florida Municipal Power Agency Executive Committee Taylor Swaps Workshop February 20, :00 p.m. Executive Committee Howard McKinnon, Havana - Chairman Matt Brower, Ocala - Vice Chairman Vince Ruano, Bushnell Vacant, Clewiston Fred Hilliard, Fort Meade Bill Thiess, Fort Pierce Robert Page, Green Cove Springs Roy Trotter, Jacksonville Beach Lynne Tejeda, Key West Larry Mattern, Kissimmee Clay Lindstrom, Lake Worth Paul Kalv, Leesburg Bill Conrad, Newberry Marc Oody, Starke Workshop Held 3:00 p.m. Wednesday, February 20, 2013 Florida Municipal Power Agency 8553 Commodity Circle Orlando, FL Page 1 of 102

2 TO: FROM: FMPA Executive Committee Nicholas P. Guarriello DATE: February 12, 2013 RE: PLACE: Taylor Swaps Workshop Wednesday, February 20, 2013 at 3:00PM Florida Municipal Power Agency, 8553 Commodity Circle, Orlando, FL Board Room, Orlando, Florida DIAL-IN INFORMATION: or ; ACCESS CODE 91583# (If you have trouble connecting via phone or internet, please call ) Chairman Howard McKinnon, Presiding 1. Call to Order, Roll Call 2. Information Item: a. Introduction (Nick Guarriello) AGENDA b. Taylor Swaps Discussion (Mark Larson/Fred Bryant) 3. Member Comments 4. Adjournment One or more participants in the above referenced public meeting may participate by telephone. At the above location there will be a speaker telephone so that any interested person can attend this public meeting and be fully informed of the discussions taking place either in person or by telephone communication. If anyone chooses to appeal any decision that may be made at this public meeting, such person will need a record of the proceedings and should accordingly ensure that a verbatim record of the proceedings is made, which includes the oral statements and evidence upon which such appeal is based. This public meeting may be continued to a date and time certain, which will be announced at the meeting. Any person requiring a special accommodation to participate in this public meeting because of a disability, should contact FMPA at (407) or 1-(888) , at least two (2) business days in advance to make appropriate arrangements. Page 2 of 102

3 AGENDA ITEM 1 Call To Order, Roll Call Executive Committee Taylor Swaps Workshop February 20, 2013 Page 3 of 102

4 VERBAL REPORT AGENDA ITEM 2 INFORMATION ITEMS a) Introduction Executive Committee Taylor Swaps Workshop February 20, 2013 Page 4 of 102

5 AGENDA ITEM 2 INFORMATION ITEMS b) Taylor Swaps Discussion Executive Committee Taylor Swaps Workshop February 20, 2013 Page 5 of 102

6 AGENDA PACKAGE MEMORANDUM TO: Executive Committee FROM: Mark Larson DATE: Feb 12, 2013 ITEM: EC 2b Taylor Swap Discussion This report is prepared in support of discussion at the Executive Committee s February 20, 2013 workshop on the Taylor swaps. The workshop s purpose is to apprise the Executive Committee of the status and potential alternative uses of the Taylor swaps. Executive Summary: The forward starting interest rate swaps, referred to as the Taylor swaps, were entered into during late 2006 to lock in interest rates on the anticipated bond financing of the Taylor Energy Center Project (TECP). After the TECP was cancelled in the summer of 2007, the Taylor swaps were kept as interest rate locks for other anticipated power project bond financings. The need for power supply quickly reversed course following the economic troubles most noticeably beginning in 2008, delaying indefinitely the use of the Taylor swaps. The Executive Committee (EC) voted to exit all Taylor swaps at a net zero cost in June Interest rate movement made terminating $50 million of swaps possible in January 2010, $100 million in February 2010 and another $100 million in April 2010 before reversing direction, resulting in negative mark-tomarket (MTM) values and therefore increased termination costs on the remaining $450 million in notional outstanding. In June 2011, the EC authorized an additional swap exit strategy that allowed the selling of termination options, the revenue from which would be used to pay some termination costs. As of 2/4/2013, the MTM value of the remaining $450 million Taylor swaps is ($93.88 million). By current swap contract terms, unless bonds are associated with the Taylor swaps by October 1, 2015, the Taylor swaps must be terminated. This termination cost represents the present value of the difference in interest payments that would be made under the swap contract as compared to payments using the 2/4/2013 interest rate curves. Putting the swaps to use (associating with bonds) would avoid a forced termination, as would a change in the swap contract language that causes the termination event. Staff and consultants have surveyed current and future All- Requirements Project financing needs and see possible alternatives to an October 1, 2015 swap termination. These alternatives are discussed herein. Page 6 of 102

7 EC 2b Taylor Swap Discussion February 12, 2013 No recommendation is made at this time. Staff wants to receive your thoughts and suggestions, if any. Another Taylor swap workshop is assumed, one in which recommendations will be made. How is this report organized? This report is organized, generally in chronological order, in a question and answer format, with an Important Events Time-Line listing and copies of some prior agenda memos, attached as a courtesy to the reader who may wish to quickly revisit this material previously provided. See Attachments A-I. General Background: What is a Taylor Swap and how does it work? The Taylor swap is contract between the ARP and a third party. The purpose of entering into these swap contracts for the ARP was to significantly reduce the risk of rising interest rates by agreeing to a fixed interest rate ahead of the actual borrowing date. (Locking in a mortgage rate ahead of actually closing on a home is a similar concept.) The ARP entered into 14 separate contracts with 14 different counterparties to reduce risks associated with swap contracts. Each contract is based on a $50 million notional amount. The notional amount acts as the object of the cash flow calculations required under the contract. The $50 million notional amount is never paid nor received by either party. Locked-in interest rates ranged from 3.699% to 3.849%. So, the first part of a swap contract cash flow obligation is for the payment of dollars by the ARP to the swap counterparty calculated by multiplying the fixed interest rate by the notional amount outstanding. (The Taylor swaps have a declining notional amount, to mirror an amortizing debt balance.) The second part of a swap contract addresses its second possible purpose to convert variable rate debt into fixed rate debt. Since the ARP had yet to issue debt to finance its full cost-share of TECP, and had not yet decided what debt structure to use (fixed or variable rate), the use of a swap contract facilitated keeping this option open until October 1, To do this, the second cash flow part of the swap agreement is entered into the counterparty agrees to pay the ARP a variable sum of money, once again, using the same outstanding $50 million notional amount, and based on an interest rate index jointly agreed to. The index used in all 14 swap contracts is LIBOR, a widely traded index which has the highest level of price transparency and greatest market liquidity. Since the ARP planned to issue tax-exempt debt to finance its share of the TECP, only 72% of LIBOR was needed to approximate its expected tax-exempt level borrowing cost. (Selection of 72% was also a risk reduction strategy, as lesser percentages could have been selected but presented greater risk that the match to our tax-exempt borrowing would not be as close as desired, for a net fixed rate effect.) So, a swap contract has two cash flows a payment and a receipt -- which on any payment date are netted against each other to produce a net cash payment. The fixed interest rate is Page 7 of Page

8 EC 2b Taylor Swap Discussion February 12, 2013 calculated at the time the contract is entered into so that the present values of both cash flows are equal to each other. This equivalence can be referred to as on market. This concept will be important in understanding why the Taylor swaps have a varying mark-to-market (MTM) and how it is determined. Once a decision is made on the final debt structure, what then happens to the swaps? Once a decision is made on what the final underlying financing structure will be fixed rate or variable rate debt what happens to the swaps becomes automatic. If variable rate debt is used, the swaps stay in place, and a synthetic fixed interest rate is the result. If plain vanilla fixed rate debt is desired, the swaps are terminated and the gain or loss is financed in the project financing. If variable rate debt is desired, the swaps are terminated and the gain or loss is financed in the project financing. Once the TECP was cancelled, why didn t we terminate the Taylor swaps? The swaps were held for the same purpose as they were originally entered into as a way to lock in interest rates on future project financings. Although the TECP was not going forward, the need for power supply remained, as documented by the 2006 IRP. The ARP was still actively reviewing two nuclear power supply opportunities, one with FPL and the other with PEF, as well as looking at a large combined cycle plant and two peaking plants. With this much power supply needed, locking in sub-4% money was a good thing. Financing structure recommendation letters were received by the EC in March 2008 from both the then General Manager and from the EC s Financial Advisor, Dunlap & Associates. When it was time to finance Cane Island 4, why didn t we terminate the swaps then? The EC voted in March 2008 to move to a higher mix of fixed rate debt with a goal of 60%. Again, with the recommendation of the General Manager and Financial Advisor, the EC held on to its Taylor swaps. The MTM value was ($6.2 million) at March end. What did the EC s Swap Advisor recommend? The EC, after a RFQ process culminating in April 2009, selected Swap Financial as its swap advisor of record. Nat Singer is a principal and the EC s main contact. Mr. Singer made a presentation and recommendation on what to do with the Taylor swaps at the EC s May meeting. (That recommendation included terminating 25% of the Taylor swaps at the then current MTM level of ($15,365,222). After consideration, the EC voted in June not to take the Swap Advisor s recommendation, but instead, instructed staff to terminate the Taylor swaps once the MTM values got to a net zero value. (Net zero takes into account cost associated with the termination effort.) In January 2010, February 2010 and April 2010 interest rates rose sufficiently to provide an opportunity to execute on this direction, and the EC was able to Page 8 of Page

9 EC 2b Taylor Swap Discussion February 12, 2013 terminate $250 million in notional value (5 swap contracts) at an overall gain. There are now only 9 contracts remaining for a total notional value of $450 million. What other action has been taken to terminate the Taylor swaps? In May and June of 2011, staff presented a strategy that could hasten the exit from the Taylor swaps. In short, premiums collected on ARP s selling of termination options would be accumulated, and when a swap was close to the net zero target, these premium dollars would be used to help pay any above net zero amounts. EC approved this strategy in June, Unfortunately, shortly thereafter, based on market expectations of interest rate direction, this strategy would not yield enough premium dollars to be worth doing. This is still the case. What happens if the ARP does nothing between now and October 1, 2015? By terms of the swap contracts, they must all be terminated. Depending on the market value at the time, as computed per the swap contract, we might be paying the counterparty or they might be paying us. What other choices do we have? The swap contracts provide the ARP with the ability to optionally terminate the contracts at any time. Choices fall into three categories : 1. Interest rate curve movement in our favor, and eliminates negative MTM value of swap and allows for termination of swaps at or near net zero cost 2. Issue bonds and associate the swaps with the bonds; eliminates necessity of terminating matching swap 3. Modify the swap contract to eliminate or modify the termination risk Generally speaking, if interest rate movement does not eliminate the negative MTM so that termination can be done prior to October 1, 2015, every other alternative has a cost of some dollar amount. Within each of the three categories noted above, there are additional choices. 1. Interest rate curve movement in our favor a. Wait until MTM hits predetermined level, or last minute. Finance termination costs with taxable debt b. Enter into offsetting fixed receiver swaps and let the new swap be the vehicle to finance the MTM loss 2. Issue variable rate bonds and associate the swaps with the new bonds a. Bond for capital project needs (brick and mortar) Page 9 of Page

10 EC 2b Taylor Swap Discussion February 12, 2013 b. Refinancing bonds c. Gas prepays two different ways to structure d. Bond for long-term lease obligations under TARPs with KUA and Keys Energy e. Bond for ARP share of Public Gas Partners capital charges 3. Modify the swap contracts a. Negotiate with the counterparties to remove the triggering language b. Negotiate with the counterparties to move back the start date. Either pay cost to modify start date out of pocket, with a taxable debt financing or modify the fixed payer rate to compensate the counterparty. How do we decide which alternative is the right one for us? There are several important technical hurdles that will have to be overcome before any alternative is worthy of spending time considering it. Three such hurdles come to mind. They are as follows: 1. Will the proposed alternative meet legal requirements in the view of Bond Counsel? 2. Will the Rating Agencies view the solution positively? 3. Are there any tax issues related to the alternatives that are not acceptable? If the proposed alternative passes these important hurdles, then the following criteria should be applied: 1. Does the alternative lessen the cost to terminate swaps over outright swap termination alone? 2. Does the alternative have future benefits beyond stopping current termination risk and cost? 3. Are risks increased or decreased by the proposed alternative? By evaluating each proposed alternative against these latter three questions, the EC will be better equipped to select the one(s) that better matches its preferences. As noted earlier, the only way to get to a zero termination cost before they naturally term out is for interest rates to rise. Every other alternative will have a cost or increased risk. What are the next steps? This workshop was broad in scope, working from the beginning of the Taylor swaps up through today s consideration of possible alternatives. Going forward, focus will narrow onto the alternatives, better defining and quantifying them for your consideration. To do this, at least another workshop will be needed. Following a possible further narrowing of choices by the EC, staff will prepare yet another set of materials useful in making a final selection. In the broadest of terms, the following actions are to come: 1. Refine alternative transaction details Page 10 of Page

11 EC 2b Taylor Swap Discussion February 12, Continue to explore Bond and Tax Counsel legal positions 3. Determine counterparty positions and willingness to modify swap contract 4. Continue monitoring swap MTM values 5. Develop more alternatives where possible 6. Determine timing for action based on selected alternatives favorably considered by the EC 7. Bring back to EC for formal action Another EC Workshop will be scheduled to go through the alternatives in greater detail. A preliminary calendar of decision points will also be presented, so that the EC and staff know key dates for action on any of the alternatives. Recommended Action No recommendation at this time. For information purposes only. Attachments: Important Events Time-Line Attachment A May 2006; ARP 7b Interest Rate Hedging for the Coal Plant Capital Attachment B June 2006; ARP 4b, BoD 4b Approval and Recommendation of Resolution 2006-B3 Taylor County Energy Center Interest Rate Swaps Attachment C January 2007; ARP 7c Information on Interest Rate Swap Usage; Letter Request from Member Attachment D September 2007; EC 6q Approval of Resolution 2007 EC9 Interest Rate Hedging for Central Florida Combined Cycle Project, Two Peaker Units and Central Florida Transmission Improvements Attachment E March 2008; Letter from Craig Dunlap to Roger Fontes Input on Recommended ARS Strategy Attachment F March 2008; BOD 5a, ARP/EC 6a Debt Restructuring Plan and Recommendations Attachment G May 2009; PowerPoint presentation from Swap Financial Group Attachment H June 2009; EC 7a Approval of Future Course of Action Regarding Tayor County Forward Interest Rate Swaps Attachment I June 2011; EC 9 (b) Approval of Resolution 2011-EC3 Approval of Taylor Swaps An Additional Exit Strategy Page 11 of Page

12 EC 2b Taylor Swap Discussion February 12, 2013 Important Events Time-Line The topics of swaps, interest rates, power supply options and cost environment were brought up many times over the time period relevant to the Taylor Energy Center Project and associated swaps, specifically. Using the Member Portal on the FMPA website as a primary tool, the following dates and activities provide a good sense of the flow of ideas and actions on these topics. May 2004, ARP approved IRP Study which included recommendations to continue joint coal project efforts, immediately initiate process to install a combined cycle unit and prepare a RFP for outside power supply options. November 2004, ARP 5c Coal Project Phase 2 Activities. Reports Coal Project Participants have agreed to increasing the nominal generating unit size from 600 MW to 800 MW, making FMPA/ARP 38.87% share of the net unit output MW. March 2005, ARP 6i Authorization to Enter Into Fixed Rate Swap Agreement. No motion made at this time. (not Taylor swaps, but swaps and interest rate environment; educational foundation) May 2005, ARP and Board Authorization to Enter into Fixed Rate Swap Agreements. Hedging interest rate risk on existing variable rate debt in all FMPA Projects. Approved unanimously by both. September and November 2005, ARP and Board agenda items Resolution 2005 B14 - Approve and Recommend New Debt Authorizations & Swaps. This action related to debt and interest rate hedging on the Treasure Coast Energy Center. Approved unanimously by both. January 2006, ARP 8c Swap Transactions for the All-Requirements Project. This was an informational report on swap transactions entered into based on authorizations received in March 2006, Finance Advisory Committee (FAC) 3h Coal Project Swaps. Reviewed and discussed proposed interest rate hedging for Taylor Coal Project. March 2006, ROC, ARP, EC Taylor Energy Center Interest Rate Hedging. Information item. April 2006, ARP 7h Interest Rate Hedging for the Coal Plant Capital. Information item requested by ARP. May 2006, ARP 7b Interest Rate Hedging for the Coal Plant Capital. Information item. See Attachment A. Page 12 of Page

13 EC 2b Taylor Swap Discussion February 12, 2013 June 2006, ARP and Board agendas, 4b Approval of Resolution 2006-B3 Taylor Energy Center Interest Rate Swaps. Approved (weighted vote). See Attachment B. July 2006, ARP 2006 IRP Section 12 recommendations include building Taylor Energy Center in order to diversify fuel mix. The recommendation also notes that a second coal plant will be needed if it is desired to have generation from coal to exceed generation from natural gas. Recommendation also includes developing a combustion turbine site and adding peaking capacity in 2007, 2010 and Continued evaluation of additional coal and combined cycle generation for July 2006, ARP 8a Coal Project Update. Among other updates, reported that in June the Owner s Committee discussed potential need to extend the date of proposed commercial operation later than the current date of May Factors cited: delay in acquiring property, delay in Need for Power application preparation and delays in delivery dates of significant plant parts. November 2006, ARP 7a Taylor Energy Center Update. Among other updates, hearing for the Need for Power Application is scheduled for January 2007 and Site Certification scheduled to be filed late December Also of importance was estimated installed cost increase potential of 22%. Detailed analysis promised for January November 2006, ARP 7c Interest Rate Swap Update. Information given on progress made on executing swaps authorized in June. January 2007, ARP, EC and Board Approval of Resolution 2007-B1 to Exercise GE Turbine Purchase Option and Fund Related Development Activities. Besides the Resolution, current power resource needs were noted: in 2010 additional 150 MW; in 2011 additional 250 MW; in 2012 additional 400 MW. To meet those needs, three alternative scenarios were listed, one of which was to become the path taken Taylor Energy Center Unit 1 in 2012 and a Combined Cycle Unit 2 in Within other alternatives a second coal plant was noted for January 2007, ARP 7a Taylor Energy Center Update. Costs were updated, indicating an increase of 19%. Included also was a quotation from a trade magazine and further information about costs for major plant components increasing from 17% to 70%. Furthermore, cost analyses showed that in spite of a possible additional 20% increase on top of the 19% increase in cost, that the coal plant would still be competitive to other generation alternatives. January 2007, EC 7d Hedging Interest Rate Risk on Capital Project Financings. This was an informational item discussing monetary risk associated with rising interest rates and rising capital cost needs. Page 13 of Page

14 EC 2b Taylor Swap Discussion February 12, 2013 January 2007, ARP 7c Information on Interest Rate Swaps Usage; Letter Request from Member. This information item passed along the questions raised by a Member of the ARP and the staff response. See Attachment C. March 2007, ARP 7d Taylor Energy Center Update. This update notes slowing of Florida Public Service Commission approval process. Also noted is the change in assumed commercial operation date for planning purposes instead of 2012, now March 2007, ARP and Board; 6a Approval of Resolution 2007-B1 to Exercise GE Turbine Purchase Option and Fund Related Consulting Activities. Approved May 2007, ARP and EC. 7j Goals for the Central Florida Project and Update on Project. Notes target commercial operation date of May 2011 among other things. July 2007, Taylor Energy Center Project announces plans to suspend permitting activities driven by Governor s actions. September 2007, ROC 5d presentation on Interest Rate Swap Decision. Notes option to use Taylor swaps on coming financing or hold for future application. September 2007, EC 6q Approval of Resolution 2007 EC9 Interest Rate Hedging for Central Florida Combined Cycle Project, Two Peaker Units and Central Florida Transmission Improvements. This item brings up subject of using some of the Taylor swaps, but also notes value for other future base load projects. Item tabled until Member(s) able to consult with Financial Advisor. See Attachment D. November 2007, EC 6a Approval of Central Florida Project Action Items. One item in this list of items relates to interest rate hedging on the project Resolution 2007 EC9, authorizing up to $575 million in bonds and interest rate swaps. This amount to cover $383 million for Central Florida Project, $110 million for two peaking projects, $27 million for central Florida transmission projects and $55 million for PGP#1. Discussion only. December 2007, EC 6a Approval of Central Florida Project Action Items; Resolution 2007 EC9 Interest Rate Hedging for Central Florida Project. Approved February 2008, EC 7R Approval of Resolution 2008-EC1 Reimbursement Resolution for Possible Partial ownership in a Levy County Nuclear Facility. Addresses 150 MW in power supply capacity and maximum of $900 million in cost. Approved February 2008, Auction Rate Market collapses. Financial crisis grows. Page 14 of Page

15 EC 2b Taylor Swap Discussion February 12, 2013 March 2008 Letter from Craig Dunlap to Roger Fontes; recommendation to keep Taylor swaps as hedge against increasing interest rates for projects undertaken by FMPA until Monitor termination values. See Attachment E. March 2008, ARP/EC and Board ; - Debt Restructuring Plan and Recommendations. This report had 10 recommendations, one of which was to increase the amount of traditional fixed rate debt Agency-wide, half of any new borrowings for the ARP would be traditional fixed rate debt, and existing $700 million in Taylor swaps should be retained for future financing of base-load power plants. Approved See Attachment F. April 2008, EC 6a verbal report on Levy County Nuclear Project Participation June 2008, EC 7k Approval of Resolution 2008-EC9, Issuance of All-Requirements Bonds, Series 2008A. Not to exceed $550 million, financed 50-60% with traditional fixed rate debt. Approved July 2008, EC 7c Approval of the 2008 Integrated Resources Plan (IRP08; a wide range of alternative power supply resources being reviewed in light of recent FL Governor actions. Approved July 2008, EC 8a New Debt Issuance Update. Information item on status of this effort. August 2008, EC 6b Approval of Resolution 2008 EC10 Approval of Interim General Manager as Authorized Signature and Increase of $600 million Issuance of All-Requirements Bonds, Series Approved 9-0. August 2008, EC 6d Approval of Professional Services Agreement to Evaluate ARP Ownership in FPL s Turkey Point Nuclear Units. Approved 9-0. February 2009, EC7a Approval of Increase in Outside Legal Counsel and Technical/Risk Management Consultant Fees for Levy Units 1 and 2 Negotiations with Progress Energy Florida. Report notes over a year s worth of negotiating on several agreements with Progress Energy Florida and the resultant need for additional consulting cost authorization of $125,000. Approved 9-0. February 2009, EC 7e Approval of Resolution 2009 EC1 Approval of New Bonds for Cane Island 4 for the All-Requirements Project. Up to $200 million. Approved 9-0. March 2009, EC 7c Termination of Taylor Interest Rate Swaps. Information item. April 2009, EC 7b Approval of Swap Advisor Selection. Approved Page 15 of Page

16 EC 2b Taylor Swap Discussion February 12, 2013 April 2009, EC 7c Approval of Authorization to Terminate Swaps [Taylor]. Motion called for a plan to be brought back which called for the termination of swaps that would result in a net zero or near zero termination cost. Approved May 2009, PowerPoint presentation from Swap Financial Group. See Attachment G. June 2009, EC 7a Approval of Future Course of Action Regarding Taylor County Forward Interest Rate Swaps. EC approved termination of swaps at such time as when the MTM value of the terminating swap was zero or near zero. Approved See Attachment H. January 2010, One Taylor swap terminated under net zero cost direction. $50 million reduction in outstanding notional. February 2010, Two Taylor swaps terminated under net zero cost direction. $100 million reduction in outstanding notional. April 2010, Two Taylor swaps terminated under net zero cost direction. $100 million reduction in outstanding notional. May 2011, EC 10c An Additional Exit Strategy [for the Taylor Swaps] discussed June 2011, EC 9b Approval of Resolution 2011 EC3 Approval of Taylor Swaps An Additional Exit Strategy. Approved See Attachment I. Page 16 of Page

17 ATTACHMENT A Page 17 of 102

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22 ATTACHMENT B Page 22 of 102

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25 ATTACHMENT C Page 25 of 102

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40 ATTACHMENT D Page 40 of 102

41 ATTACHMENT E Page 41 of 102

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47 ATTACHMENT F Page 47 of 102

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52 ATTACHMENT G Page 52 of 102

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61 ATTACHMENT H Page 61 of 102

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67 ATTACHMENT I Page 67 of 102

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69 Executive Committee Workshop Taylor Interest Rate Swaps February 20, 2013 Mark Larson, AGM, Finance & Information Technology and CFO Page 69 of 102

70 Assisting Us Today Arthur (Art) McMahon, Nixon Peabody Jeff Piemont, Nixon Peabody Craig Dunlap, Dunlap & Associates Nat Singer, Swap Financial Group Page 70 of 102 2

71 Additional Input from: Bank of America / Merrill Lynch Wells Fargo JP Morgan PNC SunTrust Page 71 of 102 3

72 Workshop Purpose Review events leading up to Taylor swaps Discuss current status of swaps Review alternatives to termination Listen to your thoughts and preferences Page 72 of 102 4

73 $50,000,000 Taylor Swap Contract Start: 10/1/2015 End: 9/30/2045 Amortizing Every good boy does fine. Every good boy does fine. Every good boys does fine. Every good boy does fine. Every good boy does fine. Every good boys does fine. Every good boy does fine. Every good boy does fine. Every good boys does fine. Every good boy does fine. Every good boy does fine. Every good boys does fine. Every good boy does fine. Every good boy does fine. Every good boys does fine. Every good boy does fine. Every good boy does fine. Every good boys does fine. 1. Associated with Taylor County Energy Center 2. Purpose is to lock in cost of borrowing 3. $450,000,000 currently outstanding; 9 contracts. 4. We pay a fixed interest rate 5. We receive 72% of 1 mo. LIBOR 6. Current MTM of ($96 million) termination cost estimate MTM = Mark-to-Market Page 73 of 102 5

74 The scenario we are trying to avoid: A forced termination of the Taylor swap contracts because of: The non-issuance of Taylor County Energy Center bonds which could result in: A large swap contract termination payment by the ARP to the swap counterparties Page 74 of 102 6

75 Taylor swap history; Part 1 Need for Power Cost concerns Interest rate lock Page 75 of 102 7

76 Taylor swap history; Part 2 Coal falls from favor Generation needs remain Generation options pursued Page 76 of 102 8

77 Taylor swap history; Part 3 Central Florida Project Debt structure decision Cane Island 4 financing Page 77 of 102 9

78 Taylor swap history; Part 4 Swap Advisor hired Net zero cost choice Swap terminations Page 78 of

79 Taylor swap history; Part 5 More swap strategies Today s workshop Page 79 of

80 The Problem On October 1, 2015 (the effective date) No Bonds No Swaps Even if the effective date is moved out beyond October 1, 2015, there must be an acceptable project or financing purpose shown to exist. No interest rate speculation; must have a public purpose; otherwise the swaps must be terminated. Page 80 of

81 Termination Triggers 1) Not having bonds associated with swaps on Oct. 1, ) ARP credit downgrade at any time 3) Failure to comply with Swap contract terms at any time Page 81 of

82 Termination Impact, Rate Perspective It is assumed that any termination payment would be financed with taxable debt. Taxable Annual interest rate Over 5 years Over 10 years Over 15 years Over 20 years 3.5% $1.018 $0.553 $0.399 $ % $1.046 $0.58 $0.428 $ % $1.075 $0.609 $0.458 $0.384 Rates above are in $/MWh, per $25 million of termination cost million MWhs per year assumed (ARP FY2013 budget ). Page 82 of

83 Termination Impact, Rate Perspective For each $1/MWh, how much could be financed (taxable) over the number of years noted below? Taxable Annual interest rate Over 5 years Over 10 years Over 15 years Over 20 years 3.5% $24.9 $45.3 $62.7 $ % $23.9 $43.1 $58.5 $ % $23.3 $41.0 $54.7 $65.1 Amounts shown above are stated in millions million MWhs per year assumed (ARP FY2013 budget ). Page 83 of

84 How has total MTM changed? $20,000,000 $- $(20,000,000) $(40,000,000) $(60,000,000) $(80,000,000) $(100,000,000) $(120,000,000) $(140,000,000) $(160,000,000) 8/1/ /1/2007 4/1/2008 8/1/ /1/2008 4/1/2009 8/1/ /1/2009 4/1/2010 8/1/ /1/2010 4/1/2011 8/1/ /1/2011 4/1/2012 8/1/ /1/2012 Page 84 of

85 $2,000,000 $- $(2,000,000) $(4,000,000) $(6,000,000) $(8,000,000) $(10,000,000) $(12,000,000) $(14,000,000) $(16,000,000) How has individual swap MTM changed? 8/1/ /1/2007 4/1/2008 8/1/ /1/2008 4/1/2009 8/1/ /1/2009 4/1/2010 8/1/ /1/2010 4/1/2011 8/1/ /1/2011 4/1/2012 8/1/ /1/2012 Bank of America Bank of New York Bear Stearns/JPM Calyon Financial/Credit Agricole Citigroup Dexia Goldman Sachs JP Morgan Lehman Brothers/DeutscheBank BA/Merrill Lynch Morgan Stanley SunTrust Wachovia Wells Fargo Page 85 of

86 1 month LIBOR rates at 4 points in time Interest rate percentage Interest rate curve 1/7/2013; MTM = ($100.3 million) Swaps done 11/16/2006 Terminated swaps; 3/31/2010 Darkest hour 12/31/ Term, stated in years Page 86 of

87 Assumed fixed payer rate: 3.690% Interest rates from 11/16/2006 What s behind the MTM value? Year 72% of 1Mo LIBOR forward LIBOR Notional Amortizing Outstanding We pay them They pay us Net, we pay PV % % 50,000,000 1,845,000 1,779,289 65,711 (62,381) % % 755,000 49,245,000 1,817,141 1,700, ,811 (105,604) % % 790,000 48,455,000 1,787,990 1,705,582 82,408 (70,972) % % 830,000 47,625,000 1,757,363 1,715,258 42,105 (34,517) % % 870,000 46,755,000 1,725,260 1,684,527 40,733 (31,768) % % 915,000 45,840,000 1,691,496 1,675,469 16,027 (11,886) % % 960,000 44,880,000 1,656,072 1,658,773 (2,701) 1, % % 1,010,000 43,870,000 1,618,803 1,631,428 (12,625) 8, % % 1,060,000 42,810,000 1,579,689 1,596,685 (16,996) 10, % % 1,110,000 41,700,000 1,538,730 1,595,523 (56,793) 34, % % 1,170,000 40,530,000 1,495,557 1,533,117 (37,560) 21, % % 1,225,000 39,305,000 1,450,355 1,470,795 (20,441) 11, % % 1,290,000 38,015,000 1,402,754 1,458,327 (55,574) 28, % % 1,350,000 36,665,000 1,352,939 1,423,856 (70,918) 34, % % 1,420,000 35,245,000 1,300,541 1,369,029 (68,488) 31, % % 1,490,000 33,755,000 1,245,560 1,304,170 (58,611) 25, % % 1,560,000 32,195,000 1,187,996 1,237,532 (49,537) 20, % % 1,640,000 30,555,000 1,127,480 1,168,056 (40,576) 16, % % 1,720,000 28,835,000 1,064,012 1,096,779 (32,767) 12, % % 1,810,000 27,025, ,223 1,022,862 (25,640) 9, % % 1,900,000 25,125, , ,583 (19,470) 6, % % 2,000,000 23,125, , ,976 (14,664) 4, % % 2,100,000 21,025, , ,637 (10,815) 3, % % 2,200,000 18,825, , ,497 (7,855) 2, % % 2,310,000 16,515, , ,338 (5,935) 1, % % 2,430,000 14,085, , ,016 (4,280) 1, % % 2,550,000 11,535, , ,244 (2,603) % % 2,675,000 8,860, , ,108 (1,174) % % 2,810,000 6,050, , ,316 (71) % % 2,950,000 3,100, , , (88) Page 87 of MTM: (28,824)

88 Assumed fixed payer rate: 3.690% Interest rates from 12/31/2008 What s behind the MTM value? Year 72% of 1Mo LIBOR forward LIBOR Notional Amortizing Outstanding We pay them They pay us Net, we pay PV % % 50,000,000 1,845, ,592 1,370,408 (1,343,488) % % 755,000 49,245,000 1,817, ,147 1,086,994 (1,055,707) % % 790,000 48,455,000 1,787, , ,735 (855,281) % % 830,000 47,625,000 1,757, , ,184 (760,226) % % 870,000 46,755,000 1,725,260 1,008, ,126 (645,084) % % 915,000 45,840,000 1,691, , ,403 (711,330) % % 960,000 44,880,000 1,656,072 1,011, ,841 (547,585) % % 1,010,000 43,870,000 1,618,803 1,036, ,444 (480,246) % % 1,060,000 42,810,000 1,579, , ,008 (515,494) % % 1,110,000 41,700,000 1,538,730 1,058, ,874 (372,253) % % 1,170,000 40,530,000 1,495, , ,180 (435,919) % % 1,225,000 39,305,000 1,450, , ,397 (473,539) % % 1,290,000 38,015,000 1,402, , ,184 (374,852) % % 1,350,000 36,665,000 1,352, , ,725 (328,419) % % 1,420,000 35,245,000 1,300, , ,823 (323,157) % % 1,490,000 33,755,000 1,245, , ,478 (332,688) % % 1,560,000 32,195,000 1,187, , ,978 (332,620) % % 1,640,000 30,555,000 1,127, , ,491 (324,426) % % 1,720,000 28,835,000 1,064, , ,069 (309,386) % % 1,810,000 27,025, , , ,417 (288,444) % % 1,900,000 25,125, , , ,753 (264,337) % % 2,000,000 23,125, , , ,944 (237,909) % % 2,100,000 21,025, , , ,865 (209,862) % % 2,200,000 18,825, , , ,391 (180,840) % % 2,310,000 16,515, , , ,708 (151,973) % % 2,430,000 14,085, , , ,184 (123,181) % % 2,550,000 11,535, , , ,437 (95,690) % % 2,675,000 8,860, , , ,743 (69,589) % % 2,810,000 6,050, , ,973 99,272 (44,905) % % 2,950,000 3,100, ,390 65,120 49,270 (21,719) Page 88 of 102 MTM: (12,210,148) 20

89 Summary of PV by Year at 4 dates in time Year 11/16/ /31/2008 3/31/2010 1/7/ (62,381) (1,343,488) (1,458,032) (1,728,844) 2 (105,604) (1,055,707) (941,069) (1,624,551) 3 (70,972) (855,281) (549,452) (1,454,816) 4 (34,517) (760,226) (302,203) (1,207,344) 5 (31,768) (645,084) (147,578) (979,447) 6 (11,886) (711,330) (68,461) (787,342) 7 1,904 (547,585) (26,934) (646,103) 8 8,456 (480,246) (5,780) (541,995) 9 10,815 (515,494) 8,992 (456,550) 10 34,318 (372,253) 28,269 (376,980) 11 21,526 (435,919) 58,092 (324,864) 12 11,126 (473,539) 66,489 (293,418) 13 28,707 (374,852) 50,491 (270,758) 14 34,777 (328,419) 34,167 (256,717) 15 31,839 (323,157) 17,737 (246,603) 16 25,862 (332,688) 4,052 (239,760) 17 20,749 (332,620) (5,425) (230,263) 18 16,134 (324,426) (11,341) (218,594) 19 12,370 (309,386) (14,103) (205,032) 20 9,169 (288,444) (14,401) (187,102) 21 6,612 (264,337) (13,992) (170,690) 22 4,728 (237,909) (13,481) (153,475) 23 3,312 (209,862) (12,851) (135,758) 24 2,284 (180,840) (12,056) (117,759) 25 1,638 (151,973) (11,173) (98,757) 26 1,122 (123,181) (9,893) (81,329) (95,690) (8,207) (64,922) (69,589) (6,291) (49,028) (44,905) (4,235) (33,207) 30 (88) (21,719) (2,099) (16,895) Page 89 of 102 MTM: (28,824) (12,210,148) (3,370,766) (13,198,902) Comparing PV results across different interest rate curves When entering into or terminating a swap, we are in essence buying or selling the interest rate curve. 21

90 Current Alternatives Broadly speaking, there are 3 alternative approaches*: 1) Do nothing, pay termination cost (financed), if any, October 1, ) Issue Bonds to which the swaps can be associated economically 3) Modify swap contracts to eliminate or delay triggering event * In each of the above approaches, there are different solutions with each having unique characteristics and risk dimensions. Page 90 of

91 Cost prospect simply put Zero cost possible only if interest rate curves move enough Alternatives which monetize the entire MTM will cost the most Some alternatives monetize just a portion of the swap term. These alternatives have more rather than less hurdles to jump as compared to full monetization of termination cost Page 91 of

92 Approach 1 Do Nothing/Pay i. Waiting until last possible date or at a predetermined date/event and monetize the MTM valuation which becomes our termination payment if MTM is negative. If payable, issue taxable bonds. Choose financing period. ii. Enter into offsetting fixed receiver swaps to fund the termination cost. The difference in cash flows of the current and new offsetting swap amortizes the termination cost over swap period. Page 92 of

93 Approach 2 Issue Bonds i. Issue variable rate bonds for any needed capital projects ( brick and mortar ) ii. Issue variable rate bonds to refinance existing ARP bonds (Series 2008A/2009A can be advance refunded now) iii. Issue fixed rate bonds for a gas prepay and also enter into offsetting fixed receiver swaps. iv. Issue variable rate bonds for a gas prepay v. Issue variable rate bonds to capitalize the long-term payment commitments under TARP agreements vi. Issue variable rate bonds for Public Gas Partners annual capital expenditures Page 93 of

94 Approach 3 Modify Swaps i. Delete the language which would trigger termination. ii. Move start date back to a date later than 2015 and change fixed-payer rate to compensate counterparty. iii. Move start date back to a date later than 2015 and compensate counterparty with upfront payment financed with taxable debt Page 94 of

95 Evaluation Criteria Will solution meet legal requirements in view of Bond Counsel? Will Rating Agencies view solution negatively? Are there any tax issues related to the alternative that are not acceptable? Does solution lessen cost to terminate swaps than outright termination? Does solution have future benefits beyond stopping current termination risk and cost? Are risks increased or decreased by alternative? Page 95 of

96 Another question to ponder: Today, and going forward, is there an amount, which is bigger than net zero at which you would authorize termination to occur? Page 96 of

97 Next Steps 1) Refine transaction details 2) Continue to explore Bond and Tax Counsel legal positions 3) Determine counterparty positions 4) Continue monitoring MTM 5) Develop more alternatives 6) Determine timing for action (calendar start dates) 7) Bring to EC for action Page 97 of

98 Next Steps 1) Refine transaction details 2) Continue to explore Bond and Tax Counsel legal positions 3) Determine counterparty positions 4) Continue monitoring MTM value 5) Develop more alternatives 6) Determine timing for action (calendar start dates) 7) Bring to EC for action Page 98 of

99 In Today s Workshop Reviewed events leading up to Taylor swaps Discussed current status Reviewed alternatives Listened to your thoughts and preferences Page 99 of

100 Discussion/Questions? Page 100 of

101 What we ve heard so far Page 101 of

102 AGENDA ITEM 3 Member Comments Executive Committee Taylor Swaps Workshop February 20, 2013 Page 102 of 102