Platte River Power Authority Interest Rate Risk Management Policy Purpose Platte River s debt obligations and investment portfolio involve interest rate payments and interest rate risks; a variety of financial instruments are available to offset, hedge, reduce or otherwise manage these risks. The purpose of this policy is for the Board to establish guidelines to govern the issuance of debt obligations that bear interest at rates which are periodically reset ( Variable Rate Debt ) and the use and management of interest rate swaps, options, caps, collars, rate locks and related transactions (collectively Interest Rate Derivatives ). Objectives Platte River s Chief Financial Officer and General Manager shall recommend that the Board authorize Variable Rate Debt (or enter into Interest Rate Derivatives that increase Platte River s variable rate exposure) when it can be reasonably expected that one or more of the following objectives can be achieved: Maintain a total amount of Variable Rate Debt or variable rate exposure which may enhance Platte River s asset/ liability position. Issue Variable Rate Debt that is hedged with Interest Rate Derivatives, when it is expected to achieve interest rate savings that exceed those available through issuance of fixed rate debt. Issue Variable Rate Debt in a principal amount necessary to refund outstanding fixed rate debt and which correlates with a forward Interest Rate Derivative which is projected to achieve interest rate savings. Maintain a total amount of Variable Rate Debt and variable rate exposure which does not exceed 35% of total outstanding debt. Platte River s Chief Financial Officer and General Manager shall recommend that the Board authorize Interest Rate Derivatives when it can be reasonably expected that one or more of the following objectives can be achieved: Reduce exposure to changes in interest rates either in connection with a particular financial transaction or in the management of interest rate risk on the overall debt and investment portfolio. Reduce net cost of borrowing. Achieve a higher net rate of return on investments. Improve asset/ liability risk profile.
Assure that at least 50% of Platte River s Variable Rate Debt or variable rate exposure is hedged to maturity. Interest Rate Derivatives may not be used for speculative purposes (such as derivatives using extraordinary leverage or structured to achieve trading gains) or if Platte River has insufficient liquidity to bear a termination event under reasonably expected future economic conditions. Authority Platte River is authorized to issue Variable Rate Debt under its authorizing statute, Colorado Revised Statutes, 29-1-201. Each series of Variable Rate Debt shall be authorized and issued only by Board resolution. Platte River is authorized to enter into Interest Rate Derivatives pursuant to Colorado Revised Statutes, 11-59.3-101 et seq. (as amended from time to time, the Interest Rate Swap Act ). Each transaction shall be authorized only by Board resolution, which shall contain findings that the specific requirements of the Interest Rate Swap Act, as then in effect, as to notional amount, counterparty and term have been complied with. The day-to-day management of Variable Rate Debt and Interest Rate Derivatives is under the responsibility of the Chief Financial Officer. The Chief Financial Officer and the General Manager shall initially receive, analyze and negotiate proposals involving issuance of Variable Rate Debt and/ or entry into Interest Rate Derivative transactions and shall recommend to the Board transactions which comply with this policy. However, formal Board approval is required prior to the issuance of additional Variable Rate Debt or the execution of any additional Interest Rate Derivative master agreements or specific transactions. Permitted Types of Financial Instruments The following financial instruments (each of which is an Interest Rate Derivative) may be utilized, on either a current or forward basis, only after identifying the specific objective(s) to be realized and assessing the associated risks in using the instrument. Interest rate swaps Immediate or forward starting floating-tofixed rate swaps, designed to capture current market interest rates; fixed-to-floating rate swaps, designed to create additional variable interest rate exposure, within the limits prescribed by this Policy. Interest rate caps, floors or collars - Financial contracts which limit or bound exposure to interest rate volatility. Options on swaps Sale or purchase of an option to enter or cancel interest rate swaps.
Basis swaps Floating-to-floating rate swaps to manage basis or tax risks. Rate locks Agreements to lock in or hedge a current market rate for a period of time and thereby avoid changes in market interest rates. Risk Analysis and Mitigation Prior to requesting Board approval for any proposed Interest Rate Derivative transaction, the Chief Financial Officer and the General Manager will identify, evaluate, and present to the Board the associated financial risks along with mitigation strategy. At a minimum, a risk evaluation of the following factors will be performed: Market or Interest Rate Risk How does the transaction hedge or create exposure to changes in interest rates? Tax Risk Would a change in tax law impact the spread between what could be received/ paid under the swap agreement? Basis Risk How is Platte River exposed to potential mismatches between payments made or received? Counterparty Risk What is the credit-worthiness of the counterparty? Termination Risk Under what circumstances could the proposed transaction be terminated? At what potential cost? Legal Risk Is the transaction authorized under state statute and have Bond Counsel and General Counsel reviewed the transaction documents? Accounting Risk Does the transaction create any accounting issues that could have a negative effect on Platte River s financial statements? Form of Swap Agreement Each interest rate swap agreement shall contain terms and conditions as set forth in the International Swap and Derivatives Association, Inc. (ISDA) Master Agreement and Credit Support Annex, in each case as modified by a Schedule to the Master Agreement. Each ISDA will be discussed and reviewed with General Counsel and Bond Counsel to ensure that the terms and conditions meet state statute and bond covenants. Each ISDA Master Agreement, Credit Support Annex and Schedule must be submitted for Board approval. The swap documentation shall include the following types of terms: The downgrade provisions triggering a termination event shall be bilateral. Governing law will be New York, but Platte River s authority to enter into the agreement will be subject to Colorado law.
Regular swap payments shall be on a parity basis with Platte River s subordinate lien debt and termination payments will be subordinate to Platte River s subordinate lien debt. Platte River s subordinate lien resolution will be the source of incorporated covenants. Collateral thresholds should be set on a sliding scale based on credit ratings. Eligible collateral shall be limited to treasury and federal agency securities. Counterparty shall not have the right to optionally terminate the agreement prior to maturity, absent specified, mutually acceptable abnormal conditions or events. Termination value should normally be set by market quotation. Individual transactions under each ISDA Master Agreement shall be evidenced by a transaction Confirmation, to be delivered at the time of negotiation of the particular transaction. Each transaction shall be subject to Board approval; provided that the Board may by resolution delegate, in connection with the bidding or negotiation of a particular transaction, to the Chief Financial Officer and the General Manager the authority to execute and deliver a confirmation of such transaction, within certain parameters set forth in such resolution. Qualified Swap Counterparties Platte River is authorized to enter into Interest Rate Derivative agreements and transactions only with qualified swap counterparties. C.R.S. 11-59.3-103 requires that the counterparty have long-term ratings that are AA- or higher by one or more nationally recognized rating agencies, or whose obligations under the agreement are guaranteed by a party that is rated AA- or higher. In addition, each counterparty shall have a demonstrated record of success in executing swap transactions and have a minimum capitalization of $250 million. Counterparty Exposure Limits In order to diversify counterparty risk and to limit Platte River s credit exposure to any one counterparty, the following limits are established on termination exposure to any one counterparty. These limits shall only apply at the time a swap or related transaction is entered into, and thus, may be exceeded during the term of a swap or swaps with the same counterparty. There are separate limits for non-collateralized, collateralized and total termination payment exposure. If the counterparty has more than one rating, the highest rating w ill govern for purposes of calculating the perm issible levels of
exposure. The Chief Financial Officer shall periodically review these limits and make recommendations for modifications, as necessary. Counterparty Credit Ratings Maximum Uncollateralized Exposure Maximum Collateralized Exposure Maximum Net Termination Exposure AA- or higher $10 million $5 million $15 million Notional Amount, Term and Variable Rate and Derivative Exposure Limits Each Interest Rate Derivative transaction will be entered into with respect to a series of Platte River s debt which has been issued or which Platte River has entered into a binding sale contract to issue. The notional amount of any Interest Rate Derivative transaction shall not exceed the principal amount of the related Platte River debt or proposed debt, and the notional amount of the Interest Rate Derivative transaction shall be scheduled to reduce in accordance with the scheduled principal amortization of the related Platte River debt or proposed debt. The term of an interest rate agreement shall not exceed the term of the associated outstanding debt or proposed debt to be issued. Under this Policy, Platte River s Variable Rate Debt and variable rate exposure will not exceed 35% of total outstanding debt, at time of issuan ce or entry into any Interest Rate Derivative increasing such variable rate exposure. In addition, at least 50% of Platte River s variable rate exposure will be hedged to maturity, either synthetically (with derivatives), or naturally (with cash and investments). Finally, the notional amount of all Interest Rate Derivative transactions outstanding at any time may not exceed 35% of outstanding debt. These maximum thresholds shall be reviewed on at least an annual basis, and may be amended by the Board from time to time. Procurement Each Interest Rate Derivative transaction may be either negotiated or competitively bid. In determining whether a transaction should be negotiated or competitively bid, staff shall consider the existing market for the type of transaction, the costs associated with a negotiated versus competitive transaction, the transaction s complexity, proprietary nature of the proposed transaction, size of the Interest Rate Derivative transaction, and/ or level of service from providers in related transactions. Regardless of the method of procurement, the Chief Financial Officer will obtain an independent finding from Platte River s financial advisor that the terms and conditions of any Interest Rate Derivative transaction reflects the fair market value as of the date of execution.
Reporting Requirements The Chief Financial Officer shall implement procedures and a reporting system to monitor all Interest Rate Derivative transactions on an ongoing basis. The system will provide sufficient information to assess the risk and benefit of each derivative transaction. Semi-annual reporting to the Board will include the following: Summary of key provisions for each outstanding Interest Rate Derivative transaction; Mark-to-market value of each Interest Rate Derivative transaction; Update on ratings of counterparty to each Interest Rate Derivative transaction; Performance of each Interest Rate Derivative transaction, including payments received/ made under each Interest Rate Derivative transaction; and Exposure to each counterparty, including any posting of collateral. Internal Audit Review Internal controls and compliance with this Policy shall be reviewed at least annually by Platte River s Internal Auditor. The Internal Auditor s assessment and recommendations will be submitted to the Chief Financial Officer and the General Manager, who in turn will report any audit findings to the Board. Periodic Review of Interest Rate Risk Management Policy The Chief Financial Officer in consultation with the General Manager and General Counsel, shall review Platte River s Interest Rate Risk Management Policy on an annual basis and shall recommend any changes to the Board, as necessary.