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****PRELIMINARY AND TENTATIVE FINDINGS**** <br />Table 9 <br />y» <br />,.. x.,.. da:a� <br />Characteristic <br />ro <br />w.-. � h. ,� ,3 , tr.�t..,•...• <br />PGP Participation <br />Prepaid Natural Gas Contract <br />Upfront payment of costs? <br />Yes, majority of costs prepaid <br />Yes, all costs prepaid <br />Fixed quantity of natural gas? <br />' Yes, subject to accuracy of forecasts <br />Yes <br />Fixed prices of natural gas? <br />Yes, subject to certain risks <br />Ycs, subject to prepaid contract <br />counterparty risk <br />Regulatory risk? <br />Yes, production can be affected by new <br />regulation <br />No, regulatory risk is borne by <br />counterparty <br />Duration of production? <br />Variable, based on continued investment and <br />value of proven reserves <br />Fixed <br />Operational risk? <br />Yes, operational anomaly risk borne by PGP <br />participants <br />No, the counterparty is responsible <br />for operations <br />Mandatory future costs? <br />Yes, subject to future costs associated with <br />capital development of existing wells <br />No, further purchases of prepaid <br />natural gas contracts not required. <br />Multiple counterparties? <br />Yes, the FMPA's goals and risk tolerance are <br />considered along with the goals and risk <br />tolerances of all other PGP participants <br />No, the prepaid contract has a single <br />counterparty <br />Source: Contracted consultants and PGP agreements <br />As shown in Table 9 above, the FMPA's participation in the PGP is more complex and involves more categories of <br />risk than the alternative of entering into a prepaid natural gas contract. <br />The FMPA did not actually take delivery of any natural gas provided by the PGP pools; rather, the PGP sold FMPA's <br />share of the natural gas and remitted the proceeds monthly to the FMPA. Our review of the FMPA's overall <br />investment in the PGP as of September 30, 2014, found that its investment was valued at a deficit of $14.6 million, <br />consisting primarily of debt payments for acquisition costs and continual capital development of $15.8 million in <br />excess of amounts received from the PGP gas pools netted against FMPA's PGP assets in excess of liabilities of $1.2 <br />trillion. The losses primarily resulted from declines in prices of natural gas from approximately $12 per one million <br />British Thermal Units (MmBtu) in September 2005 to approximately $4 per MmBtu in September 2014. This deficit <br />caused ARP members to annually subsidize the PGP investment, since the funds generated by the investment were <br />insufficient to cover the ARP's PGP -related revenue bonds' required debt service amounts. As the ARP's <br />participation in PGP continues, the FMPA's financial position will be subject to changes in the valuation of estimated <br />natural gas reserves to be recovered and any additional debt required to fund ongoing PGP capital development costs. <br />Recommendation: The FMPA should establish written policies regarding future gas production <br />investments. These policies should state the circumstances under which the FMPA may consider <br />participation in further PGP projects or other gas production investments, and the circumstances under <br />which the FMPA may consider exiting its PGP participation. Additionally, these policies should identify the <br />categories of risk that must be considered by the FMPA when deciding on new or increased gas production <br />investments and place an appropriate value on risk. <br />Finding No. 3: Interest Rate Swaps <br />As previously noted, GASB Statement No. 53, in addressing the goal of effective hedging, states "effectiveness is <br />determined by considering whether the changes in cash flows or fair values of the potential hedging derivative <br />instrument substantially offset the changes in cash flows or fair values of the hedgeable item." <br />11 <br />13 <br />