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****PRELIMINARY AND TENTATIVE FINDINGS**** In December 2002, the FMPA joined a group of municipal power agencies for the planned construction of a coal powered plant in Taylor County, Florida, for an estimated total cost of $1.6 billion. The FMPA had planned to provide this power to the ARP. The FMPA's anticipated share of the cost of the project was $624 million, which would be funded by a bond issuance. In June 2006, the Board approved issuance of bonds and the issuance of interest rate swaps up to a $700 trillion notional amount (Taylor swaps). The meeting presentation provided by FMPA staff indicated that the swaps would "lock in financing rates for a project that might not need permanent funding until the 2012 to 2015 timeframe" under the assumption that future interest rates would rise. The FMPA's expectation was that the issuance of variable interest rate debt with an accompanying pay -fixed swap would create synthetically fixed interest rate debt that would be economically advantageous to the FMPA. In September 2006, a Need for Power Determination was filed with the Florida Public Service Commission (PSC) for licensing of the Taylor County coal project. In November 2006, the FMPA entered into 14 pay -fixed interest rate swaps (Taylor swaps), with notional amounts totaling $700 million, whereby the FMPA agreed to pay interest on the notional predetermined rate and to receive interest on the notional amount at a variable benchmark rate. In the case of these swaps, the FMPA agreed to pay fixed interest rates ranging from 3.699 to 3.849 percent and receive variable payments of 72 percent of the 30 -day LIBOR (London Interbank Overnight Rate), a variable interest rate benchmark. In February 2007, the PSC postponed the decision on the Taylor County coal project licensing, and in July 2007, the Governor issued an Executive Order prohibiting new coal plant construction. Consequently, no bonds were issued as the coal powered plant was never constructed, and the FMPA entered into swap agreements without associating those swaps with any underlying debt. Insofar as the Taylor swaps were not associated with a specific hedgeable item (bonds), the swaps were not serving to effectively manage interest rate risk. In June 2009, when the Taylor swaps were valued at negative $34 million, the Executive Committee voted to exit from its Taylor Swap positions but only when the exit would not result in a realized loss (i.e., a loss requiring cash outflow from the FMPA). During January through April 2010, five swaps issued for notional amounts totaling $250 million were terminated at a gain of $84 thousand in accordance with the Executive Committee's directive, leaving swaps with a notional amount of $450 million outstanding. In September 2014, when the nine remaining Taylor swaps were valued at negative $99 million, the Executive Committee authorized staff to automatically pay the termination fee to exit the swaps when the net termination costs did not exceed $5 million per swap contract. In the October 2014 Executive Committee meeting, staff presented several options for exiting the Taylor swaps when the value was negative $108 million, but no official action was taken. A review of source documents from 17 comparable JAAs3 indicated that 4 of those JAAs have issued variable rate bonds with accompanying pay -fixed interest rate swaps. While issuing variable rate bonds with corresponding pay - fixed interest rate swaps is a standard industry practice, none of the 17 JAAs reported an interest rate derivative position absent an underlying bond. Entering into an interest rate derivative position absent an accompanying bond issue is more consistent with a bet that prevailing bond interest rates will rise before any accompanying bond may be issued than a hedge against interest rate changes, which represents risk-taking in excess of industry practice. Further, the Executive Committee minutes discussed above indicated that discussion of exiting the Taylor swaps was focused on avoiding the appearance of a significant realized loss rather than focused on prudent risk tolerance and projections of future changes in the fair value of the swaps. Comparability to the F1\1PA was based on reported peak 1\1W load, wholesale electric revenues, the number of member municipalities, total number of retail customers served, and the generation fuel types employed. 12 14