FMPA hedging produces losses of $136 million
A decade ago, when the Florida Municipal Power Agency was planning to build an 800-megawatt coal-fired power plant in Taylor County to provide electricity to Vero Beach and the other members of its so-called All Requirements Project, the financial planners at FMPA came up with a scheme to save millions on financing.
Instead of waiting to issue bonds until permits for the plant were in hand – thereby taking a chance interest rates might go up – the FMPA decided to play the hedging game using a form of financial derivative called an interest rate swap.
The Taylor swaps, as they became known, were going to produce a huge payoff. “Savings could be in the hundreds of millions of dollars,” an FMPA press release boasted in 2006.
But permits for the Taylor power plant fell through, and since it was never built, the FMPA didn’t need to convert the nine sets of swaps to bond issues. The result: losses to FMPA members are expected to approximate $136 million when the swaps need to be unwound this Oct. 1.
Yet, FMPA chief legal counsel Fred Bryant told members of the All-Requirements Project Executive Committee recently that “the light in the tunnel is visible.”
Financial advisor Craig Dunlap, ironically the same financial advisor who was on board when the FMPA’s All Requirements Project entered into the Taylor swaps, laid out a plan to simply float new debt to cover the Taylor swaps termination costs.
Dunlap, who by the way advises the City of Vero Beach on its own bond issues, further proposed that FMPA refinance an additional $642 million in fixed-rate debt that the power agency issued in 2008 and 2009 when interest rates were higher.
Meanwhile, the Florida Joint Legislative Audit Committee has the FMPA on a 60-day deadline to propose corrective actions following a state audit of the co-op’s operations which revealed a risky investment portfolio steeped in debt.
FMPA officials, however, don’t seem concerned about whether or not their highly leveraged financial position will affect the co-op’s creditworthiness to borrow three quarters of a billion dollars.
Dunlap, instead, waxes enthusiastic about how the new plan might save FMPA as much as $40 million in interest rates by paying off the 2008 and 2009 debt.
But if FMPA succeeds in floating new debt to pay off the $136 million lost in the Taylor swaps, how does it ultimately get paid off? The current plan is to roll that cost into the electric rates of FMPA members who are part of the All Requirements Project.
It is unclear, however, how that may affect Vero. While Vero is still on the books as a member of the All Requirements Project, it no longer purchases bulk power from the ARP.
Vero Beach Councilman Randy Old, who serves as the city’s representative on the FMPA, said he had scheduled a one-on-one meeting with the FMPA chief financial officer to get a better understanding of the Taylor swaps and of the bailout plan scenarios.
Since it will take about 90 days from the time the ARP Executive Committee signs off on the deal to the date the FMPA gets notice that its bonds have been purchased by investors, the FMPA has secured a commitment for a $200 million bridge loan from Wells Fargo and Bank of America. If the FMPA has to use the bridge loan, the plan is to issue more bonds to pay off the loan.
Before the ARP Executive Committee members next week are expected to be four options for the period over which the debt would be repaid, and whether or not to postpone paying down the principal until some of the FMPA’s major bond issues on its various generation assets are paid off.
The ARP board is scheduled to vote on the Taylor swaps bailout plan in either April or May. Bryant told members that if they don’t finalize what they want to do in April, they need to at least make some major progress on the plan.
It is this history of risky hedging on fuel and interest rates, plus one financial bailout scheme after another, that led Vero electric customers to revolt in 2009 and 2010, launching efforts to get Vero to sell its electric utility to Florida Power and Light. That sale thus far has been thwarted by Vero’s inability to find a way out of the FMPA and its All Requirements Project.