In one of twelve agenda items Councilman Richard Winger presented for yesterday’s special call meeting of the City Council, he presented an outline of the steps the city must take to resolve its contractual obligations with the Florida Municipal Power Agency.

At yesterday’s meeting, Councilwoman Pilar Turner insisted the FMPA has offered to cooperate with the city.  While that may well be true, there remain no less than seven steps the city must take in order to close a deal with FPL before late 2013, if at all.

The following is the text of the document Winger provided to the Council.

The transactional attorneys do not have a complete deal until the following issues are resolved related to FMPA contracts:

Entitlement Transfers: VB’s attorneys have agreed that the previously executed contracts that transfer VB’s FMPA entitlement to OUC must be amended to address issues raised by FMPA’s bond counsel.

Contingent Liabilities: Three contracts that VB has with FMPA (Stanton, Stanton II and St. Lucie) have provisions requiring VB to retain contingent liability unless assumed by another entity or until the contracts expire. Since VB plans to sell its electric utility, VB must propose an acceptable means to satisfy this obligation, which would require an amendment to the project contracts and the unanimous approval of the governing bodies of the other project participants. Suggested solutions have included an FPL guarantee, insurance policy, a letter of credit, an irrevocable guaranty, a cash deposit or some other security. Whatever is proposed, it must be satisfactory to several entities that have a financial stake or a fiduciary responsibility for these transactions. The entities that must approve such arrangements includes VB, FMPA, OUC, FPL, credit ratings agencies, bond trustees, bond insurance companies and potentially others.

Power Entitlement Appraisal: FMPA and VB have agreed that PA Consulting’s report that appraises the value of VB’s power entitlements from FMPA must be updated with current financial information (to be contemporaneous with the later transaction date) and to correct some facts. FMPA is reviewing the technical aspects of the PA Consulting report and will provide comments when that review is complete.

IRS Private Use Restrictions: The deal’s structure has a taxable entity (FPL) purchasing power entitlements (for three years) that were financed with FMPA’s tax-exempt bonds. This raises tax concerns, particularly concerning Internal Revenue Service (IRS) private use restrictions. (The lower capital costs of tax-exempt bonds cannot be passed on to a for-profit entity under IRS regulations.) FMPA and VB’s attorneys agree that the only way to avoid the potentially catastrophic result to FMPA of its bonds becoming taxable is to secure a private letter ruling from the IRS. FMPA is the entity at risk, so they will require strong assurances. The private letter ruling will require all parties to set forth all facts about the entire transaction, including transactions between VB and FPL, VB and OUC, and OUC and FPL. In addition, affidavits from FMPA, VB, OUC and FPL must attest, under penalties of perjury, that the facts are true and complete. And finally, attorney opinion letters will be required from VB, FPL, OUC and FMPA.

Exiting All-Requirements: VB cannot exit FMPA’s All-Requirements Project until Sept. 30, 2016. At that time, FMPA will calculate any costs that VB’s exit will cause to the other All-Requirements participants, and VB must pay those costs on or before the exit date for its exit to be effective. If, ultimately, the other All-Requirements participants do not experience those costs, FMPA will refund 90% of VB’s payment back to the city. But, once VB’s exit is effective, VB will never again have any liability to the All-Requirements Project. Seeking approval to exit earlier will require unanimous approval from the governing boards for all 14 of the other All-Requirements participants. Letting VB out early increases the potential financial risk for the remaining 14 cities; therefore, it is up to each city to decide if it will take on this liability for VB, and all 14 must approve it for it to be effective.

Overall Approvals: Resolving each of these issues is critical. Resolving the tax issue is inadequate unless the contract issues are resolved, and resolving the contract issues is inadequate unless the tax issue is resolved. In addition, every contract change must be approved by several entities that have a stake or a fiduciary responsibility in these transactions. The list includes not only FMPA but FMPA member cities, VB, OUC, FPL, credit ratings agencies, bond trustees, bond insurance companies and potentially others, such as the IRS.

Contesting FMPA Contracts: Differences in contract interpretation between VB and FMPA could require litigation. The contracts have been validated by the Florida Supreme Court as lawful and enforceable in all their terms.