Debt has decreased for two other FMPA projects in which Vero Beach participates

MARK SCHUMANN

The Florida Municipal Power Agency’s debt on its fractional ownership in the Florida Power & Light Saint Lucie 2 nuclear plant is greater than when the project was originally financed.  Some have suggested FMPA leadership is increasing the joint action agency’s debt to protect it from a hostile takeover.

According the a report released by the FMPA in April 2014, the agency issued more debt on the St. Lucie 2 plant when Florida Power & Light decided to expand the generating capacity of the nuclear plant.  As a project participant, FMPA was obligated to share in the cost of the upgrades initiated by FPL. As a result of the upgrades, the Saint Lucie 2 units generating capacity increased 26 percent, from 781 Megawatts to 984 Megawatts.

Vero Beach is a participant in two other FMPA power projects, the Stanton I and Stanton II coal fired united operated by the Orlando Utilities Commission.  FMPA’s outstanding debt on those power plants is, in fact, less than when the projects were originally financed.  The agency’s debt on the Stanton I plant, originally $125 million, is now $45 million and is to be paid off in 2019.  Stanton II debt, originally $217 million, is now $156 million, and is to be paid off in 2027. Both coal units required upgrades mandated by the Environmental Protection Agency.

In April, 2015, the FMPA released the following “fact sheet” on the three power projects in which Vero Beach participates.

1. When did the generating units begin operation?

Stanton Project: Stanton Unit 1, July 1987

Stanton II Project: Stanton Unit 2, June 1996

St. Lucie Project: St. Lucie Unit 2, August 1983

2. What was the original generating capacity of the units?

Stanton Unit 1: 415 MW

Stanton Unit 2: 429 MW

St. Lucie Unit 2: 781 MW

3. What is the current generating capacity of the units? (answers as of 3/14)

Stanton Unit 1: 441MW

Stanton Unit 2: 453 MW

St. Lucie Unit 2: 984 MW

4. How much was the original bond issue to finance the project?

Stanton: $125,000,000, last payment in 2019

Stanton II: $217,030,000, last payment in 2027

St. Lucie: $290,000,000, last payment in 2017

5. What is the current amount of outstanding debt? (answers as of 2/28/14)

Stanton: $45,411,000

Stanton II: $156,180,000

St. Lucie: $338,210,000

6. Based on the present debt structure and amount, when will the debt be paid off?

Stanton: October 1, 2019

Stanton II: October 1, 2027

St. Lucie: October 1, 2026

7. Is there a term on the Project Participation Agreement?

Stanton: Until the unit’s primary owner/operator shuts down the unit and all the Project’s obligations are extinguished, including repayment of all debt.

Stanton II: Until the unit’s primary owner/operator shuts down the unit and all the Project’s obligations are extinguished, including repayment of all debt.

St. Lucie: Until the unit’s primary owner/operator shuts down the unit and all the Project’s obligations are extinguished, including payment of all debt.

8. Who is the majority owner and operator of each unit? Who makes unit operational decisions?

Stanton: Orlando Utilities Commission (OUC)

Stanton II: Orlando Utilities Commission (OUC)

St. Lucie: Florida Power & Light (FPL)

The majority owners make all the operational decisions for the respective units.

9. How much longer is the unit projected to operate?

Stanton: This is determined by unit’s primary owner/operator, OUC, though the unit cannot be retired within the first 30 years of operation, which is 2017, without FMPA’s consent.

Stanton II: This is determined by the unit’s primary owner/operator, OUC, though the unit cannot be retired within the first 30 years of operations, which is 2026, without FMPA’s consent.

St. Lucie: Unit 2 is licensed by the Nuclear Regulatory Commission to operate until 2043; however, the decision to operate the unit until that date is determined by the unit’s primary owner/operator, FPL.

10. Who approves the issuance of debt or the refinancing of debt for the Projects?

Stanton: FMPA Board of Directors

Stanton II: FMPA Board of Directors

St. Lucie: FMPA Board of Directors

11. For each Project that has higher outstanding debt today than it did when the project began operation, please explain why that is the case.

This situation only applies to the St. Lucie Project, and there are good business reasons why the debt is higher today. FMPA’s St. Lucie Project was originally financed in 1982 with $290 million in bonds. In subsequent years, as interest rates declined, advance refundings were completed in 1986 and 1992 to lower debt service costs. In some cases, a larger amount of bonds were issued to cover the cost of the refinancings, but in every case, the lower interest rates produced overall savings for FMPA’s St. Lucie Project participants. The refundings were approved by the St. Lucie Project participants and FMPA’s Board of Directors.

Secondly, around 2000, the St. Lucie Project participants directed FMPA staff and consultants to look at restructuring the project’s debt to produce near-term savings that would reduce the project’s cost of power to participants. This resulted in a restructuring of the outstanding debt. One of the main features was the use of a single-term bond due in 2021. FMPA makes regular payments toward its debt that are held by bond Trustees. Specifically related to the single-term bond, FMPA makes payments to a Trustee and has entered into an agreement with Merrill Lynch that guarantees the project an effective yield of 6.22% on these payments between 2008 and 2026. The amounts invested and earned through the Merrill Lynch agreement will be used to redeem bonds outstanding for this project in 2026.

Thirdly, additional bonds were issued for St. Lucie Unit 2’s capital projects, as initiated by the unit’s primary owner and operator, FPL. The improvements resulted in upgrades to St. Lucie Unit 2 that increased its power output from the original 781 MW in 1983 to its current rating of 984 MW, a 26% increase.

Finally, the operation of a nuclear generating unit requires an operating license from the Nuclear Regulatory Commission (NRC). FPL applied for and received approval from the NRC to extend the operating license period for St. Lucie Unit 2 from the original end date in 2023 to 2043. Based on FMPA’s current St. Lucie Project debt structure, all bonds will be paid off by October 2026. FPL has indicated that it currently plans to operate Unit 2 into the extended license period and that FPL will periodically review the prudence and economics of continued operation. For the fiscal year ended Sept. 30, 2013, the average cost of power from FMPA’s St. Lucie Project was a competitive price of $70.10 per 1,000 kilowatt hours.

Each of FMPA projects was 100% financed, in accordance with the wishes of project participants. The projects were all established with level-amortizing debt service. Like a fixed-rate mortgage, principal payments are small in the early years relative to straight-line depreciation. This process reverses in the later years when principal payments exceed depreciation.

12. Do FMPA’s Project participants have any equity in the Projects?

Upon termination of a project and after all project liabilities have been satisfied, the remaining funds of the project are “divided among and distributed” to the project participants in proportion to their power entitlement shares. This is provided for in the Interlocal agreement creating FMPA and in the project contracts.

13. Are there any independent, third party assessments of the financial condition of these Projects?

Yes, there are several independent assessments. Because FMPA’s power projects issue debt to finance the capital expenditures and because FMPA wants the lowest interest rate possible on that debt, FMPA submits each of its projects to review by two independent credit rating agencies. FMPA has obtained ratings from two of the largest such entities in the world: Moody’s Investors Service and Fitch Ratings. Each of the projects is highly rated: Stanton and Stanton II have an A1 rating and St. Lucie has a slightly lower A2 rating because it is a nuclear unit. Investment grade ratings are BBB or higher.

In addition, FMPA is required by Florida law and FMPA’s Bylaws to subject its financial statements to an independent audit. FMPA’s members select the auditor, which currently is Purvis, Gray & Co. Purvis Gray provides multiple reports, as required, and meets with FMPA’s Audit and Risk Oversight Committee, an advisory committee to the FMPA Board of Directors, with no FMPA staff present to discuss any matters the FMPA members desire. Board members are welcome to attend this meeting and ask any questions of their auditors.

As to the use of bonds and the proper use and management of bond proceeds, several other parties are involved that provide checks and balances. For example, bonds cannot be sold unless appropriately authorized by FMPA’s Board of Directors for these projects. Bond and Tax Counsel, as well as FMPA’s General Counsel all must opine to certain issues about the bond issuance. FMPA’s Financial Advisor, currently Dunlap and Associates, which is also Vero Beach’s financial advisor, also must opine that the pricing of the bonds is fair and appropriate. An independent bond trustee, who represents bondholders, is also active in the supervision of the bond proceeds until the bonds are paid off. Most of the money from the bond issue goes to the Trustee, and only upon presentation to the Trustee of required documentation will funds be released to pay for the cost of capital expenditures consistent with the Board of Director’s authorization. Municipal bond issuers, including FMPA, file and update disclosure documents with the Municipal Securities Rulemaking Board’s EMMA service. FMPA has never missed a bond payment and has always complied with all debt covenants and requirements.

The Internal Revenue Service also provides oversight through its random audit function of selected bond offerings.

Last but not least, many of the bondholders, themselves, are sophisticated investors (e.g., mutual funds, insurance companies, banks, trust departments, etc.) that periodically evaluate their bond purchases and monitor the security of their investment.