Utility Investment and Debt and Interest Rate Risk Management Policies

American Municipal Power Inc.American Municipal Power, Inc.

Utility Investment and Debt and Interest Rate Risk Management Policies

Robert W. Trippe, Senior Vice President and Chief Financial [email protected]

September 2009

American Municipal Power, Inc.

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AMP Background Information


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AMP History

On July 1, 2009 AMP-Ohio changed its name to American Municipal Power Inc.

AMP is a tax-exempt membership corporation originally organized in Ohio in 1971

AMP manages the power supply arrangements for 128 public power systems in Ohio, Michigan, Pennsylvania, Kentucky, West Virginia and Virginia which currently have a combined peak load of approximately 3500 MW

AMP is a private corporation (not a joint action agency) which owns and operates electric facilities or, alternatively, provides for the generation, transmission and distribution of electric power to its members

AMP is exempt from federal income tax under IRC Sections 501(c)(12) and has received IRS private letter rulings allowing it to issue tax-exempt debt on behalf of its members


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AMP Membership


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AMP Corporate Governance

AMP is owned and governed by its 128 Members in 6 contiguous states Ohio – 82 members

Michigan - 7 members

Pennsylvania – 29 members

Virginia – 5 members

West Virginia – 2 members

Kentucky – 3 members

Board of Trustees currently consists of 16 community representatives Eight Trustees are elected by the members within their own service area

Eight Trustees are elected at large by all of the AMP members

Trustees serve for three year staggered terms

Each Trustee community appoints its representative

Board of Trustee changes approved at AMP’s June 2009 meeting The Board will expand from 16 to 19 members in October 2009 at the AMP Annual Conference

The Board will include (based on certain formulae) representatives from Michigan, Pennsylvania and Virginia


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Marc

AMP Financial Monitoring Program

AMP has instituted a Member Credit Scoring System Used to monitor existing members and for acceptance in generation projects

Used as criteria for review and acceptance of new members

Credit scores are completed annually upon the release of the member’s audited financials

A team of four individuals is assigned to monitor and assist members Conducts at least six meetings annually throughout the AMP membership

Provides updates on finance and accounting issues

Supplies updated information on AMP projects for the benefit of participating members

Assists in preparation of rating agency and investor presentations

Team oversight responsibilities Compiles and reviews audit reports and interim financial statements

Monitors continuing disclosure compliance

Monitors loan agreements and bond issue covenants compliance

Reviews internal controls of Members

Monitor electronic media for information and data related to AMP and its members, counterparties, and vendors


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Marc

AMP Financial Monitoring Program (continued)

Team Consulting and Advisory Services Assistance with accounting issues

Development of capitalization and investment policies

Assist in review of cost of service studies completed by third party vendors hired by members

Collection of member load, economic and demographic information for disclosure purposes

Liaison with the Auditor of State


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• Increase in Membership and subsequent increase in load=increase in power supply requirements

• Wholesale power market is inconsistent, bi-lateral market challenging

• AMP currently is approximately 68% Power Market Dependent-about 13% after Capital Program is complete

• Members are asking for stability and price certainty

• Independent consulting firm models long-term power requirements for each Member

Member Energy Requirements


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• 1999 AMP Builds Run of the River Hydro Generation Facility– Member participants own a 42 MW hydroelectric generating facility, transmission

line and backup generation in Belleville, Ohio

• 2001 AMP Builds Distributive Generation– Owns 138.65 MW of gas and diesel generation

• 2001-AMP Board Executive Management plans begin for building coal-fired power plant-permits acquired construction expected to begin fourth quarter 2009 or first quarter 2010

• 2004 AMP builds only commercial wind turbine farm in state of Ohio– Owns four 1.8 MW wind turbines located in Bowling Green, Ohio.– In July 2004, AMP entered into a private placement arrangement of the payment

obligations of the participants to fund the project.

Generation Projects


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Generation Projects (continued)• 2007 AMP joins Prairie State Energy Campus development-AMP acquired a 23.26%

undivided ownership interest in the Prairie State Energy Campus, a planned 1,600 MW coal fired power plant and associated facilities in southwest Illinois.

– Between July 2008 and March 2009, AMP has issued $927,220,000 in long term financing.– The 68 Participating members have entered into “take or pay” power sales contracts to

secure the debt. Also secured by a rate covenant and debt service reserve fund requirements.

• 2007 AMP acquires Hydro licenses from FERC for three currently existing dams on the Ohio River-

– Issued $350 million Bond Anticipation Notes (BANs) April 2009– The Hydro Phase I projects consist of three hydroelectric generation facilities located on

the Ohio River with generating capacity of approximately 208 MW.– In April 2009, AMP issued a $350,000,000 Revenue Bond Anticipation Note.– BAN proceeds to finance a portion of its capital expenditures, costs and expenses

associated with the acquisition, construction and permitting of the Hydro Projects.– The 79 Participating members have entered into “take or pay” power sales contracts to

secure the debt. Also secured by a rate covenant and debt service reserve fund requirements– Ground broken August 2009


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Capital Projects Summary

Total EstimatedExpenditures

($000) (a)

Prairie State Project 1,321,543$

Hydro Phase 1 1,423,022$ Includes: Cannelton

SmithlandWillow Island

Meldahl Hydro 549,464$

AMP Generating Station 3,940,080$

Total 7,234,109$

(a) Includes capitalized interest and financing costs


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• Significant Capital Plan Necessitated changes in AMP Financial Requirements, Operating Procedures and Policies

– Need for liquidity-$550 million Line of Credit (LOC) provided by syndicate of 10 banks led by JP Morgan Chase (used for working capital, credit support, and interim project financing not eligible for tax-exempt financing)

– Need for lower cost borrowing options-$450 million Tax-exempt Commercial Paper (TECP) Program secured under the Bank LOC (used for interim, tax-exempt eligible project financing prior to the issuance of permanent financing)

– AMP Board of Trustees adopts Derivative Risk Management Policy– AMP Creates Treasury and Cash Management Department– AMP Board of Trustees adopted Investment Policy to facilitate

investment of operating cash and cash from capital program bond and note proceeds

– AMP adopts Debt and Interest Rate Risk Management Policy


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• AMP Adopted Investment policies for each entity owned or managed

• Investment Policy Details Include– Authorization– Investment Philosophy– Investment Objectives– Authorized Investments– Transaction procedures– Diversification– Prohibited Investments– Monitoring and Adjusting Portfolio– Investment of Bond Proceeds– Safekeeping and Custody

Investment Policies


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• Derivatives Risk Management Policy Includes:– Authority of AMP to enter into interest rate derivative transactions– Purpose of using derivatives– Guidelines for interest rate derivative transactions– Basis of award in competitive bid process if utilized– Management of derivative transaction risk– Counterparty approval guidelines– Form of derivative transactions and other documentation– Reporting requirements to AMP Board of Trustees– Derivatives Checklist

Derivatives Risk Management Policy


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Debt and Interest Rate Risk Management Policy

• Provides a policy framework for structuring, issuance, management, ongoing evaluation, and reporting on all debt obligations

• Formalized existing practices and procedures

• Considered a living document, to be reviewed, revised and adapted as deemed necessary to reflect changes in financial industry best practices


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Debt and Interest Rate Risk Management Policy (continued)

• Debt and Interest Rate Risk Management Policy Includes:– Goals and Objectives– Considerations for Debt Issuance

• Authorization and Approval• Debt Limitations• Funding of Capital Projects• Rating/Credit Objectives

– Debt Management• Type of Debt-Fixed or Variable• Debt Structuring considerations-e.g. final maturity, debt repayment, payment

structure, redemption provisions, etc.• Method of Sale• Refundings and Restructuring• Investment of Bond Proceeds


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Debt and Interest Rate Risk Management Policy (continued)

– Variable Rate Exposure and Liquidity• Rationale for Use of Variable Rate Debt• Variable Rate exposure limitations• Liquidity facilities

– Member Project Participation– General Provisions

• Asset/Liability Management• Budgeting Methodology• Continuing Disclosure• Arbitrage Compliance• Policy Review and Revision


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Summary

• Adoption of Investment and Debt Management Policies places by AMP Board of Trustees serves as a guide for common sense objectives and sound business operating procedures

• Protects investors as well as Management and Governance Boards


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Jolene

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Utility Investment and Debt and Interest Rate Risk Management Policies