Oglethorpe Power, Ga., terminates swaps agreement with AIG on $322 million of pollution bonds

By Angela McDaniels

Tacoma, Wash., March 13 - Oglethorpe Power Corp. in Tucker, Ga., said it terminated the interest rate swaps it has with AIG Financial Products Corp. for $200 million of variable-rate pollution control bonds issued in November 1993 and $122 million of variable-rate pollution control bonds issued in December 1994.

The power generation and transmission company notified AIG Financial Products of the termination on March 7, which accelerated its financial obligation.

According to a company news release, had Oglethorpe's liability for termination payments under both swap arrangements been due on Dec. 31, it would have owed roughly $33 million. Oglethorpe expects to satisfy its financial obligation to AIG Financial Products later this month.

The two interest rate swap arrangements were in place as swap counterparty and were designed to create a contractual fixed rate of interest on the bonds, the company said. Oglethorpe is obligated to pay the bonds' variable interest rate, but the swap arrangements provided a mechanism for Oglethorpe to achieve a contractual fixed rate that was lower than it would have obtained had it issued fixed-rate bonds at that time.

In February, Oglethorpe received notice that AIG Financial Products would begin paying an alternative variable rate based on the Securities Industry and Financial Markets Association municipal swap index rather than the variable rate accruing on the bonds. Oglethorpe said this significantly increased its all-in cost under the swap arrangements.

AIG Financial Products' election to use the index triggered options for Oglethorpe to terminate the swaps.

Oglethorpe also has two swaps in place with JPMorgan Chase Bank as swap counterparty that became effective August 2006. These swaps use as notional principal a portion of the pollution control bonds and were designed to convert the variable rate of interest Oglethorpe receives under the swaps with AIG Financial Products to a longer-term contractual variable rate of interest that Oglethorpe receives from JPMorgan, according to the release.

The termination payment for these swaps would have been $2.3 million on Dec. 31, and Oglethorpe expects to receive termination payments from JPMorgan later this month.

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