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Upper Merion Area School DistrictCash Settled Forward Swaps

PFM Swap Advisors LLCPFM Financial Advisors LLC

213 Market StreetHarrisburg, PA 17101

717-232-2723pfm.com

Jeff Pearsall, Managing Director, PFM Swap Advisors LLC

August 6, 2018 Meeting

(Document as of August 1, 2018)

Brad Remig, Managing Director, PFM Financial Advisors LLC

George Hu, Senior Managing Consultant, PFM Swap Advisors LLC

John Frey, Director, PFM Financial Advisors LLC

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Estimated Financing Plan

Spring/Summer 2019 $ 10.0 Million

June 2020 $ 50.0 Million

June 2021 $ 50.0 Million

Spring 2022 $ 23.5 Million

Total Max Par Amount $133.5 Million

Two cash settled hedgeson par of $50 Million each(8/6/2018 Swap Resolution)

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Interest Rates andBloomberg Survey on 10-year US Treasury & Fed Funds

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10-Year US Treasury and 15-Year MMD Index (AAA Bond Rates)(1/4/1993 - 7/20/2018)

10-Year US Treasury

15-Year MMD Index

%

Bloomberg Survey Forecast July 12-17, 2018 Survey*Median Forecasts

10-yr US Treasury

Fed Funds (Upper Range)

Rate as of 7/12/2018 2.85% 2.00%

3rd Qtr 3.03% 2.25%4th Qtr 3.15% 2.50%1st Qtr 3.25% 2.75%2nd Qtr 3.30% 3.00%3rd Qtr 3.37% 3.00%4th Qtr 3.45% 3.00%1st Qtr 3.48% 3.00%2nd Qtr 3.48% 3.25%3rd Qtr 3.48% 3.25%4th Qtr 3.55% 3.25%

2019

2020

*Consists of economic forecasts and projections from approximately 30-60 investment banking firms and financial institutions.

2018

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Overview of a Cash Settled Forward Swap

A cash settled forward swap is a transaction that issuers can consider to hedge against rising interest rates on a future issuance of bonds

• Issuers need to consider the trade-off between hedging interest rate risk with other risks inherent to the swap transaction

“Forward”: Locks-in a swap rate to start in the future at the effective date (June 2020 & June 2021) to correspond with the expected future issuance of bonds

“Cash Settled”: Requires the issuer to “settle” the swap in the future when debt is issued or before

• Mandatory Termination on the swap effective date (June 2020 & June 2021)

• The swap is terminated and the Issuer either owes a payment or receives a payment depending on the movement of swap rates

• Therefore, the issuer is only in the swap for that 2-3 year period until the effective date

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Timeline of a Cash Settled Forward Swap

1. Trade Date (now)

●Execute swap

●Lock-in swap rate

●No payments exchanged

2. Forward Period

●Issuer can decide to terminate and cash settle during forward period

3. Effective Date (6/2020 & 6/2021)

●Swap terminates

●Issue fixed rate bonds to fund project

●Swap termination payment is made or received by Issuer

●Intention is that the receipt (or payment) is designed to offset higher (or lower) borrowing costs (subject to basis risk)

1 2 3

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Concept of Hedge & Termination Payment at Effective Date (6/2020 & 6/2021) If swap rates are higher than the executed swap rate:

• District receives a termination payment from RBC

• That receipt is used by District to reduce the amount of bonds issued to help offset the higher bond rates*

If swap rates are lower than the executed swap rate:

• District owes a termination payment to RBC

• That payment is made by District cash (therefore reducing the cash amount reserved for the project) and causing more bonds to be issued to fund the project, or by a non-PA Debt Act financing.

• District would then issue fixed rate bonds at lower bond rates*

In both instances, the District should expect to achieve similar all-in borrowing costs that were available at the Trade Date.*

LIBOR = London Interbank Offered Rate (taxable index)MMD Index = Municipal Market Data index for tax-exempt municipal bonds

* There is no assurance that swap rates will move in lock-step with the Issuer’s actual borrowing costs (Basis Risk). Historically, LIBOR Swap Rates and MMD Index have been correlated but there are times when markets move independently (example Fall 2008).

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Basis Risk - Correlation of MMD Index and LIBOR Swap Rates

LIBORSwap and bond rates have historically been correlated

Basis Risk: swap and bond rates do not move in lock-step with each other

Credit Spreads - Changes in District’s spreads to MMD Index are not hedged

Tax Risk – a form of Basis Risk - if value of tax-exemption is reduced, then the tax-exempt MMD Index and rates that the District would issue on its bonds may increase relative to taxable LIBOR swap rates

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1/3/2005 1/3/2006 1/3/2007 1/3/2008 1/3/2009 1/3/2010 1/3/2011 1/3/2012 1/3/2013 1/3/2014 1/3/2015 1/3/2016 1/3/2017 1/3/2018

15-Year MMD Index (Bond Rates) and 80% of 15-Year LIBOR (Swap Rates)(1/3/2005 - 7/24/2018)

Spread

15-Year MMD Index80% of 15-Year LIBOR

Average Spread

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80% LIBOR Swap Curve Below is a chart of 80% of LIBOR swap rates for the last day of June each year for the last three years

• Short term rates have risen more significantly than long term rates since the Fed began tightening in late 2015

The spread between 2 and 10 year swap rates has decreased significantly:

• 6/29/2018 spread: 0.11%

• 6/30/2017 spread: 0.53%

• 6/30/2016 spread: 0.50%

The result has been a flattening of the yield curve and lower forward premiums for cash settle swaps

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Per

cent

Years

80% LIBOR Curve

6/29/2018

6/30/2017

6/30/2016

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Project Risk

District should have a high level of certainty that the project will proceed as scheduled since a swap termination payment or receipt will occur whether or not the related bond issue closes.

If future District Boards decide to downsize, delay or cancel the capital project, District would still have the swaps that have a mandatory termination.

• If swap rates are lower than the executed swap rate:

District would owe a termination payment and would not have the offsetting interest cost savings since there would be no bonds issued (or fewer bonds issued in the case of a downsized project).

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Counterparty Spread & Professional Fees(On two $50,000,000 swaps for total of $100,000,000)

The current estimate for the Counterparty spread and professional fees for the execution of the two swaps is shown below:

• Note: The Counterparty will make an upfront payment to the District to cover the legal and advisory fees (since the fees are built into the executed swap rate).

2020 Swap 2021 Swap TotalPV of 0.01% is $86,535 PV of 0.01% is $81,071 PV of 0.01% is $167,606

$ % $ % $Royal Bank of Canada Swap Counterparty* $411,041 0.0475% $385,087 0.0475% $796,129

PFM Swap Advisors LLC Swap Advisor** $45,000 0.0052% $45,000 0.0056% $90,000

PFM Financial Advisors LLC Financial Advisor $25,000 0.0029% $25,000 0.0031% $50,000

Fox Rothschild LLP Legal Counsel $30,000 0.0035% $12,500 0.0015% $42,500

Total $511,041 0.0591% $467,587 0.0577% $978,629

Firm Role

*The Counterparty charged a spread above the mid-market swap rate of 4.75 basis points. In the example above, the 2020 Swap has a present value of 1 basis point (0.01%) of approximately $86,535 therefore the Counterparty spread equates to $411,041 for the 2020 Swap.

**Swap Advisor fee includes monthly valuations on SwapViewer website. Additionally, at the time of termination, PFMSA will charge $10,000 per termination.

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Forward Premium and Counterparty Spread & Fees The executed swap rates would take into account:

• The current swap rate + forward premium to lock-in a rate 2-3 years from now + the counterparty spread & other professional fees

Flattening of the yield curve over the last year results in lower forward premiums

Current estimates :

Therefore, at the effective dates using figures above, swap rates would have to increase by approx. 0.07% or the District would owe a termination payment.

2020 Swap 2021 Swap

Notional Amount 50,000,000$ 50,000,000$

Effective Date 6/1/2020 6/1/2021Forward Premium (as of 7/23/18) 0.009% 0.008%

Approx. Counterparty Spread & Fees (from previous page) 0.059% 0.058%

Total Current Estimate (%) 0.068% 0.066%

Total Current Estimate ($) $588,923 $532,444

Combined ($) $1,121,367

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Swap Termination Tables – Indicative Termination Amounts As described previously, subject to basis risk,

• If LIBOR swap rates move higher, the District would receive a termination payment from the Counterparty and reduce the borrowing amount to hedge the increased bond rates.

• If LIBOR swap rates move lower, the District would pay a termination payment to the Counterparty from District cash previously planned for the project, or by a non-PA Debt Act financing, and issue more bonds but at lower bond rates.

Note: All amounts are for indication purposes only.

See next page for illustration of hedge* At 0% Change in Swap Rates, the termination amount is negative due to the following items that were incurred at time of swap pricing and included in the executed swap rate: forward premium (for locking-in a future rate vs. a spot starting rate), Counterparty spread, and professional fees.

TERMINATION AMOUNT(Red)=District Pays, Black=District Receives

Change in Swap Rates

-1.50% -1.00% -0.50% 0.00% +0.50% +1.00% +1.50%

Termination Date

2020 Swap Notional

6/1/2020 $50,000,000 ($17,656,778) ($11,143,291) ($5,508,519) ($625,155) $3,614,807 $7,303,101 $10,517,730

Termination Date

2021 Swap Notional

6/1/2021 $50,000,000 ($16,806,462) ($10,637,956) ($5,268,034) ($585,576) $3,504,965 $7,084,285 $10,222,061

Combined $100,000,000 ($34,463,241) ($21,781,248) ($10,776,553) ($1,210,731) $7,119,772 $14,387,386 $20,739,791*

*

*

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Swap Termination & Illustration of $100,000,000 Hedge : ($50 Million to 6/1/20 & $50 Million to 6/1/21)

Columns 4-6:Assumes Lock-Step Movement in Bond and Swap Rates (Swap rates changed by 1.00% and Bond rates changed by 1.00%)

Also assumes both swaps are terminated at their Effective Dates with the same interest rate change on each date.

Note: For these purposes, assumes lock-step change in swap and bond rates (coupon and yield) and inclusive of approx. termination payments. Results will vary depending on market conditions and actual bond and coupon structuring at the time of issuance. A termination payment/receipt will be due regardless of bond closing. All rates and amounts are for indication purposes only.

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-1.00% 0.00% +1.00% -1.00% 0.00% +1.00%SD Pays SD Pays SD Receives

$21,781,248 $1,210,731 $14,387,386

Par*: $99,620,000 $100,000,000 $100,360,000 $119,310,000 $101,095,000 $87,260,000

3.35% 4.31% 5.27% 4.53% 4.39% 4.25%

Approx. Total Debt Service: $196,114,814 $221,595,344 $247,411,356 $234,957,276 $224,024,661 $215,038,390

* For comparison purposes, each scenario is sized to provide approx. $110,000,000 of proceedsNote: Assumes bond settlement and swap terminations on June 1, 2020 and June 1, 2021

FYE:6/30/2021 1,243,991 1,559,831 1,877,662 1,494,746 1,577,408 1,629,208 6/30/2022 3,240,293 4,063,683 4,892,264 3,882,600 4,108,422 4,252,351 6/30/2023 3,992,515 5,007,565 6,029,015 4,780,115 5,062,315 5,243,015 6/30/2024 3,992,415 5,007,365 6,028,715 4,780,015 5,062,115 5,242,715 6/30/2025 3,992,300 5,007,150 6,028,400 4,779,900 5,061,900 5,242,400 6/30/2026 3,992,000 5,006,750 6,027,900 4,779,600 5,061,500 5,241,900 6/30/2027 3,991,700 5,006,350 6,027,400 4,779,300 5,061,100 5,241,400 6/30/2028 3,991,400 5,005,950 6,026,900 4,779,000 5,060,700 5,240,900 6/30/2029 3,991,100 5,005,550 6,026,400 4,778,700 5,060,300 5,240,400 6/30/2030 3,990,800 5,005,150 6,025,900 4,778,400 5,059,900 5,239,900 6/30/2031 3,990,500 5,004,750 6,025,400 4,778,100 5,059,500 5,239,400 6/30/2032 3,990,200 5,004,350 6,024,900 4,777,800 5,059,100 5,238,900 6/30/2033 3,989,900 5,003,950 6,024,400 4,777,500 5,058,700 5,238,400 6/30/2034 3,989,600 5,003,550 6,023,900 4,777,200 5,058,300 5,237,900 6/30/2035 3,989,300 5,003,150 6,023,400 4,776,900 5,057,900 5,237,400 6/30/2036 3,989,000 5,002,750 6,022,900 4,776,600 5,057,500 5,236,900 6/30/2037 3,988,600 5,002,250 6,022,300 4,776,200 5,057,000 5,236,300 6/30/2038 3,988,200 5,001,750 6,021,700 4,775,800 5,056,500 5,235,700 6/30/2039 8,142,800 8,981,250 9,836,100 9,570,400 9,066,000 8,670,100 6/30/2040 10,876,200 11,536,750 12,216,600 13,048,200 11,670,000 10,608,400 6/30/2041 10,873,600 11,539,500 12,215,500 13,049,200 11,668,750 10,603,000 6/30/2042 10,879,800 11,535,250 12,216,300 13,046,600 11,665,500 10,602,800 6/30/2043 10,874,000 11,538,500 12,222,500 13,050,000 11,669,500 10,606,300 6/30/2044 10,876,200 11,538,000 12,217,300 13,053,600 11,664,500 10,607,000 6/30/2045 10,870,600 11,538,000 12,219,800 13,056,800 11,665,000 10,603,700 6/30/2046 10,877,000 11,537,500 12,217,900 13,054,000 11,664,750 10,605,200 6/30/2047 10,879,400 11,535,500 12,220,100 13,049,800 11,662,750 10,604,700 6/30/2048 10,877,400 11,536,000 12,214,300 13,048,600 11,663,000 10,605,700 6/30/2049 10,875,600 11,537,750 12,219,000 13,049,600 11,659,250 10,606,400 6/30/2050 10,878,400 11,539,500 12,216,500 13,052,000 11,665,500 10,600,000

TOTAL: 196,114,814 221,595,344 247,411,356 234,957,276 224,024,661 215,038,390

TIC (True Interest Cost):

Debt Service: Debt Service:

Bonds OnlyNo Swaps Bonds With Swaps

Change in Rates: Change in Bond Rates Change in Bond & Swap Rates

Swap Termination Amount:

$0 $0 $0

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Other Considerations prior to cash settlement:

Termination, Basis, Tax and Project Risks -

Previously discussed on prior pages. Additionally, the Counterparty could terminate the swaps if the District’s credit rating falls below a threshold as determined in the final swap documents (generally threshold is triggered if downgraded to Baa1 or below). The District is currently rated Aa1.

Market Access Risk

Risk that certain market conditions or disruptions could prevent the District from accessing the bond market and/or securing acceptable financing terms.

Counterparty Risk

Risk that the Counterparty (Royal Bank of Canada) cannot make the termination payment that may be due to the District. The Counterparty is rated Aa2/AA-/AA from Moody’s, S&P, and Fitch respectively.

Legislative Risk

Risk that future Pennsylvania legislation impacts the District’s ability to issue General Obligation Bonds for the Project or amends legislation that impacts pre-existing swaps.

Rating Agency discussion / questions Board education for new members that may come during swap term (2018-2021) Disclosure in District’s annual Audit of the swaps and their market value (2018-2021)

Other Risks

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Questions?

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DisclosuresA B O U T P F M

PFM is the marketing name for a group of affiliated companies providing a range of services. All services are provided through

separate agreements with each company. This material is for general information purposes only and is not intended to provide

specific advice or a specific recommendation.

Financial advisory services are provided by PFM Financial Advisors LLC and Public Financial Management, Inc. Both are registered

municipal advisors with the Securities and Exchange Commission (SEC) and the Municipal Securities Rulemaking Board (MSRB)

under the Dodd-Frank Act of 2010. Investment advisory services are provided by PFM Asset Management LLC which is registered

with the SEC under the Investment Advisers Act of 1940. Swap advisory services are provided by PFM Swap Advisors LLC which is

registered as a municipal advisor with both the MSRB and SEC under the Dodd-Frank Act of 2010, and as a commodity trading

advisor with the Commodity Futures Trading Commission. Additional applicable regulatory information is available upon request.

Consulting services are provided through PFM Group Consulting LLC. Institutional purchasing card services are provided through

PFM Financial Services LLC. PFM’s financial modelling platform for strategic forecasting is provided through PFM Solutions LLC.

For more information regarding PFM’s services or entities, please visit www.pfm.com.

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Projections and Estimates – All statements as to what will or may happen under certain circumstances are based on

assumptions, some but not all of which are noted in the presentation. Assumptions may or may not be proven correct as actual

events occur, and results will depend upon events outside of your or our control. Changes in assumptions may have a material

impact on results. Estimates and projections represent our judgment as of this date and are subject to change without notice.

There can be no assurance that estimated returns and results will not be materially different in the context of an actual transaction

over time. Past performance does not necessarily reflect and is not a guarantee of future results.

Terms of Hypothetical Transaction – The terms, structures and prices shown in this presentation are indicative only and do not

represent an offer to engage in a transaction. Should you decide to enter into a transaction of the kind presented here, the final

terms would be set forth in legal documentation and the terms, pricing and structure would be determined based on prevailing

conditions at the time.

General Disclaimer – PFM disclaims all liability relating to the information contained in this presentation. Opinions expressed in

the presentation are current opinions only and are subject to change without notice.

The foregoing presentation must be read together with the oral presentation that accompanied it. The presentation is a preliminary

discussion of a potential transaction and is subject to the following limitations:

S t a t e m e n t o n P r e s e n t a t i o n

Disclosures

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Thank You