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HomeMy WebLinkAboutPurchase of the Electric Capability of the Snettisham Hydroelectric Project 1998ALASKA ELECTRIC LIGHT AND POWER COMPANY May 8, 1998 Alaska Public Utilities Commission 1016 West 6th Avenue, Suite 400 Anchorage, Alaska 99501 (907) 780-2222 FAX (907) 463-3304 5601 Tonsgard Court, Juneau. AK 9980 1-7201 Alaska Industrial Development and Export Authority In The Matter Of The Agreement Between Alaska Electric Light And Power Company, Alaska Industrial Development & Export Authority, And Alaska Department Of Fish & Game For The Sale And Purchase Of The Electric Capability Of The Snettisham Hydroelectric Project (Docket U-97-245) Dear Commissioners : A. Introduction On December 23, 1997, Alaska Electric Light And Power Company ("AELP") filed with the Commission for approval a power sales agreement ("PSA") and related documents. The PSA is between AELP as the purchaser and the Alaska Industrial Development & Export Authority ("AIDEA") as the seller of the electric power capability of the Snettisham Hydroelectric Project ("Snettisham"). Snettisham, an existing generating facility that supplies most of Juneau's electric power, is scheduled to be transferred to AIDEA by the Federal government within the next few months. Timely Commission approval of the PSA is vital to this transaction. The transaction must be completed within a previously established deadline: August 20, 1998. The purpose of this communication is two-fold. First, we want to inform the Commission of changes to the PSA and other Snettisham documents that have been made since AELP's filing in December, as well as related developments. Second, we want to emphasize and explain the need for Commission approval of the PSA (and completion of related Commission actions) no later than June 1, 1998, if at all possible. Alaska Public Utilities Commission MayS, 1998 Pagel B. Changes To The PSA & Related Snettisham Documents There have been no changes to the basic structure of the Snettisham transaction since AELP's filing in December. The transaction may be summarized simply. The Federal government will divest itself of Snettisham, which AIDEA will purchase. AELP, which currently buys Snettisham power from the Federal government, will now buy Snettisham power from AIDEA. AIDEA will obtain the funds it needs to acquire Snettisham by issuing bonds. Payment of those bonds will be seemed by AELP 's payments under the PSA. To finance this arrangement, the character of AELP's payment obligations under the PSA must necessarily become •'take-or-pay" (in contrast to AELP's traditional "no power, no pay'' arrangement with the Federal government). AELP will also operate and maintain Snettisham. Given AELP's take-or-pay obligations and AELP's operation and maintenance role, AIDEA will serve largely as an intermediary for fmancing purposes only. Consequently, AIDEA may eventually transfer ownership of Snettisham and the PSA to a corporate affiliate of AELP. Under that scenario, AELP's corporate affiliate would own Snettisham and become the seller of power to AELP under the PSA. As AELP explained in its December 23 filing with the Commission, the underlying reason for this transaction is to take advantage of an opportunity to secure Snettisham and its apparent long-term cost benefits for AELP, its customers, the Juneau area, and Alaska. Under continued Federal ownership of the project, there would be no assurance of long-term cost benefits from the project --particularly in light of the submarine cable problems discussed below. The risks and uncertainties of not acting appear to AELP to be much greater than any risks and uncertainties of proceeding with this transaction. Since December, AIDEA and AELP have worked closely with AIDEA's bond underwriters and counsel for the underwriters in order to prepare for the actual financing of this transaction. This work has included efforts to anticipate the requirements and expectations of bond rating agencies. Primarily for that reason, three significant (and many smaller) refinements have been made to the PSA and related documents that AELP filed with the Commission in December. None of these refinements changes the basic transaction as described above. Instead, each is designed to make the transaction easier and/or less expensive to finance. The three significant changes in the PSA and related documents since December are these: • AELP's annual payments under the PSA and the Bond Resolution may now be set to meet a "debt service coverage" ratio specified in the Bond Alaska Public Utilities Commission MayS, 1998 Page3 Resolution. That is, the monthly debt service payment amount may exceed one hundred percent of the monthly debt service actually due on the bonds, if this proves necessary or useful for financing purposes. This change is not intended to increase AELP's annual debt service payment obligations (any unused excess payment would be returned to AELP at each year-end). Instead, it is intended to make AIDEA's bonds more readily marketable at favorable interest rates. It may be possible to structure the use of bond proceeds and the schedule of AELP 's actual payments to minimize any potential impact this debt service coverage requirement might otherwise have on AELP' s annual revenue requirement and retail rates. The amount of the debt service coverage requirement, if any, and the extent to which its effects can be minimized will not be known until preparations for the actual bond sale are more advanced, however. • The underwriters and their counsel have advised AIDEA and AELP that, in order for AIDEA's bonds to be marketable, only a "bankruptcy- remote" corporate affiliate of AELP, and not AELP itself, should be able to acquire ownership of Snettisham from AIDEA at any time when AIDEA's bonds (or any "Parity Obligations" that an entity other than AIDEA might issue for Snettisham purposes) remain outstanding. Under this concept, AELP would not own Snettisham but instead would continue to buy power under the PSA during such time as AIDEA's bonds remain outstanding. AIDEA would transfer the PSA to AELP's corporate affiliate (at the affiliate's option), along with ownership of Snettisham itself. This separation of Snettisham from AELP's other assets, while AIDEA's bonds remain outstanding, is felt necessary to protect the bondholders in the event of any AELP bankruptcy. Accordingly, the PSA and Option Agreement have been revised to eliminate any possibility of AELP itself acquiring Snettisham from AIDEA at any time when AIDEA's bonds (or any Parity Obligations) remain outstanding. • Similarly, the underwriters have advised that (1) the AELP corporate affiliate that might one day own Snettisham needs to exist before this transaction closes, and (2) a "Project Sale Agreemenf' between AIDEA and that corporate affiliate --not just an Option Agreement --must also exist before the transaction closes (even though the actual transfer of Snettisham by AIDEA to the corporate affiliate is not imminent and in fact may never occur). For these reasons, a Project Sale Agreement has been drafted for potential use at some later time, and the previous Alaska Public Utilities Commission MayS, 1998 Page4 Option Agreement (Exhibit D to the PSA) has been changed accordingly. The corporate affiliate, Snettisham Electric Company ("SEC"), will be formed before the closing but will have no active role unless and wttil AIDEA transfers Snettisham and the PSA to SEC. 1 These and many other small but primarily technical changes and improvements to the PSA and related documents previously submitted to the Commission in AELP 's December 23 filing are indicated in the "black:lined" versions of the revised PSA and related documents. Those "blacklined" documents will be submitted to the Commission no later than Thursday, May 14. The documents are: • The PSA (including Exhibit D, the Option Agreement) • The Bond Resolution • The O&M Agreement • The Project Sale Agreement (new) Of these documents, only the PSA requires Commission approval. As in our December filing, the other documents will be submitted for the Commission's information and to provide context for review and approval of the PSA. AELP would be pleased to answer questions from the Commission or the Commission Staff regarding these documents. Two important additional points are worth emphasizing here and again below. First, in order for the transaction to close, the Commission must also 1 Technically speaking, AELP erred in its December 23 filing to the extent AELP suggested that an option to acquire Snettisham from AIDEA cannot be exercised without advance Commission approval. The Commission does not review and approve acquisitions of generating projects in advance. However, the Commission would have control over any such transaction by other means. Under existing law, for example, SEC could not assume AIDEA's role as the seller of power to AELP under the PSA without some form of Commission action (e.g., certification of SEC as a utility, or exemption from the certification requirement). It would be premature to ask the Commission for any such action at this time. First. it is not possible to know whether AIDEA will ever attempt to transfer the project to SEC. Second, if AIDEA's bonds are no longer outstanding when the transfer occurs, then the transfer could be made to AELP directly, and SEC would vanish. (SEC exists and would be involved primarily for the protection of the bondholders while AIDEA's Snettisham bonds remain outstanding; SEC is also intended to avoid Snettisham being treated as "after-acquired property" for pmposes of AELP's own bond indenture at any time when Snettisham bonds are outstanding and secured, even remotely, by the project.) Third, even if AIDEA attempts a transfer to SEC at some future time, many other steps would need to be taken in order for that transfer to be effective (e.g., SEC may require a license for the project from the Federal Energy Regulatory Commission). It makes sense to deal with those issues when and if they ever arise. Alaska Public Utilities Commission May8,1998 PageS approve, in addition to the PSA, the "special contract'' AELP has filed to govern the sale of electric power to the Alaska Department of Fish & Game's hatchery at Snettisham and the associated amendment to AELP's certificate. Second, the Commission must also act (in a companion docket established for this pwpose) to allow AIDEA to sell power to AELP. C. Related Developments Financing matters, as well as the City and Borough of Juneau's support for this transaction, have both prompted other and related developments that should be brought to the Commission's attention. 1. Rating agency review. The next stages of preparing for the financing of this transaction could require further changes in the PSA and, more probably, in the related documents. For example, the rating agencies have not yet reviewed the final versions of these documents (and will not, until the Commission approves the PSA). Although every reasonable effort has been made to anticipate rating agency concerns and requirements, the rating agencies may feel that additional clarifications or bondholder protections are needed. AELP will advise the Commission of any rating agency-driven changes to the PSA that may be needed after Commission approval of the PSA but prior to closing. 2. Other changes to meet fmancing and/or rate constraints. In addition to changes the rating agencies may want or require, there could conceivably be other financing-driven or rate-driven changes to the PSA and related documents before closing. For example, AIDEA's authority to incur debt for all pwposes related to this transaction is limited to $100 million in total. Total financing needs, including those related to Snettisham' s submarine cables, could possibly exceed that limit, in which case some provision would need to be made for additional bond proceeds, which could increase annual debt service slightly b . 2 a ove present estnnates. At the same time, there are limits on the amount of annual Snettisham- related debt service that AELP can obligate itself to pay without requiring previously unanticipated increases in retail rates (i.e., rate increases for reasons 2 Contrary to AELP's expectation in its December 23 filing (at page 3), the relationship of relevant interest rates is now such that the price "floor" for this purchase is now in effect. This means that if long term interest rates for the transaction go up, annual debt service expense will also increase; there will be no offsetting reduction in the purchase price. David Germer From: Sent: To: Subject: Keith Laufer Friday, May 08, 1998 8:50 AM David Germer RE: Revised APUC letter Here are some initial comments: 1. At page 4 and on the footnote on the page the letter suggest that the only reason for that an affiliate would be required to purchase and not AELP is that as long as AIDEA bonds are outstanding, this is necessary to protect the bondholders. While this is correct under our power sales agreement, it may be that if AELP were to purchase it may still need to use the affiliate device because of the requirments under its existing bond indebture. I'm believe the languge should be toned down so that AELP doesn't get cross wise with statments it made to the commission if it later determines that an affiliate should be used for the purchase despite the fact the AIDEA and parity bonds are paid off. 2. I'm not sure any change to the $100 million reference is warranted. We should talk about this. 3. On page 9 in a paranthetical it states that an emergency COPA will also protect AIDEA and its bondholders. In light of AIDEA's non-recourse postion in the filing I don't believe the reference is correct. Perhaps it should just say that the emergency COPA will also protect the bondholders. Also will it be ok to wait on the filing of the emergency COPA untill after the close? Wont the rating agencies and investors want to see that AELP has that ability at the time of the close? 4. Did we advise the commission as it suggest in footnote 3? 5. In light of our discussions with Rodney the assumption that the transaction can not proceed unless it closes by August 20 is not correct. The real drop dead date appears to be Sept. 30. I think the language on page 15 should be toned down somewhat. Why mention the assumption at all? If we end up having to extend for some reason this could come back to bite us. Overall! think this is a very good letter. Talk to you soon. -Original Message-- From: David Germer Sent: Friday, May 08, 1998 8:10AM To: Keith Laufer; Brian BJorkquist Subject: FW: Revised APUC letter Received the following draft letter to the APUC from Eric. Bill Corbus is asking for our comments and suggestions ASAP. Keith, there is some discussion on the $100 limit which may require some scrutiny. << File: redman.doc » --Original Message-- From: Redman, Eric [SMTP:ERedman@HEWM.COM) Sent: Thursday, May07, 199810:14 PM To: Bill Corbus; Dave Germer; Bob LeResche Subject: Revised APUC letter « File: 12MB01 !.doc » 1 Alaska Public Utilities Commission MayS, 1998 Page6 other than submarine cable repair and replacement, discussed below). As the Commission knows, a principle of this transaction from the outset has been to make it as "rate neutral" as reasonably possible for AELP's ratepayers in the circumstances. If problems arise in these areas, or in other financing-related or rate-related areas, then additional changes to the PSA and related documents might be needed even after the Commission has approved the PSA. AELP would inform the Commission of any such post-approval, pre-closing changes. 3. COPA matters. Similarly, it is important for the financing of this transaction, and for other reasons as well, that AELP and the Commission have a clear understanding of how AELP's Cost of Power Adjustment ("COPA") must henceforth operate --and, if necessary, be modified--given the impending change in Snettisham's ownership and the contractual basis under which AELP will now buy Snettisham power. The COPA should be considered under two separate circumstances: • As proposed in AELP's filing of December 23, 1997 (at page 9), AELP will initially have in effect a COP A that will collect or refund, as the case may be, any difference between the cost of Snettisham power under the AIDEA contract and the cost of such power (currently 3.47 cents per kilowatthour) under today's contract with the USDOE. This COPA will be an interim measure for use only until enough time has passed and experience has been gained under the AIDEA contract for AELP to file a new revenue requirement with the Commission, at which time the Commission may conduct a new AELP rate proceeding. An interim COPA is needed initially because of the many cost items that cannot yet be known with certainty or that will not be incurred immediately, e.g., the installation cost of additional submarine cables, debt service associated with that cost, the amount of additional Federal funding (if any) for submarine cable work, contributions to the R&R Fund (which begin in 1999), actual costs of insurance (which can only be estimated at this time), and actual O&M expenses (which may be in flux initially). Time will be needed to develop a representative Snettisham test year. To assist the Commission, however, an estimated computation for the Interim COP A, based on the best information currently available and covering two periods (September 1, 1998, through October 31, 1998, and November 1, 1998, through May 31, 1999) will be provided the Commission under separate cover on Monday, May 11. The actual Alaska Public Utilities Commission MayS, 1998 Page7 Interim COP A will be filed upon closing of the transaction. (Please note that in the Interim COP A the fuel costs of nonnal diesel generation are included in operating expenses.) • Second. AELP's payment obligation for Snettisham power will now be "take-or-pay" instead of "no power, no pay." This means AELP's Snettisham payment obligations will continue (and. with repairs, may actually increase) during an outage. An Emergency Clause in the COP A must therefore be available to ensure that, during any period when Snettisham power is unavailable, AELP' s rates reflect and recover both the on-going costs of Snettisham (including take-or-pay payment obligations) and the costs of diesel fuel and other sources of replacement power (net of any available debt service insurance proceeds, discussed below). This is necessary in order to finance the transaction. The bond underwriters state that AIDEA's bonds would otherwise be difficult or impossible to market. AELP already has, today, an Emergency Clause in its COPA (see AELP Tariff Sheet 172 (11/9/90)) that allows AELP to collect the additional costs of replacement power if Snettisham power is unavailable for fourteen (14) days or more. An Emergency Clause such as this in the COP A sends consumers the proper price signal to conserve power and non-renewable resources when hydropower is not available, and protects AELP (and. in the future, AIDEA's bondholders) against the consequences of the substantial cash drain and financing problems that could otherwise result, including under the Interim COP A alone. An estimated Emergency Clause calculation for the COP A will be submitted to the Commission under separate cover on Monday, May 11; the actual Emergency Clause will be included in the COP A that will be filed for effectiveness upon closing of the transaction. The essential feature of the new Emergency Clause of the COPA should be that it will allow AELP to collect, in total, AELP's Snettisham costs plus AELP's replacement power expense, less any applicable and available debt service payment insurance proceeds. AELP understands and expects that the Commission, in approving the PSA, will order AELP to file tariff sheets for the Interim COPA and Emergency COP A as described above. This entire transaction, not just the PSA and related documents, depends on ratemaking that fully recovers AELP's costs. This feature of the transaction is not a matter for separate consideration, but something that bond financing makes inherent in any Commission approval of AELP's take-or- Alaska Public Utilities Commission May8,1998 PageS pay payment commitment for Snettisham power. That take-or-~ay commitment is necessary in tum in order to secure AIDEA's Snettisham bonds. 4. Snettisham submarine cables As AELP advised the Commission in its December 23rd filing, the four oil- filled submarine cables under Taku Inlet are currently in a high risk condition. (It is necessary for three of the cables to be energized at any one time; the fourth, if serviceable, can be used as a spare.) We reported in December that one of the cables had a small leak, which the USDOE later attempted to repair by clamping. The success of that repair effort is not known: to test the repair, the cable would have to be energized again, but to energize it now may cause it to rupture, fail electrically, and spill at least some oil into the marine environment. The USDOE as a policy matter will not take this risk. In addition, another of the cables was recently found not to be properly buried in the inter-tidal area, and, in the exposed portion, to be missing completely its protective aluminum armor. The sole remaining protection for this energized cable is its soft lead sheath, wrapped in a thin layer of polyvinyl. The lead sheath serves to contain the oil, and is now all that protects the cable from failure. That lead sheath is currently exposed to potential damage from the combination of wave and current action, rocks, and/or debris. The missing aluminum covering also results in electrical circulating currents (caused by phase current imbalance) passing through the lead sheathing. AELP understands that this will ultimately cause the early electrical failure of this cable, even if the cable is not otherwise damaged physically. (The problems with this second cable have been brought to the attention ofUSDOE, but it is not yet known what if any response USDOE can or will make.) Of the four existing cables, currently only three can be energized prudently, and at least two are now known to be at risk of failure. This underscores the conclusion by AELP, AIDEA, and the bond underwriters that another four-cable crossing (with better materials and installation) must be completed as soon as 3 It is worth emphasizing here a point AELP has previously stressed: although AELP wants to be certain the Commission has focused on the take-or-pay nature of the PSA and its implications, it is also true that Snettisham is an existing project that has operated well for many years, and a project for which due diligence could be and was carried out at a time when the project was already complete and operational. The planned construction/installation of an additional set of submarine cables, the ability to repair overhead transmission relatively quicldy, as well as other possibilities-such as the potential for insurance to cover debt service payments during certain types and durations of outages -should further reduce any realistic real-world take-or-pay risks here. As noted in AELP's December 23 filing, there are also countervailing real-world risks to AELP and its ratepayers if this opportunity to acquire Snettisham from the Federal government is not taken. Alaska Public Utilities Commission MayS, 1998 Page9 reasonably possible in order to assure the integrity of the Snettisham power supply and the revenue stream needed to secure the bonds AIDEA will issue in order to acquire Snettisham. Without this action being taken, the underwriters believe the transaction could not be financed. To this end, AELP has agreed with AIDEA that AELP will commence and manage at this time, without further delay, the cable installation project. This may involve significant financial risk to AELP, but the alternatives are few or non- existent, and the project (which will take about a year to complete) should not wait. AELP believes it has the necessary technical and administrative expertise for this project, and AIDEA agrees. Requests for bid proposals for cable fabrication and installation will be mailed out today, May 8. Bids will be due on June 26. Raytheon Engineers and Constructors (who performed the due diligence survey of Snettisham for this transaction) now estimate that installation of an 86 MW capacity cable crossing is likely to cost some $17.3 million. The U.S. Government will contribute at least $2.5 million for the cable; additional Federal funding is currently being pursued. It may be late fall, at the earliest, before the prospects for such additional Federal funding are known. 5. Debt service payment insurance As AELP stated in its December filing, AELP intends to purchase insurance to cover certain debt service payments during any long-term outage that may result from failure of the submarine cables or other project components (not including the overhead transmission), if such insurance coverage is available and can be obtained at a reasonable cost. In June 1997, Willis Corroon Corporation of Seattle advised AELP and AIDEA that such insurance might be available at an annual premium cost of some $150,000. Coverage would be limited to debt service payments required to be made after Snettisham power has been unavailable for forty-five ( 45) days; i.e., there is no coverage for the first forty-five ( 45) days of any outage. Willis Corroon has recently updated its estimate of annual insurance premium expense to $170,000. Willis Corroon's opinion that such coverage might be available, as well as the estimates of annual insurance premium cost, do not take into account the recently discovered problems with the second cable, which Willis Corroon did not know about at the time. We do not yet know whether, in light of these problems, such insurance coverage will be available --either at all, or only at a very high premium -during the very high risk period (currently estimated at about one year) before the new cable crossing is completed. AELP will keep the Commission fully informed of such matters. Alaska Public Utilities Commission MayS, 1998 Page 10 6. Accounting treatment of take-or-pay PSA obligations AELP's accountants, Deloitte Touche LLP, have advised that the take-or- pay obligations of AELP under the PSA will have the effect, for accounting purposes, of requiring AELP to record on its balance sheet a liability and a corresponding asset of approximately $100 million, the likely amount of AIDEA's forthcoming bond sale. This should have no immediate or direct impact on AELP's financial well-being or ratemaking, but it is a matter AELP nonetheless wants to bring to the Commission's attention. 7. Federal income tax treatment of AELP's payments to AIDEA Deloitte Touche LLP has also recently advised AELP that, for Federal income tax purposes, the PSA will result in AELP being considered the "tax owner" of the Snettisham project. This means that AELP will not be able to deduct for Federal income tax purposes that portion of AELP's annual payments to AIDEA that correspond, for example, to repayments of principal on AIDEA's bonds or annual contributions to the R&R Fund. On the other hand, Snettisham will be considered an asset of AELP's for Federal income tax purposes, and as such will be depreciable. AELP will therefore have the cash flow benefit of tax deductions for depreciation. For Federal income tax purposes, the effect of these different deductability impacts on AELP is expected to be that, for some initial period (perhaps fifteen years), AELP will receive a net cash flow benefit, compared with deducting the entirety of its annual payments to AIDEA (which Federal tax law apparently will not allow). Over time, however, and given the level debt service repayment schedule for AIDEA's bonds, the (non-deductible) principal repayment portion of annual debt service will increase and the (deductible) interest payment portion will decline. Thus, at some point (perhaps at about year sixteen), AELP's initial cash flow benefit will become a cash flow burden, and thereafter remain a burden. AELP believes, and Deloitte Touche LLP concurs, that these cash flow impacts need not result in any change in AELP ratemaking at this time. For example, to the extent AELP receives the current cash flow benefit of tax deductions for depreciation, AELP must also book a corresponding deferred tax liability to reflect its future tax payment obligations; there is no overall change in AELP's total tax payments. The transitory cash flow impacts of these tax effects should be disregarded for ratemaking purposes at this time, i.e., they should not be reflected in the computation of the annual cost of Snettisham energy, which, for ratemaking purposes, should remain a purchased power expense. Alaska Public Utilities Commission May8.1998 Page 11 Within a relatively short period of time after this transaction closes, however, AELP will file a revenue requirement with the Commission, as noted above and as AELP advised the Commission in its December filing (at page 13). This will presumably result in a new AELP rate proceeding before the Commission. The ratemaking consequences of Snettisham-related tax impacts, if any, can and should be addressed in that rate case. (AELP may, of course, file a revenue requirement even earlier if circumstances warrant, including for reasons that may be unrelated to Snettisham.) 8. The City & Borough of Juneau The Assembly of the City & Borough of Juneau ("CBr') on March 16, 1998, unanimously approved a resolution supporting this transaction. That CBJ Assembly resolution was communicated directly to the Commission. Under State law, separate CBJ approval was needed in order for AIDEA to sell bonds to finance a project located within the CBJ. That approval was granted at the same March 16 meeting. In addition, however, and as noted in AELP's filing of December 23, the structure of the proposed Snettisham transaction also appears to AELP to be consistent with the CBJ Assembly's July 20, 1987, resolution on this matter. At the time the CBJ Assembly acted in March, the CBJ and AELP entered into an agreement. That CBJ-AELP agreement is being submitted· to the Commission for information as Attachment 1 to this letter, although the agreement is not part of the Snettisham transaction or its financing, and AELP believes the agreement does not require Commission approval. The CBJ-AELP agreement speaks for itself, but its key provisions may be summarized as follows: • AELP agrees to use available Snettisham power to meet loads within the CBJ so long as such loads continue to require power in this amount. • AELP agrees to seek Commission approval to continue treating AELP's annual costs of Snettisham power as "purchased power expense" for ratemaking purposes. • AELP agrees that if AELP or a corporate afiiliate, having acquired ownership of Snettisham, ever proposes to resell the project to an unaffiliated third party, then AELP will provide the CBJ a right of first refusal to purchase Snettisham at that time.4 4 The Commission has provided AELP with copies of correspondence in which one individual suggested that the CBJ should have an option to acquire Snettisham as part of this transaction. The CBJ did not Alaska Public Utilities Commission May 8, 1998 Page 12 D. Need For Commission Approval By June 1 This transaction will take place pursuant to a Federal statute and a Federal- State agreement, under which the existing deadline for closing is August 20, 1998. Snettisham's current owner, the Alaska Power Administration of the USDOE, will cease to exist within weeks after that date. We are proceeding on the assumption that this transaction may not be possible unless it closes before August 20, and that any extension of that date would, at a minimum, be very difficult to obtain. In AELP's December 23 filing with the Commission, AELP asked for Commission approval of the PSA (and related Commission action needed to effectuate this transaction) by no later than Aprill. That the PSA has not yet been approved has not yet prejudiced the transaction. Further delay, however, could prevent the transaction. Commission approval of the PSA (and related Commission actions) do not represent the end of the process needed for this particular transaction. Rather, certain actions must await and come after Commission approval. These include many specific steps in the financing process. That process is described in Attachment 2 to this letter. If Commission approval of the PSA is not obtained by June 1, AELP and AIDEA have concerns that it may be very difficult if not impossible to complete all the necessary financing and related steps and close the transaction prior to August 20. In addition, even completing the process just in time to "beat'' the deadline would not be optimal. Having more time available would be better. The earlier the transaction is ready to be completed, the better the chances will be to control the precise timing of AIDEA's bond sale to obtain the most favorable interest rates possible. If the transaction can be closed only within a very short fixed period of a few days, there is little or no opportunity to make marketing choices based on changes in interest rates. As noted above, AELP can foresee the possibility that financing-related developments may require further communications with the Commission and the Commission staff even after the Commission approves the PSA. AELP will initiate such communications promptly, if the need arises. But if the Commission is going to approve the PSA and take the other steps necessary to allow this transaction to be completed, it now needs to act promptly, too. request such an option. In addition. AELP understands that the transaction could not be financed if it included such an option. Alaska Public Utilities Commission MayS, 1998 Page 13 Thank you for your time and attention to this important matter. E. Communications Copies of all communications with respect to this matter should be directed to (1) the undersigned at the address indicated on this letterhead, and (2) counsel for AELP in this matter: Attachments Eric Redman Heller Ehrman White & McAuliffe 701 Fifth Avenue, #6100 Seattle, Washington 98104 (206) 389-6000 (phone) (206) 447-0849 (fax) eredman@hewm.com (e-mail) Very truly yours, 1JJ d!A~ a. ~ "Pr William A. Corbus 1-y President cc (with Attachments): Rodney Adelman, Alaska Power Administration (USDOE) Randy Simmons. Alaska Industrial Development & Export Authority Hon. Dennis Egan, Mayor, City & Borough of Juneau Bill Jackson, Alaska Department ofFish & Game The Juneau Empire Mr. Kurt Dzinich a Printed on R W 20"Ao Po ecycled Paper st Consumer Waste 1 A. Recitals AGREEMENT BETWEEN THE CI'1Y & BOROUGH OF JUNEAU AND ALASKA ELECTRIC UGHT AND POWER 1. The Government of the United States, acting by and through the Alaska Power Administration. built and currently owns the Snettisham Hydroelectric Project ("Snettisham"), which the Government of the United States has decided to sell to the Alaska Industrial Development & Export Authority ("AIDEA "). 2. Alaska Electric Light And Power Company (" AELP") purchases electric power· from Snettisham for resale to customers within the City & Borough of Juneau ("CBJ"), for whom Snettisham represents the primary source of electric power. 3. AIDEA will finance its purchase of Snettisham by issuing bonds that will be secured by AELP' s take-or-pay commitment to purchase Snettisham power from AIDEA and pay the costs of AIDEA's Snettisham debt, including in potential circumstances in which Snettisham is not producing power. 4. AELP's Snettisham power purchase commitment to AIDEA and the Bond Trustee is set forth in a Power Sales Agreement ("PSA") and other documents related to the financing of AIDEA's proposed purchase ofSnettisham. 5. The PSA requires the approval of the Alaska Public Utilities Commission (" APUC"), and AELP has requested that the CBJ adopt a resolution asking the APUC to grant such approval. B. Agreement 1. CBJ syp,port. The CBJ will promptly express to the APUC its support for approval of the PSA, and take such other steps as AELP or AIDEA may reasonably request to help assure AIDEA's ability to complete successfully the acquisition of Snettisham. 2. Ratemakins treatment ofSnettisham power costs. So long as the PSA and the APUC s authority over AELP retail ratemaking both remain in effect, AELP as the purchaser of Snettisham power under the PSA will request that the APUC continue to treat as "purchased power expense" for retail ratemaking purposes all of AELP's costs of buying Snettisham power. If AELP purchases Snettisham and the APUC continues to regulate AELP' s retail rates, then for ratema.king purposes AELP will seek to have the APUC treat Snettisham in the same manner as other generating resources that AELP owns. 3. Preservation of Snenisham benefits. So long as AELP ratepayer loads within the CBJ continue to require Snettisham power, AELP will dedicate Snettisharn power to meet those loads. If AELP or an affiliate acquires Snettisharn from AIDEA, then neither AELP nor the affiliate will thereafter sell Snettisham to any unaffiliated third party unless that third party also agrees to dedicate Snettisham power to meet ratepayer loads within the CBJ. 4. CBJ's right of first refusal. If AELP or an affiliate, having acquired Snettisham from AIDEA, ever agrees to sell Snettisharn to any unaffiliated third party, then the CBJ shall have a right of first refusal to purchase Snettisharn instead, under the same terms and conditions (including any assumption of risks and any refunding of outstanding debt) as agreed to by such third party; provided that (a) such right shall be exercised within ninety (90) days, and the CBJ' s purchase of Snettisham shall be completed within eighteen ( 18) months, of notification to the CBJ of a proposed sale of Snettisham to such third party, unless AELP and the CBJ agree to extend these deadlines; and (b) the CBJ' s exercise of such right is consistent with then-existing Snettisham debt and AELP'~ then~existing obligations; provided further, that AELP shall consult with the CBJ from time to time .with respect to AELP' s plans regarding ownership of Snettisham. 5. Enforcement. This Agreement may be enforced only by the parties, and only through binding arbitration in accordance with rules of the American Arbitration Association. Each party shall bear its o\vn costs in any such arbitration, unless the arbitration panel orders otherwise. The parties shall use their reasonable best efforts and shall cooperate in good faith to agree upon such procedures as may be necessary to allow the arbitration to proceed with promptness and efficiency. C. Effectiveness 1. This Agreement shall become effective on the first date when (a) the Agreement has been executed by both parties, and (b) the CBJ has adopted for purposes of Alaska Statutes 44.88 a resolution substantially in the form of Attachment A hereto. 2. This Agreement shall cease to be effective if AIDEA has not acquired Snettisham on or before August 20. 1998, the deadline for this transaction established by Federal statute. 3. This Agreement shall be governed by the laws of the State of Alaska. Monday March 16 version ALASKA ELECTRlC LIGHT AND POWER William A. Corbus. President CITY AND BOROUGH OF JUNEAU. ALASKA Donna B. Pierce Acting City Manager Date: ~ 1~, I )'j r e1seM Jewnsuoa !SOd %0C: 4\ Jaded pepi\oel::t uo P91U!Jd ~ Snettishman Preliminary Calendar of Events As of May 7, 1998 May 13 Next draft consulting engineers report distributed, to include changes in projections resulting from tax investigation May 14 Final draft docwnents distributed, sent to APUC May 15 Land transfer docwnents completed and delivered to AIDEA May 20 Comments due on POS May 24 RFP for new submarine cable sent out May 27 Next draft POS distributed June 1 APUC approval June 9-10 Tentative date for due diligence meeting in Juneau June 15 Final draft consulting engineer's report Receive vendor proposals to install/provide new cable July 10 Mail preliminary official statement July 15 Price bond issue July 28 Pre-close July 29 Close