HomeMy WebLinkAboutAPA Financial Assessment Tazimina River Hydroelectric Project 1987Alaska lower Authority
Financial Assessment
Tazimina River
Hydroelectric Project
June 1987
FINANCIAL ASSESSMENT
OF THE
TAZIMINA RIVER HYDROELECTRIC PROJECT
ALASKA POWER AUTHORITY
JUNE 1987
9220/739/1
FINANCIAL ASSESSMENT OF THE
TAZIMINA HYDROELECTRIC PROJECT
I. INTRODUCTION
PURPOSE OF REPORT AND SUMMARY OF FINDINGS
This report addresses the financial feasibility of the proposed Tazimina
Hydroelectric Project (the "Project"), a 700 kilowatt facility which
would provide power to the Il iamna-Newhalen-Nondal ton Electric Coopera-
tive ("INNEC"). This assessment is based in part on costs of power
incurred with and without the Project and the corresponding rate shock..
Power Authority staff analysis found the Project to be marginally
economically feasible. Further investigation as summarized in this
report shows the costs of power incurred with the Project are far in
excess of the alternative costs in the early years. For this reason, it
is recommended not to proceed with the Project at this time; and de-
tailed financial studies have not been performed.
II. PROJECT DESCRIPTION
The Project would be built at Tazimina Falls on the Tazimina River north
of Iliamna Lake. It is a run -of -river development and includes a
transmission line to the INNEC facilities at Newhalen.
Excluding interest during construction and other financing costs,
Project costs are estimated to be $6.9 million in 1986 dollars. The
costs are assumed to be incurred over a 21-year period. A summary of
the estimated costs and the anticipated construction schedule are shown
in Exhibits 1 and 2, respectively.
9220/739/2
III. FINANCING OPTIONS
INTRODUCTION
Because State financing of the Project would probably be less expensive
than private financing by INNEC, State financing was first considered.
The options considered included the following:
A) General Fund appropriation.
B) General Fund loan.
C) Power Project Loan Fund loan, and
D) Revenue bonds issued by the Alaska Power Authority for the
Project.
Options A and B appear to be unlikely at this time due to reduced State
revenues.
Option C also appears unlikely at this time as the Power Project Loan
Fund is presently funded through General Fund appropriations, and the
amount required is more than is available at this time. This option,
however, will be investigated in the event revenue bonds are prohibi-
tive.
REVENUE BONDS
Based on the assumed construction costs and cash flow, a bond sizing
analysis was performed to estimate the amount of bonds required. Such
requirements are summarized in the following table and shown in detail
in Exhibit 3.
9220/739/3
Estimated Bond Financing Requirements
($000)
Construction Costs (1) $8,020
Discount and Financing Expenses (2) 371
Capitalized Interest (3) 2,403
Debt Service Reserve Fund (4) 986
Subtotal $11,780
Interest Earnings (5) (1,170)
Rounding (10)
Total Bond Requirements $10,600
(1) Based on a construction cost of $6.9 million in 1986 dollars
escalated over the construction period at an assumed annual in-
flation rate of 4.5 percent.
(2) Assumed to be 3.5 percent of the issue size.
(3) Interest incurred during the capitalization period based on an
interest rate of 8.5 percent per year.
(4) Equal to one year's debt service based on the assumed interest rate
and a 30-year amortization period.
(5) Interest earnings on the various bond funds during the capitali-
zation period assuming reinvestment rates ranging from 6.0 - 8.5
percent.
Annual debt service on such a bond issue with an assumed interest rate
of 8.5 percent and 30-year amortization period would be $986,000 per
year. This would be offset in part by interest earnings on the Debt
Service Reserve Fund assumed to be approximately $75,000 per year, for a
total net debt service of $911,000 per year.
POWER PROJECT LOAN FUND
A loan funded from the Power Project Loan Fund would have the advantage
of little or no financing costs, reduced interest during construction,
and no reserve fund requirements. Under this program the capital
requirements would be approximately $8.75 million, assuming interest is
capitalized during the construction period at 8.5 percent per year.
Annual debt service would be approximately $815,000 per year.
9220/739/4
IV. FINANCIAL ANALYSIS
Operating costs of the Project are estimated to be $60,000 (1986 dol-
lars) per year plus 1.5 cents per kilowatt-hour. Accordingly, total
costs of the Project including debt service are:
Power Project
Revenue Bond
Loan Fund
Debt Service
$911,000
$815,000
0&M - Fixed
71,500
71,500
Subtotal
982,500
$886,500
Energy Requirements(MWh)2
2,126
2,126
Cost (¢/kWh) 1
0&M - Variable (t/kWh)
46.2
1.8
41.7
1.8
Total Cost R/kWh)
48.0
43.5
1 Base year estimate escalated at 4.5 percent per year to 1991.
2 Estimated.
Forecasted energy requirements are based on a three percent load growth
of the INNEC load and do not include any potential sales at Keyes Point
on Lake Clark.
The current cost of power at INNEC is approximately 45.5 cents/kilo-
watt-hour. The costs for fuel and plant operation and maintenance
account for approximately 17 cents of this amount. Thus, the costs
incurred by the utility with or without the Project are 28.5 cents per
kilowatt-hour (45.5-17.0). Assuming that the diesel generators would be
run 5 to 10 percent of the time during Project outages, an additional
2 cents per kilowatt-hour should be added to the base cost, yielding a
total base cost of 30.5 cents per kilowatt-hour.
As shown in the table below, the costs with the Project would be at
least 60 percent greater than costs incurred without the Project.
9220/739/5
Project Comparison Costs
(¢/kWh)
Revenue Power Project
Bond Loan Fund
Base Costs 30.5 30.5
Project Costs 48.0 43.5
Total Costs with Project 78.5 74.0
Costs without Project 45.5 45.5
V. RECOMMENDATION
Given the large increase in revenue requirements associated with the
Project, it is recommended not to proceed with the Project at this time.
If diesel prices or load requirements increase more than expected, the
economic and financial feasibility can be reassessed.
9220/739/6
Exhibit 1
Tazimina River Hydroelectric Project
Cost Estimate
(1986)
FERC
Estimated
Acct
Description
Cost
330
Land & Land Rights
(Not Included)
331
Powerplant
659,000
332
Waterways
1,483,000
333
Turbines and Generators
556,000
334
Accessory Electrical
Equipment
300,000
335
Miscellaneous Power
Plant Equipment
115,000
336
Roads
1,500,000
352/353 Substation & Switching
Station
50,000
354
Transmission
500,000
Mobilization & Demobilization
400,000
5,563,000
Allowance for Indeterminates
537,000
Direct Cost
$6,100,000
Engineering and Design
500,000
Construction Management
300,000
Total Cost
$6,900,000
9220/739/7
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2B-may Exhibit 3
l%:, 1
CONSTRUCTION COST
8,028
GENERAL INFLATION
4.5%
WORKING CAPITAL
0
INTEREST RATES:
EXPENSES:
BONDS
8.5%
DISCOUNT
35.0
REINVESTMENT RATES:
F.A. FEE
0
CONSTRUCTION FUN
6.0%
F.A. EXPENSES
0.0
CAP INT FUND
6.5%
B.C. FEE
0.0
DSR FUND
8.5%
B.C. EXPENSES
0.0
OTHER FUNDS
8.5%
WA EXPENSES
0.0
CAPITALIZATION PER.
32 MONTHS
AMORTIZATION PERIOD
30 YEARS
ANNUAL CASH FLOW (CY)
ANNUITY FACTOR
0
1986 $ NOM'L $
1988 420
459
1989 3,240
3,697
1990 3,240
3,864
6, 900
8, 028
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BOND SUMMARY 3000)
CONSTRUCTION COST on
DISC. 8 FIN. 371
CAP. INT. FUND 403
DEBT SVC. RESERVE 986
WORKING CAP., OTHER 0
SUBTOTAL 11,760
INT. EARNINGS (1,170)
ROUNDING SURPLUS (10)
TOTAL 10,600
ANNUAL DEBT SERVICE 986
INT. EARNINGS 74