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BLACK BEAR LAKE
HYDROE LECTRIC PROJECT
PLAN OF FINANCE
PROPERTY OF:
Alaaka Power Authority
334 W. 5th Ave.
Anchonige," Alaska 99501
February 1982
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BLACK BEAR LAKE
HYDROELECTRIC PROJECT
PLAN OF FINANCE
Prepared by the
ALASKA POWER AUTHORITY
February, 1982
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The Black Bear Hydroelectric Project, as an alternative to present
diesel generation, can conceivably be financed in several ways. A low
interest rate loan from the Federal Rural Electrification Administration
(REA) could be sought. The Alaska Power Authority or the beneTited
communities could issue tax exempt revenue bonds. Finally, the State
could provide direct assistance in some form. At the present time an
REA loan is probably not available due to Federal bud~et restrictions
which may seriously impact the REA program. Further, the Alaska Power
Authority could not finance the project based upon the security of
revenues from the project without some form of State support, nor are
the communities benefiting from the project large enough here to issue
bonds. As a result it is probable that State assistance will be
necessary to finance the project.
The form which such State assistance could take is almost limitless
except for the statutory presumption that such assistance provide the
most benefit at the least cost to the State. The following four
alternatives analyzed and discussed hereafter represent the most
probable forms that this assistance could take.
1. Financing with State supported Power Authority issued tax exempt
revenue bonds at an interest rate equal to the current average
weekly yield of bonds over the last twelve (12) months as taken
from Weekly Bond Buyer. This rate is approximately 12.0% and
represents the lowest probable interest rate that could be obtained
in the market by a State supported Power Authority bond issue.
Bonds could not be issued to finance this project without at least
a state moral obligation pledge.
2. Oirect State financing of all capital costs at an interest rate of
5% per year for 35 years with principal payments deferred during
construction. This loan would be amortized over 32 years beginning
in 1986.
3. An equity contribution of the State equal to the full cost of the
project yielding a 5% yearly rate of return which includes
operating costs.
4. Partial financing with a State grant of $2,500 for each area
resident together with an appropriation from the State OT
$1,270,000 at 12.0% per year as a Debt Assistance Loan to the
project. The effect of the Debt Assistance Loan would be to
subsidize yearly bond payments in the early years of service to a
level which would generally levelize the cost of power generated by
Black Bear in real dollar terms. Thereafter when diesel costs of
energy increase beyond hydroelectric costs of energy the difference
would be used to retire the loan.
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FINANCING ALTERNATIVE #1
Tax Exempt 12.0% Bonds
•weekly Bond Buyer• Average
Capital Costs
Total Construction Cost (1/81)
Inflation (7% per yr for 5 yrs}
Total Construction Cost (1/86)
Interest During Construction (Based upon one
half of the 3 year construction cost at 12%
per year)
Total Investment Cost
Financing Expense (2.5% of T.C.R.)
Reserve Fund (One year of Oebt Service 12%)
Total Capital Requirement (T.C.P.)
Annual Cost
Debt Service
Less Interest Earned (12.0% per yr)
Operating Costs
0 & ~1
7,762,000
931,000
Adm. & General (34% of 0 & H)
Insurance {0.2% of Construction Cost}
Interim Replacement (0.2% of Construction Cost)
Total Annual Cost
$32,500,000
13,083,000
45,583,000
8,533,000
54,116,000
1,586,000
7,762,000
63,464,000
6,831,000
210,000
72,000
91,000
91,000
7,295,000
Table I represents the cost of energy for financing alternative 1.
Although the State may accept soMe risk in guaranteeing these bonds the
present worth of the State financial assistance provided here is zero.
0 TABLE I
Tax Exempt 12.0% Bonds
(l~eekly Bond Buyers Average)
Bond 1Interest 2operating 3TOTAL Energy 4cost of
Debt Service Earned Costs Annual Costs Sales Eneqly
Cost {$000) ($000) ($000) (MWH) ct/KWH
($000)
Low Salable
Energy Est.
1986 7762 (931) 464 7295 12951 56.32
1991 7762 (931) 651 7482 14635 51.12
1996 7762 (931) 912 7743 17067 45.36
2001 7762 (931} 1279 8110 19317 41.98
2006 7762 (931) 1794 8625 19317 44.64
Most Likely
Sa 1 ab 1 e Energy
Est.
1986 7762 (931) 464 7295 16540 44.10
491 7762 (931) 651 7482 20800 35.97
96 7762 (931) 912 7743 20800 37 .?2
... 001 7762 (931) 1279 8110 20800 38.99
2006 7762 (931) 1794 8625 20800 41.46
High Salable
Energy Est.
1986 7762 (931) ~464 7295 171?2 47.60
1991 7762 (931) 651 7482 20800 35.97
1996 7762 (931) 912 7743 ?0800 37.2?.
2001 7762 {931) 1279 8110 20800 38.99
2006 7762 (931) 1794 8625 ?0800 41.46
1 12% per year in all cases
2 Operating cost increase at 7% per year
3 Total annual costs = Bond debt service -Interest earned + Operating costs
4 Cost of energy = Total annual cost ~ Energy sales
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FINANCING ALTEPNATIVE #2
State Loan At 5% Per Year with Repayment of Principal Deferred
{35 Year Loan Amortized Over 32 Years)
Capital Costs
Total Construction Cost (1/81)
Inflation (7% per yr for 5 yrs)
Total Construction Cost
Interest to Completion of Construction
(Offset by Investment Earnings)
Total Investment Cost
Financing Expenses
Reserve Fund
Total Capital Requirement (T.C.R.)
Annual Cost
Debt Service (32 Years at 5% per year)
Operating Costs
0 & M
Adm. & General (34% of 0 & f·1)
Insurance (0.2% of Construction Cost)
Interim Replacement (0.2% of Construction Cost)
Total Annual Cost
$32,500,000
13,083,000
45,583,000
0
45,583,000
0
0
'105,583,000
2,885,000
210,000
72,000
91,000
91,000
3,349,000
The difference between $45,545,583 which is the present value of 32
equal annual debt servicP payments of $2,885,000 at 5% and $23,402,000
which is the present value of 32 equal annual debt service payments of
$2,885,000 at 12% is $22,181,000. To this is added $8,533,000 which is
the difference between the zero interest expense actually incurred
during construction and that which would be incurred at 12% cost of
funds (See Alternative #1). The total of $30,714,000 is then discounted
from 1986 back to 1983 at 12% per year to provide a present worth of
state assistance of $21,862,000.
0 TABLE II
State Loan at 5% Per Year with Repay~ent of Principal Defferred
(35 Year Loan Amortized Over 32 Years)
Low Salable Debt Operating Total Energy Cost of
Energy Est. Service Costs Annual Costs Sales Energy
($000} ($000) ($000) (MWH) ( ¢/KWill_
1986 2885 464 3349 12951 25 .r··
1991 2885 651 3536 14635 24. J
1996 2885 912 3797 17067 22.25
2001 2885 1279 4164 19317 21.56
2006 2885 1794 4679 19317 24.22
Most Likely
Salable Energy
Est.
1986 2885 464 3349 16540 20.25
1991 2885 651 3536 20800 17 .o.
1996 2885 912 3797 20800 18.2T
2001 2885 1279 4164 20800 20.0:
2006 2885 1794 4679 20800 22. 2~;
~ . High Salable
Energy Est.
1986 2885 464 3349 17122 20. 2fi
1991 2885 651 3536 20800 17.0C
1996 2885 912 3797 20800 18.2!:1
2001 2885 1279 4164 20800 20.02
2006 2885 1794 4679 20800 22.25
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0 FINANCING ALTERNATIVE #3
State Equity Investment With a 5%
Annual Rate of Return Which
Includes Payment of Operating Costs
Capital Costs
Total Construction Cost (1/81)
Inflation (7% per yr for 5 yrs)
Total Construction Cost
Return on Investment During Construction (Non-Cumulative
Stock)
Total Investment Cost
Financing Expenses
Reserve Fund
Total Capital Requirement
Annual Cost
Return on Investments (R.O.I)
Operating Costs (to be deducted from R.O.I)
0 & M
Adrn. & General (34% of 0 & M)
Insurance (0.2% of Construction Cost)
Interim Replacement {0.2% of
Construction Cost)
Total Annual Costs
210,000
72,000
91,000
91,000
$32,500,000
13,083,000
45,583,000
0
45,583,000
0
0
45,583,000
2,279,000
2,279,000
Table III represents the cost of energy for financing Alternative #3.
Operating costs in Alternative #3 take an increasing share of the Return
on Investment until after 24 years when the yearly Return on Investment
is reduced to zero. The present worth of a decreasing stream of Return
on Investment over 28.5 years {the mid-point of construction) discounted
at 12.0% equals $9,724,000. Subtracting $9,724,000 from the present
worth of the initial state investment of $45,583,000 equals $35,859,000
which is the present value of the state assistance as of the mid-point
of State investments.
0 TABLE III
State Equity Investment
Total Energy Cost
Annual Costs Sales of Energy
($000) (MWH) (¢/KWH)
Low Salable
Energy Est.
1986 2279 12951 17.60
1991 2279 14635 15.57
1996 2279 17067 13.35
2001 2279 19317 11.80
2006 2279 19317 11.80
Most Likely
Salable Energy
Est.
1986 2279 16540 13.78
1991 2279 20800 10.96
0 1996 2279 20800 10.96
2001 2279 20800 10.96
2006 2279 20800 10.96
High Salable
Energy Est.
1986 2279 17122 13.31
1991 2279 20800 10.96
1996 2279 20800 10.96
2001 2279 20800 10.96
2006 2279 20800 10.96
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0 EFFECT OF TH1E ON THE RELATIONSHIP BETWEEN
RETURN ON INVESTr1ENT AND OPERATING COSTS
PROJECT RETURN ROI COST
OPERATING COSTS ON INVESTMENT DISCOUNTED AT 12%
INFLATED AT 7%/YEAR
1986 464 1815 1815
1987 496 1783 1421
1988 531 1748 1244
1989 568 1711 1087
1990 608 1671 948
1991 651 1628 825
1992 696 1583 716
1993 745 1534 620
1994 797 1482 534
1995 853 1426 459
1996 912 1367 393
1997 977 1302 334
1998 1045 1234 283
1999 1118 1161 237
2000 1196 1083 198
2001 1280 999 163
8 2002 1370 909 132
2003 1466 811 105
2004 1568 711 83
2005 1678 601 62
2006 1796 483 45
2007 1921 358 30
2008 2056 223 16
2009 2200 79 5
2010 2354 (75) 0
*
* $11,755,000 represents the present worth in 1986. The present worth
of $11,755,000 at 12% in mid 1984 is $9,724,000.
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FINANCING ALTERNATIVE #4
State Grant with Power ~uthority 12.0%
Bonds Plus a Debt Assistance Lo~n From The State
Capital Costs
Total Construction Cost (1/81)
Grant ($2,500 x 1,755)
To be Financed
Inflation (7% per year for 5 years)
Total Remaining Construction Cost
Interest During Construction (Based upon one
half of the 3 year Construction term at 12% per
year)
Total Investment
Financing Expenses (2.5% of T.C.R.)
Reserve Fund (One year of Debt Service at 12.0%
for 35 years)
Total Capital Requirement (T.C.R.)
Annual Cost
Debt Service
Less Interest Earned (12.0% pP.r year)
Operating Costs
O&M
Adm. and General (34% of O&M)
Insurance (0.2% of Construction Cost)
6 '112 ,000
733,000
Interim Replacement (0.2% of Construction Cost)
Total Annual Cost
$32,500,000
4,379,000
28,121,000
7,769,000
35,890,000
6 '719 ,000
42,609,000
1,249,000
6 '112 ,000
49,970,000
5,379,000
210.000
72,000
91,000
91,000
5,843,000
Table IV represents the cost of energy for financing Alternative #4. A
debt assistance loan is at the bond rate of 12.0% per year and is repaid
in full. Therefore, the present worth of state financial assistance is
the present worth of the state grant of $4,387,500.
0 TABLE IV
State Grant with Power Authority 12.0% Bonds
Plus a Debt Assistance Loan From The State
Bond Interest Project Total Energy Cost of
Debt Service Earned Operating Costs Annual Costs Sales Energy
($000) ($000) ($000) ($000) (MWH) ¢/KWH
Low Salable
Energy Est.
1986 6112 (733) 464 5843 12951 45.12
1991 6112 (733) 651 6030 14635 41.20
1996 6112 (733) 912 6291 17067 36.86
2001 6112 (733) 1279 6658 19317 34.47
2006 6112 (733) 1794 7173 19317 37.13
Most Likely Sal-
able Energy Est.
1986 6112 (733) 464 5843 16540 35. J ..
1991 6112 (733) 651 6030 20800 28.9~
1996 6112 (733) 912 6291 20800 30.2')
2001 6112 (733) 1279 6658 20800 32.01
~06 6112 (733) 1794 7173 20800 34.49
High Salable
Energy Est.
1986 6112 (733) 464 5843 17122 34.1J
1991 6112 (733} ----651 6030 20800 28.99
1996 6112 (733) 912 6291 20800 30.25
2001 6112 (733) 1279 6658 20800 32.01
2006 6112 (733) 1794 7173 20800 34.49
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0 TJ\BLE V
State Grant With Power Authority 12.0% Bonds
Plus a Debt Assistance Loan From The State
For The Most Likely Salable Energy Estimate
~1ost Likely
Bond Interest Project Total Salable Energy Cost of
Debt Service Earned Operating Costs Annual Costs Estimate Energy
($000) ($000) ($000} ($000} (~~~IH) ¢/KWH
1986 6112 (733) 464 5843 16540 35.33
1987 6112 (733) 496 5875 173]9 33.92
1988 6112 (733) 531 5910 18136 32.39
1989 6112 (733) 568 5946 18990 3L31
1990 6112 (733) 608 5987 19884 30.11
1991 6112 (733) 651 6030 20800 28.99
1992 6112 (733) 696 6075 20800 29.21
1993 6112 (733) 745 6124 20800 29.44
1994 6112 (733) 797 6176 20800 29.69
1995 6112 (733) 853 6232 20800 29.96
1996 6112 (733) 912 6291 20800 30 . ;
1997 6112 (733) 976 6355 20800 30. ;
1998 6112 (733) 1044 6423 20800 30
1999 6112 (733) 1117 6496 20800 31,: :\
d~~ 6112 (733) 1195 6574 20800 3L <l
6112 (733) 1279 6658 20800 32. ()}
2002 6112 (733) 1369 6748 20800 32. '! '!
2003 6112 (733) 1464 6843 20800 32 '·j
2004 6112 (733) 1567 6946 20800 33 : ..
2005 6112 (733) 1677' 7056 20800 33. ~,·'
2006 6112 (733) 1794 7173 20800 34 ,!:9
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Amount
in Debt
Assistance
Provided
{$000)
1986 1685
1987 1195
1988 598
1989 0
1990 0
1991 0
1992 0
1993 0
1994 0
1995 0
1996 0
1/l/1997 0
DEBT ASSISTANCE LOAN FROM THE STATE
LOAN TERM CALCULATION
MOST LIKELY SALABLE ENERGY ESTIMATE
Accumulated Principle
and Interest Owned on
the Debt Assistance
Loan at 12.0%
($000)
1685
3082
4050
4536
4974
4546
3764
2939
2080
1165
209
0
Amount
of Repayment
of Debt Assistance
{$000)
0
0
0
95
915
1186
1140
1082
1040
978
209
0
Net Amount of
the Debt Assistance
Loan at 12.0%
($000)
1685
3082
4050
4441
4059
3361
2624
1857
1040
187
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~y 1/1/1997, the Debt Assistance ~oan.will have been.fully repaid to the State plus
~terest at 12.0% per year. At th1s t1me, the loan w1ll be closed out and the cost of
energy to consumers reduced to that of hydroelectric generation.
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1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
~~
Energy
Sales
( t1WH)
16540
17319
18136
18990
19884
20800
20800
20800
20800
20800
20800
20800
20800
20800
20800
20800
20800
SCHEDULED OF BORROWING AND REPAYMENT OF
DEBT ASSISTANCE LOAN FROM THE STATE
1cost of Energy Cost of Energy
Most Likely Salable
Energy Estimate
Cost of Energy
w/Black Bear w/Diesel Generation Lower of
(¢/KWH)
35.3
33.9
32 .6.
31.3
30.1
29.0
29.2
29.4
29.7
30.0
30.3
30.6
30.9
31.2
31.6
32.01
32.4
(¢/KWH) Diesel or Hydro
24.4
26.4
28.6
31.2
34.1
36.9
40.4
43.8
47.9
51.9
59.4
64.2
69.5
75.3
82.1
87.3
93.4
24.4
26.4
28.6
31.2
34.1
34.1
34.1
34.1
34.1
34.1
30.7
30.6
30.9
31.2
31.6
32.0
32.4
Annual Debt
Assistance
Loan Amount
($000)
1685
1195
598
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Annual
Paymen·
on Loa1
(SOOO
0
0
0
95
915
1186
1140
1082
1040
978
209
0
0
0
0
0
0
1Taken from Black Bear Lake Project Feasibility Report prepared by Harza Engineering Com::;~mY
(Base case continued diesel generation).
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SUMMARY
Summarized below are the estiMated costs of energy in various years for
the r1ost Likely Salable Energy Estimate for the four financing
alternatives analyzed, as well as the present worth of State assistance
proposed for each:
Alternative #1
12.0% Bonds
1986 44.1
1991 36.0
1996 37.2
2001 39.0
2006 41.5
P.W. of State
0
Alternative #2 Alternative #3
State Equity
investment with
a 5% return
that includes
State Loan at 5% Operating Costs
20.3 13.8
17.0 11.0
18.3 11.0
20.0 11.0
22.3 11.0
Assistance
$21,862,000 $35,859,000
Alternative #4
Partial grant
with 12.0%
bonds plus a
12.0% Debt
Assistance Loan
24.4
34.1
30.7
32.0
34.5
$4,387,500
From a review of this list it is apparent that Alternative #3 provides
the lowest cost of power over the 20 year analysis period. It is also
clear that this alternative requires the greatest amount of State
financial assistance. On the other hand, Alternative #1, which would
require sone form of State guarantee, will need no outright State
financial assistance. This alternative, however, would ·produce such a
high cost of energy that it could probably not be marketed in the early
years of operation. Between these extremes are the two other financing
alternatives. Of these two, Alternative #2 requires more financial
assistance from the State but produces a significantly lower cost of
energy, while Alternative #4 requires less up front financial assistance
from the State but results in a higher cost of energy.
The higher cost of energy during the first several years of the ?.0 year
analysis period is explained by the fact that electricity sales are less
than the productive capacity of the Black Bear project. As sales
increase the cost of energy in ¢/KWH decreases. Thereafter, during the
last few years of the analysis period, the cost of energy in all but
Alternative #3 begins to increase. This is due to increasing operating
costs which are impacted by inflation and are reflected in the cost of
energy. As a single exception the cost of energy for Alternative #3
will not begin to increase until 24 years after the project begins
production. This is because it will take 24 years before operating
costs, as a deduction from the 5% return on investment, exceeds the
return on investment.
Because State assistance is provided in three of the four alternatives
it would be possible to change the results of each by changing the
amount of assistance and the way in which it is provided. In
Alternative #2 the interest rate could be increased, thereby raising the
,
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cost of energy and lowering the amount of State assistance. It would
also be possible to defer part of the interest payments due in the first
years of the loan. This would have the effect of lowering the cost of
energy in the early years when this cost is high and increasing it in
later years when it would otherwise be lower.
In Alternative #4, the cost of energy in the early years of the analysis
period could be lowered by reducing the 34.1¢/KWH price charged between
1990 and 1995. However, it would then be necessary to raise the price
in the later years of the analysis period. Additionally, the amount of
the grant could be increased or decreased.
Finally, Alternative #3 could be changed as well. For example the state
could require that operating costs not be charged against the 5%
required return but instead be charged as an additional cost of the
project. Further the cost of energy could be increased to reduce the
resultant amount of State assistance provided.
The analysis so far has been based upon nominal dollars which include
the impact of inflation on future costs. If the cost of energy in
future years is discounted at an assumed inflation rate of 7% per year,
the real cost of power as shown below for each of the four alternatives
would actually decrease.
Alternative #1 Alternative #2 Alternative #3 Alternative #4
State Equity Parti a 1 Grant
investment with with 12.0%
a 5% return Bonds plus
that includes a 12.0% Debt
12.0% Bonds State Loan at 5% Operating Costs Assistance Loan
1986 44.1 20.3 13.8 34.6
1991 25.7 12.1 7.8 24.3
1996 18.4 9.3 6.6 15.6
2001 14.1 7.3 4.0 11.6
2006 10.7 5.8 2.8 8.9
Such a reduction in the real dollar cost of energy over time would
therefore permit the nominal dollar cost of energy to actually be raised
over time without adversely affecting the real cost of energy.
CONCLUSION
Alternative #1 requires no State assistance, however, the cost of energy
which it provides is extremely high in the early years of project
operation. Alternative #2 on the other hand provides a lower cost of
energy, however, it requires a relatively high amount of state
assistance. Alternative #4 requires less up front financial assistance
from the State and provides a shorter payback period than other State
assisted alternatives. This alternative, however, results in a higher
cost of energy than either Alternative #2 or #3. Finally, Jl.lternative
#3 requires the most State assistance and provides the lowest cost of
energy, over a longer period of time than any of the other alternatives
considered.