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Alaska Water Export 2004
Alaska Water Export eee aR eats Colma norther Economics inc. Denali Commission In association with Alaska's Best Water ¢ MWH February 2004 Alaska Water Export Final Prepared for Denali Commission February 2004 & Prepared by northern@conomics inc. In association with 7 Alaska’s Best Water 880 H STREET, SUITE 210, ANCHORAGE, ALASKA 99501 MWH T: 907.274.5600 F: 907.274.5601 E: norecon@norecon.com * www.northemeconomics.com PROFESSIONAL CONSULTING SERVICES IN APPLIED ECONOMIC ANALYSIS Anchorage 880 H St., Suite 210, Anchorage, AK 99501 TEL: 907.274.5600 FAX: 907.274.5601 President & Principal Economist: Patrick Burden, M.S. Vice President & Senior Economist: Marcus L. Hartley, M.S. Senior Consultant, Planning Services: Caren Mathis, MCP, AICP — Economists: Leah Cuyno, Ph.D., Ken Lemke, Ph.D, Jonathan King, M.S. Policy Analyst: Nancy Mundy, Ph.D. Socioeconomic Analyst: Don Schug, Ph.D. Analysts: Michael Fisher, MBA, Cal Kerr MBA Office Manager: Stephanie Cabaniss Document Production: Terri McCoy Bellingham 1801 Roeder Ave.. Ste. 124, Bellingham, WA 98225 TEL: 360.715.1808 FAX: 360.715.3588 Associate Economist: Hart Hodges, Ph.D. no rther Onomics Inc. Economist: Tamer Kirac, MA, Analyst: Kelly Baxter-Porteen, M.S. E-mail: norecon@norecon.com Web: www.northerneconomics.com Contents Section Page Abbreviations . Executive Summary Project Tasks Project RESUItS........cccesesessestessesesesesssseessseesseesseeessseseseeneeseneeeenes Water Resources ... Water Industry ... Regulatory Framework... Public Benefits ........cecceeeeeeseeesescsceeeeeeeecsssesesesseeeseassnsesenees Financial Analysis, RESUItS........:.cccccccseseseseetesessseseeteeseseseseseenenes Introduction, Discussion. The Denali Commission . Project Tasks FPRQ|@CL-SCO DC rrraaraaesecewnscescrevevesnevessvsvsssesureresuessredeeererneneverenesstensesee 2 Project Team Project Results.... Project Research, SOUICES.........c.cccssecsssecseseesesesseseeseeesestesesneneaeneaes 4 Conversions Report Organization. Water Resources. Global Water Use Global Water RESOUICES .......:csccesceseeseseeeteesececseeeseeeeeeeeaseseeseeaseneees 8 Water-Rich Countries Water Stress and Scarcity Water Issues Pacific Rim Water Resources ........... scecccccccceccssorsenccvovensceseoes 13 California Water Demand ..........cccccceeeceseeseteeseeeseseeeeeeseneeseneesenees 14 Alaska Water ReSOUr CES .......sccsscssssesssecsssessseeresesseeesseeeseees 16 Early Russian Water Exports 16 Alaska’s Precipitation...... 17 Alaska’s River Systems .... 18 Southeast Water RESOUFCE........ccccceseeceeteeesteeseeeeseesseesseeseesaees Southcentral (Anchorage) Water Resources Aleutian Water Resource Market Preference .......cccccccccsesessesesesesesssessseetecsnsssessseseeneneeseeseee Water Industry... ecsecerecccesccescerensecscsoessessesssesssssssoeeess 24 Bulk Water Export ........cccccccsseesesseseseeesesessenereseseseeeeneeneneeeeeaneneees 24 Export Bulk Water Markets, Desalination.........cccccsseeeeeeseeneees 27 northern@conomics inc. Alaska Water Export Section Bottled Water Process... Bottled Water, Market Attributes... Bottled Water, Market Summary... Alaska Bottled Water Companies .. = ve Alaska Bottled Water, Export Shipments...........c:c:ccseseseseeseeeseeeeeees 37 Regulatory Framework........scssssessseresceseecesseseereereeee seeseeeee 4 l Bottled Water Glacial Water Resource.... Gla Chel CG er ee ence crv exteeg veneers iessteseeneeneecvens cnsneseveyesvecsseasqersesreessstseret Public Berefits...........cscessccssssssecssessscesseerssenseesssssessssesssessseseees Bulk Water Evaluation... Bottled Water Financial Analysis .............sesseeeeee sesseseeseenseesseeseoess seeeeeesseeeees 50 Bulk Water Capital and Operating Costs .........cccceseeseseseeeeeeeseees 51 Financial Analysis, Bottled Water Export.. Sensitivity Analysis Break-even AnalySis ........cssscsssssessssssssssesssssessssssssesssesessnseseresees Summary, Market Opportunities ..........scscsscereeeereereneenees él Alaska Bulk Water Export Potential Alaska Bottled Water Export Potential . Appendices..........see ssssncesssussess re 63 Appendix A—Reference........scccssssssssssssssessersssenesseeneensseesees 65 Appendix B—Conversion Table ........ssssscsseseeseseresseeneees 79 Appendix C—Bulk (Raw) Water Tanker Export—Sitka, AK to Long Beach, CA.......cscsssssessessecrsesssesseeseessesseeees 80 Table Page Table 1. Aggregate Water Use, World Averages 26 Table 2. Recommended Basic Water Requirement . Table 3. Selected Water Rich Countries, Population and Cubic Meters of Water per Capita, 2000. ... Table 4. Africa and Asia, Selected Countries, with Water Stress, Scarcity, Cubic Meters of Water Per Capita, 2000.............:000 11 Table 5. Selected Conversion Costs, $ per Acre-foot, 1,000 gallons and Cubic Meter. ........cccccccceesssessessscseseseeeesceeeneeseaneees 12 Table 6. Pacific Rim Countries, with Population and Water Supply, Cubic Meters Per Capita, and Per Capita Gross Domestic Product (GDP), 2000. .........ccccccesecesseesseeeeseeeseeeeseeess 13 Table 7. Alaska’s Largest Rivers, by Area and Estimated Discharge Per SECON. ....c.cccecececsesesesesesesescsesesesesesescsescseseenevseseseeeeesiesenas 19 northern@conomics inc. Alaska Water Export Table Page Table 8. Global Bottled Water Market, 1997 — 2002, Quantity and Growth per Yeat......cccccscceseseesestessesesteseeteseereseeneneenenseeeney 31 Table 9. Global Bottled Water Consumption, Per Capita, Top 15 Countries, Gallons Per Capita. 1997 — 2002. ......cccceeeeees 32 Table 10. U.S. Bottled Water Consumption, 1992 — 2002, Gallons Per Capita. .......ccccccceeeeseeseesetetsestsesesssesetenseasseeees 32 Table 11. Leading Bottled Water Brands, U.S., Wholesale Sales, Share and Growth, 2001 — 2002. ......cccccceeecceseeeseeeseeeseeeteeeneees 34 Table 12. Known Alaskan Water Companies .........ccseceseeeeeeeetees 36 Table 13. Estimated Capital Costs, Bulk Water Export, 28,000 Acre-Feet Per Year, Sitka to Long Beach. ........:.ccccccseseeeeeeeees 52 Table 14. Estimated Operating and Minor Maintenance Costs per Trip, Bulk Water Export, Sitka to Long Beach. ..........:0cecee 53 Table 15. Summary of Annual Costs, Bulk Water Export (28,000 Acre Feet), Sitka to Long Beach. ........:cccccccssesesessseseseseeeeeeeeseee 54 Table 16. Bottled Water Pro Forma Income Statement...........00+ 56 Table 17. Bottled Water Raw Material Price Assumptions .............. 59 Figure Page Figure 1. The Earth’s Water Distribution, ..........cccseeseeeeteteeseseeeees 9 Figure 2. Population Growth, Contiguous United States, 1990 to 2000. 0... eeececcceseceseceeeesceseessecesesesesesecsseseseeesecsseeeseeseesseeenseees 14 Figure 3. Potential Water Supply Crises, by 2025, Western U.S. .... 15 Figure 4. Alaska Precipitation Figure 5. Alaska’s Major River Systems, Discharge.... Figure 6. Bulk Water Export, Sitka to Long Beach, Tanker Route.... 26 Figure 7. Trend, Water Cost, Desalination versus Imported Water, 1990 to 2002. ......c cc eecceeeeeeeeee Figure 8. Alaska’s Best Water, Process Flow. ... Figure 9. U.S. Bottled Water Consumption, Gallons Per Capita, 1992 to 2002 Figure 10. Lykes Lines. Route Map, Anchorage to Tokyo. Figure 11. Shipping Route, Alaska, Tacoma, Horizon Lines LLC. .... 39 Figure 12. Maersk Shipping Route, Dutch Harbor to Yokohama .... 40 Figure 13. Alaska Water Bottling, Regulatory Oversight. ..........0.000+ 43 Figure 14. Costs Per Acre Foot, at Selected Per Gallon Costs.......... 54 Figure 15. Probability Distribution of Bulk Water Cost per Acre-Foot58 Figure 16. Probability Distribution of Bottled Water Profit Before Taxes... .. 60 & northermeconomics inc. northern@conomics inc. iii Abbreviations AAC ABW AWWU CFR CGMP. ED FAO FDA GDP MED MFD MWD MWH PET POL RFP RMA RO TDS UAF USGS. vc UN WTP Alaska Administrative Code Alaska’s Best Water Anchorage Water and Wastewater Utility Code of Federal Regulations Current Good Manufacturing Processes Electrodialysis United Nations Food and Agricultural Organization U.S. Food and Drug Administration Gross Domestic Product Multiple-effect Distillation Multi-state Flash Distillation Metropolitan Water District formerly Montgomery Watson, Harza polyethylene terephthalate Petroleum, Oil, Lubricant Request for Proposal Risk Management Association Reverse Osmosis Total dissolved solids University of Alaska, Fairbanks United States Geological Survey Vapor Compression United Nations Water Treatment Plant northern@conomics inc. Alaska Water Export Se Eee vi northern@conomics inc. Executive Summary In June of 2003, The Denali Commission, based in Anchorage, Alaska, requested a study of the rural development opportunities, costs, and logistics of shipping and marketing new domestic water supplies outside of Alaska. Northern Economics, Inc., also based in Anchorage, submitted a successful proposal, with the assistance of MWH_ (formerly Montgomery Watson Harza), consulting engineers, and Alaska’s Best Water, a water-bottling firm serving markets in Southcentral Alaska. Project Tasks The Denali Commission requested specific responses to 12 different tasks, as listed in the Request for Proposal (RFP): 1. Conduct a literature search of government and _ private studies and reports from the past 10 years. 2. Identify and analyze three market segments: bulk water, non-premium bottled water and premium bottled water. 3. Analyze competition for potential Alaska water exporters. 4. Specify Alaska’s water export potential. a Conduct an analysis of bulk water transportation via tanker, barge, and bag. Develop capital and operating costs. Discuss bulk versus bottled water operations. List Alaska water sources. pon Develop and list the regulatory framework for processors, both state and federal. 10. Project likely costs of distribution and marketing. 11. Prepare a set of pro forma financial statements. 12. Describe public benefits from potential water export operations. Project Results Project research and analysis generated several key points, listed below and discussed in greater detail within the full report. e Alaska has a considerable freshwater resource, much of it near tidewater. nS NS res LAER northern@conomics inc. ES-I Alaska Water Export e Southern California is the nearest bulk water market, with Los Angeles, Long Beach and San Diego considered potential off-loading sites. e Bulk water export via tanker appears to be more feasible than pipelines, barges, or water bags, given the distances from Alaska’s ports to southern California. ¢ Bulk water cost, delivered by tankers, is more expensive than current desalination costs in the southern California area. ¢ The long term cost trends for on-water (tanker) delivery show rising costs, primarily through increasing labor and fuel costs. ¢ Desalination costs show a steady downward trend, especially since the early 1990s, and that trend is expected to continue. e Increasingly, bottled water is becoming a commodity, due to highly efficient plants operated by major bottlers such as Pepsi and Coca-cola, Vivendi, and other low-cost producers. e Alaska’s water bottlers face high transportation costs to most markets, markets that are already served by major low-cost producers. e Bottled glacial water has significant market appeal in domestic and export markets, especially in Southeast Asia. Water Resources Global water use shows wide variation among the three principal uses—agriculture, industry, and municipal/human use. Water supplies vary with geography, latitude, climate, and elevation, and are expressed in terms of cubic meters of water resource per capita. Global, Pacific Rim, Alaska Greenland, at one extreme, has over 10 million cubic meters of fresh water per person, while Kuwait, at the other extreme, only has 10 cubic meters of water resource per person. On average, the U.S. has 10,837 cubic meters of water resource per capita, while Alaska has 1,563,168 cubic meters per capita (second only to Greenland). Pacific Rim countries have a wide variety of population and water supply. Countries (states) with an abundance of water include Vietnam, Russia, Hawaii, Alaska and Canada. Countries with less water include South and North Korea, China and Taiwan, and Japan. Alaska has considerable volumes of high quality, freshwater, both on a per capita and absolute basis. In 1980, the USGS estimated “Alaska contains more than 40 percent of the Nation’s surface-water resources.” ES-2 northern@conomics inc. Alaska Water Export Water Industry For this project, the water industry was segmented into bulk and bottled groups, discussed below. Bulk Water Export Bulk water delivery within Alaska and other locations can be as simple as 5-gallon bottled water delivery by trucks, such as that provided by ABW in Southcentral Alaska. Another common method is delivery by tanker trucks in parts of rural Alaska, including Bethel, Fairbanks, Homer, and even Ketchikan. Trucks capable of hauling 500 and 1000-gallon loads deliver potable water to homes (or businesses) for storage in cisterns or special water tanks. For purposes of this project, bulk water export was defined as raw water loaded in Alaska and transported to specific markets out of state. Southern California was selected as the nearest destination for costing purposes. Bottled Water Process, Market Summary, Export Water bottling is relatively straightforward. First, water is drawn from one of several possible sources; second, depending on raw water characteristics, it may or may not be filtered, purified, or treated (for bacteria); and, third, it is bottled, labeled and distributed to market. Bottled water sales and consumption has shown a steady increase over the past ten years, with annual growth in the 8 to 10 percent per year range. As the market has grown, soft drink bottlers, such as Pepsi and Coca-Cola have entered the market and used their economies of scale to become low-cost producers. Bottled water has been shipped from Anchorage to Japan, where there is relatively strong market interest for glacial and Alaska water. Regulatory Framework Export water quality—raw or food-grade—will determine which set of regulations, federal or state, will apply. Raw bulk water has the least regulatory oversight. Bottled water is regulated by the federal Food and Drug Administration as a food product, while tap water is regulated by the U.S. Environmental Protection Agency and is regarded as a utility. Water is classified as “bottled water” or “drinking water” if it meets all applicable federal and state standards, is sealed in a sanitary container, and is sold for human consumption. Bottled water cannot contain sweeteners or chemical additives (other than flavors, extracts or essences) and must be calorie-free and sugar-free. northern@conomics inc. ES-3 Alaska Water Export Public Benefits Public benefits from either type of water processing include jobs, taxes, royalties, and conservation fees. These are highly dependent on the specific type of process, how it is funded, and organization of the local public sector. The state, with conservation fees of $10 per acre-foot (estimated) is not likely to receive significant revenues from water bottling plants. Bulk water exports of 45 acre-feet per tanker would generate $450 in conservation fees per export shipment If Sitka receives $0.01 per gallon in royalties (similar to a current contract), a single tanker carrying 14.7 million gallons of water would generate $147,000 in payment to Sitka. Financial Analysis, Results Exports of raw bulk water are not cost-competitive at this time with current desalination technology, although the political process often incorporates other measures and values in the decision making process. Bottled water exports are feasible and sales to countries such as Japan and Taiwan could capitalize on Alaska’s image and its glaciers. Bulk Water Costs Bulk water costs were estimated based on markets in southern California, a 2,096 nautical mile trip, served by bulk water from Sitka. Capital costs for 18 single-hulled tankers capable of 620 total trips per year are $270 million. Operating and maintenance costs, including a royalty cost of $0.01 per gallon in Sitka and amortized capital, suggest delivered costs of raw water would be $9,600 per acre-foot. Treatment to potable standards at Long Beach adds $1,000 for an estimated total cost of $10,600 per acre-foot. Current costs for desalinated water in southern California range from $130 per acre-foot (brackish water) to $1,200 per acre-foot for saltwater. Water distribution costs of $100 to $300 per acre-foot suggest a range of $230 to $1,500 per acre-foot. At these costs, the delivered price of Alaska water would be at least seven times more expensive than the competitive process. Bottled Water Costs, Revenues Bottled water plants are viable businesses in Alaska. In most instances, local Alaskan markets provide base demand and revenues. Exports, if successful, are an incremental increase in production. Bottled water from sites with glacier water and access to container shipping can be a viable export business. For example, Anchorage has Eklutna Glacier water and Port of Anchorage container berths. ame RR A ES-4 northern@conomics inc. Alaska Water Export A bottled water plant, producing and selling 300,000 cases per year and capable of growing to 400,000 cases annually, could generate $1.5 million in revenue. However, at the limited scale of production used by the model, plant operations would generate a profit of $62,500 before taxes. The bottled water analysis assumes that: e The business has about $4.2 million in total assets, including $500,000 of bottling and packaging equipment, a 9,000 square foot building for operations and warehousing valued at $1,000,000, and $35,000 in office and delivery equipment. e Other assets include cash and cash equivalents, inventory, and other assets related to operations. e Five people are employed to cover all aspects of production, marketing, and administration. ¢ The business produces 300,000 cases of water annually, at a cost of $2.67 per case, and sells each case for $5.00 wholesale. Under these assumptions, the business has revenues of $1.5 million. Sensitivity analyses and simple break-even calculations are included in the main report. Two appendices provide information on a literature search (Appendix A) and water conversion factors (Appendix B). A full version of bulk water cost assumptions and calculations is included as Appendix C. sae a A RR A AR A northern@conomics inc. ES-5 Introduction, Discussion In June of 2003, The Denali Commission, based in Anchorage, Alaska, requested a study of the rural development opportunities, costs, and logistics of shipping and marketing new domestic water supplies outside of Alaska. The project report would be a single source of information on the potential for water processing and export from Alaska, for both bulk and bottled operators. A prospective water bottler or shipper could take the report and use it to identify opportunities and constraints, along with order-of-magnitude costs. Northern Economics, Inc., also based in Anchorage, submitted a successful proposal, with the assistance of MWH_ (formerly Montgomery Watson Harza), consulting engineers, and Alaska’s Best Water, a water-bottling firm serving markets in Southcentral Alaska. The Denali Commission The Denali Commission was established in 1998 as a joint federal- state partnership with five assigned areas of improvements (www.denali.gov): 1. Energy 2. Health Care Facilities 3. Training 4. Intergovernmental Coordination 5. Other Infrastructure projects such as economic development, telecommunications, washeterias, and multi- use facilities These objectives are consistent with the Denali Commission’s mandate to provide critical utilities, infrastructure, and economic support throughout Alaska. Water export, either as bulk or bottled water, is a potential development for many parts of Alaska. Existing facilities in such places as Metlakatla, Hyder, Ketchikan, Sitka, Hatcher Pass, and Juneau are examples. With its many miles of coastlines and deep- water ports, export water is another resource that Alaskans could ship to water-stressed countries, especially in the Pacific Rim area. Tent rR northern@conomics inc. 1 Alaska Water Export Project Tasks The Denali Commission requested specific responses to 12 different tasks, listed in the Request for Proposal (RFP). These tasks are paraphrased as follows: 1. i op en Conduct a literature search of government and private studies and reports from the past 10 years. Identify and analyze three market segments: bulk water, non-premium bottled water and premium bottled water. Analyze competition for potential Alaska water exporters. Specify Alaska’s water export potential. Conduct an analysis of bulk water transportation via tanker, barge, and bag. Develop capital and operating costs. Discuss bulk versus bottled water operations. List Alaska water sources. Develop and list the regulatory framework for processors, both state and federal, including permit requirements. . Project likely costs of distribution and marketing. 11. 12. Prepare a set of pro forma financial statements. Describe public benefits from potential water export operations. Project Scope Rural Alaska is defined by the Commission (www.denali.gov) as those areas that experience three criteria: The difficulty and cost of importing and exporting products, traveling to, and communicating with, urban centers because of distance The absence of, or inadequate public infrastructure A “one industry” village or community with a small population located in proximity to a natural resource and having cheap labor All of Alaska, at specific times, meets the definition of rural. Even Anchorage has experienced difficulties with freight and passenger delivery due to strikes, bad weather, and port security issues. Much of Alaska is remote, with no access, except by air, and is subject to weather extremes such as wind, ice, extreme cold, and rain. For purposes of this report, all of Alaska was considered as rural. northern@conomics inc. Alaska Water Export Project team members evaluated trends, where possible, to the years 2020 or 2025, based on the best available information. Project Team To help meet specific Denali Commission task requirements, Northern Economics obtained the assistance of Alaska’s Best Water and engineers from MWH. Alaska’s Best Water has provided water bottling and delivery services in Anchorage since 1983; its twenty years in business has included several analyses of export of bottled water to South Korea and other out-of-Alaska locations. Mike Alfano, General Manager of Alaska’s Best Water (ABW), provided assistance, and his company’s 20 years of operating experience with water bottling, distribution, and marketing. MWH (formerly Montgomery Watson Harza) has extensive experience worldwide with all sizes of water delivery systems, from small water haul systems in Alaska villages to piped distribution systems in large metropolitan areas. In Alaska, MWH has completed over 200 water and wastewater projects since 1987. Representative projects include washeterias and a water treatment plant (WTP) in Tanana and Anchorage’s Eklutna WTP. Greg Magee, P.E. and MBA, from the Anchorage office, provided assistance on the bulk water export portion of the study. Northern Economics Inc.’s project team included Cal Kerr, Project Manager, and Pat Burden, President of Northern Economics, who served as project economist. Mike Fisher, Analyst, prepared financial and sensitivity analyses. Project Results Project research and analysis generated several key points, shown below and discussed in greater detail within major report sections: e Alaska has a considerable freshwater resource, much of it near tidewater. e Southern California is the nearest bulk water market, with Los Angeles, Long Beach and San Diego considered potential off-loading sites. e Bulk water export via tanker appears to be more feasible than pipelines, barges, or water bags, given the distances from Alaska’s ports to southern California. e Bulk water cost, delivered by tankers, is more expensive than current desalination costs for freshwater production in the southern California area. RR EN A SR northern@conomics inc. 3 Alaska Water Export e The long term cost trends for on-water (tanker) delivery show rising costs, primarily through increasing labor and fuel costs. ¢ Desalination costs show a steady downward trend, especially since the early 1990s, and that trend is expected to continue. e Increasingly, bottled water is becoming a commodity, due to highly efficient plants managed by major bottlers such as Pepsi and Coca-cola, Vivendi, and other low-cost producers. e Alaska’s water bottlers face significant transportation costs to markets already served by major low-cost producers. e Bottled glacial water has significant market appeal in domestic and export markets, especially in southeast Asia. Project Research, Sources Appendix A contains references and citations used for this project. Although there are over 200 separate references, they are representative of the major water-related topics from the last ten years. Topics such as water supplies, water use, allocation, distribution, and health and sanitation are very current and likely to become more significant in the next 20 years. Conversions Water is measured in many different units, from gallons of volume, to pounds of weight, including acre-feet, liters, and cubic meters. A full set of conversion tables is contained in Appendix B. Worldwide, water volumes are measured in cubic meters and costs are generally expressed as U.S. dollars per cubic meter. Within the U.S., acre-feet (the volume of water need to cover an acre of land to a one-foot depth) and units of 1,000 gallons are common. Common conversions are as follows: e 1 cubic meter of water contains 1,000 liters or 264.2 gallons e 1 acre-foot of water is 325,900 gallons or 1,233 cubic meters ¢ 1,000 gallons of water is 3.8 cubic meters 4 northern@conomics inc. Alaska Water Export Report Organization This report is organized in major sections and subsections, as generally described below. Introduction, Discussion. This section provides background on the project (including tasks, scope, and the team), this report, and general findings, as well as common water conversion factors. Water Resources. Global water uses, resources, and specific water- rich countries are identified, along with water issues such as continuing population growth and increased water demand. Pacific Rim Water Resources. Countries and states along both sides of the Pacific Ocean area are noted as to water resources and potential demand for Alaska water. In specific, California’s southern water demand is discussed in detail. Alaska Water Resources. Alaska’s water-rich status is noted, along with the first bulk water export (ice) in 1852. Water resources and market preferences are discussed. Water Industry. Process and market attributes of both the bulk and bottled water industry segments are discussed in this section. Regulatory Framework. Federal and state oversight of the bottled (and bulk) water industries are presented in this section, including special measures for glacial water and glacial ice. Financial_Analysis. Capital and operating costs, including maintenance, are presented in this report section, with pro forma financial statements, sensitivity analyses, and a break-even analysis. Summary, Market Opportunities. Alaska’s bulk and bottled water potentials are summarized in this section. nN ae HAART TR - northern@conomics inc. 5 Alaska Water Export Water Resources Global water supply and use varies by country location, population density and degree of development. This section provides a picture of global, regional (Pacific Rim), and local Alaska water supply and use estimates, in descending geographical order. Global water use shows wide variation among the three principle uses (agriculture, industry, and municipal — human use). Basic human needs are approximately 50 liters per day for drinking water, sanitation, bathing, and food preparation. Water supplies vary with geography, latitude, climate, and elevation, and are expressed in terms of cubic meters of water resource (ice, rivers, lakes, sub-surface water) per capita. Greenland, at one extreme, has over 10 million cubic meters of freshwater per person, while Kuwait, at the other extreme, only has 10 cubic meters of water resource per person. On average, the U.S. has 10,837 cubic meters of water resource per capita, while Alaska has 1,563,168 cubic meters per capita (second only to Greenland). Water stress occurs when water supplies drop below 1,700 cubic meters per person, with scarcity defined as less than 1,000 cubic meters per person of annual supply. Information on global water resources is presented in more detail within the following sections. Global Water Use According to the World Bank,’ world freshwater uses are categorized as shown in Table 1. Table 1. Aggregate Water Use, World Averages. Water Use Percent of Total Agriculture 70 Industry 20 Municipal 10 The World Bank’s averages include a six-fold increase (per capita) over the past century, worldwide. They do not account for high variability among (and within) countries. The bank noted: These increases have come at high environmental costs; some rivers no longer reach the sea; 50 percent of the world’s wetlands have disappeared in ' “World Bank Endorses Water Resources Strategy,” News Release February 27, 2003. northern@conomics inc. Alaska Water Export the past century and 20 percent of freshwater fish are now endangered or extinct. Many of the most important groundwater aquifers are being mined, with water tables already deep and dropping by meters every year, and some are damaged permanently by salinization. Without appropriate action taken to address the situation, four billion people-one half of the world’s population-are expected to live under conditions of severe water stress in 2025, particularly in Africa, the Middle East, and South Asia. [Emphasis added]. Other attributes of these three main water uses are discussed in the following subsections. Agriculture Food self-sufficiency consumes an estimated 900 cubic meters of water per person per year, well beyond the amount available in semi-arid countries within Africa and Asia. Forecasts for the next 30 years suggest water scarcity will make these regions, home to 55 percent of the world’s population, more dependent on food imports’. Africa and Asia have two of the highest regional birth rates in the world. Agricultural water quality needs are less stringent than those for human consumption. Parts of the world, such as Israel, use reclaimed sewage and non-contaminated industrial process water for agricultural production. Industrial Traditionally, industrial water use has been tied to industrial activity as an indicator of prosperity’. As Gross Domestic Product (GDP) increased, there was a parallel increase in water consumption by industrial firms. However, recent technological advances have reduced water consumption in many industries, such as the steel and food industries. There is no longer the direct one-to-one linkage between GDP and industrial water use. Muni al The minimum amount of water needed for human life ranges from 20 to 40 liters (freshwater) per day, for drinking and sanitation (hygiene) alone. The World Bank, the World Health Organization ? Ibid. 3 “The World’s Water, 2002-2003” Peter Gleick, Island Press, 2003. A Tn tna pant HAR EEE northern@conomics inc. 7 Alaska Water Export and the United Nations set these targets. However, these volumes exclude water for cooking and personal hygiene. The quantities in Table 2 suggest a minimum of 50 liters per person per day (18.3 cubic meters per person per year), for four essential uses, including personal hygiene. Table 2. Recommended Basic Water Requirement Purpose Liters per Person per Day Drinking Water 5 Sanitation Services 20 Bathing 15 Food Preparation 10 Total 50 Peter H. Gleick, Basic Water Requirements for Human Activities: Meeting Basic Needs, in Water International, International Water Resources Association, 1996. As a point of comparison, one Anchorage subdivision, with its own water system, distributes water to approximately 250 homes. Over seven years, metered water consumption per home has averaged about 264 gallons or almost exactly one cubic meter (1,000 liters) per day. At three people per home, the per capita water consumption in this Anchorage subdivision is 88 gallons or 330 liters, about six times the established basic water requirement shown in Table 2. Global Water Resources The earth is covered with water, estimated at 70 percent of the world’s surface area. However, only 3 percent of that water is freshwater, with the rest contained in the Earth’s oceans. Figure 1 illustrates the earth’s freshwater distribution. northern@conomics inc. Alaska Water Export Figure 1. The Earth’s Water Distribution. Freshwater Other Percent by Source, Type g xz Global Freshwater Lakes Air, soil water Surface Source: U.S. Geological Survey, http://ga.water.usgs.gov/edu/mearthall.html. Accessed October, 2003. Freshwater that readily supports human life, agriculture and industry is located in ground water, surface water, and the various icecaps and glaciers in Alaska and other countries. Alaska alone contains approximately 75,000 square kilometers of glaciers’. Overall, there is sufficient freshwater for human use on an annual basis. One estimate® suggests between 12.5 and 14 billion cubic meters of water are available on an annual basis, or about 9,000 cubic meters per person per year, for all uses (agriculture, industry, etc.). This same methodology suggests only 5,100 cubic meters per capita will be available in the year 2025. Since freshwater is not evenly distributed, there are considerable supply disparities now, and they appear likely to get worse as population increases and global warming changes traditional weather and water patterns. * http://nsidc.org/glaciers/quickfacts.html. Accessed October 10, 2003. 5 “Solutions for a Water-short World,” Population Information Program, Johns Hopkins School of Public Heath, September, 1998. northern@conomics inc. Alaska Water Export Water-Rich Countries Table 3 lists selected countries in terms of per capita water supply. Unlike thresholds for water stress and scarcity, there are no defined levels of abundance. Table 3. Selected Water Rich Countries, Population and Cubic Meters of Water per Capita, 2000. Country Continent Population Water per Capita Greenland N C America 56,000 10,767,857 Alaska, USA N C America 626,932 1,563,168 Papua New Guinea Asia 4,809,000 166,563 Canada N C America 30,757,000 94,353 New Zealand Oceania 3,778,000 86,554 Belize N C America 226,000 82,102 Peru South America 25,662,000 74,546 Laos Asia 5,279,000 63,184 Chile South America 15,211,000 60,614 Panama N C America 2,856,000 51,814 Colombia South America 42,105,000 50,635 Fiji Islands Oceania 814,000 35,074 Ecuador South America 12,646,000 34,161 Russian Federation Europe 145,491,000 30,980 Costa Rica NC America 4,024,000 27,932 Malaysia Asia 22,218,000 26,105 Australia Oceania 19,138,000 25,708 Hawaii, USA NC America 1,211,537 15,187 Mongolia Asia 2,533,000 13,739 Indonesia Asia 212,092,000 13,381 Viet Nam Asia 78,137,000 11,406 United States of America NC America 283,230,000 10,837 Source: United Nations, Food and Agricultural Organization, AQUASTAT, 2003. As Table 3 shows, the United States average is 10,837 cubic meters per person, with Alaska and Hawaii listed separately due to their unique water resources and smaller populations. Water Stress and Scarcity Water stress and scarcity are measured in terms of available annual supply per capita: e Water stress occurs when annual supplies drop below 1,700 cubic meters per person. e Water scarcity is defined as annual water supplies under 1,000 cubic meters per person per year. northern@conomics inc. Alaska Water Export e Water shortages or rationing can be expected between the two figures®. Africa and Asia are currently listed in those categories of water stress and scarcity, as shown in Table 4. Not all countries in the world are shown. Table 4. Africa and Asia, Selected Countries, with Water Stress, Scarcity, Cubic Meters of Water Per Capita, 2000. Continent and Country Estimated Population Water per Capita Africa Libyan Arab Jamahiriya 5,290,000 113 Egypt 67,884,000 859 Morocco 29,878,000 971 Kenya 30,669,000 985 South Africa 43,309,000 1,154 Weighted Average 947 Asia Kuwait 1,914,000 10 Gaza Strip (Palestine) 1,077,000 52 Saudi Arabia 20,346,000 118 Singapore 4,018,000 149 Jordan 4,913,000 179 Israel 6,040,000 276 Cyprus 784,000 995 Korea, Republic of 46,740,000 1,491 Pakistan 141,256,000 1,576 Syrian Arab Republic 16,189,000 1,622 Weighted Average 1,232 Source: United Nations, Food and Agricultural Organization, AQUASTAT, 2003. The FAO database suggests countries currently experiencing water stress or scarcities are concentrated in Africa and Asia. Many of these countries are potential markets for Alaska’s water or, conversely, they have developed alternative water production that is competition for water delivered from Alaska. Israel, with its heavy dependence on desalination (salt removal) of salt water, is such an example. Many parts of the world, including the United States, have invested in reverse osmosis water purification (membrane purification), a system that produces water in the $0.55 to $0.70 cost per cubic meter. Equivalent costs are $700 to $900 per acre-foot or $2 to $3 per 1,000 gallons, as shown in Table 5. Generally, water costs are quoted in most of the world as U.S. dollars per cubic meter. Appendix B contains more detailed conversion factors. ° “Solutions for a Water-Short World,” John Hopkins University, 1998. northern@conomics inc. 12 Alaska Water Export Table 5. Selected Conversion Costs, $ per Acre-foot, 1,000 gallons and Cubic Meter. $/Acre-foot=> $/1000 gallons => $/cubic meter 400 1.23 0.32 600 1.84 0.49 800 2.45 0.65 1,000 3.07 0.81 1,200 3.68 0.97 1,600 4.91 1.30 2,000 6.14 1.62 Water Issues In 1992, the UN’s Dublin Conference declared “Water has an economic value in all its competing uses and should be recognized as an economic good.” Others have opposed this view, suggesting water is both a social and economic good. Other policy issues include: e Water rich versus water poor countries e Developed versus undeveloped countries and water consumption e Future for water use — by sector (agricultural, industrial, and human) ¢ Globalization of water trade ¢ Global warming impacts on water supply ¢ Privatization of water supply and distribution e Large water dams ¢ Population growth Generally, there is agreement that the highest priority water use is maintaining human life, followed by all others. Although the issues noted above are beyond the scope of this project, they will have a major impact on world water use policies in the next several decades. northern@conomics inc. Alaska Water Export Pacific Rim Water Resources Pacific Rim water resources for selected countries are discussed in this section. Regional, or Pacific Rim, population and relative water supplies (in cubic meters per capita) are shown in Table 6. Unless otherwise noted, these are based on country averages. West Coast United States population consists of Washington, Oregon, and California; however, the water supply shown is based on the U.S. national average. Water supply information for specific states, such as the three West Coast U.S. states, is not readily available; population figures, however, are available by state and are shown. Water supply information for Alaska and Hawaii is available and is shown. Table 6. Pacific Rim Countries, with Population and Water Supply, Cubic Meters Per Capita, and Per Capita Gross Domestic Product (GDP), 2000. Pacific Rim Country Population Water Supply Per Capita Per Capita GDP ($) Vietnam 78,137,000 11,406 2,100 China 1,252,952,000 2,258 4,300 Taiwan 22,181,000 3,021 17,200 Japan 127,096,000 3,383 27,200 South Korea 46,740,000 1,491 18,000 North Korea 22,268,000 3,464 1,000 Russia 145,491,000 30,980 8,300 Hawaii 1,211,537 15,187 36,300 Alaska 626,932 1,563,168 36,300 Canada 30,757,000 94,353 27,700 West Coast, U.S. 43,187,168 10,837 36,300 Mexico 98,872,000 4,624 9,000 Source: AQUASTAT, United Nations Food and Agricultural Organization, 2003. Census 2000, U.S. Census Bureau; “The World Factbook” U.S. Central Intelligence Agency, 2003. Pacific Rim countries have a wide variety in population and water supply. Countries (states) with an abundance of water include Vietnam, Russia, Hawaii, Alaska, Canada and the west coast of the United States. Countries with fewer water supplies include South and North Korea, China and Taiwan, and Japan. The column headed with per capita GDP provides an estimate of economic development. Generally, more developed countries have more internal funds available for water provisioning. Poorer countries often seek external funds, such as loans from the World Bank. northern@conomics inc. Alaska Water Export Washington and Oregon have smaller populations than California and overall less demand for water. California Water Demand Southern California’s warm, dry climate, as well as similar conditions in adjacent areas such as New Mexico and Nevada (especially Las Vegas), has contributed to considerable net in-migration in the past 10 to 15 years. Figure 2 illustrates population growth in the contiguous U.S. for the period 1990 to 2000. Figure 2. Population Growth, Contiguous United States, 1990 to 2000. Demographic Changes: Population Has Grown Fastest in the West, Particularly in the “Public Land States” Percent Change in Resident Population for the 48 States and the District of Columbia: 1990 to 2000 - Darker areas denote faster growth rates. - Nevada (66%) MD 108 and Arizona W pe 67 (40%) lead the nation. - Intermountain States average about 30%. USCENSUSBUKEAU Source: U.S. Census Bureau, http://www.doi.gov/water2025/populate.html, accessed December 23, 2003. A major water source for California, Nevada, and New Mexico is an allocated portion of water from the Colorado River. Homeowners in San Diego, for example, are likely to drink water from the Colorado, shipped to the Los Angeles area and, eventually, to San Diego via a series of aqueducts. 14 northern@conomics inc. Alaska Water Export Other sources of water for the drier portions of southern California are inter-basin transfers from the northern part of the state. However, the overall picture of water supply for California to the year 2025 suggests increasing conflicts and higher demand for freshwater. Figure 3 illustrates potential water crises by 2025. Figure 3. Potential Water Supply Crises, by 2025, Western U.S. Potential Water Supply Crises by 2025 (Areas where existing supplies are not adequate to meet water demands for people for farms, and for the environment) * State Capitols Major Cites Major Rivers ZZ) indian Lands and Native Entities eo ™ SS May 2003 | Source: U.S. Department of Interior, Bureau of Reclamation, http://www.doi.gov/water2025/supply.html, accessed December 23, 2003. Conflicts in the San Francisco area are considered highly likely, while there is potential for substantial conflict from Los Angeles south to San Diego. northern@conomics inc. 15 16 Alaska Water Export Alaska Water Resources As shown in the two prior sections, Alaska has considerable volumes of freshwater, both on a per capita and absolute basis. In 1980, the USGS estimated “Alaska contains more than 40 percent of the Nation’s surface-water resources.7 The State’s average annual precipitation is about 1,050,000 million gallons [one trillion] per day, with an average annual surface runoff of about 989,000 million gallons per day.8 Water export from Alaska is not new, however. The first water export started with the Russians, as bulk ice shipped to west coast cities. Early Russian Water Exports Bulk water export from Alaska began during the Russian era, as export ice. Slabs of ice were cut, stored in sawdust within icehouses, and eventually shipped to California and other markets. The Russian America company operated an ice company in Alaska for 28 years. Initially established at Sitka, it moved to Woody Island in 1855, near Kodiak, and shipped ice to California, Mexico, and the Sandwich Islands (Hawaii).? The first shipment to California (San Francisco), displacing ice shipped from Boston, was so successful that the Russian America Company agreed to furnish 1,000 tons annually at $35 per ton. That first shipment was made in February, 1852, from Woody Island to San Francisco. At $75 per ton, the initial cargo was 250 tons, for a total sale of $18,750. Ice was cut with a special horse-powered saw and stored in icehouses, covered with sawdust, at Woody Island. Sample loads of ice from Sitka were tested in 1852 and found to be too soft and thin, at three to four inches thick, and shipped loads had to be supplemented with glacial ice from Baird Glacier near Petersburg. Woody Island produced 19,200 tons of ice in the six years that ended July 1, 1860; annual production reached 6,000 tons. By July 1, 1862, 25,500 tons of ice were exported with total revenue reaching $250,000." Freight charges ranged from $7 to $8 per ton. ” Alaska Surface-Water Resources, National Water Summary, U.S. Geological Survey, circa 1980. 5 Alaska Water Supply and Use. National Water Summary, U.S. Geological Survey, 1987. ° “The Woody Island Ice Company” by Gary Stevens. “Russian in North America” Proceedings of the 2" International Conference on Russian America, Sitka, Alaska. August 19-22, 1987. Edited by Richard A. Pierce. Limestone Press. 1990. '° Ibid. Page 198. northern@conomics inc. Alaska Water Export An American, Frederick Whymper, visited Kodiak shortly before the 1867 sale of Russian America to the United States. He recorded the ice cutting process and commented on end-product markets in San Francisco, Mexico, and Central and South American ports. The ice company was purchased in 1867 by the American Russian Commercial Company. In 1868, total ice capacity was 12,000 tons in three icehouses. In 1869, ice was priced in San Francisco at five cents per pound and customers balked at the high price. Artificial ice making began in 1871 and that started a price war in San Francisco, with Woody Island ice prices dropping to two cents per pound. Subsequently, the ice cutting business declined and it ceased operations by 1879. Lessons Learned, Ice Exports Although this project took place over 150 years ago, there are lessons from the Russian ice business: e Successful water exports (whether bulk or bottled) must overcome Alaska’s distance from many markets e Export water competitiveness is subject to technological advances, whether artificial ice-making in 1871 or cheaper desalination plants in the current time ¢ Alaska has relatively limited local markets and must depend, at some point, on exports for business expansion e Alaska has strong name recognition; its water (and ice) has generated a favorable response from many consumers since 1852, but price is always a consideration e Alaska’s association with glaciers, such as Baird Glacier, is a strong linkage for bottled water buyers Alaska’s Precipitation Figure 4 illustrates Alaska’s precipitation in inches per year. With a land area of 586,000 square miles (1,518,000 square kilometers), there is wide variation in precipitation; from under 10 inches in the Arctic to over 300 inches per year in parts of Southeast Alaska. In addition to surface water runoff, Alaska had 28,500 square miles of glaciers and ice fields in 1971 (Post and Mayo). There is evidence that global warming might be a cause of recent melting and calving, reducing the area and volume of Alaska’s glaciers. northern@conomics inc. 17 18 0 ° SCALE 1:17,000,000 150 300 MILES 150-300 KILOMETERS Alaska Water Export Figure 4. Alaska Precipitation EXPLANATION ——#— Line of equal average annual precipitation Interval, in inches, is variable Line of equal average annual runoff Interval, in inches, is variable @ National Weather Service precipitation gage—Monthly data shown in bar graphs 4 USGS stream-gaging station—Monthly data shown in bar graphs Source: USGS Alaska’s River Systems Alaska’s larger rivers drain a large portion of the state. Alaska’s four climatic zones have the following precipitation patterns: ¢ Maritime. Precipitation estimated at 67 percent of the total occurs from September to March. Ketchikan and Sitka are cities within this zone, as are Kodiak and the Aleutian chain. ¢ Continental and Arctic. About two-thirds of the precipitation occurs from June to November. The Yukon and Colville rivers are representative of these areas. ¢ Transition. This zone includes areas such as Anchorage that lie between the drier continental zone (north) and the maritime area (south). Average rainfall for Alaska is 25 inches per year but a significant range exists, from 4 inches along the Arctic coast to 300 inches for area such as Little Port Walter in Southeast Alaska. northern@conomics inc. Alaska Water Export Table 7 illustrates these rivers by area within Alaska, along with estimated discharge per second (at the mouth). Table 7. Alaska’s Largest Rivers, by Area and Estimated Discharge per Second. Discharge in Discharge in Cubic Feet Cubic Meters River Area per second per second Stikine Southeast 56,000 1,977 Taku Southeast 20,000 706 Alsek Southeast 30,000 1,059 Copper Southcentral 59,000 2,083 Chitina Southcentral 20,000 706 Susitna Southcentral 61,000 2,154 Yenta Southcentral 21,000 742 Nushagak Southwest 32,000 1,130 Kuskokwim Southwest 67,000 2,366 Yukon Northwest 225,000 7,945 Porcupine Northwest 23,000 812 Tanana Northwest 41,000 1,448 Koyukuk Northwest 22,000 777 Kobuk Northwest 18,000 636 Colville Northwest 20,000 706 Source: Adapted from USGS, Alaska Surface-Water Resources, 1980. northern@conomics inc. Alaska Water Export Figure 5 illustrates Alaska’s major river systems and their relative discharge, as displayed by the amount of shading. Figure 5. Alaska’s Major River Systems, Discharge. EXPLANATION Average annual discharge In ten-thousands of cubic feet per second 5 10 15 20 25 RELATIVE DISCHARGE = a Source: USGS Southeast Water Resource In 1994, the State Department of Natural Resources (DNR) identified Southeast Alaska as a likely source of bulk exportable water.'' Precipitation ranges from 100 to 300 inches per year, mostly as rain. Surface runoff was estimated at over 300 million acre-feet per year (370 billion cubic meters). The Southeast sub region has smaller drainage basins, less than 200 square miles, with large basins that extend into British Columbia. The Stikine River is one example. Runoff from this sub region (including the runoff from Canada) is estimated as much as that from the Mississippi River." "| Alaska Water Exports. State of Alaska, Department of Natural Resources, June, 1994. '2 Alaska Surface-Water Resources. U.S. Geological Survey. 1980. 20 northern@conomics inc. Alaska Water Export The City of Sitka signed two contracts for bulk water export from the city’s water source at Blue Lake and Green Lake. This water source was used for bulk water costing and is explained in greater detail within the report discussion on bulk water. Southcentral (Anchorage) Water Resources Southcentral Alaska includes the Port of Anchorage, a receiving port that supplies over 80 percent of the state’s population with food, supplies, and fuel. There are other areas in Southcentral with water nearby, such as Cordova, Valdez, Whittier, and Port MacKenzie, but Anchorage has the majority of non-oil tanker vessel traffic, primarily for petroleum products. Water was exported from the Port in 1994 and is the only known bulk water export from this region. This section focuses on Anchorage’s past and potential water export. Anchorage Water Sources The Port lies within the Municipality of Anchorage and it obtains water from the municipal water system. Municipal water is drawn from three main sources," listed below with their supplied volumes for 2002: e Eklutna Water Treatment Facility, 7.9 billion gallons or 79.6 percent of the total supply e Ship Creek Water Treatment Facility, 299 million gallons or 3 percent of total supply ¢ Chugach Mountain Range watershed and in-town wells, 1.7 billion gallons or 17.4 percent of the total The Eklutna and Ship Creek treatment facilities produce up to 65 million gallons of water per day. The Anchorage Water and Wastewater Utility (AWWU) also operates 12 high production wells and nine smaller standby units. Eklutna water is glacial water, from the Eklutna Glacier, and meets state requirements for labeling as glacier water. There is further detail on glacial water in the report section titled Regulatory Framework. Anchorage Water Treatment Water produced by AWWU is treated in four steps: 1. Raw water is mixed with soda ash to maintain a pH of 7.7 to 8.0, a range that minimizes corrosion in the distribution system and residential plumbing fixtures. '3 Anchorage Water Quality Report, Anchorage Water and Wastewater Utility, 2003. 1 PR eR A RS NR northern@conomics inc. 21 Alaska Water Export 2. Ferric sulfate is added for coagulation and flocculation. As it dissolves, it binds dirt and other floating particles to settle in large basins. 3. Filtration through layers of anthracite coal, sand and gravel removes remaining impurities. 4. Chlorine and fluoride are added to finished water for bacterial treatment and prevention of tooth decay. AWWU water may be metered and, if so, it is sold at the rate of $2.64 per 1,000 gallons for both residential and commercial consumers. However, AWWU residential water is billed at a flat monthly rate of approximately $50 per home for both water and sewer. Anchorage Bulk Water Export In August 1994, AWWU exported water to Japan from the Port of Anchorage. The 1.76 million gallons was loaded via special hoses connected to water points near the Petroleum, Oil and Lubricant (POL) dock. The tanker had loaded a partial-cargo of naphtha, along with water in the remaining holds. The ship was en route to Japan after unloading cargo in California. The end-product consumer was a Japanese industrial user, facing extreme draught and limited industrial water availability. Grit and sand were greatest concerns for the purchaser, since the water would not be consumed by humans. Total loading time was 16 hours, due to delays from 30-foot tide fluctuations in Cook Inlet and inadequate water-fill piping. An engineer at AWWU estimated a 15-million gallon tanker would be a likely limit for any future such sales, due to depth limits in Cook Inlet. The system used would require three 24-hour days to fill a tanker of this size; a faster, quick-fill system was suggested for any future water sales, along with a water reservoir of appropriate size. Exported water volume was estimated by a marine surveyor and was charged at the rate of $2.64 per 1,000 gallons or $4,650 for the whole load. Two other purchases were attempted but the POL dock was blocked and loading time could not be scheduled. Aleutian Water Resource Export bulk water applications were approved by the State Department of Natural Resources in January, 2000 for Adak Island, at the western end of the Aleutian Island chain. Three sources of surface water were identified near the former Adak military base, totaling a potential removal of 46 million gallons per month (12,200 cubic meters). 22 northern@conomics inc. Alaska Water Export The applications indicated water would be gravity fed by pipelines, approximately 11,500 feet in length, to a deep-water port. Although no actual shipments have been made to date, the permits are still valid. Market Preference Water export from Alaska is expected to continue as a spot market commodity, similar to the 1994 shipment from Anchorage. Bulk water purchasers will likely use tankers, in preference to slower tugs or more costly pipelines. The current price in Anchorage is $0.00264 per gallon (treated water) and $0.01 per gallon (untreated) at Sitka. There are several criteria that define a successful bulk water export candidate: e High quality water, including low sediment and other dissolved solids, along with a neutral pH (relative acidity), and low bacteria counts e Sufficient water for bulk export on a fast fill basis, to reduce loading time and cost e Accessibility to a port with terminals that can load bulk fluids such as water —_———_— northern@conomics inc. 23 Alaska Water Export Water Industry The water industry, including public utilities, has three main participants: e Water producers such as the City of Sitka e Water distributors, generally a water utility e Water bottlers (wholesale, retail; 5-gallon and PET) Producers are generally public utilities such as Anchorage’s Waste and Wastewater Utility (AWWU) that supply water to commercial and municipal end-users. Several, such as the Imperial Valley Irrigation District in southern California, provide water directly to the agricultural industry. This report section provides more specific information on bulk water suppliers, distributors and water bottlers. Bulk Water Export Bulk water delivery within Alaska, and other locations, can be as simple as 5-gallon bottled water delivery by trucks, such as that provided by Alaska’s Best Water (ABW) in Southcentral Alaska. Another common method is delivery by tanker trucks in parts of rural Alaska, including Bethel, Fairbanks, Homer, and even Ketchikan. Trucks capable of hauling 500 and 1000-gallon loads deliver potable water to homes (or businesses) for storage in cisterns or special water tanks. Water Transport Methods For purposes of this project, bulk water export was defined as fresh water loaded in Alaska and transported to specific markets out of state. Water tankers capable of hauling up to 15 million gallons via ocean travel were considered most feasible. Three ways of exporting bulk quantities of fresh water from Alaska were considered: single-hull tankers, water transport bags, and barges. At this time, towing a giant, reinforced nylon water transport bag by tug, similar in holding capacity to a tanker, was considered more problematic and costly than a tanker. Although there are instances where huge bags have been hauled successfully for short distances by tugs, the technology of hauling bags long distances is not fully proven (McCann, 2000). However, significant advances have been made over the last few years to improve the economics and technical feasibility of water transport bags (Davidge, 2004). 24 northern@conomics inc. Alaska Water Export Likewise, exporting large amounts of water by barge was also found to be uneconomical and technically unfeasible due to lower capacity and slower speeds than the tanker alternative. Pipelines were also evaluated, both on-shore and offshore. However the extremely high costs of such pipelines eliminated them at this time. An order-of-magnitude cost estimate in 1992 for an offshore pipeline from southeast Alaska to Lake Shasta in northern California was approximately $160 billion (U.S. Congress, 1992). Depending on end use, either raw or potable water can be exported from Alaska. However, transporting potable water for drinking water purposes is not feasible because of the high risk of contaminating water during delivery. Even if potable water were exported, then tested, and found safe for drinking upon delivery, drinking water providers would still be required to reprocess water through a water treatment plant before entering a water distribution system. This would ensure that the water complied with current drinking water standards and is safe for public consumption. Therefore, for the purpose of this study, raw water instead of potable water would likely be exported. The most promising method of exporting bulk raw water from Alaska is a single-hull tanker. Since the City and Borough of Sitka are actively pursuing bulk raw water sales, and with fresh water supply shortages in southern California, exporting water by tanker from Sitka, Alaska to Long Beach, California was selected as the model bulk water export project for cost estimating. Distance between ports is about 2096 miles. Figure 6 illustrates the proposed water tanker route from Sitka to Long Beach. 1 RR A i NERS IES ETL northern@conomics inc. 25 Alaska Water Export Figure 6. Bulk Water Export, Sitka to Long Beach, Tanker Route. BULK WATER EXPORT ROUTE- SITKA TO LONG BEACH . .* ‘dussenste™ y qucsenmeenennacesausens® . . o* Source: MWH Sitka’s source of water is Blue Lake, which is fed by glacier, snowmelt and rain. Water quality is very good. Blue Lake supplies hydroelectric power and drinking water for the community. Between the lake and the hydroelectric plant is a 72” pipeline, which flows at 552.5 million gallons of water per day. The City and Borough of Sitka have two water export certificates from the State of Alaska, each for 12.5 million gallons per day. Thus, the total water available per year from Sitka for bulk water export is 25,000 acre-feet or 9 billion gallons (Sitka, 2003). However, Blue Lake has the capacity to provide more water. The loading of raw water at Sitka would occur at the Sawmill Cove Industrial Park, located on the shore of Silver Bay, a large ocean bay. northern@conomics inc. Alaska Water Export However, there is no existing dock suitable for holding a tanker for the purpose of loading water. Access to the aqueduct from Blue Lake is less than 2,000 feet from the shore-side dock site at Sawmill Cove. A suitable sized dock and water line would need to be constructed. At the receiving end in Long Beach, port facilities would need to be upgraded and a water pipeline would need to be constructed to tie into the existing water distribution system that provides water for southern California. Export Bulk Water Markets, Desalination Southern California is the major market for Alaska’s potential bulk water exports. A recent task force report (California Department of Water Resources, 2003) included the following selected key findings: ¢ California’s population is projected to increase by 600,000 per year, largely from natural increases (births minus deaths), which will impact demands for potable water supply. ¢ Some areas of the State have serious groundwater overdraft problems, adding pressure on existing water supplies to meet agricultural and urban demands. ¢ Desalination is receiving increased attention as the cost of desalination decreases and the cost of many other water supplies continues to rise. ¢ There are currently more than 40 brackish groundwater- desalting facilities and generate approximately 170,000 acre- feet per year. e The total cost for brackish water desalination...will be based on site-specific conditions and currently range from $130 to $1,250 per acre-foot. ¢ There are currently 16 permitted seawater desalination facilities that generate 4,600 acre-feet per year of desalinated water in California. e The costs for new seawater and estuarine water desalination...range from $700 per acre-foot (energy costs of $0.05 per kWh) to $1200 per acre-foot (energy costs of $0.11 per kWh). Distribution costs are $100 to $300 per acre-foot. ¢ Current desalination systems using reverse membrane technology require about 30 percent more energy than existing interbasin supply systems currently delivering water to parts of Southern California. northern@conomics inc. 27 Alaska Water Export Desalination Methodology There are two major types of desalination processes (International Desalination Association, 2000): thermal and membrane. Thermal processes include distillation and compression — techniques. Membrane processes include reverse osmosis (RO). As expected, thermal processes require considerable heat energy, from 158 degrees F up to 230 degrees F, to keep the processes efficient. Membrane technologies, however, mostly require energy for pressurization and do not need high temperatures. Most desalination plants in the world are older thermal plants (particularly in the Middle East) or RO plants, especially in areas with brackish water (Israel, Tampa Bay, Florida). Almost all plants planned for Southern California are RO plants with a likely cost range of $130 to $1500 per acre-foot, produced water cost. The latter extreme assumes $0.11 electrical costs per kWh and $300 per acre-foot of distribution cost. The overall cost of desalination has shown a sharp decline since 1990, while the cost of imported water, including that from the Colorado River, has increased slightly, as shown in Figure 7. Figure 7. Trend, Water Cost, Desalination versus Imported Water, 1990 to 2002. Desalination —® Imported Water Source: Unit Cost of Desalination by Shahid Chaudhry, California Energy Commission. 2003. SE 28 northern@conomics inc. Alaska Water Export Bottled Water Process Water bottling is relatively straightforward. First, water is drawn from one of several possible sources; second, depending on raw water characteristics, it may or may not be filtered, purified, or treated (for bacteria); and, third, it is bottled, labeled and distributed to market. Figure 8 illustrates the bottling process for ABW. The company uses raw well water as its source and then heats it to 77 degrees F for the most efficient RO processing. It is filtered before reaching RO membranes, where water is pressurized to 200 pounds per square inch. Half of the in-feed water is forced through the membrane while the other half (brine, or process reject) is discarded or stored for re- use. Purified water is then treated with ultra-violet light and ozone to kill any bacteria. ABW bottles its water in 5-gallon re-usable bottles; consumer bottles in the 0.5, 1.0 and 1.5 liter sizes are termed small-package goods or PET (an acronym for polyethylene terephthalate, the resin used to make these bottles). In Alaska, Mat-Maid, Purely Alaska, and Sitka Beverage Corporation manufacture PET bottles using blow mold machines. Virtually all bottled water export is limited to PET packaged goods. Large containers, such as the 5-gallon bottles that ABW uses, are heavy and not as consumer-friendly as PET bottles. RR northern@conomics inc. 29 Alaska Water Export Figure 8. Alaska’s Best Water, Process Flow. ya | Water is drawn from well \ / Water is heated | to 77 degrees F | for best reverse \ osmosis. \ a (Raw water is | filtered three | times, down to 5 microns. \ Reverse ~ osmosis, 200 psi / | One gallon reject, —» 200-300 parts per | million, minerals ——— { Recycled or reused / (4,500 gallon fiberglass / One gallon of _| tanks. One for product | product, 2 parts — \._ and one for reject. per million, to ~ storage. | Treated: UV and | ©3 (ozone) for bacteria. To dual-head | gravity injector. Capped, sealed, labeled, to inventory. 30 northern@conomics inc. Alaska Water Export Bottled Water, Market Attributes Bottled water consumption has grown steadily in the past decade. Table 8 illustrates 2002 ranking, by country and millions of gallons consumed, for the top ten countries. These ten countries consumed approximately 76 percent of all bottled water in 2002. Compound annual growth rates for each country are shown, along with the worldwide average of 10.3 percent per year, since 1997. Table 8. Global Bottled Water Market, 1997 — 2002, Quantity and Growth per Year. 2002 Millions of Gallons _—, Rank Country 1997 % of World 2002 % of World 1997-2002 1 United States 3,794.30 17.8 6,018.50 17.3 9.7 2. Mexico 2,767.80 13.0 3,898.60 11.2 71 3 China 726 3.4 2,610.10 7.5 29.2 4 Italy 1,995.40 9.4 2,558.20 74 51 5 Brazil 1,038.00 4.9 2,541.80 73 19.6 6 Germany 2,166.70 10.2 2,371.50 68 1.8 7 France 1,598.00 75 2,225.60 6.4 68 8 Indonesia 597 2.8 1,622.50 47 22.1 9 Thailand 941.7 4.4 1,277.00 3.7 6.3 10 — Spain 935.2 44 1,133.70 3.3 3.9 Top 10 Subtotal 16,560.30 778 26,257.40 75.7 9.7 All Others 4,731.10 22.2 8,435.40 24.3 12.3 World Total 21,291.40 100.0 34,692.80 100.0 10.3 Source: Adapted from Beverage Marketing Corporation Per capita bottled water consumption by the top 15 countries is shown in Table 9. Average worldwide bottled water consumption approximately doubled from 5.7 gallons per person in 1997 to 11.8 gallons in 2002. a northern@conomics inc. 31 Alaska Water Export Table 9. Global Bottled Water Consumption, Per Capita, Top 15 Countries, Gallons Per Capita. 1997 — 2002. Rank Country 1997 2002 1 Italy 35.1 44.2 2 Mexico 28.6 37.7 3 France 27.3 37.1 4 United Arab Emirates 26.8 35.2 5 Belgium-Luxembourg 30.3 32.7 6 Germany 26.4 28.8 7 Spain 23.9 28.2 8 Lebanon 13.8 24.8 9 Switzerland 22.7 24.2 10 Saudi Arabia 17.1 23.8 11 United States 14.1 21.5 12 Cyprus 17.2 21.4 13 Czech Republic 14.2 21.1 14 Austria 18.5 20.9 15 Thailand 15.8 20.1 Global Average 5.7 11.8 Source: Beverage Marketing Corporation Table 10 illustrates U.S. bottled water consumption from 1992 to 2002, in gallons per capita, along with annual percent change. For the ten-year period, consumption approximately doubled from 9.8 gallons (1992) to 21.5 gallons (2002). Table 10. U.S. Bottled Water Consumption, 1992 — 2002, Gallons Per Capita. Year Gallons Per Capita Annual % Change 1992 9.8 _ 1993 10.5 7.4 1994 11.5 9.4 1995 12.2 6.4 1996 13.1 7.4 1997 14.1 7.4 1998 15.3 8.3 1999 16.8 10.0 2000 17.8 6.0 2001 19.5 9.6 2002 21.5 10.0 Source: Beverage Marketing Corporation northern@conomics inc. Alaska Water Export Figure 9 illustrates the steady growth in U.S. bottled water consumption, on a per capita basis, from 1992 to 2002. Figure 9. U.S. Bottled Water Consumption, Gallons Per Capita, 1992 to 2002. 25 20 a 3 Gallons Per Capita 0 7 - — . 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Year —# Gallons per capita | Table 11 illustrates the leading bottled water brands in the U.S., based on wholesale dollar volume, market share, and growth, for the years 2001 and 2002. — northern@conomics inc. 33 Alaska Water Export Table 11. Leading Bottled Water Brands, U.S., Wholesale Sales, Share and Growth, 2001 — 2002. Millions of Dollars % Share of Sales % Change Brands 2001 2002 2001 2002 2001/02 Aquafina $645.0 $838.0 9.4 10.8 29.9 Dasani 567.0 765.0 8.2 9.9 34.9 Poland Spring 542.0 621.5 7.9 8.0 14.7 Arrowhead 399.6 456.6 5.8 5.9 14.3 Sparkletts 361.8 321.4 5.3 4.2 -11.2 Deer Park 247.5 311.1 3.6 4.0 25.7 Crystal Geyser 235.0 270.0 3.4 3.5 14.9 Ozarka 183.9 209.6 2.7 27 14.0 Zephyrhills 184.4 202.1 27 2.6 9.6 Evian 211.2 191.1 3.1 2.5 -9.5 Subtotal $3,577.4 $4,186.4 52.0 54.2 17.0 All Others 3,302.6 3,538.6 48.0 45.8 TA Total $6,880.0 $7,725.0 100.0 100.0 12.3 Source: Beverage Marketing Corporation According to a bottled water trade publication (Beverage Marketing Corporation), 2002 per capita consumption in the United States was: ¢ 21.2 gallons of bottled water ¢ 22.6 gallons of milk ¢ 22.1 gallons of coffee ¢ 21.8 gallons of beer e 54.2 gallons of carbonated soft drinks Market experts note soft drink consumption has declined in the past four years as other drinks have held steady or, in the case of bottled water, increased at approximately 8 to 10 percent each year. The two main bottled water companies are Nestle Waters North America (NWNA) and Groupe Danone’s Danone Waters of North America (DWNA). NWNA had five brands in the top ten: Poland Spring, Arrowhead, Deer Park, Ozarka, and Zephyrhills. DWNA had two brands in the top ten: Sparkletts and Evian, both of which lost market share. Both Pepsi-Cola (Aquafina) and Coca-cola (Dasani) were gaining significant market share at the end of 2002. Both firms have concentrated efforts in the PET market segment, a segment that has gained share from a tenth of the market in the early 1990s to a third in 2002. northern@conomics inc. Alaska Water Export Bottled Water, Market Summary Bottled water sales and consumption has shown a steady increase over the past ten years, with annual growth in the 8 to 10 percent per year range. As the market has grown, soft drink bottlers, such as Pepsi and Coca-Cola have entered the market and used their economies of scale to become low-cost producers. Alaska bottling firms generally confirm these annual growth figures, but face a more limited in-state market. Exporting bottled water, especially as glacial water, is potentially a viable option and one that will become more attractive as shipping volumes increase. Alaska Bottled Water Companies Several businesses in Alaska sell water or provide support services for water use. Table 12 shows the known water businesses in Alaska, including primary location, types of products, known markets, and relative sizes. Anchorage and Fairbanks have a considerable number of water companies, although most Fairbanks businesses provide bulk water and delivery for the local market only. Three of the businesses shown have sold water to markets outside Alaska, primarily to locations on the Pacific Rim. a northern@conomics inc. 35 Alaska Water Export Table 12. Known Alaskan Water Companies Size of Company/Product Name Location Bottle Sizes/Types Business Known Markets Advanced Water Anchorage Medium Anchorage Technologies Alaska Glacier Anchorage PET Small Japan, Lower 48 Refreshments Alaska Polar Glacier Anchorage PET Small Southcentral Alaska Water Co. Alaska Pure Water Anchorage Water Treatment, Large Anchorage Products 5 gal, Water Store Alaska's Best Water Anchorage 5 gal Large Anchorage, Wasilla, Palmer, Kenai Peninsula Matanuska Maid Dairy Anchorage PET, 1and2.5gal Large Alaska, Japan, Lower 48 Winter Frost Anchorage Small Aqua Alaska Fairbanks Arctic Water Works Fairbanks Bulk: Residential Small Fairbanks Tanks Fairbanks Bottled Water Fairbanks 5 gal Small Fairbanks Company Hydro-Baby Fairbanks Bulk Fill Point Small Fairbanks Metro Water Co Fairbanks Bulk Deliveries Small Fairbanks Pioneer Wells Water Fairbanks Bulk Deliveries Small Fairbanks Company Silver Gulch Brewing Fairbanks Beer, PET? Small Fairbanks Bottling Spring Alaska Fairbanks 5 gal Small Fairbanks Twin Springs Water Fairbanks Bulk Deliveries Small Fairbanks Water Wagon Fairbanks Bulk and Bulk Fill Small Fairbanks Point Waterman Fairbanks Bulk Deliveries Small Fairbanks Alaska Pure Mountain Juneau 5 gal Small Juneau Spring Water Alaskan Rain Ketchikan PET Small Ketchikan Bottled Water Express Ketchikan 5 gal Small Ketchikan Mount McKinley Clear Palmer PET Small Alaska Purely Alaskan Water, Inc. Palmer PET Large Alaska, Lower 48 Sitka Beverage Corp. Sitka PET Large Alaska, Asia, Lower 48 Alaska Tok Water Tok PET Small Tok Alaska Water Works LLC _— Wasilla Water Treatment Small Mat-Su Valley Choice Alaska Artesian Wasilla PET Small Alaska Water Mat-Su Water Wasilla Water Treatment, Small Mat-Su Valley 5 gal, Water Store 36 northern@conomics inc. Alaska Water Export Alaska Bottled Water, Export Shipments Alaska bottling companies have shipped containers of bottled water from two locations. Sitka Beverage Corporation packaged PET shipments for delivery, via barge and ferry, to the U.S. west coast, including Washington and southern California. The most recent shipment was 29,000 cases purchased by Rite-Aid. Transportation costs have varied but generally average between $0.50 and $1.00 per case. Alaska Glacier has shipped PET bottled water from Anchorage to Japan. Bottled Water, Container Shipping Costs Bottled water is generally shipped in a standard 40-foot dry container. Cases are stacked on pallets, in six layers of 12 cases each, for a total of 72 cases per pallet. Each container can hold two rows of nine pallets each, for a total of 18 pallets. The total capacity of a container is 18 x 72 or 1,296 cases. At 24 bottles per case, a container load consists of 31,104 bottles. Bottlers in Anchorage shipped several containers to southeast Asia via container from the Port of Anchorage. The most recent shipments were sent via Lykes Lines, a new shipper from Alaska. A shipping quote of $2,200 per container generates transportation costs of $1.70 per case or $0.071 per individual bottle, assuming a standard case size of 24 bottles. Lykes quotes $2,200 per container for delivery from Anchorage to Japan, direct. Shipping representatives suggest larger volumes shipped on a regular basis could generate lower quotes. One article suggests shippers could enjoy at least a 30 percent reduction in freight costs from Anchorage to Japan". Bottlers in Southeast Alaska ship water to the Seattle area via several methods, including barges, Lynden trucking, and road (from Hyder, for example). Costs are highly variable, depending on volume and method selected, but documents suggest a range of $0.50 to $1.00 per case is a likely range of costs. This additional transportation cost, from Southeast Alaska to Seattle, is added to container shipping costs from Seattle to Southeast Asia. For this reason, most bottlers in this region are looking to markets in the Pacific Northwest and California. '4 New Asia-America ship link may open doors, save money, Christina Session, Alaska Journal of Commerce, April 14, 2003. northern@conomics inc. 37 Alaska Water Export Figure 10. Lykes Lines. Route Map, Anchorage to Tokyo. 38 Source: http://66.129.69.16/route.asp, Lykes Lines. Alternate shipping routes, from Anchorage, include Horizon Lines from Anchorage to Dutch Harbor and then Maersk from Dutch to Japan and other parts of southeast Asia. Figure 11 illustrates shipping routes for Horizon Lines LLC to Alaska from Tacoma, and also shipping routes within the state. Figure 12 illustrates shipping routes for Maersk shipping lines, from Dutch Harbor to Yokohama. northern@conomics inc. Alaska Water Export Figure 11. Shipping Route, Alaska, Tacoma, Horizon Lines LLC. dhocage Kocksk Dutch Hetbot te forage Kock. tarceres northern@conomics inc. OCA er tt) Arrives Departs Tacoma Weelneslay Anchorage Surxhry Monety Kodiak Monday Tueseleny Tacoma Friday Friary Anchorage Tueswlay Weelnesday Kodiak Wednesday Weelnesday Dutch Harbor Friday Saturday Tacoma Wednesday Bec tat FROM TACOMA fo Harnit Days Anchorage 35 Fairbanks 45 Kenai 415 Kediak 15 Dutch Harbor m0 Source: Horizon Lines LLC. http://www.horizon-lines.com//alaska.asp. December 24, 2003. 39 Alaska Water Export Figure 12. Maersk Shipping Route, Dutch Harbor to Yokohama Transpacific II Service (TP2) Ay Source; http://www.maersksealand-usa.com/advertising/sailing%20schedules/tp2_ib.pdf Alternatively, containers can be shipped to the Seattle-Tacoma area via TOTE (ocean vessel) or via Lynden trucking (Alaska highway) and then transshipped to southeast Asia. 40 northern@conomics inc. Alaska Water Export Regulatory Framework Raw bulk water has no regulatory oversight. If the end use is drinking water, raw water must be treated to meet drinking water standards. Bottled water products are all considered food-grade and have the most regulatory oversight, at the federal level. Bottled water is regulated by the federal Food and Drug Administration as a food product, while tap water is regulated by the U.S. Environmental Protection Agency and is regarded as a utility. Water is classified as “bottled water” or “drinking water” if it meets all applicable federal and state standards, is sealed in a sanitary container and is sold for human consumption"®. Bottled water cannot contain sweeteners or chemical additives (other than flavors, extracts or essences) and must be calorie-free and sugar- free. Flavors, extracts and essences—derived from spice or fruit—can be added to bottled water, but these additions must comprise less than one percent by weight of the final product. Beverages containing more than the one-percent-by-weight flavor limit are classified as soft drinks, not bottled water. In addition, bottled water may be sodium-free or contain “very low” amounts of sodium. Some bottled waters contain natural or added carbonation. This section provides further information about water regulations. Bottled Water Bottled water is considered a food product and must meet general requirements for food labeling as contained in 21 CFR 101. This also means nutrient labeling must also be provided if the water contains nutrients or any food component’. The Food and Drug Administration's product definitions for bottled water are: e Artesian Water or Artesian Well Water: Bottled water from a well that taps a confined aquifer (a water-bearing underground layer of rock or sand) in which the water level stands at some height above the top of the aquifer. e Drinking Water: Drinking water is water that is sold for human consumption in sanitary containers and contains no added sweeteners or chemical additives (other than flavors, extracts or essences). It must be calorie-free and sugar-free. '5 Adapted from references on the International Bottled Water Association, http:/Awww. bottledwater.org, accessed in July 2003. 16 “What guidance does FDS have for manufacturers of bottled waters?” http://vm.cfsan.fda.gov/‘dms/qa-ind4c. html. NS northern@conomics inc. 4l Alaska Water Export ¢ Mineral Water: Bottled water containing not less than 250 parts per million total dissolved solids may be labeled as mineral water. e Purified Water: Water that has been produced by distillation, deionization, reverse osmosis or other suitable processes and that meets the definition of purified water in the United States Pharmacopoeia may be labeled as purified bottled water. ¢ Sparkling Water: Water that after treatment contains the same amount of carbon dioxide that it had at emergence from the source. Soda water, seltzer water and tonic water are not considered bottled waters. They are regulated separately, may contain sugar and calories, and are considered soft drinks. e Spring Water: Bottled water derived from an underground formation from which water flows naturally to the surface of the earth. e Well Water: Bottled water from a hole bored, drilled or otherwise constructed in the ground which taps the water of an aquifer The Food and Drug Administration has also published Current Good Manufacturing Practice (CGMP) Regulations for processing and bottling drinking water. CGMP regulations apply to all water within sealed containers, packages, etc. and offered for sale for human consumption. Essentially, these regulations require producers to monitor their source water, and to handle all phases of bottling and selling under safe and sanitary conditions. The U.S. Food and Drug Administration also regulates interstate bottlers (firms that ship water from one state to another) under Title 21, Parts 129 and 165 of the Code of Federal Regulations (21 CFR, 129 & 165). It regulates intrastate bottlers who use containers shipped into Alaska. Figure 13 illustrates regulatory oversight for Alaska water bottlers. RR NS 42 northern@conomics inc. Alaska Water Export Figure 13. Alaska Water Bottling, Regulatory Oversight. — | ~ Agency Start Process > | Develop own source: PE — y —— -——New—-» prepared plans, raw wate! DNR - Water analysis. Rights x |ADF&G Water Source — eet ee |ADEC , Class A Public System - | IDNR - Water ‘Existing —> PE plans to ADEC for [Export | review, approval. ADEC -———————- 1) | ;—Buy——»_ Buy, transport to plant | yY L | YN | I “Buy or blow | i < | Bottles mold? | i Blow mold Select, install blow mold | ADEC Inspection | line | | Bottling | OO — | | a | | I Legible, readable, contrasting, in English, |ADEC product name, name and address of [FDA Labeling — aaal manufacturer, net contents, name of all | | ingredients, production code, any substandarc l | quality statement. | | -Intrastate Monthly coliform of source and each |ADEC | [ | container type. _ vy L Inspecting L ce | | Source: Alaska regulations apply; FDA yv Interstate— bottled: annual chemical, weekly ~ coliform; containers: quarterly. Packing, shipping | DNR - Pay Conservation Fee _» Ss ( tore \. Consumer ; northern@conomics inc. 43 Alaska Water Export Alaska’s intrastate regulatory agencies include: e The Department of Natural Resources, Division of Mining and Water Management: water rights and permitting process, water extraction/appropriation, water export e The Department of Natural Resources, Office of Habitat Management and Permitting: habitat permitting and protection e Alaska Department of Fish and Game, Division of Sport Fish: water extraction that impacts fisheries e Alaska Department of Environmental Conservation, Drinking Water Program: source, treatment and bottled water quality e Alaska Department of Environmental Conservation, Environmental Sanitation and Food Safety: plant design, operating, microbial testing, labeling, permitting Glacial Water Resource Glacial water is a unique feature of Alaska’s water supply and has been used as a marketing (branding) characteristic for several bottled water labels. As defined in 18 AAC 31.740, glacial water includes: ¢ Runoff directly from the natural melting of a glacier e Water obtained from the melting of glacier ice at a permitted food processing establishment ¢ Stream water that flows directly from a glacier and has not been diluted or influenced by a non-glacial stream The terms glacier-blend and glacially influenced mean water from: e Aglacial stream that is influenced by a non-glacial stream e Alake that is fed by a glacial stream Bottled water from Alaska that uses any of the above definitions may: e Be collected and transported by pipes, tunnels, trucks or similar devices e Not be altered at a food processing establishment; no minerals may be added or removed, but water may be filtered and otherwise treated e Drawn from a catchment that is connected to the stream or lake water source Glacial Ice Firms who wish to export processed glacial ice (not icebergs) also fall under state regulation (18 AAC 31.73) and must obtain a ice-harvest permit or authorization from the DNR. 44 northern@conomics inc. Alaska Water Export The processing facility must first be permitted as a food establishment, with weekly sanitizing of food-contact surfaces and daily sanitizing of utensils. Specific requirements for glacier ice processing include: e Ice contamination must be minimized during harvest, transportation and storage e Transport must be done in clean containers or vehicles e Processing floors must be sloped to floor drains with traps e Receiving and processing walls must be impervious to water up to at least four feet e Glacial ice must be cleaned with potable water before processing e After cleaning, belts, slides or transport equipment that can be cleaned must be used for movement into the processing area * Manufactured ice must be separated by space or enclosure from any source of contamination e Glacial and manufactured ice may not exceed drinking water contaminant levels Se northern@conomics inc. 45 Alaska Water Export Public Benefits Bulk Water Evaluation As discussed earlier in this report, exports of raw bulk water are not cost-competitive at this time with current desalination technology, although the political process often incorporates other measures and values in the decision making process. While there may be a unique situation that would result in a long- term raw water export project, the financial analysis section (following) suggests a delivered cost of $9,600 per acre-foot (at Long Beach), or $0.0294 per gallon. Bottled Water Bottled water plants are viable businesses in Alaska. In most instances, local Alaskan markets provide base demand and revenues. Exports, if successful, are an incremental increase in production. Bottled water that features glacier water can be a viable export business from an area such as Anchorage, with Eklutna Glacier water and Port of Anchorage container berths. As other areas develop container berthing facilities and access to glacier water, they will become more likely candidates for bottled water shipments. Dutch Harbor, for example, would be a strong candidate if adequate glacier water was located near its container berths. There are very large plants operating in the lower 48 states (and in other countries) that produce bottled water on a commodity basis. These plants achieve very low prices due to economies of scale and are generally low-cost producers. As noted previously, Alaska bottled water producers will have difficulty competing on a price basis with these very large producers. The benefits discussed in this section are for water bottling plants that can achieve a unique marketing proposition and operate in niche export markets, such as bottling and distributing glacier water. Jobs Jobs are one of the benefits most cited by proponents of water export facilities. The actual number of jobs can vary significantly depending on the marketing element of the plant’s business model. The three plants with the longest operating history, Alaska’s Best Water (1981), Purely Alaska Water (PET bottler) (1993), and Clearly Arctic (PET bottler) (1996) employ 4-6 people in their plants and essentially have a similar business model. 46 northern@conomics inc. Alaska Water Export All three have a domestic (local) market, but the PET bottlers export water opportunistically, using the cachet of glacier water and Alaska’s image to reach foreign markets. Exports are a relatively small portion of their revenues at this time. The plants in Hyder, Metlakatla, and Sitka have business models that are fairly similar to each other, based on marketing their products in Southeast Alaska, Canada (particularly for Hyder), and the West Coast states. An exception is the Sitka plant and its trial shipments to Rite-Aid in the Pacific Northwest and its contract with Alaska Airlines for on-board bottled water. To date, these plants have had difficulty in successfully selling the necessary volume into these markets. These market targets are much larger than the Southcentral Alaska market that is the primary focus of the three plants in Palmer and Anchorage. As a result, the business concepts for the three Southeast plants projected larger throughput volume and a greater number of employees than the Southcentral plants. The plant at Sitka reportedly has 17 employees, the Hyder plant was to employ two shifts of 18 and 14 people respectively for a total of 32 but has operated only occasionally as of this date, and the Metlakatla plant could eventually employ two shifts of eight to ten people (16-20 total employment) although in late summer of 2003 the plant had four employees. Taxes, Royalties, Conservation Fees All noted bottling plants vary in their contribution to local tax bases. For example, the Matanuska-Maid plant in Palmer (Clearly Arctic), the facility in Metlakatla, and the facility in Hyder are owned by the State of Alaska, the Metlakatla Indian Community, and the Hyder Community Association, respectively. As facilities owned by the public or tribal and governmental entities, they are not subject to state or local taxation and may contribute little in the way of taxation or other government revenues. Hyder does not have a local government and does not have taxing authority so local taxation is not possible. The entity formed to operate the plants could be subject to State of Alaska corporate income tax. The potential amount of corporate income tax is uncertain but anticipated to be minimal, if any. The Purely Alaskan Water plant in Palmer is subject to City sales tax, Borough property tax, and State corporate income taxes. The company leases building space but owns plant equipment. This equipment is conservatively estimated at $2 million when new but it is uncertain what the current value of the plant would be with depreciation. northern@conomics inc. 47 Alaska Water Export While we are uncertain of the total assessed value of the land, building, and equipment in the plant, if we assume that the total is approximately $2.5 million, then the property taxes paid by the plant (included in rent payments), would be approximately $33,000 per year, given the current tax rate of 13.202 mills in the Borough. Total sales data are proprietary and the level of sales taxes Purely Alaska Water generates is unknown. While we are uncertain of the corporate structure of the company, most firms in Alaska are incorporated as Subchapter S corporations or Limited Liability Corporations in which profits are passed through to the owners. Under these corporate structures the State of Alaska does not collect any corporate income tax. Alaska’s Best Water is located in Anchorage and would be subject to the Municipality’s property tax. The value of the equipment is estimated at approximately $1.2 million and with the land and building may be approximately $1.5 million. This valuation would generate about $26,000 in annual property taxes for the Municipality of Anchorage. Anchorage does not have a sales tax. The corporate structure of the company is unknown and it is uncertain if the State of Alaska would collect any corporate income tax. The value of the Sitka water plant is unknown but First National Bank of Alaska provided a loan for $5 million to the owners of the company. Assuming a debt to equity ratio of 80:20, the total value of the facility would be about $6 million. This would provide property tax revenues of about $36,000 for the City and Borough of Sitka. Sitka would also receive sales tax revenues from the products that are sold. The corporate structure of the operators of the Sitka plant is unknown so it is uncertain if the plant is subject to the State of Alaska corporate income tax. Another possible source of income to the state would be an excise tax or royalty on water used in the water plants. The City of Sitka charges 1¢ per gallon of water that is sold and 0.5¢ per gallon for water that is used for cleaning and wash down. Those amounts are likely acceptable for bottling plants but would be too high for bulk, raw water exports since a 1¢ per gallon excise tax or royalty is twice as great as the cost of desalination. Revenues generated by such excise taxes or royalties on water use in bottling plants would not be significant revenue generators for the state. For example, the two Palmer plants use less than 1,000 gallons per day. At 1¢ per gallon, 1,000 gallons per day would generate only $10 per day. Over the course of a year the state might receive about $2,640, or likely less than $5,000 from both plants. A plant using 29,000 gallons per day, such as proposed at Hyder, might generate more than $76,000 per year but the viability of a plant at this scale has not yet been demonstrated. Conservation fees of $10 per acre-foot were used for costing purposes in the Financial Analysis section. This figure was derived 48 northern@conomics inc. Alaska Water Export from DNR estimates in 1994 and amounts to $450 due to the state for each tanker-load of water shipped from Sitka. In summary, the state is not likely to receive significant revenues from water bottling plants. If a bulk, raw water facility were to develop in Alaska, it would likely require a very low excise tax or royalty, approximately a few tenths of a cent, to be a viable venture. Other Community Benefits In addition to jobs and tax revenues, bottling plants can provide other benefits to rural communities. These benefits include payments for utility services, and some portion of supplies, equipment, repairs, and transportation. The extent of additional economic activity that would result from a bottling plant is dependent on the degree to which other services, supplies (pallets, for example), equipment, repairs, and transportation (including services such as_ longshoring and warehousing) can be met with suppliers or vendors located in the community. In many small, rural Alaska communities a “rule of thumb” is that the multiplier effect of additional spending in the community can range from 10 percent to possibly as high as 30 percent of the original spending level. So for every dollar of sales that the bottling plant makes, the additional economic activity in the community increases by 10 to 30 percent ($1.10 to $1.30). Smaller communities are likely at the lower end of the range while larger communities may be higher. northern@conomics inc. 49 Alaska Water Export Financial Analysis This section presents results of a financial analysis of bulk and bottled water export. A variety of sources were employed to develop the models, which were then tested to determine the sensitivity of results to changes in input values. A break-even analysis was also conducted on the bottled water model to determine the volume of sales required to be profitable. Capital and operating costs for both bulk water and a bottled water plant of small to medium size are also discussed. Bulk Water Capital costs for a bulk water operation, based on the Sitka to Long Beach route (estimated at 2,096 nautical miles), and a 28,000 acre feet per year annual demand, are $270 million. This operation would require 18 single-hulled tankers, each with a capacity of 14.7 million gallons or 45.1 acre feet, and approximately 620 deliveries per year. Annual operating and minor maintenance costs for this bulk water process are $155.2 million with allowances for administration, engineering, permitting, and contingencies, plus $1.44 million for major maintenance. Delivered raw water cost, including the $0.01 per gallon royalty to the City of Sitka, is $9,600 per acre-foot. Water treatment costs are projected at $0.003 per gallon, or $1,000 per acre foot. Total potable water costs, at Long Beach, are $10,600 per acre foot. Cost Competitiveness, Bulk Water The California Department of Water Resources estimated high desalination costs (energy cost of $0.11 per kWh) at $1,200 per acre- foot. Adding an additional $300 (high figure) per acre-foot of distribution costs totals $1,500 per acre-foot for processed salt water. The high end of desalination costs, $1,500 per acre-foot, is approximately 14 percent of the delivered (and treated) water cost of $10,600. Under the most likely scenario, it is unlikely that export bulk water from Sitka will be cost-competitive in Long Beach. Bottled Water A bottled water plant, producing and selling 300,000 cases per year and capable of growing to 400,000 cases annually, could generate $1.5 million in revenue. At this production level, the plant would operate at a projected profit of $62,500 before taxes. a 50 northern@conomics inc. Alaska Water Export The model was developed to reflect a reasonable market entry point for a new bottled water business. Reaching full plant capacity would require a ramping-up period, estimated at three to five years, and it would depend on plant efficiency, market acceptance of the plant’s bottled water, and, most likely, some percentage of export. Export could take the form of water shipped to other North American markets (Canada or the contiguous U.S.)—similar to recent sales from Sitka’s bottling plant—and potentially to some Asian markets. Bulk Water Capital and Operating Costs The bulk water export analysis utilizes a cost model developed by MWH to determine delivered raw water costs to Long Beach, California from Sitka, Alaska. The model utilizes the quantity of water required and the costs of delivering that water to project the cost per acre-foot in Long Beach. A copy of the model’s printout is included in Appendix C. The model is based on MS Excel and is available from the Denali Commission. Tanker Capital Costs For estimating capital costs, the annual volume of raw water to be exported was assumed to be 28,000 acre-feet. Furthermore, the size of the tanker to be used for exporting this water from Blue Lake was assumed to be 350,000 barrels or 45.1 acre-feet. Therefore, eighteen (18) tankers would be needed to export the water. Other include 20 million gallons of storage at Sitka. The storage tanks would be either large reservoirs on land or reinforced nylon bags in the water at the Sawmill Cove. Tankers would be filled using a gravity fed pipeline from tank storage or pumped from bags. At Long Beach, raw water would be pumped directly from the tanker into a pipeline, not requiring any storage facilities. Since large tankers are now required to be double hulled for transporting crude oil, there are many used single-hulled tankers available for purchase between $6 and $10 million each. The capital cost estimate assumes $8 million for each tanker. The total capital cost for single-hulled tankers, port facilities, pipelines and other related appurtenance for exporting 28,000 acre- feet of raw water from Sitka and Long Beach is $270 million. Assuming a 4 percent interest rate over 20 years, the annualized cost of $270 million to the nearest million is $20 million. The estimated capital costs are shown in Table 13. ec A REARS northern@conomics inc. 51 Alaska Water Export Table 13. Estimated Capital Costs, Bulk Water Export, 28,000 Acre-Feet Per Year, Sitka to Long Beach. Cost, Location Quantity Unit Unit Cost ($) Extended Total ($) Used Single Hull Tankers 18 Each 8,000,000 144,000,000 Contingency (%) 15 21,600,000 Sitka Loading Dock for 2 Tankers 41 Lump Sum 8,200,000 8,200,000 On-Site Storage Tanks or Bags 20,000,000 Gallon 1 20,000,000 Pumping Facilities 1 Lump Sum - - 4' Pipeline - Sitka 2,000 Linear Foot 400 800,000 Long Beach Loading Dock for 2 Tankers 1 Lump Sum 12,000,000 12,000,000 Pumping Facilities 1 Lump Sum 5,000,000 5,000,000 4' Pipeline - Port to Water System 50,000 Linear Foot 400 20,000,000 Subtotal: 210,000,000 Administration (%) 5 3,300,000 Engineering (%) 15 9,900,000 Permitting (%) 10 6,600,000 Contingency (%) 25 16,500,000 Subtotal: 36,300,000 Total (rounded): 270,000,000 Capital Cost, 20 years, 4% Annual Cost (rounded) 20,000,000 Source: MWH. Note: Total capital costs rounded up to nearest $10 million; annual costs rounded up to nearest million. Tanker Operating Costs The operating cost per tanker per round trip is $250,000. This unit cost includes labor, fuel, fees, overhead, insurance, minor maintenance and repairs, and a rate of return. To meet the 28,000 acre-feet demand, 621 tanker trips would be required. A trip is based on 13 days travel time (2,096 miles at 14 knots) and two days each to load and unload the water. Thus, the annual operating cost would be $155.2 million. In addition, it was assumed that each tanker would be taken out of service 20 days each year for major maintenance, an annual cost of $1.44 million. These operations and maintenance costs are listed in Table 14. 52 northern@conomics inc. Alaska Water Export Table 14. Estimated Operating and Minor Maintenance Costs per Trip, Bulk Water Export, Sitka to Long Beach. Unit Cost Extended Cost Quantity Unit ($) Total ($) Operating Tanker Costs, Per Round Trip Load Tanker w/ Raw Water (Sitka) 2 Day 6,500 13,000 Tanker Travel (Payroll) 13 Day 7,500 97,500 Tanker Travel (Fuel) 13 Day 6,000 78,000 Tanker Travel (Other) 13 Day 500 6,500 Unload Tanker (Long Beach) 2 Day 6,500 13,000 Miscellaneous 1 Lump Sum 6,000 6,000 Subtotal: 214,000 Administration (%) 1.0 2,140 Insurance (%) 0.5 1,070 Routine Maintenance, Repairs, Parts (%) 2.0 4,280 Rate of Return (%) 5.5 11,700 Wharfage Fee 61,248 Ton 0.075 4,600 Conservation Fee to the State of Alaska 45.0 Acre Foot 10.00 450 Contingency (%) 5 10,700 Subtotal: 35,010 Total (rounded): 250,000 Source: MWH Note: Total costs rounded up to the nearest $1,000. The final cost item is raw water cost. Recently, the City of Sitka negotiated $0.01 per gallon price for bulk (raw) water with Quest Imports International. The cost for treating raw water to meet drinking water quality would add another $1,000 to the per acre- foot unit cost. Table 15 summarizes annual bulk water export costs, delivered to Long Beach from Sitka by tanker, with a purchase price for raw water of $0.01 per gallon. northern@conomics inc. 53 Alaska Water Export Table 15. Summary of Annual Costs, Bulk Water Export (28,000 Acre Feet), Sitka to Long Beach. Extended Cost Quantity Unit Unit Cost ($) Total ($) Amortized Capital 1 Lump Sum 20,000,000 20,000,000 Raw Water Purchase 621 Round Trip 147,000 91,200,000 Operations 621 Round Trip 250,000 155,200,000 Major Maintenance 18 Tanker 80,000 1,440,000 Total (rounded): 268,000,000 Cost Per Acre-foot(rounded): 9,600 Cost Per Thousand Gallons 29.37 Cost Per Gallon: $0.0294 Water Treatment Cost, $1,000 per Acre Foot. 10,600 Treated Cost Per Gallon: $0.0324 EEE Source: MWH. Note: Total annual costs rounded up to the nearest million; per acre foot costs rounded up to nearest hundred. At this raw water price, the cost per acre-foot would be $9,600 or $29.37 per 1000 gallons. Treated water would be $10,600 per acre foot. Figure 14 shows the acre-foot cost versus the equivalent per gallon price for raw water. ———— eeeeeeSSSSSSSSSSSSSSSSSSSSSSeSSs Figure 14. Costs Per Acre Foot, at Selected Per Gallon Costs. $12,000 $10,000 $8,000 $6,000 $ per Acer-foot $4,000 $2,000 \ $- $0.0100 $0.0080 $0.0060 $0.0040 $0.0020 $- $ per Gallon a A 54 northern@conomics inc. Alaska Water Export Subsea Pipeline For a subsea pipeline from Alaska-to-California, the cost per acre- foot for water delivered to Lake Shasta (in Northern California) from Southeast Alaska was estimated in the $4,000 and $5,000 (2003 dollars) range depending on pipeline length (U.S. Congress, 1992). It appears these are only operational costs and do not include the amortized cost of the $150 billion conceptual cost to build the 2,000-mile pipeline. Assuming a 14-foot diameter pipe, 4 percent interest, and 50-year life cycle, the amortized cost per acre-foot of the pipeline would be about $1,100 more, making the range $5,100 to $6,100 (2003 dollars). Bulk Water Transport Evaluation At this time, the cost of exporting water by tankers is significantly more expensive than desalination. Also, it appears that a subsea pipeline between Sitka and Lake Shasta is notably cheaper than exporting water by tanker. Financial Analysis, Bottled Water Export Projected (pro forma) financial statements for bottled water production and export were prepared using financial information from the Risk Management Association (RMA), current public information for the Sitka Bottling Corporation, and cost data from multiple sources. Operations described by the spreadsheet model would operate on a single shift, and could produce up to 400,000 cases annually with minimal capital investments. The model was been developed this way to reflect a reasonable market entry point for a new bottled water business. Assumptions The bottled water analysis assumes that: e The business has about $4.2 million in total assets, including $500,000 of bottling and packaging equipment, a 9,000 square foot building for operations and warehousing valued at $1,000,000, and $35,000 in office and delivery equipment. e Other assets include cash and cash equivalents, inventory, and other assets related to operations. ¢ Five people are employed to cover all aspects of production, marketing, and administration. ee northern@conomics inc. 55 Alaska Water Export e The business produces 300,000 cases of water annually, at a cost of $2.67 per case, and sells each case for $5.00 wholesale. Under these assumptions, the business generates revenues of $1.5 million. Table 16 shows the pro forma income statement for this model operation, along with RMA benchmarks. Table 16. Bottled Water Pro Forma Income Statement Summary Detailed % of Revenue Sexteae (%) Account Account Summary Summary Revenue and Cost Accounts Dollars Dollars Account Account Revenues 1,500,000 100.0 100.0 Cost of Goods Sold: 991,324 66.1 66.1 Raw Materials Cost (water, bottles) 801,524 Direct Labor Cost (plant labor) 189,800 Gross Profit Margin 508,676 33.9 31.5 Operating Expenses 431,200 28.8 27.0 Selling 112,500 7.5 General and Administrative: 296,200 19.8 Indirect Labor Costs (manager) 96,200 Building and Utilities (plant) 200,000 Other Operating Expenses 22,500 1.5 Operating Profit 77,476 5.2 45 All Other Expenses (net) 15,000 1.0 0.9 Net Income (Loss) Before Taxes 62,476 4.2 3.6 Note: RMA benchmarks are for an average national firm with net assets of $2 to $10 million. The cost of goods sold is approximately two-thirds of total revenue. Operating and other non-operating expenses account for another 27 percent of revenue. Compared with RMA income statement information for an operation with $4 million in assets, this model would be slightly more profitable than average, with a 4.2 percent profit margin before taxes, versus the national average of 3.6 percent. The gross margin and operating expenses as a percent of sales are consistent with RMA averages. This conceptual model ignores financial transitions from a start-up company to one that is in full production, a transition that may take up to five years, depending on markets, technology, and management. 56 northern@conomics inc. Alaska Water Export This analysis indicates the bottling plant would be profitable under basic assumptions, but it should be noted that the projected rate of return is not commensurate with the expected risk. As reported on January 22, 2004 on Bloomberg.com, a 30-year U.S. Government Treasury Bond maturing February 15, 2031 currently has a yield of 4.85 percent. This rate could be considered almost a risk free rate and is very similar to that projected for bottling plant operations. Certainly, the effects of inflation, taxes, ability to raise capital, contribution to economic development, and other business and economic considerations are important in deciding to start a water bottling operation. However, as alternative investments, the existence of “risk-free” government securities with competitive rates of return will likely deter all but the most dedicated entrepreneur. Sensitivity Analysis A sensitivity analysis was conducted on both the bulk water cost model and the bottled water pro forma income statement. The analysis was conducted using Crystal Ball software, termed an add-in for Microsoft Excel. Crystal Ball uses Monte Carlo analysis, allowing users to track output estimates (revenue or price) as input values (costs) fluctuate according to defined probability distributions. Both analyses for this study used 10,000 trials. Bulk Water Sensitivity The purpose of the bulk water sensitivity analysis was to determine the likely range of acre-foot cost for water delivered to Long Beach, California from Sitka, Alaska. The analysis allowed variation in the quantity of water demanded, as well as capital and investment costs. All variations were plus or minus 35 percent, except for the cost per gallon paid to the City of Sitka, which was varied from $0.0001 to $0.01 per gallon. The original cost model rounded the final and many intermediate calculations. For the sensitivity analysis, those restrictions were relaxed to allow a full range of variation in acre-foot costs. As mentioned above, the estimated delivered and treated cost per acre- foot is $10,600. The sensitivity analysis indicated a delivered and treated cost range of $5,900 to $11,500 per acre-foot. The mean cost was a little under $9,200 and the median was $9,200. The estimated cost per acre- foot discussed above ($9,600) is slightly different from the mean and median costs indicated by the sensitivity analysis due to relaxing the restrictions on various input values and intermediate calculations. Seen eee EE EEE EIT northern@conomics inc. 57 58 Alaska Water Export The largest absolute dollar variations in acre-foot cost are caused by the cost of raw water, tanker crew payroll, and tanker fuel costs. The effects of other changes are relatively small. Figure 15 shows the probability distribution of cost per acre-foot and the range of costs at the 95 percent confidence level. Figure 15. Probability Distribution of Bulk Water Cost per Acre-Foot Forecast: Deliv ered and Treated Cost Per Acre Foot 10,000 Trials Frequency Chart 9,930 Displayed oz a 242 Ce coins fH ARM A AMD sas snnneeel 459 = a | |||| 8 sev 166 | @ < 000 0 4 $9,078 $10,174 $11,270 — 95.00% from $7,361 to $10,637 Increasing or decreasing payroll cost by 50 percent only changes delivered water cost by about 11.5 percent. Fuel cost changes of 50 percent generate a 9.2 percent change in acre-foot cost. These changes suggest elasticities of 0.23 and 0.18 to changes in payroll and fuel costs. The effects of changes in raw water purchase costs are likewise insensitive. A 50 percent change in raw water costs only causes a 15.8 percent change in the cost per acre-foot. The elasticity of delivered and treated cost to raw water cost is 0.32. Therefore, changes in major factors—raw water costs, fuel costs, payroll costs—do not produce significant changes in the relative cost per acre-foot. This analysis has shown that the cost per acre-foot delivered to Long Beach, California is insensitive to most cost variations. Larger or faster tankers may affect the transportation cost, but for the most part delivered cost per acre-foot cost varies little. As a result, the success of water export depends on the target market's cost per acre-foot using available transportation, treatment, and competing desalination technology. northern@conomics inc. Alaska Water Export Bottled Water Sensitivity Analysis The purpose of the bottled water sensitivity analysis was to determine the likely profit range (measured before taxes) under an expected range of operating conditions. The analysis included variations in the input costs (preform bottles, caps, labels, case packing, and water), production levels, and wholesale price per case. Table 17 shows low, likeliest, and high price assumptions for raw materials. Table 17. Bottled Water Raw Material Price Assumptions Per Unit Price ($) Input Low Likeliest High Preform bottles 0.050 0.060 0.100 Caps 0.009 0.010 0.015 Label 0.010 0.015 0.030 Water 0.001 0.010 0.020 Case Packing 0.300 0.600 0.650 Total per Bottle 0.069 0.085 0.145 Total per Case 1.956 2.640 4.130 Annual production levels were allowed to vary from 200,000 to 400,000 cases, with 300,000 being the most likely. Wholesale price per case varied from $4.50 to $5.50, with $5.00 being the most likely. The sensitivity analysis showed a before-tax range of a loss of $416,000 to a profit of $446,000. The mean loss was $17,000 and the median was a loss of $20,000. Figure 16 shows the probability distribution of profits before taxes. SS northern@conomics inc. 59 Alaska Water Export Figure 16. Probability Distribution of Bottled Water Profit Before Taxes Forecast: Income Before Taxes 10,000 Trials Frequency Chart 9,944 Displayed a 25 oe + soft afeonse mea 2. i 2 S o “| A725 | 3 > *! AA “* b ETH -T216 8B 54880 Hass The analysis shows that the probability of achieving a profit is about 44 percent, as described by the model and its assumptions. Further refinements to the model and its assumptions would yield a more accurate evaluation. Recommended refinements include adjusting capital costs to fit the range of production capabilities and local prices and determining likely funding and financing options that will affect the new operation’s financial burden. As noted earlier, there are significant variations in costs and revenues when comparing a start-up company with on-going operations. These have to be carefully evaluated for each specific case. Break-even Analysis A simple break-even analysis was conducted using the bottled water pro forma income statement. Two analyses were conducted: one for production levels and one for the wholesale price per case. Using input cost data from a number of sources and an estimated wholesale price of $5 per case, the analysis showed a break-even annual production of 265,827 cases, or just over 22,000 cases per month. Wholesale price per case has the largest impact on the break-even quantity. If the business were only able to sell cases for $4 wholesale, the break-even quantity would nearly double to 524,000 cases, or nearly 44,000 cases per month. The second analysis looked at the wholesale price per case needed to break even at specific production levels. With 300,000 cases produced annually, the break-even wholesale price per case is about $4.77. This price drops to $4.32 with a production of 400,000 cases, and increases to $5.67 with a production of 200,000 cases. 60 northern@conomics inc. Alaska Water Export Summary, Market Opportunities Market opportunities for bulk and bottled water operations within Alaska have significantly different profiles. They are discussed in the following subsections. Alaska Bulk Water Export Potential Alaska’s bulk water, especially from Sitka’s Blue Lake, is very clean, with low dissolved solids and is generally free of pesticides, fertilizers, and other industrial and agricultural by-products found in other parts of the world. The high quality of this raw water makes it very attractive for blending and diluting with other water such as that from southern California. There is a plentiful supply in most coastal Alaska areas, with Sitka, Anchorage, and Adak representative of several sources. Cost is the major hurdle to bulk water export. Both capital costs and operating costs are higher than the competing technology, desalination, except in very limited circumstances. Capital costs for tanker purchases, or pipeline design and construction, are relatively high and unlikely to decline. Operating and maintenance costs for bulk water transport are equally high, whether tanker-based or related to pumping through a pipeline. The long-term trend for these costs is a gradual increase, due to labor and fuel cost increases. Desalination is the major competitor for Alaska’s bulk water and the long-term trend for this technology is a decline in both capital and operating costs. New technologies are being developed as forecasts through 2025 suggest water shortages will continue in most areas, and increase in others. Alaska Bottled Water Export Potential Bottled water consumption is growing rapidly throughout the world, with a projected 8 to 10 percent per year rate. Alaska has quality water in considerable supply, including a relatively unique product in the form of glacial water. Bottling firms are located near tidewater, from Sitka to Anchorage, and they have considerable access to export markets via containerized shipping. Asia has shown strong interest in bottled water (PET) from Alaska, especially with a glacial connection, image, or state certification. Local markets are more limited and there is strong cost competition from other bottlers, including low-cost producers in the lower 48 a RCE ERI northern@conomics inc. 61 Alaska Water Export states. As bottled water continues to be commoditized, local bottling firms will have to become more cost efficient, which generally means more capital investment (automation). However, it is unlikely local bottling firms can achieve efficiencies of sale enjoyed by large bottling firms such as Pepsi and Coca-cola. Environmental concerns are low at this time, but future concerns are likely to include solid waste aspects of PET containers. 62 northern@conomics inc. Alaska Water Export Appendices A — References B — Conversion Factors C - Bulk (Raw) Water Tanker Export—Sitka, AK to Long Beach, CA i northern@conomics inc. 63 Alaska Water Export Appendix A—References 10th Annual Southern California Urban Water Conference. 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Alaska Water Export Appendix B—Conversion Table Unit Metric English Unit Cubic Meters 1,000,000 810.7 Acre Feet Cubic Meters 1,000,000 264,200,000 Gallons Cubic Meters 1,000 264,200 Gallons Cubic Meters 1 264.2 Gallons Cubic Meters 1,233 1 Acre Foot Acre Foot 1 ==> 325,900 Gallons Cubic Meters 3.785 1,000 Gallons Cubic Meters 3,785 1,000,000 Gallons Liters 3,785,000 1,000,000 Gallons Acre foot 3.07 1,000,000 Gallons Cubic Meters 3,785,000 <== 1,000,000,000 Gallons Liters 3,785,000,000 <== 1,000,000,000 Gallons Liters 1,000,000 ==> 264,200 Gallons Liters 1,000 ==> 264.2 Gallons Liters 1,000 ==> 1 Cubic Meters Cubic Meters 28.32 <an 1,000 Cu Ft $/Acre-foot=> '$/1000 gallons => $/cubic meter $ 400 $ 1.23 $ 0.32 $ 600 $ 1.84 $ 0.49 $ 800 $ 2.45 $ 0.65 $ 850 $ 2.61 $ 0.69 $ 860 $ 2.64 $ 0.70 $ 900 $ 2.76 $ 0.73 $ 1,000 $ 3.07 $ 0.81 $ 1,200 $ 3.68 $ 0.97 $ 1,600 $ 4.91 $ 1.30 $ 2,000 $ 6.14 $ 1.62 $ 2,400 $ 7.36 $ 1.95 $ 2,800 $ 8.59 $ 2.27 $ 3,200 $ 9.82 $ 2.60 $ 3,600 $ 11.05 $ 2.92 $ 4,000 $ 12.27 $ 3.24 $0.00/Gallon => '$/1000 Gallons => $/Acre-foot=> _|$/cubic meter $ 0.001 $ 1.00 $ 326 $ 0.26 $ 0.002 $ 2.00 $ 652 $ 0.53 $ 0.003 $ 3.00 $ 978 $ 0.79 $ 0.004 $ 4.00 $ 1,304 $ 1.06 $ 0.005 $ 5.00 $ 1,630 $ 1.32 $ 0.006 $ 6.00 $ 1,955 $ 1.59 $ 0.007 $ 7.00 $ 2,281 $ 1.85 $ 0.008 $ 8.00 $ 2,607 $ 2.11 $ 0.009 $ 9.00 $ 2,933 $ 2.38 $ 0.010 $ 10.00 $ 3,259 $ 2.64 i S northern@conomics inc. 719 Alaska Water Export Appendix C—Bulk (Raw) Water Tanker Export—Sitka, AK to Long Beach, CA a 80 northern@conomics inc. Bulk Raw Water Export By Tanker - Sitka, AK to Long Beach, CA Basis of Estimate (Control Board): Raw Water Supply Per Year Tanker Size Distance Between Ports Average Speed of Tanker Travel Time Tanker Deliveries Per Year Number of Tanker Deliveries Per Day Time Between Deliveries Per Tanker Tankers Needed to Meet Supply Deliveries Per Tanker Per Year Days Out of Service for Annual Maintenance Storage Capacity 28,000 Acre Foot 350,000 Barrel 2096 Nautical Miles 14 Knots 150 Hours 621 1.7 16 Days 18 34.5 20.2 Per Tanker 20,000,000 Gallon 9,123,828,000 Gallon 45.1 Acre Foot - 14,700,000 Gallon 6.3 Days Note: Capital costs for port improvements are estimated for handling and loading 2 tankers only. Except for the capital cost of tankers, the control board does not revised the capital costs for additional port facilities for larger tankers and/or more tanker slips. Cost of Raw Water $ 0.0100 Gallon Capital (Investment) Cost Quantity Used Single Hull Tankers w/ Ballast Tanks and Pumps 18 Contingency 15% Sitka Loading Dock for 2 Tankers & Related Apputenances 1 On-Site Storage Tanks or Off-Shore Storage Bags 20,000,000 Pumping Facilities (Auumed Tankers Will Be Gravity Feed) 1 4' Pipeline - Existing Aqueduct to Dock Site 2,000 Long Beach Loading Dock for 2 Tankers & Related Apputenances 1 Pumping Facilities and Related Apputenances 1 4' Pipeline - Port of Long Beach to Region's Imported Water System 50,000 Administration 5% Engineering 15% Permitting 10% Contingency 25% 2/16/2004 @ mwu Unit of Measure Unit Cost Extended Total Each $ 8,000,000 $ 144,000,000 S____21,600,000_ Subtotal: $ 165,600,000 Lump Sum $ 8,200,000 $ 8,200,000 Gallon $ 1 $ 20,000,000 Lump Sum $ - $ - Linear Foot $ 400 $ 800,000 Lump Sum $ 12,000,000 $ 12,000,000 Lump Sum $ 5,000,000 $ 5,000,000 Linear Foot $ 400 $ 20,000,000 Subtotal: $ 66,000,000 $ 3,300,000 $ 9,900,000 $ 6,600,000 $ 16,500,000 Subtotal: $ 36,300,000 Total: $ 270,000,000 Rounded Up to the Nearest 10 Million Annualized Capital Cost at 4% over 20 years: $20,000,000) Rounded Up to the Nearest Million Page 1 Cost of Raw Water Per Tanker Per Round Trip Blue Lake (Sitka) 14,700,000 Gallon $ 0.0100 $ 147,000 Operating Costs Per Tanker Per Round Trip Load Tanker w/ Raw Water (Sitka) 2 Day $ 6,500 $ 13,000 Tanker Travel (Payroll) 13, Day $ 7,500 $ 97,500 Tanker Travel (Fuel) 13 Day $ 6,000 $ 78,000 Tanker Travel (Other) 13 Day $ 500 $ 6,500 Unload Tanker (Long Beach) 2 Day $ 6,500 $ 13,000 Miscellaneous 1 Lump Sum $ 6,000 $ 6,000 Note: Assumes 6.5 day travel time each way between ports. Subtotal: $ 214,000 Administration 1.0% $ 2,140 Insurance 0.5% $ 1,070 Routine Maintenance / Minor Repairs and Replacements 2.0% $ 4,280 Rate of Return 5.5% $ 11,770 Wharfage Fee 61,248 Ton $ 0.075 $ 4,600 Conservation Fee to the State of Alaska 45.0 Acre Foot $ 10 $ 450 Contingency 5% $ 10,700 Subtotal: $ 35,010 Total: $ 250,000 Rounded Up to the Nearest Thousand Major Maintenance Per Tanker Per Year Out of Service Maintenance (1% of the Initial Purchase Value) 1% Each $ 8,000,000 $ 80,000 Annual Cost Summary (Including Amortized Capital Cost) Amortized Capital 1 Lump Sum $20,000,000 $ 20,000,000 Raw Water Purchase 621 Round Trip $ 147,000 $ 91,200,000 Operations 621 Round Trip $ 250,000 $ 155,200,000 Major Maintenance 18 Tanker $ 80,000 $ 1,440,000 Total: $ 268,000,000 Rounded Up to the Nearest Million Cost Per Acre Foot $ 9,600 Rounded Up to the Nearest Hundred Cost Per 1000 Gallon $ 29.37 Cost Per Gallon $ 0.0294 Add On - Annual Water Treatment Cost Potable Water Treatment Cost by User 9,123,828,000 Gallon $0.0030 $ 27,400,000 Rounded Up to the Nearest One Hundred Thousand Cost Per Acre Foot $ 1,000 2/16/2004 Rounded Up to the Nearest Hundred 7.5% 34.1% 57.9% 0.5% 100.0% Page 2