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HomeMy WebLinkAboutRes 2013-06 PPF Loan Resolution Humpback Creek MEMORANDUM TO: Board of Directors Alaska Energy Authority FROM: Sara Fisher-Goad Executive Director DATE: December 5, 2013 SUBJECT: Resolution No. 2013-06 Cordova Electric Cooperative, Humpback Creek, Power Project Fund Loan Resolution 2013-06 will approve the Power Project Fund (PPF) loan for the Humpback Creek (HBC) hydro project located in Cordova and owned and operated by Cordova Electric Cooperative (CEC). Additional information about the project is available in the attached staff analysis that was submitted to and reviewed by the PPF Loan Committee. The PPF loan committee recommends the loan to CEC for the HBC project as outlined in this memo. Background and Purpose Cordova Electric Cooperative was formed in 1978 to replace the municipality owned utility and is the sole electricity provider to the community. CEC has 1,556 customers served by three generation facilities with total generation capacity of 18 megawatts: Power Creek (6MW hydro), Orca (10.8MW diesel) and Humpback Creek (1.25MW hydro). The utility is a non-profit electric cooperative organized exclusively for the benefit of its members. The Loan Request Cordova Electric Cooperative is requesting a loan from the Power Project Fund in the amount of $8,928,094.18 to convert several short-term variable rate loans used to construct HBC hydro into one long-term fixed rate loan. HBC total project costs were $19.5 million and was paid for with a combination of grants and loans as outlined below.  FEMA - $2.35 million  AEA REF grant - $8 million  CEC - $9.12 million Cordova Electric is requesting a 30-year loan term at 4.5% with annual payments of $542,848 billed quarterly. Loan terms will allow pre-payment of principal with no penalties, keeping quarterly payments the same but amortizing the loan more quickly. Res 2013-06 - Board Memorandum December 5, 2013 Page 2 of 4 Application History Sec. 28(o), ch. 14. SLA 2013 appropriates $10 million from the general fund to the power project fund, with the appropriation contingent upon AEA approving a loan not to exceed $9,123,000 to CEC for the HBC project. This appropriation also constitutes legislative approval for the PPF loan, and became effective on July 1, 2013. CEC submitted a full application on September 1, 2013. CEC debt is currently with CoBank in variable rate loans. Recent historic low interest rates have benefited CEC but the nature of variable rate loans leaves them vulnerable to the risk of future rate increases. CoBank has offered to fix all debt at 5.98% for 20 years. CEC has explored other funding options but has not been successful in obtaining a lower long-term rate. AEA staff performed analysis and due diligence and prepared recommendations which were heard by the loan committee in September. CEC’s board of directors voted at their October meeting to move forward in pursuing loan terms accepted by the AEA loan committee. Project Information The HBC project is a run of river hydro-electric project located 5.5 miles northeast of the community of Cordova. The project was originally constructed (unlicensed) in 1908. In 1988 FERC issued the first license for a timber frame intake/diversion system at the mouth of the canyon, a flume and new penstock which sent water over a new bridge to the powerhouse. This system was destroyed by flooding in 2006. The project was rebuilt with improved design standards between 2009 and 2011 and has been operational since July 2011. Financial Feasibility As part of the loan analysis, AEA examined the applicant’s ability to repay the loan. AEA has determined that the project has a positive net present value and the ability to repay the AEA Power Project Fund Loan based on the applicant’s current sales and savings associated with displaced diesel generation. There is some risk that in years of low flows the utility will be forced to generate with diesel, increasing costs and diminishing income available to repay debt. However, CEC has a rate base with the capacity to absorb unforeseen short term cost increases and the utility has the administrative capacity to make these adjustments as needed to maintain the health of the system. CEC is a well-run and financially healthy utility in a stable marketplace. Balance sheet ratios for period ending July 31, 2013 are provided below:  Equity as a percent of assets = 43.17%  General funds as a percent of total utility plant = 2.63%  Current assets to current liabilities ratio = 1.69:1  Long term debt as a percentage of total utility plant = 40.49% Res 2013-06 - Board Memorandum December 5, 2013 Page 3 of 4 Economic Viability The HBC project was evaluated using the same model and methodology employed for evaluation of Renewable Energy Fund projects and returned positive b/c ratios with the net present value of benefits well in excess of capital. The value of the diesel displaced by HBC generation is presently estimated at roughly $1 million, nearly twice the value of debt service payments. Cordova electric operated in a stable market in a community with substantial population and a healthy economic base. All energy generated at HBC is currently used by existing CEC customers. Technical Feasibility AEA hydro engineer Doug Ott reviewed the loan application documents, made comments and noted that the project is not only complete and operational but also that all documents appear to comply with applicable codes and ordinances. The project is technically feasible. Findings As required by 3 AAC 106.110, the Alaska Energy Authority hereby makes the following determinations: 1. Both the project and the application meet the program’s eligibility criteria. 2. The project meets the needs of the area and the area will benefit from the project. 3. All necessary permits or certificates have been applied for or awarded. 4. The power project fund has sufficient funds to meet the existing loan requests. 5. The applicant has sufficient revenue from all sources to repay the loan. 6. Sufficient funds are available in the Power Project Fund to make the loan. 7. The project is technically and economically viable and financially feasible. 8. There are no alternatives to the project at a different site, by a different method, or by another applicant that could be expected to provide comparable volumes of power at lower cost which meets the needs of the area, that could be built within comparable timeframe, that is economically viable and financially feasible. 9. That the project benefits the area by providing power from a renewable source at a stable rate acceptable to Cordova Electric Cooperative and its members. Legislative approval Sec. 28(o), ch. 14. SLA 2013 appropriates $10 million from the general fund to the power project fund, with the appropriation contingent upon AEA approving a loan not to exceed $9,123,000 to CEC for the HBC project. This appropriation also constitutes legislative approval for the PPF loan, and became effective on July 1, 2013. Conclusion Cordova Electric Cooperative is a financially healthy and well run utility. The HBC project has been fully operational for nearly two years and has exceeded electric generation expectations. There is little risk associated with this loan. Recommendation and Conditions Approval is recommended with the following conditions: Res 2013-06 - Board Memorandum December 5, 2013 Page 4 of 4 1. Cordova Electric will provide AEA with a copy of a fully executed lease agreement with Eyak Corporation. 2. Proof of insurance for on all fixed assets and improvements to real estate, including but not limited to buildings, structures, pipelines, power lines, power generation equipment, controls and other fixtures related to the HBC project and the delivery and sale of power from it. 3. Loan Debt Service a. Principal and Interest payments will begin immediately b. Payment of $135,712 will be due quarterly c. Annual debt service = $542,848 4. Cordova Electric continuously maintain Cash or Cash Equivalents of at least $500,000. 5. Cordova Electric will maintain 1.25 Debt Service Coverage (DSC) ratio. a. Calculated (Annual Net Income + Amortization/Depreciation + Interest Expense + other non-cash and discretionary items) / (Principal Repayment + Interest payments + Lease payments) 6. Collateral will include all project assets, rights to access lands and operations, insurance coverage, and contracts and sales agreements. 7. Cordova Electric will guarantee payment on the full loan amount. Attachment 1. AEA staff analysis 2. Letter indicating CEC board acceptance of AEA loan committee proposed loan terms ALASKA ENERGY AUTHORITY RESOLUTION NO. 2013-06 A RESOLUTION OF THE ALASKA ENERGY AUTHORITY REGARDING A LOAN BY THE AUTHORITY TO CORDOVA ELECTRIC COOPERATIVE WHEREAS, Humpback Creek has applied to the Alaska Energy Authority (“Authority”) for a loan in the amount of $8,928,094.18 with a term of 30 years under the Authority’s power project fund program (AS 42.45.010) at the interest rate established under AS 42.45.010(f)(2)(A) (the “Loan”); WHEREAS, the nature, purpose and terms of the Loan are described in the memorandum from Authority staff attached as Exhibit “A” hereto (the “Memorandum”); WHEREAS, the loan committee and staff of the Authority have recommended that the Authority make the Loan, subject to certain conditions, as described in the Memorandum; WHEREAS, 3 AAC 106.110(d) requires that a loan from the power project fund be approved by the Authority’s board if the subject loan will exceed $2,000,000; WHEREAS, 3 AAC 106.110(d) requires that the approval or disapproval of a power project fund loan be in the form of a written determination that contains the findings required by 3 AAC 106.110; WHEREAS, the loan committee and Authority staff have recommended findings required by 3 AAC 106.110(d) in the Memorandum and its attachments; and WHEREAS, it is in the best interest of the Authority that the Authority make the Loan, subject to conditions recommended by the loan committee and staff as described in the Memorandum. NOW, THEREFORE, BE IT RESOLVED BY THE ALASKA ENERGY AUTHORITY AS FOLLOWS: Section 1. The written findings recommended by staff, required by 3 AAC 106.110(d), and contained in the Memorandum and its attachments, are adopted and incorporated by reference as part of this Resolution. Section 2. The Authority approves the Loan in the amount of $8,928,094.18 from the power project fund to Cordova Electric Cooperative for the Humpback Creek hydroelectric project, with terms descri bed in the Memorandum , and subject to the conditions recommended by the loan comm ittee a nd staff as set forth in th e Memorandum. Section 3. This Resolution is the f inal decision of the Authority regarding the requested loan from the powe r project fund for th e Humpback Creek hydroelectric project. Section 4 . The Ex ecutive Directo r of the Authority is authorized to take such actions as may be nece ss ary or convenient to con su mmate the Loan including, without limitation, issuing a comm itment w ith res pect to the Loan. T he Executive Director is authorized to approve non-material changes in the te rms and conditions of the Loan as the Executive Director, in her discretion , determines a ppro priate . DATED at A nch orage , Alaska on th is 5 th day of December 2013. AEA Resolution No. 20 13-06 Page 2 of 2