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HomeMy WebLinkAboutRes 2002-01 Larsen Bay Hydro FundingAlaska Industrial Development and Export Authority .AI_ .... MEMORANDUM TO: Board of Directors Alaska Energy Authority FROM: Robert Poe, Jr. Executive Director DATE: June 13, 2002 SUBJECT: Resolution No. 2002-01 Larsen Bay Hydroelectric Project Resolution 2002-01 will implement the basic terms of the 1999 agreement between the City of Larsen Bay ("Larsen Bay") and the former Division of Energy, Department of Community and Regional Affairs ("DOE") (in conjunction with the Authority) to resolve debt issues related to the Larsen Bay Hydroelectric Project. The resolution will: (1) Authorize the Authority to use up to $220,000 from the Power Development Fund (PDF-AS 44.83.382) to call all remaining Larsen Bay bonds; (2) Ratify the 1995 action by the former Division of Energy reducing the interest rate on the Larsen Bay Power Project Fund loan (PPF loan -AS 42.45.01 0) to zero percent (0%); and · (3) Ratify the expenditures made by the Authority from the PDF for the operating costs and bond principal and interest payments (see itemization, attached as Exhibit A). The positive story regarding Larsen Bay is that the hydroelectric project now appears to have good prospects for becoming a viable, self-sustaining project. After having not operated for approximately three years, the project was repaired and has produced electric power for Larsen Bay for over one-half year. The Authority undertook these repairs under a reimbursement agreement with Larsen Bay. Funding came from a $100,000 appropriation to Larsen Bay and from a $25,000 Department of Administration grant to Larsen Bay. Larsen Bay will also reimburse the Authority for any costs in excess of $125,000. The Authority is working with Larsen Bay to develop a business plan (modeled after Rural Energy Group's plans for bulk-fuel facilities) to provide for a sustainable project. A significant component of this plan is the establishment of an R&R fund to cover repair costs as they arise. Further, Larsen Bay utility operators and city administrators have participated in training programs for operating small hydroelectric projects and administration of municipal utilities and administering grants. 813 West Northern Lights Boulevard • Anchorage, Alaska 99503 907 I 269-3000 • FAX 907 I 269-3044 • www.aidea.org Board of Directors June 13, 2002 Page 2 The less positive story is that even after the substantial debt relief afforded by Resolution 2002-01, it is not at all clear that revenue from the Larsen Bay utility will be sufficient. The total projected revenues and expenses are on Exhibit B. Of particular concern is the future operation of Kodiak Salmon Packers ("KSP"). Energy sales to KSP has always been critical to the economic viability of the project. The residents of Larsen Bay do not have sufficient demand for electric power to generate sufficient revenues at affordable energy rates. Due to a surplus supply of canned pink salmon on the market, KSP operations in 2002 will be limited to supplying ice to fishing vessels. KSP currently plans to resume more extensive cannery operations in 2003 or 2004, but that is subject to fish market conditions. History/Background: The Larsen Bay Hydroelectric Project consists of a 475 kW turbine/generator, a 140 ft. wide by 14 ft. high earth dam, approximately 6,000 ft. of penstock, and with a 600 ft. elevation difference. The Larsen Bay project was originally projected to cost approximately $525,000 by Polar Consultants. The Authority in 1987 agreed to provide partial funding for the project with a $493,000 PPF loan. Administration of the PPF loan transferred from the Authority to the former Division of Energy in 1993, and then back to the Authority in 1999 as part of various agency and program reorganizations in those years. By 1990, the original budget amount was substantially expended without significant progress towards completion of the project. The new total estimated cost increased to $1.8 million. Larsen Bay requested that the Authority assume responsibility for construction and ownership of the project. Additional funding to complete the project was obtained through a $500,000 PCE efficiency grant, a $30,000 Department of Administration grant, and bonds issued by the Authority. The Authority issued $855,000 fixed rate revenue bonds, Series 1991B, in May 1991. The bonds had annual maturities, beginning on April 1, 1993, with a final maturity on April1, 2011. Interest rates ranged from 6.75% to 7.75%. Payment on the bonds are secured by a Letter of Credit from Bank of America (the "Bank"), successor in interest to Security Pacific Bank of Washington. All payments on the bonds are made through the Letter of Credit, with the Bank reimbursed under an agreement between the Authority and the Bank. The Authority, as owner of the project, has certain obligations to operate the projects under separate agreements with Larsen Bay and with the Bank. Those obligations are generally to be fulfilled pursuant to a cooperative agreement between the Authority and Larsen Bay. Under this agreement, Larsen Bay operates the project and agrees to pay from revenues of the Larsen Bay utility, all operating costs (including those incurred by the Authority) and debt obligations under the Bonds and PPF loan. By the mid 1990's, it became obvious that Larsen Bay would have difficulty meeting all of its debt obligations from revenues of its utility. In 1995, the former Division of Energy reduced the interest rate on the PPF loan to zero percent (0%). The interest rate on a PPF loan may be at a rate not less than zero, and may be at a rate set that allows the project to meet criteria for financial feasibility. AS 42.45.01 O(f)(2)(B). The former Board of Directors June 13, 2002 Page 3 Division of Energy apparently considered the financial feasibility of the project at that time, and reduced the interest rate to zero percent. The files transferred to the Authority in 1999, however, fail to document this action. Resolution 2002-01 ratifies the 1995 reduction of interest rate bv the former Division of Energy. As Exhibit B demonstrates, criteria for the project's financial feasibility currently also would support a reduction of interest to zero percent. To retain incentive for timely payments, the new agreement described below will provide that interest shall again be incurred if Larsen Bay defaults by failing to make required payments even though the Larsen Bay utility has sufficient revenues to make the payment. The former Division of Energy, in conjunction with the Authority, also began discussions of a more complete resolution of Larsen Bay project debt. This led to a 1999 agreement. 1999 Agreement Terms: Under the 1999 agreement between Larsen Bay and the former Division of Energy, the Authority would defease outstanding Larsen Bay bonds (then approximately $750,000) and transfer ownership of the project to the former Division of Energy. The Authority then would have had no further involvement with the Larsen Bay project. Larsen Bay would pay the outstanding balance on the PPF loan related to the project of $528,000, in interest free payments. Additionally, Larsen Bay was required to enter into an Administrative Support Service Agreement with the Alaska Village Electric Cooperative, Inc. (AVEC). Under this agreement, entered in 2000, the Larsen Bay utility would operate the utility, including the hydroelectric project, and AVEC would provide oversight and support for utility operations, and provide billing and collection services for the utility. Post 1999 Agreement Events: Certain circumstances changed almost immediately following the 1999 agreement. In June 1999, the agency and program reorganization under HB 40 transferred both the PPF program and the former Division of Energy to the Authority. Thus, the Authority would again have a future involvement with the Larsen Bay project. The relationship between AVEC and Larsen Bay deteriorated rapidly after they entered their agreement in 2000. AVEC complained about not being paid timely, and Larsen Bay complained about the quality of service provided. It became obvious that AVEC and Larsen Bay were unlikely to work well together to ensure success of the Larsen Bay project. 2002 Settlement Terms: Call Bonds: While the Authority will continue to call all outstanding revenue bonds under Series 1991B, the expense to the Authority has been significantly reduced. A 2001 legislative appropriation of $400,000 has already been applied to call outstanding bonds. The approximate total remaining balance necessary to call the bonds on October 1, 2002 (the next available date) is $210,000. The Authority has already expended Board of Directors June 13, 2002 Page4 $76,000 from the PDF to pay bond interest and principal that was due on October 1, 2001 and April 1, 2002. Resolution 2002-01 authorizes the Authority to use up to $220,000 from the PDF, if necessary. to call these bonds. The resolution further ratifies the Authority's paying $76,000 from the PDF for bond interest and principal. See Exhibit A (expenditures reflected in Exhibit A also include approximately $228,000 paid toward operating costs of the project described below). The Authority will pay to the bond Trustee the amount necessary to call outstanding bonds by June 30, 2002, to satisfy an agreement reached with Bank of America. To assist resolving outstanding Larsen Bay debt issues and relieve itself of possible letter of credit liability, Bank of America cooperated with the Authority and Larsen Bay to obtain the 2001 appropriation to call bonds. Bank of America also agreed to waive its letter of credit fees for 2001 and 2002 (more than $10,000) contingent upon the Authority by June 30, 2002, paying sufficient funds to the Trustee to call all outstanding Larsen Bay bonds. Debt Payments: Larsen Bay will agree to pay the outstanding balance on the PPF loan of $528,000, payable in annual, interest free installments of $35,000. The initial payments will be deferred approximately two years to first provide for funding an R&R fund. (See discussion regarding Business Plan below). However, interest shall again be imposed on the PPF loan if Larsen Bay defaults by failing to make required payments even though the Larsen Bay utility has sufficient revenues to niake the payment. Additionally, the Authority will receive approximately 11 annual payments of $11,725 (a total of approximately $129,000 over 11 years) assigned from Kodiak Salmon Packers payments for power. These amounts represent debt Kodiak Salmon Packers owe related to bond proceeds that were used to extend power lines from the hydroelectric project to the cannery. These payments will be made to the PDF. Payments to the Authority will continue to be subject the Larsen Bay Utility generating sufficient revenues. Business Plan to Substitute for AVEC Agreement: The Authority will assume a greater role and responsibility overseeing the Larsen Bay project to substitute for the role contemplated in 1999 for AVEC under that failed relationship. The Authority is working with Larsen Bay to develop a business plan (modeled after Rural Energy Group's plans for bulk-fuel facilities) to provide for a sustainable project. The Authority will receive and monitor monthly reports of utility operations, and provide for periodic inspections of the hydroelectric project. Annual budgets will be established, and revenues from the Larsen Bay Utility will cover all operating costs (including expenses of the Authority for oversight). The business plan also provides for the establishment of a R&R fund to provide a funding source for necessary repairs. The Authority's prior experience is that Larsen Bay has not had sufficient funds available to make necessary repairs on a timely basis, creating greater problems for the project. The R&R fund will initially be established at a $60,000 level, with funding provided by deferring approximately the first two years '' Board of Directors June 13, 2002 Page 5 $35,000 payments towards the PPF loan, and transferring those payments instead to the R&R fund. The R&R fund will be held by the Authority, and will be available for the costs of necessary repairs not covered by O&M. The R&R fund will also be security for repayment of the PPF loan. Finally, Larsen Bay utility operators and city administrators have participated in training programs for operating small hydroelectric projects and administration of municipal utilities and administering grants. These training programs are being separately reported on by the Authority at the June 13, 2002 meeting. The operators at Larsen Bay are now better able to operate the projects. Ratification of Operating Costs Paid from PDF. Between Fiscal Years 1997 and 2002, the Authority has expended a total of approximately $228,000 from the PDF for costs associated with operations of the Larsen Bay project Resolution 2002-01 ratifies the Authority's payment of these project operating expenses from the PDF. See Exhibit A (expenditures reflected in Exhibit A also include $76,000 paid toward bond principal and interest described above). Staff recommends adoption of these proposed amendments to the Bylaws of the Alaska Energy Authority_ ALASKA ENERGY AUTHORITY RESOLUTION NO. 2002-01 RESOLUTION OF THE ALASKA ENERGY AUTHORITY AUTHORIZING RESOLUTION AND RESTRUCTURING OF DEBT RELATED TO THE LARSEN BAY HYDROELECTRIC PROJECT, AND PROVIDING FOR RELATED MATTERS WHEREAS, The Larsen Bay Hydroelectric Project ("Larsen Bay project") is a 475 kW turbinefgenerator hydroelectric project constructed to help provide affordable electric power to the residents and other power users in the City of Larsen Bay ("Larsen Bay"); WHEREAS, The Larsen Bay project was originally estimated to cost approximately $525,000, and would be partially funded by a $493,000 Power Project Fund loan ("PPF loan"), but the actual cost to complete the project rose to approximately $1.8 million, and the additional expense was funded through a combination of a $500,000 PCE efficiency grant, a $30,000 Department of Administration grant, and bonds issued by the Authority; WHEREAS, The Authority issued $855,000 fixed rate revenue bonds, Series 1991B, in May 1991. The bonds had annual maturities, beginning on April 1, 1993, with a final maturity on April1, 2011. Interest rates ranged from 6.75% to 7.75%. Payment on the bonds are secured by a Letter of Credit from Bank of America (the "Bank"), successor in interest to Security Pacific Bank of Washington. All payments on the bonds are made through the Letter of Credit, with the Bank reimbursed under an agreement between the Authority and the Bank; WHEREAS, The Authority assumed responsibility for construction and ownership of the project in 1990, and continues to have certain responsibilities for operation of the project that are generally fulfilled through a cooperative agreement with Larsen Bay; WHEREAS, Administration of the PPF loan transferred from the Authority to the former Division of Energy in 1993, and then back to the Authority in 1999 as part of various state agency and program reorganizations in those years; Resolution No. 2002-01 Page 1 H:\ALL\bfug!estad\BOARD\RESOLUTI\AEA Larsen Bay.doc WHEREAS, AS 42.45.01 O(f)(2)(B) provides that the interest rate on a PPF loan may be at a rate not less than zero, and may be at a rate set that allows the project to meet criteria for financial feasibility, WHEREAS, In 1995, the former Division of Energy reduced the interest rate on the PPF loan to zero percent (0%) after the financial feasibility of the project became questionable and it became obvious that Larsen Bay Utility would have difficulty meeting all of its debt obligations from revenues of its utility; however, the files transferred to the Authority in 1999 fail to document this action; WHEREAS, Larsen Bay and the former Division of Energy in 1999 reached agreement to further resolve debt problems of the Larsen Bay project under which, Larsen Bay would repay the PPF loan then administered by the former Division of Energy, while the Authority would defease outstanding Larsen Bay bonds (then approximately $750,000) and transfer ownership of the project to the former Division of Energy so that the Authority would have had no further involvement with the Larsen Bay project; WHEREAS, Administration of the PPF loan and the former Division of Energy were transferred to the Authority in 1999 as part of the reorganization of state programs and agencies under HB 40; WHEREAS, The Legislature in 2001 appropriated $400,000 to help call the outstanding Larsen Bay project revenue bonds (the Authority's Series 1991 B), to further the intent of the 1999 agreement to reduce the debt associated with the Larsen Bay project; WHEREAS, AS 44.83.384 provides that the Power Development Fund ("PDF") may be used for expenses associated with power projects constructed or acquired by the Authority before August 11, 1993, for costs to operate and maintain the project, to defease bonds, and to pay debt service on bonds sold in connection with a power project; WHEREAS, The Authority has expended approximately $304,000 from the PDF towards operating costs of the Larsen Bay project and repayment of interest and principal on the Resolution No. 2002-01 Page2 H:IALL\bfugleslad\BOARD\RESOLUTAAEA Larsen Bay doc outstanding Larsen Bay project revenue bonds (the Authority's Series 1991 B), as is depicted in Exhibit A; WHEREAS, The Authority and Larsen Bay have reached certain understandings to implement the basic concepts incorporated in the 1999 agreement between Larsen Bay and the former Division of Energy to reduce the debt associated with the Larsen Bay project, including that the Authority will call the remaining approximately $210,000 of outstanding Larsen Bay project revenue bonds (the Authority's Series 1991 B), that Larsen Bay will agree to repay the PPF loan from revenues of the Utility, that Larsen Bay will assign to the Authority (for deposit into the PDF) certain payments for power purchased by Kodiak Salmon Packers, and that the Authority will continue to work closely with Larsen Bay through implementing a business plan to assist the Larsen Bay project to become sustainable; and WHEREAS, Resolving the debt problems associated with the Larsen Bay project will further the best interests of the people of Larsen Bay and the purposes of the Authority. NOW, THEREFORE, BE IT RESOLVED BY THE ALASKA ENERGY AUTHORITY AS FOLLOWS: Section 1. The Executive Director of the Authority is authorized to expend up to $220,000 from the Power Development Fund (AS 44.83.382) to call the outstanding Larsen Bay project revenue bonds (the Authority's Series 1991 B), and to pay such necessary amounts to the bond Trustee on or before June 30, 2002. Section 2. The action taken in 1995 by the former Division of Energy, as then administrator of the Power Project Fund, to reduce to zero percent (0%) the interest rate on the Power Project Fund loan made to Larsen Bay related to the construction of the Larsen Bay hydroelectric, but which action is not documented in files transferred to the Authority in 1999, is hereby ratified. Resolution No. 2002-01 H:\ALL\bfug!as!ad\BOARO\RESOLUTI\AEA larsen Bay.doc Page3 -.-> ~ Section 3. The expenditures made by the Authority from the Power Development Fund (AS 44.83.382) for the operating costs and payments toward principal and interest on Larsen Bay project revenue bonds (the Authority's Series 1991B), itemized in Exhibit A, are hereby ratified. Section 4. The Executive Director of the Authority is authorized and empowered to take such actions as he deems necessary or appropriate in order to resolve debt issues related to the Larsen Bay hydroelectric project, as further described in this resolution and the accompanying memorandum. Dated at Anchorage, Alaska this 13th day of June, 2002. ATTEST [SEAL] .. i -~;:) :-3·-: . ·-' ' ;', J a, Resolution No. 2002-01 H:\ALL\bfugleslad\BOARD\RESOLUTI\AEA larsen Bay.doc Chairman " Page4 Other O&M Expenses paid by AEA E-401-54XXX-OOO Maintenance, Renewal & Replacement E-401-54000-000 Land Rents E-401-92401-000 Insurance E-401-92402-000 RSA with Risk Management AEA Administrative Expenses ALASKA ENERGY AUTHORITY LARSEN BAY HYDRO PROJECT AEA OUT OF POCKET COSTS 1997 1998 10,843 1,509 532 12,884 12,934 99 20 24,359 14,463 E-401-71xxx&731 04 Personal Services 9,212 10,264 E-401-72XXX-XXX Travel 1,808 626 E-401-73XXX-XXX Other administra~ve costs 2,560 2,425 E-401-73102-000 Legal Expense 13,580 13,315 Other Administrative Expenses E-401-92303-000 Professional Services (arbitrage report) 900 E-40 1-92305-000 Trustee and Letter of Credit Fees 10,613 10,179 10,613 11,079 Less amounts not paid by AEA: E-401-72XXX-XXX AEA travel costs credited against Due from City (850) (150) E-401-92305-000 LOC Draw Fees charged direct to Ops fund (200) (200) (1,050) (350) Loan from Power Dev. Fund for Debt Svc WT207 Larsen Bay Debt Sv fund trsf from PDF WT238 Larsen Bay Debt Sv fund trsf from PDF Total AEA Out of Pocket Costs 47,502 38,507 Less amounts reimbursed from Operating Fund: Trustee fees prepaid in FY96 (1 ,989) 8/28/96 Reimbursment of FY97 expenses (5, 122) 6/30/97 Reimbursment of FY97 expenses (18,500) Unreimbursed AEA Out of Pocket Costs 21,891 38,507 EXHIBIT A ITO 1999 2000 2001 2002 2/6/2002 70 4,392 56 268 17,139 532 12,654 12,594 14,359 19,293 84,719 20 20 159 12,744 17,006 14,415 19,561 102,548 11,637 8,238 1,461 40,812 2,499 694 1,229 6,855 1,070 3,732 3,812 1,038 14,637 3,640 27,173 3,055 3,091 36,959 18,646 39,836 9,556 4,129 99,263 900 900 1,025 3,725 9,895 9,551 7,626 2,622 50,486 10,795 10,451 8,651 2,622 54,211 (135) (1 '135) (200) (200) (200) (100) (1 '100) (335) (200) (200) (100) (2,235) 54,000 54,000 22,700 22,700 54,000 22,700 76,700 42,050 67,093 86,422.65 48,912.15 330,487.02 (1 ,989) (5, 122) (18,500) 42,050 67,093 86,423 48,912 304,876 EXHIBITS 1 Plan ITotall ; ' ; ; I I ~ I I I I I REVENUE LESS I , li I i