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HomeMy WebLinkAboutAEA Board Minutes Jan 18 2023Alaska Energy Authority. BOARD MEETING MINUTES Wednesday, January 18, 2023 Anchorage, Alaska 1. CALL TO ORDER Alt& ALASKA ENERGY AUTHORITY Chair Pruhs called the meeting of the Alaska Energy Authority to order on January 18, 2023, at 8:30 am. A quorum was established. 2. ROLL CALL BOARD MEMBERS Members present: Chair Dana Pruhs (Public Member); Vice -Chair Bill Kendig (Public Member); Albert Fogle (Public Member); Adam Crum (Commissioner DOR); Julie Sande (Commissioner DCCED); Bill Vivlamore (Public Member); and Randy Eledge (Public Member). 3. AGENDA APPROVAL Chair Pruhs requested that the people in the boardroom introduce themselves and state their affiliation. There was no objection and the attendees introduced themselves. Jennifer Bertolini, AEA, also introduced the attendees participating via Teams. MOTION: A motion was made by Vice -Chair Kendig to approve the agenda, as presented. Motion seconded Mr. Vivlamore. The motion to approve the agenda passed without objection. 4. PRIOR MINUTES - December 19, 2022 MOTION: A motion was made by Vice -Chair Kendig to approve the prior minutes of December 19, 2022, as presented. Motion seconded by Mr. Vivlamore. The motion to approve the minutes of the December 19, 2022, passed without objection. S. PUBLIC COMMENTS (2 minutes per person) There were no members of the public online or in -person who requested to comment. 6. NEW BUSINESS A. Power Cost Equalization Endowment Presentation Curtis Thayer, Executive Director and Secretary -Treasurer, informed that this item is a follow-up from a Board request to have a presentation by the Department of Revenue (DOR) regarding the Power Cost Equalization (PCE) Endowment. By statute, the Endowment is managed by the • •AKENERGYAUTHORITY.ORG 813 W Northern Lights Blvd, Anchorage, AK 99503 • Phone: (907) 771-3000 • Fax: (907) 771-3044 • Email: info@akenergyauthority.org Commissioner of Revenue. Mr. Thayer introduced Zachary Hanna, Chief Investment Officer (CIO), State of Alaska, to review the presentation included in the packet. Mr. Hanna described the presentation as a an executive summary of the Department's asset allocation process, the PCE fund performance, and the impact that downside risk could have on assets and spending. He noted that the appendix to the presentation contains a market review for additional information. Mr. Hanna indicated that the presentation is intended to be a summary discussion and that continued dialog is welcome to continue over time. Mr. Hanna discussed the background of the Treasury Division as shown on page two. Nearly $50 billion in assets are managed and 80% of that is for the Alaska Retirement Management (ARM) Board. Approximately $8 billion is under the fiduciary direction of the Commissioner of Revenue, including the PCE assets, and approximately $300 million is managed for other State fiduciaries, such as Alaska Mental Health Trust, Exxon Valdez Oil Spill Trust, and Alaska Student Loan Corporation. Setting investment policies and asset allocation for State funds are key fiduciary duties for the Commissioner of Revenue. An asset allocation process is conducted annually. The investment policies for each fund are based on factors such as time horizon, return objectives, liquidity needs, and capacity for loss. Mr. Hanna noted that performance, investment policy and asset allocations are discussed quarterly in a transparent process with an independent professional investment advisory committee. All the meeting minutes and materials are publicly available on the website. Mr. Hanna informed that Callan is the investment consultant for both the ARM Board and Alaska Permanent Fund Corporation (APFC). Callan is not a consultant for the State. However, the State uses Callan's independent capital market long-term assumptions for consistency, coupled with other market inputs. Mr. Hanna described the yearly process by which potential changes are made to the set of asset classes used to construct State portfolios, as shown on page six. Mr. Hanna explained that even though the Securities and Exchange Commission (SEC) changed its accredited investor definition in 2021 to allow State funds to purchase illiquid assets like private equity and private real estate, the State portfolios still do not invest in illiquid asset classes because the State funds are subject to annual legislative changes. The portfolios are focused on delivering market -plus returns without downward deviations in the mid-term time horizon. Mr. Hanna reviewed the current Investment Policy for the PCE portfolio shown on page seven. He discussed that statute calls for the Commissioner of Revenue to apply the prudent -investor rule and invest the assets of the fund considering the preservation of the purchasing power over time, while maximizing the expected total return. Mr. Hanna explained that since PCE has a long time horizon, the portfolio can take some volatility in the pursuit of maximizing expected return and preserving the purchasing power. Thus the recommended and adopted portfolio is 70% domestic equity and 30% core bond portfolio. This is the highest risk and return portfolio that can be used for State assets. Mr. Hanna discussed that per statute, PCE uses three-year smoothing. The degree of asset smoothing impacts spending volatility. There is a natural tension between current spending and inflation proofing the portfolio. Mr. Hanna reviewed the year-to-date through November 30, 2022 Alaska Energy Authority Page 2 of 11 capital market performance update shown on page nine and the portfolio performance shown on page 10. It was a very challenging year for almost all asset classes due to inflationary concerns and rising interest rates. Only cash and commodities provided a positive return over the period. Both fixed income and equities provided similar double-digit losses to portfolios. Mr. Hanna noted that the table on page 10 shows the PCE portfolio performance over the last 10 years. The assets have been managed for decades and longer -term performance numbers are available. The loss for the one-year period was negative 10.31 %, compared to the benchmark loss of negative 10.56%. The portfolio is expected to perform similarly to the benchmark and hopefully, outperform the benchmark by an additional 10 to 20 basis points. Over the past 10 years, performance has been 6.76%, with modest excess returns compared with the benchmark. Mr. Hanna discussed the underlying performance of each asset class of the PCE portfolio as shown in the second table on page 10. Mr. Hanna commented that the portfolio is performing within the bounds of expectations of its asset allocation. He discussed that continued market volatility is expected in 2023 as the tug of war between inflation and growth persists. The December monthly returns for equities were down 6%, and the PCE funds were down 2.91 %. Chair Pruhs asked if the PCE portfolio has investment restrictions. Mr. Hanna agreed, and noted that even though the portfolio can now invest in alternative investments, it becomes problematic because the Legislature can make changes annually. He discussed that the portfolio needs to have fairly liquid investments in order to ratchet those changes. Chair Pruhs noted that AEA, with the Board's concurrence, recently approved $160 million of bonding at 6.06% that is backed by the Railbelt utilities for project work. He asked if DOR purchased any of those bonds or if they have the ability to invest in themselves and purchase any of those bonds. Mr. Hanna discussed that the bonds that the State currently invests in have high forward rates of return similar to the referenced AEA bond issuance with similar risks. He does not know specifically if the AEA bonds could be considered, although, he believes it is possible. Mr. Hanna discussed that a separate process is undertaken for investments that are considered non - routine. Chair Pruhs requested that DOR inform and make AEA staff and the Board aware of DOR's investment parameters for future investment opportunities. Mr. Hanna agreed. Chair Pruhs commented that he directly relates PCE with stable rates of return to support rural Alaska Power Cost Equalization and believes it would benefit the State to invest in its reliable revenue streams. Mr. Hanna noted additional work can be directed to this line of questions. Mr. Hanna continued the presentation on page 12 regarding asset allocation, real returns, and downside risk of the portfolio. He discussed that one characteristic of capital market expectations for the past 10 years is that returns have fallen along with interest rates. Now that interest rates have increased dramatically, the effect on performance has been negative, but the increase will have a positive impact on forward expectations. The expected 10-year compounded return for PCE for FY23 was 5.6%. For FY24, this is expected to increase to 6.59%. Mr. Hanna reviewed the Alaska Energy Authority Page 3 of 11 downside risk statistics and noted that the three-year 5% probable annual return is negative 9.2% for FY23. He explained that the information contained in the chart provides reasonable statistical downside expectations for the portfolio. Chair Pruhs asked what the downside risk expectations were for FY22. Mr. Hanna noted the expectations for FY22 were very similar to the FY23 expectations. He discussed that Callan's capital market assumptions did not change much, but that PCE underwent two changes; including the used of the Prudent Investor Rule. The expected 10-year return for FY22 was 5%. The expected 10-year return of 5.6% for FY23 was due to a reasonable increase in the amount of equity in the portfolio. Mr. Hanna reviewed that the long-term real return statistics show the projected total return after accounting for inflation expectations. The statute calls for the consideration of inflation proofing the portfolio. The real return for FY24 is expected to be approximately 4.09%. Spending beyond this level could result in a less than full inflation proofing of the portfolio at Callan's expected 2.5% inflation assumption. Mr. Hanna discussed the chart on page 13 showing the historical market drawdowns and rolling one-year, three-year, and five-year smoothed returns of a similar 70% equity and 30% bond portfolio over the past 40 years. The frequency of drawdowns impacts the planning strategy. Mr. Hanna discussed the spending limits as shown on page 14. For FY24, the three-year smoothed maximum appropriation limit is $54.9 million. The appropriations have increased from $31.6 million in 2015 to the current, all-time high level. Mr. Hanna reviewed that DOR does not make forecasts regarding the direction of markets, however, if markets remained flat for the next 2.5 years, and PCE continued to spend at the statutory limit, the FY27 spending limit would be $46 million. This is approximately 16% less than the FY24's spending limit. Chair Pruhs asked if it would make a difference to the outcome if the smoothing was five years rather than three years. Mr. Hanna agreed, and estimated that a five-year smoothing average would reduce the reduction by approximately 3.5%. He explained that five-year smoothing is the industry norm for endowments and PCE uses three-year smoothing. Mr. Hanna discussed that the expected spending reductions over three-year periods is approximately 20%, given the investment structure of PCE. Chair Pruhs asked for the DOR position regarding three-year smoothing and five-year smoothing. Mr. Hanna noted that five-year smoothing is best practice and three-year smoothing is a reasonable practice as well. He does not believe that the change from three-year smoothing to five-year smoothing would have a dramatic effect. However, if prospective legislative changes were to occur, DOR would recommend changing from three-year smoothing to five-year smoothing. Chair Pruhs indicated that the Board would support a resolution recommending the change if it makes economic sense to do so. Commissioner Sande expressed appreciation for the presentation. Mr. Fogle expressed appreciation to Mr. Hanna for the update and presentation. Mr. Fogle asked Alaska Energy Authority Page 4 of 11 Mr. Thayer regarding communication to the participants and if they have been made aware that the funding is on a negative trend. Mr. Thayer reported that the information provided by DOR has been given to the Alaska Power Association and others. They are aware of the negative trend. Mr. Thayer informed that last year, the Legislature increased the amount of PCE kilowatt hours (kWh) per customer from 500 kWh to 750 kWh, which gives the Legislature a larger draw on the PCE program. The Legislature did not provide additional funds into the PCE program. Chair Pruhs expressed appreciation to Mr. Hanna for the presentation. He commented on the interesting decision last year to increase the PCE amount to the private homeowners without adjusting the smoothing from three years to five years. This puts pressure on the three-year smoothing. There were no additional questions or comments. B. Resolution No. 2023-01 FY24 Operating and Capital Budget Submissions Ratification Mr. Thayer explained that Resolution 2023-01 is the annual resolution for the Board to ratify the Governor's submission to the Legislature for the FY24 Operating and Capital Budget. The Operating Budget last year for FY23 was approximately $41 million. The proposed Operating Budget for FY24 is approximately $58 million. The increased funding is primarily the result of the change of PCE by 50%, from 500 kWh to 750 kWh. Other factors include the Legislature providing an additional appropriation from the General Fund for $683,000 for the 5% cost of living increase to all exempt employees, a technical insurance correction on State healthcare benefits, and $958,000 for five infrastructure positions of two program managers, one grants administrator, one procurement position, and one accounting technician. Mr. Thayer discussed that the Capital Budget is approximately $74 million, comprised of the Federal receipt authority of $46 million and the State contribution of $28 million. The total is less than last year and additional Federal receipt funding is anticipated to be received in a supplemental process that will need legislative approval. Mr. Thayer reviewed the spreadsheets and charts provided in Attachment A. He noted that the internal Renewable Energy & Efficiency Program has funding of $5 million and had not been funded in eight years. The Grants to Names Recipients for Golden Valley Electric Association (GVEA) of $3 million is new to the Capital Budget. It was requested by the Governor's Office to route through AEA. Mr. Thayer highlighted that the two supplemental requests that are pending release for FY23 are the Black Rapids Training Site Project for $12 million and the Infrastructure Investment Jobs Act (IIJA) State Energy Program for $2.8 million. There were no questions or comments. MOTION: A motion was made by Vice -Chair Kendig to approve Resolution 2023-01, FY24 Operating and Capital Budget Submissions Ratification, as presented. Motion seconded by Mr. Vivlamore. A roll call was taken, and the motion to approve Resolution 2023-01 passed unanimously. Alaska Energy Authority Page 5 of 11 MOTION: A motion was made by Vice -Chair Kendig to enter into Executive Session to discuss confidential financial matters related to the FY24 Budget, the immediate disclosure of which would have an adverse impact on the Authority. This is supported by the Open Meetings Act, AS 44.62.310, which allows a Board to consider confidential matters in Executive Session. In this case, the Board believes these are subjects which would have an adverse effect upon the finances of AEA or are protected by law due to rules protecting personal privacy and certain business information. Motion seconded by Mr. Vivlamore. A roll call was taken, and the motion to enter into Executive Session was approved unanimously. i. EXECUTIVE SESSION: 9:26 a.m. — To discuss confidential matters related to the FY24 Budget The Board reconvened its regular meeting at 10:22 am. Chair Pruhs advised that the Board did not take any formal action on the matters discussed while in Executive Session. 7. OLD BUSINESS - None 8. DIRECTOR COMMENTS A. Strategic Planning Discussion Mr. Thayer noted that this item is a placeholder to schedule a date and location to conduct a strategic planning discussion. He proposed that the date occur at the end of the legislative session. Chair Pruhs suggested that the strategic planning session occur in Fairbanks during the Energy Fair in August. He recommended that half a day is scheduled for AEA and half a day is scheduled for AIDEA. Mr. Thayer indicated that he would provide Chair Pruhs with the specific dates. There were no other questions or comments. Mr. Fogle informed that he has to leave the meeting and will return around noon. B. Power Revenue Bonds — closed 11/30/2022 (Updated Term Sheet Letter) Mr. Thayer discussed that included in the packet is a memorandum from Fred Eoff, Financial Advisor, summarizing the final terms for the $166 million Series 11 Bonds between AEA and National Cooperative Services Cooperation (NCSC). The duration of the loan is 28 years. The Board previously gave permission for additional negotiations to the terms, which were successful and resulted in the interest rate being lowered by 46 basis points, the inclusion of the option to refinance the 6.5% locked interest rate after 10 years, and the elimination of certain proposed definitions of debt service and debt service coverage. The amortization scheduled is also included in the packet. There were no questions. Alaska Energy Authority Page 6 of 11 C. 2022 Final Audit and Federal Single Audit Mr. Thayer indicated that the 2022 Final Audit and Federal Single Audit were approved at the previous meeting and are included in the packet for informational purposes. There were no questions. D. Hydro Update Mr. Thayer noted that the Hydroelectric Program Update provided by Bryan Carey, Director of Owned Assets, is included in the packet and outlines the current status of the projects. Mr. Thayer highlighted the Dixon Diversion Feasibility Project. It is located five miles from Bradley Lake on State-owned land. The Initial Consultation Document (ICD) with the Federal Energy Regulatory Commission (FERC) has been filed. AEA has provided Study Plans in response to Study Requests and a public meeting was held on November 17, 2022. Public and agency comments have been received. The project looks to be a viable opportunity for power. Mr. Thayer noted for the record that a decision has not been made to move forward with the Dixon Diversion Project and additional studies will occur in 2023 and 2024 to make the determination. The Governor has included $5 million in the budget for the studies. Mr. Thayer reviewed the Fivemile Creek Hydroelectric Project that is funded with a Renewable Energy Funds (REF) grant of $3.4 million and a matching grant of $2.8 million from the Denali Commission. He noted that Audrey Alstrom, AEA, is responsible for the project. Mr. Thayer discussed the Godwin Hydroelectric Project that is located on Godwin Creek in Seward. Chugach Electric Association (CEA) is currently performing the feasibility work on this small project. Mr. Thayer mentioned the Jenny Creek Hydroelectric Project and informed that the Nuyakuk River Hydroelectric Project in Dillingham has REF funding of $2 million for approved studies. He noted that the Thayer Lake Project located near Angoon has unobligated REF funds of $4.9 million. Work continues on the project and it has good potential. The cost of the project is challenging. Chair Pruhs asked if staff's due diligence analysis of hydroelectric projects includes the permitting process and possible legal challenges. Mr. Thayer agreed and asked Mr. Carey to respond. Mr. Carey explained that during a review of the project, consideration is given to the permitting process, and to whether the project is FERC regulated or State regulated. The FERC licensing follows a different process that includes additional permitting and public engagement. Mr. Carey indicated that highly controversial projects are not typically pursued, unless there is a tremendous benefit that the project will provide a great amount of energy at a cost-effective rate. E. Grid Resilience and Innovation Partnerships (GRIP) Concept Papers 1 (Railbelt Backbone Reconstruction), 2(Battery Energy Storage /HVDCO), 3 (Railbelt), & 3 (Rural) Mr. Thayer discussed the three Grid Resilience and Innovation Partnerships (GRIP) Concept Papers provided for informational purposes. AEA partnered with the Bradley Lake Project Management Committee (BPMC) Railbelt utilities for submission of the first two Concept Papers, GRIP 1 and GRIP 2, which consist of a smart grid for the Railbelt and grid resilience for the Railbelt. Two Alaska Energy Authority Page 7 of 11 Concept Papers were submitted for GRIP 3. The Railbelt Innovation Resiliency Project was also submitted in partnership with the BPMC. The Rural Alaska Microgrid Transformation Project was submitted by AEA under the diligent direction of Rebecca Garrett, Rural Programs Manager, and her team. Mr. Thayer explained the process that the Concept Papers will be reviewed and if they are accepted, the projects will be invited to compete nationally. Mr. Thayer does not anticipate that all of the Concept Papers will be asked to compete. He noted that the congressional delegation is aware of the process and AEA will review these Concept Papers with them tomorrow to key in their support. F. Required Project Work Update Mr. Thayer noted that the projects that have been vetted and approved are the Sterling to Quartz Creek transmission upgrade, the Bradley to Sterling transmission upgrade, and the three battery storage systems. The bid to remove the old 69 kVa line for the Sterling to Quartz Creek transmission upgrade was awarded to Lineworks, LLC. The plan is to begin to remove the line in January with completion in the spring. Due diligence is being conducted on the battery energy storage systems for the Kenai Peninsula and the specifications are still being developed for the batteries for the other two regions. Mr. Eledge asked how long of a section is the 69 kVa line. Mr. Thayer reported that the SSQ Line is 39 miles, and the 69 kVa was an abandoned line that is not in service and next to the 115 line. The removal of this line must be completed for the upgrade and was also a condition to access the Refuge. All permitting is secured, including a 100-foot right-of-way that allows for the upgrade. G. State Energy Security Plan Update Mr. Thayer discussed that the State Energy Security Plan is a requirement of IIJA. A $200,000 grant has been received from Department of Energy (DOE) to complete the plan, which has been contracted to ICF. The advisory committee meets regularly and has conducted interviews with parties in both rural and urban Alaska. Audrey Alstrom, Director Alternative Energy and Energy Efficiency, is leading the effort. ICF is expected to visit Nome, Kotzebue, and rural Alaska in order to better understand the needs for drafting the plan. The plan is scheduled to be completed in May, and will then go to the Governor for approval and submittal. H. Rural Update Mr. Thayer noted that the Rural Update is for informational purposes and was prepared by Ms. Garrett. It highlights personnel training and upgrades to the rural power system and to bulk fuel facilities. Chair Pruhs asked for an update on the status of the infrastructure. Mr. Thayer indicated that with inflation, deferred maintenance on bulk fuel facilities is now behind by more than $800,000. The deferred maintenance on powerhouses is also behind by a greater amount. Mr. Thayer discussed that supply logistics, waiting for equipment to be available, has caused issues and delays to Alaska Energy Authority Page 8 of 11 projects. Chair Pruhs inquired if the inventory assessment is current. Mr. Thayer agreed, and noted that a multi -year contract has been procured to assess the 400 bulk fuel facilities. Additionally, in order to receive PCE funding, an inventory of rural community buildings must be submitted. This will occur simultaneous to the assessment of the bulk fuel facilities. Chair Pruhs asked for an explanation as to who is the responsible party for clean-up and replacement in the event that a containment breach occurs in a bulk fuel tank. Mr. Thayer explained that the responsible party is different for each community. He noted that Alaska Village Electric Cooperative (AVEC) is responsible for nearly 50 utilities. Inside Passage Electric Cooperative (IPEC) is responsible for utilities in Southeast. AEA responds to emergencies for approximately 45 communities that own their own facilities and tanks. However, AEA would probably be tasked to be first on the scene for clean-up and replacement. Other State agencies, such as Department of Environmental Conservation (DEC), could also be called in an emergency. Chair Pruhs asked if those 50 communities have insurance coverage for such a scenario. Mr. Thayer indicated that he does not know the status of their insurance coverage. Chair Pruhs suggested that the risk to the State from a fuel spillage within those 45 communities should be understood and that a protocol should be developed to identify what steps are taken if a spill occurs and who will ultimately be financially responsible. Mr. Thayer agreed. Chair Pruhs asked if AEA receives annual financial statements or balance sheet information from independent power entities in rural communities. Mr. Thayer explained that information is normally filed in May with the RCA. There were no additional questions. I. Power Cost Equalization Update Mr. Thayer announced that the long-term project manager has retired and that Tim Sandstrom, Chief Operating Officer, has taken the lead until a new manager is identified. There was a backlog of over 300 unprocessed payments. Staff has been successfully working on the Power Cost Equalization (PCE) program and the backlog is now 100% current. Mr. Thayer anticipates that the PCE Statistical Report will be completed in early February and subsequently shared with the Legislature. He mentioned that the decrease in performance of the PCE endowment was discussed earlier in the meeting. Mr. Thayer informed that the Utility Monthly Report (UMR) for the communities of Klukwon and Chilkat have been combined because they are served by the same utility. This provides a potential savings of $12,000. Chair Pruhs asked if any communities are behind schedule on completing the PCE application. Mr. Thayer noted that all qualified PCE communities determined by RCA are current, as they have 90 days to file. He is unaware if any communities have been denied by RCA. There were no additional questions. Alaska Energy Authority Page 9 of 11 J. Power Project Loan and Dashboard Mr. Thayer discussed that there are 19 loans and no delinquencies. The uncommitted cash balance is approximately $11.8 million. He informed that staff is following up with a couple of communities who have decided not to receive their loans. There were no questions. K. Denali Commission Update Mr. Thayer identified that the total active awards is approximately $31 million. The total funding remaining in active awards is approximately $13.8 million. Additional federal funding is anticipated to be received in the upcoming funding cycle and will be complemented by the State match. There were no questions. L. Community Outreach Mr. Thayer reviewed the Community Outreach report that itemizes the dates, locations, topics, audiences, and presenters of AEA's public communication within the last six months. There were no questions. M. Articles of Interest — Included in the packet N. Next Regularly Scheduled AEA Board Meeting Wednesday, March 1, 2023 MOTION: A motion was made by Vice -Chair Kendig to enter into Executive Session to discuss confidential personnel issues. Motion seconded by Mr. Vivlamore. A roll call was taken, and the motion to enter into Executive Session was approved unanimously, with Mr. Fogle absent. 9. EXECUTIVE SESSION: 10:47 a.m. — Discuss confidential personnel matters The Board reconvened its regular meeting at 11:59 am. Chair Pruhs advised that the Board did not take any action on matters discussed while in Executive Session. 10. BOARD COMMENTS Commissioner Crum expressed that he looks forward to working on the AEA Board while focusing on Governor Dunleavey's priorities of economic development and opportunities to reduce the cost of power. Vice -Chair Kendig expressed appreciation to Mr. Thayer for the informative meeting. Chair Pruhs thanked Mr. Thayer and staff for the good information and project updates during the meeting. Alaska Energy Authority Page 10 of 11 11. ADJOURNMENT There being no further business of the Board, the AEA meeting adjourned at 12:03 pm. Curtis W. Thayer, Executive Director c3GpRPO/3q� G�yO = F 3 SEAL 197E Alaska Energy Authority Page 11 of 11