HomeMy WebLinkAboutCooper Valley Intertie Plan of Finance 1994
Copper Valley Intertie
Plan of Finance
State of Alaska
Department of Community and Regional Affairs
Division of Energy
Submitted by
J.C. Bradford & Co. - Financial Advisors
to the Division of Energy
May 3, 1994
Copper Valley Intertie
Plan of Finance
* Table of Contents
Introduction
i Financing Issues
Cost of Power Discussion
Appropriation for State Loan
Cases to be Examined
Four-Dam Pool Power Sales Agreement and
Impact on Allison Lake Alternative
Bond Financing Not Eligible for Tax-Exemption
\ Availability of Financing for Thirty-Year Term
Financing Assumptions
Hypothetical Financing Conditions Scenario
Without State Assistance Scenarios
Minimum State Assistance Scenarios
Estimated Interest Rate Assumed, All Scenarios
Consideration of Possible Funding Sources
1. Issuance of Revenue Bonds
Considerations for Utilizing the AEA or
AIDEA as Issuer of the Bonds
The Capital Reserve Fund Feature
2. General Obligation Bonds or Bonds Guaranteed
by the State of Alaska
3. Appropriation from the General Fund
4. Loan from the General Fund
5. Financing Arrangements with Other Entities
6. Assistance from any Federal Agency
7. Loan from Power Project Fund
8. Any Combination of Sources
Conclusion
REA Most Cost Effective Market Alternative
No Financial Feasibility Without State Loan
Tables
Page HRW Nn 10
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Copper Valley Intertie
Plan of Finance
State of Alaska
Department of Community and Regional Affairs
Division of Energy
Submitted May 3, 1994 by
J.C. Bradford & Co. - Financial Advisors
to the Division of Energy
Introduction
The State of Alaska Legislature in 1993
appropriated $35 million to the Power Project Fund to
provide for a contemplated 50-year zero-interest loan
for the proposed Copper Valley Intertie, "contingent
upon the completion of a feasibility study and a plan
of finance satisfactory to the Department of
Community and Regional Affairs as set out in former
AS 44.83.181."
The Power Project Fund is now administered
by the Division of Energy of the Department of
Community and Regional Affairs of the State of
Alaska (the "Division" or the "Division of Energy").
This Plan of Finance has been prepared in response to
the requirement that a finance plan satisfactory to the
Department of Community and Regional Affairs
("DCRA") be completed.
According to former AS 44.83.181, a plan
of finance must include recommendations of the most
appropriate means to finance a_ project, after
consideration of the following possible funding
sources: (1) issuance of revenue bonds of the
authority, (2) issuance of general obligation bonds of
the state or revenue bonds of the authority that are
guaranteed or partially guaranteed by the state, (3) an
appropriation from the general fund, (4) a loan from
the general fund, (5) financing arrangements with
other entities using leveraged leases or other financing
methods, (6) assistance from any federal agency such
as the REA, (7) a loan from the power project fund
under AS 44.83.170(a) or (8) any combination of
financing arrangements listed above.
Further directives in development of a plan
of finance are found in 3 AAC 94.065 which states
that a plan of finance should be prepared for any new
power project identified in a feasibility study as the
most feasible alternative for development. It further
provides: "The purpose of the plan of finance is to
present various alternatives available to finance the
power project and to identify the most appropriate
means to achieve the lowest cost electric power for
consumers while minimizing the amount of state
assistance required."
When state assistance is required to meet
financial feasibility criteria, 3 AAC 94.065 provides
that the proposed cost of power must be analyzed for
the base case (diesel) and for the most feasible
alternatives as follows:
A. Projects are financed based on "hypothetical
financing conditions;"
B. Projects are financed based on the most
advantageous market financing but without
any State financial assistance; and
¢ Projects are financed with a combination of
the most advantageous market financing and
the minimum level of State assistance
needed to achieve financial feasibility.
The required Feasibility Study has been
prepared by R.W. Beck of Seattle. The two most
feasible alternatives to diesel generation identified in
the study are the proposed Copper Valley Intertie
Project ("Intertie") and the proposed Allison Lake
Hydroelectric Project ("Allison Lake"). Under ail
but the low-load case, the Feasibility Study identified
either the Intertie or Allison Lake as the most
economical scenario over the long-run, in terms of
cumulative present value of Comparable System Costs
(see Table I-5 in the Feasibility Study). Therefore,
the cost of power will be analyzed in this Plan of
Finance for the diesel case, the Intertie case and the
Allison Lake case.
We have concluded in this Plan of Finance
that a loan or guaranty from the Rural
Electrification Administration (the ''REA"'), even
under its most expensive program, would be the
least costly financing alternative for those funds
required in excess of the state loan.
All financing alternatives assume no tax-
exemption will be possible under current law. The
project will benefit primarily the Copper Valley
Electric Association ("CVEA"), a rural electric
cooperative which does not enjoy the ability to
finance its projects on a tax-exempt basis. Even the
two-county rule, a federal exemption for certain
projects, is unavailable because of the various public
entities within the service territory of CVEA (the City
of Valdez, the Matanuska-Susitna Borough and the
unincorporated areas).
For purposes of this Plan of Finance, an
interest rate of 72% is assumed for all funds required
above those provided by the proceeds of any State
loan. This rate is the projected rate (including
guaranty fee) for a loan from the Federal Financing
Bank ("FFB") which would be guaranteed by the
Rural Electrification Administration . Of all financing
alternatives available, this one is considered to be the
least costly, other than of course the State Loan. The
actual rate of the FFB loan will be determined when
loan advances are made and will correspond directly
with the long U.S. Treasury bond market at the time
of each advance.
Copper Valley Intertie Plan of Finance
May 3, 1994
Page 2
Financing Issues
Cost of Power Discussion
In the Feasibility Study, "cost of power" was
defined as the nominal cost per kWh to CVEA of
generating and/or purchasing power supplemental to
the production from Solomon Gulch, excluding costs
that are common to all scenarios such as certain
depreciation and labor costs as well as purchase costs
for Solomon Gulch energy. For example, in the
Feasibility Study, the "cost of power" for the diesel
case was calculated by dividing the estimated amount
of diesel energy into the estimated incremental costs
of diesel generation.
For this Plan of Finance, the definition of
"cost of power" has been changed in one respect: the
cost of purchasing power from the Solomon Gulch
project as presently configured is blended into the
"cost of power" estimates in each case. Using the
diesel example once again, the "cost of power" in the
diesel case is calculated by dividing the total energy
requirement for the CVEA system into the sum of
incremental diesel costs and Solomon Gulch purchase
costs. This produces a number that more closely
approximates the blended power production cost for
each scenario and that provides for a more useful
comparison among cases. A specified difference in
the cents per kWh outcome between two cases shown
in this Plan of Finance also represents the estimated
absolute difference in retail rate requirements between
the two cases.
For the Intertie and Allison Lake cases, it
will be assumed that financial feasibility is achieved
if the cost of power, as defined above, expressed in
nominal cents per kWh, is equal to the cost of power
in the base case (diesel) in the first full year of
project operation. In other words, each project is
assumed to be financially feasible in this analysis if
no rate increase relative to the base case (diesel) is
required in the initial year of operation (assumed to
be the year 2000 for uniformity).
The first step in the analysis required by this
section of the regulations will be to estimate the cost
of power for the base case (diesel), the Intertie case
and the Allison Lake case for the initial full year of
project operation assuming no State financial
assistance. This conforms with item "B" above. For
information purposes, cost of power will also be
estimated for the year 2010 to show the expected
long-term cost trend for each scenario.
The next step will be to estimate the levels
of State assistance needed for the Intertie case and for
the Allison Lake case such that the cost of power in
the initial project year is equal to the estimated cost
of power in the base case (diesel) for the same year,
assuming no State financial assistance for the diesel
alternative. Stated another way, how much State
assistance would be needed for the Intertie case and,
alternatively, for the Allison Lake case for each
project to come on line without causing rates to
exceed what they would have been in an unassisted
diesel case. This conforms with item "C" above.
Finally, in accordance with item "A" above,
the cost of power for the Intertie case, the Allison
Lake case, and the diesel base case must be analyzed
under "hypothetical financing conditions." _ There is
no guidance in the regulations to help detine what
these hypothetical financing conditions are intended to
be. The approach taken here is to define the
hypothetical financing conditions as follows:
T, For both the Intertie and Allison Lake, a $35
million, zero-interest, 50-year loan is applied
to the capital cost, supplemented by the most
advantageous market financing as necessary. nN For the base case (diesel), zero-interest 20-
year loans are used to finance new diesel
capacity as needed through the year 2010.
Twenty-year maturities are used to conform
with the expected life of the diesel
generators. The total amount of diesel
capacity loans over the period would be less
than $35 million.
Copper Valley Intertie Plan of Finance
May 3, 1994
Page 3
Appropriation for State Loan
As noted earlier, the 1993 Alaska legislature
appropriated $35 million for a zero-interest, 50-year
loan to participating utilities for the design and
construction of the proposed Copper Valley Intertie.
The appropriation is contingent upon completion of a
feasibility study and plan of finance satisfactory to the
Deparunent of Community and Regional Affairs.
Intertie advocates have suggested that illustrating the
effect of applying the $35 million loan to Allison
Lake should not be included in the “hypothetical
financing" cases because, according to the language of
the appropriation, such application is not possible.
While the object of the appropriation is
clearly specified as the Intertie project, re-
appropriation is legally possible at the discretion of
the Legislature and the Governor, and there is
considerable precedent in recent Alaska history for re-
appropriating capital funds to other projects and
purposes. The only basis for excluding the possibility
of re-appropriation would be a political judgment
about possible outcomes in the Alaska political
process. Whatever the current political realities or
future political possibilities might be, such judgments
are outside the proper scope of this analysis.
While we realize such state loan may not be
made available to alternatives other than the Intertie
Project, we view our role as financial advisors to
independently and objectively compare alternatives
using "apples-to-apples" calculations whenever
possible.
Aside from avoiding political judgments, a
goal of this analysis is to provide the maximum
amount of information that would be useful in
comparing the financial implications of the most
feasible alternatives. This is consistent with the intent
of the plan of finance regulations. Application of the
$35 million zero-interest loan not only to Allison
Lake but also to acquisition of new diesel capacity is
therefore considered under "hypothetical financing
conditions.". The reader should be cautioned,
however, that such inclusion is meant to imply
nothing about political probabilities.
Cases to be Examined
In summary, both the Intertie and Allison
Lake cases are examined:
Without State assistance; nN With State assistance in the form of a $35
million, zero-interest, 50-year loan; and
With the minimum level of State assistance
needed to achieve financial feasibility. The
minimum level of State assistance will be
expressed as the required amount of State
loan issued at zero interest with a repayment
of principal spread evenly over 50 years.
The base case (diesel) is examined:
1. Without State assistance; and nN With State assistance in the form of zero-
interest, 20-year loans as needed to replace
diesel generating capacity.
The Plan of Finance will also estimate the
present value cost to the State of Alaska for the level
of state assistance which is assumed in the Plan of
Finance, all in accordance with 3 AAC 94.065.
Copper Valley Intertie Plan of Finance
May 3, 1994
Page 4
Four-Dam Pool Power Sales Agreement and
Impact on Allison Lake Alternative
In the proposed Allison Lake Project
alternative, a question arises in the interpretation of
resulting power costs of electricity generated by
Solomon Gulch Hydroelectric project and sold to
Copper Valley Electric Association ("CVEA"):
"What rate will CVEA pay under its power
sales agreement with the State of Alaska
(Alaska Energy Authority) for additional
power generated by Solomon Gulch from
water supplied through a tunnel from Allison
Lake to the Solomon Gulch Reservoir?"
The answer impacts the CVEA and the State
of Alaska as well as the other participating utilities in
the Four-Dam Pool (the Cities of Ketchikan,
Petersburg, Wrangell and Kodiak Electric
Association). The agreement does not provide for a
situation such as Allison Lake whereby a participating
utility does something to increase the generation
potential of one of the projects. All the cost
allocations were based on expected output of the
projects in 1984 when the agreement was negotated.
If CVEA were to pay the Four-Dam Pool
wholesale power rate for the additional power
generated by Solomon Gulch from Allison Lake
waterflow, it makes the projected cost of power under
the Allison Lake scenario somewhat less than the
proposed Copper Valley Intertie under certain
scenarios (assuming the state loan is made available
to Allison Lake). Without any payment for the power
produced from the Allison Lake waterflow into
Solomon Gulch, and assuming the same state loan,
the cost of power under the Allison Lake scenario is
projected to be substantially less than the cost of
power under the Intertie scenario, except in the high
load growth scenarios.
At this early stage of consideration, there is
insufficient basis to narrow the range of possibilities
on this quesuon. A compromise settlement might
occur in the interest of all parties; ie. a negotiated
price somewhere between zero and 6.4 cents per
kWh. There is precedent for the Four Dam Pool
adopting negotiated rates in instances not dealt with
explicitly in the initial agreement, such as rates for
interrupuble sales.
For purposes of analysis, the Division of
Energy has concurred that three power rates be
analyzed for the power generated from the waterflow
of Allison Lake into Solomon Gulch. These three
rates are the full 6.4 cents per kWh presently being
charged to the Four-Dam Pool members, zero cents
and an assumed rate of 3.2 cents per kWh. In both
cases where a rate is charged, the operation and
maintenance component would be escalated for
inflation.
Bond Financing Not Eligible for Tax-Exemption
The principal beneficiary of the contemplated
financing, whether the Intertie or Allison Lake is the
financed project, will be the Copper Valley Electric
Association, a rural electric cooperative that serves
the Glennallen and Valdez areas. Under current tax
law, any project for the benefit of such a cooperative
(as opposed to a municipally-owned utility) is not
considered a public purpose project unless an
exception is met. Specifically, the two-county rule is
an exception which sometimes is possible for gaining
tax-exempt Status.
The two-county rule provides when all the
output of a project is used within what is defined as
a "two-county area”, the project may qualify for tax-
exempt financing. For purposes of this rule,
incorporated cities and counties within the service
area of a project each constitute a "county." In the
case of Alaska, a borough is considered a county as
Copper Valley Intertie Plan of Finance
May 3, 1994
Page 5
is the unorganized borough. In the case of the CVEA
specifically, customers reside in Valdez, an
incorporated city, the Matanuska-Susitna Borough and
the unorganized borough. Thus, three "counties" are
involved, even in the case of Allison Lake. In
evaluating the Intertie, it is possible that even more
"counties" would be involved, considering the profit
margins in the sale of power that would benefit other
uulities and any ancillary benefits to others from an
enlarged power grid.
Those familiar with the Bradley Lake
Hydroelectric Project near Homer may recall the
project was built by the AEA and the power is being
sold to four electric cooperatives and two
municipalities. This project was financed with tax-
exempt revenue bonds because Bradley Lake received
special legislative designation as a two-county rule
project. In this instance, short of similar legislative
assistance in the U.S. Congress, no tax-exemption
will be possible. Because the chance of receiving
such an exemption is remote, taxable financing rates
have been assumed.
Availability of Financing for Thirty-Year Term
This Plan of Finance assumes the avail-
ability of financing for a full thirty-year term from the
start of commercial operation of either the Intertie or
Allison Lake. The REA (or any lender of funds
supplemental to the State loan) may consider the
allowable term of the loan in light of the anticipated
economic life of the Alyeska pipeline and associated
facilities as well as the prospects for additional loads.
Copper Valley Intertie Plan of Finance
May 3, 1994
Page 6
Financing Assumptions
Hypothetical Financing Conditions Scenarios
In addition to the assumption that the
financing will not enjoy the benefits attributable to
tax-exempuon, the following assumptions have been
made with respect to the Aypothetical financing
Scenarios:
1, The State of Alaska $35 million zero-interest
loan is assumed to be available for any of
the alternatives considered. It is recognized
that the authorizing legislation for the state
loan presently refers only to the Intertie as
previously discussed. N The $35 million loan from the State of
Alaska will be at zero-percent interest and
will be repaid over the first fifty years of
operation of the project. Such repayment is
assumed to be in fifty equal annual amounts
of 2% per annum ($700,000 per annum).
3: The proceeds of the $35 million loan will be
expended first, before the proceeds of any
other financing, in an effort to minimize
capitalized interest during constuction. The
State would release loan proceeds as needed,
with the project receiving no interest
earnings on the funds.
4. The issuance of any bonds or other financing
instruments will be delayed as long as
possible, consistent with complying with
state law and good business practice (making
sure adequate funding is on hand or assured
before entering construction contracts).
Ss The long-term interest rate is assumed to be
72% for bonds with a term of thirty years
from the date of commercial operation. Debt
service is assumed to be level as to total
principal and interest each year.
6. Costs of issuance are assumed to equal one-
half of one percent of the total par amount
of bonds issued (minimum of $100,000).
Without State Assistance Scenarios
With respect to the without state assistance
scenarios, assumptions | through 4 above would not
apply and assumptions 5 and 6 would apply.
Minimum State Assistance Scenarios
With regard to scenarios using the minimum
State assistance required, all of the above six points
would apply, but the loan from the State of Alaska
would be reduced if possible. The loan would be
computed to be that amount needed to reduce the cost
of power from the project to a level competitive with
diesel.
For purposes of this calculation, it is
assumed that from the first year of commercial
operation there would be no increase in the retail cost
of power over what the cost of the base case power
would have been.
Estimated Interest Rate Assumed, All Scenarios
Under current market conditions, FFB loans
are being made at approximately 744%. With the
REA guaranty fee of %s% added, the current cost to a
REA borrower is approximately 77%. The FFB rate
is tied to the U.S. Government long bond (30-year)
rate. The 72% rate used in this Plan of Finance is
consistent with what seems to be a consensus view of
interest rate forecasters that interest rates in the next
few years will be at or near this level for the U.S.
Government long-term borrowing.
Copper Valley Intertie Plan of Finance
May 3, 1994
Page 7
There are many opposing views on interest
rate forecasts, particularly in light of market volatility
in recent weeks. No forecast can be guaranteed. For
purposes of analysis of rate sensitivity, we will
compare costs of power at 642% and 8%2%, which is
1% higher and 1% lower than the assumed rate, to
gain perspective on the magnitude of interest rate
sensitivities. On such capital intensive projects,
interest rate fluctuations can dramatically impact the
outcome when comparing to the diesel alternative, a
very low-capital power source when viewed next to
hydroelectric or long-line Intertie projects.
Copper Valley Intertie Plan of Finance
May 3, 1994
Page 8
Consideration of Possible
Funding Sources
The legislation appropriating $35 million to
fund a loan for the Copper Valley Intertie requires
compliance with former AS 44.83.181 in preparing
the financing plan for the project. The statute lists
eight categories of project financing for consideration:
1. Issuance of Revenue Bonds
Considerations for Utilizing the AEA or AIDEA
as Issuer of the Bonds
There are notable advantages and
disadvantages of issuing bonds through the Alaska
Energy Authority ("AEA") as compared to the Alaska
Industrial Development and Export Authority
("AIDEA"). Although the functions of the AEA have
been greatly diminished by recent legislation, the
AEA remains a legal entity with legal authority to
finance projects under certain conditions and
advantages may exist in so doing. The principal
considerations in comparing AEA to AIDEA as issuer
of the bonds are as follows:
A. Ability to secure the bonds with the state's
capital reserve fund - both AEA and AIDEA
have the ability to accomplish this on an
Intertie project, but only AEA has the ability
to accomplish it on Allison Lake.
B. AIDEA can use its general obligation to give
marketability to any feasible project, but in
so doing, that project must show 1.50 times
coverage of debt service to comply with
AIDEA's bond resolution. This requirement
exceeds market requirements for power
revenue bonds and would raise power rates
unnecessarily.
(on While APUC approval of use agreements
would probably be required under either
AIDEA or AEA financings, AIDEA
financings would also require municipal
approvals. AIDEA must secure approval
from any municipality in which a project is
located if the project cost exceeds $6
million.
D: AEA may not be the owner of any project
for which it issues bonds but it may be the
issuer for conduit financings.
It is apparent that the use of the capital
reserve fund of the State of Alaska will help provide
the lowest cost of power for any bond financing
alternative. This would be accomplished by lowering
debt service coverage requirements and by
maximizing market acceptance of the bond issue.
We have assumed the issuer which is
chosen, if bond financing were utilized, will be one
that is able to utilize the capital reserve fund as one
of the security features of the bond issue. While this
feature does not create a legal obligation on the State
to make up shortfalls, the capital reserve fund is
commonly referred to in the municipal bond industry
as a "moral obligation” of a state.
In the case of the proposed Copper Valley
Intertie project, the capital reserve fund security
feature could be provided by either AIDEA or AEA.
However, in the case of the proposed Allison Lake
project, only AEA could provide this benefit because
AIDEA's legislation only permits the use of the
capital reserve fund for Intertie projects.
Copper Valley Intertie Plan of Finance
May 3, 1994
Page 9
The Capital Reserve Fund Security Feature
The Capital Reserve Fund feature refers to
what is commonly known and thought of in the
municipal bond industry as a “moral obligation" of
the state in which the project is located. The
language in the state legislation simply provides that
if the capital reserve fund is drawn upon and therefore
on January 1 of any year has a shortfall in its
required balance, the Governor, the Speaker of the
House and the President of the Senate will be notified
of such shortfall.
The State may, at its option, replenish the
shortfall. While this creates no legal liability for the
State, the State of Alaska (and most issuers in the
nation) have historically honored such obligations.
The bond market, for the most part, as well
as credit rating agencies and bond insurance
companies, has confidence that "moral obligations"
will be honored so that the issuers involved may
protect their excellent credit reputations. The State
of Alaska has a history of utilizing the "moral
obligation" feature on many of its agencies’ debt and
has on occasion been presented the opportunity to
make good on these obligations and has done so.
The rating agencies have taken the position
that so long as the project appears feasible (and
therefore the likelihood of calling on the "moral
obligation" is low), that the bond issue should
generally be rated no worse than a full letter grade
below the state's general obligation bond rating. In
the case of Alaska, this enables the "moral obligation"
financing to obtain an "A" rating on its own merit and
makes the financing attractive for bond insurance
which allows the bonds to be marketed with a "AAA"
rating.
It is our opinion that the use of the Capital
Reserve Fund feature is critical to assuring
marketability for this financing if revenue bonds are
utilized because of the relatively small size and
remoteness of the Copper Valley Electric Association
in terms of the municipal bond market. It not only
assures marketability, but reduces debt service
coverage requirements and lowers interest rates.
This technique has been utilized by the
Alaska Energy Authority on its interim and permanent
financing for the Bradley Lake Hydroelectric Project
as well as its interim financing for the Swan, Terror
and Tyee Hydroelectric Projects. The Capital Reserve
Fund has commonly been used by the Alaska
Municipal Bond Bank Authority and the Alaska
Housing Finance Corporation. In short, the market is
familiar with and accepts the "moral obligation" of
the State of Alaska as a meaningful credit
enhancement for bonds of its agencies.
Revenue bonds issued on a taxable basis in
today's market would bear interest at a rate of
approximately 812% and no significant change in rates
is expected by many interest rate forecasters. We
have therefore used the REA approach as the best
hypothetical financing, assuming a 742% rate. If tax
exempt financing were available for this project or
any alternative, revenue bonds would be the least
costly financing other than a financial hardship loan
from REA, if available.
2. General Obligation Bonds or Bonds
Guaranteed by the State of Alaska
For over a decade, the State of Alaska has
made every attempt to minimize its issuance of
general obligation bonds or guarantees. The State has
also been extremely cautious in extending maturities
of any of its debt because of the declining oil
revenues projected with the Prudhoe Oil Curve. This
financing will be one of a very long term and one
which can be accomplished without the general
obligation support of the State of Alaska. It is
however very important to note that the use of the
Copper Valley Intertie Plan of Finance
May 3, 1994
Page 10
capital reserve fund, if revenue bonds are issued,
accomplishes much of the same benefit for the
project. As discussed earlier, this technique invokes
the "moral obligation" of the State.
3. Appropriation from the General Fund
We assume the Legislature has previously
addressed this question in its decision to conditionally
offer a zero-interest fifty-year loan in support of the
Intertie Project.
4. Loan from the General Fund
This source has in effect been considered in
#7 below, inasmuch as the loan from the Power
Project Fund would be made from appropriations
from the Legislature.
5. Financing Arrangements with Other Entities
No other financing source was identified
which would offer a more cost-effective financing
than financing available through the REA discussed
immediately below.
In our review of REA alternatives, we also
discussed financing arrangements available through
both the National Rural Utilities Cooperative Finance
Corporation ("CFC") and the National Bank for
Cooperatives ("CoBank"). Both expressed interest in
either making a loan to CVEA (either project would
be eligible if feasible in their judgment) or in
participating in a REA loan on a concurrent basis.
While there are differences in loan rates and
conditions between the two organizations, the loan
rate from either would reflect market rates on long
U.S. Treasury obligations and would probably range
1%4% to 134% above such Treasury rates in any given
market. Both organizations are cooperatives and
require membership. We understand CVEA presently
belongs to CFC.
6. Assistance from any Federal Agency
As a rural electric cooperative, CVEA is an
eligible borrower from REA. As a cooperative
qualifying for a financial hardship status (with per
kWh retail rates exceeding 15 cents), CVEA would
qualify for all three REA loan programs:
A. 5% fixed rate for the entire project; or
B. a concurrent’ financing with REA
participaung with CFC or Co-Bank on a
70/30 basis (or up to 90% by REA in
certain case). REA interest rate is tied to
20-year municipals, currently about 614%
and the other participant is currently about
834% for a blended rate of about 7%; or
iG; a FFB loan (fixed at long U.S. Treasury
rates) with a REA guaranty (4% guaranty
fee), producing a total cost of approximately
7¥%% in today's market. As stated earlier,
this is consistent with long-term rate
forecasts (we are using 742% for analysis
purposes).
If CVEA were to not qualify at the time of
the loan for financial hardship status, CVEA would
only be able to access the FFB program because of
the nature of the project. Only distribution or sub-
transmission programs can qualify for the other less
expensive programs. There is also concern that the
lower cost programs will be the most in jeopardy in
the Federal budgetary process. Because of these
uncertainties, the FFB approach is utilized in this Plan
of Finance, although in actual practice, any lower cost
alternatives which may then be available — will
certainly be explored as the actual financing is
undertaken.
Copper Valley Intertie Plan of Finance
May 3, 1994
Page 11
7. Loan trom Power Project Fund
This funding source has, of course, been
considered, not only for the Intertie but also for
Allison Lake and the base case (diesel), both of which
would require additional legislation. We have
considered not only a full $35 million zero-interest
loan for fifty years, but also whether a smailer loan
could still accomplish financial feasibility.
8. Any Combination of Sources
The Plan of Finance scenarios listed above
consider combinations of participation in REA
programs by CVEA and loans from the Power Project
Fund which would be made possible by
appropriations from the General Fund.
Copper Valley Intertie Plan of Finance
May 3, 1994
Page 12
Conclusions
REA Most Cost Effective Market Alternative
Of all the alternatives available for
borrowings in excess of available state loans, the
REA is clearly the least costly. As explained earlier,
there are three possible programs within REA,
depending on the nature of the loan and the status of
the borrower. Even if the most expensive program
must be utilized (a FFB loan guaranteed by REA), the
cost of funds would still be attractive under current
market conditions. CVEA would be allowed to
borrow at a rate only marginally higher than the
long-term rate at which the Federal government
borrows.
The recommended financing alternative for
the financing of the proposed Copper Valley Intertie
Project is a REA loan to CVEA or guaranty, Even in
the highest cost program of REA, that of a FFB loan
which is guaranteed by REA, the cost under current
market conditions is less than 72% per annum for a
loan amortized over the first thirty years of the life of
a project.
In the event the Allison Lake Project is
selected (provided a state loan were made available),
REA would also be the preferred alternative for
financing in our opinion.
In addition, if for any reason the REA
programs were not available, the revenue bond
approach is likely to be a viable alternative, although
a considerably higher interest rate (about 1% higher)
would result. This approach would require the moral
obligation of the State of Alaska as previously
discussed.
Use of CFC or CoBank as a lender might
also be attractive in such event, since CVEA would
be the borrower and no moral obligation of the State
of Alaska would be involved.
No Financial Feasibility Without State Loan
No project reviewed has financial feasibility
without a state loan. This is based on the definition
of financial feasibility stated previously: No rate
increase relative to the base case (diesel) in the year
2000, the assumed first year of operation, is allowed.
Further, depending on the scenario being
depicted, both the Copper Valley Intertie Project and
the Allison Lake Hydroelectric Project could be
placed into commercial operation at power rates
competitive with the diesel base case. This would be
possible even with fifty-year zero interest state loans
of less than $35 million as shown on the tables which
follow.
Copper Valley Intertie Plan of Finance
May 3, 1994
Page 13
Copper Valley Intertie
Plan of Finance
Projected Cost of Power Tables
(Nominal Cents / kWh)
Table I Medium-High Scenario Medium Load Growth / High Fuel Cost Escalation
Table II Medium-Low Scenario Medium Load Growth / Low Fuel Cost Escalation
Table II High Scenario High Load Growth / High Fuel Cost Escalation
Table IV Low Scenario Low Load Growth / Low Fuel Cost Escalation
Tables I through IV follow. Each was prepared by R.W. Beck, at the direction of J.C.
Bradford & Co., utilizing the data base compiled as part of their Feasibility Study. However,
such Tables reflect the assumptions provided R.W. Beck by J.C. Bradford & Co. which are
detailed in this Plan of Finance.
Case 1 - No State Assistance
7.5% Interest Rate
6.5% Interest Rate
8.5% Interest Rate
Case 2 - Minimum State Assistance ($000)(5)
7.5% Interest Rate
Net PV of State Loan (6)
6.5% Interest Rate
Net PV of State Loan (6)
8.5% Interest Rate
Net PV of State Loan (6)
Case 3 - Hypothetical Financing(7)
7.5% Interest Rate
6.5% Interest Rate
8.5% Interest Rate
Net PV of State Loan (6)
(1) Medium-high scenario assumes medium load growth and high fuel cost escalation through 2010. Includes assumed inflation at 3.5% per year.
Table 1
Copper Valley Intertie Plan of Finance
Cost of Power Analysis
Projected Cost of Power (Nominal Cents/kWh)
(Medium-High Scenario)(1)
2000 2010
Allison Allison Allison Allison Allison Allison
Diesel Intertie Lake(2) Lake(3) Lake (4) Diesel Intertie Lake(2) Lake(3) Lake (4)
9.4 11.8 11.6 11.1 10.6 12.7 13.1 133 12.7 12.1
9.3 11.1 11.1 10.5 10.0 12.6 125) 12.8 12122. 11.6
9.6 12.6 12.3 eT, 11.2 12.8 13.8 13.9 3 3) 12.7
9.4 $25,000 $22,000 $16,500 $11,000
- $21,200 $18,600 $14,000 $9,300
9.3 $22,000 $20,000 $13,500 $7,000
$18,600 $16,900 $11,400 $5,900
9.6 $27,000 $23,000 $17,500 $13,000
: $22,800 $19,500 $14,800 $11,000
8.8 8.5 8.3 78 73 12.0 10.1 10.3 9.7 9.1
8.8 8.3 8.3 Det D2 12.0 99 10.2 9.6 9.0
8.8 8.8 8.4 19 14 12.0 10.3 10.3 98 9.2
i $29,600 $29,600 $29,600 $29,600 - -
(2) Assumes all additional generation at Solomon Gulch priced at 7.1 cents/kWh in 2000 and 8.3 cents/kWh in 2010, both in nominal dollars. Includes inflation on O&M component
of cost.
(3) Assumes all additional generation at Solomon Gulch priced at one-half the rate assumed in the previous case, i.e. 3.55 cents/kWh in 2000.
(4) Assumes additional generation at Solomon Gulch has no charge.
(5) Estimated state loan required to provide first year cost of power the same as for diesel case in that year.
(6) State loan amount less present value of loan payments. Assumes 8.5% discount rate.
(7) Assumes $35,000,000, zero interest, 50-year, state loan available for Intertie and Allison Lake. In the Diesel Case, zero interest, 20-year, state loans are assumed to be available to
fund diesel capacity additions.
Prepared by R.W. Beck 5/3/94
Case 1 - No State Assistance
7.5% Interest Rate
6.5% Interest Rate
8.5% Interest Rate
Case 2 - Minimum State Assistance ($000)(5)
7.5% Interest Rate
Net PV of State Loan (6)
6.5% Interest Rate
Net PV of State Loan (6)
8.5% Interest Rate
Net PV of State Loan (6)
Case 3 - Hypothetical Financing(7)
7.5% Interest Rate
6.5% Interest Rate
8.5% Interest Rate
Net PV of State Loan (6)
(1) Medium-low scenario assumes medium load growth and low fuel cost escalation through 2010. Includes assumed inflation at 3.5% per year.
Table 2
Copper Valley Intertie Plan of Finance
Cost of Power Analysis
Projected Cost of Power (Nominal Cents/kWh)
(Medium-Low Scenario)(1)
2000 2010
Allison Allison Allison Allison Allison Allison
Diesel Intertie Lake(2) Lake(3) Lake (4) Diesel Intertie Lake(2) Lake(3) Lake (4)
9.2 LL7 11.6 11.0 10.5 11.7 12.6 12.9 12:3 11.7
9.1 11.0 11.0 10.4 99 11.6 119 12.3 11.8 11.2
9.3 12.5 122. 11.6 11.1 11.8 13.3 13.5 129 12.3
9.2 $26,000 $24,000 $18,000 $10,000
= $22,000 $20,300 $15,200 $8,500
91 $23,000 $22,000 $15,500 $9,000
$19,500 $18,600 $13,100 $7,600
9.3 $28,000 $25,000 $20,000 $15,000
$23,700 $21,200 $16,900 $12,700
8.5 8.4 8.3 77 12 11.0 95 98 9.2 8.7
8.5 8.2 8.2 17 7A 11.0 9.3 97 9.2 8.6
8.5 8.6 8.4 78 73 11.0 97 99 9.3 8.8
- $29,600 $29,600 $29,600 $29,600 - - -
(2) Assumes all additional generation at Solomon Gulch priced at 7.1 cents/kWh in 2000 and 8.3 cents/kWh in 2010, both in nominal dollars. Includes inflation on O&M component
of cost.
(3) Assumes all additional generation at Solomon Gulch priced at one-half the rate assumed in the previous case, i.e. 3.55 cents/kWh in 2000.
(4) Assumes additional generation at Solomon Gulch has no charge.
(5) Estimated state loan required to provide first year cost of power the same as for diesel case in that year.
(6) State loan amount less present value of loan payments. Assumes 8.5% discount rate.
(7) Assumes $35,000,000, zero interest, 50-year, state loan available for Intertie and Allison Lake. In the Diesel Case, zero interest, 20-year, state loans are assumed to be available to
fund diesel capacity additions.
Prepared by R.W. Beck 5/3/94
Case 1 - No State Assistance
7.5% Interest Rate
6.5% Interest Rate
8.5% Interest Rate
Case 2 - Minimum State Assistance ($000)(5)
7.5% Interest Rate
Net PV of State Loan (6)
6.5% Interest Rate
Net PV of State Loan (6)
8.5% Interest Rate
Net PV of State Loan (6)
Case 3 - Hypothetical Financing(7)
7.5% Interest Rate
6.5% Interest Rate
8.5% Interest Rate
Net PV of State Loan (6)
(1) High scenario assumes high load growth and high fuel cost escalation through 2010. Includes assumed inflation at 3.5% per year.
Table 3
Copper Valley Intertie Plan of Finance
Cost of Power Analysis
Projected Cost of Power (Nominal Cents/kWh)
(High Scenario)(1)
2000 2010
Allison Allison Allison Allison Allison Allison
Diesel Intertie Lake(2) Lake(3) Lake (4) Diesel Intertie Lake(2) Lake(3) Lake (4)
9.3 11.2 IDES) 11.0 10.5 13:3) 12.3 13.8 133 12.9
9.2 10.6 10.9 10.5 10.0 13.2 11.8 13.4 12.9 12.4
9.4 11.9 12.0 115 Pict 13.4 12.9 14.3 13.8 13.3
93 $21,000 $24,000 $18,000 $12,000
= $17,800 $20,300 $15,200 $10,200
9.2 $18,000 $23,000 $16,000 $10,000
- $15,200 $19,500 $13,500 $8,500
94 $24,000 $25,000 $20,000 $15,000
- $20,300 $21,200 $16,900 $12,700
8.7 8.2 8.5 8.0 76 12.6 99 113 10.9 10.4
8.7 8.0 8.4 19 Tes 12.6 97 ats 10.8 10.3
8.7 8.4 8.6 8.1 7.6 12.6 10.0 11.4 11.0 10.5
- $29,600 $29,600 $29,600 $29,600 - - -
(2) Assumes all additional generation at Solomon Gulch priced at 7.1 cents/kWh in 2000 and 8.3 cents/kWh in 2010, both in nominal dollars. Includes inflation on O&M component
of cost.
(3) Assumes all additional generation at Solomon Gulch priced at one-half the rate assumed in the previous case, i.e. 3.55 cents/kWh in 2000.
(4) Assumes additional generation at Solomon Gulch has no charge.
(5) Estimated state loan required to provide first year cost of power the same as for diesel case in that year.
(6) State loan amount less present value of loan payments. Assumes 8.5% discount rate.
(7) Assumes $35,000,000, zero interest, 50-year, state loan available for Intertie and Allison Lake. In the Diesel Case, zero interest, 20-year, state loans are assumed to be available to
fund diesel capacity additions.
Prepared by R.W. Beck 5/3/94
Case 1 - No State Assistance
7.5% Interest Rate
6.5% Interest Rate
8.5% Interest Rate
Case 2 - Minimum State Assistance ($000)(5)
7.5% Interest Rate
Net PV of State Loan (6)
6.5% Interest Rate
Net PV of State Loan (6)
8.5% Interest Rate
Net PV of State Loan (6)
Case 3 - Hypothetical Financing(7)
7.5% Interest Rate
6.5% Interest Rate
8.5% Interest Rate
Net PV of State Loan (6)
Table 4
Copper Valley Intertie Plan of Finance
Cost of Power Analysis
Projected Cost of Power (Nominal Cents/kWh)
(Low Scenario)(1)
(1) Low scenario assumes medium load growth and low fuel cost escalation through 2010. Includes assumed inflation at 3.5% per year.
(2) Assumes all additional generation at Solomon Gulch priced at 7.1 cents/kWh in 2000 and 8.3 cents/kWh in 2010, both in nominal dollars. Includes inflation on O&M component
of cost.
(3) Assumes all additional generation at Solomon Gulch priced at one-half the rate assumed in the previous case, i.e. 3.55 cents/kWh in 2000.
(4) Assumes additional generation at Solomon Gulch has no charge.
(5) Estimated state loan required to provide first year cost of power the same as for diesel case in that year.
(6) State loan amount less present value of loan payments. Assumes 8.5% discount rate.
2000 2010
Allison Allison Allison Allison Allison Allison
Diesel Intertie Lake(2) Lake(3) Lake (4) Diesel Intertie Lake(2) Lake(3) Lake (4)
8.4 12.7 11.7 111 10.5 10.7 14.2 13.0 12.3 11.5
8.3 11.9 11.1 10.5 98 10.6 13:3 12.4 11.6 10.9
8.5 13.6 12.4 11.8 11.1 10.7 iS 13.7 13.0 12:2
8.4 $40,000 $29,000 $23,000 $17,000
$33,800 $24,500 $19,500 $14,400
8.3 $39,000 $29,000 $22,000 $15,000
- $33,000 $24,500 $18,600 $12,700
8.5 $40,500 $30,000 $24,500 $19,000
- $34,300 $25,400 $20,700 $16,100
79 8.9 19 i 6.6 10.1 10.2 91 8.4 16
79 8.6 78 72 6.6 10.1 10.0 9.0 8.3 15
79 9.1 719 13 6.7 10.1 10.5 92 8.4 del
- $29,600 $29,600 $29,600 $29,600 - -
(7) Assumes $35,000,000, zero interest, 50-year, state loan available for Intertie and Allison Lake. In the Diesel Case, zero interest, 20-year, state loans are assumed to be available to
fund diesel capacity additions.
Prepared by R.W. Beck 5/3/94