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HomeMy WebLinkAboutValdez Regional Cold Storage and Processing Facility Business Plan3. Combination or joint operation: Under this option, the owner provides the space, area, and major equipment for a lease fee. The fillet operator provides minor and specialized equipment, some or all workers, supervision, and raw products. There are many variations on this option dealing with equipment and personnel. This is a model used in roe processing in Alaska and some "for lease" processing plants. The fee structure may include a factor for the space and area, equipment, and personnel. The third option is recommended. Under this option, the landlord (VFUA) will provide space, basic fillet processing equipment, engineers, maintenance personnel, and utilities. The breakdown of responsibilities between plant owners and tenants will be along the following lines: Table 6 Processing Line Landlord/Tenant Responsibilities Basic fillet equipment Engineer, maintenance, and operations of sensitive equipment Thaw room operations Equipment replacement costs Space In & out from cold storage Processing workers Specialized equipment beyond that supplied by plant owner Packaging Quality Control and sanitation All consumables Product insurance Building and equipment insurance Product monitoring Inspection services Product marketing Utilities Insurance The cold storage owners generally acquire and provide insurance coverage for a multitude of risks including: • Property and casualty including fire • Refrigeration failure, including ammonia contamination • General liability • Warehousemen lien (bonding) The client generally provides insurance coverage for the value of the product stored in the cold storage. For an optional fee on the storage rate the cold storage may provide insurance coverage for the value of the product as declared by the client. The following table lists typical insurance coverage for a similar cold storage facility. This insurance estimates below include coverage for the space and equipment in the processing area. It also covers all product in the cold storage and workers compensation for 14 cold storage personnel. The annual premium is $184,200. Valdez Regional Cold Storage and Processing Facility Business Pion - 2009 Update McDowell Group, Inc. • Page 28 Table 7 Estimate of Insurance Premium for Typical Cold Storage Facility General liability insurance S 12,000 Warehousemen legal liability 5,000 Umbrella liability premium 7,000 Property insurance premium 130,000 Boiler St machinery (including refrigeration equipment) 18,000 Workers compensation premium 8,000 Auto insurance premium 4,200 Total coverage (estimate) S 184,2DO Not included in the insurance quote is. • Insurance on specialized equipment owned by the fillet processor(s). • Worker's compensation for fillet processor workers. (VFDA worker's compensation is included in the payroll figures listed in the financial section of this report.) • Product liability insurance for sale of fillet finished products. Fillet operators will often carry their own coverage for products the fillet operator might own that are stored in the cold storage. This is basically double coverage. Most of the time the owner of the product has some type of coverage on products held in coid storage. Fillet operators would typically carry their own general liability as well. A fillet operator would be required under the lease with the cold storage owner to have some general liability coverage. Regulatory Permits and Licenses The following is a list of the licenses and permits that may be required of fillet processing facility ❑perator(s). Some of these permits may be held in conjunction with the cold storage ownerloperator. Not covered are local community license or permit requirements. The application process to obtain some of the permits may require an extensive listing and review of the operation practices in the facility such as a Hazard Analysis and Critical Control Point (HACCP) plan. Valdez Regional Cold Storage and Processing facility Susiness Plan - 2009 update McDowell Group, Inc. • Page 29 Table 8 List of Frequently Required Permits or Licenses Permits or Licenses (listed in alphabetical order) AK Fish Business License Notice to Report all Injuries Posting AK Financial Responsibility AK Wage & Hour Act Posting Cert. for Primary fish Buyer/Processor Corporate License Emergency Information Posting Employers' Notice of Insurance Equal Employment Opportunity posting Europe Certification Family Medical Leave Act Posting Federal Minimum Wage Intent To Operate NPDES Annual Report NPDES Notice of Intent Polygraph Protection Act Pressure Vessel Inspection Cert. Processor Permit Safety & Health Posting Scale Certification Scale Registration Sexual Harassment Posting Unemployment Insurance Posting Alaska Department of Environment Conservation requires a submission of building plans and the list of specific materials used in the construction of the processing facility prior to the commencement of construction. Valdez Regional Cold Storoge and Processing Facility Business Plan -1009 update McDowell Group, Inc. • Page 30 Personnel The following organization chart depicts the lines of authority for Valdez Fisheries Development Association personnel, including the three main business units. VFDA ORGANIZATION CHART VFDA Board of Direciars Seven Members � Mar�eger AsasWri h1aK:Fiery Marxenerrx Engaxeer I Cununsls;3) I Frstr Ted"cw s (9) i Jason, wells Executive Director _ Dave Cabb r' Firunciat tllanager t.tilll'+ WatiVK Corparate Accourewx Gild Storage and Praaef" Line Facilely Mertey7Br Fmhav Vassal Coorduwbor I I Cold Sb w Erg. Cod 5twaga Crew (2) L Pr"m"&V Reo*mg Cr" (6) seaannal ppetlipil6 olfiae AAartiiger Procr'as+rx} Facddyr auauty comNro Irmpedor The following describes personnel duties, pay and benefits, and required skills and abilities for the initial phase of the cold storage and processing line facility. The focus of the following discussion is on major positions for the new facility along with a brief description of seasonal and part-time positions. In the beginning phases of the cold storage and processing line facility, major positions cover some of the activities of the less technical positions. As the final phase of expansion nears, more of the less technical positions (i.e. the cold storage and shipping and receiving crews) will be required. Cold Storage and Processing Line Facility Manager The facility manager wili hold an exempt salaried position reporting to the VFDA Executive Director and in turn the Board of Directors of the Corporation. Valdez Regional Cold Storage and Processing Facility Business Plan - 2009 Update McDowell Group, Inc. ■ Page 31 The primary job requirement is management of the start up of a cold storage facility and the capacity to work with a diversity of issues ranging from setting up operational systems within the cold storage, hiring personnel, negotiating leases, attracting business users and dealing with the public and governmental representatives. The position requires intimate knowledge of cold storage operations, including warehouse management systems, budget development and implementation, refrigeration, quality control, personnel management, and public relations skills. PAY AND BENEFITS The pay and benefits are subject to the qualifications and experience of the individual. The benefit package includes medical and dental insurance, annual leave, holiday pay, and other benefits as described in the VFDA Personnel Policy Manual. This position will have a salary range of 565,000 - 575,000. JOB DUTIES This position is responsible for the overall operation and maintenance of the cold storage and processing line property including personnel, building, and equipment. Additional responsibilities include compliance with regulatory agencies, timely applications for permits and licenses, and maintaining good relations and communications with personnel, the Board of Directors, community leaders, and the public at large. The cold storage and processing line facility manager will develop and implement a state of the art warehouse management system. This position is also responsible for all leasehold users operating within the cold storage facility including negotiation with potential lessee for use of the space and equipment for fillet operations and coordination of the cold storage and fillet operations. The facility manager will also advise the Executive Director and the Board on local, national, and international factors affecting the cold storage and processing line facility. The person holding this position will analyze business developments and consult trade journals to monitor market trends and determine market opportunities for products. This person assists in setting prices or fees and conducts economic and commercial surveys to identify potential clients for the facility. The facility manager will develop and implement the strategic and operation plans. The facility manager is responsible for the annual operating budget and quarterly reporting to the Executive Director and the VFDA Board. The facility manager is actively involved in the recruitment of potential users of the cold storage and processing line facility, staffing, and personnel evaluations. MINIMUM QUALIFICATIONS A bachelor's degree in business management or a related field and at least four years of experience in a supervisory position in a cold storage facility or similar experience that can be substituted. Valdez Regional Cold Storage and Processing Facility Business Plan - 2009 Update McDowell Croup, Inc. • Page 32 Office Manager The office manager is an exempt salaried position reporting to the cold storage and processing line facility manager or the Executive Director. This job may be a shared position with the other business components of the Valdez Fisheries Development Association. PAY AND BENEFITS The pay and benefits are subject to the qualifications and experience of the individual. The benefit package includes medical and dental insurance, annual leave, holiday pay, and other benefits as described in the VFDA Personnel Policy Manual. This position will have a salary range of 537,000 - $48,000. JOB DUTIES Primary job functions for the office manager are management and operation of the cold storage office including the warehouse management system, accounting and financial systems, personnel, and payroll, The office manager confers and cooperates with the cold storage and processing line facility manager and the Executive Director and others in formulating and implementing administrative, operational, and customer relations policies and procedures. This position will generate regular reports (i.e. accounts receivable, accounts payable, inventory summaries, etc.) for review by the facility manager and the Executive Director. The office manager must demonstrate good personnel relations (i.e. office workers and cold storage employees) and ability to professionally handle the public (i.e. clients and local leaders). MINIMUM QUALIFICATIONS A bachelor's degree in business administration with a major in accounting or finance or equivalent and a minimum of four years of experience in accounting with expertise in QuickBooks or other similar accounting system. Experience with warehouse management systems is preferred. Cold Storage Engineer The cold storage engineer will hold an exempt salaried position, reporting to the cold storage and processing line facility manager or the Executive Director. PAY AND BENEFITS The pay and benefits are subject to the qualifications and experience of the individual. The benefit package includes medical and dental insurance, annual leave, holiday pay, and other benefits as described in the VFDA Personnel Policy Manual. For budget and planning purposes, the salary range for this position is $65,000 - 575,000. Valdez Regional Cold Storage and Processing Facility Business Plan - 2009 Update McDowell Group, Inc. 0 Page 33 tors DUTIES The cold storage engineer is responsible for the operation and maintenance of the cold storage plant and equipment. This position assists with the start up and ongoing operation of the ammonia absorption refrigeration and heating, rolling stock, facilities maintenance, and all specialized processing equipment. The cold storage engineer routinely confers with the cold storage and processing line facility manager and the Executive Director on status of the plant operations. This position conducts experiments to test and analyze existing designs and equipment to obtain data on performance of the cold storage system and equipment, and prepares reports. This position may be responsible for supervising non -technical workers in the performance of duties as it pertains to the plant operations. MINIMUM QUALIFICATIONS A bachelor's degree in engineering with a major in refrigeration systems or equivalent and a minimum of four years of experience in operating and maintaining a cold storage unit. Experience with ammonia absorption systems is preferred. Processing Facility Quality Control Inspector This is an exempt salaried position reporting to the Cold Storage and Processing Line Facility Manager or the Executive Director. This is an independent third party inspection service provided by VFDA. PAY AND BENEFITS The pay and benefits are subject to the qualifications and experience of the individual. The benefit package includes medical and dental insurance, annual leave, holiday pay, and other benefits as described in the VFDA Personnel Policy Manual. For budget and planning purposes, the salary range for this position is $45,000 - $50,000, 108 DUTIES The quality control inspector examines, weighs, and measures commodities, such as seafood to certify wholesomeness, grade, and weight. This position will act as an independent auditor of product characteristics and quality and ensure that product meets the buyer's specifications. MINIMUM QUALIFICATIONS A bachelor's degree in a science related field and two years of experience in a similar environment. Cold Storage Crew The cold storage crew are non-exempt hourly positions reporting to the cold storage and processing line facility manager or the cold storage engineer. Valdez Regronol Cold Storage and Processing Facility Business Plan - 2009 Update McDowell Group, Inc. • Page 34 PAY AND BENEFITS Hourly wage estimates: $12lhr. to S181hr. JOB DUTIES The cold storage crew works under the supervision of the cold storage and processing line facility manager or the cold storage engineer. The crew must be able to work in a cold storage environment with sometimes loud equipment. Workers are also required to operate equipment such as a forklift. MINIMUM QUALIFICATIONS A high school graduate or equivalent and demonstrated general work skills such as reporting to work on time, following workplace rules, and ability to follow directions. Workers must be able to lift 75 pounds. Shipping and Receiving Crew The shipping and receiving crew are non-exempt hourly positions reporting to the cold storage and processing line facility manager or the cold storage engineer. Some of these positions may be seasonal. PAY AND BENEFITS Hourly wage estimates: S1 Q1hr to S151hr. JOB DUTIES The shipping and receiving crew works under the supervision of the cold storage and processing line Facility manager or the cold storage engineer. The crew must be able to work in a cold storage environment with potentially loud equipment. Workers are also required to operate equipment such as a forklift. MINIMUM QUALIFICATIONS A high school graduate or equivalent and demonstrated general work skills such as reporting to work on time, following workplace rules, and ability to follow directions. Workers must be able to lift 75 pounds. Valdez Regional Cold Storage and Processing Facility Business Plan - 2009 Update McDowell Group, Inc. ■ Page 35 Operations The proposed Valdez regional cold storage is designed to serve two basic functions: 1. Receiving, storage, and shipping: This service allows consolidation of customer specific loads, lowers freight costs, and permits mixing several products to suit a specific customer order. 2. Reprocessing: This activity, not offered in all cold storages, permits warehoused product to be pulled from inventory, reprocessed to meet customer specifications, and re-entered into cold storage. As simple as these functions may appear, to be performed efficiently requires several, often complex, steps. The section below discusses in greater detail some of these more complex activities. Receiving and Storage 1. Pre -receipt entry • Shipper notification document to cold storage of incoming shipments prior to arrival at the cold storage. This document tells the cold storage where the product is coming from. Based on this information the cold storage creates off load tally sheets and pallet labels. • off load tally sheet. This is a data form created by the cold storage using shipper information for the unloading crew. This document is used by the unloading crew to record when the product arrived and what was included. This includes the temperature of the van and the product at the time of arrival at the cold storage. • Pallet labels are printed in the office based on the shipper provided information on the product arriving. The pallet labels include the lot numbers assigned by the office for tracking within the cold storage. 2. Unload and receive • Off load tally sheet records the product off the truck and records the piece count, weight, and temperature of the van and the product at the time of delivery. • Pallet label, preprinted by the office. The unloading crew palletizes the product and applies the preprinted pallet label. 3. Location putaway ■ Off load tally sheet records the storage location in the facility. For example.. 3R-1_21-2 means cold room 3R - row L - slot 21 - level 2. • Off load tally also records any extra labor charges above the standard services. Valdez Regional Cold Storage and Processing Focifity Business Plan - 2009 Updole McDowell Group, Inc. 0 Page 36 • Warehouse receipt. The off load tally sheet goes to the office and the information is used to generate the Warehouse Receipt. This is a legal document and binding between the parties that records what is in the cold storage. At that point the cold storage is legally responsible For the products and condition of the product as listed on the Warehouse Receipt. 4. Confirm putaway • Double check on data entry to confirm. • Set up billing records and initiate the cold storage charges to invoice to the customer, S. Transfer of ownership • The customer may sell or transfer ownership of specific lots within the cold storage to another customer. This can be done within the office by switching the ownership of specific lots. Or, it may require splitting certain lots and re -label to indicate the change of ownership. Shipping 1. Customer order entry ■ Customer order document- the order document states who owns the product, who is receiving the product, what products were ordered, and how much was ordered. It is a specific list of lot numbers and quantities to pull. Customer order document also provides shipping company information for container arrival and loading schedule. 2. Order picking • Order picking sheet. This document is generated by the cold storage office from the information in the customer order document. It contains the specific lot numbers, product description, and the location within the cold storage. • Tally sheet. The order picking sheet is used as a tally sheet by floor crew to pull the product pursuant to instructions and double Checks the product. • Container set up sheet. This document is created by the cold storage office from the information provided in the customer order document. It details the shipper, load date, booking number, trucking company, and a variety of information dealing with labeling, inspection, load configuration, net and gross load weights. 3. Loading and order confirmation • Container load checklist. This is a preprinted checklist used by the loading crew to double check and record the loading information. It includes the shipper, load date, loading crew names, and confirms that pictures and other special instructions are implemented. • Booking confirmation. The shipping company or customer provides a booking confirmation that details the specific shipping information including the booking number, vessel, Valdez Regional Cold Storage and Processing Facility Business Plan - 2009 Update McDowell Group, Inc. • Page 37 departure port and date, arrival port and date, trucker, agent names, and temperature settings for the container. • Bill of lading. The cold storage office produces the bill of lading from the order picking sheet, tally sheet, container set up sheet, and container load check list. Warehouse Management Systems Warehouse Management Systems {WMS} are used to handle the functions described above. These systems automate and add an important element of reliability and accuracy to many of the receiving, tracking, Storage, and shipping activities in the warehouse. WMS systems vary from basic hand tally, hand entry to very sophisticated bar code and radio frequency (RF) systems. More sophisticated systems can be integrated with accounting systems for invoice generation, account payable, accounts receivable, and financial statements. There are also options to include warehouse management labor and time keeping functions. The level of electronic automation in warehouse management and integration of WMS systems with accounting systems is a major decision process to be faced in the future operating plan. Depending on the level of integration the cost of these types of systems vary from $100,000 • S2,000,000 plus. Factors to be considered in choosing the right warehouse management system for a specific cold storage project include a review of the following: • Labor savings • Equipment choices • Space utilization • Inventory turnover cycles • Transportation factors • Information systems cost • Employee productivity • Customer service improvements The warehouse management system recommended for the proposed cold storage is a relatively simple system containing bar coding and radio frequency technology. These functions will reduce the labor requirement on the loading dock, in the cold storage box, and in the office. These systems also reduce errors and produce timely reporting for the cold storage operator and customer. Integration of the warehouse management system with the accounting and finance system will further reduce time and labor and increase timeliness of invoice and financial reporting. The cold storage operation anticipates high volume storage with a relatively low number of customers. The variety of products is small. The deliveries into and out of the cold storage are low. With these parameters, the right size warehouse management system for the Valdez project is a smaller and less complicated one Valdez Regional Cold Storage and Processing Facifrfy Business Plan - 2009 tlpdale McDowell Group, Inc. ■ Page 38 with fewer components. A survey of warehouse management system providers specializing in cold storage operations places the range of cost for the Valdez system at $100,000 - S150,000. This includes the computer hardware, portable bar code readers, radio antenna, and transmitters for the cold storage facility and the computer programs that run on off -the -shelf computer software. This type of system will integrate with most common accounting and finance programs. The specific WMS program selected should be reviewed further when the facility's operating plan is developed. Factors to consider include estimates for the number of customers and different products, weekly inventory additions and deductions, size of deliveries, average holding time for product, number and sire of shipping orders per day, and layout and design of the cold storage facility. Reprocessing The second basic function for the Valdez Regional Cold Storage facility is the reprocessing line. Product arrives at the cold storage facility after it has been previously headed and gutted and frozen. Clients of the cold storage may then remove product from the cold storage for further processing, The fillet operations are the heart of a specialty seafood processing plant. The VFDA proposed plant includes two fillet -processing lines capable of producing basic fillet products using high quality automated equipment. VFDA (the landlord) will provide processing equipment needed to produce a basic pin bone out salmon fillet. Equipment needed to produce more specialized product may be provided by the tenant. Each fillet line is capable of running 30,000 pounds of H&G pink salmon per day. The equipment provided by the landlord will generate 18,300 pounds of vacuum-packed pin bone out fillets per day in a single shift. The building facility will have two independent spaces of 3,000 - 4,000 square feet fully equipped with state of the art fillet equipment. These fillet facilities will be leased to qualified third party operators. The frozen product for use in the fillet operations will be stored in the cold storage, The cold storage personnel will pull the frozen product from the cold box as needed by the fillet operators and deliver it to the thaw area in the fillet rooms. The fillet operators will take product from the thaw area and produce the fillet and value-added products. The finished fillet products will be frozen in a tunnel freezer operated by the cold storage personnel. The rest of this discussion will focus on the cold storage and processing line facility business unit. The plan is for the fillet room to handle up to 30,000 H&G pounds in a single 10 - 12 hour shift. The area and equipment include the receiving of H&G salmon in totes and freezing with a tunnel freezer. The equipment is designed to handle a continuous flow of product. The plan includes the person picking up the totes of H&G fish to supply the fillet line with raw product through the case up and labeling personnel and supervision and quality control. It is assumed the cold storage owner provides the labor to: Valdez Regional Cold Storage orrd Processing Facility Business Plan - 2009 update McDowell Group, Inc. ■ Page 39 • full product from the cold storage • Set up the thaw operations • Operate the tunnel freezer refrigeration system • Adjust, repair, and maintain landlord -supplied equipment in Both fillet rooms ■ Move cased up product from the fillet area to cold storage holding room • Sanitation crew The tenant provides the labor to: Fillet the product • Operate any specialized equipment supplied by tenant • Load the freezer • Case up the product Fillet Operations Each fillet room has the capacity for 30,000 pounds frozen H & G salmon per working day. The frozen product is held in the main cold storage facility. The cold storage owner/landiord provides the personnel and equipment to pull the product from the cold storage facility and deliver it to the fillet operator. The cold storage owner picks up the finished fillet after freezing and case up and returns the product to the cold storage facility pending Shipment. Table 9 Processing Line Landlord/Tenant Areas of Responsibility Frozen salmon in cold storage Cold storage transport to thaw room Freezer operations Return finished product to storage Fillet Room Equipment Monitoring product while thawing Fillet processing Loading freezers and case up Technological innovation in the processing equipment is ongoing, The processing plant will be built in a manner that allows for change and continuous upgrading of equipment and processes. There are a variety of options for the purchase and ownership of the major, specialized fillet equipment. The following equipment cost estimate assumes the tunnel freezer system is built and installed by the cold storage owner and is available for use by each fillet operator on a fee basis. The tunnel freezer is installed, operated, and maintained by the cold storage owner. The fillet operator personnel do the loading and unloading of the freezer. The landlord is responsible for operating and maintaining the freezer. Valdez Regional Cold Storage and Processing Facility Business Plan - 2009 Update McDowell Group, Inc. 9 Page 40 Capital costs associated with the two fillet rooms total $840,000. The table below shows these costs split out between the four main activities performed in the processing area. Table 1 ❑ Processing Line Basic Equipment Summary Fillet and bone removal S 180,000 S 180,000 S 360,000 Grading and packaging 40,000 40,000 80,000 Freezing and case up 50,000 50,000 100,000 Tunnel Freezer 300,000 (Included in #1) 300,000 Total equipment cost S 570,000 S 270,000 S 840,000 The major equipment will be purchased and installed by the cold storage owner. The use of the equipment will be through a lease fee to the fillet room operator. The fillet room tenant will supply any additional specialized equipment needed to create product for a particular customer product specification. Fillet Tunnel Freezer The box for the tunnel freezer is located adjacent to the fillet rooms to incorporate the freezer area within the bacteria control zone of the fillet rooms. This design allows the frozen product to return to the fillet rooms for case up and labeling by the individual fillet operators. The major factors contributing to the selection of the tunnel freezer are: • Cost effective operation with uneven daily production, ■ Flexibility to freeze variable size fillets from pink salmon to king salmon. • Freezer capacity matches pink fillet production at 1,800 pounds per hour from one fillet room or 3,600 pounds per hour from both fillet rooms simultaneously. This is one rack every 10 minutes or six racks per hour from each fillet room. • Substantially lower initial capital cost compared to other continuous freezing options such as belt or spiral freezers. • Operation of the tunnel freezer drag chain mechanism is reliable and easy to use. The tunnel freezer capacity is 1,800 finished pounds per hour for each fillet room for a total of 3,600 pounds per hour, The refrigeration load at full production for both fillet rooms running at peak capacity is 729,000 BTU per hour or 60 tons of refrigeration at -40 saturated suction temperature. The refrigeration is assumed to be supplied from the main cold storage ammonia absorption refrigeration plant. Refrigeration is assumed to be available as needed to accommodate loads in the tunnel freezer. If needed later, this design allows the installation of redundant and back up compressor systems. Valdez Regional Cold Storage and Processing Facility Business Plan - 2009 update McDowell Group, Inc. • Page 4 I The estimated cost for the tunnel freezer box with a drag through system is S 300,000. This includes all of the component parts for the box, coil, drag mechanism, and installation. It does not include the refrigeration and related piping. The compressor and evaporative condenser are considered part of the cold storage system. Payment for use of the tunnel freezer and refrigeration is blended int❑ the facility lease fee. Processing Line Operating Casts The entire facility, cold storage and processing, is assumed to operate on a break-even basis and is further assumed to have no debt service. Accordingly, the lease rate for processing needs to compensate the owners for operating and replacement costs only. The lease rate is further reduced due to the facilities access to free waste heat that is assumed to be adequate to meet the facility's energy needs (including electricity and energy for refrigeration needs). Table 11 Summary of Processing Line Operating Costs 1perating Costs Line I Line 2 Total Monthl) Engineer and maintenance $ 119,760 $ 119,760 $ 239,500 $ 19,960 Equipment replacement account 54,000 54,000 108,000 9,000 Fish waste 18,000 18,000 36,000 3,000 Total operating costs S 191,760 S 191,760 S 383,520 $31,960 Finished product weight (pounds) 4,536,000 4,536,000 9,072,000 756,000 Valdez Fisheries Development Association's operating costs for the two processing lines is estimated to total $384,000 per year. That amount spread over the assumed pounds of finished product indicates a breakeven cost of approximately S0.04 to S0.05 per pound. This becomes the rental rate (if the facility is used at its full capacity) since the owners intend to run this operation on a non-profit basis and only needs to recover actual operating expenses. It is recommended that the rental rate be based upon the full capacity of each fillet line (or a high percentage of that figure), not the actual throughput. If the lease rate were based upon actual use, in the worst case a tenant not using the facility for a month would pay no rent during that period. Such a situation would unfairly leave the landlord with uncompensated overhead costs. Engineering and maintenance costs refer to wages and benefits for one full time engineer and a full time maintenance person. These workers will be responsible for adjusting and maintaining equipment used by the tenant and operating specialized equipment such as the tunnel freezer. Valdez Fisheries Development Association will accrue funds for replacing equipment as it wears out. The table assumes a five-year straight-line schedule. The result is that each year 20 percent of the equipment's cost is put into this account or about S54,000 per year for each line. Valdez Regional Cold Storage and Processing Focrioty Business Plan - 2009 update McDowell Group Inc. ■ Page 42 Equipment used in the processing operations requires modest amounts of electricity to run motors and hydraulic pumps. The tunnel freezer utilizes the ammonia absorption refrigeration system built for the cold storage. As such, it requires no compressors or other power intensive machinery. As a result, although the tunnel freezers capital costs are high, operating costs are minimal and not a major factor in the facility's operating costs. Removing waste from the plant's inland location will require trucking. Those costs are expected to be about $3,000 per month or less than a penny a pound. Even this estimate may be high. Valdez Fisheries Development Association has serious interest from a prospective tenant willing to utilize waste products to make their target product, a pet treat. Valdez Regional Cold Storage and Processing Facility Business Plan - 2009 Update McDowell Group, Inc. ■ Page 43 Financial Summary Valdez Fisheries Development Association History The Valdez Fisheries Development Association began operations in 1978. VFDA has as its mission to enhance the well being of the Prince William Sound fishery resource for the benefit of fishermen, processors, and: the State of Alaska. Valdez Fisheries Development Association is a non-profit organization headed by a seven - member Board of Directors- The cold storage and processing line facility wilt be included under the VFDA corporate umbrella but for purposes of this study is considered separately. The following table summarizes Valdez Fisheries Development Association's financial status for the last nine years and has been compiled from income tax records from 1999 through 2007. Valdez Regional Cold Storage and Processing Facility Business Plan - 2009 Update McDowell Group, Inc. + Page 44 v In ry +r M n a+ V] kn O K r. 00 as n w In %C m m oo vi r` w >. N 00 e v 0 ao -r o ak o u ni as lr o�r' ni aaQ +n e�i q 4 Q r Ic N S m m f" LA N H m M .- rr7 Y7 YI V► 1 r v W p �n N C• %0 N r+1 O 4 In C% N rn 1P1 M v M �o 1• m r1 v Q IT H C lri H C H % r r rn N V1 C7 O� cr n a +0 v v N v ti M v r'V N M m r M M M H V! av v Ch ' n oo rn w Ch rn N +n W C+ — o v o O% O v 00 O Kn Ch a G m 00 v 'fl m N 7 _O u f VS rri pp Q+ ri vy w v C] 011, %D n m NO Ln 4 �4 61) rr+ Ali Sri Ci r• Ok rY .n N r rn rn rw a0 V! 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H W1 v 1• %O C ' [O v W v M n W VS m v m C• n v OD v N a rn o m rn a a n 00 r. r Q p rn L' I M 111 Vl n 00 +Q cl v rVr- +O v r�, to ni N - rn 00 w a N vi w N w M fN 00M v ri H n wN V5 Q N M rd C] N r .n ry ni ey `A N H C c rn rn W CO C No u1 p V5 C P. n n o, 0 C, rV M p %Q N p W �Q W a rn kQ W LM M w V7 Q m Vi �o go mO Ln IT N r+{ o: % ni -9� N n a O+ rri r. r +n P� N VIP +n o N N n! n Ln c 000 ry rn H M '3S rJ A W n n r� Vt rn rn rv% im N E nW M 00 %Q �Q M W, O n 0+ n %* �Q `Cy N a rr'1 n m v rn v W 00 N G m v r+ r N1 n I'i D1 t• r•i �O O r- ►� a 0 to n 00 Y Q 00 r n m r �Q VY %n N Q 0% N y'; N a m r No H N N Q H V'1 H Gi ' a a M ' M %Q r m Ln N r. +n rV v %Q w m W ON T V'1 %Q 00 SO �o w N n do C• K K M n tj OQ IQ m QR 00 rn C % r. C+ v W O — V1 N N Q a �D v N v w %C Vf O v rr1 L` Vl n 00 r n rn n h %C n r .A Ch P r n r- rn N N M N M � J N v1 cr. C w N in v1 C w R $ CP 'o q _ o, E E C �+ 7 a A r a V m u r D c 6r r� w Oal u 15 > im E �' i O' ,. d ; Q _ C M Q h Ol _M? u R x 31 a C M C �- O Nj d — PJ Q Ilp sL u.l Cl w V L O 6] C r =s W �+ 7 R� .� C l7 a a❑ ✓o1 a J In ,� E❑ u❑ Crao m E 7 Lz Assumptions As with any proposed business venture, particularly one with no precedent, assumptions must be made in the beginning stages of the project that serve to guide the business concept's future shape. The following assumptions are based on interviews with board members of the Valdez Fisheries Development Association, interested processors, community leaders, and a previously published engineering report. Facility assumptions • Design and capital costs are based on the Valdez Fisheries Cold Storage Conceptual Engineering Report by Alaska Anvil, Inc. dated September 19, 2003. Costs associated with the absorption refrigeration unit are based on a report by Energy Concepts Co. dated July 20, 200& ■ The modular approach for the development allows for ease in snow removal and phased construction of the facility. The project will be built in 5-10 million pound stages as justified by demand and potential revenue. • Petro 5tar Refinery operations will continue at rates sufficient to supply the cold storage facility with waste heat for all electric power, including refrigeration. The pipeline is expected to continue operations for the next 30 years. ■ In accordance with the Memorandum of Understanding dated June 5, 2003 with Petro Star, Valdez Fisheries Development Association will bear the capital and operating costs associated with the recovery of the heat and its transmission to the cold storage facility. • Construction costs for the facility and heat recovery system are estimated at Soo million using an ammonia absorption system. • Construction and processing equipment will be funded by grants, requiring no match or repayment Operating assumptions ■ Waste heat from the Petro Star facility is at no cost to Valdez Fisheries Development Association other than the cost of the infrastructure to deliver the waste heat. Revenue from operations of the combined facility will cover all operating Costs including labor, utilities, repair and maintenance. • The modular design of the facility will allow shutdown of unused portions of the facility when there are fluctuations in demand for cold storage. • To be viable, the cold storage and processing plant must be competitive with existing alternatives available to prospective customers - The entire facility (cold storage, warm storage, and processing plant) will be managed under the Association's 501(c)(3) tax status. • Fish delivered to the cold storage facility are previously headed and gutted and flash frozen. • The Association does not wish to compete with existing capabilities in the region, merely enhance existing operations. Valdez Regional Cold Stomge and Processing Facility Business Plan - 2009 Update McDowell Group, Inc. ■ Page 46 Fish returning From the Association's hatchery operations will be a main source of product for the cold storage and the processing plant. Seafood businesses from outside the Valdez area, such as Cordova, may use part of the facility, but the financial feasibility is justified by local use alone. • Long term grants may offset some of the operations cost. Processing plant assumptions • Valdez Fisheries Development Association will equip the processing line with basic machinery and lease to competent operators. Tenants will hire necessary personnel for processing [asks. ■ A base tenant may sublet to smaller users. • No primary processing will be done at this site -- only value-added processing that draws product from the cold storage. • A fishmeal plant may be built at the site but is not a part of this study. • A smoking facility may be built at the site but is not a part of this study. Capital Requirements The Valdez Fisheries Development Association intends to minimize the risk of developing a cold storage facility by constructing the facility in stages and to the capacity needed based on the demand for cold storage. This business plan assumes that all 12 buildings are constructed over a five-year time frame. However, the Association can modify the construction schedule based on actual and projected usage of the cold storage and/or agreed -upon contracts with potential users of the facility. For instance, a large processor wishing to use the facility may encourage the Association to ramp up the construction schedule to less than five years to meet the needs of the large processor. On the other hand, if the demand that Valdez Fisheries Development Association anticipates does not materialize, full development may take longer. Land The estimated purchase price for the land is $225,000. The 18.9-acre privately held parcel is located directly across the street from the Petro Star refinery. The Association is currently in negotiations with the landowners and has an option for another 50 acres adjacent to the site. The building footprint for the entire cold storage facility is 13 acres. The site and the option for the additional acreage will allow the Valdez Regional Cold Storage and Processing Facility to expand in order to meet fishing industry needs. Buildings Cost of the full development including all 12 buildings, site work, engineering, and ammonia absorption refrigeration system is approximately $40 million. The modular design of the buildings will allow Valdez Fisheries Development Association to expand cold storage capacity as the demand for space increases. This analysis assumes that four buildings are constructed in the first year and two additional buildings are added in each of the following four years. The cold storage capacity for the first year is approximately 6 million pounds of product, and if all 12 buildings are constructed, the cold storage capacity will be 30 million pounds. The Valdez Regional Cord Storage and Processing Facifity Business Pion - 2009 Update McDowell Group, Inc. ■ Page 47 modular design of the building will also allow Valdez Fisheries Development Association to shut down buildings when not in use or expand as the need arises. Equipment As currently envisioned, equipment is needed for two processing lines, an office, and cold storage equipment. Total equipment outlay is almost S2 million and is explained more fully in the following paragraphs. PROCESSING LINE There will be two complete basic processing lines including fillet machines, glazers, vacuum packers, portion controllers, labeling and boxing machines, and spiral blast freezers. Total cost for the two lines is approximately S840,000 and is based on equipment providers' best estimate of costs for the proposed concept. Users of the processing lines may require other specialized equipment for their processing activities. It is anticipated that users will make their own specialized equipment purchases. The Association may negotiate purchasing specialized equipment for long-term processing line users. OFFICE EQUIPMENT Office equipment needs are expected to cost approximately S21,000. This equipment includes computers, printers, copier, inventory control software, furniture, and telephone system to equip at least three offices. A warehouse management system especially for cold storage operations places the cost for the Valdez system at approximately $150,000. This includes the computer hardware, portable bar code readers, radio antenna and transmitters for the cold storage facility, and the computer programs that run on off the shelf computer software. This type of system will integrate with most common accounting and finance programs. OTHER EQUIPMENT Additional equipment needed for the cold storage operations is approximately $379,500. This equipment includes ice machines, forklifts, pallets, totes, scales, tables, and other miscellaneous equipment. Specialized equipment will not be purchased by the Association but will instead, be supplied by the processors requiring such equipment. Summary of Capital Investment Capital investment for the full project over five years is nearly S40 million. Year 1 estimates are for $27 million in capital investment. This includes the full ammonia absorption infrastructure and four modular buildings. The study estimates that the full facility will be built over a five-year period; however, this schedule will be based on processors needs and could be sooner or later depending on project success. This project is a unique concept for Alaska seafood storage and processing. The Association does not intend to compete with already established seafood activities. Valdez Fisheries Development Association anticipates receiving grant funding for this entire project. See Table 13 for a summary of capital costs. Valdez Regional Cold Storage and Processing Facility Business Plan - 2009 Update McDowell Group, Inc. 8 Page 48 Table 13 Capital Casts Using Five -Year Phased Approach to Development Year I Year 2 Year 3 Year 4 Year 5 Land 18.9 acres across from Petro Star S 225,000 S - S $ - S - Total Land Outlay S 225,000 Buildings (4 Bidgs.) (2 Bldgs.) (2 Bidgs.) (2 Sldgs.) (2 Bldgs.) Site work $460,000 $4,000 $4,000 S 4,00❑ S 4,000 Concrete 993,000 238,000 238,000 238,000 238,000 Structural steel 47,000 - Building components 3,932,000 1,438,000 1,438,000 1,438,000 1,438,000 Plant equipment 7,792,000 162,000 162,000 162,000 162,000 - Piping 732,000 54,000 54,000 54,000 54,000 Electrical 1,124,000 204,000 204,000 204,000 204,000 Instrumentation 20,000 10,000 10,000 10,000 10,000 Paint, insulation, scaffold 50,000 - Freight 1,501,000 212,000 212,000 212,000 212,000 Studies, assessments, permits 500,000 - - - - Engineering 3,523,500 - - Contingency 5,146,000 580,000 580,000 580,000 580,000 Inflation adjustment - 63,000 64,000 64,000 64,000 Total Building Outlay S 25,720,500 $2,965,000 $2,966,000 $2,966,000 S 2,966,000 Equipment Office equipment and $ 18.750 $2,000 $500 - computer software Warehouse management system (hardware, software, radio 150,000 ' antenna, transmittem High -lift Forklifts 32,000 16,000 16,000 16,000 Other Forklifts 78,000 40,000 - - Pallets, totes, stales, tables 75,000 62,500 62,500 62,500 62,500 Ice machines I00,000 - - - Processing line equipment (fillet:bDning, grading: packaging, 840,000 300,000 - labeling; Wxmg, tunnel treeaer) Inflation adjustment - 8,000 3,000 2,000 1,000 Total Equipment Outlay S 1,293,750 S 398,500 S 122,000 S 80,500 5 63,500 Cumulative Total for Land, $ 27,239,250 $ 30,592,750 S 33,680,750 S 36,727,250 S 39.756,750 Buildings, Equipment Source: Based on 6aider Cold Storage Fociiity Conceptual Engineering Report by Alaska Anvil dated September 19, 2003, Fatal Flaw Analysis by Energy Concepts dated July 20, 2006, Valdez Fisheries Development Association's estimates, and McDowell Group and RedPoint Associates estimates. Valdez Regional Cold Storage and Processing Facility Business Plan - 2009 Update McDowell Group, Inc. • Page 49 Revenues Revenues from this venture are anticipated to derive from two main sources: cold storage and processing line rental. Cold storage is assumed to be the greater source of revenue but all buildings may be used as warm storage as well. Since both the cold and warm storage areas will use waste heat to warm or cool the space, revenues and expenses are assumed to be similar under either scenario. The study team contacted potential users of the cold storage processing line facility to determine interest in the facility. The revenues depicted here are based on those conversations with potential customers. When a high and low range for usage was indicated by the potential clients, the low range usage is assumed for Year 1 and gradually increases to the high range usage in Year 5. Successful marketing efforts may draw customers unknown at this time, eventually enhancing revenue. High case revenue is heavily dependent on the participation of a major processor of frozen H&G salmon. Cold Storage The primary source of revenue for this facility is from cold storage. Most cold storage lacilities charge fees for each separate activity that occurs in their plant. This analysis assumes that in/out fees, loading/unloading, inspections, and inventory tracking are all revenue generating activities. In/out fees are based on $2.00 per CWT and loading/unloading fees are estimated at SO.77 per CWT. Inspection fees are typically billed hourly, and inventory tracking is a nominal monthly charge, both adding minor amounts to the revenue. Other fees may be charged but typically do not add significant revenues to operations. Revenues from cold or warm storage are assumed to be similar. Generally, this business plan refers to the cold storage revenues and expenses; however, the facility can be used for either. Because seafood product is assumed the primary user for the cold storage, the highest revenues will occur in the June to September time frame when the salmon runs return to Prince William Sound. Figure 3 shows the anticipated pounds of product in cold storage by month in Year 5 of operations when the facility is almost at full capacity. The cold storage demand depicted here is based on interviews with potential customers and may not reflect the real demand for cold storage. Valdez Regional Cold Storage and Processing Facility Business Plan - 2009 Update McDowell 6toup, Inc. ■ Page.SO 25.000.000 20.000,000 IM+i+lOu110 10,000.000 ;i4Lli 1 n Figure 3 Monthly Cold Storage Demand in Year 5 (Pounds of Product) Jd n4a FP6r� -9r0h ��ril May JG�� � ,94Yoe, sID 64, to b C106 r �0`a�'b Source: Estimates based on interviews with potential customers and VFDA assumptions about processor paniupatton. The revenues for the first year of operations are based on low estimates from potential customers for use of the facility. The Year 5 revenue projections are based on high estimates from potential customers for their cold storage needs. In all cases, revenues accruing to Valdez Fisheries Development Association will be greatest in the June through September timeframe and gradually fall off throughout the rest of the year until the following June when salmon return to Prince William Sound. Cold storage rates for this evaluation are based on a minimum break-even point for Valdez Fisheries Development Association with discounts for high -end users and slightly Nigher fees for low -end users of the facility. Processing Line As with the cold storage area, the fee structure is based on the separate activities occurring in the plant. Product is assumed to be moved from the cold storage area to a thawing area probably a day in advance of using the processing line. The processing line is equipped at a minimum with fillet and boning equipment, Valdez Regional Cord Storage and Processing Focility Business Plan — 2009 Update McDowell Group, Inc. • Page 5 1 grading and packaging, labeling and boxing machines, and a tunnel freezer for refreezing product after value-added activity. A labeling machine is available for processors' use. This analysis assumes the processing line will be made available to multiple processors who will rent the space on a daily basis. It is more likely that one line will be a long-term lease and the other line for Short-term usage or that long-term lessees will sub -let their space to smaller processors. The thawing area is assumed to hold 60,000 pounds of product, with revenues estimated at S500 per day or $0.0083 per pound. Product that has been thawed one day can move to the processing area the next day. It is assumed that all 60,000 pounds can be processed in one day with revenues from this activity estimated at $2,800 per day or S0.0467 per pound. The charge to processors from these two activities is about $0.055 per pound. Further discounts could be offered to processors willing to rent the equipment and space for longer periods. Cleaning fees are estimated at $50 per hour for half of the processing line days. Labeling is assumed at S0.34 for 25-pound boxes. Training Revenues from training of processing line users are not included in this evaluation. Processing line customers must demonstrate competency prior to use of the facility. Graduates of the Fisheries Business Incubator Investment Program would be one way to demonstrate competency. Other Income Other revenues might be obtained from interest income, sales of supplies, or additional charges for services now included as part of the total package. Other value-added activity, such as a smokery or a fishmeal plant, is not considered for this study, though some consideration was given to including these activities at a future time. Revenue Summary Total revenues from cold storage and processing activity in Year 1 are estimated at S181,100 based on the results of interviews with potential clients. In Year 5, total revenues from cold storage and processing activity rises to S2.7 million, assuming that potential clients are able to reach the high estimate for usage. Higher revenues may occur sooner if processors are able to quickly relocate their operations to Valdez. High case is based on VFDA assumptions about major processor participation. Successful marketing efforts can also increase revenues. Valdez Regional Cold Storage and Processing Focility Business Plan - 2009 update McDowell Group. Inc. ■ Page 32 Table 14 Annual Revenue Summary for the Valdez Regional Cold Storage and Processing Line Facility Cold Storage Space Rental $ 64,100 S 153,300 S 344,900 $ 655,600 S 873,300 In/Out Fees 40,100 96,900 221,600 431,200 592,200 Loading/Unloading 14,600 33,500 73,500 138,200 183,600 Inspection Services 4,600 10,400 22,900 43,100 57,200 Cold Storage Sub -total $ 123,400 S 294,100 S 662,900 $1,269,100 $1,706,300 Processing Line Thawing $ 6,300 S 16,200 S 39,600 S 81,900 $ 118,900 Line Rental 35,500 91,400 223,000 461,000 668,300 Sorting and Grading 5,700 13,100 28,700 53,900 71,600 Labeling and Boxing 6,200 14,200 31,200 58,600 77,800 Cleanup fee 1,200 3,300 8,000 16,500 23,900 Processing Line Sub -total $ 54,900 S 138,200 S 330,500 $671,900 $ 960,400 Other Inventory Tracking S 2,200 $ 2,30❑ $ 2,200 S 2,200 S 2,200 supplies 600 800 900 1,100 1,200 Other Sub -total $ 2,800 S 3,100 $ 3,100 $3,300 $3,400 Total Annual Revenues $ 181,100 S 435,400 $ 996,500 $ 1,943,300 $ 2,670,100 Expenses There are eight main categories of operating expenses estimated for this facility: utilities, supplies, labor, building and equipment repair and maintenance, accounting and legal services, depreciation, and taxes. As this analysis assumes that the entire project will be funded with grants, debt service in not included. Depreciation is a non -cash expense; therefore cash flow before depreciation is shown. Personnel Personnel requirements have already been described in the Monogemeof Plan section. Those requirements were based: on a 6- to 12-million pound cold storage facility needing 14 employees (1 1 full-time equivalents). For this analysis, we assume that 8 employees are needed in Year 1, 9 employees in Year 2, and in Year 3, all 14 employees (includes 6 seasonal workers) are needed. Even though the previous estimate is based on a 6- to 12-million pound cold storage facility, no additional employees are anticipated for the larger facility. Economies of scale are realized by serving the larger facility with the same number of personnel. The labor burden for employee benefits is assumed to be 20 percent. Valdez Regional Cold Storage and Processing Facility Business Plan - 2009 Update McDowell Group, Inc. • Page 53 Utillf►les -- Utility expenses consist of fuel oil for heat, diesel for the generator backup, and telephone utilities. Waste heat from the Petro Star facility is expected to generate all electricity used at the facility, including the refrigeration needed for the cold storage space and heat needed for hot water for the buildings. Heat for the office building is assumed to be provided from fuel oil, and a diesel generator will serve as backup to the entire system in the event of service interruptions. Telephone service for three lines including DSL Internet service is anticipated. Water is supplied from two on - site wells and sewer service is a 2,000-gallon septic tank and drain field. Heavy waste from processing activity will be transported to the city dump or the cannery for disposal. Supplies Office supplies such as paper, pens, toner for printers and copiers, along with grounds supplies are minimal. Included in the supplies estimate are also minor expenses for processing line cleaning. Equipment Repair and Maintenance Equipment repair and maintenance expenses are estimated at 1.5 percent of all equipment costs. An additional set -aside for processing equipment upgrades has been included since typical useful life of commercial equipment is seven years, and this analysis takes us to Year 5. It is anticipated that some equipment may require major repairs, upgrades, or technology improvements by Year 5; this set -aside should cover those expenses. Building Repair and Maintenance Building expenses include insurance (for the building only, not the customer contents), repair and maintenance, and grounds maintenance including snow removal. Building insurance is estimated at 0.3 percent of the capital costs. This expense may be more or less depending on insurance carriers and rates at the time of initiation of coverage. Building repair and maintenance is based on 0.25 percent of the capital costs. This expense may be overstated for the beginning years when the building is new and will require less maintenance but these funds should be set aside for future maintenance needs. Snow removal costs are based on actual expenses currently expended for the Valdez Fisheries Development Association office and Business Incubator site. Snow removal at the new facility is assumed to be a similar expense, Taxes Valdez Fisheries Development Association intends to operate this venture under its non-profit 501(c)(3) status and therefore will not be liable for business corporate taxes. Fish taxes will be paid by the processors utilizing the facility and not by the Valdez Fisheries Development Association. The only taxes envisioned for the enterprise at this time are real property taxes. The current real property tax rate for the City of Valdez is 20 mills and the assessed value of the property for this evaluation is based on the cost to purchase the land and construct the buildings. Valdez Fisheries Development Association may realize some additional savings on the Valdez Regional Cold Storage and Processing Facility Business Plan - 2009 Update McDowell Group, Inc. • Page 54 real property taxes provided the City grants a waiver for this facility. It is uncertain at this time if the cold storage and processing line facility would be eligible for the waiver so the full real property tax indebtedness is included. Accounting and Legal Business services such as accounting and legal fees are estimated at $5,000 in the first year and ramp up to 510,000 in Year 5. Depreciation Although not a cash outlay, depreciation is a very real expense. Depreciation attempts to match up profit with the expense it took to generate that profit - or in this case, the break-even point. Accumulating the depreciation of the buildings and equipment for this venture will allow for eventual replacement of the capital as it reaches the end of its useful life. For this analysis, processing line equipment is assumed to have a seven- year life and 30 percent residual value, the ice machines are assumed to have a ten-year life and 20 percent residual value, the office equipment is assumed to have a five-year life and no residual value, and the building is assumed to have a 35-year life and a 20 percent residual value. Depreciation is listed separately from the normal operations in order to determine cash flow. Debt Service The concept for this endeavor is to cover all costs of purchasing the land, buildings, and equipment and to cover the operating deficiencies in the beginning years with grant funds. This analysis assumes there will be no debt service. Valdez Fisheries Development Association has as its goal to create jobs, year-round employment, and allow processors to retain the value-added profits from their fishing endeavors. Expense Summary Annual expenses range from SM million in the first year of operation to $1.8 million in Year 5 based on discussions with industry experts for labor, insurance, repair and maintenance, and depreciation schedules. When depreciation is added, Year i expenses are $1.8 million and Year 5 expenses rise to $2.8 million. Table 15 shows the estimated five-year expense summary. Valdez Regional Cold Storage and Processing Facility Business Plan - 2009 Update McDoweN Group, Inc. ■ Page 55 Table 15 Annual Expense Summary for the Valdez Regional Cold Storage and Processing Line Facility - utilities Heating fuel S 1,200 $1,200 $ 1,200 S 1,200 S 1,200 Telephone/Internet connection 3,700 4,000 4,300 4,600 4,900 Diesel for generator backup 3,000 3.000 3,000 3,000 3,000 Utilities Sub -total $7,900 S 8,200 $8,500 $8,800 $9,100 - - Supplies Office 1,500 1,700 1,800 2,000 2,200 Grounds 500 600 600 700 700 Processing line 2,500 2,800 3,000 3,300 3,700 Supplies Sub -total S 4,500 $ 5,100 $5,400 S 6,400 $ 6,600 Labor Salaries 260,000 310.000 465,000 465,000 465,000 Burden at 20% 52,000 62,000 93,000 93,000 93,000 Labor Sub -total S 312,000 S 372,000 S 558,000 $558,000 $558,000 Building &t Equipment Expense Insurance (property & liability) 106,200 132,200 158,200 184,200 184,200 Building repair & maintenance 64,700 72,100 79,500 86,900 94,300 Grounds maintenance (snow removal) 10,000 10,000 10,000 10,000 10,000 Processing equipment R&M 19, 300� 25,000 27,100 28,400 29,200 Set -aside for equipment upgrades 50,000 75,000 100,000 125,000 150,000 Building & Equipment Sub -total S 250,200 $ 314,300 $374.800 $434,500 S 467,700 Business Services Accounting St legal 5,000 6,000 71000 8,000 10,000 _ Taxes Real property (20 mills) 480,500 535,400 590,300 645,200 700,100 Expenses before Depreciation &c Debt S 1,060,100 $1,241,000 S1,544,000 S 1,660,500 S1,751,500 - Service Depreciation Equipment (processing) $ 84,000 S 114,800 S 114,800 S 114,800 $ 114,800 Equipment (office) 33,800 34,200 34,300 34,300 34,300 Equipment (cold storage) 11,000 12,600 18,200 19,800 19,800 Ice machines 10,000 10,000 10,000 10,000 10,000 Buildings 587,900 655,700 723,500 791,300 859,100 Depreciation Sub -total $726,700 S 827,300 $900.800 S 970,200 S 1,038,000 Debt Service Assumes 100% grant funding - - - Total Expenses $1,796,800 S2,068,300 S2,444,800 S2,630,700 S2,789,500 Note, Asa 501(c)(3) Valdez Fisheries Development Association may not be subject to real property taxes for this facility. Valdez Regional Cold Storage and Processing Facility Business Plan - 2009 Update McDowell Group, Inc. • Page 56 Monthly cash Flow Seasonal businesses must often contend with uneven cash flows during the year. This is particularly true of businesses reliant on seafood product. Table 16 shows the monthly revenues and expenditures for Year 1 and Year 5 of Operations. In Year Five the facility has positive cash flow for the year but has negative cash flow in the first five months of the year. Valdez Fisheries Development Association is aware of the cash flow challenges associated with a seafood dependent business and is prepared to meet these expenses during periods of low cash flow from operations. Valdez Regional Cold 5roroge and Processing focifO Business Plan - 2009 Update McDowell Group, Inc. • Page 57 18§0018 w M �c x a qr p ❑ v a a � � N ]+ � w cr Z d 4S a c � rL m .n w z l h o a a 8 0 8 Od0 .6n T 7 OC � 7 P � I Prnlected Cash Flaw The following table summarizes the first five years of projected cash flow from operations of the Gold storage and processing tine facility. Revenue projections are based on existing interest in the facility and an approximately break-even cash flow in Year 4. Cash flow from operations depicted in Table 17 does not include an expense item for depreciation. Starting in Year 5, the Valdez Regional Cold Storage and Processing Facility must begin to accumulate funds for replacement of processing line equipment that typically has a useful life of seven to ten years. Table 17 Valdez Fisheries Development Association Cash flow Statement for the Regional Cold Storage and Processing Line Facility Year I Year 2 Year 3 Year 4 Year 5 Revenues Cold storage S 123,400 S 294,100 S 662,900 S 1,268,100 $ 1,706,300 Processing line 54,900 138,200 330,500 671,900 960,400 Other 2,800 3,100 3,100 3,300 3,400 Total Revenues $ 181,100 $435,400 $ 996,500 S 1,943,300 S 2,670,100 Expenses Utilities $7,900 S 8,200 S 8,500 S 8,800 $ 9,100 Supplies 4,500 5,100 5,400 6,000 6,600 Labor 312,000 372,000 558,000 558,000 558,000 Building & 250,400 314,500 375,000 434,700 467,900 equipment Business services 5,000 6,000 7,000 8,000 10,000 Taxes 480,500 535,400 590,300 645,200 700,100 Total Expenses $ 1,060,300 S 1,241,200 S 1.544,200 $ 1,660,700 $1.751,700 Cash Flow from Ops. (S 879,200) ($805,800) (S 547,700) $282,600 $918,400 ti'ote. Depreciation expense has not been taken in this cash Ilow analysis Valdez Regional Cold Storage and Processing Facility Business Plan - 2009 update McDowell Group, Inc. • Page 5 9 Risk Assessment and Mitigation The maiar risk factors for this operation include: Management Competence: This factor is perhaps the single most important risk factor. A new development in a high -cost environment such as Valdez, Alaska must be managed extremely well, or the financial and community economic consequences could be severe. The potential risk of reliance on competent management increases as the scale of this proposed phased development increases. Mitigating measure: Recruit a cold storage and processing line facility manager from among the best available and pay and support this person well. Reliance on a single customer: In this business plan VFDA assumes that most of the revenues will derive from a single large processor currently operating in Prince William Sound. Failure to attract and keep this customer could have serious consequences for the cold storage and processing line facility, particularly if the processor elects to take their business elsewhere after the entire facility has been constructed. Mitigating measures: Recruit or train an existing employee in marketing. Second, consider negotiating a long-term contract commitment with any major customer. Adequate volume of fish product: Historical records of fish harvest show substantial volume. However, as witnessed in 2004, the history of salmon returns is volatile. Generally, there is more than ample supply returning to Prince William Sound, However, poor run years have been recorded in the past. Mitigating measures: Valdez Fisheries Development Association could work with other aquaculture operators in Prince William Sound and the Alaska Department of fish and Game to ensure that the fish supply is properly managed. Quality of fish: Valdez Fisheries Development Association will not be responsible for the quality of the Fish product or the value-added activity. However, the success of the cold storage and processing line facility is dependent on the success of the users of the facility. Mitigating measures: Actively engage in distributing educational materials and offer training to processors who use the cold storage and processing fine facility. Valdez Fisheries Development Association could also provide processors information on grant funding to purchase improved equipment for their own harvesting operations. Deferred depreciation: The financial analysis depicted in this business plan relies on the assumption of 100 percent grant funding. Normal wear and tear on buildings and equipment is typically accounted for through depreciation accounts but because of the grant funding assumption this business plan has focused mostly on cash flow. This is a unique project for Alaska and the price offered to potential customers must compete with much larger facilities in the Pacific Northwest. Mitigating measures: The financial analysis depicted in this business plan postpones the accrual of depreciation on the building and equipment until later years. Valdez Fisheries Development Association should consider an accelerated depreciation schedule after the facility reaches breakeven in order to have sufficient funds in later years for repair and replacement of buildings and equipment. Valdez Regional Cold Storage and Processing Facility Business Pion - 2009 update McDowell Group, Inc. ■ Page 60 Petro Star reliance: The ammonia absorption refrigeration relies on the use of waste heat from the Petro Star Refinery. The refinery has had scheduled downtime of up to two weeks in the past and unscheduled downtime could occur at any time. Mitigating measures: Valdez Fisheries Development Association should coordinate with Petro Star to make sure that scheduled downtime occurs at non -peak cold storage times. In addition, VFDA should ensure that backup systems are adequate to maintain cold storage temperatures in the event of systems wide failure for whatever reason. Valdez Regional Cold Storage and Processing Facility Business Plan - 2009 Update McDowell Group, Inc. • Page 61 Valdez Regional Fold Storage and Processing Facility Business flan - 2009 Update Prepared for: Valdez Fisheries Development Association McDowell G R Q U P Research -Based Consulting Anchorage Juneau March 2009 Valdez Regional Cold Storage and Processing Facility Business Plan - 2009 Update Prepared for: Valdez Fisheries Development Association Prepared by: AM —McDowell a R o u P Juneau ■ Anchorage March 2009 Table of Contents ExecutiveSummary .................................................................................................................1 - Adding Value to Alaska........................................................................................................... 1 TheVFDA Concept................................................................................................................. 2 VFDAAssumptions.................................................................................................................. 2 ProjectGoals.......................................................................................................................... 3 Location Assessment............................................................................................................... 4 Salmon Market Assessment..................................................................................................... 4 Operations.............................................................................................................................. 5 CapitalRequirements.............................................................................................................. 5 Financial Summary of Operations ............................. --- ...................................................... 6 v Company Statement of Purpose............................................................................................. 7 Introduction........................................................................................................................... 7 LegalEntity..... ........................................................................................................................ 7 OrganizationHistory ............................................................................................................... 8 Locationand Facilities............................................................................................................. 8 Model for Other Facility Developments................................................................................... 9 ProductOfferings.................................................................................................................. 10 Overall Operational Concept................................................................................................ 10 OperationalGoals.................................................................................................................1 a Cold Storage Business Offering............................................................................................. 11 Processing Line Rental........................................................................................................... 1 1 Other Business Offerings....................................................................................................... 12 Space and Area Considerations............................................................................................. 13 MarketAssessment............................................................................................................... 16 TheCurrent Situation........................................................................................................... 16 FacilityCompetition.............................................................................................................. 16 - Processor Interest.................................................................................................................. 18 Pink and Chum Salmon Product and Market Trends............................................................. 18 PW5 Salmon Harvest Trends............................................................................ .... 21 ................. Potential Growth in Facility Use............................................................................................ 23 Strategy and Implementation.............................................................................................. 25 PricingStrategy.................................................................................................................... 25 MarketingStrategy............................................................................................................... 25 MajorEvents......................................................................................................................... 26 ManagementPlan................................................................................................................. 27 Structure.............................................................................................................................. 27 ManagementOptions ........................................................................................................... 27 Insurance.............................................................................................................................. 28 Regulatory Permits and Licenses........................................................................................... 29 Personnel.............................................................................................................................. 31 Operations..................................................................................................................... M Receivingand Storage.......................................................................................................... 36 Shipping............................................................................................................................... 37 Warehouse Management Systems........................................................................................ 38 Reprocessing........................................................................................................................ 39 filletOperations................................................................................................................... 40 FilletRoom Equipment .......................................................................................................... 40 FilletTunnel Freezer.............................................................................................................. 41 Processing Line Operating Costs........................................................................................... 42 FinancialSummary ................................................................................................................ 44 Valdez Fisheries Development Association History ................................................................. 44 Assumptions......................................................................................................................... 46 CapitalRequirements............................................................................................................ 47 Summary of Capital investment............................................................................................ 48 Revenues.............................................................................................................................. 50 Expenses............................................................................................................................... 53 MonthlyCash Flow............................................................................................................... 57 ProjectedCash Flow............................................................................................................. 59 RiskAssessment and Mitigation........................................................................................... 60 Executive Summary Since the Valdez Fisheries Development Association's business plan for a cold storage and fish reprocessing facility in Valdez was completed in 2005, new technology has been incorporated into the facility design that will significantly reduce its operational costs. VFDA contracted with McDowell Group, Inc., to update the 2005 business plan (also prepared by McDowell Group) to reflect these operational cost savings as well as current market conditions. The new technology incorporated into the design, provided by Energy Concepts Co., alters the way in which waste heat from Petro Star Refinery will be converted into usable power for the cold storage and fish reprocessing facility. This new technology is expected to produce enough energy to meet all of the facility's power needs. A thermal turbine will be inserted downstream from the ammonia absorption system and is expected to produce in excess of 250 kilowatts. Capital costs associated with the improved ammonia absorption system design are estimated to be approximately V million more that the original absorption design, but operational costs are expected to be 5200,000 to 5250,000 less annually, depending on the cost of electricity in Valdez. In this revised business plan, only operational costs have been adjusted - capital costs remain at the original estimate of approximately $40 million. The $1 million increase associated with the new technology is well within the range of certainty associated with the S40 million estimate; therefore no adjustment is warranted at this time. The next step in the development process will be to refine construction cost estimates for the facility. Operational costs have been lowered to reflect zero electricity costs. In an effort to streamline this updated report, the appendices have been removed. They can be viewed in the original 2005 plan. Adding Value to Alaska Valdez Fisheries Development Association has developed this business plan for a cold storage and fish reprocessing facility in Valdez, The facility will use the fishery resource created by VFDA and other fisheries available in Prince William Sound to provide local jobs and contribute to the state's economy of the. The goals of the program include maintaining harvest -related employment, providing a means for entrepreneurs and established processors to produce value-added products in Masks, and increasing the in -state economic value of VFDA and Prince William Sound seafood resources, especially salmon. Historically, a significant portion of the Alaska seafood harvest undergoes only primary processing into frozen headed and gutted form. These fish are then exported to locations outside the state (Washington and Japan, for example) for value-added processing into finished products for retail consumption. The Alaska economy loses this important industrial activity, and with it employment, income, investment, and multiplier benefits. The VFDA regional cold storage and processing facility is designed to keep this value-added activity in Alaska. The development is intended to encourage additional processing and inventory management by existing Valdez Regional Cold Storage and Processing Facility Business Plan - 2009 Update McDowell Group, Inc. • Page t processing companies, entrepreneurial start-ups, and harvesters interested in generating more value from their catch. The Valdez Fisheries Development Association is a non-profit organization with a mission of contributing to the local area economy through development and utilization of fish resources. The organization intends to develop the project with the goal of breaking even in terms of operating costs. Processors and fishermen who utilize the facility for value-added activity will realize lower costs as a result of this business plan. VFDA's plan is to seek grant funding for the capital cost, as well as for initial operating losses until the facility attracts sufficient business to break even from operations. The VFDA Concept The overall concept for the regional cold storage facility is to store previously headed and gutted frozen fish in a modular designed cold storage facility for possible later processing on site. Customers will also use the cold storage for managing inventories of finished product. Valdez Fisheries Development Association will purchase the land and build a facility to house a cold storage, dry heated Storage, a secondary seafood processing area, an office, and loading docks. The temperature range for the facility modules varies from -20 to 70+ degrees Fahrenheit. VFDA will not compete with other established businesses in Valdez. The Association will build the processing plant complete with basic value -adding equipment and lease it to qualified tenants. The modular design of the buildings will allow VFDA to shut down portions of the building during non -peak times, in addition, waste heat from the nearby Petro Star Refinery will be used to generate all needed electric power, including that for the heating and cooling capabilities of the facility, thereby reducing the costs of operating the plant. VFDA Assumptions As with any proposed business venture, particularly one such as this with no precedent, assumptions must be made in the beginning stages of the project that serve to guide the business concept's future shape. The following assumptions are based on interviews with board members of the VFDA, interested processors, community leaders, and a previously published engineering report. Facility assumptions • Construction and processing equipment will be funded by grants, requiring no match or repayment. • The project will be built in stages over five years. • Design and capital costs are based on the Valdez Fisheries Cold Storage Conceptual Engineering Report by Alaska Anvil, Inc. dated September 19, 2003. Costs associated with the absorption refrigeration unit are based on the Fatal Flaw Analysis by Energy Concepts Co. dated July 20, 2006, Valdez Regional Cold Storage and Processing Facility Business Pion - 2009 update McDowell Group, Inc. 9 Page 2 ■ Use of waste heat will work as anticipated in the Energy Concepts report and as represented by Valdez Fisheries Development Association. • Petro Star Refinery operations will continue at rates sufficient to supply the told storage facility with waste heat for all electric power. • Valdez Fisheries Development Association will bear the capital and operating costs associated with the recovery of the heat and its transmission to the cold storage facility. • Construction costs for the facility and heat recovery system are estimated at $37.3 million using an ammonia absorption system. Total cost rises to S39.8 million when processing equipment and inflation adjustments are added over the 5-year construction timeline, Operating assumptions • Fish delivered to the cold storage facility are previously headed and gutted and flash frozen. • Waste heat is provided by the Petro Star facility at no cost to VFDA. • Revenue from operations of the combined facility will cover all operating costs including labor, utilities, repair and maintenance. • The modular design of the facility will allow shutdown of unused portions of the facility when there are fluctuations in demand for cold storage. ■ The cold storage and processing plant must be competitive with existing available alternatives. • The entire facility will be managed under the Association's 501(c)(3) tax status. • The Association will not compete with existing businesses in the region. • Fish returning from the Association's hatchery operations will be a major source of product for the cold storage and the processing plant. • Long-term grants may offset some of the operations start-up shortfalls. Processing plant assumptions • Valdez Fisheries Development Association will equip the processing line with basic machinery and lease to competent operators. Tenants will hire necessary personnel for processing tasks. • A base tenant may sublet to smaller users. • No primary processing will be done at this site — only value-added processing that draws product from the cold storage. Project Goals Since Valdez Fisheries Development Association is a non-profit organization, the combined operations are intended to break-even under the assumptions fisted. jobs, new business development, expansion of existing businesses, and economic multiplier impacts are the ultimate goals for this project. The intention is that profits will fail to the processors and harvesters, and that VFDA will meet operating expenses with moderate user fees from facility customers. Extending the region's seafood business activity beyond the harvest season by means of reprocessing stored frozen inventory should provide more employment opportunities for seafood workers and keep more seafood dollars in the state. The cold storage unit will allow small Valdez Reg ronoI Cold Storage and Processing Focilrty Business Plan - 2009 Updore McDowell Group, Inc. • Page 3 reprocessors to hold their fish inventory and establish new or expanded businesses over time without the drain of a large capital investment. Location Assessment The key advantage for the facility is the proximity to the Petro Star Refinery, which will provide cost savings through electricity produced by waste heat. The ability to generate electricity for all facility operations provides a significant advantage to potential customers by lowering their costs to use the facility. Additionally, the facilities Valdez location, near the productive Prince William Sound fishery, is an advantage to potential users who will have ready access to raw product and will allow them the option of shipping value-added product via air, land or sea. Salmon Market Assessment Commercial harvests have been substantial in recent years, and VFDA's salmon hatchery production is a significant contributor to those harvests. The volume of salmon available to potential users of the facility should remain substantial. The potential annual supply of salmon from Prince William Sound has averaged more than 195 million pounds over the last six years. VFDA's planned contribution is important to this outlook - While canned salmon will remain an important product For PWS, demand for salmon Fillets is strong, particulariy in the US. This has the potential to create demand for reprocessing at the Valdez Cold Storage and Processing Facility. Table 1 Salmon Resource in Prince William Sound, 1999.2008 (Thousands of Pounds) .. .. . . 2008' 257 8,019 5,206 143,727 39,449 196,658 2007 896 20,237 2,811 213,455 24,799 262,198 2006 646 14,1 T 6 6,824 78,288 19,008 118,882 2005 781 11,740 4,178 207,217 16,525 240,441 2004 879 10,977 5,595 87,449 15,047 119,947 2003 1,119 16,660 4,378 189,442 24,285 235,884 2002 830 14,453 6,096 65,795 52,583 139,757 2001 870 13,890 4,250 119,460 23,500 161,970 2000 670 9,310 6,690 132,990 41,520 191,180 1999 1,360 12,180 1,360 133,690 16,160 164,750 Average Actual Harvest 831 13,158 4,739 137,151 27,288 183,167 Source: Alaska Department of Fish and Game division of Commercial Fisheries Salmon Harvest Statistics (1999-2008) based on Salmon Fish Tickets. 'Data are preliminary as of February 2009. Valdez Regional Cold Storage and Processing Facility Business Pion - 2009 Update McDowell Group, Inc. • Page 4 Operations The proposed Valdez regional cold storage is designed to serve two basic functions: 1. Receiving, storage, and shipping: This service allows consolidation of customer specific loads, lowers freight costs, and permits mixing several products to suit a specific customer order. 2. Reprocessing: This activity, not offered in all cold storage facilities, permits warehoused product (mainly headed and gutted frozen salmon) to be pulled from inventory, reprocessed to meet customer specifications, and re-entered into cold storage. A warehouse management system is used to handle the functions for the steps involved in receiving, storage, and shipping. More sophisticated systems can be integrated with accounting systems for invoice generation, accounts payable, accounts receivable, and financial statements. The second basic function for the Valdez Regional Cold Storage and Processing Facility is the reprocessing line, The fillet operations are the heart of a specialty seafood processing plant. This plant includes two fillet - processing lines capable of producing basic fillets using high quality automated equipment. Each fillet line is capable of running 30,000 pounds of headed and gutted salmon per day. The equipment provided will generate the equivalent of 18,300 pounds of vacuum-packed pin -bone -out fillets per day in a single shift. Valdez Fisheries Development Association's operating costs for the two processing lines is estimated to total S 384,000 per year. That amount spread over the assumed pounds of finished product indicates a breakeven cost ❑l approximately S0.04 to S0.05 per pound. Since VFDA intends to run this operation on a non-profit break-even basis, that cost becomes the rental rate for the processing line portion of the facility. Capital Requirements Capital investment for the full project over five years is estimated by VFDA and Anvil Alaska, Inc. at approximately $40 million. Year 1 estimates are for just over $27 million in capital investment. This includes the ammonia absorption infrastructure and four modular buildings. The VFDA intends to develop the full facility over a five-year period; however, this schedule will be based on processors' needs and could take more or less time depending on project success. The following table outlines projected capital costs. Table 2 Capital Requirements for Valdez Regional Cold Storage and Processing Facility Land S 225,000 $ - Buildings 25,720,500 2,965,000 Equipment 1,293,750 388,500 S - S S 2,966,000 122,000 2,966,000 80.500 2,966,000 63,500 Total Capital S 27,239,250 $ 3,353,500 $ 3,088,000 S 3,046,500 S 3,029,500 Cumulative Total $ 27,239,250 $ 30,592,750 $ 33,680,750 $ 36,727,250 $ 39,756,750 Valdez Regional Cold Storage and Processing Facility Business Plan - 2009 Update A.trAawell Group, Inc. •Page 5 Financial Summary of Operations Revenue Total revenues from cold storage and processing activity in Year 1 are estimated at $181,100 based on the results of interviews with potential clients. In Year 5, total revenues from cold storage and processing activity increase to $2.7 million, assuming that potential clients are able to reach the high estimate for usage. VFDA's Year 4 and 5 revenue assumptions include attracting the cold storage business of the dominant processor in the Prince William Sound region. Nigher revenues may occur sooner if processors are able to quickly relocate their operations to Valdez. Revenues Cold Storage Processing Other misc. Total Revenues Expenses Utilities Supplies Labor -- Building and Equipment Business services Taxes Total Expenses Table 3 Pro -forma Operating Cash Flow Statement Valdez Regional Cold Storage and Processing Facility $ 123,400 $294,100 S 662,900 S 1,268,100 S 1,706,300 54,900 138,200 330,500 671,900 960,400 3,400 S 7,900 S 8,200 S 8,500 S 8,800 S 9,100 4,500 5,100 5,400 6,000 6,600 312,000 372,000 558,000 558,000 558,000 250,400 314,500 375,000 434,700 467,900 5,000 6,000 7,000 8,000 10,000 480,500 535,400 590,300 645,200 700,100 $1,060,300 $ 1,241,200 $ 1,544,200 S 1,660,700 $ 1,751,700 Cash Flow From ($879,200 Operations } (5805,800) ($547,700) $282,600 $918,400 Note: As a 501(c)(3) Valdez Fisheries Development Association may not be subject to real properly taxes for this facility. Expenses Annual expenses range from $1.1 million in the first year of operation to $1.8 million in Year 5. Estimates are based on existing conditions in Valdez for utility races, the Alaska Anvil conceptual engineering report for construction, the Energy Concepts analysis for power generation, and discussions with industry experts for insurance, and repairs and maintenance. When depreciation is included, Year 1 expenses are nearly $2 million and Year 5 expenses rise to just under $3 million. Valdez Regional Cold Storage and Processing Facility Business Plan - 2009 Update McDowell Group, inc. • Page 6 Cash Flow From ($879,200 Operations } (5805,800) ($547,700) $282,600 $918,400 Note: As a 501(c)(3) Valdez Fisheries Development Association may not be subject to real properly taxes for this facility. Expenses Annual expenses range from $1.1 million in the first year of operation to $1.8 million in Year 5. Estimates are based on existing conditions in Valdez for utility races, the Alaska Anvil conceptual engineering report for construction, the Energy Concepts analysis for power generation, and discussions with industry experts for insurance, and repairs and maintenance. When depreciation is included, Year 1 expenses are nearly $2 million and Year 5 expenses rise to just under $3 million. Valdez Regional Cold Storage and Processing Facility Business Plan - 2009 Update McDowell Group, inc. • Page 6 Company Statement of Purpose Introduction Valdez Fisheries Development Association believes that some fish resources in the State of Alaska are significantly underutilized. In the case of non -canned salmon, much of the resource is minimally processed into headed and gutted form, then shipped frozen to locations outside the state for further processing into finished product for retail consumption. VFDA further believes that providing infrastructure close to the Prince William Sound fishing grounds at reasonable cost will allow focal processors to increase the value of the harvest and provide in -state employment for Alaska residents. Toward this end, Valdez Fisheries Development Association proposes to construct a cold storage and processing facility to allow regional processors to add value to previously headed and gutted fish product. The stated goal is to use the existing resource that Valdez Fisheries Development Association created - through very successful hatchery program - to provide jobs and contribute to the economic base in Prince William Sound. The anticipated benefits from this project include the following: • Increased Alaskan employment • Decreased shipping costs from avoiding the shipment of non -saleable product to Seattle, Bellingham, and other points south • Delay shipping costs closer to time of sale • Increased Alaskan income from keeping seafood product in the state for value-added activity • Ability to await better market conditions or tailor products to meet specific customer requirements • Decreased utility costs from using Petro Star Refinery waste heat ■ Model for a collaborative endeavor between the seafood and oil industries • Model for other similarly situated Alaska communities This business plan provides a detailed map for implementing and operating the facility as previously described in the Valdez Cold Storage and Processing Facility Feasibility Study (May 2004). A feasibility study lays out the general groundwork making several assumptions about customers and products to determine if a project is realistic. A business plan takes the feasibility study to the next level by identifying detailed strategies, tasks, schedules, costs, assets, markets, personnel, and operating systems necessary for a successful project. As a project nears implementation other, more specific, plans will be developed. Legal Entity Valdez Fisheries Development Association is a non-profit organization recognized by the Internal Revenue Service as tax-exempt under IRS Section 501(c)(3). Valdez Fisheries Development Association has a valid Alaska business license, number 20401, which expires on 12/31/2009. Valdez Regional Cold Storage and Processing Facility gusoness Plan — 2009 Update McDowell Group, Inc. • Page 7 Contact information for VFDA: Valdez Fisheries Development Association Post Office Box 125 Valdez, Alaska 99686 Tel: (907) 835-4874; fax: (907) 835-4831. Email: vfda@alaska.com. Organization History In 1978, a group of local commercial fishermen formed the Valdez Fisheries Development Association, The goals of the organization were to develop a hatchery program and offer training and community resources to enhance the fishing industry in the Valdez area. In 1982, the Association released about 10 million pink salmon fry from the Solomon Gulch hatchery site in Valdez. By 2007, more than 222 million fry were released, making it the largest pink salmon hatchery in Alaska. In recent years, smaller numbers of coho salmon have also been released. In 2002, the Valdez Fisheries Development Association obtained a grant from the U.S. Department of Commerce, Economic Development Administration in order to develop the Fisheries Business Incubator Investment Program. This program was initially developed to provide the commercial fishermen of the Prince William Sound Economic Development District with the opportunity to add value to their harvest. The program has since been expanded to all interested parties in the state. The goal of the program is to create new jobs within the commercial fishing industry and to save as many existing jobs as possible by removing many of the obstacles facing fishermen in the state. The goal is achieved by encouraging and providing a means for entrepreneurial fishermen to build business models and develop marketing plans for selling value-added fish products. The training program is a certificate program through the University of Alaska and Prince William Sound Community College. Designation as a certified processor aids commercial fishermen in the direct marketing of products to individuals or corporate consumers. This business plan for the Cold Storage and Processing Line Facility takes the Fisheries Business Incubator Investment Program to the next level by providing the needed infrastructure for program graduates to continue to achieve success and potentially expand their businesses. Location and Facilities The corporate offices of Valdez Fisheries Development Association are located at 1815 Mineral Creek Loop Road in Valdez. Valdez Fisheries Development Association is currently negotiating to purchase 18.9 acres on Dayville Road in Valdez, directly across from the Petro Star Refinery, for the cold storage and processing line facility. The refinery will be the source of heat used to generate power for the facility, including the ammonia absorption refrigeration system. {See the Appendix for the Conceptual Engineering Report by Alaska Anvil Valdez Regional Cold Storage and Processing Facility Business Pion - 2009 Update McDowell Group, fnc. 0 Page 8 and Fatal Flaw Report by Energy Concepts.) The location is close to ideal for capturing and using waste heat. Insulated 8-inch lines will be set in a trench to carry waste heat from the refinery to the facility. The building site is currently zoned for heavy industrial use - the appropriate category for the proposed project. Product must be trucked to and from the site, which is several miles from the water. This is the case for several Pacific Northwest and Alaska cold storage facilities and is not considered a major handicap for this project. The preliminary engineering study done by Anvil envisions a total of twelve 85' X 150' cold storage buildings, a refrigerated access corridor, refrigerated dock area, office area, and dry storage. The modular design of the buildings will allow Valdez Fisheries Development Association to shut down unused buildings during low cold storage demand times thereby keeping operations costs at a minimum. A backup boiler and fuel tank provide heat when the refinery is shut down. One of the cold storage buildings will have an area designated for fish processing. The fish processing building will have sufficient space for two complete processing lines. Model for Other Facility Developments Valdez Fisheries Development Association has evaluated the need for, and ways to create, a cold storage facility in Valdez. VFDA believes that appropriate infrastructure is needed to create a better environment for the seafood industry, both in Prince William Sound and statewide. Historically, a significant proportion of Alaskan seafood has been harvested, minimally processed, and then shipped to locations outside the state for value-added activity. Alaska needs the ability to hold its resource in a stable form, in -state, at reasonable cold storage prices so that processors can avoid shipping non -saleable product south. Part of the difficulty in developing cold storage capacity in Alaska is the high cost of utilities. The use of the Petro Star Refinery waste heat for generating power will mitigate this difficulty by reducing the cost of electricity to zero. The building of a cold storage and processing facility could help the existing industry - and new businesses - be more competitive. If successful, at least some aspects of this project can act as a model for other seafood dependent communities in the state in similar situations. The proposed VFDA facility is on a larger scale than most communities might consider, and the potential use of waste heat from a petrochemical plant is a unique feature. Nonetheless, lessons learned should be beneficial to other contemplated developments. Valdez Regional Cold Storage and Processing Facility Business Plan - 2009 update McDowell Group, Inc. • Page 9 Product Offerings Overall Operational Concept The overall concept for the cold storage facility has several primary components: • Using grant funds, the Valdez Fisheries Development Association will purchase the land and build a facility to house a cold storage, dry heated storage, secondary seafood processing area, an office, and loading docks. ■ Primary processing will not be done at this facility. Product will arrive in headed and gutted form for cold storage. Processors may rent the facility's processing equipment (boneless fillet machines, for example) for further value-added processing. • Using grant funds, the Association will equip and manage the cold storage facility. The facility will be used to stockpile primary processed product and to finish products prior to shipment. Finished product may also be stored prior to shipment. • The Association will build the processing plant complete with basic value -adding equipment and lease it to qualified tenants. • Tenants may supplement the Association's supplied equipment with their own specialized machinery needed to create desired products for their customers. Operational Goals The primary goal of the cold storage facility is to diversify and enhance the regional seafood economy. This goal can be achieved by encouraging the development of new products by creating a fully equipped processing and cold storage facility and leasing those facilities to qualified operators. A natural outcome of this may be to increase the market value of salmon and in so doing raise the grounds price. Another outcome may be to create year-round employment for processing workers. A secondary goal for this project is to create a self-sustaining environment in which new products can get a solid start. The Valdez regional cold storage facility is a unique concept and, if successful, may act as a business model for other fishing industry regions in Alaska. The proposed facility encourages development of higher -margin product forms of low -value salmon. This may reduce the current over -supply of canned salmon (pink salmon in particular) and may help restore canned prices. Since Valdez Fisheries Development Association is a non-profit organization, the combined operations should break-even. Valdez Regional Cold Storage and Processing Facility Business Pion - 2009 Update McDowell Group, Inc. 9 Page 10 Cold Storage Business Offering The largest business component, in size and revenue, is the proposed cold storage. Twelve storage units (about 3 to 4 million pounds capacity on average) will be built in five stages resulting in a total storage capacity of 25 to 30 million pounds. The Valdez Fisheries Development Association will manage and maintain the cold storage business component. Seafood processors in the region will lease the -20 degree Fahrenheit storage space. Warehoused products may be consolidated for efficient shipping, reprocessed to suit specific customer requirements, or a combination of both. As a result, products will ship directly to customers or to forward warehouses - thereby skipping Seattle where much of the Prince William Sound harvest is currently stored and re -worked before being shipped again to customers. This facility will replace the need to ship product to Seattle for storage and/or reprocessing and retain more fishing industry dollars in -state. Customer use of the facility depends on competitive storage rates. See the Valdez Cold Storage Feasibility Study for a listing of competitive rates. The proposed rates for this facility are well below the published rates and on par with negotiated rates for competing cold storage facilities. Valdez Fisheries Development Association employees will be responsible for transporting product into cold storage from the loading dock. VFDA employees will inspect the product for proper containerization, weigh the product, assign cold storage space, and operate the forklifts for transporting the product to the assigned space. The customer's responsibility is to head, gut, and property freeze the fish product prior to arrival at the Valdez Regional Cold Storage location. Processing Line Rental The second business component consists of two facilities equipped with contemporary processing technology needed to thaw, fillet, package, and re -freeze. Long-term tenants will be sought to lease the units for custom processing or for re -working their own primary -processed products held in the adjacent cold storage. Tenants will be responsible for hiring their own personnel and for equipment needed for specialized products. Completion of training offered by the Valdez Fisheries Business Incubator Program will qualify potential processing line rental. Other potential users of the processing line facility must demonstrate competency on the Association's equipment prior to utilizing the facility. Each processor will have special needs for equipment based on their customer's expectations, Valdez Fisheries Development Association may purchase specialized equipment for processors when negotiating processing line rental. For purposes of this business plan, only basic processing equipment is assumed to be purchased. In conjunction with the reprocessing facility, Valdez Fisheries Development Association will offer comprehensive third party inspection services. Such services have become essential to provide customers with product confidence, and will be particularly important for a facility located so far from normal distribution centers. Valdez Fisheries Development Association personnel will be responsible for transporting processor's product from the cold storage to the processing line thawing area. Processors will then become responsible for the Valdez Regional Cold Storage and Processing Facility Business Plan - 2009 Update McDowell Group, Inc. - Page 1 f product and any value-added activity. When the processor has completed value-added activity along with repackaging and refreezing, the product may be prepared for re-entry to the cold storage or shipped directly from the processing line facility as per prior arrangement with the Association. Product that is to be refrozen will be transported by Valdez Fisheries Development Association personnel after weighing and assigning a cold storage location. Processors will typically be responsible for cleanup of the processing line facility but may elect to pay Valdez Fisheries Development Association employees for clean-up when prior arrangements have been made for this activity. Association employees will inspect the area after cleanup to insure that equipment is ready for the next processor wishing to use the equipment. Inspection services of product about to be shipped will take place when buyers request such service. Other Business Offerings Warm Storage Despite the ongoing product -form shift for pink salmon, canned salmon remains a substantial product form for the Prince William Sound region. In 2007, canned production in the region was likely over 700,000 48-tall case equivalent, more than 30 million pounds. Currently, much of this product is shipped as bright -stack (canned salmon without labels) to Seattle for warehousing and for later labeling and casing. The purpose of this warm storage is to allow these warehousing and packaging functions to occur on -site and to permit direct shipments of canned salmon. Like the cold storage, this component will be managed by Valdez Fisheries Development Association and made available to local processors. Throughout this report, the facility is referred to as the cold storage facility. However, the modular design and the use of Petro Star Refinery waste heat will allow all cold storage buildings to be used alternatively as warm storage. Valdez Fisheries Development Association does not currently plan to offer labeling equipment services. However, the facility can easily be used for warm storage based on processor's needs for such space and Valdez Fisheries Development Association could negotiate with processors to supply this equipment as weft. Only modest warm storage business is anticipated in this business plan, Cool Storage Though not planned at this time, the Valdez Fisheries Development Association Cold Storage facility temperatures can be modified to allow for cool storage for fresh product as the need arises. At this time, the Association does not anticipate the need for cool storage. The Association has the flexibility to meet customer requests for this offering if needed. Valdez Regional Cold 5torage and Processing Facility Business Plan — 2009 Updore McDowell Group, Inc. 0 Page 12 Build to Suit An integral part of the success of this endeavor will be to provide the cold storage and processing line facility customers with the tools and infrastructure needed for successful Alaskan operations. Valdez Fisheries Development Association will tailor its operation to meet the needs of Prince William Sound processors. Those needs might be cold, warm and dry, or cool storage. Processing line equipment will be based on customer's needs for equipment. Additional supplies or services may be offered if customer demands warrant and provided the Association does not then compete directly with other Valdez businesses. Valdez Fisheries Development Association has ample acreage for future expansion that will be based on customer's need for other offerings. This could be additional cold storage space, processing lines, or offerings such as a smokehouse, fishmeal plant, or special packaging capabilities. Training Valdez Fisheries Development Association will continue to offer training through the Valdez Fisheries Business Incubator Investment Program, There is no fee for participation in the business incubator program (program fees are funded through grants). Users of the processing line equipment must demonstrate a certain level of competency prior to using the facility. Potential users of the processing line facility must provide some level of assurance that they have the necessary training for use of the seafood processing line equipment. Support Services Support services for the business components will be provided by a central facility, These services include office space, loading docks, inventory tracking, and facility management services. Valdez Fisheries Development Association will be responsible for security of the entire facility plus repair and maintenance of the warehouses and the processing area basic equipment. The Association will also be responsible for snow removal and grounds upkeep. Space and Area Considerations The space and area needed for the fillet operation is included in the construction of the cold storage warehouse facility, in today's food manufacturing environment, quality requires control and monitoring of bacteria levels on the product. The fillet processing area will be built and operated with an emphasis on food quality and safety. Each fillet room will meet the following standards for infrastructure, product control, and safety: Infrastructure Needs: • Space: 3,000 - 4,000 square feet with 10 - 12 foot ceiling. • Floors: concrete and sloped for easily cleanable drain system. • Curbs: concrete 12" - 16" high. Tight joint with floor to prevent collection and build-up of organic materials. Valdez Regional Cold Storage and Processing Facility Business Plan - 2009 [Update McDowell Group, Inc. + Page 13 • Utilities: adequate electrical, hydraulic and air to operate the processing equipment. Preferably the conduit and piping can be built into the walls and ceiling to reduce the area for accumulation of moisture and dust. • Sanitation: sanitation system and equipment can be built into the walls if it is a centralized type system. Product Control: • Walls: food preparation quality. • Ceilings: food preparation quality. • Ventilation: positive air flow/ventilation to prevent the build-up of moisture. • Temperature control: refrigeration coil to maintain the room temperature at or below 50 degrees Fahrenheit. • Waste stream disposal: An effective and efficient way to grind and dispose of the skin, bones, and meat from the fillet process. Safeq: • Sprinkler system: It is best to have piping in the ceiling with low profile sprinkler heads. This minimizes the area moisture and dust can accumulate and provide a breeding area for bacteria growth. • Lighting: surface mount/wash-down protected light fixtures. Whole spectrum lighting is needed to allow for proper color grading of fillets. • Doors/access: Personnel access and product flow into the space need to be controlled to prevent the entrance of bacteria. Doors need to be food preparation area quality. Personnel access requires foot and hand dip stations. Air curtains and bug zappers: required on all open doorways and inside of all entry points. The following diagram shows the general layout of the processing facilities in relationship to the cold storage and the product flow lines. The layout is built around making efficient use of a common set of blast tunnel freezers. Valdez Regional Cold Storage and Processing Facility Business Plan - 2009 Update McDowell Group, Inc. • Page 14 Central Cold Facliq Figure 1 Processing Line Product Flow Diagram dnc Akate Not to scale, schematic Valdez Regional Cold Storage and Processing Facility Business Plan - 2009 Update McDowell Group, inc. • Page 1 S Market Assessment The Current Situation There are currently no public or quasi -public cold storage warehouses in Valdez, or in the whole Prince William Sound region. To date, cold storage needs are met by individual processors. Due to their high capital costs, most processors have opted to provide the minimal amount of cold storage needed to accumulate product into full container loads (40,000 pounds) for shipping to outside cold storages or to customers. During the peak of the season, most frozen product is loaded directly from the plant's blast freezers into 40- foot refrigerated containers. The absence of a cold storage in the region means that shortly after the harvest season concludes, the entire harvest has been shipped out of the region and there is very little economic activity in the region's seafood industry until the next harvest period. The local seafood industry slips into eight months of dormancy. Once product departs the region it flows toward end users, often pausing at various other (outside Alaska) warehouses or re -processors along the way. Each of these pauses represents potential revenue lost to the Valdez region. Facility Competition The proposed facility offers two Core functions: cold storage and reprocessing. For the most part, these activities are presently supplied by businesses located elsewhere. To draw these activities to the Valdez facility, it must successfully compete against businesses currently providing these services. Pacific Northwest businesses, well known to the industry, now supply most of these functions and serve as good examples of the competition faced by the planned Valdez facility. SeaFreeze and Bellingham Cold Storage offerings are described briefly below. SeaFreeze Inc. SeaFreeze, inc. is a venerable component of the seafood industry in the Pacific Northwest and Alaska. It is generally well regarded for its professionalism and customer orientation. The 350,000 square foot warehouse is located along the Duamish River just south of downtown Seattle, conveniently sited for receiving and shipping access by truck, sea, or rail. Importantly, its location near SeaTac International Airport and major traffic arterials provides easy access to customers and their buyers for inspecting product. Major offerings: • 7 million cubic feet of frozen storage capacity (approximately 75 million pounds). • Temperature maintained at -10 degrees Fahrenheit in 5 separate rooms. ■ 35 loading dock stations. • 51,000 square foot facility for custom processing. Valdez Regional Cold Storage and Processing Facility Business Plan - 2009 Update McDowell Group, Inc. ■ Page 16 Bellingham Cold Storage Bellingham Cold Storage (BCS) is a very large public cold storage located at the Bellingham Harbor. This 13.+6 million cubic foot facility may be the largest warehouse complex on the west coast, including Canada and Alaska. Like SeaFreeze, this is a well -regarded operation offering an entire range of warehouse and reprocessing activities. Their location, about 1.5 hours north of Seattle, is a less convenient site for potential buyers needing to inspect product. Major offerings: • 13.6 million cubic feet of storage space. ■ 160 million pounds of frozen storage capacity. • 50 truck loading bays and 13 railcar loading zones. • Reprocessing capacity to freeze 600,000 pounds daily. Location Preference Depending upon their needs, customers will find different advantages and disadvantages to storing and re- working products in Valdez. One of the key advantages is the lower rates made possib€e by the facility being constructed using grant funds and run as a non-profit business. The resulting lower rates may go a long way to offsetting any problems concerning its remote location and associated issues regarding project oversight and customer inspections. The services offered by VFDA are designed to meet the stated needs of certain regional seafood processing corporations and, in turn, their fishing fleets and the local economy. Prior to now, this important Alaskan port offered no way for processors or other entrepreneurs to properly store frozen seafood, to further process those products within the region, or a way for new seafood businesses to lease storage or processing space and avoid huge initial capital costs. By leasing such facilities, the start-up times will be significantly shortened for new business concepts. In addition, both new and existing businesses seeking opportunities for expansion can avoid extensive delays associated with permitting, design, and construction of a new facility. The following table highlights the advantages and disadvantages of the proposed plant as seen from the view of a hypothetical customer. Table 4 VFDA Plant Advantages and Disadvantages Evaluation Grant funded capital costs Distant from corporate offices Non-profit management Difficult for customers to inspect product Community support Valdez is not a regular port of call for major international shipping lines Conveniently located close to seafood resource Seasonally difficult highway access Inexpensive operating costs due to using waste Reprocessing during the off-season may require the heat and no debt service on construction costs cold storage client to post employees in Valdez Full service facility; warehouse and re -processing Valdez Regional Cold Storage and Processing Facility Business Plan - 2009 Update McDowell Group, Inc. ■ Page 17 Processor Interest Support for this project and potential interest from processors is demonstrated by the Letters of Interest solicited by Valdez Fisheries Development Association. (See the Appendix.) One processor puts it nicely when he says: "The historic methods of exporting commodity fishery products from Alaska to the lower forty-eight states and international destinations are no longer practical. Our business has been adversely impacted by the inability to fully process product close to "point of harvest". This processor goes on to say that the ability to engage in secondary processing and store products in Alaska will help his firm to capture increased market share for Alaska seafood products. Another processor puts it this way: "Ultimately, (we) would be willing to alter (our) current operations if our bottom line were positively affected. This would mean that the combination of injout fees, handling fees, cold storage, and transportation would need to be less than or equal to our current operational expenses. The proposed access to processing equipment further enhances our interest in this project." Other processors as well as community leaders in Valdez and Fairbanks have offered verbal support for the project as well, according to VFDA management. Pink and Chum Salmon Product and Market Trends Product Trends The outlook for value-added Alaska salmon is promising. The U.S. salmon fillet market is among the largest in the world and has grown at an average annual rate of 18 percent since 1998.' Import statistics are specific to product form, providing a very clear picture of product form preference. Salmon fillet is the preferred product in the U.S. and accounts for nearly all salmon import growth. Fillet processing activity at Valdez would serve a very large existing market with strong growth potential. While the relative growth rate of fillet versus other salmon products has slowed in recent years, the total of salmon fillet imports and Alaska salmon fillet production represents U.S. consumption of over 900,000 pounds per day. At that rate, the entire statewide production of salmon fillets in Alaska amounts to a five - week supply. (See Figure 2.) Overall, U.S. imports of salmon fillets grew 134 percent between 1999 and 2008, while imports of all other salmon products combined grew just 42 percent during the same ten years.' National Marine Fisheries Service annual reports. Using data from annual reports by the National Marine Fisheries Service_ Valdez Regional Cold Storage and Processing Focitity Business Plan - 2009 Update McDowell Group, Inc. • Page 18 160.000 140.000 120,000 100,000 K 80.000 E 60.000 40,000 20,000 Figure 2 U.S. Salmon Imports by Product Form (metric tons) 1994 1995 19,96 1997 1998 1999 2000 2001 7002 M 12004 200.5 2006 2007 2008 Source- National Marine Fisheries Service. Two species (pink and chum) account for nearly 90 percent of PWS salmon harvest tonnage. Pink Salmon Alaska pink salmon values have improved substantially in recent years, driven largely by strong demand for frozen pinks and a related product -form shift in Alaska, from canned to frozen. The chronic surplus of tanned pink was a key factor in low pink salmon values early in this decade. Canned pink has a shelf life of several years and with a series of record and near -record pink harvests throughout the last decade, unsold inventory bridged the low years in the two-year abundance cycle, keeping the canned pink market in a constant state of oversupply. Ex -vessel and first wholesale value of Alaska pinks bottomed out during 2002-2004. Ex -vessel prices were 9- 10 cents per pound, while average first wholesale price for H & G frozen pinks remained below 55 cents per pound and average 48-tall wholesale case price remained in the $34-S38 range. Values began to improve in 2005 as demand for frozen pinks grew and the product -form shift from canned to frozen accelerated. through 2002, the canned product -form share for Alaska pink salmon was in the 75-80 percent range. That share of production declined to 64 percent by 2004 and by 2007 was down to 50 percent. Valdez Regional Cold Storage and Processing Facility Business Plan - 2009 Update McDowell Group, Inc. 0 Page 19 This progression and the associated price changes were accelerated by the unusually low Alaska pink harvest of 72 million fish in 2006. Wholesale values for the major pink salmon products recovered, with frozen H&G prices rising to the 80-90 tent range and 48-tall case prices rebounding from the low point of S34 to $57+ per case. Ex -vessel pink prices increased to 16 cents per pound in 2006, 19 cents in 2007 and 29 cents in 2008. PINK SALMON IMPLICATIONS The product -form shift has two important implications for Alaska pink salmon markets. One, it demonstrates a major increase in the demand For primary -processed (H&G frozen) product. Through 2007 this was reflected in strong export growth to low-cost labor markets like China, presumably For secondary processing. However, there are indications From 2008 export data that export activity to such labor markets has slowed. The relevant implication for the proposed Valdez Cold Storage Facility is a potential increase in demand for domestic secondary processing of frozen H&G pinks. Second, the product -form shift has reduced the supply of raw material available for canning and "dried up" the longstanding cumulative surplus of canned pinks. This brings canned pink supply and demand into balance and may substantially increase demand for the product. This is reflected in the September —December average case price of $69 for 48-tall pinks, more than S10 higher than any other ASP reporting period of the last 10 years. The relevant implication for the Valdez Cold Storage Facility is that heightened demand for raw pink salmon to supply canned production may reduce the volume available for frozen H&G production and secondary processing activity at Valdez. Chum Salmon Statewide average churn salmon prices have improved substantially in recent years, from 19 cents per pound in 2003 to 34 cents per pound in 2007. Roe value has traditionally been a significant driver for the ex -vessel price of chums, but the 2004-2007 price growth apparently results from increased wholesale value of chum salmon meat products. First wholesale value of frozen H&G chum has risen steadily since 2003. from the mid-40-cent range in 2003 to $1.09 per pound in early 2007 and a peak of $1.17 per pound in 2008. Frozen chum fillets show similar first wholesale value growth, from the 51.3041.40 range in 2003 and 2004 to a high of $2.46 per pound in 2008. The statewide average chum price increased to a remarkable 53 cents per pound in 2008 (preliminary), driven primarily by a major increase in first wholesale chum roe values, but supported by the continued growth in chum salmon meat product values. CHUM SALMON IMPLICATIONS The improved prices for chum salmon meat products are widely considered to be a function of the continued growth in broad consumer demand for salmon (especially fillets), and the ongoing success of efforts to differentiate wild salmon from farmed product. Post -season wholesale chum prices of 2006 may have been Valdez Regional Cold Storage and Processing Facility Business Plan - 2009 Updore McDowell Group, Inc. a Page 20 buoyed by substitution activity associated with the pink salmon harvest shortfall that year, but continued value growth for chum salmon meat products in 2008 supports the notion of growing consumer demand for the fish. The relevant implication for Valdez is a good one. Since chum salmon are twice the size of pinks, the return for labor to fillet the fish is much higher. in light of the steady improvement in first wholesale value of chum salmon meat products, this would logically create incentive for industry to pursue product development for chums rather than simply shipping out high volumes of H&G as a by-product of participating in the roe market. This creates a fall -back position for maintaining those value-added product lines at such time as churn roe prices return to more typical levels. PWS Salmon Harvest Trends PWS commercial harvests have been substantial in recent years, and VFDA's salmon hatchery production is a significant contributor. Commercial harvests of salmon in Prince William Sound exceeded projections for all species in the five years from 1999 to 2003. There were mixed results for actual versus projected returns during the 2004 - 2008 period, with Chinook routinely falling below projection and sockeye harvest coming in substantially below projection in three of the most recent five years. However, the two species that account for nearly 90 percent of PWS harvest tonnage (pink and chum) both show positive trends with respect to actual versus projected returns in the last five years. The actual chum harvest was substantially below projection in 2004 (-56 percent) but actual versus projected harvest has improved steadily since then and in 2008 the PWS harvest of over 5 million chum exceeded projection by 41 percent. The increasing actual/projected ratio indicates significant improvement in ocean survival of PWS-origin chum. Actual versus projected pink harvest in PWS fluctuates consistently with the odd -even abundance cycle for pinks. However, the PWS pink harvest has substantially exceeded the projection in three of the last five years, by well over 50 percent. In fact, Prince William Sound has been the top pink -producing region in Alaska for three of the last four years, accounting for half the state's total pink salmon harvest in 2008. Valdez Regional Cold Storage and Processing Facility Business Plan — 2009 Update McDowell Group, Inc. 9 Page 21 The volume of salmon available to potential users of the Valdez facility should remain substantial, and VFDA's planned contribution is important to this outlook. The total salmon harvest volume from PWS averages over 180 million pounds per year, with strong peak harvests exceeding 230 million pounds Table 5 Historical Harvests in Prince William Sound, by Salmon Specie (thousands) Actual Harvest (fish) ChinookPWS . Co . Pink Chum Total 2008• 12 1,303 548 42,413 5,089 49,365 2007 41 3,231 329 63,470 3,579 70,650 2006 32 2,525 764 21,722 2,182 27,225 2005 36 1,989 523 59,945 2,099 64,592 2004 39 1,893 620 23,531 2,002 28,085 2003 49 2,730 522 51,976 3,804 59,081 2002 40 2,263 651 18,951 6,374 28,279 2001 40 21260 490 35,250 3,100 41,140 2000 32 1,431 714 38,886 5,164 46,227 1999 60 2,040 170 45,010 1,960 49,240 Average Actual Harvest (thousands of fish) 38 2,167 533 40,115 3,535 46,388 Actual Harvest (lbs) ChinookPWS 2008' 257 8,019 5,206 143,727 39,449 196,658 2007 896 20,237 2,811 213,455 24,799 262,198 2006 646 14,116 6,824 78,288 19,008 118,882 2005 781 11,740 4,178 207,217 16,525 240,441 2004 879 10,977 5,595 87,449 15,047 119,947 2003 1,119 16,660 4,378 189,442 24,285 235,884 2002 830 14,453 6,096 65,795 52,583 139,757 2001 870 13,890 4,250 119,460 23,500 161,970 2000 670 9,310 6,690 132,990 41,520 191,180 1999 1,360 12,180 1,360 133,690 16,160 164,750 Average Actual Harvest (thousands of lbs) 831 13,158 4,739 137,151 27,288 183,167 Source: Alaska Department of Fish and Game Division of Commercial Fisheries Salmon Harvest Statistics 0999 through 2008) based on Salmon Fish Tickets. '2008 is preliminary data as of February 2009. Valdez Regional Cold Storage and Processing Facility Business Plan - 2009 Update WDawell Group, Inc. ■ Page 22 Potential Growth in Facility Use Other potential supply could exist through the efforts of the hatcheries in Prince William Sound, the rivers that feed into it, or from other areas of the state. The focus of the potential supply for this business plan has been on Prince William Sound salmon as the most likely source for value-added activity. However, processors could utilize this facility for halibut, sablefish, and other seafood. Non -fish items such as bottled water (warm storage) or frozen fruits and vegetables might be candidates for the cold storage as well, but are unlikely to contribute significant to revenues. Valdez Fisheries Development Association Enhancement Valdez Fisheries Development Association hatchery release activity at 230 million pink salmon fry is currently the maximum permitted. Coho production, however, has potential for growth. The Association would like to improve its coho production, though this would mostly serve to benefit the sport fishermen. Historically, coho releases have been in the 1.3 to 1.9 million fish range and coho returns range from 100,000 to 475,000 adult fish with an average weight of 8.5 pounds. Coho salmon production increases could provide higher value product and additional potential for the cold storage and processing facility. Additional coho production not utilized by the sport fishermen could add to the production. In the near term, Valdez Fisheries Development Association does not plan significant increases in coho production because of water restrictions. Copper River Fish Discussions with processors currently operating on the Copper River suggest that, at this time, there is little interest in the Valdez facility for their product. However, late run Copper River fish could achieve higher prices if processed in Valdez and may become a potential in the future. Kodiak Fish Anecdotal reports suggest that processors currently bring product from Kodiak to Valdez for processing. Therefore, the Kodiak fish resource may also represent potential customers for the cold storage and processing line facility. However at this time, interest in Valdez is not considered to be significant. Other Cold Storage Product Additional potential exists for other frozen food products (such as ice cream, meat, or frozen vegetables). Frozen products entering the state could use the Valdez facility rather than transporting product to Anchorage. Frozen product currently entering the state for retailers and military bases in the Interior may realize cost savings from transporting by barge to Valdez and then by highway to their final destination. The Valdez port is closer to Seattle (typical origination point) than Anchorage; however, the distance from Valdez to Fairbanks is comparable to the distance from Anchorage to Fairbanks (364 miles and 358 miles, respectively). However, it is unlikely that existing supply chains would be altered just by the existence of this facility and this business plan does not include cold storage food products. Valdez Regional Cold Storage and Processing Foubty Business Plow - 2009 Update McDowell Group, Inc. • Page 23 Entrepreneurial Endeavors Discussions with Interior farmers suggest that, at this time, there is a need for cold storage for their products. Travel distance from the Interior to Valdez may make Interior farmer participation prohibitive. However, the potential exists for Valdez to become the entry and exit point for produce and frozen product bound to and from the Interior region, It does not appear that interior farmers represent an immediate market for this facility. Valdez Regional Cold Storage and Processing Facility Business Plan - 2009 Update McDowell Group, inc. ■ Page 24 Strategy and Implementation Pricing strategies must be a reflection of both management goals and market realities. The Association's goals for this business unit are to provide needed infrastructure for the Prince William Sound fishery resource that will allow entrepreneurs to pursue new businesses thereby creating jobs and maintaining profits in -state. The market reality is that currently, fish processors can store and add value to their product more economically in the Pacific Northwest and other areas. Pricing Strategy It is not enough for prospective users to compare just cold storage costs between various facilities. Many other factors influence the decision of which cold storage offers the best advantage to a customer. Valdez Fisheries Development Association charges are just part of the calculation a processor must perform to determine the feasibility of storing product in Valdez in preference to the cold storage currently used. from a customer's perspective, using the Valdez cold storage or reprocessing facility requires adding VFDA charges to other related costs such as; transportation, inspections, customer convenience, exchange rates and more - most of which will be affected by a change in storage location. The study team does not have access to each prospective client's related costs of transportation, etc. Many of those costs are carefully negotiated and are proprietary and confidential. Rather than trying to determine the costs of each specific service and activity being offered by the Valdez Fisheries Development Association facility, the study team provided potential clients with an estimated monthly cold storage charge and asked them if, using the Valdez cold storage or reprocessing rate, they would consider using the VFDA facility. The potential client did the calculations combining the suggested facility charges with other refaced costs (transportation, inspection, convenience of use, etc). After looking at the combined costs and usability, most of the prospective clients asked indicated strong interest in using the proposed VFDA facility. Marketing Strategy A marketing plan defines potential customers, how to reach them, and the cost to the company of selling the product to the customers. Marketing plans are detailed and can be complex. The following briefly outlines a marketing strategy for Valdez Fisheries Development Association's new offering, 1. Identify the target market: Primary customers for the cold storage and processing line business unit are the fishermen and processors operating in Prince William Sound. Other potential customers are the fishermen and processors operating in Cook Inlet and Kodiak regions, refrigerated and frozen food product vendors serving Prince William Sound and the Interior region, and potential warm storage clients. Valdez Regional Cold Storage and Processing Facility Business Plan - 2009 Update McDowell Group, Inc. 0 Page 25 2. Plan to reach the target market. This could be achieved by personal contact with Prince William Sound operators, getting the word out at trade shows, and assigning personnel to marketing activities. 3. Advertise and promote: Develop a brochure, take ads in trade journals, local newspapers, and yellow pages, attend trade shows, visit with potential customers, offer incentives to employees who bring in new customers, send announcements to local newspapers. Depending on the available budget, any or all of these approaches may be taken to entice customers to change their current operations and use this new facility. Major Events Funding, design, construction, and management of a cold storage/reprocessing facility is a serious and complex undertaking. Each major step introduces a complex series of sub -steps and yet another series of actions. The major categories of actions include: • Secure funding • Site acquisition & due diligence • Establish timeline for all permits and licenses • Issue a RFP for design • Issue a RFP for construction • Issue RFP for warehouse management systems • Initiate construction and assign construction oversight • Hire key personnel; manager, engineer, and Quality Control inspector • Develop back office and administration systems • Develop quality control, inventory tracking systems Valdez Regional Cold Storage and Processing Facility Business Plan -1009 update McDowell Group, Inc. ■ Page 26 Management Plan Structure Valdez Fisheries Development Association is a non-profit corporation. Its Board of Directors consists of seven members who represent the major salmon user groups and business people in the Port of Valdez. With the addition of the cold storage and processing line, there will be three distinct business units in the Valdez Fisheries Development Association organization. They are as follows: 1. Hatchery Unit: charged with the propagation and raising of fish and the development of renewable fisheries resources for the benefit of commercial Fisherman, sport fishermen, subsistence fishermen, fish processors, tourists, and all businesses dependent upon the fishing industry in Alaska. Z. Fishing Vessel Coordination Unit: led by an Administrator/Sales Manager, this unit performs a variety of duties in the area of salmon product sales, harvest, and processing. This unit also works directly with the Fishing Vessel Coordinator in the fulfillment of the contractual obligation to Alyeska/SERVS Fishing Vessel Response Program. 3. Cold Storage and Processing Facility Unit: infrastructure that will allow processors to store seafood product close to the fishing grounds for later processing thereby creating jobs and retaining resource value in the state. The focus of this business plan is on the Cold Storage and Processing Facility Unit of VFDA's business. It is assumed that this entity, while part of the larger whole, will be responsible for its own revenues and expenses and will not be supported by other units of VFDA. Management Options Three options were considered for managing and leasing the processing lines: 1. Owner provided: The owner provides 100 percent of all needs including spate and area, equipment, personnel, and management. This is the model used in China and a few processing plants in Alaska and Washington. The third party provides the fish for Fillet, the specifications, and the customer's representative of the finished product. The plant owner provides all of the workers and equipment to Fillet the fish to the agreed specification. The usual arrangement involves the plant owner charging a fee based on the pounds of finished product. 2. Bare plant: The plant owner provides the Facility space and defined equipment for a fee. The fillet operator provides the personnel, specialized equipment, and pays all operational costs. Valdez Regional Cold Storage and Processing Facility Business Plan — 2009 Update McDowell Group, Inc. • Page 27