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Home My WebLink AboutAppendix 2Valdez Cold Storage and Processing Facility Feasibility Study Il 1MCDCOwell G H 0 U P DRAFT REPORT PREPARED FOR: Valdez Fisheries Development Association Research -Based Consulting Juneau Anchorage May 2004 Em Valdez Cold Storage and Processing Facility Feasibility Study ❑RAFT REPORT PREPARED FOR: Valdez Fisheries Development Association PREPARED BY: AH LPACDCOWell G R O U P Anchorage • Juneau In Association With RedPoint Associates May 2004 TA13LE OF CONTENTS ExecutiveSummary........................................................................................................... 1 Introduction and Methodology.......................................................................................... 7 SeafoodResource Supply................................................................................................. 9 SalmonI fatche.ry Fish Supply.......... ........................................................................................................... 9 Halibutand Sablefish Supply....................................................................................................................11 ExistingPotential Supply-•....................................---..................................................................................11 Prospects for Add itional Potential Supp1 �....................................................................................... ...13 Cold Storage and Seafood Market Demand................................................................... 15 Overviewof Cold Storage Demand..............................................•----...............--.................................1.15 SeasonalDemand .............................. ......... __......................................................... ......... ...................... ...l a Processing Equipment Rental Demand...................................................................................................17 DemandEnhancement .......................................---........._.._..............---............._.........................................17 Seafood Market Overview and Outlook.....................................•---.........................................................17 ColdlWarm Storage Operations ......................................................................................19 OverallOperational Concept----------------..........................................-----------------.------.............--...................19 OperationalGoals.......................................................................................................................................19 Assumptions.......................................................... ............................................................ ......... 20 SiteAssessment...........................................................................................................................................21 BusinessOfferings........................................................................ ..........................................................22 EquipmentNeeds............._.................----.-...........................................---.............................. -................... 23 WorkforceRequirements ....... .... ............. ...... ........................................................ ..................................... 26 VariableExpenses.. ...................................................................................................................... ____.....26 F.nvironmenlal Considerations.................................................................................................................27 CapitalInvestment........................................................................................................... 28 CapitalCosts................................................._..............................................................................................28 Surnmarvof Capital Investment...............................................................................................................29 FinancialAnalysis............................................................................................................ 31 OperatingRevenues ............. .............. ._......................... .............................................................. 31 RevenueSu mmary ......................................................................................................................................33 Operating.Expenses....................................................................................................................................33 OperatingExpenses Summary......... ............................... ......................................................................... 35 CashFlow Analysis....................................................................................................................................37 SensitivityAnalysis.......................................................................................................... 38 ProductResource........................................................................................................................................38 BuildingConstruction................................................................................................................................38 FinancingAlternatives...............................................................................................................................39 Summary of Quantifiable Risk Factors ........ ...-....... ....................................................-.----.--.--......---.--.....39 OtherKey Assumptions Risks.. ............... ....................... .......... ...................................................... Al Recommendations........................................................................................................... 43 Operations............................................._...................................................................................................... 43 Market......... ..................... ............................................................................................................................. 43 Financing............................................................................ --.--....................................................................43 PhasedApproach........................................................................................................................................44 Equipment............... ............... ......................... ................................................................................. ............ 44 Appendix A. Financing Options....................................................................................... i Grant Funding Sources........... .................. --- .... ........ ................................. ....................................... 1 LoanGuarantees......................................................................................................... 2 LoanAgencies...............................................................................................................................................3 CityAssistance . ............ ................... --- .................................................................................................... .... 3 Salmonas a Commodity ................... ........................... ...... ...............................3 Appendix B: Comparable Facilities .................................................................................. 5 BellinghamCold Storage..... - - . ...................................................................................................................5 CitylceCold Storage.....................................................................................................................................5 SeafreezeCold Storage .................................. ............................................................................................... 6 Sitka Marine Services Center.......................................................................................................................7 AlaskaSeafood international...................................................................................................................10 fh EXECUTIVE SUMMARY The Valdez Fisheries Development Association contracted with the McDowell Group, Inc., an Alaska research -based consulting firm, to study the feasibility of a cold storage and seafood processing facility in Valdez. The McDowell Group study team included Mr. Bob Waldrop, a seafood industry operations expert with RedPoint Associates. The concept of the proposed of the cold storage and processing facility is to allow regional processors to add value to their product. The Association believes that the ability to freeze product for future value-added processing gives the fishing industry flexibility in scheduling and delivery to .market and is intended to maximize profit and support year-round employment for industry participants. The study includes a market demand analysis and operational feasibility, including revenue sources, capital requirements, and operating expenses. Below are the key findings from this feasibility analysis. The Project Concept The overall concept for the cold/warm storage facility has several primary components: ■ Valdez Fisheries Development Association would 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 would not be done at this facility. Product wiII arrive in frozen headed and gutted form for cold storage. Processors may rent the cold storage equipment for further value-added processing. • The Association would equip and manage the cold storage facility. The facility will be primarily used to stockpile primary processed product for later re -processing in the adjacent value-added plant and to store finish products prior to shipment. The cold storage may also be used to grade, box, and consolidate products for efficient shipping to customers. • The Association would 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 their desired products. ■ Either the Association or a managing tenant would supervise and sub -let additional processing areas to smaller businesses needing to further process raw material. vaidez Cold Storage Facrrrty Feasibility Shady DRAFT McDowell Group, Inc. - Page I Basic Assumptions The study team, in cooperation with the Valdez Fisheries Development Association, established some basic assumptions that serve as a guide for this feasibility analysis. A summary of these assumptions includes: • The capital required for this project is 100 percent grant -funded. In the initial years of operation, grant funds may be used to support operations as well. ■ Product will arrive at the cold storage headed and gutted and .flash frozen. No primary processing will be done at the facility. • Fifty percent of existing canned product will shift to frozen form in the first year. This assumes that alternatives to canned product will be more profitable. ■ In Year 1, 10 percent of the most Iikely potential supply of product from Prince William Sound will utilize the facility, By Year 5, this share will grow to 50 percent. • The cold storage and processing line facility is dependent on supply from existing processors. • The processing line enables processors to add value to 60,000 pounds of headed and gutted product per day. • In Year 1, 40 percent of the product in the cold storage facility will move to the processing line for a value-added activity. By Year 5, this share will grow to 60 percent. ■ Building and site development cost estimates provided in the Valdez Fisheries Cold Storage Conceptual Engineering Report by Alaska Anvil, Inc. are assumed accurate. ■ The supply of waste heat from the Petro Star refinery operation will meet operational energy demand and is provided at no cost to the Association other than the cast of the infrastructure to deliver the waste heat. Potential Product Supply Based on an average of total commercial harvest from 1999 through 2003 (176 million pounds), then adjusting for processed yields and product form, and for percent of fish by hatchery, it is estimated that approximately 47 million. pounds of product •4.4 t"o could likely use the cold storage and processing facility located in Valdez. - e 6AwL-' Other potential supply may come from area processors, Cordova area seafood harvests, the Associations' enhancement program, and other frozen food product storage. Valdez Cold Storage Facility Feasibility Study DRAFT McDowell Group, Inc. - Page 2 Cold Storage and Processing Demand Assessment Currently, two major processors operate in the immediate vicinity of the proposed facility. The study team conducted interviews with both of these processors plus several smaller ones in Valdez and Cordova to determine the existing and potential future demand for cold storage space. Several processors with operations in Cordova indicated that they would not utilize a Valdez facility. Processors who expressed interest in the facility stated that their usage would depend on the cost of storage, the ability to reprocess seafood products on -site, and the logistics for shipping products to customers from Valdez. Processors indicated that high value species are likely to continue to be shipped by air as fresh products. However, salmon currently produced as canned product would have potential to be processed in. frozen form if higher values could be achieved. Respondents indicated an interest in the availability of the .following, types of processing activity: the ability to rebox, thaw, cut, glaze, and refreeze product. They indicated they would use these services only if they were econonucal and logistically available to their current operations. Financial Feasibility Capital Investment Capital investment for the full project over fine years is estimated at about $40 million, according to engineering estimates made for the Valdez Fisheries Development Association. Year 1 estimate is for $27.4 million in capital investment when much of the basic facility infrastructure is required. 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 should be based on processors' needs and could be sooner or later depending on project success. Revenue Projections I'otal revenues from cold/warm storage and processing activity in Year 3 are estimated at $606,800, assuming 10 percent of the total potential product utilizes the cold storage facility and that 40 percent of stored product moves to the processing line for value-added activity. In Year 5, total revenues from cold storage and processing activity rise to $3.7 million, assuming that 50 percent of the total potential product is in cold storage and that 60 percent of stored product moves to the processing line for value-added activity. Operating Expenses Projections Annual expenses range from $1.1 million in the first _year of operation to $1.9 million in Year 5. These estimates are based on existing conditions in Valdez for utility rates, Valdez Cold Storage Facility Feasibility Study DRAFT McDowell Group. Inc_ • Page 3 the Alaska Anvil conceptual engineering report for construction, and discussions with industry experts for insurance, repair and maintenance, and depreciation schedules. When depreciation is added, Year 1 expenses are $1.8 million and Year 5 rises to $2.9 million. Income Projections With 1.00 percent grant funding, a stable future resource, and the given assumptions Concerning product forms and willingness of processors to utilize this facility, the cold storage and processing line has negative cash flow in Year 1 of $521,500. By Year 5, the financial picture evolves to a positive $2,106,100. However, if the basic assumptions change there will be impacts on the total I projected cash flow in each of the years. Sa'r. oi ummary of Financial Feasibility Results Valdez Cold Storage Facility Concept Year I Year 2 Year 3 Year 4 Year 5 Capital Outlay $27.374,2501 $3.353,5001 $3,088,000 1 $3,046.500 1 $3.029,500 Revenues $ 606,800 $1,275,300 $2,012.200 $2,819,900 $3,701,000 Expenses $1,128,300 $1,113,500 $1.379,600 $1,487,300 $1.594.900 Annual Cash Row From Operations $ (521,500) 5 161.800 $ 632.600 $1,332,600 $2,106,100 Cumulative Cash Flow 5 (521,500) $ (359,700) $ 272,900 $1.605.500 $3.711.60fl Recommendations Considering a Phased Approach This analysis assumes that the entire project is constructed over a five-year time frame. This phased approach has both advantages and disadvantages. On the plus side, Valdez Fisheries Development Association has the opportunity to assess real demand for the facility prior to entering the next phase of construction. Processors can test the facility and evaluate whether it works for their operations. Processor interest in additional cold or warm storage spate should drive the next phase of construction. On the minus side, the capital required to build the facility cannot achieve a typical return on investment in the beginning years due to the small capacity of the cold storage plant. Economies of scale are achieved in later _years when the cold storage space is expanded. Processor interest should drive the construction phases. Five years may be too long or too short a period of time for the completed facility. The business plan, once developed, should not be static but subject to change based on the market conditions. Valdez Card Storage Facility Feasibility Study DRAFT McDowell Group, Inc. • Page 4