HomeMy WebLinkAboutAPA2500. (' .
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~~: ' < • ":~--~
· .·.,.~~Qhn~ N1.1veen & company
!} ~09. ~South Lasalle St.reet
Chic~go, Ill{nois
U • S •:A• 6060;f' r ••
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A.tl.ten±.ion: ~-.Jolin VincenJ~ ~·· .. '
...... :t• ,.,.. ' .~ -.: ":~ • •• ~-=. t· ' :;·;~:)\-. ... ~· :... .. De·ar:. Mr.!:?vit'lceirt: .......
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Re: s:u·~·j_ f~a· -lL~n1;~l Capital .Expe~til~~utes · Exclildi.ng ...
Ihterest .-During Ci='nsti.;uqtion":
~ ~·. ~ ..... ·~*-~~--.}:~_:3J.~·~Tn~ ..... 11....;;,.;. .. ___ ..._ _______ , .....
Enclosed i·~' :the infqrma·t:~qn, ·_you reqne-sted~i · . .. : ... ~:.r·~ -"~ .. :... -~~~~
lo : ··h:t:·; :; . •" ..
.. •• ,....,,. •••. ,.~ .. .t..:.··~ ... _,.,, Cfip::ji:t;.~+.~-· ·. ; <:·· ·
~ • * ; , .
Year
Expendii:;·\l:tes ~-, ;:.,
(Noniina;;l $~1illiOilS ):<·: · .
cr--ow; -~~-1"• "'l!.·~r .... • -· ._,.._ ...
Ca.p.i:t:.af Expendfture s * ;; .. :~
.O<eal: J.:9,82 $1\dillions).-~
1985
1986
1987
1988
1989
1990
1991
1992
1993
·.
~
4 0 3. 7 ..
4·7·· '?' 7 . ~.n,
479.7
~ 99. 5~ ..
9 38 e 3· ~;
1 5 50 4·.::: ... ; .... ~ t' ••. 'to
1 ., 4 7 . ,_, .. , ~· . ~ ~=-: .. ·
676o4
333 .. 1
...... ' .. ·
. 33J3!. 6
3'·413-<i. 6~
330 ~ 6 ..
321~ 8 .
564 .. 9'
812: 3·. 6·s~ ~·a·.·
332 .'4
153.,0
3,898.0
* Includes Heal C-3-pi i:al Cost F~s,;alt:Hti.ons.~
·.
ACRES AMERICAN INCORPORATED
~-"-___ , ____ .....,.._..,_,_,.. ---~ .. -~-~~----··-------.,-,.~
1-··--:·-·~·~,S .. I''-ND PIN 0 ··
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l\.laska Power Authority
~~ 334 West 5th Avenue
·~~~ S'uite 31
£ll1chorage, Alaska
!::~501
:~t
· ··· .. t;::~_ten tion: R. Benish
i~f.
:-n:. !.·!~
I 1ear Ray:
December 17, 1982
:~~/~!J;e attached ten-page assembly of text, tabulations and d~agram was telecopied on December 17th to:
....
.,.
~ First Boston Corporation,
New York, N.Y.
1;
~First SouthwestCompany,
nallas, Texas . .
John Nuveen Company,
Chicago, Illinois
Attention:
Steve McAleer
Attention:
Don Grimes
Attention:
Tony Dean ..
.. and to you in Anchorage. The follow-up copy delivered
~f express courier is to ensure that you have available
reanily readable tables for your further study.
;:·
eopies are being expressed to each of the above recipients
of the telecopied material and we have been in telephone
r'tnntact with them on December 17th. We would welcome
early input, if possible -earlier than Dec.embe·.c 24th.
With kind regards and best wishes for the Christmas
Season.
.~fGW: lb
n:ttach:
AC.RES AMERICAN IN.CORPORATEO
Con 5 u!tmg Engineers .
The Liberty Bank Buildmg, Main at Court
Buffalo. New York 14202
Telephone 716-853-7525
Yours sincerely,
J. • Warnock
Vi President
Corp rate Development
~~~ffi] Contact Report
GROUP
DIVISION
REGIONAL OFFICE 11:45 a.m.
CONTACT
TITLE
COMPANY
ADDRESS
Steve McAleer DATE OF CONTACT December 17th
CONTACT BY J. G. Warnock Public Finance Department
First Boston Corporation
New York
TELEPHONE ( 212} 9 09~ 2917
CHECK OFF
APPROPRIATE
INFORMATION
TYPE OF CONTACT
c:J Repeat
CJ New
r=J Lead Only
PROSPECTS
CJ Excellent
CJ Good
CJ Fair
c=J Poor
c=J Write Off
FOLLOW-UP
c=J Yes
c=J No
Date
Who
Wnere
Who To
See
DISTRIBUTION
80 File, ACS. Tor.
(1
PROJECT DISCUSSED D
PROJECT TITLE
LOCATION
DESCRIPTION
CAPITAL COST
SUMMARY OF DISCUSSION (Brief)
NO PROJECT DISCUSSED D
SCHEDULED TO BEGIN
McAller telephoned to advise that he had received the
telecopied memorandum and attachments. He was in the
process of reviewing these with Terry McGuire who was
present at the time of the phone call.
MeAlier had some general questions:
-Required confirmation that figures applied
only to Watana phase····~········· (Alternatives}
-Will require clarification of the implications
of the 3 phased approach
-Required clarification of energy pricing
philosophy .........•.... (The tracking of the
'•thermal cost alternative line" was explained
and apparently understood)
-Requires copy of the Task II Reference Report
(J. G. Warnock arranging)
-Were we providing for escalating costs of
operation and maintanence. In a recent case,
he had studied in Pacific N. W. a Public Utility
District with 20 year old plant -probably P~est
Cupids or Wanapun (Grant Casting PUD) were t' ~J."" . ~"""'--............... . forecast~ng very substantJ.ally h1gher costs of
maintaining the plant operable than had applied
when bonds were issued. (Advised that both
operating costs and capital replacements were
escalated and that approaches had been to ensure
that plant could be maintained in "pristine 11
condition throughout life)
-Questioned provisions necessary to make
appropriations of $200 million p.a. or $150 million
p.a. available. (Agreed that this was matter for
legal/political consideration in connection with
referendum procedure).
Form SA
-~,t~awtwnrrtrMii!iiilltf&·ttt'·t,_ t"• zrf, rm" .. ~-
[ ~~~m] Contact Report
CONTACT Steve McAller
TITLE Bublic Finance Department
COMPANY First Boston Corporation
Ai:>bRESS New York
CHECK OFF PROJECT DISCUSSED D
APPROPRIATE
INFORMATION
TYPE OF CONTACT
CJ Repeat
CJ New
c:J Lead Only
PROJECT TITLE
LOCATION
DESCRIPTION
CAPITAL COST
SUMMARY OF DISCUSSION (Brief)
page two
GROUP
DIVISION
REGIONAL OFFICE
DATE OF CONTACT Dec. 17/82
CONTACT BY J. G. Warnock
TELEPHONE (212) 909-2817
NO PROJECT DISCUSSED D
SCHEDULED TO BEGIN
PROSPECTS
CJ Excellent
r=J Good
I I Fair
-Questioned the make up of the $5 bn. and the $6.36 bn.
totals in Table of Borrowing (Advised that this was
gffiOunt to be funded by 11 GO" and Revenue Bonds).
c=J Poor
r=J Write Off
FOLLOW-UP
[=:J Yes
c=J No
Date
Who
Where
Who To
"• See
DISTRIBUTION
BD File, ACS. Tor.
-Has further questions line by line in financial
analyses and would wish to go through tabulation
with A. J. Merrett.
McAleer advised that telecopied material clear, but
would welcome hard copy by courier.
Form 9A
DRAFT
OFFICE MEMORANDUM
J. G. Wc?-rnock Date: December 17, 1982
File: P6724
J. R. Plummer cc:
SUSITNA HYDROELECTRIC PROJECT
Financial -Real Escalation Costs
This is in response to a request dated December 9, 1982,
from G. Warnock to J. Plummer for a report to review the Red
Escalation of hydro electric construction capital costs
expressed as deviations from the general inflation rate.
Data provided was as follows.
-Me~orandum April 20, 1981, Diener to Warnock
-Letter November 24, 1981, Battelle to AAI
Letter September 24, 1981, APA to AAI
The Ebasco/Battel1e escalation rates showed a deviation of
~0.1 percent to +2.0 percent from a general inflation rate
of 7 percent. These rates were considered as possibly being
too high. In addition it was questionable as to whether or
not potential future productivity benefits had been included.
The task assigned to Niagara Falls/Buffalo was as follows.
1 -Review available historical data and establish a base on
which to make reasonable predictions to early 1990's.
2 -Develop escalation indices appropriate for the hydro-
electric construction indices.
3 -With assistance from Economics and Planning, Toronto
detennine a likely future cost escalation scenerio
appropriate particularly to State of Alaska.
Sources of information checked were as follows.
-ENR
-Handy Whitman
-US Department of Labor
-·us Bureau of Reclamation
\ . t
1 -COMPARISON OF OVERALL HYDRO
CAPITAL COSTS REAL ESCALATION
~0 THE CONSUMER PRICE INDEX _,..;.., _,____..._
1.1 -Data and Assumtions
Dece~ber 17, 1982
Overall hydro construction cost escalation statistics were
developed from Handy Whitman and the USBR and plotted to
1982. The ENR statistics on the overall hydro costs
escalation are derived from USBR, s.o ENR was not employed.
From USBR the figures cover the 1971-1982 period and apply
to the western and pacific regions of the United States.
Handy Whitman's indices were chosen for the US pacific
region and cover the 1913-1982 period.
The US Consumer Price Index was assumed to identify with
the General Price Inflation and its projections, as the
term (as we~l as the figure) is used in the Susitna financial
analysis. The CPI was taken from the US Department of Labor
statistics and is the US average, available for ~e 1913-
·'·
1982 period. ..
SUSITNA CAPITAL COST BREAKDO~~
Types of Work
Dams and Reservoirs
Structures and
Improvements
Electromechanics
Transmission
Total
Watana
(x$1, 000,0 00)
1,813
78
100
391
Devil Canyon
(x$1,-000, 000)
378*
394*
68
91
Percent
of Total
66
14
5
15
100
(Contingencies, Contr.actor•s Overhead and Engine-ering/
Management excluded).
-*Half of the cost of dams (arch) is taken in structures.
J. G. Warnock - 3 December 17, 1982
Given the composition of the Susitna capital cost as shown ~elow~ it was tried initially to develop a hydro cost index
~n wh~ch component hydro work indices as given by Whitman
and USBR, were weighted in proport.ion to the actual Susitna
~ercentages. It was seen however, that the so developed
~nde~ almost identi£ies completely with the overall hydro • d • • • I rn iees given d~reetly in the above sour~es (indication of
Susitna's typical costs breakdown). Consequently the over-
all hydro indices were directly used.
A third way of developing a composite overall hydro construe-.:. ·-
tion capital costs escalation indices, given by USBR,
~·Jhitman and the USDL, in proportion to the resource mix, as
used by Susitna. It was felt however, that within the time
constraints of the present report preparation no appreciably
better (if not worse) accuracy could have been obtained, nor
in interpreting the past neither in projecting the future.
Consequently, review of the construction resources cost
escalation past data, is used qualitatively only in this
report.
1.2 -Results
The object of the exercise was to follow the development of
both the CPI and the overall Hydro construction capital
cost escalation index (HCI) through the yeaxs, detect any
deviations between them in both annual as well as cumulative
rate of change and identify any systematic trend which
would permit future projections. The results are summarized
as follows. (see Table of Comparison-Annex 1).
Period
1929 to 1932
1933 to 1939
1940 to 1947
1948 to 1967
1968 to 1972
1973 to 1976
1977 to 1982
Depression
Work War II
The Oil Crisis
A
(%)
-0.7
1.2
6.9
1.7
4.4
8.7
9.6
A Average yearly rate of inflation (CPI)
B
(%)
+1.2
+2.4
+0.5
+2,.3
+2.4
+3.1
-1.4
B Real Hydro costs escalation over the general inflation
(ave~age yearly).
"'f• --·· --~~--. .. ~-··----· ·-----:---·--···-----.,-.---·-· ..,, ... l
.. ··---·· .. ,;· ............. ~--. '' '
.
:.i
........ "'
.•.
•' ··-
J. G. Warnock-4 December 17, 1982
E:xru~i~ation of the curves shown in Annex 2 and Annex 3 shows
a SL~~lar pattern of deviation between the curves identified
as Number 1 and Number 2. Annex 4 is informa+;ion received
f~om the Economics Division of Ontario Hydro. This informa-
t~on furhter confirms the information presented in Annexes
numbered 1 to 3 inclusive.
(a) During periods of stability of the economy (small varia-
tion of the inflation rate in the vicinity of low
values), hydro costs have maintained and steady real
rate of increase at 2e3 to 2.4 points over and above
the inflation rate.
(b) During the depression and the Second World War,. hydro
cost 8 s real escalation was reduced.
(c) During the oil crisis, the real escalation rate of hydro
increased in apparent response to the dependence of the
·industry to fuel prices. ?he period following the oil
crisis whos a reversal of the rates trend, well into
negative values. If the allowance of the 1977 to 1980
period was made, as a make-up time for internal adjust-
ments in the economy, the overall 1973 to 1980 period
would average close enough to a hydro real escalation rate
of again around ~ percent positive.
~.o
(d) The downward trend of the rate from 1979 on, in combina-
tion with Point C above (on the "adjusting 11 nature of the
period) could justify a peaks-and-valleys forecast pattern
·value into the eighties, until the rate stability itself
(e)
(f)
at the value of +2.0 to+2.5 percent, all other things
consider~ed equal. Tl.~.is remark could justify Ebasco' s
figures variation pattern, if not their absolute value.
Subject to submission of the above points (a): tlmough (d)
to the expert~ opinion of economists, reservations should
be made as to the rates changes pattern if past experi-J.
ence is inte1:preted through different groupings of the
y.early rate. -· ~
Finally though not constituting an object ~f ~~:
report,'the general infla~ion rate assumed ~n not
financial analysis scenar~os (7 percent) does t
tie with the recent experience of an average r~.e
9. 4 percent from 1973 to today (see also Appe:x :;;;:,;
At->,u~ "'
... r-::::::-~' , .... • .
. ~ k iAS!WCW: 414 '
present
Susitna
seem to
of about
:g.) •
.. -
J•-
. .· .
!t''
i
.. .
-....... > .... .h·;~ ..
. . . ,
. ...
.. -
·'
· ... ,,;
.. . .
,,, ... . ·
. . ' ·. J. G. ~Iarnock s December 17, 1982
1.3 -Remarks
In the understanding that a Real Escalation rate on th·=-}..,1dro oanst .... u ~ · · --.. '"" ,u.;L· . · • C'Cl.On cap.~t~l costs reflects an: exte:tnal (or market) ~fluence, on the ~ndustry's product prices, past history in
e US show~ that the hydro industry operated on i~e.average
almost contl.nuousl~r in conditions at a "seller • s market 11 .. Wheth~r. Susitna will fo.~low the same pa~tern i.e. maintaining
a pos~t~ve real escala·t~on rate, would depend primarily on the
S~ate of Alaska's economic development plans for the next f~fty~years. ?t~erwi~e stated, if Alaska plans for high energy
demanas condl.t~ons ~n the future, they should expect.positive
real escalation (i~e. value increase) of the related energy
production capital costs.
In regard to future potential productivity improvements,
di£cussion amongst our senior estimators indicated that in
g~ner.al, past history in recent years lead to the belief
that productivity improvements are generally lost to changing
and more demanding labor. The US Department of Labor shows
a manufacturing productivity improvement of approximatelY.
2 percent per annum. When telephoned, the US Department of
Labor had calculated a corresponding decrease of 2 percent
for the construction industryQ This figure was not published
cue to a lack of confidence in the figure. The only o·ther
information discovered was an extract taken from the October
1982 Economic Outlook from Ontario Hydro shown as Annex 5.
This extract shows a productivity growth rate of 1.5 percent
to 2.0 percent. In conclusion it appears that a small pro-
ductivity improvement may be anticipated. However, we feel
that such improvement is either already included in Real
Escalation forecasts or is greatly outweighed by other factors
to be a matter of considerable consideration.
1.4 -Conclusions
The Real Escalation rate of the capital cost of the Susitna
Project is likely to follow an oscillating pattern through
1982 to 1990 with periods of three to five_years, and
amplitude at -3 percent to +3 percent until it stabilizes
itself around the value +2.0 percent. This value exceeds
by 1 percent those figures put forward by Ebasco Battelle.
It is noted .that Ebasco assumed the general inflation rate
to be 7 percent whereas the calculations of this memo
assume the general inflation rate to be the consumer price
index. We have made no attempt to assess the consumer price
index a
We c.:,.._ .:.,... rr~neral agreement with the Ebasco Real Escalation
rate curve slopes; ~ ... '"'··--·or. we feel that the actual Real
Escalation rates could be slign~~~ ~~~ho~ than th~ Ebasco
rates.
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60.04.03 Form 1486
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Et.~NOMIC FORECASTING SERIES.
1.0 COMPOSITE CONSTRUCTION INDEXES
-LABOUR AND MATERIAL COMPOSITIES
GENERATION PROJECT CONSTRUCTION
HYDRAULIC FOSSIL NUCLEAR(+l/2 FUEL)
TRANSMISSION
SYSTEMS
A.NNE'X. 4
..
Effective Date: October· 1982
Caucels Issue: October 1981
Information: 6845
-·
REGION
CONSTRUCTION
.-----------------------------------~--------------------·----------------+----------·--------------------------1~ ~-------~~----------------------~ (
INDEX %!1 INDEX %!1 INDEX %/:l INDEX %[). INDEX %[).
~0 YEAR I .ltJF . T'1orJ I I I I YEAR i
1981 100.0 ~ 100.0 100.0 100 .. 0 100.0
1982 109.7 9o 7-'r Z: '-1 109 0 8 ' 9.8 110.1 10.1 110.0 10.0 112s3 12.3
1983 121.4 10. 7·• 3 ·l 121.0 10.2 121 .. 4 10.3 120.1 9.2 1£~.0 8.6
1984 132o6 9. 2-to ·2 131.9 9.0 132.9 9e5 130.9 9.0 133.0 9.D
1985 146.5 10. s-o ·> 145.7 10.5 147.5 11.0 144.6 10.5 146.3 10s0
1986 161.1 10.0~ I •0 160.3 10.0 162.3 10.0 158.3 9.5 160.9 10.0
---------'·---------------'------------------1982·-1986 10.2+1 ·Z 9.9 10 .. 2 9.6 10.0
1987-·1991 10.0 * l• 0 10.0 10.0 9.5 9 .. 5
1992-1.996 9.5 9.0 9.0 9.0 9.0
1997-2001 8.5 8.5 8 .. 5 8.5 8.5
2002-2021 7.5 7.5 7.5 7.5 7.5
~----------------~--------------L------------~-----------------~w--··------~
data base Weighting as supplied by Generation Projects Division, Transmission Systems Division,
and and Distribution and Marketing Division have been applied to the appropriate indexes
composition containet...~ in these sheets.
·~ .. " ...
CAUTION: Important notes concerning the a'bove data follow these tables-•
. ' •• tl!!"' • •
~~981
1982
1983
1984
19H5
19H6
1982-1986
1987-1991
1992-1996
1997-2001
2002-2021
data base
and
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CANADA
REAL GROSS NATIONAL PRODUCT
ACTUAL AND FORECAST, BY YEAR, 1972-1986
1 ~~------------R_C_T~~L--------~"---·~F~~=E=CA~S~T--~
I
72 73 74 75 7S 77 78 79 80 81 82 83 84 85 8S
OCT 82 (LINE>
OCT 81 <DOT)
In this forecast it is presumed that major energy projects of such types as
Cold Lake., Alsands, and the Alaska Higtiway Natural Gas Pipeline will be
delayed at least until the beginning of the 1990's.
The long-run growth pattern is essentially derived from an assumed labour
productivity growth rate of about 1.5% to 2.0% and a iabour force growth rate
of 0.5% to 1.0%.
The ass• ... nnpt!,ons underlying a resurgence in labour productivity relative to
today r.·elate to:
-old capital stock being replace<;J with efficient equipment;
-technological advancements;
- a more mature and experienced work forGe; and
- a more efficient and leaner economy as a result of rationalizing inefficient
and unproductive businesses during the severe recessionary conditions of
the early 1980's.
So""'e~
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ACRES EUF
-A:RES TOR
ATTN: J. PLUMMER
I:UF'F'ALO OFFICE
.
cc: D. MC~AY ---D. O'ROURKE
RE:: P6724
--WE DISCUSSED POSSI SLE REVl EW CI-IURCHI LL FALLS PROJECT ESCALATION
--STUDY COMPLETED IN 196~ WHICH APPLIED COST/PRICE TRENDS TO --. -----INDIVIDUAL ELEMENTS OF THE PROJECT CONSTRUCTION COST ESTIMATE
----AND ASSESSED THE PRUDENT PROVISION FOR INFLATIONARY/ESCALATION -. --..... -, -EFFECT AS THAT AMOUNT COMPUTED BY APPLYING 4• 5 0/0 ANNUAl.
. ----.. ---COI'IPOUNDED RATE <ASSESSED ON A QUARTERLY EASIS> TO THE ES"i'IMATED
--... -PROJECT EXPENDITURES OVER SCHEDULE WHICH ORIGINALLY SPANNED 9 ----YEARS FROM SPRING 1967 TO 1976 BUT IN PRACTICE SPANNED SPRING -.
1967 TO END 1974•
--ESCALATION INDEX WAS ASSESSED BY PROJ'ECTI NG ANNUAL PERCENTAGE
INCREASES IN MATERIALS
BUILDING MATERIALS CWEIGHTHJG 22 0/0
-IN ESTINATE>
STEEL 14 0/0
-TUR.BXN:..S AND GENERATORS 12 0/0
--OTHER ELECTRICAL AND MECHANICAL -.. --CONTRACTORY EQUIPMENT 28 0/0
" ---PETROLEUr'l PRODUCTS 7 0/0
-WE ARE TELECOPYING SUMMARY TABLE WHICH WAS USED IN ARRIVING AT
.alNCLUSIONS:
.. ""' --1HE PROVISION FOR ESCALATION ARRIVED AT IN 1967/68 PROVED TO BE -.. ,. -- -... SUFFICIENT TO MEET ACTUAL COST INCREASE TRENDS DURING CONSTRUCTION.
u
---. -YOU l·:~y BE ABLE TO DETERMINE A0 PLICABLE CONSTRUCTION COST -~ -. ESCAL~TION RATE RELATE'.:> TO CPI fOR 1'HE 196'7-1974 PERIOD • ..,. ... ""' ....
. . -
J. Go WARNOCK
+
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teRES TOR ..
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~~.G..~ ~ROJECT EXPENDITURE PROGRAM .t\ND ESCALATION STUDY-APPENDIX B
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TABLE 13
CONSTRUCTION COST ESCALATION INDICES AND WEIGHTINGS
1967 1968 1969 1970
Weight Index Weight Index Weight Index Weight Index
Materials and Equipment ...... 65 3.0 75 3.0 66 2.7 68 2.5
Labour ... "' .................. 27 5.2 10 9.9 26 9.7 25 14.0
Management and Engineering .. 8 7.0 6 7.0 8 7.0 7 7.0
Weighted Average ............ 3.9 4.6 4.9 5.7
Weighted Average ............ 100 103.9 108.7 114.0 120.5
.5 per cent Index
Compounded Annually ...... 100 104.5 109.2 114.1 119.2
1971 1972 1973 1974
Weight Index Weight Index Weight Index Weight Index
Materials and Equipment ...... 73 2.5 82 2.8 85 2.8 83 2.8
Labour ...... ~ ............... 21 12.8 14 9.0 12 9.6 14 8.1
Management and Engineering .. 6 7.0 4 7.0 3 7.0 3 7.0
Weighted Average ............ 4.9 3.8 3.7 3.7
Weighted Average .. . . . . . . . . . . . 126.4 . 131.2 136.0 141 .. 0
4.5 per cent Index
Compounded An11ually ...... 124.6 130.2 136.1 142.2
,.
31
December 16, 19 82.
To: Mr. R. Blniah
Alaskan Power Authority
c.c. Mr. H. Noonan, Steve McAleer
Tony Dean, D. Grimes
Subject: ANNUAL CONTRIBUTION FUNDING (ACF) FOR
SUSITNA NITH GO AND PRIORITY REVENUE BONDS
Outline
fo~\0
This Susitna Financing Analysis considers the financial/
borrowing re~uirements and cost of power for the cases in which
the State appropriates in Case A $200M per annum starting in
1984 and increasing in line with inflation for the nine years
to 1993 and in Case B $150M per annum beginning in 1984 and
increasing with inflation until the year 199 3. In both cases
the balance of the required capital of expenditures are assumed
to be provided by GO Bonds, and 'Priority' Revenue bonds as
described below.
In both cases it is assumed that the cost of power-is restricted
to the cost of power that would arise each year under the best
thermal option as described in Acres Task 11 Reference Report.
This cost of power is 147mils/kwh in 199~ (first normal year of
Watana). (This translates at the assumed 7 percent continuing
rate of inflation to a cost of power of 63 mils in 1982 prices).
Insofar as this creates deficits for the project after meeting
interest and debt repayments the deficit is assumed to be met
by borrowing. The cost of power from Watana therefore "climbs
up the ceiling" set by the year by year cost of power from the
best thermal option (see attached diagram) until it reaches th
point at which it is meeting the 1.1 coverage requirement when
the outstanding debt is assumed to be funded into 35 year level
payment bonds like the rest of the bond financing. -Please also note that the results are only provisional and generally
conservative. We will fine tune the numbers for the final versions.
In particular we are reviewing the whole issue of the large real
escalation built into capital costs (see my letter of December 13).
Cost of Power
~e resulting Cost of Power under schemes A and B assuming a
10 percent rate of interest are given in nominal and 1982 dollars
in 'l'able 1 and shown graphically on the attachment. In Case A
the price stabilizes (i.e. 1.1 times cover is met\ at lBS mils
( 71 mils in 1982 dollars and in Case B at 226 mils ( 82 mils
in 1982 dollara). In both cases price stability (except for O.M.
escalation, etc.) ia in 1996.
ACRES AMERICAN INCORPORATED •••• /2
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The issue for consideration is whether these levels of cost
would be politically acceptable in the context of the .
February re~ision of the Task 11 Reference Report. Our
asses~men~ 1s that the 71 mils resulting from the $200M annual
contr1but1on certainly ought to be acceptable since it is still
be~o~ ~e production costs of additional power in the East coast.
ut1l1t1es even today and offers virtually level power costs ·
thereafter in nominal dollar and rapidly falling real costs.
Borrowing Requirements
The Borrowing Requirements of alternatives A and B are also
set out in Table 1 in nominal and real dollars. I suggest we
consider the borrowing in three phases.
It must be an objective of the debt financing plan to minimise
the burden on the credit of the State. The borrowing for the
first phase of construction (first phase borrowing) up to year
1987 immediately prior to commencing major work on the dam
itself would have to be on 'Go' Bonds having regard to the
possibility that the project could,wi~~out excessive economic
cost (see below),still be aborted up to that time.
The next stage of financing can be seen as the committrnent phase
taking the project through much of the dam construction. At
the end of this phase the ultimate completion of the project is
certain {barring natural calamities). It must be expected that
much or all of this phase will need to be financed by ~O'er
'moral obligation' indebtedness.
All or large part of the final phase financing should however
be possible by Revenue Bonds depending on the power contrt-.:ts
established by that date and level of financial security which
they offer.
A possibility would be to offer these oonds on the basis of
priority in revenues to the'GO'bonds. The security of the latter
is the State of Alaska and would therefore not in any material
manner be diminished by such priority being afforded the revenue
bonds. But it should substantially increase the Revenue Bond
component of overall financing. Even on the extremely pessimistic
assumption that demand or the price of power halves the projected
revenues, this would still provide debt service at 10 percent interest
for $ 2. 4 bn of Revenue bonds.
Hence with such priority and a State guarantee of completion
(which could be delayed until part way through the committment
phase) upwards of $2.4 bn ( 47 percent) at least of total borrowing
ahould be obtainable from Revenue Bonds. This priority status
would increase the risk to the GO Bonds but this aay still be
politically acceptable and preferable to loading the State's
indebtedness with more GO bonds on a double-barrelled guarantee
basis. •
ACRES AMERICAN INCORPORATED •... /3
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~e have requested th~ earliest possible res.ponse from Firs.t
?~Osten, Nuveen and F1.rst Southwest on their asses5ment on any
prob~ems w~ich may arise in planning bond issues of the
.agn~tude ~plied by alternatives A and B, and a view on
the proportion of the borrowing which might be met by
revenue bonds.
Phase Financing and Problems at Referendum
An issue which must. be considered in assessing the practicality
of any financing scheme is the extent to which, having regard
to the magnitudes involve~ it would gain political support
under the current referendum legislation. A basic problem is
that with construction extending to a decade ahead the total
sums involved expressed in nominal dollars may look unacceptably
high causing the project to-fail at referendum.
Two procedures which might minimise the problem are as follows:
First it is our understanding from thePower Authority's legal
advisors that it should be possible to state the $200M per annum
in "real" dollars rather than ever increasing nominal amounts.
A determination of the appropriate wording and possiblities
should be obtained if either of the above possibilities go forward
for final consideration.
The second possibility is that the Power Authority does not seek
total project financing in a single referendum but instead seeks
successive phases of financing at two or more referenda. This
could produce the First Phase referendum on the basis of the
$911 M State appropriation ($20M p.a. in real terms) and $466M
of borrowing (both in nominal dollars) required to take the project
up to the point at which the major and irreversible commitment
would be required in the year 1987. This procedure might have
much greater chances of success a referendum and the project might
automatically generate political momentum once commenced that
would carry it through the referendum required for Committment
Phase of financing."
Against this must be set the risk that this phase would fail at a
second state referendum and project work would then be suspended.
This might be an acceptable risk however particularly since t~is
outcome is always possible irrespective of any consent to tota-l
financing at any prior referendum if atate finances are inadequate
to ~et the sums appropriated or the borrowing aanctioned. Also
the work acheduling could be arranged auch that 110at of the
expenditure would be for works that were atill uaeful when work
resumed at a later date.
••GII•e•o•/4
ACRES AMERICAN INCORPORATED
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Subsequent Schemes Being Considered
In the following week, achemes variant on the above will be
run depending on comment f+om your banking advisors.
The above schemes will also be rerun to take account of our
presently underway revision of real escalation.
Other possibilities include 100% debt and deficit subsidy financing.
prgency
If the deadline of end year for agree~ent on viable options
is to be reached, any commentary rnust reach us by December
24th. Please telephone (416-595-2048) telex 06-217815 or
telecopy 2127. Alternatively during out of office hours call 416-598-0173.
A. J. Merrett
:
ACRES AMERICAN INCORPORATED
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BORROWING REQUIREMENTS
$ Million
Case A ($200M) Case B ($150M)
Nominal Real (1982) Nominal _Real (1982)
1985 78.2 61.7
1986 210.4 155.1 308.8 227.7
1987 255.7 176.3 334.6 230.6
1988 28j.9 182.8 375.1 241.6
1989 732.8 441.2 837.6 504.2
1990 1398.6 786.9 1518.7 854.5
1991 1214.0 638.4 1351.5 710.6
1992 742.3 364.8 899.2 441.9
1993 101.1 46.4 279.5 128.4
1994 78.1 33.5 186.4 80~0 Deficits on Operation
1995 71.5 28.7 190.6 76.5
TOTAL 50 88 0 4 2854.1 6360.2 355 7. 8
1993 1994 1995 1996 1997 mills
Cost of Power
Nomi.na1
Case A 111 14 7 153 188 189
Case B 111 147 153 220 226
Real
Case A 51 63 61 71 66
Case B 51 63 61 82 79
* Excludes working capital requirements and possible funding of
the two years of deficits.
ACRES AMERICAN INCORPORATED
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***~*****************************************************C*****************************************************************~··· DATA10L2 WATANA (ON LINE 1993)-SZOOM P.A. STATE FUNDS-INFLATION 7~-INTEREST 10%-CAPCOST S3.647 BN . 15-DEC-82 **********•****************************************************************************************************************••••
1995 1986 1987 1988 1989 ,lQ90 1991 1992 1993 1994
CASH F\ew ~MMMARY ===C$M Ll )==== 73 ENERGY GWH 0 0 0 0 0 0 0 0 3387 3387 521 REAL P~JCE-MILLS o.oo o.oo o.oo o.oo o.oo o~oo o.oo o.oo 50.85 62.99 466 INFLATION INDEX 126.72 135.59 145.08 155.24 166 .. 10 177.73 190.17 203.48 217.73 232.97 520 PRICE-f1lLlS o.oo o.oo o.oo o.oo o.oo o.oo o.oo o.oo 110.73 1~6.75 -----INCOME-----------------516 REVENUE o.o o.o o.o o.u o.o o.o o.o o.o 375.0 497.0 170 lESS OPERATING COSTS o.o o.o o.o o.o o.o o.o o.o o.o 26.9 2.9.3 -------------------~~--------------------------·---------------------------------Sl7 OPERATING INCOME o.o o.o o.o o.o o.o o.o o.o o.o 34-8.1 467.7 21~ aDo INTEREST EARNfD ON FUNDS o.o o.o o.o o.o o.o o.o o.o o.o o.o 5.6 550 hESS INTEREST ON SHORT TERM DEBT o. 0 o.o o.o o.u o.o o.o o.o o.o o.o 9.8 391 LESS lNTEREST 0~ LJNG TERM DEaT o. 0 o.o o.o o.o o.o o.o o.o o.o 483.8 493.9 -----------------~-------------- ---------------------------------------- --------
548 NET EAaNINGS FROH OPERS o.o o.o o.o o.o o.o o.o o .• ·o o •. o -135.7 -30.~ -----CASH SOURCE AND USE----
548 CASH INCOME FROM OPERS o.o o.o o.o o~o o.o o.o o.o o.o -135.7 .. 30.4 446 STATE CONTRJ3¥TION 403.7 262.3 245.0 262.3 260.5 300.). 321.2 343.6 367.7 o.o 143 lONG TERM DEB ORAWOOWNS o.o 210.4 255.7 283.9 732.8 1398.6 1214.0 742.3 101.1 o .. o 248 WORCAP DEBT DRAWDOWNS o.o o.o o.o o.o o.o o.o o .. o o.o 98.0 17.7 ---------------------------------------------------------~----------------------549 TOTAL SOURCES OF FUNDS 403.7 472 .. 7 500.7 546.£ 1013.3 1698.7 153'5..2 1085.9 431 • .1 -12.6 320 tESS CAPITAL EXPENDITURE 403.7 47 z. 7 500.7 546o2 1013.3 1698 .. 7 1c;35.z 1085.9 3 33. 1' 29.5 448 LESS WORCAP AND FUNDS o.o o.o o.o o.o o.o o •. o o.o o.o 98.0 17.7 260 lESS DEBT REPAYMENTS o.o o.o o.o u.c o.o o.o o.o o.o o.o 18.2 395 LESS PAYMENT TO STAT~ o.o o.o o .. o o.c o.o o.o o.o o.o o.o o.o ----------------------------------------~--------------- ------------------------141 CASH SURPLUStDEFICJT) o .. o o.o o.o o.o o.o o.o o.o o.o o.o -78.1 249 SHORT TERM DEBT o.o o.o o.o o.o o.o o.o o.o o.o o.o 78.1 · 444 CASH RECOVERED o.o o.o o.o o.o o.o o.o o.o o.o o.o o.o -----BALANCE SH~ET----------
225 RESFRVE AND CONT. FUND OuO u.o o.o o.o o.o o.o o.o o.o .56.5 61.6 371 3THER WORKING CAPITAL o.o o~o o.o o.c o.o CI.O o.o o.u 41.5 54.1 454 CASH SURPLUS RETAINED o.o o.o o.o o.o o.o o.o o.o o.o o.o o .. o 370 CUM. CAPITAL EXPENDITURe 403.7 876.4 137?.1 1923.3 2Q36.6 4635.3 6170.5 7l56.1t 7589.5 7619.0 ~======= ======== ======:= ==~===== ======== ======== ==~===== ======== ======== ~======= 465 CAPITAL EMPLOYED 403.7 876 .... 1377.1 1923.3 2 93 6. 6 4635.3 6170.5 7.Z56.1t 7687.5 7734-.7 ==:====~ ======~= ======== ======== ======== ======== ======== =~====== =====~;~ ======== 461 STATE CONTRIBUTION 403.7 666.0 911.0 1173.3 1453.6 1753.9 2075.1 2418.7 2786.4 278'6.4 462 RETAINED EARNINGS o.o o.o IJ.O o.o o.o o.o o.o o.o -135.7 -166.0 555 DEBT OUTSTANDING-SHORT 1ERM a.o o.o o.o o.o O.rJ o.o o.,_.o o.o 98.0 193.8 55~ DEBT OUTSTANDING-LONG T~RM o.o 210.4 466.,1 750.0 1482.8 2881.4 4095.4 4837.7 '•938. 8 4920.6 54Z ~NNUAL DEBT DRAWWDOWN Sl9d2 o .. o 155 .. 1 176.3 182..8 441.2 ~186.'9 638.4 364.8 46.4 o .. o 543 :uH. DEBT DRAWWDOWN Sl982 o.o 155.2 33 L.4 ?14.,3 955.5 1-f42.3 2380.7 2745.5 2791.9 z1q1.s 519 ~EBT SERVICE COVER o.uo o.oo c~oo o.ou o .. oo o.oo o.oo o.oo Q .. 72 0.91
~ ,_. --~---··~··-,-__,~~~~._ • •. ! /-~J~~~:,-?~~~-~~-lf:t~r~t'f~:~W1~~~~~1'~1RW:Tr:}~~mf~.·-.e~r JZ."' ~ · '~,: .~ ..... "~~:'..:{'t~~!t~'"1!i>~ .~ ..;~ · ~~;,·'~<,!;; . ,, :t· = "'!·". ~-:, ~: ... ~ .. ;;,.,:y; ~· .. ~.::~l. ~ft· ~ .~·.r:. ~~>+/ · = ·\ ... : ..,r;.r ~ .... =~ :;.~ · · : ~ .: · · :~ & • ·~ .::-'~., ~-~.-... .... _..... ... ~-·~:.4):
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·············~··************************¢*************************************************************~*~********************** DATA10L2 WATANA ION LINE 1993)-SlOOH P.A. STATE FUNDS-INFLATION 7t-INTEREST 10t-CAPCOST S3.647 BN .~5-D~C-82 *•················************************~*~********************************************************************** ····~····~·
73 ENERGY GWH
521 REAL P~ICE-MILLS
466 INFLATION. INDEX
520 PRICE-fULLS
-----I~COME-----------------
516 REVENUE
170 lESS OPERATING COSTS
'17 OPERATING INCOME
214 ADO INTEREST EA~NED ON FUNDS
550 LESS INTEREST ON SHORT TERM DEBT
391 lESS INTEREST ON LONG TERM DEBT
548 NET EARNINGS FROM OPERS
-----CASH SOURCE AND USE----
548 CASH ~~~OME FROM OPERS
446 STATE CONTRJB¥TION 1~3 LONG TER~ DES DRAWOOWNS
248 WORCAP D~BT DRAWDOWNS
549 TOTAL SOURCES OF FUNDS
320 LESS CAPITAL EXPE~DITURE
448 LESS WORCAP AND FUNDS
260 L~SS~ OEBT REPAYMeNTS 395 Lr ~ PAYMENT TO STAlE
1~1 CASH SURPLUSCDEFJCJT)
249 SHORT TERM DEBT lt-'t4 CAS'H RECOVERED
-----BALANCE SHEET----------.
2Z5 RESERVE A~~ CONT. FUND
371 OTHER WORkiNG CAPITAL
454 CASH SURPLUS RETAI~EO
370 CUM. CAPITAL EXPENDITURE
465 CAPITAL EMPLOYED
461 STATE CONTRIBUTION
462 RETAINED EARNINGS
555 DEBT OUTSTANDING-SHORT TERM
55~ DEBT OUTSTANDING-LONG TERH
Jti ~~~~AL B~ll B~~=~B8=~ ll~B~
519 DEBT SERVICE COVER
ACRES AMERICAN INCORPORATED
1995
3367
61.36
249.28
152.95
518.0
32.0
486.0
6.2
19.4
492.1
-19.3
-19.3 o.o
149.,6.
8.1
138.4
32.2
8.1
20.0 o.o
78.1
-78.1 o.o
67.2
56.6 o.o
7651.2 ----------------1115.0 ----------------
2786.4
-185.3
123.9
5050.1
28~~=~
0.92
1996
3387
70.63
266.73
188.40
638.0
35.0
603.1
6.7
12.4
505.0
92.4
92.4 o.o o.o
29.3
121.7
35.1
29.3
38.1 o.o
19.2 o.o o.o
73.,4
79.7
19.2
7686.3 ----------------7858 .. 6 ----------------2766 .. 4
-92.9
153.1
5012 .. 0
285Y:~
1.10
1997 1998 1999
CASH FlOW SUMHARY
===( SMILl!OfH====
3387 3387 3387
66.38 62.27 58.47
285.40 305.38 326.75
189•45 190.14 191.04
61t1.6
38 .. 1
603.5
., 8 3
13.4
501.2
9~,.2
96.2 o.o o.o
11.2
107.4
38.3
11.2
41.9 o.o
16.0 o.o o.o
80.1
84.2
35.2
7724.6 ======== 7924.1 ========= 2786.4
3.3
164.3
4970.1
285~:ij
lelO
644.0
41.6
602.3 8.o
12.9
't97e0
100.4
100.4 o.o o.o
12·2
112.7
41.8 t:z.z
46.1 o.o
12.5 o.o o.o
87.4
89.1
47.7
7766.4 -----------------7990.7
========
2786.1t
103.6
176.6
4924.0
285~=~
1.10
6~7.0
45.4
601 .. 6
8.7
12.9
492.4
105.0
105.0 o.o o.o
10.6
115.6
45.6
10.6
50.7 o.o
8.7 o.o o.o
95.4
91.7
56o4
7812.1 ======== 8055.6
========
2786.4
206.8
187.1
4873.2
2a5?;g
1.10
2DOO
3387
54.94
349,.62
192.09
650.6
49.6
60!.0
9.5
13.1
487.3
110.1
110.1 o.o o.o
lOe't
120.6
~9.8
10 .. 4
55.8 o.o
4.5 o.o o.o
104.1
93.4
60.9
7861.9 =======-= 8120.3 ----------------2786.4
318.9
197.6
4817.4
zasf:Q
1.10
2001
3387
51.68
374.10
193.35
654.8
54.1
600.7
10.4
13.7
4-81.7
115.7
115.7 o.o o.o
12.3
128e0
54.4
12.3
61.4 o.o
-0.1 o.o o.o
113.7
9682
60.8
7916.3 ----------------8186.9 ======== 2786.4
434 .. 6
209.9
4756.1
28sf:~
1.10
2002
3387
~8.69
400.29
194.89
660.0
59.1
601.0
lls't
14.9
475.6
l2le8
121.8 o.o o.o
13.1
135.0
59.3
13.1
6~.7 o.o
-z.z o.o o.o
124 .. 0
99.0
58.6
7975.6
::::::z:::::
8257o2
::::z:z:
2786.4
556.4
223.0
4691.3
zs5Y:~
1.10
2003
3381
43.56
428.31
186.56
631.8
64.5
567.4
12.4
16.4
469.1
94.2
94-.2
8.0 .o
14.1
l08Qi3
64.8
14.1
4~:8
-13.6 o.o o.o
135.4
01.8
~5.0
8040. 4J.
:.:aaa.:z:az
8322.5
::zz:::zzzz:
2·t86. 4
650.6
237.2
4648.4
28sY:~
1el0
TOTAL
372.57 o.oo o.oo o.oo
6557.9
4·1s. 1
6082.3
86.3
138.9
5379.1
650.6
6,0.6
2786.4
5088.4
237.2
8762.6
8040.4
237.2 440.0 o.o
45e0 o.o o.o
1~1:3
45.0
8040.4
azzaa:aza
8322.5
aazazasa
2786.4
650.6
237.2
4648.4
~~~~=~ o.oo
.....l
0 -" 0
(
R i
I
I !
f ~ ~ ,. :
f
'
l
""111!'1• ·~.,
I I
!
I
tl u
'-~~·-
1
'¥ TABLE 3 -pag'
•******~ ·******************•************************~**********•*********•******************************************$********* DATAJOL~ UATANA CON LINE 1993) t150H P.A. STATE FUNDS·IHFLAT!ON ?X-INTEREST 10%-CAPCOST t3.647 DN 15-DEC-82 **********************************************~****~···~~***~*******~*'**'************************************************~**t*
73 ENERGY GWH
521 REAL PRICE~HILLS
466 INFLATION INDEX
520 PRICE-HILLS
-----INCOHE-----------------
516 REVENUE
170 LESS OPERATING COSTS
517 OPERATINO INCO"E
214 ADD INTEREST EARNED ON FUNDS
550 LESS INTEREST ON SHORT TERH DEBT
391 LESS INTEREST ON LONG TERH DEBT
548 NET EARNINGS FROH OPERS
-----CASH SOURCE AND USE----
548 CASH lNCO"E FROH OPERS
446 STATE CONTRIIUT!ON
143 LONG TERH DEIT DRAWDOWNS
248 WORCAP DEIT DRAWDOWNS
549 TOTAL IOURCES OF FUNDS
320 LESS CAPITAL EXPENDITURE
448 L£88 WORCAP AND FUNDS
260 LESS D£1T REPAYHENTS
3f~ l~ll ~AYM!NY TO !TATE
141 CASH SURPLUS<DEFICIT>
249 SHORT TE~" DEBT
~44 CASH RECOVERED
-----BALANCE SHEET----------
225 RESERVE AND CONT. FUND
371 OTHER WORKING CAPITAL
454 CASH SURPLUS RETAINED
370 CUH, CAPITAL EXPENDITURE
465 CAPITAL EHPLOYED
461 STATE CONTRIBUTION
462 RETAINED EARNINGS
SS5 DEDT OUTSTANDING-SHORT TERH
554 DEBT OUTSTANDING-LONG TERH
.
542 ANNUAL DEBT DRAW~~OWN $1982
543 CUH. DEBT DRAW~iiOUN l 1982
S19 DEBT SERVICE COVER
ACRES AMERICAN INCORPORATED
19BS
0
o.oo
126.72
o.oo
o.o
o.o
1906
0 o.oo
135.59
o.oo
o.o
o.o
1907 1968 1989
CASU FLOW SUHHttRY
··.:($MILLION>·
0 0
o.oo o.oo
145.08 155.24
o.oo o.oo
o.o
o.o o.o
o.o
0
o.oo
166.10
o.oo
o.o
o.o
1990
0
o.oo
177.73
o.oo
o.o
o.o
1991
0
o.oo 190.17
o.oo
o.o
o.o
1"992
0
o.oo
203.48
o.oo
1993 .
3387
50.95
217.73
110.73
1994
JJ87
62.99
232.97
146. ns
o.o
o.o J7S.O
26.9 --------------------------------------------------------------------------------
497.0
29.3
o.o
o.o o.o
o.o
o.o
o.o o.o
o.o
o.o
o.o o.o
o.o
o~o
o.o o.o
o.o
o.o
o.o o.o
o.o
o.o
o.o o.o
o.o
o.o
o.o o.o
o.o
o.o
o.o o.o
o.o
348.1 o.o
o.o
570.4
467.7
5. 6•
9·8
:Sfi.J
o.o --------------------------------------------------------------------------------o.o o.o o.o
o.o
325.5
78.2
o.o
o.o
171.7
308.8
o.o
o.o
183.8
334.6 o.o
o.o
196.6
375.1
o.o
o.o
o.o
210.4
837.6
o.o
o.o
o.o
225.1
1518.7
o.o
o.o
o.o
2.,0.9
1351.5
o.o
o.o -222.3 -134.8
o.o
257.7
899.2
o.o
-222.3
27S.I
279.,
98,0
-134.1
O;O o.o
17.7
403.7 -------·---------------------------------------------------------------------~~~-480.5
<480.5
o.o
o.o
o.o
518.4 571.7
403.7
o.o
o.o
o.o
518 ...
o.o o.o
o.o
571.7
o.o
o.o
o.o
1048.0
1048.0
o.o
o.o
o.o
1743.8
1743.9
o.o
o.o
o.o
1592.4
1592.4
o.o o.o
o.o
1156.9 -117.1
lfL~ ..
17.ic7
22d.
1156.9
o.o
o.o
o.o
431.1
JJJ.I
98.0 o.o «1,. 0 o.o ------------------------------------------------ --------------------------------o.o
o.o
o.o
o.o
o.o
o.o
o.o
o.o
o.o
o.o
o.o
o.o
o.o o.o
o.o
403,7
403.7
o.o o.o
o.o
884.2
-~ == = ~
884.:?
-· = = !,.' ...:. ... = .. :: = --= --.. :..: ·~
3 .,.,. •.
-~·'"' o.o
o.o
78.2
61.7
61.7
o.oo
497.2
o.o
o.o
387.0
2:.!7.7
289.5
o.oo
o.o o.o
o.o
1402.6 ..
140:.!.6
.. ::::-. ":' -=-==
681.0
o.o
o.o
7::!1.6
230.6
520.1
o.oo
o.o o.o
o.o
1974.3
-~ ·. ;..; ~~ : ~ '"" ..
1974.3
==-~-:=:-:.-=
877.6
o.o
o.o
1096.7
2-11.6
761.7
o.oo
o.o
o.o
o.o
o.o o.o
o.o
30:.!2.3
--------~ ---". -·
302:!.3
o.o
o.o
o.o
o.o o.o
o.o
4766.1
::::--•.!::=::..;::.
4766.1
o.o
o.o
o.o
o.o o.o
o.o
aJ58.5 ______ ... __ .,.. ______ _
6358.5
o.o
o.o
o.o
o.o o.o
o.o
7515.4
o.o
o.o
o.o
56.5
41.:5
G.O
79'49. :5 --------------------------------
7515.4 7946.5
z. ' ~-:-.:· :. = :'"' ...:: '!,.: .:::-::::: .::::: = .:: = = = = = = ::! -:. .--= = = = = = = = = = =
1088.0
o.o
o.o
1934.3
504.:.!
1:!66.0
o.oo
1313.1
o.o
o.o
31\53.0
854.5
21:?0.4
o.oo
1S54.0
o.o
o.o
480'1,5
710.6
2831.1
o.oo
1811.7 2087.5
0.02 -22:!.3
o.o 90.0
5703.7 5983.2
441.9
3273.0
o.oo
128.4
3401.3
0.61
-18,.1
106 •.. ~
o.o
61.6
54,1 o.o
7877.9
======-==
7993.7
=======:;:
2087.5
-357.1
302ol
S961.1
o.o
3401.3
0.75 O<S
-~ 0
~ . \
~.-........
~
I I
i
I
I
··ul . I
l
. . ~ . . · -_ U 1.2 / D-·. . . / 1-' I I
7 TABLE 3 P page 2
******' *********************************ttttttttt*******t*v t******ttt****************************************** :****** DATA10L ~ATANA CON LINE 1993>-~150H P.A. STnTE FUNDS·INFLAT10h /%-INTEREST 10%-CnPCO~T 13.647 DN 15-bEC-82 *************************i************tl******~***********t******~*~****t************t*****************************************
73 ENERGY GWH
521 REAL PRICE-HILLS
466 INFLATION INDEX
520 PRICE-HILLS
-----INCOHE-----------------
516 REVENUE
170 LESS OPERATING COSTS
517 OPER~TINe INCOHE
214 ADD INTEREST EARNED ON FUNDS
550 LESS INTEREST ON SHORT TERH DEBT
391 LESS INTEREST ON LONG TERH DEFT
548 NET EARNINGS FROH OPERS
-----CASH SOURCE ~ND USE----
~48 CASH lNCOHE FROH OPERS
446 STAT£ CONTRIIUTION
143 LONG TERM DEBT DRAWDOWNS
248 WDRCAP DEBT DRAWDOWNS
S49 TOTAL SOURCES OF FUNDS
320 LESS CAPIT~l EXPENDITURE
448 LESS WORCAP AND FUNDS
260 tESS DEBT REPAYMENTS
39~ LES! rAYHENT TO STATE
141 CASH SURPLUS<DEFICIT>
249 SHORT TERH DEBT
444 CASH RECOVERED
-----BALANCE SHEET----------
225 RESERVE AND CONT. FUHD
371 OTHER WORKING CAPITAL
454 CASH SURrLUS RETAINED
370 CUH. CAPITAL EXPENDITURE
46~ CAPITAL EMPLOYED
461 STATE CONTRIBUTION
462 RETAINED EARNINGS
555 DEBT OUTSTANDING-SHORT TERM
554 DEBT OUTSlANDING-LONG TERM
542 ANNUAL DEBT DRAWWDO~N $1982
543 CUH. DEBT DRAWWDOWN ~1982.
519 DEDT SERVICE COVFR
ACRES AMERICAN INCORPORATED
1995
3387
61.36
249.28
152.95
518.0
32.0
1?9(,
3387
82.47
266,73
219.97
745.0
35.0
1997 1998 1999
CASH rLOW SUHHnRY
~<$MILLION)
3387 3387 3387
79.16 71.13 69.49
285.10 305.38 326.7~
225.92 226.38 227.05
765.1
38.1
766.7
11.6
769.0
45.4
2000
3387
65.18
3-19.62
227.87
771.7
49.6
2001
3387
61.19
374.10
228.90
7i'5. 2
54.1
2002
3397
57.51
400.29
230.22
779.7
59.1
2003
3397
54.12
428.31
231.81
785.1
64.5
rOTAL
37257 o.oo o.oo
o.oo
7547.6
475.7 --------------------------------------- ----------------------------------------
486.0
6.2
30.2
596.1
710.0
6.7
50.1
593.7
727·0
7.3
51.9
591.0
72.5.1
8.o
50.6
588.1
723.5
8.7
49.8
584.8
722.2
9.5
49.3
581.3
721.1
10.4
49.1
577.-4
720.6
11.4
49.5
573.1
720.6
12.4
50.6
56B,J
73.0
7071.9
86.3
441.0
6-4.22.5
-134.2 -------- -------- -------- --------------------------------------------------------
-134.2
o.o
o.o
8.1
-126 .t
32.2
8.1
24.3
o.o
73.0
o.o
o.o
29.3
102.3
35.1
29.3
26.7
o.o
91.4
91.4
o.o
o.o
11.2
102.6
38.3
11.2
29.4
o.o
94.4
9-1.4
o.o
o.o
12.:!
106.6
41.8
12.2
32.3
o.o
97.6
97.6
o.o
o.o
10.6
108.2
45.6
10.6
35.6
o.o
101.1 105.1 109.4
101.1 105.1 109.4
o.o o.o o.o
o.o o.o o.o
10.4 12.3 13.1
------------------------
111.6 117.~ 122.~
-19.8
10.-1
39.1
o.o
54.4
12.3
43.0
o.o
59,3
13.1
47.3
o.o
114.1 294.8
114.1 294.8
o.o 2087' •. 5
o~o 5983 • .2
1-4.1 2J7.2
------~---------
128.2 8602.7
64.9
14 .t
52.1
o.o
-190.6 .. 11.2
8299.3
237.2
351.8
o.o --------------------------·------------ -------- ---------------- ----------n-----
190.6 -11.2
o.o o.o
67.2
56.6
o.o
7910.1 -·----·-"~ .. .. ..... --
8034.0
. -: =:: = ===~ ":'
2087.5
-491.3
500.9
;.936.9
o.o
3401.3
0.74
73.4
79.7
o.o
7945.2.
~'" -.. . ... ----. ' ~ . -....
8098.4 --------' • -·· ~--- -->
20£P, ~
-4H3. 2
519.0
5910.1.
o.o
3101.3
1. 07
23 •. 7
-23.7
o.o
80.1
84.2
o.o
7983.5
:·.---...... ;..-: •·
8147.9 ----~ _,. .. _ --· ... _ ' ..
2087.5
-326.8
:J()f,.1
5880.8
o.o
3401.3
1 • 1 f)
~,)t:~;:~' ·"·;.-wc,i,;;,-.J;!":r~
20.2
-20.::!
o.o
87.4
89.1
o.o
B02:::i.4 --------.. -.. -.. --·
8201.9
!*". =-=·~~':": .... a.-, ..
::!087.5
-232.5
498.:::i
5818.4
o.o
3'101.3
1' 10
16.4
.. 1. 6. 4
o.o
9 ~ ... ,.} . .
91.7
o.o
8071.0
-.:: ": ~~== '::' "";
8258.1 --------... . -
2087.5
-13<1.0
1192.6
5R12.?
o.o
3401.3
1.:1.0
12.2
-12.2
o.o
104.1
93.4
o.o
8120.8
-"=-.!""7"-:"-:-~
831.8.4
2087.5
··33. 7
·190. 9
:::i:-'73.8
o.o
3401.3
1.10
7,,7
-7.7
o.o
113.7
96 • .2
o.o
8175.2
!":"! ·:::---=~-=
8385.1
==~=-.-.. ~::--:-
2087.5
7!.3
495.5
5730.8
o.o
3-101.3
1.10
2.7
-2.7
o.o
-2.7
2.7
OtO
124.0 . 135.4
99.0 101.8
o.o o.o
8234.5 9299.3
===!:::====
8457.6
==-======
2087.5
180.7
505.9
5683.4
o.o
3401.3
1.1 \)
======~=-
8536o5
::::-==:=::-==
2087.5
294.8
522.8
5631.4
o.o
3401.3
1.10
-2El5.6
285.6
o.o
135.4
101.8
o.o
9299.3
:-:=~=-::::.=~·-:·
8536.5
2087.5
291.8
52.2.8
5631.4
3401,3
3401.3
o.oo .J)
0
11 -0
I
"· .
0 ' \ I
(.) l I
J I
'" '1
!
I ' ' i
!
' I 1
'
l
1 U
!
.~ v
.,,
ATTACH~~NT TO MEMORANDUM TO R. BENISH -12/16/B2
-.I:
~ ~ -~ -..
B
'i:
C1.
"'0 c co ..
1;;
0
(J
> &:I) ...
G:l c w
380
360
340
320
300
ANNUAL CONTRIBUTION FUNDING
WITH 'GO' AND PRIORITY REVENUE BONDS
,,
~# ,' ,' ,,
,' ,,
280
,,
~--' ,, Mill Rate Cost
Best Thermal Option Price
260
240
.
220
200
, ---------,.-·' ,; T ;*'' COST SAVINGS GROWING OVER
#4/) WHOLE OF SUSITNA LIFE
._## $150 Million* p.a. contribution .,..-·-·-·-·-·~·-·· I • (plus $6.4 bn borrowing}**
I I $200 Million* p.a. contribution
180
II J (plus $5 bn borrowing}**
160
140
120
100
II
I
I --· •
94 95
Years
96 97 98 99 2000 01 02 03 '04 05 06 07 08
*Real Terms
** Nominal Dollars
09 10 11 12 13
Et~ERGY COST COMPARISON WITH ANNUAL STATE CONTRIBUTiON FUNDING
r.·
•
0
7-:.pril 7, 1982
Dale Nolan
For:J. G. Warnock
RECORD OF TELEPHONE CALL WITH DENIS ROHMq, SRI
APRIL 1, 1982 cc~ J. D. Lawrence
C. A. Debelius
A. J. Merrett
S. Diener
Contact made with Rohan to determine his reaction to Acres Feasibility
Study. He advised that he was just at that time formulating his opinion
to be given to the APA Board.
Rohan's basic concerns arise from high interest rates (never been
higher) and from the softening of full prices. He contends that major
capital outlay on hydroelectric power development can only be justified
if situation on these two vital factors is reversed. i.e. low interest
rates and rapidly rising fuel costs.
His view is that Acres has not squarely addressed these vital issues
and that we have reported on a situation which possibly could have been
postulated a year ago but not now. He feels we should be responsive to
current trends.
Rohan feel& that the multivariate probability analysis we carried out,
while being an advance on what we offered before, does not adequately
present the now likely combination of adverse fac·tors militating against
early construction of Susitna. Nor have we emphasised sufficiently the
lack o.f economic j ust,if ica tion in the short term i.e. ·to 2 010. (Rohan notes
that the Executive Summary, which the public will read does not stress
this point).
Taking all adverse points into consideration Rohan feels that APA
should not. proceed to sink substantial funds into Susitna. He would agree
with expenditures in the "hundred thousands'' for licence application etc.
but would question any greater amounts.
We may expect a cool and negative viewpoint from Rohan in his report
to the Board of APA.
(JGW advised T. McGuire of the conversation with D. Rohan in a later
telephone call on April 1, 1982)
" I
'-.:-f.)
fj
( .. l... , . --......... ' ...
[f~l7}cpl~ Record of Telephone Call Project No.
l~~f~ Date -B ~-\ 7-8-z_
S7cx::::;, o7, l t File
Project 5u>fTNA
Subject ~AA~Ntk I A t\J~ ~~~
I
Call (to) (from) fl~'f ~..CvN Telephone No.
(CDI',\pany) ~(_£; ~ UJr<O..~'vD ll l"w-~~ f'> and Discussion between \ AAl-2-~
(of Com any) (of Acres)
--
Details of Call ~ q, ""~~ N *"-} ~ ~ Action Required
\~~-uGrJ 't"~ '[~ l\ ~-r Ar.Jkt--
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FROM:
(
OFFICE MEMORANDUM
Memo to File
J. G. Warnock
ALASKA POWER AUTHORITY
SUSITNA HYDROELECTRIC PROJECT
Dare: March 8, 1982
File: P5 700.11
cc: A. J. Merrett
M. Walton
Attached are construction expenditure curves for Watana and
Devil Cany·on. They cover the periods 1981-1997 (16 years)
for Watana and 1992-2002 (10 years) for Devil Canyon.
The distribution of expenditures for the concentrated portion
of the expenditure programs Watana 1985 to 1993 and Devil
CanyorJ. 1994 to 2002 have been compared with the dit>tribution
used for the financial analysis of Susitna as follows,-
Watana Devil Canyon
% Annual Expenditure % Annual Expenditure
Assumed Actual* Assumed Actual*
~-.... -
1985 7.2 7.0 1994 ... 8 4 ., ·-..
86 9.2 9.5 95 8.4 5.5
87 8.7 9.5 96 8.1 8.0
88 8.4 12.0 97 5.9 14.5
89 14.6 13.0 98 18.3 20 .. 0
90 22.3 15.0 99 19 .. 2 19.0
91 16.5 14.5 2000 18.0 16.0
97 8.2 13 ~ . --0~ 12.5 12.0
93 3.7 6.0 02 3.8 1 .. 0
98.8 100.0 100.0 100 .. 0
*Derived from the Project Schedule and Construction Cost Estima·te
JGW:DN \' ~,\
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Mr. D. W. Grimes
Vice President
First Southwest Company·
Mercantile Bank :Building
DALLAS, Texas 75201
Dear Don:
February 19, 1982
I enclose the replacement copy of the Task 11 report. You will see
that I have amended the paragraph on 18-61 to correct the missing line.
Sorry about the omission.
We had a useful meeting with. you in Seattle and will now proceed with
all due speed to get the final draft document ready for mid-March.
Thank yc•l for your assistance.
With kind regards.
JGW:ic
Encl.
ACRES AMERICAN INCORPORATED
Consulting Engineers
The Liberty Bank Building, Main at Court
Buffalo, New York 14202
Telephone 716·853·7525
Yours sincerely,
J. Ga~~ Warnock
Vice Pn,~siden t
Corporate Development
PLEASE REPLY TO:
Telephone:
480 University Avenue
Toronto, Ontario
CANADA M5G 1V2
416-595-2000
~·-
..
Amended wording suggested by First Boston Corporation and
First Southwest Company on February 18, 1982
We are only able to render a conditional estimate of the
possible impact on the credit of the State of Alaska as a
result of the contemplated general obligation bond financing
of $1.8 billion for the Watana stage of the Susitna
Hydroelectric Project. Alaska's presently favorable ratings
are greatly influenced by its low debt to assessed value
ratio which helps to overcome the unusually high per capita
debt statistics. Given the dramatic growth of assessed
valuation and the fact that interest expense through start-
up of Watana is to be capitalized from bond proceeds, the
envisaged financing should not significantly impair the
credit of the State. Even if the State of Alaska•s general
obligation bond rating were reduced one full letter grade,
the cost in terms of interest rates on future bond issues
would likely be in the approximate range of 1/4% to 1/2% per
annum.
,.,
lWL -
~atana stage as a project fully capable of securinq tax-exempt low
1nterest revenue bond finance for its completion. -
(iv) Impact on State Credit Rating
of Susitna G.O. Bond Financing
Where the_ financing plan actually undertaken is near the minimum
($2 billion) State preappropriation, the G.O. bond financing at the ~atana stage may be of a magnitude that warrants consideration of
1ts effect upon the overall credit rating of the State of Alaska.
As at June 1980 the State of Alaska had approximately $744,000,000
of General Obligations outstanding. In late 1981 these were rated
AA by Moody's and AA-by Standard & Poors at which time approximate
interest rates for new issues at an AA rating were 8.25 percent for
1-year bonds, 11.25 percent for 10 years and 13 percent for 20 years.
The impact on the State's credit rating of Susitna G.O. bond
financing of $1.8 billion (in 1982 dollars) for the $2 billion State
preappropriation case will depend upon a wide range of factors. The
most important will obviously be the strength of the credit standing
of the State of Alaska, at that time 3 taking into account the total
amount of bonds which it has in issue. The second factor will be
the economic prospects for Susitna itself -that is the extent to
which it is perceived by the bond market as likely to be able to
meet the interest burden on the GaO. bonds issued to finance it 1 s
construction ..
The advice of First Boston Corporation, lead Management Underwriters
approved by APA, First Southw~st Corporation, the Financial Advisors
and Wohlfarth & Flint, Bond Counsel respectively to APA, has been
sought on the question of the possible influence of the Susitna
financing, at the Watana stage, on the credit of the State and they
ha~e concurred in the following statement.
We are only able to render a conditional estimate of the possible
impact on the credit of the State of Alaska as a result of a
contemplated general obligation bond financing of $1.8 bn (1982 $)
for the Watana stage of the Susitna Hydroelectric Project. Alaska's
presently favorable ratings are greatly influenced by its low debt
to assessed value ratio which helps to overcome the unusually high
per capita debt statistics. Given the dramatic growth of assessed
valuation in Alaska and the fact that interest expense through
start-up of Watana is to be capitalized from bond proceeds, the
envisaged financing should not significantly impair the credit of
the State. In a worse case scenario of a one point downgrading in
credit ratings, assuming some degree of normality in the bond
market, the cost in terms of higher interest rates on future bond
issues would be of the approximate order of one-quarter percent. If
the bonds issued in this time frame are of the customary magnitude
heretofore, the effect could only be relatively small in terms of
total additional burden particularly when consideration is given to
18-61 Corrected February 18, 1982
P5700.ll February 12, 1982 Telecopier #415-859-4100
Dr. Dennis Rohan
Stamford Research Institute
International
333 Ravenswood Avenue
~ffiNLO PARK, California 94250
U S A
Dear Dr. Rohan:
I hope by now you will have received or be receiving shortly from
APA our draft Section 18 of the Feasibility Report -Economic,
Marketing and Financial Evaluation which we hope to discuss with
Eric Yould, Terry McGuire and yourself on the 18th of February.
I should be most appreciative if you could find time at that
meeting to let us have your views specifically on Section 18.5
dealing with Financial Risk. The analysis given there is only a
"first cut". This is because some of the data (particularly the
distribution of the coal fired generation capital cost)was not
available at the time of writing, while bther data was ~vailable
only in the last few days.
It is our intention (subject to your views and those of the APA)
to expand the analysis to bring in (a) time for construction/
completion (allowing for possibly·delays arising from for instance
regulatory or environmental constraints, and for possible
acceleration of the rate of dam construction) and (b) the probability
distributions associated with the cost saving stream. The latter
poses formidable difficulties si~ce it consists of a series of
capital investments together with distributions of possible
escalation of the associated fuels. We intend to simulate these
primarily by Beta distributions.
No decision has yet been taken whether or not we should extend the
analysis to the Devil Canyon stage. Apart from the technical
difficulties there is the question whether or not financial/economic
forecasts of detailed events nearly two decades away have sufficent
credibility to make them \vorthwhile.
As present planned, therefore, our main intention now is to extend
the analysis and to broaden significantly the magnitude of the
simulation to enable a tightening up and better definition of the
statistical character of the results.
We look forward to having your views.
JGW:DN
Yours sincerely,
_J~
Warnock
President
·1 .... , .. ., .. , ..... ., .. ~---~,(--~----
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ACRES TOR
l
FE!RUARY 10• 1982
#
P5700.t1
--...&.~
ATTN a PHIL HOOVER
.
REa' SUSITNA
-------
...
AS P ISCUS!ED THIS MORNING WITH CHUCK W£ ARE J N THE P ROC£SS OF'
f --
HARDENING UP THE FINANCIAL ANALYSIS FOR IUSIT~A AND WISH TO ENSURE
... 1., .. .. • ~
THA?f OUR INTEJilPRETATIONS.:OF 0.-I~USULTS AX£ IN FACT PROIIERLY . . . ..
BASED 0+1 THE FINAL CUTCOME Of' TOUR JlllAftNING RUNS• :WE WOULD LIKE:
.
1) FUll PRINT-OUTS FROM FINAL eGP-5 1«UNS rOR SUSITtiA OPTION•
.
All THERfliiAL OPTION
• .
:CAN THESE PRINT-OUTS BE RUN ON TE~INAL IN TORONTO WHERE WE
~COULD COLL~CT OR DO THEY HAVE.TO BE DELIVERED VlA ~HILADELPHIA
I • • • <#
OR FROM COLUMBIA•
. . .
2> 'SUMMARY OF INPUT DATA INCLUDING BUT NOT LI~ITED TO.
-CAPiTAL COSTS W AND DC
-
·-D!STRIBUTION OF CAPITAL EXPENDITURES Wl11i TIME
... ., ....
METHOD Of COMPUTING I·D·C•
-METHOD or CDMPUTI NG ESCALATJ ON -G...t INk .... ~ ~e:.~
. . "
METHOD OF COMPUTATJ ON OF UIV£STMENT COSTS•
' i2.~ .... ~ ~ -...·'·d-~
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. .
3> CHECK MANUAL COMPUTATIONS Or INVESTMENT COST• FULL COST .
: ~ND 0 + M FOR EACH YEAR AND YEAR +1 AT WHICH AN ADDITION
.
• IS MADE TO THE SYSTEMS
~ > ANY FURTHER RELEVANT DATA
~
WILJ., CALL THIS AFTERNOON TO CHECK W! .. vi YOU AVAILABILITY Of THIS
-CONfiRMATION DATA
REGARDS
" ,. ~ J.o. WARNOCK
ACRES -TORONTO . ' . .
ACRES COLB
. .
OFFICE MEMORANDUM
Memo to File
J. G. Warnock
CHINESE COVER
Date:
File:
cc:
February 8, 1982
A. J. Merrett
rL Walton
The term chinese cover has b~en applied to the debt service
cover for revenue bond financing capital projects.
"Chinese cover" may take one of two forms.
(1) Borrowings are increased by an amount to provide for
any expected deficiences in debt service cover.
{2) The burden arising from application of the debt service
cover ratio each year is rebated to the purchase in the
following year.
It has been suggested by First Boston Corporation that
a "Chinese Cover" approach would satisfy any requirements
that arise for debt service cover on Susitna.
JGW:DN
~·
Record of Telephone call February 5, 1982
Don Grimes to J. G. Warnock
Re: Alaska Po\·.rer Authority
Don Grimes called F9bruary 5th expressing some concern over the range
of interest rate increases we had attributed to "one notch" of bond
rating. In present market conditions he woulu have expected possibly
up to 1/2% or possibly 3/8. He cE=rta.inly felt that 1/8% was too low.
Agreed, for the present, to use "approximately 1/4%.
Noted that debt/capita in Alaska is very high being about twice
·the level in the lower 4 8. ( 2 5 ~ 2% is Alaska level according to SEP
1979 statistics). Assessment/capita is also·very high and therefore
this offsets the high debt/capita.
Also changed words to cover "future State of Alaska bonds 11
•
Lat.er call from Don Grimes recommended that the wording should be
changed and his recommendation was accepted and introduced. to the
da:rft text.
,J. G. Warnock
Acres
JGW:DN
,,
Mr. E. P .. Yould
Alaska Power Authority
334·West 5th Avenue
SuitE;! 31
ANCHORAGE, Alaska 99501
U. S. A.
Dear Eric,
February 4, 1982
P5700.11
T-1486
We have now completed a draft of the text dealing with
Economic, Marketing and Financial Evaluation, Marketing
and Risk Analysis, In view of the volume of material,
these topics are being summari2ed in Section 18. of the
draft Feasibility Report. You will, however, be
interested in reviewing the unabridged text now enclosed
with this letter. This still bears the reference "Section
18." and the Tables and Figures are so numbered .. We shall
make the necessary changes in the Final Report.
Some outstanding issues not covered in this draft, require
further consideration and possible inclusion in the Final
document.
Firstly, regarding omissions from the report. You will
notice that we have not described the various schemes now
being considered to ensure that the financing plan would
go ahead with tax-exempt bond financing. These were se·t
out in our letter of January 11, 1982. The omission is
partly for reasons of space; but primarily following the
advice of tax counsel at our New York meeting, that it is
not advisable to compromise the chances of achieving
compliance through a special IRS ruling by making, in
advance, an explicit description in a publicly available
document.
Secondly, the analysis omits any reference to the
financial cost benefit or relative net present worth
computations. This is because we are awaiting final and
detailed reconciliation of the more comprehensive financial
analysis wi·th the data finally used in the economic analysis.
Present indications are that, in terms of benefit/cost
ratio, Susitna shows an advantage of about 1.5 over the
coal-fired thermal alternative.
• . . • 2
ACRES AMERICAN IN.CORPORATED Please reply to:
Consulting Engineers
The Liberty Bank Building, Main nt Court
Buffalo, New York 14202
Telephone 716-853-7525
I ·J -
... s:w C£4Aif
480 University Ave
TORONTO, Ontario
Canada MSG 1V2
I.
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~tt~ Ec P~ Yould-2 February 4, 1982
You will see that we have provided an initial probability
assessment in the section on Financial Risk -18.5o This
~nalysis is subject to some further revision, t.o take
account of the influence of schedule variances now
available from the basic risk analysis. We shall forward
further run~ t:o you as soon as they are available.
·~ou will also see that we have omitted any reference to
the financing options posed by the Governor's proposals
1ernbodi~d in Senate Bill 646. A very provisional assessment
has been made of these proposals and the outcome is shown
on the attached diagram.
The lower line of the diagram represents the price of energy
first from Watana and then from Devil Canyon based on the
assumption ~hat the whole of the capital cost of the project
is financed in accordance with Governor's proposals. You
will see that this gives rise to a mill rate of around 80
mills/KWh in 1994 which is about 55% of the cost of energy
from the best thermal option.. Thereafter it would only
escalate at around 6% per year (in line primarily with the
historic rate of inflation as required by the proposed bill.)
On this basis the government proposals appear attractive and
warrant further most careful consideration.
Incidentally the Senate Bill 646 proposals have the advantage
of overcoming some of the strange effects of the \vholesale
rate setting process as required by Bill 25. This is the
phenomenom of the mill rate in any of the larger appropriation
cases tending to be constant for nearly a decade and then
shooting up with the corning on-stream of a virtually 100%
debt financed Devil Canyon. There is the related anomaly
that, by continuing to capitalize in the first year of
operation, the cost would be virtually zero in t:he first
year of Watana and also of Devil Canyon so that the output
to all intents and purposes would have to be passed on to the
utilities free.
Finally, I would like to stress the importance of the
preappropriation approach used throughout our analysis. If
this approach is not used and appropriations are made only
as required for construction, the magnitudes of appropriation
and debt financing double automatically. Misreporting and
misunderstanding of capital requirement trends influenced,
as they will be, by continuing inflation, can then have
possibly serious and unjustifiable effects. Preappropriations
by the State obviates this risk and in addition (as noted in
the report), cushions the impact of higher interest rates
and inflation in the future.
• • • • 3
ACRES AMERICAN INCORPORATED
•·
,.,., nn
Mr. E. P. Yould-3 February 4, 1982
I discussed the distribution of our report with Terry
McGuire and, as agreed, have sent full copies of Section
18.1 through 18.5 to Tarleton Long at First Boston
Corporation and Don Grimes at First Southwes·t Company.
One particular paragraph in 18.4 requires their concurrence
and we telecopied this wording to them for their considera-
tion {copy attached).
Tony Merrett and I look forward to having your views on
these points and any other comments which you .may have
on the existing draft. In particular, we would appreciate
your advice on the extent, if at all, it would be appropriate
to consider in detail the proposals of Bill 646.
JGW:DN
Enclosure
ACR~ES. AMERICAN INCORPORATED
Yours sincerely,
February 4, 1982 Telecopier #(212)909-2200
Attn: Tarleton Long
First Boston Corp
New York, New York
Re: Alaska Power Authority
Susitna Hydroelectric Project
Financing Evaluation
We shall be.dispatching to you by courier on Feb. 5th a copy of our
recent Sect10n 18.4 dealing with Acres American Financial Evaluation
of Susitna Project. The base financing plan adopted therein has
various levels of State pre-appropriations provided through the
Power Development Fund followed by G.O. bond financing for the balance
of Watana Phase, with later conversion to Revenue Bonds for completion
also of Devil Canyon.. Our discussion on the impact on the State credit
rating of Susitna G.O. bond financing foresees a requirement for about
$1.8 billion (in $1982) for a State pre-appropriation of $2 billion and
recognizes that the impact will dependent on a number of factors. The
text of our report calls for your advice on the question of the possible
influence on the Susitna financing on the State G.O. bond credit
position and we are seeking concurrence with the following statement.
Quote •••. It is only possible to give a conditional estimate of the
possible effect on the bond financing envisaged for Watana stage on the
credit of the State of Alaska. On the assumption that its bond rating at
that time is unchanged from today's level and that normality prevails
on the bond market, as long as the bond requirements did not markedly
exceed the magnitudes envisaged for the $2.0 billion State pre-appro-
priation. This is because the existing level of bond indebtedne$S of
the State of Alaska is relatively low and certainly well below the
levels consistent with its present rating and its wealth relative to
population. At what we would regard as an outside extreme of one point
downgrading, the cost in terms of the higher interest rate which would
have to be paid on the State of Alaska's bonds might be expected to be*
of the order of one-eighth to one-quarter percent. If the bond issues
are of a magnitude assumed therefore, the effect could only be relatively
small in terms of total additional interest burden particularly when
account is taken of the short period {an average of five years) that the
G.O. bonds used to finance Watana would be in issue prior to being
refinanced by revenue bonds •••• Unquote.
We have the view of Wohlfarth & Flint that there are no legal problems
inherent in this paragraph. They have advised that we may also wish
to consult with Nuveen 5 Co. as financial advisor to the State
but this has not yet been initiated.
This advance telecopy is provided to draw particular attention to
the above text when you receive Section 18.4. Its reference is 18.4
C iv.
We understand that any plans for APA meetings in NYC next week have
been deferred.
Re.gards,
J. G. Warnock, Acres American Incorporated
Responded (on Friday February 5th) with a recommendation for rewording
of the par.agraph. Thus recommendation was accepted and the wording
proposed by :b,irst Southwest has been incorporated with minor editorial
changes only.
-
A 44
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Ala~ka Power Authority
Sus1tna Hydroelectric Project
Marketing ·and Financing Task 11
Meeting to discuss Financing Plans
Held at the offices of First Boston Corportion, 55 East 52nd Street,
NYC.
Present:
-Eric P. Yould
Terry McGuire
-John Raben
-Don Grimes
John Crew
-Robert Gibbons
Steven Gross
Morris
-Gavin ~varnock
-Tony Merrett
Purpose of Meeting:
Executive Director., Alaska Power Authority
Manager, Finance Alaska Power Authority
Vice President, Public Finance, First
Boston Corportion
Vice President, First Southwest Company
First Southwest Company
Debevoise & Plimpton, Counsel to First
Boston Corporation
Debevoise & Plimpton, Counsel to Fir~t
Boston Corporation
Debevoise & Plimpton, Tax Partner with firm
Vice President, Acres American Incorporated
Consultant to Acres American Incorporated
To receive, from Acres American, a presentation of progress to date
on the preparation of a plan for financing the Susitna Hydroelectric
Project. To hear from First Boston and their bond counsel observations
on plans under consideration.
Notes on Meeting:
J. G. Warnock introduced the topic by a review of the severQl modes
of financing considered by AAI over the past 12 months, (Attachment A).
Dr. A. J. Merrett has been directly involved in the development of
the financing concepts and would deal specifically in this presentation,
with that rnost recently considered; a combination of Sta·te equity,
general obligation bonds and tax exempt revenue bonds.
Dr. A. J. Merrett explained the reasoning which had influenced the
progression in the financing plans and led to the combined G.O./
Revenue bond approach to the Watana/Devil Canyon projects over the
period 1993-2004. 'J.lhe implications of this type of financing wi·th
two levels of State equity contribution ($1.5 billion and $2.5 billion)
were explained. Dr. Merrett's presentation is summarized on
Attachment B 1.
• • • • 2
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( P5700.11 ·~'"""'
~y--3:~ ~982
Ala~ka Power Authority
Sus~tna Hydroelectric Project
Marketing ·and Financing Task 11
~eting to discuss F~nancing Plans
Held at the offices of First Boston Corportion, 55 East 52nd Street,
NYC.
Present:
-Eric P. Yould
Terry McGuire
-John Raben
-Don Grimes
John Crew
-Robert Gibbons
Steven Gross
Norris
-Gavin Warnock
-Tony Merrett
Purpose of Meeting:
Executive Director, Alaska Power Authorit}J
Manager, Finance, Alaska Power Authority
Vice Presiqent, Public Finance, First
Boston Corportion
Vice President, First Southwest Company
First Southwest Company
Debevoise & Plimpton, Counsel to First
Boston Corporation
Debevoise & Plimpton, Counsel to First
Boston Corporation
Debevoise & Plimpton, Tax Partner with fi. 7m
Vice President, Acres American lncorporatt:d
Consultant to Acres American Incorporated
To receive, from Acres American, a presentation of progress to date
on the preparation of a plan for financing the Susitna Hydroelectric
Project. To hear from First Boston and their bond counsel observatior.s
on plans under consideration.
Notes on Meeting:
J. G. Warnock introduced the topic by a review of the several modes
of financing considered by AAI over the past 12 months, (Attachment A)
Dr. A. J. Merrett has been directly involved in the development of
the financing concepts and would deal specifically in this presentatior ,
with that most recently considered; a combination of State equity,
general obligation bonds and tax exempt revenue bonds.
Dr. Ae J. Merrett explained the reasoning which had influenced the
progression in the financing plans and led to the combined G.O./
Revenue bond approach to the Watana/Devil Canyon projects over the
period 1993-2004. The implications of this type of financing with
two levels of State equity contribution ($1.5 billion and $2.5 billion)
were explained. Dr. Merrett's presentation is summarized on
Attachment B 1.
•••• 2
:.(--·~ ~-··-... =--·~··· .... ··-·-···--· .............. 0 ····--···-······ ··-... ..
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,.., IJMI>W£•>•
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· e' r-a,. 1!' z rt r= \ .... __ ,..._~. ...
i
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- 2 -
Ala~ka Power Authority
Sus1tna Hydroelectric Project
(continued) ·
Discussion of the financing plans covered the following points.
-In regard to GoO. bond financing concern was expressed in
regard to reaction within State of Alaska which might take
the form of questioning why the project could not proceed
with revenue bond flnance. Recent events on the.WPSS nuclear
plant project would possibly be related to difficulties
perceived. for Susitna. WPSS problems should not be under-
estiroa ted as they are likely to call to question a nun) er of
issues on which projects had been confidently funded in the
past. Contractual aspects of WPSS financing arrangements
would not be tested in the courts.
-It was recognized that with G.O. bond financing Susitna
would not require take-or-pay contracts. The matter of
impact on State credit had to be considered. While no
immediate impact was to be expected following release of
any plan to fund Susitna with G.O. bond issues there was a
real possibility of downgrading the credit standing of the
State. The degree of this would depend on several matters
including the borrowing status and the economoy of the State
at the time.
-It \<Vas noted that at the i:ime Susi tna comes on-stream the
system will have 250 .r.r-w of plant and transmission facilities
with "asset value" of $1 billion in place. The whol,.=sale
energy charges applicable to Susitna would be a blend of
charges applicable to all projects supported by the
Power Development Fund.
-The tax exempt status of the Project was discussed at length.
The legal/tax advisers stated that the determinatioL as to
whether \:he bonds are taxable Industrial Development Bonds
(IDB) was generally made under tests concerning:-
.use of the proceeds of the bonds
.use of the facility financed with the bonds
Output constraint rules applied regarding the business interest
receiving the benefit. Special output contract rules apply in
relation to "benefits" and "burdens" and application of formula
decides the outcome. 1~. current problem as ~ret untested with IRS.
is that no rlear indication ezists as to whether the business
and st~curi t ,~ tests are the excl.t.,sive conditions which have to be
rttet or whether other condi t~ons nl:Lght then be applied.. (A filing
request is being prepared for submission in February 1982 to
clarify this , b.su,-:; but no deter.mination is expected for about
6 months .. )
• • • • 3
'(;
Alaska Power Authority
Susitna Hydroelectric Project
(continued)
- 3 -
-Variops approaches are worth considering in efforts to ensure
compliance with IRS rules~ Considerable work has been done
in connection with a South Carolina Public Serv~ce case where
contracts are envisaged with no take-or-pay obl~gation but with
a demand charge. Such charges alone may be expe~ted to meet
rules as possibly would contracts that were written for no
specific amount of energy supply or for no specific time period.
It is clear that contracts written with no-tax-eYempt parties
with rates set to meet revenue requirements would be unlikely
to comply. Arguments have been presented in the past to
suggest that in an electrical system it is not possible to
discern where output of any particular plant is being delivered
or sold, and such considerations make application of IRS rules
difficult. It was noted that a difficulty exists in resolving
contention points as the IRS staff responsible for the present
rules is no longer available to provide expert opinion or
judgement.
-Questions posed during the discussion on Susitna project
compliance with IRS covered the following:-
o Relationship between the fuel output capability
(nameplate) and the contracted quantities of energy.
o The term of take-or-pay contracts in relationship to
the life of the project.
o Acknowledgement that no single non-tax-exempt person
can take more than 25% of output and cover more than
25% of debt service.
o Interpretation of term "two or more related" persons
poses the question as whether co-ops are "related".
-Discussion of revenue bond and alternative means of financing
raised the follov.·dng points:-
o Bond holders are, to an increasing extent, more
concerned with what risks are incurred prior to project
reaching operational stage; experience has shown that
post start-up projects incur fewer difficulties.
o State guarantee for bond issues could probably be
provided but this would require a constitutional
amendment.
o There could be value in double barrelled bonds bearing
the obligation of both APA and the State of Alaskac
o Like.L.J.hood that State funds would only be provided on
an "as-required-for-construction" basis. They will
probably require, furthermore, an annual appropriation .
• • • • 4
~l' --~-·· ..... :::.
¥. nt:: o;uc; lei:Nhllot
- 4 -
Alaska Power Authority
Susitna Hydroelectric Project
(continued)
o Leverage leasing, particularly for coal fired thermal
plants, is no~ considered a possible mode of financing.
Some types of plant could be owned a.nd operated by
taxable entity. Raising of finance could be supported
by selling the tax benefits from depreciation and
investment tax credit. These benefits are available if
the facility is not 11 Used" by an exempt person. ("use"
is defined as "ownership" or "leasing" and "take-or-pay"
contracts generally not regarded as "lease" but basis of
undertakings requires careful consideration) . Investment
tax credit and depreciation are worth about 25% of cash
outlays and the balance would have to be raised by
conventional financing.
o Joint action possibilities could be considered with co-
ops becoming part owner e.g. A co-op could take a 75%
undivided interest and buy 25% of the residual APA
portion of output (i.e. about 40% in all). From an
alternative point of view, if user wanted 35% of output
he could buy 35% undivided interest, from the prime owner:~
his debt requirements. ITC and and depreciation would
still enjoy tax shelter benefits. In APA's opinion
joint action unlikely to be an acceptable route from the
State's point of view.
~rn consideration of the overall financing market climate the
following points were made.
o In the past the principal buyers of municipal bonds have
been:-
-casualty companies -who may be back into the
market
and -banks -who are unlikely to be significant
purchasers in future
The change in the percept.ions of tax payers towards tax
exempt bond investment has arisen from current trends in
taxation policy. There is a very high level of forward
supply and dealer inventories remain high. It was noted
that the differential interest rates between tax
exempt/non-tax·-exempt was now 91% (as opposed to 6 5%
in the past) •
-Risks remain that the long term credit tnarket may not recover
its "faith" in major projects. No significant recovery is fore-
seen for 12-15 months and the true equilibrium may not be fully
restored for say 5-6 yearsG
..... 5
,,
- 6 -
Alaska Power Authority
Susitna Hydroelectric Project
{continued)
-Agreed that Acres American would prepare an outline of 3 or 4
options for Susitna financing and provide these to APA. Acres
would also compile a summary of "Project Facts" for the guidance
of the Financial Advisors.
Meeting adjourned at 12:30 p.m.
JGW:DN
i
..
THE FIRST BosToN CoRPORATION
i
ALASKA POWER AUTIIORITY
January 8 2 1982
Alaska Power Authority
Acres American Inc.
First Southwest Company
Debevoise & Plimpton
First Boston
Name
Eric Yould
Terry McGuire
J. G. Warnock
A. J. Merrett
John Crew
Don Grimes
Steven Gross
Robert Gibbons
John Raben
Attendees at meeting,offfices of First
Boston Corporation -January 8, 1982
0
OFFICE MEMORANDUM
J.W. Hay.rlen
· M.A. Hosko/P.M. Hoover
Susitna Hydroelectric Project
Subtask 6.37 Results Summary
February 3, 1982
File: P5700. 14.06 .
cc: G. Warnock ·.J
J .. Lawrence
C. Debel ius
. .. , -·-· -_ _, __
Attached is a listing of OGP-5 runs made for subtask 6.37 which will
· be· documentea-··;n ·Section 18 of the ·feasibility report and appendices:
Unless otherwise noted, all plans were run under the "base _case 11
parameters-: ··-· ------·--·---·------·-
-Medi urn Load Forecast (Dec. , 1981 )
-Economic Parameters (0% escalation, 3% interest) . ·
-p&M.and capital cost escalation at about ·2% per year Jl992 on)~~~
·-.::--~ -·---_ _::_ -~-ap~ ~-l~~~~ts _.per ~~-~~~l}~.. --1982-= ---· -""2001.:..-----~~ .~ '\ ~<; "-
-Fuel Costs and Escalation: 2000 2010
-Coal (Nenana) $1.75 (1982) 2. 3% -. 1. f%
-Coal {Beluga)· $1.43 (1982) 2.6% · 1.2%
-Coal (Healy) $1.46 {1982) 2.6% · .. 1.2%
-Natural Gas . $2.80 (1990) Variable · ·· ... ·2.0%
-Oil $6.50 (1-982) 2.0% --·. --··2.0%
The multivariate (probability tree) analysis also provided ·a· few runs
for this 1 i st as noted.
MAH:PMi/pml P.M. Hoover
En c 1 os tn·es
i'
l\
t
1982 6
$ X 10
LONG TERM
KUN PLAN OGP-510 COMMENTS PW
Ll Fuel escalation = 0% See Vl Alternatives
L2 u and V2 Susitna "C"
Ml Interest Rate = 7% Not Run Alternatives
M2 II Not Run Susitna 11 C"
Nl Reliability Not Run To be r·un with
Sensitivity Battelle's %Reserve -
N2 II II II
01 O&M, CAP escalation = 0% .L4Z5 Alternatives 7157
02 II L4Z7 Susitna 5585
Pl Interest Rate = 5% L9J7 Alternatives 4946
P2 II L9J5 Susitna 5449
Ql Interest Rate = 2% LD23 Alternatives 11167
Q2 II LD27 Susitna 8550
R1 Q&M, CAP escalation = 4% LD31 Alternatives 9811
R2 II LD33 Susitna 9029
)1 Interest Rate = 4% L431 Alternatives 6235
52 II L439 Susitna 6126
I
Tl High Coal Co?t {$2.08) L3S3 Alternatives {Opt) 9721
T2 II L7Z5 Susitna 8297
T3 II L7Z9 Alternatives (A) 9030
Ul Susitna less contingency LOX3 0% contingency (533) 6151
U2 Susitna plus double contingency L4L9 40% contingency (531) 7974
Vl Zero Fuel Escalation LI23 Alternatives (T15) 5660
V2 II L3Y3 Susitna {535) 6838
Wl High Fuel Escalation LI15 Alternatives (Tl3) 10367
W2 II L4M1 Susitna (529) 7388
• • • : / # '~ • . • ~-s; s ~ • . • t <::)·
.,.. • ___,_, .... F" '
• "' ,g
~~
I
I I l
J
I
1
'
Lj
1 .
11 ~ ' • .. ~
.J!F. .. "
$ X 10 6 •
LONG TERM
P.W
RUN PLAN 'OGP-510 COMMENTS _1_982($}
A ALTER;~ATIVES L9J9 dated 1/20/82 8238
B ALTERNATIVES L9El with 330MW Chakachamna in 1993 7899
c Susitna Watana/DC L9K3 Watana 680 MW 1/93 ~a ~ 1/2002 7062
0 Susitna DC/Watana LG15 Devil Canyon 600 1/93 Watana 680 1/2002 7221
,E Chakachamna/OC LG17 Chakachamna 1993 330MW Devil Canyon l/97 8069
Fl Financial 7% 10% LDT3 Alternatives same as A Pre 1 imina ry
F2 Financial 7% 10% LAP7 Susitna same as C Preliminary
F3 Financial 7% 10% L9E3 Alternatives optimized Pre 1 imina ry
•
Gl Alternative's
Cap. cost +20% L3Nl Alternatives + 20% 8858 fl . G2 Susitna "C 11 L9K3 } "~!I with manual adjustment of three gas turbine costs + 20% 7076 r~ r :
Hl Alternative's fi\"'~i·>-; '~.
Cap. cost -10% L303 Alternatives -10% 7915
H2 ~~sitna "C 11 L9K3
with manual adjustment of three gas turbine r.osts -10% 7056
12 Susitna ucn L9K3 + 25% LDL3 Susitna cost + 25%
J1 High Load Forecast L4W1 Alternatives 10859
.1? High Load Forecast LCI5 Susitna: Watana 1993 Devil Canyon 1997 9247 ...,_
K1 Low Load Forecast L195 Alternatives 6878
K2 Low Load Forecast L9K7 Susitna: Watana 1995 Devil Canyon 2004 6650
-~·w ·--w-~ •"·-" ·,;:i~'hl>Jii:tPJ,~V.~~;'#!W!i•'I~'I!Pl.f!Sir~.:,J;J!i~,~~1~~(~¥:.>:(~~*~',;9~~~~~~11~:~~.,.~~~~~~Jf~.'~;~..::~,.-1¥~~F'---
. .
OFFICE MEMORANDUM
Memo to File D~re: February 1, 1982
File: P5700.07.11
FROM: J. G. Warnock cc: A. J. Merrett
M. Walton
SUBJECT: SUSITNA C. A. Debelius
FINANCIAL RISK ANALYSIS
Capital cost -probability distribution. This memo records
data input used for the above analysis~ On Wednesday,
27th Januarythe risk analysis being carried out in Columbia
had reached the following conclusion regarding probability
distribution.
Level of Capital Cost
Base Direct Cost + 40%
(i.e. 2xcontingency)
Base Direct Cost + 20%
(i.e. Contribution Capital
cost)
Base Direct Cost
(no contingency)
$ billion*
5.96
5.11
4.25
Probability of
Non-exceedance
90%
72%
55%
The "outside" limit (at 99.8% probability of non-exceedance)
was predicted to be $7.5 billion.
On Friday 29th January the capital cost for Watana and Devil
Canyon was established at $5.1 billion.
JGW:DN
For: J. G. Warnock
*These costs quoted for reference only. The risk analysis
was carried out on Watana alone at a capital cost of
$3.6 approximately.
OFFICE MEMORANDUM
Memo to File
J. G. Warnock
SUSITNA
FINANCIAL ANALYSIS
ENERGY OUTPUT
Date:
File:
cc:
February 1, 1982
U»5700. 07.11
A .. J. Merrett
M. Walton
C.Aa Debe1ius/P. Hoover
J. W. Hayden
This memo records data used for the above analysis.
1993-2003. Watana alone
2002
03
04
05
06
07
08
09
2010
Energy Deliveries
GWh
3387
5223
5414
5605
6092
6147
6250
6472
6544
6616
Energy*
Dumped/Carried Over
498/291
411/0
363/258
270/73
178/106
64/64
33/33
30/30
Figure 18.4.4 shows the above energy deliveries plotted against
(1) Demand -mid range Battelle forecast as of December 21/81
and (2) the energy values used in the OGP-5 runs.
JGW:DN
-Dale Nolan
For: J. G. Warnock
*Carry over included in following year deliveries
...
·r~~·-:::::= .. ····----· -
. ...
OFFICE MEMORANDUM
l·1emo to File Date:
File:
February 1, 1982
t:PS 7 0 0 • 0 7 • 11
FROM: J. G. Warnock cc:
A. J. Merrett
t-1. Walton
SUBJECT: SUSITNA
FINANCIAL ANALYSIS
ENERGY OUTPUT
C.A. Debelius/P. Hoover
J .. W. Hayden
This memo records data used for the above analysis.
1993-2001 Watana alone
2002
03
04
05
06
07
08
09
2010
Energy Deliveries
GWh
3387
5223
5414
5605
6092
6147
6250
6472
6544
6616
Energy*
Dumped/Carried Over
498/291
411/0
363/258
270/73
178/106
64/64
33/33
30/30
Figure 18.4.4 shows the above energy deliveries plotted against
(1} Demand -mid range Battelle forecast as of Decf~mber 21/81
and (2} the energy values used in the OGP-5 runs ..
JGW:DN
-Dale Nolan
For: J. G. Warnock
*Carry over included in following year deliveries
+
ACRES COLI:!
ACRES TOR .
JAN 18/82 P5700.11
ATTN: PHIL HOOVER
RE: COST BENEFIT -A FEw THOUGHTS PRIOR TO CHUCK'S TRIP TO
BUFFALO TOMORROW.
1· WE ASSUME YOU WILL NEED THE FOLLOWING RUNS IN ANY CAS~ FOR
YOU~ SENSITIVITY ANALYSIS•
CAP· COST SUSITNA L M H
CAP· COST COAL L H
COAL E 15C:ALATI ON 0 2 C APP ROX) 3 C APP kCIX >
I NTERE 1H RATE 2 3 4
TOTAL 81
2• IT ~AY WELL RE THAT THE COST ~ENEFIT RATI0 IS NOT SENSITIVE
TO LOAD FOR~CASTS• AT MC.ST IT MIGHT PE SLIGHTLY S~NSIT!Vl
TO THE LOW LOAD· HENCE AT WORST NEED TO RG~ ~EDI~~ ANQ
LOW MAl< I NG TOTAL RUNS 162 ALTHOUGI-i YOL' MAY ALREAIW HAV~
SAY 10 LEAVING 152·
3• THIS SHOULD 9E ADEQUATE. fOR YOUR COST PENE.FI T IF yOU NEED Ttl
DO IT• THEREFOR£, SUGGEST GO AHEAD WITH A~OVE RUNS AND
. COST BENEFIT AS NO ADDITIONAL COST {+) COMPAR~D WITH
SENSITIVITY TEST REQUIREMENTS IS INVOLVED· WE WILL RUN
IN PARALLEL IF WE CAN ON FINANCIAL IF NC'T TOO COSTLY AND
GIVE YOU RACK-UP•
<+> IT APPEARS SO ANYWAY
J. n. WARNOCK
+
ACR£5 COLq
ACRI:..S TOR
-
r
l
V+
ACRES COL~.
ACRES TOR
JANUARY 18./82 ?5700·11
ATTN: PHIL HOOVER
R, .•
r.. -
PLEASE PROVIDE SCHEDULE BY YEAR OF AWHR ARSOR8ED RY SYSTE~
FROM SUS 1 TNA OVER YOUR PLL'\NI\; l NG PERIOD· ALSO v:OULD 8::
INTERESTED IN ANNUAL OUTPUT FROM NEW COAL FIRED THERMAL
POWER GENERATION ADDED•
PLEASE PROVIDE SCHEDULE WITH YEARLY DLR/~HP FOR 2MLDT3•
J ., G. WARN 0C K
+
ACRES COLR
ACPES TOR
-
. ·~_,.,..-,.~·--···
. :i :y'> . ·-~-~ .... ---...... ~ ..... ~--.···.·-·''"' . t ·"',;·
. .
0+
ACRES COLR
ACRES TOR
JANUARY 13, 1982 P5700.11
ATTN: c. A· DE8ELIUS
ALASKA POWER AUTHORITY
SUSITNA
TASK 11 MARKETING
---------------------~
IN ORDER EXPEDITE COMPLETION OF MARKETING SEGMENT OF
ASSIGNMENT AND REPORT WOULD REQUEST SONG OMKAR'S PRESENCE
IN TORONTO FROM JAN~ 18 FOR AT LEAST 5 AND PROBABLY 10 WORKING
.
DAYS· PLEASE ISSUE NECESSARY TRAVEL AUTHORIZATION.
J J
+
ACRES COLR
ACRES TOR
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•
. Mr. E. P. Yould-2 January 11, 1982
~'
Under the scheme we would contrive to construct. contracts which,
to any rational bond holder, would clearly amount to virtual
certainty, without the output numbers being specified
numerically. The contracts might take the form, for example,
of the utilities contracting to take output equal to a given
percentage of the average of their total sales of electricity
over the term of the bonds. We would then argue vis a vis the
Section 103 that natural calamities or massive economic
recession might conceivably make this a very low actual offtak~ by
the contracting utility so that there were no guaranteed payments
violating the business and security interest test. These
contracts could also be supplemented by guarante.ed payments which
were \vithin the 25% debt service limitation so that, for example
24e9% of the debt service was covered by such payments.
State Appropriation as a "Tail-end Loan" for Repayment over
35 Years after Repayment of Revenue Bonds
On Friday we discussed the possibility of some State recovery
in the form of a continuation of the debt service payments after
recovery of the whole of the revenue bond financing, and we
pointed out that this would be in fact a negligible burden in
real terms. If the State appropriation were re-structured in
this manner it would furthermore, substantially alleviate the
tax exempt financing problem. The appropriation could be
structured so that the APA carries it as an interest free loan
from the State upto the point of making actual revenue issues.
The APA then makes repayment of the State loan part of the
bond issue. The State loan would be repayable starting at the
end of 35 years and continuing for a further 35 years at the
same magnitude of annual payments as the Revenue Bond debt
se~vice for the first 35 years. This extension of the total
term of the formal financing to 70 years would, then, double
the debt service for purposes of Section 103 since this defines
debt service as "debt service payment times the number of
years". On a rough estimate this might enable us to get the
allowable level of minimum guaranteed payments upto virtually
all of the debt service on the non-State revenue bonds over the
first 35 years, effectively avoiding our tax exempt problem.
Contingent State Guarantee
This scheme would envisage a State guarantee of payment of
the debt service in the event that the APA was not able. to
meet such payment. The APA in its turn would not engage in
any contracts on a scale which could be interpreted as
11 take-or-pay" or "minimum guaranteed payment" which would make
the bonds IDE's. There would b.= no necessity for the APA to
• • • • 3
..... :.J
c>
.. Mr .. E. P. Yould-3 January llr 1982
seek such exacting contracts since the State contingent
guarantee would give the bond holders effectively the same
guarantee as they would have on a G. o. Bond. At the same
time the guarantee, because it was contingent and only, if
ever, likely to be called upon for a fraction of the bond
issue., its effect o;1 the State 1 s credit would be correspondingly
small. (We appreciate that we shall have to investigate the
constitutional issues applying to State guarantees).
In submitting these or any other schemes to your advisors we would
of course spell them out in more detail and provide a general
briefing on the factual characteristics of the project and its
financing. We feel this brief summary of our ideas developed over
the past few days might be helpful in written form.
We look forward to discussing them with you later this afternoon
and receiving any comments or changes you might wish to make.
JGW:dn
Yours sincerely, .-......_
•. ........ ' ~ . I
,, . ·-.._·"-'\o \. . ::-,_. '--._..'-
J.. G •\ Warnock
Vice President
Corpor~te Development
'
• • •w••-!<"-'•~_..,. ....... ,_~-·'~""~"'"•"""""'"'-'"'-·~-""--...... -............._,
,,
-~~ ..... _,/ ,,
_,· ~~' . ._,·~·\:·,.~ ;•', •"..-J~~~~¢~!"-,J-'e"J.~..-.,
FINANCING PLANS CONSIDERED DECEMBER 1980 TO JANUARY 1981
o CONVENTIONAL DEBT PROJECT FINANCING
o STATE CONTRIBUTION THROUGH SUBORDH~ATED LOAN
;..
o PARTIAL DIRECT FUNDING BY STATE C\{fiTANA DAM)
o ROYALTY RECOVERY ON PARTIAL STATE FUNDING
o RENEWABLE EQUITY RECOVERY
o FULL STATE EQUITY FINANCING
o VAP~JUS LEVELS OF STATE EQUITY FINANCING
o DEBT SERVICE GUARANTEE FUND
o STATE APPROPRIATION WITH G.O. BOND FINANCING
CONVERTING TO REVENUE BOND DEBT
• L,.______._ __
IQQIC a;
'
ECONOMIC VIABILITY
BENEFIT /COST RATIO = INCREMENTAL SYSTEM COST ON BEST THERMAL OPTION Pl·l
INCREMENTAL SYSTEM COST WITH SUSITNA PW ,..
BASED ON: -HIGH CONFIDENCE LEVEL SUSITNA CAP COST ($5.2 BN
IN 1982)
-THERMAL COSTS CONSISTENT WITH ALL MAJOR
AUTHORITATIVE FORECASTS
-ALLOWING FOR 2% P.A. REAL INCREASE IN CAPITAL
COSTS
HENCE: LONG TERM ECONOMIC VIABILITY
[ii]L ___________ _
-~ I
i
.'1~ II;
••
I
-
r~lNIMUM $1.5 BN STATE CONTHIBUTION SCEIMRIO
BAS I C CONSTRAINTS: .
0 CANNOT ~AT A PRICE IN EXCESS OF
BEST THERMAL OPTION.
0 CANNOT CHARGE A PRICE IN EXCESS OF COST
(INCLUDING DEBT SERVICE COVER).
0 "low" STATE CONTRIBUTION ($1.5 BN IN 1982)
PUSHES CHAR~ FOR SUSITNA ENERGY UP AGAINST
MAXIMUM SET BY BEST THERMAL OPTION,
• ··-------------
-"'
380
360
l
340
320
300
-:s 280 c
Cl u -...
S260
t) -8
~ 240
Q) ... c.v a: = 220 ~
200
180
160
140
120
100
L
1J4
--· <F-~ .... , ... ~---.-_,.,.._~
•
MiNIMUM STATE CONTRIBUTION SCENARIO
{$1.5 BILLION) 7% INFLATION AND 10% INTEREST
5
Susitna Pricing Restricted to
Maximum of Best Thermal
Cost
~ Susitna ~'Price"
Watana Completed with $5.5 billion (2.8) of GO Bonds 1989 -94 :l
Cover meets GO Bond Interest in 1994 and Sufficient for
GO Refinanc~ng with Revenue Bonds in 2000
6 7 8 9 2000 01 02 03 04
Mill Rate Cost
Best ·rhermal Option
250 MW at Nenana Cost Saving
to Consumers
05
Oevii Canyon Completed with $10.5 billion (2.6) of Revenue
Bonds Raised 1994-2004 (Large Margin of Cover 2005)
06 07 08 09 2010 11 12 13
••
~ .
·~
380
360
340
-"';'><
MEDIAN STATE CONTRIBUTION SCENARIO
($2.5 BILLION) 7% INFLATION AND 10% INTEREST
,~
##
._# .#
#~ •• •• I
200 MW at Beluga /
320 • Q
/ 250 MW at Nenana Cost Saving
to Consumers 300
-lJ 280 c w
0 -..
; 260
~
8
;E· 240
a ta a: = 220 i
200
180
160
Best Thermal Option _!
~ #.., •• .... •• -· -· ---· •• -·· 210MW ~' # .
400 MW at Beluga ~# Gas Turbines
/ ~·
• I
·---· ;( ------140 ~--r-W-at_a_n_a_C_o_m_p-le-t-ed_w __ ith_$_2-.4-b-il-lio_n_( 1-.4-)_o_f_G_O_B_o_n_d_s_1_9_9--1 ---9-3--......,l
120
100
94
,,.
Cover of 1.25 at 107 MiUs and Allows Revenue Bonds Refinancing
1994. Excess Cover Contributes $.65 billion Total to Devil Canyon Cost :=z._
/ Susitna .. Price"
5 6 7 8 9 2000 01 02 03 04
Susi.tna Price (Restricted by Rating Ordinance) w
05
Devil Canyon Completed with $4.4 billion (1.6) of Revenue
Bonds 2000 -2005 (Massive Cover Potential in 2005)
06 07 08 09 2010 11 12 13
• ,,,.,~
'
[ijJ
•
...
•
ADVANTAGES OF G.O. BOND ROUTE IN $1.5 BN MINIMUM
STATE CONTRIBUTION SCENARIO,
0 AVOIDS REQUIREMENTS FOR COMPLETION GUARANTEES
(IF G,Q, BOND OF SUFFICIENT MAGNITUDE),
0 CAN MAINTAIN T~X EXEMPT STATUS BY LESS OUTPUT
HAVING TO MEET nTAKE-OR-PAYu ETC,
0 CREATES SCOPE FOR RESOLVING REVENUE BoND TAX
EXEMPT STATUS BY DEFERRING PROBLEM UNTIL
PROJECT COMPLETE AND WITH DEMONSTRABLE REVENUE
RECORD,
0 No REQUIREMENT FOR EXCESS DEBT SERVICE
COVERAGE,
~L------------------~
.•. '· ' " . f
-\ ,, ;;
~rr--------------------------------------------------------.
7%J lNFLATIONJ 10% INTEREST
1982 $1.5 BN STATE APPROPRIATION
BOND FINANCING
MoNEY REAL
1989 .4 .24
90 1.6 .90
91 1.5 .79
92 1.0 .49
93 .8 .37
94 '1 .09 ,L
TOTAL
WATANA 5.5 2.88
9%J lNFLATIONJ 12% INTEREST
$1.5 BN STATE APPROPRIATION
BOND FINANCING
MONEY REAL
.5 .30
1.9 1.05
1.8 .95
1.3 .64
1.1 .50
.3 .13
6.9 3.58 = =
~L_----------------~
-
.. ) .;,
"
• -
~
TAX EXEMPT STATUS
o SI03,4 SPECIFICALLY REQUIRES G.O. BONDS TO MEET
SECURITY INTEREST TEST.
o SECTION 5 FORMULAE:TAX EXEMPT STATUS IS LOST IF
CONTRACTS WITH NON-EXEMPT ENTITIES MEETS CONDITION
THAT -
BUSINESS TEST
~ PAYMENTS UNDER CONTRACTS EACH TAKING
25% OR MORE OF OUTPUT
SECURITY TEST
+ ) 25% OF DEBT SERVICE
PAYMENTS UNDER CONTRACTS GUARANTEEING I
3% OR MORE OF DEBT I
I
I
' ,/
•~--------------~~
J!
"
o TAKE-OR-PAY AT WHOLESALE RATE (UNSPECIFIED) PREVAILING
IN FUTURE IS NOT A GUARANTEED MINIMUM PAYMENT (?),
o RESTRICT ALL SUCH "TAKE-OR-PAY" TO 25Z OR LESS OF
SUSITNA OUTPUT SO THAT CONTRACTS MEETING 25% PART
OF 11 BUSiiJESS TEST/I ARE ZERQ,
o CONTRACTS MEETING 3% GUARANTEED MINIMUM PART OF
"BUSJNESS TEST" ARE ALSO ZERQ,
o SECURITY TEST SUMMI~G CO~TRACTS MEETI~G EITHER OF
PREVIOUS H·IO CRITERION ALSO Z£R.Q.
o HENCE BONDS NOT I . D. AND ARE_ TAX EXEMPT.
o EBOBlEM: HOvJ MUCH WOULD ABSENCE OF GUARANTEED
PAYMENT IMPAIR SECURITY FOR BOND HOLDERS?
.L_ ________________ ~
'
"
..
LEAST BURDEN STATE "REPAYMENTS"
o RESIDUAL INTEREST = CONTINUATION OF DS CHARGE AFTER
FULL REPAYMENT OF
= $.75 BN P.A. BUT 1994 PW = $.27 BN TOTAL
o SUBORDINATED ROYALTY BEGINNING AT COMPLETION OF DEVIL
CANYON
1% = $.29 BN 1994 PW
o SUBORDINATED CLAIM TO EXCESS DS (.25) 1994-2004
<NEGLIGIBLE EARLY YEAR BURDEN SINCE JUST INCREASES
CAPITALISED INTEREST ON DEVIL CANYON)
~~----------------~
. .
...
•
ACRES AHG
ACRES TOR
DECEMBER 31~ 1981 P5700. 11
ATTN: BOYD BROWNFIELD
WE WOULD BE MOST INTERESTED TO LEARN PRICE LEVEL AND ESCALATION
...
PROVISIONS IN KOREAN CONTRACT. ALSO WOULD BE INTERESTED IN
RECEIVING WHATEVER INFORMATION JS ACCESSIBLE THROUGH GVEA
REGARDING DETAILS OF ESCALATION PROVISIONS AND THEIR APPLICATION
WITH PARTICULAR REFERENCE TO ANY PASSING ON OF BENEFITS ARISING ..
FROM PRODUCTIVITY SAVINGS• COULD BOB HUFFMAN ADVISE ON HIS
EXPERIENCE AS RELATED IN HIS MEMO 29TH MAY 1981 TO CHUCK SITKtN
REGARDING COAL PRICES WHICH WAS COPIED TO ERIC YOULD AND
STATES• QUOTE· ••' 'I HEAR EY THE GRAPEVINE THAT USIBELLJ COAL CO
INFORMED WARD SWIFT OF BATTELLE THAT IN CALCULATING FUTURE
ADJUStMENTS OF COAL PRICES THAT ONLY ACTUAL INFLATION INDEX
ADJUSTMENTS SHOULD BE USED. IF MY INFORMATION IS COFtRECT~ THE
ALTERNATIVE RAILBELT STUDY MAY BE USING ERRONEOUS INFORMATION.
H£RE ARE THE FACTS· AS OF JANUARY 1.~ 1965~ OUR COAL PRICE WAS
J ;
27•85 CENTS PER MBTUS• IT IS NOW DLR 1·123 PER MBTUS• THE REF' (IRE.~
COAL INCREASED 303 0/0 OVER THE BASE PRICE COVERING A !6-~LUS YEAR
SPAN.
... THE HIDUSTR(AL COMMODITY INDEX WAs l32o2 ON JANUARY 1 .. 1965
AND IS 298.9 AS Or APRIL 1~ 1981. .J
... INFLATION"SHOWS 125 0/0 OVER BASE.
THEREFORE THIS MEASURE Or
ACCORDINGLY .. COAL PRICES HAVE
ESCALATED 177 0/0 MORE THAN INFLATION DURING THE SAME PERIOD OF
TIME.
IN ADDITION. I UNDE~~ND THAT PROVEN RESERVES IN ~E USJBELLI/
NENANA FIELD APPROACH 100 MILLION TONs. USJBELLI NOW MINES
750oOOO TONS ANNUALLY. THEREFORE. AT THE PRESENT RATE OF
PRODUCT! ONo HE HAS A 100 YEAR SUPPLY. HOWEVER. IT LOOKS
FAVORABLE AS TO HIS DEVELOPMENT OF AN EXPORT MARKET APPROACH! NG
ONE MILLION ADDITIONAL TONS WITHIN THE FOLLOWING TWO TO THREE
YEARS. AT THAT TIME HE HAS 50-PLUS YEAR SUPPLY. IF WE WERE TO
ADD A SUSITNA SIZE COAL PLANT OF loSOO MW IT WOULD USE
APPROXIMATELY EIGHT MILLION TONS ANNUALLY. NOW WE HAVE A 10 ... Y~BR SUPPly, IN MY ESTIMATION, THAT IS NOT AN ALTERNATIVE
TO SUSITNA~'' END QUOTE •
.JI J
J. G. WARNOCK
ACRES !00 TORONTO
ACRES AHG
ACRES TOR
Mr. E. P. Yould
Executive Director
AlasRa Power Authority
334 West 5th Avenue
Sui i.:e 31
~iCHORAGE, Alaska 99501
U. S. A.
Dear Eric,
December 31, 1981
P5700.ll
T-1388
Further to our conversation this week regarding the proposed
meeting with Battelle N.W. I spoke today with Jay Jacobsen
who has readily agreed to the discussions planned for
January 5th. These will be held in Richland, 'Washington and
we plan to be at Battelle offices by 9:00 a.m.G Our group
will include Dr. A. J. Merrett, Dr. J. W. Hayden and
S. Diener and myselfe
The impression I gain from the brief discussion with Jay is
·that they are ready to be guided by the opinions we have to
present and relate their present position to that defined
by Ward Swift admitting that they do not have full support
readily available. We would hope therefore, to be able to
reach a common position on this issue.
In view of the increasing ir(lportance of achieving reljable
figures for fuel pricing we would suggest that APA should
be represented at the meeting and wonder whether·you would
wish to have Bob Mohn take the chair. I propose discussing
this possibility by phone later this morning.
The agenda we propose for the Richland meeting is:-
1) Objective of Meeting
2) Fuel pricing -Railbelt Alternatives
2) (a) Statement of findings and definition of areas of
agreement/disagreement
-Acres
-Battelle
ACRES AMERICAN INCORPORATED
Consultmg Engineers
The Liberty Bank Building. Main at Court
Buffalo. New York 14202
Telephone 716·853·7525
. . . . 2
.,
..-~) .,,.
,,
..
'Mr. E. P. Yould-2
December 31, 1981
2) (b) Outstanding issue for discussion
-Methodology
-Factual data
-Probabilities
2) (c) Statement of ~ammon position
•
3) (a) Review of current status of generation planning work
(i) Battelle/AREEP
{ii) Acres/OGP-5
3) {b) Further analytical work
4) Treatment of construction cost/operating expense
escalation provisions
5) Program for future interactive consultation
We would be glad to have your approval of the outline .
Happy New Year!
Yours sincerely,
J. • Warnock
Vi e President
JGW:dn Corporate Development
cc: J. D. Lawrence
P. Hoover
ACRES AMERICAN iNCORPORATED
• December 31, 1981
Anchorage Office
Telecopy
Attn: Bo·Brownfield
(iJ>JvP.flD
For aowa.rd delivery to E. P. Yould a.s~~.p.
J. G. Warnock
Acres -Toronto
1
I
.. ·,: ) L~ ,tt 0c.1 c.JL.f.
l
I CtJ p.,.y)
t/ v
v
..
i'
...
DRAFT NOTES
December 31, 1981
MARKETING AND FINANCING REPORT LINKAGE
.
The Marekting Report must lock into the Financing Report in
that the latter is predicated on the revenues dervied from the
marketing scenario. we· have established that the long-term
financial costs of the best thermal option are as shown on the
attachment. In aggregate therefore, the Alaskan utilities should
be willing to meet a maximum price for Susitna equal to the costs
which they would otherwise incur from this best thermal option.
The APA, however, are obliged to charged a single wholesale
rate and theref0re, is in a positi~ that the price it can charge
is restricted by what the least willing customer will pay. For
our marketing/financing scenario to hold it is necessary that
we demonstrate that under this pricing constraint the APA can still
get revenues equal to the best thermal option.
There is presumative evidence that this is the case because
the big thermal additions called for by the best thermal option
primarily serve Anchorage and thus would create high cost incremental
sources of supply for Anchorage. At the same time Fairbanks is
already a high cost area and should be more than willing to accept
supplies at the starting price of 139 mills.
To consolidate (or if necessary modify) this impression the
Marketing Report needs to have a secti~ estimating the generation
cost curves of Anchorage and Fairbanks un the best thermal option
basis. This we would hope would dem~strate the conclusion just
re2ched that these two main utility areas ought to be willing to
accept Susitna supplies at 139.mills.
• •.• 2
' -2 -
This Me might describe as the "shad~· scenario since it ~.11
not come into being if Susitna goes ahead, but it will be a point
of reference around which the Susitna price must be negotiated.
The second, scenario is the "Susitna anticipation scenario"
which would describe the actual generation cost curves of Anchoo:age
and Fairbanks utilities as they would arise over the period 199·1
to say, 1995 given that the utilities will have anticipated the
corning of Susitna and there power generation capacity will have
been organised optirninally in ac?ordance with this expectation,
It is to be expected that this would give r.ise to incremental
costs (having regard to risk of outage etc. ) which over the 5 Y•=ar
period would be in excess of the price at which Susitna energy
would be offered so that this cost scenario would not conflict
with our estimation as to the prices at which Susitna could sell
its energy.
Problems would arise, of course, if this "Susi tna anticipa·:ion
scenario" nevertheless led to highest post.'i' of energy over the
f~ye rear period 1994 to 1999 being less than the 139 mills
estimatedfor Susitna. If this cost configuration does emerge from
the 0~-5 runs which corresp~d to ~e Susitna anticipated gene~•
ti~ plan then it would have to be met by appropriate horse-
trading by the A~ with the utilities. (We could enlarge on thiE
if this eventuality does emerge from the figures).
A point to be stressed throughout these scenarios is that th•=
cost numbers which we require are financial costs in then current
money and not economic costs. The costs which would be incurred l:y
the utilities in respect of financing any additions should be
assumed to be 10% in money terms and throughout we ought to base
the analysis on 7% inflation.
. ... 3
-3 -
The last possible deadline for this part of the marketing
study is Friday the 8th of January when we hope it WOllld be possible
for Columbia to telecopy the results through to Toronto ready for
a meeti~g if necessary in Columbia on the 11th of January to pull
together the interrelated elements of marketing, economics and
financing.
•
•
+
ACRE~ COLB
ACRES TOR
DECEMBER 31, 1981 J
P5700.tl
ATTN• P. HOOVER
REz SUSITNA TELECOPJER RUNS FOR ALL THERMAL CASE RECEIVED
~------~---~--------~-------------------~--~---------
IN fUTURE WOULD HOPE THAT THESE SHOW 1992 AS BEING THE LAST YEAR
IN WHICH SYSTEM iS UNAFFECTED BY ADDITIONS Or NEW PLANT AND
THEREFORE PROVIDES A USEFUL BASE FOR DETERMINING THE AVOIDED
J COST OF EXISTING GENERATION.
WE HAVE AGREED THAT YOU WILL LET US HAVE <1> CHACKAMNA RUNS
<2> WATANA/DEVIL CANYON RUNS WHEN DEBAGGED {3) A RE-RUN Or THE
ALL THERMAL CASE WITH INPUT Of SOME PARAMETERS USED FOR FINANCIAL
.
ANALYSIS AS OUR NOTE Or DECEMBER 23RD· (4) REPEAT OF (3) WITH
ESCALATION FACTORS ON CONTINUATION COST AND OPERATING EXPENSES
<~> REPEAT OF YOUR BASE RUN WITH ESCALATION FACTORS INTRODUCED.
LATER WE WILL REQUIRE REPEATS OF <2> AND (4) WITH fiNANCIAL
PARAMETER INPUTS 70/0-10 0/0.
COULD YOU PLEASE INDICATE EARLIEST TIME OF DELIVERY Or EACH ITEM
AS DATA REQUIREMENTS FOR MEETINGS IN WEEK OF ~ANUARY 4TH NOW
CRUCIALLY IMPORTANT.
HAPPY NEW YEAR•
GAVIN
ACRES • TORONTO
•
ACRES COLB
ACRES TOR
•
•
F' I RSTCORP NYK
ACRES TOR
DECEMBER 30, 1981 . ~
P5700.11.21
F' l RST BOSTON CORPORATION
ATTN: JOHN RABEN, VICE PRESIDENT"
PUBLIC POWER FINANCE GROUP
REt SUSJTNA
-------
WE AR£ CONTINUING OUR STUDY Or FINANCING ISSUES RELATED TO
SUS·I TNA HYDROE:LECTRI C DEVELOPMENT AND IN PREPARATION FOR
MEETING WJ TH APA ON 7TH JANUARY. WE WOULD WELCOME YOUR
CONSIDERED OPINION ON FOLLOWING QUESTIONS ARISING FROM OUR
READING Or IRS CODE SECTION 103!-
IT IS OUR READING THAT IN ORDER TO LOSE TAX EXEMPT STATUS FOR
FINANCING OF THE PROJECT IT WILL BE NECESSARY TO rAil BOTH
<REPEAT BOTH> THE TRADE OR BUSINESS TEST AND THE SECURITY TEST·
WOULD IT BE POSSIBLE FOR US TO ACHIEVE TAX EXEMPT SYATUS FOR BONDS
BY:-
1> CONTRIVING TO FAIL THE FIRST PART OF TRADE OR BUSINESS TEST
BY ENSURING THAT NO TAX EXEMPT ENTITY UNDERTAKES TO
~ TAKE-OR-PAY FOR MORE THAN 25 0/0 0~ OUTPUT. THIS COULD BE
DONE BY ARRANGING FOR CHUGACH -TH!: ONLY ENTITY CAPABLE
Or CONTRACTING FOR MORE THAN 25 0/0 -TO CONTRACT FOR LESS
THAN 25 0/0 OF SUSITNA OUTPUT CTHJ! WOULD MEAN~ HOWEVER,
THAT 10 0/0 OR SO Or SUS I TNA•! OUTptUT WOUl.D NOT BE COVERED
BY ''TAKEAOR-PAY'' CONTRACTS'>
I' ...... ,
2> THEN, ALSO CONTRIVING TO FAlL THE SECOND PART OF THE TEST
(CONDITION SCA> 2) THAT ''NO TWO OR MORE NON-TAX
EXEMPT PERSONS EACH OF WHICH PAYS ANNUALLY A GUARANTEED
...... _._ _____ _
MINIMUM PAYMENT EXCEEDING 3 0/0 PER CENT OF THE AVERAGE
ANNUAL DEBT SE~~ICE••••'' BY SOMEHOW AVOIDING THE CONCEPT
OF AN ''GUARANTEED PAYMENT'' WITHIN THE MEANING Or THE IRS
J
CODE.
WOULD IT BE POSStBLE IN YOUR OPINION TO. INTRODUCE TERMS INTO THE
TAKE-OR-PAY CONTRACT WHICH IN FORM MAKE J T NOT A GUARANTEED
------
A GUARANTEED MINIMUM PAYMENT OBLIGATION WITHIN iRS MEANING Or
J
THIS TERM. FOR EXAMPLE~ THIS MIGHT BE ACHIEVED BY A TAKE-OR-PAY
CONTRACT WHICH WAS CONDITIONAL UF~N OUTAGE NOT EXCEEDING X0/0
J OR UPON SOME OTHER ADDITIONAL IMPROBABLE CONDITIONs.
<WHERE X IS• IN REALITY AN ALMOST TOTALLY UNLIKELY LEVEL Or OUTAGE>
WE WOULD 1-1 Kf. TOU TO COI'JMENT ON WHETHER SUCH A QLIALJ F"l ED CONTRACT
COULD BE DEVELOPED WHICH BY INSERTION Or SUCH CONSIDERATION
WOULD MEET BOND HOLDERS CONDITIONS WHILE ENABLING US ''TO rAIL''
CONDITION S<A>l. fURTHERMORE IT WOULD BE USEFUL TO HAVE AN
EXPLANATION Or THE ESSENTIAL DIFFERENCE IN iRS VIEW Or
''A TAKE·OR-PAY CONTRACT'' AND ''A GUARANTEED MINIMUM PAYMENT''•
ANSWERS TO THESE QUESTIONS WOULD BE WELCOMED AS SOON AS POSSIBLE
AS THEY WOULD ASSIST US IN FORMULATING A POSSIBLE APPROACH INVOLVING
INITIAL G.O. BOND FUNDING CONVERTING LATER TO TAX EXEMPT REVENUE
J BOND FINANCING FOR SUSITNA.
WITH VERY BEST WISHES FOR THE NEW YE~R.
REGARDS
" ..
J. G. WARNOCK
ACRES -TORONTO
•
rl RSTCORP NYK
ACREs TOR
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To:
cc:
From:
Re:
Mr. J.D. l1awrence
Mx~ G.A. Debelius
Mr. P. Hoover
Mr. s. Diener
~!r. A. J. Merrett
J~ Gavin Warnock
-p~7 tJ CJ · I J
Deeember 28, 1981$
Susitna Hydroelectric Project
Task 11 -Marketing and Financing
Meeting with APA, December 3=-4, 1981
The attached notes record the discussions with APA at
our meetings in Anchorage, December 3 -4, 1981. These
notes will have had a limited internal circulation and I
leave it to you to decide on any wider distribution •
JGW/JC
Att .. ~
• \
( '
•
(
. MEMORANDUM
To; Mr. J.D. Lawrence
cc: Mr. C.A. Debelius
Mr. P. Hoover
Mr. s. Diener
Mr .. A.J. Merrett
F.r:om: .J .. Gavin Warnock
Re~:
P~7D CJ.))
December 28, 1981.
Susitna Hydroelectric Project
Task 11 -Marketing and Financing
Meeti~g with APA, December 3-4, 1981
The attached notes record the discussions with APA at
our meetings in Anchorage, December 3 - 4 ,. 1981. These
notes will have had a limited internal circulation and I
leave it to you to decide on any wider distribution .
JGW/JC
Att ...
.... ,.. v t">f ...... . ~-"'~,"
Warnock
ALASKA POWER AUTHORITY
SUSITNA HYDROELECTRIC PROJECT
TASK 11 -~~TING AND FINANCING
Meetings with:-
E. P. Yould, T. McGuire APA
J. D. Lawrence, A. J. Merrett,
J. G. Warnock AAI
Anchorage.offices of APA
December 3-4: 1981
1) Loan guarantees fund concept ~uestioned by T. McGuire on basis
that it would not be allowable under IRC Section 103G It was believed
that debt service guarantee funds were limited to 15% of debt covered
( and subject to certain roll-over prgvisions on a 5 year basis.
•
(
(Th~~ ~~~ue wa~ la~e~ Qlea~ed-up w~~h APA bond QOun~el and
limi~a~ion 6ound no~ neee~ca~~ly ~o apply).
T. McGuire of opinion, furthermore, that State funds would best
be applied directly to construc·tion expenditures as soon as convenient
but accumulating interest while on deposit.. With current revenue
constraints State funds were quite likely to be made available in a
pattern of:-
$250 M . 1 ~n year
$250 M " " 2
$350 M .. " 3
$350 M " " 4
etc.
Limitations were noted on the capability of funds available
from the State to provide either for:-
(a) Substantial amounts of~xpenditures in the early
years of construction (or prior to, start of construction).
(b) Large front-·end deficits occurring when Susitna comes
into operation.
• ••• 2
(·
" •
-2 -
T. McGuire sugge§ted that any IRC limitations which did apply
were unlikely to be amended, particularly for the State of Alaska and
with. the present administration in Washington.
T. McGuire, was in any case 1 of the opinion that senior lenders
would prefer to see a situation wher~, say, 30% to 35% of total capital
cost, by way of State funds, were committed to construction rather than
held in reserve at time debt was' dra~ down. It was suggested that any
required bond reserve fund to meet debt service should simply be
borrowed from senior debt accumulations.
Discussions on relative rnagni·tude of State funding in relation
to estimated capital cost and tp likely need for ultimate funding showed
no misunderstanding on the part of APA regarding the "plus-upn for
inflation, IDC etc. The Exhibit demonstrating this which accompanied
Acres letter of November 27th, (copy attached hereto), ·did not ra~se
( any surprise.
. .
2) Deep concern was expressed by Eric Yould over the security
of the "capital cost not to be exceeded".. Figures mentioned in
discussion of the "optimisation" process caused concern with APA who
saw a distinct trend towards excedence of the limiting cost, stated
as $4.9 billion.
(I~ ~hould be noted that ~4.9 bn l~, in 6act, ~he initial
"c.o~t not to ex.c.eed" telexed in Ma~tc.h 1981 and ~ub.6e.que.ntty
amended, with an inc.Jt.e.a~e. to $5.11 bn, in May 1981. 1t:. witt
be. a.ppJt.e.c.iate.d 6u~tthe.Jt.moJt.e. that thi~ c.o~z ha~ be.e.n .hubje.c.z
~o in6tatlonaJt.y e~6ec.t~ ~in~e that date).
• • • • 3
••• ·'
- 3 -
•
John Lawrence explained that the optimisation efforts at
present in hand were directed at determining the ideal project with
maximum. energy output to ceiling cost. However, the capital costs
estimate still contains a 20% contingency allowance which may
ultimately be reduced. The necessity of holding to the limiting cost
ceiling was clearly understood.
Discussion ensured on level of confidence of the "capital cost
(. not to exceed". Risk analysis would play a part in determining such
confidence levels .. Constraints of "cost not to exceed"·and of
"financing limitations" were noted. Considerable criticism has been
leveled at the performance to date on capital cost est~mating for
~ hydroelectric developments in State of Alaska. There would be very
serious problems for Sus·itna if confidently-stated estimates were to be
(
exceeded in any similar way. Every attempt has to be made to keep
Susitna cost estimates both reliable and within declared limits.
Explanation by Acres of theoptimisationprocess identified
three reservoir levels of 2215 ft., 2165 ft., and 2115 ft., which
had been examined in recent studies and estimates. Maximum energy
output was, naturally associated with the highest achievable level of
Watana reservoir. Energy outputs were likely to be affected by
environmental constraints and any required downstream water releases.
Three conditions had been examined; one without constraints; one witn
•••• 4
J
t ' ' . '
•••• ••
~ .
i .
(.
-4 -
full effect cr constraints and a third - a compromise believed reason-
albe and, hopefully, acceptable by A.D.F,. & G. and other agencies ..
Dam height variations have a marked e:Efect on over:·all capital
costs, equivalent to about $700 million for 100 feet of dam. Hal£
1
of this cost variation was attributable to drun construction costs and
the remainder to the influence of such change on other elements of
the project and support facilities. -
It was noted that financing limitations had not yet been
brought to bear on the selection of an optimum project. FLOro Task 11
studies -Financing, it was becoming apparent that, with tha less
~ generous State funding arrangem~nts, now contemplated reducLions from
(
the stated "cost not to exceed" would be required to achieve assured.
viability.
~
3) Other limitations to financing Susitna was discussed including
the applicability of tax exempt revenue bonds to a project which did
not meet the business test whereby not more than 25% of the output
may be contracted with a tax exempt purchasing entity. APA could see
that of total output be:ing supplied to the Railbelt 55% would be
contractable within the limits of the business test and 45% would not.
The concept of having 45% of the project covered by funding from the
State was discussed a.nd arrangements made to obtain ad.vice from
Wohlfarth& Flint, APA Bond Counsel, on this matter •
• • • • 5
• - 5 -
(A !~~e~ meeting e~tab!i~hed that thi~ appnoaeh wa~ unlikely
Zo b~ aceepted by IRS; but ~ub~equent examination a6 IRC See~~an 103 ~ugge.~t~ that p~avided no ~lngte non-~ax exempt
ent~ty take~ 25% a6 the output an a take-a~-pay ~ant~aet the.
. agg~e~ate a6 all tax exempt entitle~ eant~aeting may be able
to take. ma~e. than 2 5%) • -===
In the absence of access to tax exempt revenue bonds, however,
consideration would have to be given to General Obligation Bonds of
the State of Alaska (G.O. bonds). A report was available on State
government financing and on the options open to State agencies and
bodies such as APA. It was recommended that further advice should
be sought from Bond Counsel.
Dr. Merrett raised the matter of "no-coupon" bonds or "deep
.,. discount u bonds. Eric Yould di<f not see fundamental objections to
such paper but warned of the impact of non-conventional bonding on
the overall State bond ratings.
It was agreed that there were no strict limitations applying
to the mode of bond financing and Acres were free to suggest whatever
was believed appropriate and optimal to project viability.
4) Legislative action was at present being processed which would
possibly lead to a referendum procedure for all major allocation of
funds. It \'las recognist~d that such a measure could only have an
adverse effect on Susitna financing and impose dangers of delay in
timely funding and possibly interruptions in the execution of State
commi t·l:.ment~s. Hopefully Susi tna would be excluded from referendum
• • • 0 6
•
(
••
(
- 6 -
procedures but the situation would have to be carsfully watched during
the next few months while the Phase 1 efforts were being concluded.
5) Other items relevant to financing were discussed:-
Account format for Acres analysis output should be checked
with certified public account such as Coopers & Lybrand or
Peat Marwick.
Prior bond placement documents issued on behalf of the APA
were not truly relevant to Susitna.
Acres stated that "renewals and replacements'; allowance of
3/4% of capital costs (escalated) was based on prior
experience on other hydroelectric projects. It was noted
that actual requirements would be reviewed in detail. The
allowance made at present is conservative.
(La~en examlna~lon o6 Aene~ 6lnanelal analy~l~ ~hawed
3/4% applied ~o non-dam pon~lon o~ Wa~ana equlvalen~
~o about 0.4% on oveAall eo~t~ a~ eompa~ed wlth 0.2%
Aeeommended a~ h~andaAd aeeoun~lng pftaetlei by FERC).
Allowance for "Reserve and Contingency" was presently being
taken as 400% of annual operating costs. The level of this
funding parameters as stated in attachment to Acres letter
of November 27th 1981 were reviewed and revisions made as
recorded on the amended table attached.
The only likely impact on the legislated "Power Cost
Assistance" provisions on Susitna could be a requirement
that the Project contribute to the fund (at a level
• • • . 7
• •'
.-.. ','_; .. ':.·
- 7 -
of about $9.2 in 1982 dollars escalating at the predicted
rate for fuel costs of 2.6% above a 7% general inflation ~.e.
9 • 6% p. a. in all). It is; unlikely that any consumers in
Railbel t utility area wo1.1ld benefit from this fund.
Recently concluded contractual arrangements to meet tax
exempt bond requirements should be examined.
First Boston Corporation and Wolfarth & Flint will be
available for consultation. -APA will advise AAI on the
status of First Southwest Corporation in further financing
studies.
6) Revenue earning projects for Susitna have a critical influence
~ on financial viabilty. Approa~hes to the analysis to date have
(
determined a likely "entry price" for Susitna energy to its ~arket
at the level of avoided cost to the system. This price level has been
determined both by analysis of overall system costs at the time Susitna
. .
comes on-power and by comparison with the most likely alternative, a
100 MW/200 MW coal burning thermal genrating plant. Revenues have been
computed based on 1993 price levels of 135 mills/Kwh to 150 mills/Kwh
with test analaysis at 120 mills/Kwh.
It is recognised that these 1993 energy avoided cost/price levels
will be substantially influenced by altern~tive energy costs determined
• largely by fuel-costs but also heavily influenced by the capital costs
of thermal generating plant. Recent figures made available by Battelle
from their alternative energy studies showed energy costs substantially
lO\-ler than previous indicated levels and lower than the assumptions
on which generation planning had been based.
• Cl •• 8
l ;,;.,..,w..-.._
(
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- 8 -
Both the current cost levels attributed to fuels and the related
escalation rates deserved most careful review and a determination of
the confidence level with which they were offered. AAI would review
and discussion was reconunended with Dale Teale and Harold Schmidt
of AGSC who were particularly interested in the relief which may be
offered to them by early contribution.of Susitna.
7) A program for future meetings wa~ discussed:-
Jan 12/13 Possible attendance by AAI at meeting in
Anchorage
Jan 14/15
First Week Feb
Mar ·15
Meetings in Seattle with Battelle, AAI, APA and
Dr. Rohan. Topics for discussion would include
load forecasts, gas fired-generation options,
energy costs, escalation forecasts, alternatives
to Susitna financing and project economics.
Initial issue pf draft report to APA
Draft feasibility study to APA (a s~~ week
period is anticipated for review and public/
agency briefing with possibly 3 public meetings.)
Briefing by AAI to APA Board Mar 15-31
~ Briefing by APA External Panel to APA Board
8) AAI submission of revised scope_of work~under cover of letter
November 27th was reviewed. Scope.agreed omitting only Work Package
D as defined under Marketing concerning "Influence of Power Cost
Assistance Legislation".
• • • • 9
- 9 -•• •
The level of effort was agreed as:-
Task Computer
lvlanhours Consultant ExEenses
Financial Analysis 1192 68 m/days $ 7500
Marketing 951 12 m/days $ 1500
Risk Analysis 2400 $ 4000
Totals ;.4543 80 m/days $13000
( .
(Note:-other expenses not included)
Costs to complete as agreed in Contract Amendment #2 are $491,025
(including escalation). It was recognised that the above level of
effort converted to total billings is less by a margin of 10%, than
this arnounte Every effort will be made to retain this difference as a
contingency.
c· ..
SUSITNA HYDROELECTRIC PROJECT
TASK 11 -FINANCIAL ANALYSIS
Low
(a) % Funqing of the total
·project cost from State
of Alaska . 30
(b) % ROI on State funds -
(employed for test of
financial viability
only)
(c) % Interest rate on senior
debt funds
5
{d) Senior debt maturity (with
interest and principal
payments levelised over
period commencing one year
following the year of full
plant operation) -years 35
(e) Inflation rate %
(f) Debt service cover
applied to the annual
requirements for levelised
senior debt service
(g) % Rate, applied to original
capital cost, with
allowance for inflation, at
which "Replacement and
7
Renewals" are. provided 3/4
(h) Inflation rate applied to
construction costs
during the period of
construction 10
(i) Inflation rate applied
operating costs during
the period of operation
(j) "Reserve and Contingency"
fund as a % of annual
operating costs set aside
and replenished year by
year
(k) Committment and placement
fees as bond financing
costs
8
(Attachment A to letter of
November 27, 1981 amended at
APA/Acres meeting December
4, 1981)
Median High "Test" Values
50 70
5 5 5
12 14 12 and 14
35 35 35
7 7 7 and 9
1.25 1 .. 25
3/4 3/4 3/4
10 10 7 and 9
8 8 7 and 9
not decided 400%
not decided 1/2% of bond value
I I
--.
-
18
17
16
15
14
~ 13
(.f)
2 12
0
3 I I
tO z 10
~· 9
<t: :I e
8 ..._ 7
1i ~ 6
5
4
3
2
;~ • ~
~ q"lo INF"L.ATION ~·' TOTAl..CAPtTAL.. COST
•' ~17.9bn I
.I
STAGE!
$:3.5-$4.9 bn
BOND OFFERING
lN 1984-/5
I ~J~l~bn / 1°/o IN FLAiiON.
TOTAL.CAPIT~ COST
$13.9bn
BONDOFFE.RING I
IN 1991 /•
.I·
WAT#JA COMPf...E.Te+j ./
I I I •
~~l'lm•••• 9"/o INF~ION ~-··.. $11.~ bn
.••" BORROWING ~eQlJI~E.Mf.NT
! ./ : ./
~·.. WITH $ 2 5 bn STATE i~ APPR~IA'TION IN 1~8!$ ~
I • ._..-
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./ '-L...--~/
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/ #~ ~ ,
II #
1°/o !NFl.ATJON
$8.~ br·,
'
~RRO~tiNG R~Ut~EMf.NT
WITH.$2.5 bn 5TATe.
~PPROP~IATION IN 196!5
.~ .A. . ~ ~
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...
. , I
0 I I I I I ~~ t I I I I I I I I I I I I I I _ I I .J
1985 86 87 88 69 90 91 92 9.3 94 95 9b 97 98 99 2000 01 02 03 04 05 06 07
ALASKA A::NVE.R AUTH(.qiTY •
5U51TNA HYD~OELECTRIC P~OJECT
CAPITAL COST AND BORROWING REQJIREMENT ~~~R
•
··\
" . ~ ... ·,
,;. "f
~
,.
I •
1 .•
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SUSITNA -P5700
.,Marketing and Finance December 23, 1981
via telecopier P. Hoo,rer-Colu.'Tlbia
D.D. Lawrence -Buffalo
Su.tr.lfiar~ of data f7om fi~ancial analyses conducted 12/14 to 12/23 to
determl,ne B/C rat~o Susl.tna/thermal alternative and to test various financing plans:-
A) Capital costs
$ millions
Janu~ry 1982
levels
B) 1 Expenditures by
year % of total
Susitna
B) 2 Alternatives
Watana 1020 1-iW
Devil Canyon 600 MW
Beluga 400 MW
Beluga 200 MW addn
Nenana 250 MW
$3698.6
$1470.2
$1056.0
$ 564!!0
$ 632.0
Beluga 400 MW and Nenana both
include-transmission at $,72 million
and.are based on/KW capital costs
increaaed by 20% above Battelle/
Ebasco figures.
Watana·l985 7.2 D.C. Year 1
86 9.2 2
87 8.7 3
88 8 .. 4 4
89 14.6 5
90 22.3 6
91 16.5 7
92 8.2 8
1993 3.7 9
q(·~
5.8
8.4
8.1
5.9
18.3
19 .. 2
'
18.0
12.5
3 .. 8
\().)
13eluga Two units Beluga or Nenana One Unit
Year 1 7.7 -9 .. 1
2 8.8 12.0
3 15.0 15.6
4 27.6 27.4
5 18.1 18.5
6 7.0 9 .. l;_~
7 7 .. 7 8.3
8 8.1
B) 3 In addition to coal fired thermal additions the alternative to
Susitna assumed to have 3 x 70 MW gas turbines added in 199:8
at capital cost $198 million with only fixed O&M charged to
system at $40/KW/year as equivalent to the spinning reserve
capacity available from the 6 x 170 MW Watana station.
·-or "" -
-
..
- 2 -
•. ·•"'· B~~luga and Nenana charged $16. 83/KW/year fixed o & M and
· _ ~-·· D. 6 mills/KWh variable o & M.
B) 4 In above t<;bulatiot1s Devil Canyon year 9 corresponds either
to 2000,or with delayed schedule to match reduced demand,
2004. Beluga 400 MW year 8 corresponds to 1994 and Beluga
200 W~ year 7 corresponds to 2000 or to 2004 and Nenana
250 M\.,; year 7 to 2001 or 2005.
B) 5 All capital costs are escalated in accordance with Battelle
factors over and above general inflation rates.
C) 1 Coal costs are based on Acres reassessment which departs
from Battelle estimates and lead to January 82 levels for
fuel 13.6 mills/KWh-for·Beluga and 16.1 mills/KWh for
Nenana -escalating at rates percent:-
(continues) 3 .. 4 from 1982 to 1985 1.16 2030 to 2040
2.6 1985 1990 1.14 2040 to 2050
2.5 1990 2000 l.l:l 2040 to 2060
1.23 2000 2010 1.1 thereafter
1 .. 17 2010 2030
~ Note rates from 2000 onwards approximately equivalent to
1.2% ..
C) 1 These coal prices result in energy costs from thermal power
plants in then current dollars assuming 7%-10% scenario of.
MWhe Equivalent Mills/KWh
Supplied
(equivalent to
Susitna)
1993 2000 51 (before coal fired
addition)
94 3315 139 (Beluga added)
95 3320 144
96 3325 150
97 3330 156
98 3335 190 (NG turbines added)
99 3340 . 198
• '"
• '
- 3 -
Above mill rates used as basis for Susitna ravenues as
Watana comes into service and if generating plant additions
followed on schedule allowed by original demand., forecast
would continue.
2000
20Ul
2010
4720
6060
6580
179
268 (Beluga and Nenana
added)
381
We have also run 9%-12% scenario case which we believe may
yet have to be seriously considered as providing the correct
relationship of escalation and financing interest rates.
This improves case for Susitna.
We appreciate that OGP-5 unlik~ly to call for thermal additions
to provide energy outputs~matching Susitna capabilities but we
believe it gives viable basis-for judging reasonable estimate
of Susitna revenuesa
C) 3 With reduced demand forecast additional plant or Devil Canyon
can be delayed probably by 4 years or so and past 2000 picture.
2000
2001
2002
2003
2004
2005
3340
3340
334'0
":)":)AI"\
.:>.J~U
4720
6060
208
217
227
238
220
~53 (Nenana added) .
D) Financial analysis on above basis has established B/C ratio
Susitna/thermal alternative of 1.59/1 for Watana 1994/DC 2000
on original demand schedule and above 1.56/1 for Watana
1994/DC 2004 on reduced demand. Watana alone E/C ratio is
about 1.17/1.
Financing of overall project is made easier by 4 year deferment
of DC.
E) While financial analyses involve different approach than
OGP-5 we recommend a run conducted using sa.me capital costs,
schedules of expenditures, fuel costs and other relevant
data. This could be viewed ~s test of sensitivity arising
£rom variations in these factors from your assumed base caser
but if not regarded as nece.ssary for Task 6 at this time
would recommend the run be made chargable to Task 11 •
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-
OFFICE MEMORANDUM
J. Lawrence
J. Hayden
Date: December 18,1981
File: ?5700.14.06
M.A. Hosko
cc: J.G. Warnock
Information from meeting with Battelle
Enclosed please find the following ·infonnation: .
DRAFT of meeting minutes
Copy of the 11 Rai 1 belt coa 1 a 1 ternati ve' s report 11 (Ebasco)
Copy of 11 Alaska Economic Projections.. ISER
Some unresolved issues remain, including the load forecasts \-Jhich
are expected to be in the same range as the DSR forecasts.
M2mo of Meeting December 17, 1981 Jecember 14 and 15, 1981
t:at.telle PNL
i. ·; c.h 1 and, \-.'a5h i ngton
Subject: Susitna Generation Planning and
Railbelt Alternatives Studies
Purpose:
The purpose of the meeting was to review the study progress to date and identify
and reconcile, if possible, d1fferences.
Attendance:
Jay Jacobson, Battelle; Mary Ann Hosko and Phil Hoover, Acres
Aoenda
1. Discuss status of progress of the individual studies, including work
remaining.
2. Review and compare preliminary input/output of the Railbelt Generation
Planning models, OGP {Acres) and EPRI Over/Under-AREEP Version (Battelle).
3. Discuss and resolve specific issues and differences between studies
identified.
4. Unresolved issues
Meeting Notes
1. Phil Hoover reviewed the Acres' scope of work for the 6.37/.38 efforts and
left a copy of the work scope. This scope provides for a breakout of the
effort into eight subtasks:
Update Load Models (input)
-Update Generation Model (input)
-Alternatives Data
-Generation Plan without Susitna
-Generation Plan with Susitna
-Financial Analysis
-Sensitivity Analysis
·· Documentation
Jay Jacobson reviewed Battelle's effort which consists of essentially five
tasks:
{a) Fuel cost estimating: {Lead -Tpm Sechre~t) This task is essentially ?
complete. One area which is being review•d is the availability of
North Slope Gas in Fairbank' given recent developments in the gas pipeline. -
(b) Demand Forecasting: {Lead -Mike Scott) The forecast provided 12/9 has
been invalidated due to an internal error in program data. New
forecasts were being developed during the meeting. Anchorage and
Fairbanks are assumed to have a 97 percent coincident peaK.
t, ..
Memo of Meetings -2-December 17, 1931
It_appears that the medium load forecast, when completed, will be
fa1rly close to the forecast used in previous DSR Acres• studies. All
three forecasts will probably be available during the December 16-18
time period. The forecasting team is confident that the errors are
ironed out of the forecast.
(c) Evaluation of Generation and Conservation Alternative: (Lead -
jeff King) This task is also nearly complete. From the initial
exhaustive list of alternatives, there remains 17; eight or nine are
hydro and the rest are coal and natural gas. The plans to be developed
in Battalle Plans lA and lB will use coal-fired steam, combined cycle
and gas turbine plants, located in both Anchorage and Fairbanks.
(d) System Integration: (Lead-Jay~Jacobson) The primary tool to be used
in this task is the EPRI Over/Under Model, AREEP Version. Using this
model, Battelle will develop plans with scheduled plant additions and
cost. Also to be done is a sensitivity analysis consisting of:
-Higher and lower fuel costs. The base case is set with world markets
forcing real escalation of 2 percent on oil prices. Sensitivity will
be done on price forecasts with world oil escalating at 1 and 3
percent.
-Capital costs will be varied on a+ 20% basis. Variance will be
limited to one alternative at a time. All capital costs will be
recovered in the generation planning study.
-Effect on demand of SB25 11 Capital cost grant 11 interpretation. For
example, if consumer did not have to repay the costs of Susitna in
their r~tes, what effect would the low cost energy have on demand .
.
(e)· Implementation Strategy-This will be defined for each Generation Plan
identified. This task will address the possibilities for financing,
strategy and institutional arrangements needed for pian
implementation, including cautionary notes on assumptions.
The actual completion date for the draft report in January 30. This
will include plans, cost of plans, environmental impacts, other
precautions. No recommendations are anticipated.
2. Mary Ann Hosko reviewed in detailed printout of a preliminary OGP output.
The input data was discussed in detail. In general, there is a high degree
of consistency between Acres and Hattelle's basic data.
The load model used by OGP will be annually matched to the Battelle
forecast; nowever, the monthly/daily characteristics will remain based on
the 1980 Woodward-Clyde studies. The load model is a significant difference
between AkEEP and OGP as the former operates on a yearly load duration curve
while the latter varys by month and day. AREEP will use a constant shape of
load duration curve throughout the 30-year period of analysis.
Memo of Meetings -3-December 17, 1981
Acres has adopted the most recent Battelle information on existing and
~ommi~ted units. We will include the Copper Valley/Glennallen resources and
load 1n the study, as Battelle has been directed to do so. In the OGP
model, ~eat rates are specified to units, thus the existing units have a
-much higher heat rate than the available new alternatives. AREEP allows
only a single heat rate for each type unito Therefore, the OGP model will
have higher fuel costs associated w~th use of existing generation units.
It was noted that Battelle is assuming no interactive energy flows.between
Anchorage and Fairbanks can take place prior to 1984. In 1985-89, energy
transfer is limited to the planned intertie, 260 GHW annually. In the
post-1990 period, energy transfers are unlimited. Acres, in focusing in the
post Susitna period (1993-2010) has full exchange potential but also in~•~~~;
costs to account for the~ intertie capability.
~rt..z.\'~
Acres is currently using one cost level each for coal, gas and oil.
Battelle is differentiating between coal in Anchorage (Beluga) and Fairbanks
(Nenana), and aid and new gas in CEA and AML&PD. It was decided that Acres
would make the necessary changes in their Railbelt model to enact the cost
difference. This change will probably have a small impact on results.
~attelle is reviewing cost projections of North Slope gas available to
Fairbanks. This is consistent with the economic scenario assumption of the
completion of the TAPS gasline. It is interesting that this gas decreases
in real price through time, due to the back out price from the lower 48
sales.
Battelle is using two coal plants at the separate prices at Beluga and
Nenana, as compared to the Atres• all Beluga development. Since the costs
developed by Ebasco are nearly equal for the two sites! the prior decision
that it would be n1uch less expen5ive to upgrade the intertie and keep
development at Beluga may be remiss. Acres will give consiaeration to the
shifting of some of the Beluga units to the Nenanna fields. This could
enact savings to the all-thermal pian, as it would have lower transmission
costs (currently $500 million).
At this time, 200 MW units are the standard size being used by Battelle for
coal and combined cycle units. Acres will adopt this size. The retirement
policies on the units will be from publishe~ ~attelle work p3per 4.1.
The AREEP model calculates interest during construction on capital costs,
given a constant annual cash flow during the construction period. The OGP
model does not calculate !DC so it is input as part of the capital costs.
Acres is using an "S" curve formula for this calculation. These differences
should not be significant.
Start up time as defined on Battelle's information sheets is not consistent
with the Acres' definition of immature unit time. The Battelle definition
is time which would be added on to the construction period for unit
commissioning. The Acres' definition is that time that the unit suffers a
Memo of Meetings -4-December 17, 1981
higher forced and planned outage rate, due to 11 bugs" in the plant which must
be ~orke~ out. Acres will revert to using the previous immature time
per1ods 1nstead of the new Battelle start-up times. Battelle does not have
the capability for expressing immature outage rates.
Battelle is using several factors in AREEP, not used in the Acres' model.
These include a rate base for plants in service, and a cost for distibution
and overhead. Battelle is using 8.13 mills/kWh for general administration
and overhead. The rate base was supplied by the Alaska-PUC. A copy was
given to Acres. It is depreciated by Battelle on a declining balance method
at 10 percent per year.
The AREEP model develops a generation plan based on a desired long term mix
goal and an upper limit on capacities specified by the operator. Thus, the
mix is controlled somewhat by the operatoro The program, when capacity is
needed, reviews the existing system mix and compa~es it to the long term
desired plan. Units are then selected to make th,: existing balance as close
as possible with the plan. Currently, the all-thtrma1 long term mix is
approximately 40% Beluga coal units, 18% combined cycle, 8% gas turbines,
14% Fairabnks (Nenana) coal and 20% hydro.
Spinning reserve requirements are not addressed by the AREEP model. The OGP
model operates plants as necessary on a hot spinning reserve mode. Thus,
the fuel costs in the Acres model will be higher for the same amount of
generation.
The output of the AREEP model are in three categories of price Jan. 1981,
mills/kWh: total, electrical requirements, delivered energy, and
conservation. The latter is calculated by Battelle's RED (Railbelt Electric
Demand) model. The delivered category corresponds to the Acres' planning
sinte conservation is taken into account by the forecasts provided by
Battelle.
It was concluded from the close comparison of the two models that the
outputs will not be directly comparable on an absolute number basis. The
generation plans are expected to be similiar with the relative merits of
each plan shown to be the same. The fcllowing are major differences in
methode 1 ogy/mode ·1 capabi 1 i ty:
(a) Dispatch: The daily unit dispatch modeling in the OGP model results in
greater use of more expensive units than the AREEP model, which
dispatches units on an annual basis. This will result in higher fuel
costs in the OGP model.
{b) Heat Rates: The AREEP model uses only one heat rate per unit type.
The Acres' model was specific rates for each existing unit~ This fuel
costs for operating existing units will be significantly higher in the
Acres • mode 1.
(c) Overhead and Sunk Costs: The Battelle AREEP model has included cost
for distribution systems and utility overhead. These have not been
included in the Acres' model since relative costs between plans is
desired rather than an absolute customer cost. Thus, the production
•
.. .
Memo of Meeting =-5-December 17, 1981
cost value from the OGP model is not equivalent to the AREEP consumer
cost. The AREEP model also includes an annual cost for existing plant
in service which is depreciated over time.
3.-Other issues discussed:
(a) Hydro alternative: Battelle has cost and energy information 'fr·om both
Bechtel and Ebasco on the Chackachamna project. It was agreed that the
primary Chackachamna. alternative would be Case B from the Bechtel
Study. Battelle will check the Ebasco costs and project insensitivity
analyses.
Other hydro alternatives to be used are Grant Lake (7 MW in 1988)
Allison Creek {7MW in 1992) based on Acres-DSR costs escalated to
January 1982 by 7 percent and energies.
{b) Socio-economic data which is the basis of ISER•s forecast was provided
to Acres in report form.
(c) The revised medium forecast, as well as the high and low forecast, will
be available by December 18. The high and low will bracket the range
of reasonable economic futures.
(d) No analysis of a resultant reserve margin which would be dependent on
forecast uncertainty has been completed. At this time Battelle is
doing their analysis on a 40 percent reserve goal. Acres is planning
to a loss of load probability of one day in ten years.
(e)
(f)
(g)
A copy of Acres• final report on Cook Inlet Tidal Power will be sent to
Battelle.
Acres will adjust its model to differentiate between fuel costs in the
different load centers. This will be consistant with the AREEP model.
Additionally, to be consistent with Battelle•s findings~ a limited
number of coal plants will be sited in Nenana to balance demand and
generating resources.
The period of analysis for the study was discussed. 1\cres is making
the assumption of a 40-year extension of the last year (2010) of
modeling in order to make some measure of the long term relative
benefits of the with and without Susitna plans. While Battelle has no
specific objections to the methods, they will not be doing the same,
unless directed.
c
•
• J
•
!·=mo of Neet i ng -6-December 17, 1981
(h) Susitna development was discussed, and it was pointd out that the
development could be formulated as follows:
W~tana 1 4 170 MW units = 680
2 2 170 MW units = 340
1020 MW
Devil Canyon 1 3 150 MW units = 450
2 1 150 MW units = 150
600 'MW
Energy
3385 GWh
0
GWh
3264 GWh
0
6649 GWh
Addition of second stage at Watana delays $41 million expenditure.
4. Unresolved Issues:
'a) \ . The escalation of O&M and capital costs proposed by Ebasco have not
been accepted yet by Battelle. They have requested that Ebasco
substantiate the figures. At this time the values are not being used.
(b) The Acres' concern with regard to coal prices was discussed including:
the zero real escalation of Nenana coal, the relationship between the
coal and oil prices, and the probability of the opening of the Beluga
fields in light of low coal value~ This issue will be pursued at a
later date ..
(cJ An additional concern with regard to level of confidence of estimates
was discussed. The Susitna estimate, made with detailed studies, takes
into account the specific problems of the site. The alternative
estimates, on the other ha~d, may have a lower confidence level and may
actually be a center point forecast, subject to a cost increase.
Battelle will discuss the level of confidence of the estimates with
Ebasco.
(d) Transmission line costs for Susitna development have included a
reliable assessment of transmission line update and capability. A
similar assumption and associated costs must be made for the thermal
alternative, to be added to the cost of the "without" Susitna caseo
• . • l
.\ I !
·~ \ '
Year
1992
1993
1994
1995
1996
1997
1998
1999
2000
December 17th 1981
ALASKA POWER AUTHORITY
SUSITNA HDYROELECTRIC DEVELOPMENT
DEVIL CANYON DEVELOPMENT
PRELIMINARY CASH FLOW
% Of Total
Period Cummulative
5.8 5.8
8.4 14.2
8.4 22.3
5.9 28.2
18.3 46.5
19.2 65.7
18.0 83.7
12.5 96.2
3.8 100.
Total Capital Cost $1470.2 Million
-
81 \ ·~
. "" ~-
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E..t!.EL
2
Earliest Commercial Availability 1989
Preconstruction Studies and (
Li.censing {years)
Construr..~tion (years) 6
Sta.rtup (years) 1/2
Plant I:ife (years) 35
Beating Value (Btu/lb) 8000 {"Railbelt
Standard• Coal)
Nenana
16.83
Variable OE&! {mills/kWh) 0.6
.
Fuel ( $/~R1Btu) 1.09.
c/ :~· .{ I. !~1.. { 1 i
Escalation Facto~ {%/Year, 1981-2010}
Capital · ·· (see Table l)
Fixed O&M (see Table 2)
Variable O&M . (see Table 2)
Fuel (Belugaj tl.S
Fuel (nenana} ·0.2
}
2107
16.83
0.6
1.47
6
1 o7:· & 4
I ---
7 ,, .
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1 •
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3.
4.
5.
6.
.tl' ~t: " ~ (~
7.
A G E N D A
SUSITNA HYDROELECTRIC PROJECT
FINANCING & MARKETING -TASK II
INTRODUCTION
REVIEW OF TAS1~ PROGRESS
OUTLINE OF FINANCIAL APPROACH
DECEMBER 3, 1981
MARKET INTERACTION ·WITH RAI LBEL T UTILITIES
STATE OF ALASKA APPROPRIATION
SCOPE vf FuRTHER WORK
Financing
-Marketing
-'Risk Analysis
OTHER ISSUES
\
..
" .
December 1, 1981
Presentation in Anchorage~Alaska
Objective
-
To demonstate what the basic pre-conditions are for:-
' {~A Viable financing plan under todays conditions.
Bond Holder Requirements
The basic bond holder requirements will be:-
1) Adequate debt service cover.
2) Absorption of all risks -particularly the risks arising from
inflation -by third parties.
Capital Requirements Allowing for Inflation
et. Whatever the long term rate of inflation (taken at 7% in D study)
bond holders must be expected to demand that the bond offeringlsufficient
to bring the project to an economically viable state (Watana alone)
allowing for at least 9% inflation over the construction period. This
defines the bond offering requirement as $4.8 bn in 1984/85 assuming
$2.5 bn of State funding accumulating interest from 1985. A further
$6.8 bn will be required around 1991 for completion of Devils Canyon.
real
~
Risk
They would probably also wish to see contingent financin~ to mee~.
1
capital cost overruns of upto 20% of the bond offer in~.~ it'l.t.~ iJ.. {U>f ~J.i.
t s:.1t.ln..ll. ~~!Wit ~ ~ ~I k ~ ~ J! }irk ~ w.Jl Ji ~· up t #Jt h.
Absorption ~~
It is basic to ~tfinancing pl~n that the APA does ~t seek to
absorb the virt-pally unlimited risk of capital overrup~~~rising from
( ~tt 1{. f .A.) ( ~~~ -l~tlf
increasesjin the rate of inflation· over the 8 years1..to c mpletion of
Watana. It is assumed that the supply contracts required for the
.... /2
•
- 2 -
bond offering of 1984/85 will contain escalation provisions lifting the
price of Watana energy at least in line with the general rate of
inflation so that any impact of such inflation on capital costs aan be
serviQed out·of the higher revenues~
This means that only increases in capital costs in excess of the
general rate of inflation (real capital overruns) would be "uncoveredn.
Possible Outcomes
Exhibit 2 shows the project limits of viability for capital cost
and entry prices. The critical number in the table is the 1994 entry
price as negotiated pre 1984/85 in the take-or-pay contracts. It is
the "rock bottom" number which might result if thermal energy p:rices
increase by only 7% per annum or if the escalated contract price was
limited to general inflation and this was 7%. On this basis the
matrix points to the following conclusions:
1) The project could withstand (a) % capital overruns
(construction costs 20% higher in real terms) and still
be cash viable (showing a positive net cash flow after
debt service by the year ). Debt service cover in
·conventional sense would be inadequate upto th~s date.
It would be possible, however, to meet all debt servicing
out of the $1 bn reserve fund.
2) At the more probable entry price of 135 mills (based on
10% escalation from 1981) the financing viability level
limit goes out to a 30% capital overrun in real terms .
. . . . /3
1 ....., ........ -
• ' 4
- 3 -
•. atana Alone as Back Stop
In terms of contingency planning and satisfying bond holders
consideration should be given to halting construction after the coinpletion
of Watana under certain circumstances.
The circumstances which might justify the consequent delay of Devil~
Canyon are:-
(a)
(b)
(c)
General inflation inordinately increasing the borrowing
J' requirement or exceeding what was negotiated in the flow
Jf
through contracts;
very large real capital cost overruns;
less than forecast increase in demand making Watana ~
pass Devil~ Canyon bigger than the system can absorb
at a mill rate consistent with financial viability
at sufficiently early stageo
ll. Provisional analysis shows that Watana alone could provide a strong
back stop in the event of such extreme adversity. In the 120 mills case
the extreme financing limit on capital cost would be a capital overrun
in real terms of %. This would still leave the project reaching
cash flow break-even by the year with the $1 bn reserve fund adequate .
to meet all cash deficits prior to this stage •
.... w:p:w
, c~
I ...
-4 -
• ISSUES TO RESOLVED
1) Magnitud~ and_ date of State appropriation
~f 120 mills is accepted the possible lower limit at which take-or-pay
contracts can be negotiated in run up to 1984/85, $2.5 bn made available
in total to the project in 1985 is the minimum consistent with the
ability of the project to withstand a real capital overrun of % in the
Watana back stop case. When the money is available, however, it is also
very important$ If the capital is appropriated as required to meet
construction costs (no interest accum~lation) the capital that would need
to ber-,~P~!~~r~ated woul~ b~ $3.5 ~~ o~~r the years upto 1989. . ) ~ op~~ ~ J1t ~ ~ ~·(~ill-~ ~[t Uf t ~J;..~ ~~
The Issue of Inflation ~ Ui~J ~ tid,; ~.tt ~ ~ }Ja-1~ Jc ~pit 14 ~~~u.rrd 41 ~~ ~~ ~ )hyl.
The desirability of an aggresive rather than defensive posture as
2)
regards inflation stressing that it will force up the capital cost of
all the energy options and stressing that Susitna uniquely offers
Alaskans' the opportunity to obtain 2/3 or more of total electricity
requirements in to perpetuity at a virtually fixed cost.
3) Understatement of the Susitna Case
The studies at present understate the case for Susitna by focusing
on the Susitna versus coal as the le.ast cost option. In my view the
case for Susitna would stand even if it were assumed (and it can be
no more than assumed) that coal represented the cheaper long ter~t
alternative. This is because the real issue is what option long term
maximises benefits to the State of Alaska. This is almost certainly
going ahead with Susitna and exporting coal since maximising all
economically available sources is what maximises State real wealth.
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-
I
#:
'"
i\l.t\S 1\1\ POWER AUTHORITY
~!USI'l'NA HYDROELECTRIC PROJECT
!fiJ
---'
Cos-nparison l'irith Capital Cost $3672M Esc. From 1982 at 7% P.A. -State Contribution $3.0 Bn
\'Jatana Alone Mi11s/NWH •
Entry Price: 1201 + 7% per annum
Year:-1994 1996 1998 2000
Revenue $M 423 485 555 635
$367~M DS/C ~ 1.7 2.1 2.6 3.3
BA3E DS/C+ FUND , 4.1 4.3 4.7 CAP 5.1
COST CASH 114 180 405 . 500:
DS/C l .. l 1.3 1.6 1.9
+10% DS/C+ FUND 3.1 3.2 3.4 3.6
CASH (3) 32 220 269
DS/C 0.9 0.9 1.0 1.2
+20% DS/C+ FUND 2.5 2.5 2.5 2.6
CASH. (120) (115) 35 37
DS/C 0.7 0.7 0.8 0.8
+30% DS/C+ FUND 2.1 2.0 1.9 1.9
CASH (238) (262) (150) (195)
Note Cash Deficits Shown ( )
,~,
2001 2003
680 778
3.8 4.8
5 .. 4 6.1
6~0 844
2.1 2.7
3.8 4.2
340 518
1.3 1.5
2.7 2.9
80.. 192
0.9 0.9
1.9 1.9
(180) (134)
Mi1ls/'F<WH
i35 + 10% per annum
"-1994 1996 1 1998 .200'0
490 592 717 867
2.0 2.6 3.6 4.9
4.3· 4.7 5.4 6.2
183 310 624 349
1.4 1.7 2.2 2.9
3.3 3.5 3.9 4.4
66 162 439 617
1.0 1.2 1.5 2.0
2.6 2.7 3.0 3.3
(52) 15 255 385
0.8 0.9 1.1 1.3
2.2 2.2 2.3 2.5
(169) (132) 70 . 154
2001 2!003
954 1154
5.7 7.7
6.7 8.0
1032 1493
3.4 4 r; . ~
4.7 5.6
772 1167
2.2 3.0
3.6 4.1
513 841
1.5 2.0
2.7 3.1
253 515
EXHIBIT B
December 2, 1981
•
P5700.11
•
-·-
• ·-
ic ,..,
i\~ .. .7 •
~
1:.
;d.r\SKi\ POWER AUTHORITY P5700.ll
SUS I'l'UA HYDROELECTRIC PROJECT
Comparison With Capital Cost $3672M Esc. From 1982 at 7% P.A. -State Contribution $2.5 Bn
\'latana Alone Mills/KWH Mills/KWH •
Entry Price: 120 + 7% per annum 135 + 10% per annum
Year:-1994 1~96 1998 2000 2001 2003 '1994 1996 1998 2000 2001 2003 .
~' ......,
I I '
~~ Revenue ~M 423 485 555 635 680 778 490 592 717 867 954 1154
~3G72M DS/C . 1.0 1.2 1.4 1,7 1.8 2.3 1.2 1.5 2.0 2.6 3.0 4.0
BASE
CAP DS/C+ FUND ~.9 2.9 3.1 3.3 3 .. 5 3.8 3.1 3.3 3.6 4.1 4.3 5.1
COST CASH (37) (10) 167 202 266 425 32 120 386 551 698 1074
DS/C 0.8 0.8 0.9 1.1 1.1 1.3 0.9 1.1 1.4 1.8 2.0 2.6
+10% DS/C+ FUND 2.4 2.3 2.3 2.4 2.4 2.5 2.5 2.5 2.8 3.1 3.3 3.8
CASH {154) (157) (18) {30} 6 99 (85) (27) 202 319 438 748
DS/C 0.7 0.7 0.7 0.8 0.8 o.o 0.8 0.8 1.0 1.2 1.4 1.8
+20% DS/C+ FUND 2.0 1.9 1.8 1.8 1.8 1.7 2.1 2.1 2.2 2.3 2.4 2.9
CASH (272} {305) (203) {262) (254) {227) (203) (174) 17 87 179 422
DS/C 0.5 0.5 0.6 0.6 0.6 0.6 0.6 0.7 o.8 0.9 1.0 1.2
+30% DS/C+ FUND 1.7 1.6 1 ~. o.J 1.4 1.4 1.3 1.8 1.7 1.8 1.8 1.9 2.0
CASH (389) (452) (388) (493) (514) (552) (320) (322) (168) {145) (81) 96
---------------~ ----~-----
Note Cash Deficits Shown { } EXHIBIT B
December 2, 1981
~-·~
1 I
•.' Qf:·.
ALASKA P0WER AUTHORITY
SUSITNA HYDROELECTRIC PROJECT
,
\,~J
Comparison With Capital Cost $5299M Esc. From 1982 at 7% P.A. -State Contribution $3.0 Bn
Watana and Devil Canyon Mills/KWH Mills/KWH
Entry Price: 120 + 7% per annum 135 + 10% per annum
Year:-1994 1996 1998 2000 2001 2003 1994 1996 1998 2000 2001 2003 I
Revenue $M 423 485 555 1076 1151 1318 490 592 717 1469 1616 1956
$5299M DSlC .
1.7 1.9 2.3 4.4 1.5 1.8 2.0 2.4 3.0 6.1 2.6 3 • .s BASE DS/C+ FUND ' 4.1 4.3 4.6 5.0 6.8 3.5 4.3 CAP 4.2 4.5 5.7 2-4 2.7
COST CASH -- --253 472 - --445 892 1455
DS/C 1.1 1.3 1.5 2.9 1.0 1.2 1.4 1.6 2.0 4.1 1.7 2.3
+10% DS/C+ FUND 3.1 3.2 3 .. 4 4.3 1.7 1.8 3.3 3.5 3.8 5.1 2.5 2.9
CASH -- -
-(89) 43 ---125 551 1026
DS/C 0.9 0.9 1.1 2.2 0.8 0.8 1.0 1.2 1.5 3.1 1.3 1.6
+20% DS/C+ FUND 2.5 2.5 2.7 3.4 1.4 1.4 2.6 2.8 3.0 4.1 1.9 2.2
CASH (55) (12) --(432) (386) --- -
208 596
DS/C o.a 0.9 1.2 2.4 1.0 1.2
+30% DS/C+ FUND 2.2 2.3 2.4 3.3 1.5 1.7
CASH (99) (23) --(134) 167
-
Note Cash Deficits Shown ( ) EXHIBIT C
December 2, 1981
~~---~-.,.~~------c;~
."
P5700.ll
---
--0':.:."-
"-.,,_
I I :
,,.
~~~
ALASKA POWER AUTHORITY
SUSITNA HYDROELECTRIC PROJECT
,
:,. __ ,.-'".:
Comparison With Capital Cost $5299M Esc. From 1982 at 7% P.A. -State Contribution $2.5 Bn
\-latana and DeV'il Canyon Mills/KWH Mills/KWH
Entry Price: 120 + 7% per annum 135 + 10% per annum
Year:-1994 1996 1998 2000 2001 2003 1994 1996 1998 2000 2001 2003
Revenue $M 423
..-
485 555 1076 1151 1318 490 592 717 1469 1616 1956
$5299M DS/C ~ 1.0 1.2 1.4 2.7 1.0 1.2 1.2 1.5 1.8 3.7 1.7 2.3
BASE DS/C+ FUND . 2. 9 CAP 3 .. 0 3.2 4.0 1.8 1.9 3.1 3.2 3 .. 5 4.8 2.5 2.9
COST CASH --- -
(84) so ---146 556 1032 -DS/C 0.8 0.9 1.0 2.0 0.8 0.3 0.9 1.1 1.4 2.8 1.3 1.6
+10% OS/C+ FUND 2.4 2.4 2.5 3.1 1.4 1.4 2.5 2.6 2.8 3.9 1.9 2.2
CASH ( 88) {53} --(426) (380) (17) - --214 603
DS/C 0.7 0.7 0.8 1.4 0.6 0.7 0.8 0.9 1.1 2.2 1.0 1.2
+20% OS/C+ FUND 2.0 1.9 1.9 2.4 1.1 1.1 2.1 2.1 2.3 3.1 1.5 1.7
CASH (203) (197) {152) -(767) {807) (132) (65) --{128) 174
DS/C 0.6 0.7 0.8 1.7 0.8 0.9
+30t DS/C+ FUND 1.8 1.8 1..8 2.5 1.3 1.3
CASH (248) (209) (109) -{469) (254)
------~-------------------~~
Note Cash Deficits Shown ( ) EXHIBIT C
December 2, 1981
~·~·····.~·---· . ~ .. ::n~W~?i;:~rr::~~~~J~
•
P5700.ll
~-
·-
1
. •
November 27, 1981.
PERSONAL & CONFIDENTIAL
Mr. T. McGuire,
Alaska Power Authority,
334 West 5th Avenue,
Suite 31,
ANCHORAGE, Alaska 99501.
Dear Terry:
Susjtna Hydroelectric Project
Financing Plan
In the weeks since the October l3th meeting in Buffalo, we
have proceeded with the development of a viable financing
plan which would fit the financial parameters and constraints
which we have agreed and which are set out on Attachment A.
The financing approach to Susitna is sensitive to a number of
variables and we are very well aware of the need to pursue a
basis for definitive study which meets the requirements of
the State, of the Authority, and of the senior debt invest-
ors. We do not want to embark on an approach which has a
real risk of challenge and we seek one which will meet a wide
variation of eventualities.
As you will recall, Professor A. J. Merrett worked closely
with us during the period earlier this year when we inves-
tiga~ed financing arrangements based on State funding of the
Watana Dam as a principal element of the overall project.
We investigated fin.ancing schemes where the State enjoyed
either a royalty income return or, alternatively, a residual
equity position after senior debt had been redeemed. From
his prior knowledge of the Susit:.1a Hydroelectric Development,
Tony Merrett is in a position to provide an important contri-
bution to current considerations in the light of the most
likely level of State of Alaska legislature appropriation
findings.
-~ ACRES AMERICAN INCORPORATED
Consulting Engineers
The liberty Bank Bullding, Main at Court
Buffalo, New York 14202
Telephone 716·853·7525
Cont'd •••
,
.;
Nr .. T. McGuire,
Anchorage. Page 2.
November 27, 1981.
A£ reported to you, we discussed with John Raben on November
23rd th7 bes~ manner of approaching the bond raising program
for Sus~tna ~n the present uncertainties of the bond market and,
in particular, the very adverse experience the market has seen
yith major capital projects (like Washington Public Power
Supply) massively and repeatedly overrunning their forecast bond
raising requirements. Our present thinking is that we should,
under these conditions, develop a robust financing plan which
would cope with these problems by a three-pronged approach.
The first, would be that of reserve fund financing with 40%
of the State contribution (e.g. $1 bn out of $2.5 bn set
aside in an interest accumulating fund) dedicated to protecting
bond holders in substantial measure from their perception of
the engineering risks, inflationary overruns, etc., with the
fund released to pay off medium~term indebtedness (and there-
fore, with some delay, to be used for construction) as soon as
the project has established the track record of earnings cover
which bond holders require. John Raben's view was that this
will be attractive in increasing the "leverage" which could
be exerted by State funds compared with using these totally
for construction expenditures.
The attached brief statement and chart will, I hope, provide
a reasonably full explanation of this approach and the other
measures that may be required to produce a financing package
acceptable to bond holders.
It would be very helpful, however, if we could have ~n early
discussion with you and Eric to determine to what extent
these approaches are politically acceptable, a.nd the extent
to which you would, if at all, wish to see them detailed in
the "Financing" and "Financing Risk" sections of our report.
With the possibility of underwriters taking first soundings
of the market in 1985 it is important that, whatever is
published at this stage, we do propose concepts, contractual
arrangements, and possible State guarantees which would ensure
that the project could go ahead almost irrespective of the
bond mark~~ conditions at that time.
We have suggested a visit to Anchorage, with Tony Merrett,
for discussions with you on December 3rd and 4th. John
Lawrence would also plan to be present as he has other matters
to deal with in Alaska at that time. You offered to confirm
these dates once you have seen-the situation as set out in this
letter and attachments. We look forward to hearing from you
on Monday, November 30th.
With kind regards. Hope you had a happy Thanksgiving '81.
ACRES AMERICAN INCORPORATED
.. i
Yours sincerely,
~ c;s •
~
J. avin Watrnock,
Vic President
.,j
Corporate Development
Hr. T. N.cGuire,
Anchorage
.
Page 3.
Novemb~r 27, 1981 .
-P.S. With the attachments I have included an outline of
the revised scope of work for Task 11 for your
consideration and approval.
JGW/JC
Att.
ACRES AMERICAN INCORPORATED
ALASKA POvffiR AUTHORITY
SUSITNA HYDROELECTRIC PROJECT
THE SUSITNA FINANCING OPIJ:'ION
The Basic.Financing Problem
November 26, 1981
~rhe conclusive economic jus-tification for Susitna is inflation
and the guarantee which Susitna offers of a virtually perpetual supply
of fixed cost energy. A-t the same time it is this very inflation which
also creates for Susitna (as for every other major high capital cost
investment) related hazards of financing difficulty and loss of public
creditability because the realities created by inflation may not be
addressed thoroughly and consistently at the outset.
The ser1ousness of the probl~ of inflation in fin~cing is readily
overlooked in the context of construction cost estimates based on
constant prices and excluding IDC. The impact of inflation even at the
7% assumed in our estimates is shown on the attached Exhibit in
transforming our provisional capital cost estimate of $5.3 bn in
current prices into $13.9 bn in then current money. Taking into
account a $2.5 bn State contribution in 1985 this still leaves a total
borrowing requirement $8 bn on the basis of 7% inflation or $11.6 bn
if a 9% inflation rate was to apply (In the light of past experiences
it must be assumed that bond holders will wish to allow for rates of
inflation higher than the "central" estimate). This leads to three
basic conclusions:-
(1) The necessity of accustoming the public and the legislature to
these financing realities and only giving qualified reference
to the constant price capital estimates and so avoiding the
adverse publicity and loss of creditability which ensues when
the capital cost estimates appear to rise massively over time.
L
()
- 2 -
(2) Continually emphasising the basic point that it is precisely
this inflation in capital cost (as it arises from the general
price level) which justifies Susitna in terms of its being
a unique perpetual source of constant price energy protecting
Alaskans' from future inflation.
(3) Developing,cts early ·as is practical a financing plan which is
realistic, robust and flexible so that the project is not held
1.:p by unforeseen difficulties and changing circumstances.
Probable Financing Scenario
In assessing the alternative financing options we need to keep
in mind the schedule and possible magnitude of the bond offerings
required.. On present forecasts we would need to put forward fairly
definitive prosposals to underwriters in 1984 with a view to a
1985/86 bond offering of minimum magnitude $3.5 bn for Watana and the
prospect of a subsequent bond offering of minimum $4.7 bn ·to complete
.. Devil Canyon (assuming that $2.5 bn has been appropriated by the
State for Susitna in 1985). This is on the assumption that inflation
averages only 7%~ At 9% the bond offerings would have to be for $4.8
bn and $6.8 bn respectively (again assuming $2.5 bn State contribution
in 1985).
These bond offerings are substantial and with the probability of
continuing (if not increasing inflation),and numerous examples of
major capital 2rojects overrunning their forecast borrowing
requirements,the bond holders will expect positive demonstration that
we have a financing plan which protects them from this and every
other possible contingency. In the absence of specific and independent
guarantees it will not be enough to~demonstrate the fact that,
long-term, Susitna has immense economic strength. Their concern
will be absolute assurance that,in the worse conceivable eventualities
of capital overrun,or revenue shortfall,debt service is not at
risk in any year.
'""' • = J
- 3 -
We also have to allow for the probability that without independent
guarantees it is unlikely that any committment to the $11.6 bn total
borrowing requirement (on 9% inflation) could be obtained in 1985/86
and that bond holders may want demonstration that, if for any reason
the second stage of borrowing is dealyed or does not occur, the first
stage borrowing is suffiqient to establish Watana alone as an
economically viable project.
With sufficient pre-planning we believe that all these
requirements could be met and a successful bond offering reasonably
assured ..
The Two Stage Reserve Fm1ding Plan
In outline the plan we suggest for consideration at this time
provides for the risks of Susitna to be borne appropriately in part
by the APA, in part by the consuming utilities with a possible residual
-part borne by the State and most importantly allocates $1 bn of an
assumed State contribution of $2.5 bn to a Reserve Fund dedicated to
shielding bond holders from any residual risks. As soon as full
viability of the project is established the Reserve Fund would be used
to repay medium-term indebtedness and thus is effectively used for the
construction of Susitna.
The essential elementing of this structure are first the
establishment of appropriate supply contracts with the consuming
utilities which would provide for their taking the Watana output at a
price equivalent 45 mills (in 1981 prices) escalated by the rate of
inflation of thermal fuels. Our provisional estimates indicated that
the utilities could contract at this price and inaggregrate obtain
substantial savings compared with Lhe cost of alternative fuels. These
contracts would also contain minimum rates of escalation based upon .
- 4 -
the general rate of inflation. Our provisional estimates are that,
if the construction estimates are held (that is there is no increase
in the cost at constant prices), Watana would constitute a viable
project in its own right and therefore provide the basis on which
bond holders could prudently move to the second stage bond financing
and the completion of Devil Canyon~
The second key element, the $1 bn reserve fund, can be seen,
at this stage, as protecting bond holders:-
(a) Against any hazards which, in their estimation, might
conceivably lead to the project not being completed
to the Watana stage;
(b) Against real construction (co11stant money) overruns
which result in the project having inadequate debt
ser:·vi ce cover given the additional borrowing' that
would be required and the absence of any escalation
provisions obliging the utilities to meet this
additional element of cost;
(c) Against any "flexibility" in the sales contracts or
credit standing of the contracting parties, which
resulted in the bond holders not being fully
protected by "flow through" provisions, against the
effect of general inflation on the project capital
cost and borrowing requirement.
In all these circumstances, and covering a very wide range of
eventualities, the Reserve Fund would exist to assure unfailing
payment of debt service. In effect the Reserve Fund proposal is
just an extension (on a larger scaie) of the Bond Reserve require-
ments in most bond offerings requiring that a reserve be created
- 5 -
to ensure debt service against year to year fluctuation in earnings.
Using a significant part (40%) of the State contribution for this
purpose, ho'tqever, we can get maximum "leverage" (maximum secured
borrowing) from it.
If the project is, at the end of the first stage, within its
construction estimates, the whole of the $1 bn reserve fund would be
available for again shielding bond holders at the second stage from
all the residual risks not covered by the "flow through" provisions
of the power sales contracts relating to the additional output
from Devil Canyon. When this stag~ is successfully established the
Reserve Fund would be released for repayment of medium-term debt and
so effectively used to finance construction. (The Reserve Fund approach
would not in any way increase the cost of the project since the
interest on the fund would offset interest on monies borrowed.)
The logic of this scheme can best be seen by contrasting it with
_. that in which the whole of the State contribution is simply dedicated
to first stage construction. In this case the project would be without
financial reserves and bond holders would almost certainly demand that
the sales contracts with the utilities are completely open ended such
that the utilities would take an unconditional liability to meet the
whole of the debt service obligations on whatever the final capital
cost of the project may be.
•• \
Such unlimited liability contracts would be difficult to
negotiate and might prove a major obstacle to progress towards a
timely bond offering. They might also be regarded as unfair in that
the utilities are (as in the Washington Power case) being asked to
assume unlimited liability for construction (constant cost) overruns
in addition to the risk of overruns due to inflation. It is reasonable
for them to assume the latter type of risk since such risks are inherent
in any alternative option. The construction cost risks, however, are
properly the responsibility of the entity sponsoring the project •
1'
.
. jtM&WIWD#lW4
-
- 6 -
~J The reserve fund would enable the sales contracts to proceed on
the more equitable basis described and give some degree of further
flexibility on the precise terms of the critically important "flow
thr_ough" provisions of the sales con tracts.
The scheme as proposed would then distribute the construction,
inflation and eocnomic risks of the project equitably between the
parties-in-interest. There may, however, be some residual risks as,
for example, the ongoing risk of natural hazards.
Our preliminary inquiries have indicated that such risks may not
be insurable in the commercial markets at any acceptable cost.. It
may therefore be necessary for the State to assume this ultimate
responsibility so that, in total, all potential bond holders risks
are absorbed ..
Conclusions
The financing proposal outlined above appears to provide a
flexible and realistic manner in which all bond holder risks can
equitably be absorbed. If accepted in principle by the APA it would
also provide a realistic and acceptable basis on which to negotiate
with the utilities in a manner which would result in fairly definitive
contracts being arrived at by 1984/85, the date at which a reasonably
complete financing proposal would need to be presented to the
underwriters.
It is also readily adoptable to any subsequent developments
which may alter the terms in which the power would be contracted
to consuming utilities.
SUSITNA HDYROELECTRIC PROJECT
TASK 11 FINANCIAL ANALYSIS
Attachment A
(To letter of November 26, 1981)
~ Financial Parameters ---·--------------~~~~
••
At a meeting in Acres American, Buffalo offices on October 13th
agreement was reached with T. McGuire APA and J. Raben, First Boston
Co~poration on financial parameters which should be used for analysis
of the Susitna Hydroelectric Project. These are listed below together
t~i th "average" parameters used in the early stage of 11 test" finc:ncial
analysis.
Low Median High "Test" Values
(a) % Funding of the total 30 45 60 $2 bn project cost from
$2.5 bn State of Alaska
$3.0 bn
(b) % ROI on State Funds
(employed for test of
5 5 5 5
financial viability
only)
(c) % Interest rate on 10 14 12 and 14 senior debt funds
(d) Senior debt maturity 30 30 30 ?.5 ..;, (with interest and
principal payn1ents
levelised over period
con~encing one year
following the year
of full plant operation) -years
{e) Inflation rate % 7 7 7 7 and 9
(f) Debt service cover 1.25 rising to 1.25 rising to applied to the 1.5 1.5 annual requirements
for level.ised senior
debt service
·•. ¥.
•
SUSITNA HDYROELECTRIC PROJECT
TASK 11 FINANCIAL ANALYSIS
Financial Parameters
Att&chment A
(To letter of November 26, 1981)
At a meeting in Acres Am~rican, Buffalo offices on October 13th
agreement was reached with T. McGuire APA and J. Raben, First Boston
Corporation on financial ~arameters which should be used for analysis
of the Susitna Hydroelectric Project. These are listed below together
with "avera'Je •; parameters used in the early stage of "test" financial
analysis.
(a) % Funding of the total
project cost from
State of Alaska
(b) % ROI on State Funds
(employed for test of
financial viability
only)
(c) % Interest rate on
senior debt funds
(d) Senior debt rnatu~ity
(with interest and
principal payments
levelised over period
commencing one year
following the year
of full plant operation)
-years
(e) Inflation rate %
(f) Debt service cover
applied to the
annual requirements
for levelised senior
debt service
'l""
Low Median High -
30 45 60
5 5 5
10 14
30 30 30
7 7 7
1.25 rising to
1.5
ISCC:SS# ;e:w
"Test" Values
$2 bn
$2.5 bn
$3.0 bn
5
1.2 and. 14
35
7 and 9
1.25 rising to
1.5
,.
!!9w Median High
{g) % Rate, based on
original capital cost
with allowance for
inflation, at which
"Replacement and
3/4 3/4 3/4
Renewals" are provided for ·
{h) Inflation rate appli€d 10
to construction costs
during the period of
construction
{i) In£lation rate applied 8
operating costs during
the period of operation
(j) "Reserve and Contingency"
fund as a % of annual
operating costs set aside
and replenished Yeal::' by
year
(k) Commi ttrnent and
placement fees as bond
financing costs
···.· ~ ;; Fl
10 10
8 8
not decided
not decided
''Test" Values
3/4
7 and 9
7 and 9
400%
1/2% of bond value
·~ -· ·~-···---,..··-· -··· ........ -·-· --~ --~-~-.. -· .. ~-
'
::;::·
18
17
16 ·-
15
14
~ 1.3
(.f)
2 12
Q
:J II
\1)
z 10
(Q 9
:1 -l 8
8 '-., 7
1i
-tft 6
5
4
STAGE. I
$.3.5-$4.9 bn
BOND OFFE.RING
lN 1964-/5
.. C}0/o IN~L.ATION
/•' TOTAC-.~ITAL.. COST
It ~ 17.9 bn
I •
ST,AGE.IT / $4.8-.1>~.8 bn ./
BONDOFFE.RING I
IN 1991 ,. ,.
•
7°/o IN FI.. .. AiTION
TOTAl-CAPITAL-COST
$1.3.9 bn
• /. •"',
11111111 9°/o INFLATION WAT;\NA COMP~ST~-IIi • .,•""' $ll.h bn
I I ~~··4) BORROWING Reo.UI~E.ME.NT I 1. i" WITH $ 2.5 bn STAT&;
I l APPROPAIAIION IN 1985
I ~· ~ I ,-.,.,
I • .,•"'
,1 ·--l ., ..
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• I •""' # l I •'''' ## . . .... ~·() ~' ~ •'' I ~ <~>"'"' I _.# .,.... I,__. • ~ J ~ ~· ...
7°/o INFLATION
$8.3 bn
BORROWING REQUIREME:NT
WITH.$ 2.5 t:)n 5TAT&
APPROPRIATION IN 196!5
.... 3
,~ ... ~...-. ...... ~~ I) l' t/IJ~ .... # .... ~ 2 • ~· ,<r A .... ~~, . ~ ~' A l• ~· ;,' ~ ,,
Q L I I I I ~# I I I it I . I I I I I I I I I I I I J
1985 ek, 87 86 89 90 91 92 9.3 94 95 96 9 7 98 99. 2000 01 02 03 04 05 06 07
ALASKA ~E.R AlJTHORITY
SUSITNA HYD~OELECTPIC P~OJECT IIPR~~.
CAPITAL COST AND BO~ROWING REQUIREMENT Lltb .. iJJ I
..
~.
~ " e,
I I
~-110-~ ,...,
\
!
-OFFICE MEMORANDUM
J. D. J_,awrence Date: November 25, 1981
File: P5700.07.11
FROM: J. G. Warnock cc:
SUBJECT: SUSITNA
Further to todays te1econ I hope that these rough diagrams
will assist in understanding the financial plan we are
suggesting.
-f
JGW:dn
.' I
Dale Nolan
for: J. G. Warnock
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Record of Telephone Call
Terry McGui v·ej J. G. Warnock November 17, 1981 6:00 p.m.
JGW advised that the delay in submitting a scope of work, level
of effort, schedule etc. for Task 11 was due to a desire to provide
firm dates, which \~as proving difficult in the £ace of the several
deci_sions which now had to be made concerning, dam height, energy
level etc.
In the meantime Task 11 had maintained some momentum and we were
at a stage where we would benefit greatly from an exchange of views
with John Raben. A meeting had been arranged for Monday 23rd.
,
Outlined the "pattern" of finace we were considering with the
loan guarantee fund to meet early year deficits. Terry McGuire asked
for an informal letter outlining our ideas and requested that we open
a "dialogue" through "informal" correspondence to allow over the next
few weeks a resolution of some of the issues in which APA had a key
role to play.
.. McGuire advised that they were work1ng torwards a possible
meeting with Rohan and Batt.elle MW to discuss some of the concerns
arising over economic and financial evaluation. He indicated that
Dr. Rowan's viewpoint was not entirely in phase with their own.
We discussed Robert Mohn's letter requesting sensitivity runs
on noptimum scheduling". Advised that we were planning to give an
opinion on the financiability of project delivering first power in
1993 and could, if desired look at various corresponding schedule
dates for Devil Canyon. McGuire felt that information of this nature
would be helpful.
McGuire encouraged an open dis9ussion with John Raben, First
Boston Corporation and looked forward to hearing of the outcome.
JGW:dn
l p;:u;.ltiJ ••••••
(
·-·--,------
' ·-----. -..... --~---~-..... --.
.. 0
ACR£.5 BU'F
ACRES TOR
~v 10/81
.. ..
?5700.07.11
ATTN: JOHN LAWRENCE
... -·-· . ...
"
t:;:'."!:" • ·-· SUSITNA HYDROELECTRIC PROJECT
TASK 11 FINANCING ANALYSIS
·'·
. .
1 ; ..
. ...
. . . •
..
-.. -· -·-4~· -.. -•
0
Ouf
/7ou /0/ ~,~7
..
(M.) FOLLOWING OUR ~·lEE~IN'":3 WITrl TE?.RY •!CGUIRE AND d•JH'~ R>4 :::.:~· ~ ·~
. -.... 5-R 1 1 -H -H .... f"'l' -~.~·~J ... ,_ .. I>JA~',...I ' \:.!t:P"< !V·t"'-... ,-,_ I -p----.. ,-~ --~. U C 1 '..; c. v ! 1 c.. . • ...... ._ c_. vv ..1. • • 1 r .l '"'"" ~ .... ~ :-t A , J _ i ..:.. ;: :;, ~ ;:. . :. ... .; ! M .-:-:. '-... ; ~ • ._
1 ··~ I • --·"' _ ....... ___ __ .... ___ __
------
(A) 0/0 FUNDING Or T)TAL
PROJECT COST F'Ri)~·l
OF ALASKA JQ 60
·· . ...
(8) 0/0 ROl ON STATE FUNDS
. (EMPLOYED FOR TEST OF .
FINANCIAL VIABILITY ONLY> 5 5
(c)
..... . ~
\
(
(
(
-l ~~ T E F.'£.£ T IH~ D P ~· J ! ,• C r -;: r~ !..
... --LCVEL!SED OVER PERle~
-__ .,._
CO~MLNCING O~E YEAR FOLLOWING
-THE YtAR Or FULL PLANT
.
9PERATI ON
CE> INTEREST ON DEET ADVANCED
r-u·•r,c DU?!._,r. co-r·'-t::''f ·-t.-...... ,, "';'"''' r ... vo.J • • tliu ' 1 n. ~J l J. -...J,,. • .,.,
EE CAPITALISED TO 1 YEAR AFTER
-PULL OPERATION Of EACH PROJECT
5EG:·1ENT
CF> DEBT SERVICE COVER TO
~!T 1.25 Tli•i!:S INITIALLY R1Sl!~S T·:· ..
. . .
1.5 TIMES TH~ ANNUAL REQUIREMENT FOR
LEVELISED SENIOR DEBT SERVICE
\G) FUND FOR REt'>LACEMENT ANP REVENUES -. . ~
A C CUI'1U LA TEO AT A RATE OF 3/4 0/0 . .
-.
OF' ORIGINAL CAPITAL COST wiTH ------ALLOWANCE FOR INFLATION
<H> INFLATION RATE APPLIED TO '·
-CONTRIBUTION COSTS DURING
CON.STRUCTI ON 10 0/0 PER ADDU'1 ...
... -,_
<I> INFLATION RATE APPLIED TO OPERATING --
• COS!S 8 0/0
30 YEARS
-·-... _, --..-·Mot..._,"""_,...,.,_.,._ ~-----...roo"""-'~""' ............... _. __ ,._~-~'..,. ___ ..._ .... _....,.-_.,,.___.~,_,_--~•-.. -•-•·· •" ·
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-
..
.... -
..
!'JOT£ ITEMS CA> -(G) . -... -
... -·--DETERMINED SU~StQUE~TLY ~5:-
-
(J) FUND FOR RESERVES AND
.. -CONTINGENCIES ACCUMULATED
--- -
.AT A RATE OF 400 0/0 OF OPERATl NG ·
COST AND EMPLOYED YEAR BY YEAR T0
-PROVlDI: FUND (G)
<K> COMMITTMENT AND PLACEMENT FEES
. . .
RECOGNISED AS FINANCING CCSTE PT
LEVELS Y£1 TO 5E DECI~tD
t '•'"'RI-' .. J. ,,, ..... Ct t:.TT"' ............... -_. ,_,. .... _. ".·.· _f'l_:-" .J • [·, .. I • • -H -
. -
OUTLAY FUNDED wiTH PROJ~CT
<M> REVENUE ASSESS ON ONLY FIRM ENERGY OUTPUT
(
. . -<B> APA LETTER OF OCTOBER 29TH PLACES NE~ ~MPHASIS ON ~NPUTS FROM " -.... -,. ,. -
OGP-5 ANALYSIS AND FROM TASK 11 -FEZI~. IT APPEARS TO ASK ----
US TWO SEPARATE SETS OF QUESTIONS WHICH THEY MAY NOT HAVE -.
--. ...
CLEARLY IN THEIR OWN MINDS. (1) THE FlRST SET OF QUESTIONS IS --.... _-.. ., ..
ABOUT COST BENEFIT ANALYSIS INTERPRETAilON OF' OGP-5. THEY MAY ---·~ ... --
HAVE IN MIND THAT OGP-5 TAKES NC ACCOUNT OF LONG RUN SECURITY~
-..... . .. ~ ..... .. ......
CONSERVATION ISSUES £Tc •• ~ND THAT THE ••sTATE IS LOOKING FOR
. --~ .... . ... .,
THE LOWEST COST LONG TERf\1 ALTERNATIVE' •· IN THIS SENSE. THE: - -_,
J
... .. -""' STATE CONTRIBUTION CAN THEN BE SEEN AS PUTTING A VALUE ON THESE --.
/. . • ---""' ... -INTANGIBLE BENEFITS AND TH£ APA WA~TS ~S TC TEST OGP-5
--. .. .... ... -...
, __ _,.;l_N-=12~R~J"~ .. TI,N~ 1 TS RESUJ..:£:.§ .~ =.~:.:ftU: SEtJSIVI.TIVITY OF' OPTI,l1U1':1_.,._ --..-. -. . --\ --.. ; ., . ..--.. ..... .,
SCHEDULING'' WHEN THE COST OFFSET REPRESENTED BY THIS
'i"'"*+"'"·'"*,.t .. :M,q;, 4'11,tli,G ,i¥,+'if'jl->l41•S 4-o ,--_::.. ! __ ·-::' ,..;:::;,.:.,..,., .. .;::.:_.~
•'f:"' T .... :r .. l ... _
.. -
EQUITY liP.£ TAKEN INTO ACCOUNT AS A REDUCTION IN 5US1TNA c;,•·;;;,L
s:.JS! T:;;. .. -l • !:... •
..
COST.
IT SHOULD BE NOTED THAT THIS CO~TRIBUTION . --"' -
ATTRACT INTEREST OR CHARGE. THE 5 0/D RETURN ON INVESTMENT IS A
DOE.S ' ' NCT' '
-------... -TEST TO BE APPLIED WHEN F"lNANCIAt OUTCC!~E or PROJE:CT HAS BEEt:
. -
"DETERMINED. (2) THE OTHER ''OPTIMUM SCHEDULI~n•• OUEFT!0~S
THEY MAY HAVE IN MIND RELATE TO THE OPT!~AL 'FINANCIAL SCHED~LINr --.
----..... -~----------
THAT IS WHEN AND TO WHAT EXTENT WOULD·l~ EE FEASIBLE TO
f"l NANCE TH!: RENAl Nl NG PROJECT REQU! RE~lENTS BY DEBT • G! VE:t~ THE
( ASSUMPTIONS THEY STAT£. WE ARE l~ A PCSITIC~ TO GC 4HEAD ~ITH
ANS~EHlNG TrllS LAST QUESTION FRO~ OUTPUT OF rEZIBL UNDER
TASK 11.
-... -.. ,
.. GO AHEAD WITH THE f"INANCIAL SCHEDULING PART aT AS PART Ot TASK 11.
If YOU ARE HAPPY ABOUT THIS INTERPRETATION~~ THE LETTER ~E WILL
-
IF ON THE OTHER HAND YOU HAVE ANY DOUBTS WHA~ IT IS THEY WANT
~ . . ,
PERHAPS YOU SHOULD CHECK WITH R. NOHN AND ''T~N LET US KNQI,.,l WHAT
" IT IS YOU WOULD LIKE DONE.
J.G. WARNOCK
TORONTO
+
A'::RES BUF
teRES TOR
_.., .... .,. ... ..,_ . ---·w 0 Vll.J .,__ .,...,_ ,,.,_.,.,._ 10 , .,,.
·-···-'*._ ... _,_"---~.,.,.-... --~---~-~~"-~':"';~~~~-~-·.·--' ... --' .
''-'·~-~---· -·-<•-··, .. ____ , __ ~_,,,~, .. ---··" , ....... , -·~·-...... ,. ~-·
..
j • .. : . -...
' ' ( .( _ .. ,
~ .
. .
'' '• .. ' ...
(.
r
' <( , ,..
..
Telex
_, Buffalo Office
91-6423
I
Attn: John Lawrence
Re: Sus;tna Hydroelectric Project
Task 11 Financing Analysis
(A) Following our meetings with Terry McGuire and John Raben on
October 13th the following financial parameters were established
for further analysis:-Low Medium Hiah
(a)
(b)
(c)
(d)
% Fm·Jing of total project
cost from State of Alaska
% ROl on State Funds
(employed for test of
Financial viability only)
% interest rate on senior
debt
Senior debt maturity with
interest and principal
payments levelised over
period conunencing one year
following the year of full
plant operation
(e) Interest on debt advanced
funds during contribution
to be capitalised to 1 year
after full operation of each
project segment
{f) Debt service cover to be
maintained at 1.25 times
initially rising to 1.5 times
the annual requirement for
levelised senior debt service
30
5
10
(g) Fund for replacement and revenues
accumulated at a rate 6f 3/4%
of original capital cost
with allowance for inflation
. 1" . ----·
45 60
5 5
14
30 years
.... /2
..
,
I
(B)
-2 -
{h) Inflation rate applied to
contribution costs during
construction 10% per annum
(i) Inflation rate applied to
operating costs 8%
Note items (a) -{g) as discussed, following items determined
subsequently as:-
{j) Fund for reserves and
contingencies accumulated
at a rate of 400% of operating
cost and employed year by year
to provide fund (g)
(k) Committment and placement fees
recognised as financing costs
at levels yet to be decided
-{ 1) Working capital treated as
cap~~~l outlay funded with
project
(m) Revenue assess on only firm
energy output
APA letter of October 29th places new emphasis on inputs from
OGP-5 analysis and from Task 11 -FEZIBL. It appears to ask
us two separate sets of questions which they may not have clearly
in their own minds. (1) The first set of questions is about
cost benefit analysis interpretation of OGP-5. They may have
in mind that OGP-5 takes no account of long run security,
conservation issues etc .. , and that the "State is looking for
the lowest cost long term alternative" in this sense. The
State contribution can then be seen as putting a value on these
intangible benefits and the APA wants us to test OGP-5
interpretating its results as 11 the sensitivity of optimum
scheduling" when-the cost offset represented by this
evaluation of ·the .. intangible benefits of Susitna i.e. 45%
equity are taken into account as a reduction in Susitna capita:
cost.. It should be noted that this contribution does "not"
attract interest or charge. The 5% return on investment is a
test to be applied when financial outcome of project has been
determined. (2) The other "optimum scheduling" questions they
may have in mind relate to the optimal financial scheduling,
that is when and to what extent would it be feasible to finance
the remaining project requirements by debt, given the assumptinns
they state. We are in a position to go ahead with answering
this last question from output of FEZIBL under Task 11 •
. . . . /3
- 3 -
If you are happy about this interpretation of the letter we will
go ahead with the financial scheduling part ~£x~Rskxxxx%xxaxx~axx
m£ it as part of Task 11. If on the other hand you have any doubts
what it is they want perhaps you M~Ni~ should check with R. Mohn
and then let us know what it is you would like done.
J. G. Warnock
Toronto
'-·-,.,-·
+
ACRES C0LB
• ACRES TOR
NOVEMBER 10~ 1981 J J
P5700.07.11
ATTN: P. HOOVER/C.A. DEBELIUS
FURTHER TO TELECON TODAY OUR OPINION HERE IS THAT YOUR OGP-5 RUN
IN RESPONSE T0 APA LETTER OCTOBER 29TH SHOULD 8E CONDUCTED ON
55 0/0 DERT FINANCING AT 12 0/0 AND ~ON ACCEPTANC~ OF STATE FUNDS
A9 EQUITY TREATED QUITE SEPARATELY FROM DEBT. FINANCIAL OUTCOME
OF PROJECT SHOULD THEN BE TESTED TO ESTABLISH THAT RETURN ON EQUITY
OF 5 0/0 COULD BE SUPPORTED. WE HAVE B~E~ ADVISED BY E.P. YGULD
THAT LEGISLATURE PROVISIONS CALL FOR THIS TEST ONLY AND NO REAL
RETURN TO STATE •
CHUCK, COULD YOU PLEASE O?TAIN FOR US COPIES OF APA REGULATION 3
AAC 94.065 SETTING OUT PURPOSE OF PLAN OF FINANCE ETC. ALSO 3
AAC 94.100 RELATING TO POWER PROJECT FU~D AND ANY OTHER REGULATIGNS
WHICH MAY AFFECT FINANCING APPROACH.
J .I
TORONTO
+
ACRES COLR
ACRES TOR
-
ALASKA POWER AUTHORITY P5700. Task 11
SUSITNA HYDROELECTRIC PROJECT
TASK 11 -MARKETING AND FINANCE
REVISED SCOPE STATEMENT -NOVE~1BER 1, 1981
1 -INTRODUCTION
During earlier phases of work on Task 11, as defined in the
Plan of Study and its various revisions, progress was made
towards defining possible approaches to financing of the
Project. In spring 1981 work was suspended awaiting clarifi-
cation of the likely approach to financing support to hydro-
electric projects in general and Susitna in partic~l~~ by
the State of Alaska. State Bill 25 set out oetails of
funding being made immediately available and the future plan
for Susitna. It presented the possibility that the Susitna
project could be financed by funds made available by
legislative appropriation.
2 -DISCUSSION
Subsequently it became apparent that State funding would
provide only a substantial portion of the capital required
leaving a major requirement for senior debt financing to be
raised in conventional markets. A series of issues was
raised by Acres with APA in mid-September and on 13th
October, following discussion with First Boston Corporation
-· -·-·<-···--·-···--·--·-·-·--~-·. ·-· --· ....... .,.--··
~ ,,_ .. ,..,.._ .....,, __
- 3
APA with the output originally defined as content of
the Project Overview and Internal Reports under
Task 11.
{iv) The output of the financing analysis now to be
.
completed under Task 11 will provide data for exhibits
required for the FERC licence application. APA vlill
provide Acres with input regarding State of Alaska
approaches to the financing plan, particularly as
these evolve from the outline of S.B.25.
(v) While consideration is being given by the State of
Alaska to approaches which could affect the market-
ability of Susitna output, Acres will proceed with
analysis of utility profiles and energy/capacity needs
and determine the basic marketing principles which
will apply.
(vi) The development, construction, financing and marketing
aspects of the Project each involve elements of
undertainty. The current approaches being considered
to ntarketing and financing of Susitna do not reduce
substantially any of the risks involved and the full
range of analyses originally proposed should be
applied.
' i -"
- 4
3 -SUBTASK ll.02{A) -FINANCIAL ANALYSIS
_A -Objective
To update and revise the financing plan to incorporate the
provisions of State Bill 25 and to test a range of likely
outcomes.
B -Approach
The financial analysis will be conducted by a team of Acres
staff working closely with specialist consultants and using
an advanced adaptation of computer program "FEZIBL 11 designed
to meet the specific requirements for Susitna and accounting
layout appropriate for FERC and public utility practice. A
ran~e of possible financing approaches will be considered
and preferred selection will be recommended which best
provides for the necessary level of confidence on the part
of senior debt lenders faced with a variety of uncertainties
regarding the conditions applying before and during project
construction and in operation of the Susitna Development.
In addition to the specific financial analysis covered by
identified work packages, it is expected that there will be
-
••
{-
'
- 5
a need for regular consultation with the Authority over the
period up to the date at which the State of Alaska decides
to fil~ the license application and thereafter as variants
of the financial plan are considered.
Work Package A -
Review Prior Analysis
Review the preliminary financial analysis in the light of
the legislative provisions of SB25 and the financial para-
meters agreed with the Authority and their financial
advisors.
Work Package B -
Formulate Alternative Financing Plan
Formulate a series of financing plans which could possibly
serve the project. Examine these in the light of variation
in the significant parameters and select the most favourable
for further consideration and test.
Work Package C -
Test Selected Financing Plan
Determine the likely limits under which financing of Susitna
would be practicable with a range of wholesale energy price
•
- 6
levels, potential overruns in capital cost, variations in
interest rate, inflation rate and levels of state equity.
This will be done by estaqlishing the adequacy of funds to
-cover; with sufficient reserve margins, operating deficits
which may occur in early years of operations and of the debt
service cover once the various stages of development have
reached a satisfactory level of financial performance.
Work Package D -
Provide Data for Optimum Scheduling
Determine the levels of senior debt and interim financing
required for various stagings of construction of Watana and
Devil Canyon and provide data to assist in judging optimum
scheduling of on-power dates.
Work Package E -
Set up Form of Accounts
Review accounting practices and form of accounts suited to
public utility financing and secure approval of certified
public accountant accustomed to preparation of accounts
suitable for the purposes of Federal Energy Regulatory
Commission.
-.. , ....
~SO$
-
• '•
'VI.1ork Package F -
Establish Level of Funds
Determine the level of reserves, funds and other provisions
-necessary to meet requirements for debt service, reserves
and contingencies, renewals and replacements and acceptable
guarantees.
Wurk Package G -
Present Results of Financial
Analysis and Test Variations
Prepare in graphic form and in clearly constructed matrices
comparisons of significant indicators of finnncial viability
for the most likely range of interest rates, wholesale
energy price levels, inflation factors, state funding
tested against various levels of capital cost overruns.
Work Package H -
Financial Risk Analysis
Establish the impact on the integrity of the project
financing plan of:
(1) overruns in capital cost arising from engineering and
construction variations from plant;
,,,, 'l··~·---
-
I I
- 7
... •
(2} variations in rates of inflation taking into
consideration parallel impacts on alternative energy
costs and;
(3} variations in interest rates ana financial market
conditions.
Identify means of mitigating and/or eliminating the impacts
of such risks on overall project outcome.
Work Package I -
Prepare Proforma Set of Accounts
Select the desirable set of parameters to present the most
likely outcome of a financing plan for Susitna Hydroelectric
Development and, using these, prepare a set of proforma
accounts including balance sheet, source and use of funds,
and operating statement.
Work Package J -
Prepare Reports
Report on the outcome of the financial analysis in form
suitable for:
(1) the Project Feasibility report;
- 9
• (2) the application for license before Federal Energy
Regulatory Commission and;
_ ( 3) t:he financial advisors to the Alaska Power Authority .
.
A further work packa ;.e "K" is designed to cover consul tati.on
and analytical services required by the Authority (\S
detailed consideration of the financing approach continues
through the spring of 1982. These services wjll be provided
in response to requests from the Authority, the managing
underwriters or the financial advisors and precise defini-
tion of their nature and scope is not possible at this time.
Manhours: 1192
Consultants: 68 days
Computer Expense: $7,500
Schedule: Preliminary work has been in hand through
November 1981 and initial ..:lisct:ssion held
with First Boston Corporation.
Further work scheduled for December 1 to
February 15 and thereafter as required.
Li1Mi,41U ?4i4 •• 4
-
•
-10
4 -SUBTASK 11.02(B) -MARKET ASSESSMENT
A -OBJECTIVE
.
To assess the market provided by the Railbelt electric
utility system and to determine the optimum basis for
absorption of the output of the Susitna Hydroelectric
Development. To determine viable methods of contracting
with individual utilities for supply of wholesale energy
from Susitna and to predict a range of rates (and a most
likely level) at which this could be priced in the year of
first power and in succeeding years. To recommend a basis
for contract negotiations for supply of Susitna energy.
B -APPROACH
The Railbelt electrical system is served by individual
utilities of differing size, nature and tariff level (as
determined by Alaska Public Utility Commission). The impli-
cation of these variants must be determined and the impact
of Susitna energy delivered assessed. The outcome of the
assessment will be the determination of applicable wholesale
rates,of a level of likely energy sales by utility, and of
the annual revenues attributable to Susitna Hydroelectric
Development.
··l ji$.34 ·qe~
-
I
I
A series of individual work packages can be defined as
follows ..
Work Package A -
Data Collection
Secure from accessible sources information concerning the
-11
recent years of operation of the Railbelt utilities includ-
ing, not not restricted to, existing power sales and inter-
change contracts, filings with Alaska Public Utilites
Commission (APUC) and FERC, testimony presented to APUC,
studies of alternative energy supply modes and of electrical
inter-ties between systems. Data to be consolidated in a
series o£ files designated by utility involved.
Work Package B -
Assessment of Demand
From the ISER Medium Growth forecast and from other sources
determine the pattern of demand and likely energy sales month
by month over significant years of operation of Susitna
Hydroelectric Develo~ment. This demand will be correlated
with predicted energy deliveri~s from Susitna and with the
individual needs of and opportunities for sales to the
various utilities.
'** ··-·
-
• Work Package C -
Determination of Conditions Affecting
SupEly, Reserve, and Emergency Standb~
-12
_Energy from Susitna will in all probability mainly displace
existing energy generated by other plant although a propor-
tion of the hydroelectric output will meet new demand.
Existing generating facilities may remain in operable condi-
tion and provide useful capacity for reserve and emergency
standby. The cost implication and burden on the Alaska
Power Authority will be assessed as an allowance charged
against revenue earned from Susitna.
Work Package D -
Influence of Power Cost
Assistance Legislation
SB25 allows for power cost assistance to consumers of
electricity in Alaska. The influence of this legislation on
the consuming utilities purchasing wholesale energy from
Susitna will be investigated.
Work Package E -
Determination of Wholesale Energy Supply,
Price and Variation with Time ·
As energy supplied from Susitna will, in the early years of
opera,tion, displace the output from existing generating
&2£2 -
•
-13
Plant, a price determinant could be the avoided cost of such
generation. Such cost will vary from utility to utility and,
unless special provisions are made energy supply prices
.based ·on this level of cost could be unduly low if related
to the lowest system cost. The fair value of Susitna energy
deliveries and variation with time will be determined ~nd a
structure of wholesale pricing recommended.
Work Package F -
Power Contract Issues
The task will not involve formulation of draft power
contracts nor will there be any discussion with utilities or
others on the matter. Certain basic principle which should
be considered will be established and guidelines suggested
which would provide an approach satisfactory to the Authority
and the necessary level of revenue assurance to senior debt
lenders.
Manhours: 951
Consultants: 12 days
Computer Expense: $1,500
Schedule: December 1 to January 15 and thereafter as
required ...
•
t
-14
SUBTASK 11.03 -SUSITNA RISK ANALYSIS
A -OBJECTIVE
To identify all relevant risks which, if realized, could
impact cost, schedule, project safety, and public confi-
dence; to determine probable consequences of realizing risks;
to assess r~levant preventive measures and responses; to
estimate the probability that project criteria will be
satisfied; and to stimulate documentation of problems and
solutions to improve expected risk performance.
B -APPROACH
The risk analysis will be conducted by a separate team from
the' project design and cost estimating groups. This
approach will permit fresh insights into potential risk areas
and will also facilitiate identification of possible preven-
tive measures which, if incorporated into preliminary
designs and proposed construction approaches, could serve to
improve the overall project risk expectations. A series of
individual work packages will oe accomplished as follows.
• Work Package A -
Plan, Cost Estimate,
and Schedule Review
A review will be made of the currently proposed project
plans, "not to exceed" cost estimate, and construction
-15
schedule. A summary statement of the current position will
be prepared to set forth important underlying assumptions,
areas wherein uncertainties exist (e.g., the extent to
which subsurface investigations may have failed to locate
potential difficult foundation problems) , major design
criteria (e.g., flood crest elevation and return frequency
for temporary cofferdams), and proposed construction methods
and sequence. In consultation with members of the cost
estimating team, a major activity critical path method (CPM)
chart will be prepared.
' Work Package B -
Ri;:sk List Development
A list of all risks to be considered in the analysis will be
developed. Each risk will be defined and initial gross
assessments will be made of the degree of interdependency
with other risks. Probability of realizing any given risk
magnitude level will be determined from readily available
data or, in the absence of sufficient data, assessment needs
to be provided in Work Package D will be identified.
. ·-::: ·-T....._.._ .......
--. '' '' ,_.,;.:.:_
-16
(Note that risks themselves will be treated, to the extent
possible, as independent of the activities or project
components. In this regard, for example, the probability
that a particular flood level will occur is the same regard-
less of whether a cofferdam or spillway is being considered.
The consequences of realizing particular risk magnitudes
will, of course, vary from activity to activity and from
component to component.)
Work Package C -
Methodology Revie:v
Upon completion of Work Package A and while Work Package B
is under way, a management review of proposed documentation
and risk analysis programs will be conducted. Requirements
for software revision will be identified and specified and
the adequacy of Work Package A results will be assessed.
Work Package D -
Risk Assessments
Risk lists will be reviewed and initial interdependency
assumptions will be refined. Detailed data collection and
review will be accomplished to determine as precisely as
possible risk realization probabilities. In the absence of
hard data, decision analysis by appropriate dis• ; lines will
-17
define probabilities. Assumptions, estimates, .and sources
will be documented.
Work Package E -
Transformation Assessments
The direct consequence of any given risk is best determined
in terms of "natural" criteria. In other words, risk
analysts will be encouraged to assess consequences in the
most appropriate terms (e.g., repair time, cost impact, road
loss, fuel requirements, etco) The purpose of this work
package is to define transformation criteria which will
permit reduction of "natural 11 criteria to a single common
denominator. (This single criterion will most likely be
cost since, for example, a schedule slippage can be trans-
lated into lost project revenues, increased interest during
construction, overtime costs, etc.)
Work Package F -
Software Revisions
Existing software will be modified as necessary to accommodate
the results of prior work packages and to minimize abortive
runs during computer analysis. Test data will be produced
and calculated manually. The computer program will then be
used to process the test data to ensure that the system is
performing properly.
--
. .
,.
-18
Work Package G -
Consequence/Response Criteria Assessments
'
For eaoh major activity in the overall CPM and/or for each
major component in the project, the consequences of realiz-
ing each possible ris~ magnitude will be assessed and
estimated. Responses will be defined as actions taken if
consequences are realized. For the first iteration of the
computerized risk analysis, design criteria and construction
procedures will be held exactly as they have been set forth
by the project design group (this will be the base case).
To the extent that preventive responses are possible (for
example, starting an activity sooner or raising the height
of a temporary cofferdam), their values will be tested as
perturbations to the base case in later work packages.
Work Package .H -
Review and Revise
Pr~or to starting actual computations, the efforts
accomplished to this point will be reviewed in detail and
revisions will be made as appropriate.
1 -
• il
•"
''
#
'Work Package I -
Initial Computations
anc~te:rpre;'!_:ations
-19
_At this point, the data will be processed using the
appropr:· :~tely modified software. Preliminary results will
be reviewed for anomalies and errors, final program
debugging will occur, and interpretation of results will be
made for the base case. Preventive responses will then be
tested to determine the extent to which the expected project
costs and schedules would change with modifications to
certain design criteria, construction approach, etc. Initial
interpretations will be made.
Work Package J -
Assessment of Emergency Generation
If a risk is realized, the resulting consequences may cause
the loss of Susitna generation. A set of responses is then
required in order to assess the ability of the system or
other generation facilities to provide emergency power.
Whereas Subtask 6.36, generation planning, provides an
analysis and assessment of the system's ability to respond
to planned or forced outages based on plant operating
experience, this work package will investigate the range of
responses required for the low probability but catastrophic
loss of Susitna generation. The results of this assessment
-i
will be incorporated into the interpretations of Work
Package L.
Work Package K -
Project Response and Update
-20
Initial results and interpretations will be fed back to the
project team and comments will be reviewed.
Risk/consequence/response data will be updated as appropriate
and, to the extent that desirable changes are identified in
design criteria or assumed construction procedures, these
will be considered for incorporation by the project design
team.
Work Package L -
Final Computations and Interpretations
Final runs will be made and a series of expected values will
be produced for cost, schedule, and other items as necessary.
Graphical representations relating probability to possible
costs and completion dates will be produced for the project
as a whole and for individual risk categories as appropriate.
The most important contributors to risk will be identified
and a final risk analysis report will be produced.
)_\
'(), _____ ,~
-21
ti . . .
Manhours: 2400
Computer Expense: $4,000
Schedule:
December 1, 1981 through January 1982
..
ALASKA POWER AUTHORITY P5700
SUSITNA HYDROELECTRIC PROJECT
TASK 11 -MARKETING AND FINANCE
REVISED SCOPE STATEHENT -NOVE11BER 1, 1981 .-::..---
1 -INTRODUCTION
During earlier phases of work on Task 11, as defined in the
Plan of Study and its various revisions, progress was made
towards ~efining possible approaches to financing of the
Project. In spring 1981 work was suspended .awaiting clarifi-
cation of the likely approach to financing support to hydro-
electric projects in general and Susitna in particular by
the State of Alaska. State Bill 25 set out details of
funding being made immediately available and the future plan
for Susitna. It presented the possibility that the Susitna
project could be financed by funds made available by
legislative appropriation.
2 -DISCUSSION
Subsequently it became apparent that State funding would
provide only a substantial portion of the capital required
leaving a major requirement for senior debt financing tc be
raised in conventional markets. A series of issues was
raised by Acres with A.PA in mid-September and on 13th
October, following discussion with First Boston Corporation
ACRES AMERICAN INCORPORATED
_____ ,,_.,_ .•.•..... ,-~-~--"·"·: ...... ___ ~-"-""
\ ,-'
-
- 2
present, specific direction was provided regarding the
further work now required under Task 11. {The following
subnurnbers refer to the six questions posed by Acres in
-attach:ment to letter of September 15, 1981.)
{i) It was agreed that financial analysis would be
recommended. using paramete~s appropriate to the likely
financing plan with substantial State "equity" funding
and the current predictions of future connitions. The
work would be carried out using Acres existing program
(ii)
(FEZIBL) but with this modified to comply with the
accounting practices of publicly owned power utilities.
First Boston Corporation would provide consulting
advice as required.
With the levels of State financing envisaged of 30 to
45 per cent, or 60 per cent, it was considered likely
that, within this range and within the constraints
presented by the nature of consumer utilities, a
financing plan could be developed which could be based
largely on tax exempt revenue bonds.
{iii) In view of the vital necessity to arrive at firm and
convincing financing and marketing plans, all further
efforts under Task 11 would now be concentrated on
these elements of the work and on related risk
analysis. The Project Feasibility Report will provide
ACRES AMERICAN INCORPORATED
•
,:t ,.;-· ~
'\
;;\
- 3
APA with the output originally defined as content of
the Project Overview and Internal Reports Lmder
Task 11.
(iv) The output of the financing analysis now to be
-
completed under Task 11 will provide data for exhibits
required fc.)r the FERC licence application. APA will
provide Acres with input regarding State of Alaska
approaches to the financing plan, particularly as
these evolve from the outline of S.B.
(v) Wh~le consideration is being given by the State of
Alaska to approaches which could affect the market~
ability of Susitna output, Acres will proceed with
analysis of utility profiles and energy/capacity needs
and d\·termine the basic marketing principles \47hich
will apply.
(vi) The development, constriction, financing and marketing
aspects of the Project each involve elements of
undertainty. The current approaches being considered
to marketing and financing of Susitna do not reduce
substantially any of the risks involved and the full
rangi. of analyses originally proposed should be
applied.
ACRES AMERICAN INCORPORATED
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3 -SUBTASK ll.02(A) -FINANCIAL ANALYSIS
A -Objective
To update and revise the financing plan to incorporate the
provisions of State Bill 25 and to test a range of likely
outcomes.
B -Approach
The financial analysis will be conducted by a team of Acres
staff working closely with specialist consultants and using
an advanced adaptation of computer program "FEZIBL" designed
to meet the specific requirements for Susi tna a.nd accounting
layout apprapriate for FERC and public utility practice. A
range of possible financing approaches will be considered
and preferred selection will be recommended which best
provides for the necessary level of confidence on the part
of senior debt lenders faced with a variety of uncertainties
regarding the conditions applying before and during project
construction and in operation of the Susitna Development.
In addition to the specific financial analysis covered by
iden·tified work packages, it is expected that there will be
ACRES AMERICAN 'NC()RPORATED
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a need for regular consultation with the Authority over the
period up to the date at which the State of Alaska decides
to fill the license application and thereafter as variants
-of the financial plan are considered.
Work Package A -
Review Prior Analysis
Review the preliminary financial analysis in the light of
the legislative provisions of SB25 and the financial para-
meters agreed with the Authority and their financial
advisors.
Work Package B -
Formulate Alternative Financing Plan
Formulate a series of financing plans which could possibly
serve the project. Examine these in the light of variation
in the significant parameters and select the most favourable
for further consideration and test.
Work Package c -
Test Selected Finnncing Plan
Determine the likely.limits under which financing of Susitna
would be practicable with a range of wholesale energy price
ACRES AMERIC.~N INCORPORATED
- 6
levels, potential overruns in capital cost, variations in
interest·rate, inflation rate and levels of state equity.
This will be done by establishing the adequacy of funds to
-cover,· with sufficient reserve margins, operating deficits
which may occur in early years of operations and of the debt
service cover once the various stages of development have
reached a satisfactory level of financial performance.
Work Package D -
Provide Data for Optim~ Schedulin~
Determine the levels of senior debt and interim financing
required for various stagings of construction of Watana and
Devil Canyon and provide data to assist in judging optimum
scheduling of on-power dates.
Work Package E -
Set up Form of Accounts
Review accounting practices and form of accounts suited to
public utility financing and secure approval of certified
public accountant accustomed to preparation of accounts
suitable for the purposes of Federal Energy Regulatory
Corrunission.
ACRES AMf;fUCAN INCORPORATED
--·· ··-·· . . -~~J--.. ··' . ~;-~--.. . .. -~ ...
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Work Package F -
Establish Level of Funds
Determine the level of reserves, funds and other provisions
·necessary to meet requirements for debt service, reserves
and contingencies, renewals and replacements and acceptable
guarante.es.
Work Package G -
Present Results of Financial
Analysis ·and Test Variations
Prepare in graphic form and in clearly constructed matrices
-7
comparisons of significant indicators of financial viability
for the most likely range of interest rates, wholesale
energy price levels, inflation factors, state funding
tested against various levels of capital cost overruns.
Work Package H -
Financial Risk Analysis
Establish the impact on the integrity of the project
financing plan of:
(1) overruns in capital cost arising from ~ng1neering and
construction variations from plant;
ACRES AMERICAN INCORPORATED
(2) variations in rates of inflation taking into
consideration parallel impacts on alternative energy
costs and;
(3) variations in interest rates and financial market
conditions.
Identify means of mitigating and/or eliminating the impacts
of such risks on overall project outcome.
Work Package I -
Prepare Proforma Set of Accounts
Select the desirable set of parameters to present the most
likely outcome of a financing plan for Susitna Hydroelectric
Development and, using these, prepare a set of proforma .
accounts including balance sheet; source and use of funds,
and operating statement.
Work Package J -
Prepare Reports_
Report on the outcome of the financial analysis in form
suitable for:
(1) the Project Feasibility report; ..
ACRES AMERICAN INCORPORATED
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(2} the application for license before Federal Energy
Regulatory Commission and;
-(3) the financial advisors to the Alaska Power Authority.
A further work package "K" is designed to cover consultation
and analytical services required by the Authority as
detailed consideration of the financing approach continues
through the spring of 1982. These services will be provided
in response to requests from the Authority, the managing
underwriters or the financial advisors and precise defini-
tion of their nature and scope is not possible at this time.
Manhours: 1192
Consultants: 68 days
Computer Expense: $7,500
Schedule: Prelirvinary work has been in hand through
November 1981 and initial discussion held
with First Boston Corporation.
Further work scheduled for December 1 to
February 15 and thereafter as required.
ACRES AMERICAN INCORPORATED
\)
.
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4 -SUBTASK llo02(B) -~~RKET ASSESSMENT
_A -OBJECTIVE
To assess the market provided by the Railbelt electric
utility system and to determine the optimum basis for
absorption of the output of the Susitna Hydroelectric
Development. To determine viable methods of contracting
with individual utilities for supply of wholesale energy
from Susitna and to predict a range of rates (and a most
-10
likely level) at which this could be priceJ in the year of
first power and in succeeding years. To recommend a basis
for contract negotiations for supply of Susitna energy.
B -APPROACH
The Railbelt electrical system is served by individual
utilities of differing size, nature and tariff level (as
determined by Alas.ka Public Utility Commission) . The impli-
cation of these variants must be determined and the impact
of Susitna energy delivered assessed. The outcome of the
assessment will be the determinatior. of applicable wholesale
rates,of a level of likel; energy sales by utility, and of
the annual revenues attributable to Susitna Hydroelectric
Development.
ACRES AMERICAN INCORPORATED
; '
A series of individual work packages can be defined as
follows.
Work Package A -
Data Collection
-11
Secure from accessible sources information concerning the
recent years of operation of the Railbelt utilities includ-
ing, not not restricted to 8 existing power sales and inter-
change contracts, filings with Alaska Public Utilites
Commission (APUC) and FERC, testimony presented to APUC,
studies of alternative energy supply modes and of electrical
inter-ties between systems. Data to be consolidated in a
series of files designated by utility involved.
Work Package B -
Assessmen~ of Demand
From the ISER Medium Growth forecast and from other sources
determine the pattern of demand and likely energy sales month
by month over significant years of operation of Susitna
Hydroelectric Development. This demand will be correlated
with predicted energy deliveries from Susitna and with the
individual needs of and opportunities for sales to the
various utilities.
ACRES AMERICAN INCORPORATED
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~\fork Package c -
Determination of Conditions Affecting
§upply, Rese~ve, and Emergency Standby
-Energy from Susitna will in all probability mainly displace
existing energy generated by other plant although a propor-
tion of the hydroelectric output will meet new demand.
Existing generating facilities may remain in operable condi-·
tion and provide useful capacity for reserve and emergency
standby. The cost implication and burden on the Alaska
Power Authority will be assessed as an Hllowance charged
against revenue earned from Susitna.
Work Package D -
Influence of Power Cost
Assistance Legislation.
SB25 allows for power cost assistance to consumers of
electricity in Alaska. The influence of this legislation on
the consuming utilities purchasing wholesale energy from
Susitna will be investigated.
Work Package E -
Determination of Wholesale Energy Supply,
Price and Variation with Time
As energy supplied from S1lsitna will, in the early years of
operation, displace the output from existing generating
ACRES AMERICAN INCORPORATED
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-13
plant, a price determinant could be the avoided cost of such
gen~ration. Such cost will vary from utility to utility and,
unless special provisions are made energy supply prices
-based on this level of cost could be unduly low if related
to the lowest system cost. The fair value of Susitna energy
deliveries and variation with time will be determined and a
structure of wholesale pricing recommended.
Work Package F -
Power Contract Issues
The task will not involve formulation of draft power
contracts nor will there be any discussion with utilities or
others on the matter. Certain basic principle which should
be considered will be established and guidelines suggested
which would provide an approach satisfactory to the Authority
and·the necessary level of revenue assurance to senior debt
lenders.
Manhours: 951
Consultants: 12 days
Computer Expense: $1,500
Schedule: December 1 to January 15 and thereafter as
required.
ACRES AMERICAN INCORPORATED
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SUBTASK 11.03 -SUSITNA RISK ANALYSIS
A -OBJECTIVE
To identify all relevant risks which, if realized, .could
impact cost, schedule, project safety, and public confi-
dence; to determine probable consequences of realizing risks;
to assess r@levant preventive measures and responses; to
estimate the probability that project criteria will be
satisfied; and to stimulate documentation of problems and
solutions to improve expected risk performance.
B -APPROACH
The risk analysis will be conducted by ,3 separate team from
the· project design and cost estimating g:roups o • This
approachwillperrnit fresh insights into potential risk areas
and will also facilitiate identification of possible preven-
tive measu~es which, if incorporated into preliminary
designs and proposed construction approaches, could serve to
improve the overall project risk expectations. A series of
individual work packages will oe accomplished as follows .
.,
ACRES AMERICAN INCORPORATED
•-
W~rk Package A -
Plan, Cost Estimate,
and Schedule Review
A review will be made of the currently proposed project
plans, "not to exceed" cost estimate, and construction
-15
schedule. A summary statement of the current position will
be prepared to set forth important underlying assumptions,
areas wherein uncertainties exist (e.g., the extent to
which subsurface investigations may have failed to locate
potential difficult foundati-on problems), major design
criteria (e .. g., flood crest elevation and return frequency
for temporary cofferdams), and proposed construction methods
and sequence. In consultation with members of the cost
estimating team, a major activity critical path method (CPM)
chart will be prepared.
'tvor~c Package B -
Risk List Development
A list of all risks to be considered in the analysis will be
developed. Each risk will be .defined and initial gross
assessments will be made of the degree of interdependency
with other risks. Probabilit~ of realizing any given risk
magnitude level will be determined from readily availabl~
data or 1 in the absence of sufficient data, assessment needs
to be provided in Work Package D will be identified.
ACRES AMERICAN INCORPORATED
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.. ,
16
(Note that risks themselves will be treated, to the extent
possible, as independent of the activities or project
components. In this regard, for example, the probability
that a particular floqd level will occur is the same regard-
less of whether a cofferdam or spillway is being considered.
The consequences of realizing particular risk magnitudes
will, of course, vary from activity to activity aPd from
component to comP-Onent.)
Work Package C -
Methodology Review
Qpon completion of Work Package A and while Work F~ckage B
is under way, a management review of proposed documentation
and risk analysis programs will be conducted. Requirements
for software revision will be identified and specified and
th~ adequacy of Work Package A results will be assessed.
Work Package D ~
Risk Assessments
Risk lists will be reviewed and initial interdependency
assumptions will be refined. Detailed data collection and
1:-eview will be accomplished to determine ?.S precisely as
possible risk realization probabilities. In the absence of
hard data, decision analysis by appropriate disciplines will
ACRES AMERICAN INCORPORATED
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-17
define probabilities.· Assumptions, estimates,·and sources
will be documented.
Work ~ackage E -
Transformation Assessments ---. -
The direct ~onsequence of any given risk is best determined
in terms of nnatural" criteria. In other words, risk
analysts will be encouraged to assess consequences in the
most appropriate terms (,e.g. 1 repair time, cost impact, road
loss, fuel requirements, etc.) The purpose of this work
package is to define transformation criteria which will
permit. reduction of "natural" eri teria to a single common
denominator. (This single criterion will most likely be
cost since 1 for example.. a .schedule slippag·e can be trans-
lated into lost project revenues, increased interest during
construction, overtime costs, etco)
Work Package F -
·software Revisions
~~xist.ing software will be modified as necessary to accommodate
the results of prior work packages and to minimize abo~tive
.
runs during computer analysis. T~st data will be produced
and calculated manually. The computer program will then be
used to process the test data to ensure that the system is
performing properly.
ACRES AMERICAN INCORPORATED
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Work Package G -
Consequence/Response Criteria Assessments
For each major activity in the overall CPM and/or for each
major component in the project, the consequences of realiz-
ing each possible risk magnitude will be assessed and
estimated. Responses will be defined as actions taken if
consequences are realized. For the first iteration of the
computerized risk analysis, design criteria and construction
procedures w111 be held exactly as they have been set forth
by the project design group (this will be the base case).
To the extent that preventive responses are possible (for
example, starting an activity sooner or raising the height
of a temporary cofferdam), their values will be tested as
perturbations to the base case in later work packages.
Work Package H -
Review and Revise
Prior to starting actual computations, the efforts
accomplished to this point will be reviewed in detail and
revisions will be made as appropriate.
ACRES AMERICAN INCORPORATED
Work Package I -
Initial Computations
and Interpretations
-19
_At this point, the data will be processed usi~g the
appropriately modified software. Preliminary results will
.
be reviewed for anomalies and errors, final program
debugging will occur, and interpretation of results will be
made for the base case. Preventive responses will then be
tested to determine the extent to which the expected project
costs and schedules would change with modifications to
certain design criteria, construction approach, etc. Initial
interpretations will be made.
Work Package J -
Assessment of Emergency Generation
If a risk is realized, the resulting consequences may cause
the loss of Susitna generation. A set of responses is then
required in order to assess the ability of the system or
other generation facilities to provide emergency power.
Whereas Subtask 6.36, generation planning, provides an
analysis and assessment of the system's ability to respond
to planned or forced outages b~sed on plant operating
experience, thjs work package will investigate the range of
responses required for the low probability but catastrophic
loss of Susitna generation. The results of this assessment
ACRES AMERiCAN INCORPORATED
i
l.
will be incorporated into the interpretations of Work
Package L.
Work Package K -
Project Response and-Update
-20
Initial results and interpretations will be fed back to the
project team and comments will be reviewed.
Risk/consequence/response data will be updated as appropriate
and, to the extent that desirable changes are identified in
design criteria or as~umed construction procE~dures, these
will be considered for incorporation by the project design
team.
work Package L -
Final Computations and Interpretations
Final runs will be made and a series of expected values will
be produced for cost, schedule, and other items as necessary.
Graphical representations relating probability to possible
costs and completion dates will be produced for the project
as a whole and for individual risk categories as appropriate.
The most important contributors to risk will be identified
and a final risk analysis report will be produced •
•
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Manhours: 2400
Computer Expense: $4,000
Schedule: December 1, 1981 through January 1982
ACRES AMERICAN INCORPORATED
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1,1'\L )(.C~ .j \)
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TELEX AS INDICATED TO PROVIDE RECORD
TELEX AT BOTH TORONTO & COLUMBIA
REPEAT TO C. A. DEBELIUS -COLUMBIA
J. G. WARNOCK -TORONTO
\ ) J. D. LAWRENCE
V .Drtl/jt<P
~\"' Y"-Ei!\-tw in Ce~~<.I\.A., vv\d. \'\.a~~ g
BUFFALO 1~+~ cie~ Ttk • ~Oy ~ 2-<.."i-D~o-J--\ L"'A/ SUSITNA
TASK l) v-;, J (/(NVt-..12~ ~ -tv~ Urf'r
FINANCING AND MARKETING Ovv~~ ~-~~-~N
MOHN AT BUFFALO MEt.,-TINGS 13TH ~BE~R. ~/q FOLLOWING DISCUSSION WITH T. McGUIRE AND R. 1(~E
WE HAVE REVIEWED LIKELY OUTCOME OF STATE LEGISLATURE APPROVAL APPROACH AND IMPACT OF
MOST PROBABLE CAPITAL COST ON SUSITNA ENERGY PRICING. TASK 11 CAN BE RESCOPED WITHIN
REMAINING BUDGET ALLOTMENT TO INCLUDE FINANCIAL ANALYSES, MARKET ASSESSMENT AND RISK
ANALYSES. IN VIEW URGENT NECESSITY TO INITIATE WORK AND MEET MID JANUARY SCHEDULE
WOULD RECOMMEND TELEXING APA AS FOLLOWS: QUOTE
FOLLOWING DISCUSSIONS RELATING TO MOST LIKELY RANGE 'OF FUNDING FOR SUSITNA FROM STATE
OF ALASKA AND YOUR INSTRUCTIONS LIMIT OUR FURTHER WORK ON TASK 11 TO FIRSTLY FINANCIAL
ANALYSES SECONDLY MARKETING ASSESSMENT AND THIRDLY RISK ANALYSES. WE HAVE RESCOPED
TASK 11 BY ELIMINATING FUTURE EFFORT ON PROJECT OVERVIEW AND INTERNAL REPORTS AND
• j APPLYING LEVEL OF EFFORT EQUIVALENT TO REMAINING FUNDS BUDGETED FOR TASK 11 TO WORK
"'-v·
ITEMS AS ABOVE. BRIEF SUBTASK DESCRIPTIONS FOLLOW: -FINANCIAL ANALYSES
OBJECTIVE UPDATE AND REVISE FINANCING PLAN TO INCORPORATE LEGISLATIVE PROVISIONS
SB25 AND RANGE OF LIKELY OUTCOMES.
METHODOLOGY IDENTIFY BASIC FINANCING OPTIONS AND APPLY COMPUTER PROGRAMED ANALYSIS
FEZIBL TO GENERATE ALL RELEVANT AND REQUIRED ACCOUNTING AND FINANCING DATA OVER PROJECT
LIFE.
SCHEDULE -BEGTNNING NOVEMBER 9 TEST COMPUTER ANALYSIS AND ASCERTAIN THAT OUTPUTS
CONFIRM TO REQUIRED ACCOUNTING PRACTICES TO SERVE NEEDS OF APA, FERC, FIRST BOSTON
AND OTHER PARTIES. CONDUCT ANALYSES WITH MOST RECENTLY AVAILABLE COST, SCHEDULE,
EXPENDITURE PROGRAM AND ENERGY OUTPUT INFORMATION AND AGREED FINANCIAL PARAMETERS
AND RANGES OF VALUES. PRESENT RESULTS IN MATRIX FORM TO DEMONSTRATE IMPACT OF SUCH
VARIABLES AS STATE FINANCIAL CONTRIBUTION, INTEREST RATES ON SENIOR DEBT CAPITAL
COST, SCHEDULE OF ENERGY DELIVERIES ETC. PROVIDE FOR INTERACTION WITH APA, FIRST
BOSTON TO ALLOW REFINEMENT OF ANALYSES AND OUTPUT TO PROVIDE FOR FINAL OUTPUTS IN
SUITABLE FORM FOR FEASIBILITY REPORT, LICENSE APPLICATION AND FINANCING CONSIDERATIONS
IN MID JANUARY 1982 IN PARALLEL WITH FOREGOING IDENTIFY PRINCIPAL FINANCING RISKS -J WITHIN RANGE OF ALTERNATIVE PROTECT OUTCOMES AND DETERMINE IMPACT AND PROBABILITY IN
COORDINATION WITH RISK ANALYSES SUBTASK BELOW.
MANHOURS 1192
: .
, .. . '
-Pag~ .. 2
SCHEDULE NOV. 9, 1981 TO JAN 15, 1982 AND AS REQUIRED TO COMPLETION OF LICENSE
· APPLICATION
\} COMPUTER EXPENSE $7500
CONSULTANTS 68 M~N DAYS
MARKETING ASSESSMENT
OBJECTIVE ASSESS LIKELY MARKET RESPONSE TO AVAILABLE OUTPUT FROM SUSITNA AND
DETERMINE PATTERN OF WHOLESALE PRICING LIKELY TO BE ACCEPTABLE TOGETHER WITH RESULTING
REVENUE.
METHODOLOGY IDENTIFY ELEMENTS OF RAILBELT MARKET TO BE SERVED BY SUSITNA AND . .
DETERMINE LIKELY PROGRAM AND PRICE AT WHICH AVAILABLE ENERGY/POWER WOULD BE ABSORBED
INVOLVES ANALYSIS OF UTILITY DE~~ND PROFILES AND DEVELOPING CHARACTERISTICS WITH
TIME AS INDICATED BY OGP-5 AND OTHER STUDIES INCLUDING ANCHORAGE -FAIRBANKS INTERTIE.
DETERMINE LIKELY ACCEPTABLE BASIS UNDER WHICH UTILITIES WOULD CONTRACT FOR WHOLESALE
SUPPLY.
SCHEDULE BEGINNING NOVEMBER 16 REVIEW AND ANALYSE ALL AVAILABLE DATA RELATING TO
RAILBELT UTILITIES AND IN EARLY DECEMBER PROVIDE APA WITH DRAFT OF INITIAL APPRAISAL
OF MARKETING PLAN. REVISE AND RESTRUCTURE A'S NECESSARY DURING DECEMBER AND COMPLETE
REQUIRED PORTION OF REPORT INPUT BY JANUARY 15, 1982.
MAN HOURS 951
~, SCHEDULE NOV 1, 1981 TO JAN 15, 1982 AND AS REQUIRED TO COMPLETION OF LICENSE APPLICATION
COMPUTER EXPENSE $1500
CONSULTANTS 12 MAN DAYS
RISK ANALYSES TO BE PROVIDED IN SIMILAR FORM TO ABOVE BY C. A. DEBELIUS NOTING THAT
FINANCING RISK MANHOURS INCLUDED IN FINANCIAL ANALYSIS LEVEL OF EFFORT.
QUOTE WE WOULD APPRECIATE TELEX FROM APA RELEASING US TO SUPPLY FULL EFFORT TO
TASK 11 IMMEDIATELY. ANALYSIS WILL REQUIRE CAPITAL COST AND ENERGY INPUTS FROM
TASK 6 EARLY IN WEEK OF NOVEMBER 9.
.
SUSITNA HDYROELECTRIC PROJECT
TASK ll FINANCIAL ANALYSIS
Financial Parameters
Attachment A
(To lett:er o£ November 26, 1981)
At a meeting in Acres American, Buffalo offices on October 13th
agreement was reached with T. McGuire APA and J. Raben, First Boston
Corporation on financial parameters which should be used for analysis
of the Susitna Hydroelectric Project. These are listed below together
with "average" parameters used in the early stage of "test" financial
analysis.
(a) % Funding of the total
project cost from
State of Alaska
{b) % ROI on State Funds
(employed for test of
financial viability
only)
(c) % Interest rate on
senior debt funds
Low Median High
30 45 60
5 5 5
10 14
(d) Senior debt maturity 30
(with interest and
principal payments
levelised over period
commencing one year
following the year
30 30
of full plant operation)
-years
(e) Inflation rate %
(f) Debt service cover
applied to the
annual requirements
for levelised senior
aebt service
7 7 7
1.25 rising to
1.5
"Test" Values
$2 bn
5
12 and 14
35
7 and 9
1 .. 25 rising to
1.5
L•
I I
(g)
(h)
% Rate, based on
original capital cost
with allowance for
inflation, at which
"Replacement and
Renewals" are provided
for
Inflation rata applied
to construction costs
during the period of
construction
I
(i) Inlfation rate applied
operating costs during
the period of operation
(j) "Resexve and Contingency"
fund as a % of annual
operating costs set aside
and replinshed year by
year
(k) Committment and
placement fees as bond
financing costs
'Low Median High "Test" Values
3/4 3/4 3/4 3/4
r
10 10 10 7 and 9 I
8 8 8 7 and 9
not decided 400%
not decided
1/2% of bond value
Susitna Hydroelectric Project
Marketing and Financing -Task 11
Financial Analysis
'
A) Following discussion of the approach now appropriate to financing
of the Susitnr Project it was decided to adopt the following
criteria:-
1. to reflect the likely mix and cost of State and debt market
financing:-
(a) % Funding from State of Alaska
(% of total project cost)
(b) % Return on investment ~li~~e
to State funds
(c) % Interest rate on senior debt
financing
(d) Debt maturity period commences in the
year following the first full year of
operation through semi annual level
debt service to amortise the
principal over~ years from
commencement of debt service
(e) Interest and principal payments
on debt services to be lelvelised over
period set out in sub paragraph (d)
(f) Interest to be capitalised to 1 year
after full operation of each project
segment (e.g. Watana 400 MW Watana
800 MW or Devil Canyon 600 ~1)
. .; . ·;·l
"
cv ,...~.18tlr-.n._r,..,tn . ' -.
''t -··-.....
Low -30%
10%
.... /2
Median
45%
5%
30 years
High
60%
14%
"
\ I Q (g)
(h)
- 2 -
Committment fee on ~nior debt
(would.be of order dt:l% per annum
on the undrawn balance)
w\.d. ~ ~c.o~
Plac~ment fee~for senior debt
~-~ld be in range of 0 .. 3 to 0. 5%
f the principal amount)
(i) Draw down
( J.......-1' C......l-v-~ J
2. to provide for the necessary funds
(a)
to be .. decided
assume quarterly draw
down to nearest $5 million
of requirements rounded
upwards
i4% of original capital
cost per annum from the
first year of full operation
(including with capital cost
allowance for inflation at
10% p.a.) and with amounts
increased to allow for
inflation thereafter at
8% p.a. ~~-~f~r Reserves and ~Cont1ngenc1es ~~ 7 @ I o 1. cfkJU.I.k S-tx.M.L {)' -tL:,.06f •
accumulate 10% of annual
~ross re"Jenue from first
year of full operation until
fund equals 6 months gross
revenues and maintain at
this level thereafter
~~t11'SUu~ ~~Vt£ ~""-~
(c) To allow for ~t~ W'-n maintllin 1.25 times ('a\1e:rage~
-~ Wtliill)r iE'iBift! 'fiQ,}.i:wt";imee ~~~~ cover on requir~for annual ~..,. {~.+ .A:k) debt: servi~~e on senior gebt ......
/ Cover of 1. 0 only required
r-&1 L~D\-for 5% legis return on
()M ,-~L-State ~ng. and this ~mount ~ orm port1on of sen~or
debt cover ~~-~A~~~~
. . // ==-/'ir!. ~ P"j....:t
!~-t~~ ~ () .... /3
~C;f
~ -r.
; , ...
....
,.
\
. .
- 3 -
Note (i) Amounts accumulated .:i.n funds to be invested -with interest
used to reduce (or subsidise) the rates at which energy is sold •
•
(ii) In relation to provisions for interest ce>ver this should
be'funded for the year ahead in reserve and recirc~lated
with adjustment year by year. Any surplus arising in a
given year can be set against cover requirements for
following year.
3. to allow for various charges on capital account
(a) Interest on debt to be capitalised
to one year past first year of full
operation for each project segment
(b) Working capital may be treated as
capital required for project
(c) Construction cost estimates to be
subject to an allowance for
inflation equal to 10% p.a.
4. to allow £or various charges on earnings account
(a) Revenue to be accounted for
firm energy only
_, {b) ~econ~Jl e~efgy revenue (assessed
with appropriate probability and
rate/KWh) should be accumulated in a
separate fund and applied, as
considered advisable to funds 2(a),
(b) or (c)
"'l \'C·Y"'' ... --·· . l ·-
. ... ;
.... /4
• • "
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. .
- 4 -
(c) Operating cost estimates to
be subject to an allowance for
inflation equal to 8% Poa.
X
~~~rating costs to be ~~educted from the 5% on State
of Alaska investment
~Balance of the 5% on State of
Alaska investment m~y be available
to pay debt service on senior debt
(Note: It must be established whether the 5% return on State investment
has to be returned 1:o the State and reallocated to meet costs
4(d) and (e) above or whether the deductions of allowable costs
can be made by APA)
B)
1. Financial analysis of cases covering the range of criteria
will involve the following runs:-
% Inflati
(a) % Funding %ROI % Interest on Debt Maturity p.a.
Senior debt Years Construction Operatic
Run X 1 30 5 10 30 10 8
X 2 30 5 14 30 10 8
X 3 45 5 10 30 10 8
X 4 45 5 14 30 10 B
X 5 60 5 10 30 10 8
X 6 60 5 14 30 10 8
.... /5
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- 5 -
2. Energy costs in mills/KWh will be determined initially for
1993 i.e. year 8 of the schedule. Then to obtain an overall
picture of the likely outcome the FEZIBL program will be run
for ·
(i) Starting mill rate increased in subsequent years by
inflation. @ 8% per annum with i:his :A:ate of increase
applying also to operating cost~
{ii) Starting mill rate increased in suosequent years by
inflation in operating costs only @ 8% per annum
(iii)Starting mill rate increased in subsequent years by
a median rate between 2(i) and 2(ii) of 3 1/3% with
operating costs increasing @ 8% per annum
(Note:-Any construction costs incurred even subsequent to commercial
operation will be increased at 10% p.a. Renewals and
replacement allowances to increase at 8% p.a.)
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ACRES 8UF
.
ACRES TOR
-~ ~ \1' NOV 10/81 PS700.07.11
--ATTNz JOHN LAWRENCE
. -.
REs SUSITNA HYDROELECTRIC PROJECT
-TASK 11 FINANCING ANALYSIS
-
(A) --.. ~ - -FOLLOWING OUR MEETINGS WITH TERRY MCGUIRE AND JOHN RABEN ON
--~ , -OCl'OBER 13TH THE FOLLOWING FINANCIAL PARAMETERS WERE ESTABLISHED ---.
FOR FURTHER ANALYSIS~-
l.OW MEDI.UM HIGH ...........
--'W-W' -
(A) 0/0 FUNDING OF TOTAL
--.....
PROJECT COST FROM STATE . -OF ALASKA so 45 60
---
(9) 0/0 R01 ON STATE FUNDS
--<EMPLOYED FOR TEST OF
-~
FINANCIAL VIABILITY ONLY> 5 s s
---(C) 0/0 INTEREST RAT£ ON SENIOR --
DEBT 10 14
--... ... ... -<D> SENIOR DEBT MATURITY WITH ---~
... .... -....
INTEREST AND PRINCIPAL PAYMENTS - -.. ... --
LEVELISED OVER PERIOD
--COMMENC!NG ONE YEAR FOLLOWING
---THE YEAR OF FULL PLANT -.,
OPERATION 30 YEARS
-(£) -INTEREST ON DEBT ADVANCED
-FUNDS DURING CONTRIBUTION TO ----BE CAPITALISED TO 1 YEAR AFTER
" ---- - -FULL OPERATION OF EACH PROJECT
~
SEGMENT
-.. -.
<F> DEBT SERVICE COVER TO BE MAINTAINED .. . .
AT le25 TIMES INITIALLY RISING TO ---... ... .. -
1e5 TIMES THE ANNUAl REIUIREMENT FOR ----LEVELIS£0 SE~IOR DEBT SERVICE
-~ --
(Q) FUND FOR REPLACEMENT AND REVENUES
-. -ACCUMULATED AT A RATE OF 3/4 0/0 ---- - -... OF ORIGINAl CAPITAL COST WITH -. --... -AlLOWANCE FOR INFLATION
.. ----<H> INFLATION RATE APPLIED TO ----CONTRIBUTION COSTS DURING -- ---CONSTRUCTION 10 0/0 PER ADDUM --
-<I) --.. --'"" INFLATION RAT£ APPLIED TO OPERATING
.
COSTS 8 0/0
---. NOTE ITEMS (A)·-<G> AS DISCUSSED~ FOllOWING ITEMS
-~---DETERMINED SUBSEIUENTLY ASta --(J) FUND FOR REStRVES AND
... -CONTINGENCIES ACCUMULATED --
""' --.. . AT A RAT£ OF 400 0/0 Or OPERATING ---
COST AND EMPLOYED VEAR·BY YEAR TO
--PROVIDE FUND <G>
---.., <K> COMMITTMENT AND PlACEMENT FEES
-RECOGNISED AS FINANCING COSTS ~T --..., -" ...
lEVElS Y£T TO BE DECIDED
'
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-w -<~> WORKING CAPITAL TREATED AS CAPITAL -. . .. -"' OUTLAY FUNDED WITH PROJECT . -
--<M> REVENUE ASSESS ON ONLY FIRM ENERGY OUTPUT
·,
t ..
-<B> ... -----... -APA LETT£~ OF OCTOBER 29TH PLACES NEW EMPHASIS ON INPUTS FROM
• ---
OGP:S ANALYSIS ~ND FROM TASK 11 -F&ZIBL. ..
IT APPEARS TO ASK -.... .. -~ ..
US TWO SEPARATE SETS OF •UESTIONS WHICH THEY MAY NOT HAVE
--'" -., ---CLEARLY IN THEIR OWN MINOS. <1i THE FIRST SET OF OUESTIONS IS ~. . --. .. --~ .. ---~ .. ABOUT COST BENEFIT ANALYSIS INTERPRETA!ION OF OGP•S. THEY MAY -----
.. .. II» -
HAVE IN MIND THAT oap .. s TAKES "10 ACCOUNT OF LONG R~"J SECURITY~ - -------~. -CONSERVATION ISSUtS ETc.~ AND THAT THE ''STATE IS lOOKING FOR -., -.. ·-.. --~ .. THE LOWtST COST LONG TERM ALTERNATIVE~' IN THIS SENSE. THE --.. -· ~ ..
., -.. ---STATE CONTRIBUTION CAN TH£N BE SEEN AS PUTTING A VALUE ON THESE ---~ . . -.. -.. -INTANGIBLE BE~JEFITS AND THE APA WANTS US TO TEST OGP•S --.. .. - -
"' ... .... . .. --INTERPRETAT!NG ITS RESULTS AS ''THE SENSIVITIVITY OF OPTIMUM ---. -.. ------ -SCHEDULING'' WHEN THE COST OFFSET REPRESENTED BY THIS ---
... .. --.. ... -111'
EVALUATION OF THE INTANGIBLE BENEFITS OF SUSITNA t.£. ~5 0/0 ---. ---.... -.... --EQUITY ARE TAKEN INTO ACCOUNT AS A REDUCTION IN SUSITNA CAPITAL ---.. --- --~ COST. . --IT SHOULD BE NOTED iHAT THIS CONTRIBUTION DOES ''NOT'' ... -...
-.. J---.. -ATTRACT INTEREST OR CHARGE. THE S 0/0 RETURN ON INVESTMENT IS A ----
w • ------.,. TEST TO BE APPLIED WHEN FINANCIAL OUTCOME OF PRO~ECT HAS BEEN
' ~
DETERMINED. --..
(2) THE OTHER ''OPTIMUM SCHEDULING'' QUESTIONS -. ..
~ ----THEY MAY HAVE IN MIND RELATE TO THE OPTIMAL FINANCIAL SCHEDUL!N; -. ---. . . . . . .. ~ .
-------..--------------. .. THAT IS WHEN AND TO WHAT EXTENT WOUt.O IT BE FEASIBLE TO --. --. ----. . FINANCE THE REMAINING PROJECT REQUIREMENtS BY DEBT~ GIVEN THE . --- -
-~ • <II -.. ..
ASSUMPTIONS THEY STAT£. WE ARE IN A POSITION TO GO AHEAD WITH ------- -. --ANSWERiNG THIS LAST QUESTION FROM OUTPUT OF FEZIBL UNDER -TASK 11. -
--.... .. .. "" ... --..
IF' YOU ARE HAPP"f ABOUT THIS INTERPRETATiON Of' THE LETTER WE WILL ---.. ... -----~
QO AHEAD WITH THE FINANCIAL SCHEDULING PART IT AS PART OF TASK 11. ---.... ·-.. -.. ... ., ..
IF ON THE OTHER HAND YOU HAVE ANY DOUBTS WHAT IT IS THEY WANT --"' "" " ... - -.. -"" -. PERHAPS YOU SHOULD CHECK WITH Ro MOHN AND THEN LET US KNOW WHAT -.... .... -IT IS YOU WOULD LIKE DONE. ,-
~ ~ -J,Q. WARNOCK
..
'TORONTO
~ -
•
ACRES BUF
-14CRES TOR
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'
November 9r 1981
To:: J .. G. Warnock
From: A. J. Merrett
Re: ENTRY PRICE AND OUTCOME
MATRICES
The task outline to the APA should refer to "outcome" matrices which,
for the financial analysis, would be capital cost, entry price and earnings
cover (CEE)where the outcome would be the earnings cover resulting from
the first two mentioned variables. In the case of the risk analysis
the matrix would be the event, provision risk (EPR) matrix where the
outcome would be the residual risk remaining to the bond holders, upon
from the events specified and mitigate given the provisions taken to
measure the adverse consequences of these events in terms of risk to
the bond holders.
On a related point, it would help if we could formalise now the
terminology and range of results for the entry price. My suggestion is
that we call the lower number "current avoidable cost". We should
also, however, take cognisance of a possibly substantially highe.r
number "long run avoidable cost" the latter would be wh~:%t it would be
"fair" for the utilities and their ultimate consumers to be prepared
to pay. This would be not merely the operating cost savings which
Susitna offers the utilities, but also, for the increased capital costs
that would have been incurred to replace or expand existing capacity,
if Susitna had not come along. If the whole system were under the
control of APA it is this latter price which they r.tight be expected
to get in any "fairn regulatory hearing or political situation. We
might get a fix on this long run avoidable cost by estimating what
price hike does OGP-5 suggest that Alaskan consumers would have faced
if Susitna did not go ahead and instead the next best option had been
pursued. The "long run avoidable cost" then might be what this option
would have resulted in 1993 costs, and in a '1 fair" world Susitna could
charge whatever would bring the utilities costs up to this level,
It would be worth getting the people producing OGP-5 to check out this
and the estimate of the current avoidable cost entry price since both
are likely to become quite hotly contested numbers. My own guess is
that if OGP-5 is operating correctly, there may be little difference
between the two entry prices. This is because, presumably, OGP~S
will select for the system in the ruh-up to Susitna high current costs
"make do and mend" solutions rather than lower costs long term investment
solutions, since the latter would be relegated to a standby role once
Susitna carne along. However, these are facts which we should have at
our finger tips.
AJM:dn
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FOJt THE ATTENTION OF' a.JG WARNOcK ------· sr -
P'OM Jlt~VI~ l:N cOt..Juc!tOt. wt!H MOHN• LETTER DA!to oc! 29 AND
cOORDI~ATION WITH CURRENT surFALO ENERGY COST ASSESSMENT! BEroR~ -- --... lKANSMITTAL
ACRES BUF'
11.19.181
..... -. .. -.. !LX !0 COLUMBIA ATTNt c. DEBELIUI • Pe HOOVER
.... -<
FROMI "'•De LAWRENcE·· BUFrALO
SJSlTNA
TASK 11
~
nNANCING AND MARKETING
--COPY TO a Je B. WARNOCK/TORONTO ---sr
--.. ---FOLLOWING DI!CU51ION WITH Te MCQUIRE AND Re MOHN AT eurrALO MEETINGS
-·-0 • -• 13TH OCTOBER WE HAVE JtEVIEWED L!KELY OUTCOME OP' STATE LEGISLATURE --·-----------APP~OVAL APPROACH AND IMPACT or MOST PRCABLE CAPITAL COST ON SUSITNA - ----. --. ENERGY PRICING. TASK 11 C~N BE REICOPED WITHIN REMAINING BUDGET -~ .. --------ALLf.ITMENT !O !NCLU~ F'~NANCIAl. ANALYS!I* MARKET AIS~SSMEN! AND RISK -MALYSUe ' -.. "* --IN VIEW URGENT NECESSITY TO INITIATE WORK AND MEET MID -----
---!If!"'--· ~NUARY SCHEDULE WOULD RECOMMENDED TELEXING APA AS F'OLLOWSI QUOTE - ----
--.., ---FOLLOWING DISCUSSIONS RELATING TO MOST LIKELY RAN~E or FUNDING F'OR ---
SUSITNA rROM STATE OF' ALASKA AND YOUR INs!RUC!ION LIMit ou! FURTHER
wORK ON TASK 1! TO FIRSTLY FINANCIAL ANALYSES SECONDLY MARKETING -.. , -. . -.. ASSESSMENT AND THIRDLY RISK ANALY!Eie WE HAVE REICOPED TASK 11 BY -"' .. -.. .. ELIMINATING FUTURE ErFORT ON ,ReJECT OVERVIEW AND INTERNAL REPORT! ... --"" -. .. ... -.. ~D APPLYING LEVEL or ErroRT EQUIVALENT TO REMAINING FUNDS BUDGETED -----.. ... FOR TAlK 11 TO WORK ITEMI AI ABOVE. BftiEF SUBTASK DESCRIPTION roLLOW
- - ---·-FINANCIAL ANALYIEI OBJECTIVE UPDATE AND REVIS! rtNANCING PLAN TO
. -..... --... --·-· INCORPORAT LEGISLATIVE PROVlSIONI 5825 I1ND RANGE OF' LII(ELY OUTCOME. .. --. ---I'I:THODOLOGY IDENTifY. BAIIC F'INANCING OP'l'lONI AND APP'LY COMJt\JTER --... --~ . ... ---... --. -. PROGRAMED ANALYSIS rEZIBLE TO GENERATE ALL RELEVANT AND REIUUJ:D ACe--. -__ .. _ -",. -.. --, CUNTING AND F'INANCINQ DATA OBVER PROJECT LirE• --.. -
s:Ht:ooi.E-BEOINNINO NoVEMBER ' TEIT cOt.!PUtER AN~LYSfl AND Asct~RTIAH
1HAT OuTPUTS CONFIRM TO REIUIRED ACCOuNTING PRACTICE& TO SERVE NEEDS --... . ... ... -.. ~· --.... .. ... ... . -... --
OF APA• F'ERC.t riRST BOSTON AND OTHEI PARTIEie CONDUCT ANALYIEI WITH ... -----M)ST RECENTLY AVAILABLE COIT.t SCHEDULE-. .-• -. ..
• -ACRES TOR
--IS SOMEONE THERE HELLOil . ------
-10< -Uo ..
EXOY OU11'PUT INrOR(ItATION AND AGREED FINANCIAl. PARAMETERS AND RANGES
-u. --... ---., ,, - -.....
ar VALU!:I• PJil£SENT RESULTS IN ~TRIX FORM 1~0 DEMONSTRAT~ IMPACT or
... -·--.. ---SJCH VARIABLES AI STATE FINANCIAL CONTRUIUTION.tM INTEREST RATES ON
---u .. "' ---. .. .. .. . !INieRSENIOR DEBT CAPITAL COST• SCHEDULE OF ENERGY DELIVERIES ETe. ... . --... - -.. -... . ------PROVIDE FOR INTERACTION WITH APA• F'!~ST BOITO~ TO ALLOW REFINEMENT .. , - --.. ~' .... ... -...... - -.... -., . -
OF' ANALYSES AND OUTPUT TO PROVIDE roR riNAL OUTPUTS IN SUITABLE FORM .. -.... .. -..... _ -. ... - -
FOR F'EAIIBILlTY REPORT. LICEN!I\1: APPLICATION AND artNANCINO CONli.IDERA"' ---... ------noNS IN MID JANUARY 1982 IN PAkAU.EL WITH F'OREOOING IDENTIFY PRIN• ..
~ .....,.._+----·--·-......................... ~·~ ~ .. ~ ............ -,. ........... -w' ..
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REPoRT: ~rcENsE APPLICATION AND ~INANCINo coNsiDERA-
!Io..s IN MID JAr~~ft'r ~982 IN P~WALLEL w;TH i"OREOOINO XD!:NTin PIUN.., --ClPAL FINANCltiO RISKS WITHIN RliNOE OF ALTERNATIVE PROTECT OuTCMS
Y!ES IUBTASK BELOw: ---
~D DETLRMINE IMPACT AND PROBABILITY IN COORDINATION WITH RISK ANAL• ---"" -.. -. ----
. .. -----·~
-# IWRNHOURS 119Zco
--S::HEDULE NOV 9,. 1981 TO ~AN l !5• 1912 AND AI REIUJIIIED TO COPPLETION OF ----LICENSE APPLICATION
"'' ---COMPUTER EXPENSE D7500
--CONSULTANTS 61 MAN DAYS
--~RKETINO ASSESSMENT --
.. --. ~ SUSITNA AND DETERMIN PATTERN OF WHOLESALE PRICIN~ LIKELY TO BE
---.. ------.. OBJECTIVE ASSESS LIKELY MARKET RESPONSE TO AVAILABLE OUTPUT FROM ... _ .. -""' ---... ~
'"' ---.. ACCEPTABLE TOO~THER WITH RESULTING REVENUE •
. ---· ... -... .. -METHODOLCOY IDENTIFY ELEMENTS OF RAILBELT MARKET TO BE SE1rvED BY ----~ -. --- -SUSITNA AND DETERMIN LIKELY PROGRAM AND PRICE AT WHICH AVAILABLE -.. -~ -.. -------ENERGY/POWER WOULD BE ABSORBED INVOLVES ANALYSIS OF UTILITY DEMAND -... -. ----... ---PROFILES AND DEVELOPING CHARACTERISTICS WITH TiME AS INDICATED BY .. -----. --... - -
OQPuS AND OTHER STUDIES INCLU~I~O ANCHORAGE-FAIRBANKS INERTIEo --... ----""'-... -CETERMIN LIKELY ACCEPTABLE BASIS UNDER WHICH UT!LITlES WOULD CONTRACT ---. FOR WHOLESALE SUPPLY.
---.. . .. SCHEDuLE BEGINNING NOVEMBER 16 REVIEW AND ANALYSE ALL AVI.ILABtE MT~
--- -RELATING TO RAILBELT UTILITIES AND IN ~RLY DECEMBER PROVIDE APA ---... --. ---.. WITH DRAFT OF INTIAL APPRAISAL OF MARKETING PLAN. REVISE AND RE• -----STRUCTURE AS NECESSARY DURING DECEMBER AND COMPLETE RE8UIRED PORTION - --. -... ... --~ ..
OF REPORT INPUT BY JANUARY 1!5• 1982o -· ---~NMSUftS YSi
--... --SCHEDULE NOVl• 1981 TO JAN 15. 1982 AND A! RE8UIRED TO COMPLETION 0~ -. --.
LlCENSE APPLICATION -. COMPUTER EXPENSE Oi500 -. . --GON!UbTAN!! !2 ~~N DAYS
------RlSK ANALYSE! TO BE PROVIDED IN !IMLAR FORM TO ABOVE e.A. DEBELIUS -. -· -.... ----NOTING TH~T ~~N~NCINO RISK MANHOURI INCLUDED IN FINANCIAL ANALY!IS -- -
----4 .. -•
LEVEL OF Et~ORT. QUOTE WE WOULD APPRECIATE TELEX FROM APA RELEAS•
JNG us TO SUPPLY FULL E~FORV TO.TASK 11 IMMEDIATELY. ANALYSIS WILL ~ -... -.. --... .. ~gUift~ CAP~!AL COlT AND ENERGY INPUTI F~~ TASK 6 EARLY IM WEEK --.
CT NOVEMBER 9e
'""!" ~
-J• ~! LAWRENCE
.
N;Rq TOR
.
-~
RECORD OF TELEPHONE CALL
NOV n 11 t981
•. ; ..
JOB NO. jJ S70 C). oc.J FROM (Originator) {?/.Jjj -------------------0 Company ~~/ DATE C.T 30 · 8/ /7/7-
TO Go/ef)tJ/V h'~m&
FILE NO. _p_~_7_cro_. _o_7._._/J ____ Company Cet?~t:=r'S L/8/C/JN'LJ (CPA F/~1)
· SBBJ"ECT · ~sk // Acov/l/.77.11/G ;:::ofi!/JJ/37:5 FO/c FEfi?C
Per sf/. es~ --vr-~_ v(;J / I ec;./tcf &,/;h/r;e
CIRCULATE TO:
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ALASKA POWER AUTHORITY
,:i"\4 WEST 5th AVENUE-ANCHORAGE, ALASKA 99501 Phone: (907) 277-7641
(907) 276-0001
ALASKA POWER
AUTHORITY
SUSITNA
FILE P5700
. II
3EQUENCE NO.
F.dOB
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Mr. JoJ:m D. Lawrence
Acres American
Liberty Bank Building
.Main at Court
Buffalo 1 New York 14202
Dear John:
October 29, 1981
RECEIVED
, NOV 6 1981
AtRtS hu1tiliW'Ji lli~~ORATID
You will rerrember that 1 at the recent Buffalo rreetings 1 there was
discussion about input pararreters for generation planning. Phil Hoover
expressed reservations about using econcrnic parameters to optimize the
schedule of SUsit.ha additions 1 because he believed that the arrount of
existing gas turbine generation being displaced was excessive. We
tentatively agreed to use a marketability test based on financial
pararreters to schedule the Susi tna developrent, while continuing to use
the econcrnic parameters in the econanic evaluation.
I have discussed the matter with Eric at sorre length, and he does
not share Phil's concern. Eric believes that we should stick with the
economic parameters throughout Q because the State is lcx:>king for the
lc:Mest cost long term alternative. There is no doubt that there would
be market:ing problems in the early years if we had no latitude in -
establishing rates. HCMever 1 that is not the case. We recognize the
likelihood that rates may have to be adjusted in the early years through
State contributions in order to make Susitna po;.ver attractive. We
believe this will be well worth it in the long run, hOW'ever, if it is
the price for bringing on line the rrost econanical long tenn
al te1:native.
Therefore 1 after due consideration of the ar~j;p vour staff !)as
presented to date, we wish you to cont:inue u_sing the econanic pararneter.s_ m all aspects of the econOITiic feasibility eva"luatlon-: --For -infornation
purposes oruy-;pi:ease-ex-plore-t.he-setlsit::J..vit.y· of··opt:i:nn.nn scheduling to a
set of fiP.ancial pararreters listed below. The results of this check are
for our in-house use.
Percent Equity
Return on Equity
Percent Debt
Cost of :SOrra.ving
Period. of loan
Underlying Inflation Rate
45%
55%
7%
5%
12%
35 years
Leaving that subject, '~e agreed in Buffalo that a formal and
carprehensive sensitivity analysis will be perforrred to detennine the
sensitivity of net benefits to pos..:.ible variation in the input
asSlDTiptions. Net benefits are the difference between total discounted
. ·-.. .• ' ... ----···-·~·-----'"-··--··---:-~ r-,~-........ _ tw
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costs of the with-Susitna plan and those of the without-Susitna plan
fran ~983 to the end of the econanic evaluation periOd. The sensitivity
analysis will address several prlltary sets of assunptions:
a) SUsitna rosts and schedule
b) Non-SUsitna alternative costs and schedules
c) Econanic analysis paraneters
d) Load forecasts
The sensitivity analysis should include the follc:Ming aspects:
a)
b)
c)
d)
Identify all assurrptior-.Ls.
For each assurrption, iClentify t.'he reasonable range
of variability.
Test (or otherwise determine) the ~-nsitivity of the
econanic analysis results to change in each assurrption
over its range of variability.
Identify and discuss the ".inp::>rtant" asSl..li!ptions,
i.e. , :those to which the results are sensitive.
The source of data for exploring the assumptions underlying the
Susitna Project will be the separate risk analysis. Battelle
infonration should be the main source of data for exploring assu:rrptions
deal:ing with load forecasts, al temati ve project capital costs and fuel
costs.
A flav diagram of the typ~ I provided you in Buffalo may be a
useful tool for the identification of asSl.lil'ptions and the presentation
of the analysis results.. For instance, you might show a diagram 6f all
assumptions and then the sarre diagram with the "irrportant" assumptions
highlighted.
Both the risk analysis and the sensitivity analysis will be
presented as an appendix, with surrma.ry results pret..:ented as appropriate
iri. the main report and in the executive smrmary/project overview.
Please advise if anything in this letter conflicts with your
recollection of our discussion.
Sincerely,
~~4??'L.
RobertA.Molm
Director of Engineering
RAM/blm
cc: Ph:tl Hoover, Acres, Colurnb±a, Ma:cyland
Jo:y Jacobson, Battelle, Richalnd, Washington
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SUSITNA HYDROELECTRIC PROJECT
Marketing and Financin9-Task 11 DRf-1rr 26 OCT 81
------~------------------------~--..::-a.-..-:.------....... ---
FINANCIAL ANALYSIS-SCOPE OF WORK __________ ........, ____________________ _
1 • With new estimates for:-
lwl CaPital costs
1 .....
•-'
1. 3
1.4
1.5
0Per·a t i n9 cc·~.ts
RePairs and renewals
Ener·g·y· c•utput
Working caPital re~uirements
Determine Prices required to fulfil
criteria i9norin9 sources of fin~ncin9.
PossiblY for a range of economic criteria
bas-.ic
e.9. Real return 3% after 25Yrs,30vrs and 40Yrs.
MoneY return 10%/14% after 30Yrs.
CertainlY for a ran9e of Price Patterns.
economic
e.9. revenue increase=increase ~n operating costs
total Price increases at inflation rate ~ &%
-F·r·ice ir,crea.-::.e.:. ev\!'rk'J' 5',1'~ .• (or7ll2l'·tr-s·;--7
.-, ..::.. AdJust model lo9ic to allow for minimum cash balances
in the form of "Funds" which ca~ earn interest.
2.1 Reserve and Contin9encY Fund
-next vears renewals and rePlacements
+ next vears oPerating costs
+ ?
2.2 Debt Service Reserve Fund
= la25 (?) times next Years debt service
The basic PrinciPle of these Funds is to ensure that
sufficient cash exists to meet obli9ations for ,say, 1 vear
ahead if revenue is cut off or erraticp
(QUESTION-If revenue is inadequate because of known-low
ener-9··1" Per·iods can the fund valLte diP or· mus-.t e::·::ter·Ral ca.F..h
be in.Jected ? )
3 .. A d ..i u ~. t t h e m .:• de 1 1 C• g i c t , :r a 1 l ott1 f o r· b Cl n d d i s c cr u n t c• r·
Placement feesai.e.costs which ar~ Proportional to debt
d r·aiJ..Id own:: .•
4" AdJust the model lo9ic to alloiJ..I for dr-awdown of debt
and State(or-Power DeveloPment Fund) contributions in a
ran9e of relative propor-tions.
e~9~ Each sta9e of the ProJect <Watana 1,Watana 2,Devils
Canvon) could be financed in a different manne~u
",·:·" ~------·~· ~-· ... ,_ .. -... :•·•• ... ·------.......... -·-·-------··-·~-~------"''l --
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Marketing and Financin9-Task 11 -------------------------------n ~~ "· F=· ·r ·-:· L .-} ("' .,. c·· 1 <..r I ,fi ...:..• . ..' 1• J \.;)
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A standa~d aPP~oach would be to divide ea~h Pr0Ject stage
into a nutT1b-er· of financi1·1g Pl"!B.£-:=?s··-hoPv-.:-full·:-· •7:t rn.::i.:~=:imum of -.: .• Phase 1 would be all e9uitv.
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Phase 3 w~u1d be debt and equitY in an0~~~r reti0
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hoL will i+ fit into the debt:e~ui*Y ratios?)
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( SUSITNA HYDROELECTRIC PROJECT
· 1"1ar·I·::Et-l: i n9 and F i n.:tn c i n9-· Ta:::. k 11
3
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COMMEl\ITE:
Item lc This is essentiallY a reP£tition of the last
exercise in Feb~u~rY during Tony Merrett 7 s visita
Item 2. As with most other financial simulation computer
1-:r o 9 r· am · ::: ··( ::. t em;:. l'-1 P SF P r· 1) v i d f:! :::. f ·~· r· •ri. 1 1 c a 1 c u i a t i o n s t o b e
comPleted in each PePiod before 9oin9 on to the next Period.
Thus it i~ difficult t0 Pro9ram decisions in this Period
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It·2!1i 3n FEZIBL L':.ti 11 eith-..~r· ;::i.ll oc.::i.i:f:! ir:t-::.·r·-:::::::1: dur·irr~}
' ((·ns.tr·uci:ion on an·y· loan to a s-P<:.~cifit=:d cos.t cateSI,:•r···,·· or-
Pro-P~te it amon9 all cost cate9o~ies.If thi:: latt~~ oPtion
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Fi•r i·:·JuTI·t2r·~::f•:.r·E! when lt'·:rr·t· in9 ort art Etnnu;;;:.l ba~.is it cannot
'=-'.;fft!Jl:::.t,·J ·:!.Jflj:'::J.f·f",::.•"·]··,·· •dr·;::••t~r', .. ,,,,,-,t::,-~1 +·1-,rrtJqt·· 1''1--r·;::~,)"t j:'tlll"r''' o~::, .. ,, ... • • -• • •• :.. .. -.... ... -.. ·-1.,:_ .J "" \.!.. -...... -• .. • ... ~ • ...-·-.. • .. \.;.. l ..
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r~g~~a~ Pattern~ For a ProJect of this size all calculation~
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adJustments should be
financi~l analysis.
f~, ........ , .. ,;!, r. +· n ...... J ••. , 1 + '"' e1 , ... ·t-. 1-1 .... ,... ,q ·~.· ·'·I·.
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As the fin~ncin9 scena~io~ tccom0 mor~ comple~c it
w 0 u 1 d b E.• n f"• c e ::;. ::. a f" ··t ·1: ·=· d f~ v f:: 1 (r p .::'L 1: Jj 1 1 '•( II a:: I.J ;::. i: 0 1TI :t s \;,. d II P' r· a:t g I"' i::L m
usinB FE:IBL as a ::tartin9 Point~ Such e rro9ram will
certainlY be ne~~:::sarY onc2 debt ar~an9ement details start
to be seriouslY considered, and chan9e~ to it will be an
r, , .. , .:' t"r 1' 1"1 9 i::~,': ,-; .. 1' · ·' : .. i· ·1' ::'-~ 1"1 ,::, '•t 1' t'j .::. ~ r.: •::1 ,·!:, \' ..... 1 t, Q u -• ' .':J -• • •• ... v • ...-~'1. -"-w ~ ,_ '-1. .... ,. .. .... • .. ....
Features which cannot be handled effici0ntl~ b~ rEZIE~
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J:!'-i,~·r·.i.cd 1;:in;:L:·:·:~<?.J and r:•P·~r··'3.tiJs~3 r·~·v'G.:nu::.·~:: d•.Jr-·inB 'tl""t~: r··.:rl .i.·:·d~
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( SLlSITNl1 HYDROELECTRIC PRO~.TECT Ma~keting and Financin9-Task 11
-·--·-·-·-----·--·---,---·<~•c:•··~--·-·-·--·-4-·---·--·-----
--· ........ ---...... --...... -·
GENERt~L ( contd.)
--· L~ --·
I) R ~ r.:·r ·::· L.. n r··r c-; 1 ... \l '• ·----.... ,... \.J.
(c)
11
Cir-ctJlatin·;,u Ftlnd:E. with ":=.Pill-·ov<:.o::r-:::.11 into otht~r-s"
(d) ComPlex debt r-ePaYment ter-ms with PreP~Yments based ~n OPe~atin9 r-esults.
(e) Annual r-evenue based on much c~lculation~
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SUSITNA HYDROELECTRIC PROJECT
Minutes of·Meeting to Discuss Task 11 Issues
October 13, 1981
Attendees: J. D. Lawrence
J. G. Warnock
C. A. Debel ius
· R. A. MJhn (APA)
T. McQuire (APA)
J. Raben (First Boston)
J. Hayden } _(f t• M. Vanderburgh or por lons of the meeting)
P5700.13
P5700el4.11
1. Finance Status. T. McQuire reviewed the status of State plans for
participating in financing the Susitna Project. He stated that there
is less optimism within the State with respect to future revenues than
there has been in the past. It is likely that on the order of two to
-l t~ billion dollars in 1981 terms will ultimately be made avalrable.
• 1 This corresponds to a 40-50 percent equity. The approach will assist
~in resolution of the.tax exempt problem. It is likely that arrangements
. .~ will be made on a take-or-pay basis with municipals at 35 percent and
~·L;·. / then divide the remaining~ issues amongst other uti!.!_!.:!es.
2. Risk Analysis. C. Debelius made a brief presentation on the proposed
Susitna Risk Analysis. R. Mohn suggested that in addition to the
Susitna specific risk analysis which we propose to do, there are several
other risk areas that need so.nehow to be considered. These include
risks or sensitivity dealing with the alternative to the Susitna Project,
with the economic parameters, and with the validity of the forecasts
that are being used. Jn effect, R. Mohn suggests that a careful
sensitivity analysis must be done on all of these issues. (See also the
final paragraph in this memorandum for further discussions of
sensitivity analysis which occurred in the afternoon session.)
3. Financial Analysis. T. McQuire suggested that it would be interesting
"', : . 11 1, if it is possible to produce a three-dimensional plot which relates
...... f, ~,~.~-...:'interest rates, rates of return to the State, and percent equity
·-···contribution by the State. J. Warnock noted that there may be a
fourth dimension which has to do with the variability of capital costs
themselves.
T. McQuire noted that there is a great sensitivity to terminology.
He prefers that we avoid words like 11 tax 11
,
11 royalty 11
, and 11 depreciati9.[~.
It's probably bettE~r to speak in terms of 11 return 11 • Insofar as a State
completion guarantee is concerned, T. McQuire observed that it is
probably unlikely. Even so, there will be a guarantee by APA.
T. McQuire addressed the present .concept for APA rates. He believes
there will be a single system rate determined by the cost of operations
and maintenance and debt services. However, it is possible that the
next 1 ~; s 1 at·i ve session wi 11 revise this formula to include a return
Ti>e~rhaps s percent1 .. on-state investiii'€mts~-.. ···~--·· ·---
.. .. ........ f .. _'_. • ... -.. --• ·-··-.-.-·
. , ..
' t t i -
'. ...... -.........
Minutes of Meeting to Discuss Task 11 Issues
October 13, 1981
r·~ J. Warnock plotted a spectrum of potential equity positions for the
State, and it was agreed that the JIDst likely equity position for the
State will be about 50 percent with no completion guarantee and with
on the order of 5 percent return on investment.
4. Response to Task 11 Questions. J. Warnock had sent a series of questions
regarding Task 11 issues to the Power Authority during the month of
September~ Unfortunately these had apparently not been received.
Each of the questions was addressed at the rreeting as follows:
a. Question: Should Task 11 scope be rrodified to eliminate financial
analysis based on State appropriation approach to finance Susitna?
Answer: State will not fund the whole project. Perhaps only
-2
50 percent equity will be provided. Therefore, financial analysis~
should not be eliminated from the Task 11 program.
b. Question: Should Task 11 financial analysis include part State-
part institutional considerations, potentially with tax exempt
bonds?
Answer: Yes.
c. Question: Is further project overview required along the lines of
earlier ones or is an executive summary of the feasibility report
sufficient for the purpose?
Answer: A number of documents will be needed to satisfy the
requirements of the decision-makers. These include the feasibi.lity
report, the Susitna risk analysis, sensitivity analysis which
R. Mohn had earlier mentioned, and the financing risk anaylsis .
. T. McQuire said that he sees the feasibility report would include
risk sensitivity reports as appendices. The executive summary
would brief the feasibility report, concentrating on important
issues including financial ones. Major issues include such things
iasenvironmental, seismic, costs, financing, etc.
Some discussion ensued on things that might be highlighted in the
executive summary of the feasibility report. R. Mohn suggested
the following:
, Description of project with good drawing. (What, Why, What plan)
1 The Railbelt system.
, Implicationsof a large project with a small system.
• Capital costs and schedule.
1 Assessment of risks and how they will be dealt with.
•
•
,
Minute$ of Meeting to Discuss Task 11 Issues OctoDL~ 13, 1981
• How the power and energy will be marketed. (It was pointed out
that this is a delicate issue and it must be handled with care.
Basically, it will be necessary to indicate how APA and the State
will market Susitna energy.)
• Benefit/cost picture.
• Environmental issues including downstream fisherieso
• PA statement of how the project will be operated in the sense of
whether there will be a resident community or some form of central
contra 1.
• Conclusions with respect to capacity and energy costs, schedule,
financing and so forth.
T. McQuire noted that in spite of the many things that must be
included it will be necessary to make the executive summary brief.
J. Warnock cited the Churchhill Falls experience which included
approximately 22 pages. It was agreed that this will be a reasonable
length for the executive summary of the feasibility report.
T. McQui~e noted that the executive summary will be needed for the
decision-making process in the springo R. Mohn reviewed what he
sees as the sequence of events. The draft feasibility report will be
widely distributed on March 15 and it will be out for comment. It
will be reviewed by the Review Panel and will also be subject to
public comment. A decision will be made by the APA Board at the
end of April. Following the APA Board decision, a letter will be
addressed to the Governor with recommendations and asserting that
the final report will be published by the end of Mayo
There was some discussion as to whether a technical executive
summary could also reasonably serve as one that meets the needs
of the public or of the financial communityo T. McQuire suggested
that no special documentation for the financing community is really
needed at this stage. In short, APA wants a good executive summary
of the feasibility report.
de Question: Will APA provide a statement of the financial ability
of the applicant and an explanation of the proposed method of
financing or will Acres have to do so?
Answer: Acres will not be required to research and prepare
statements regarding the financial· ability of the applicant. APA
will provide these. Even so, there is a significant amount of
effort required of Acres to satisfactorily address the requirements
of FERC for the financing section of the licensing application.
In short, APA will provide a summary regarding financial ability
and explaining certain proposed methods of financing. Acres will
prepare the exhibit and request whatever information is necessary
from APA.
-3
I
, I
5.
Minutes of Meeting to Discuss Task 11 Issues
October 13, 1981
e. Question.: Should Task 11 involve the same degree of analysis of
utility profile and energy/capacity needs following on to the
recommendations as to pricing philosophies which could form the
basis for power contract negotiation?
Answer: The current system calls for the return to be operation and
maintenance costs, and debt services. Even so it could be modified
to get a 5 percent return on investment. The State will be a
wholesaler of power; utilities will be expected to handle reserve
requirements.
In short, there is no need to change from the current Task 11 plan
on this issue. APA desires Acres recommendations on pricing policies.
It was suggested by T. McQuire that work done by Gilbert Corrrnonwealt::
for the intertie may be useful. R. -Mohn also suggested Battelle's
work could assist. Finally, it was noted that the Alaska Power
Administration has done a power and marketing analysis for Bradley
Lake which should be obtained and reviewed.
f. Question: Is it still necessary to conduct a risk analysis with
possibly some reduction in analysis of risk of default in providing
revenue assurance?
Answer: Risk analysis should be accomplished at the indicated level,
basically along the lines suggested by C. Debelius in the earlier
presentation. T. McQuire reiterated the fact that the State will
probably not guarantee completion. J. Raben indicated that the
investor will not bear the risk of umcompleted construction. He
will want reasonable assurance of completion. J. Raben also
noted that it will not be possible to wait until the State funds
run out before APA goes to the market for bonds. Basically, he
suggests that there is a risk that there will oe bad market condition
when bonds are sought and that, to the maximum extent possible,
APA should allow itself some flexibility. Briefly stated, the
State share is expected to be high in the early years and this will
decline in later years as the bonds begin to assume more and more
importance in terms of pt~ject funding.
Afternoon Meeting. In the afternoon two subgroups assembled to
further discuss financing and marketing issues as well as the whole
question of sensitivity analysis. The two papers attached are notes
provided by R. ~hn regarding his thinking on sensitivity analysis ..
R. Mohn suggests that each of various parameters should be varied at
least one at a time and if possible interdependence should be
considered. R. Mbhn states that we should demonstrate that all
assumptions and sensitivities were considered. It is not necessary to
run the full computer model every time, but we must be at least
able to show how we handled potential differences from original
assumptions.
The group which had discussed financial issues returned to the
meeting and indicated that it appears that a rate of about 8.85 percent
-4
'
Minutes of Meeting to Discuss Task 11 Issues
October 13, 1981
may be appropriate for financial analysis. Some discussion followed
regarding the necessity for running the OGP Model using financial
P?rameters. It was agreed that this sort of effort will be necessary.
P. Hoover was tasked to provide recommended revisions to the scope of work.
-It was-further agreed that J. Warnock would prepare recommended
changes to Task 11 scope stemming from the discussions which had
transpired and that these would be furnished to the Power Authority
at the earliest opportuntty. It wa~ also agreed that the risk
analysis task should be started shortly after the first of November,
since by that time revised cost estimates will have been under
preparation by the Project Services Departmentc
6. Adjournment. The meeting adjourned at 5:00. J. Hayden and P. Hoover
participated in some of the discussions in the afternoon session.
CAD:l s
-5
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••• ,..,
Mr. Eric P. Yould
Executive Director
Alaska Power Authority
333 West 4th Avenue
Suite 31
Anchorage, Alaska 99501
Attention: Mr. Terry McGuire
'•
September 15, 1981
P5700.11
T.114B
Dear Terry: Susitna Hydroelectric Project
Revised"T~sk"II"Scope· · · ·
In the process of rescoping Task 11 we have endeavored to assess the
implications of the Stat~ of Alaska legislation, passed in August, on
the work now required on marketing and finance. In order to assist us
in reaching a-Task 11 scope which meets the requirements of APA, FERC,
the State and other parties of interest~ we have set out six particular
questions to which we_would appreciate a response and/or comment. These
questions together with a brief statement of the issues involved and a
short discussion of the implication for Task 11 as planned, are set out
in Attachment 1 to this letter. · ·
Task 11 includes Subtasks 03, 04j ,QS and 08 which involve analysis and
assessment of risks to which the Susitna project ~~Y be exposed. The
change in the approach to financing through Stat .. appropriation does not
in ·aur opinion reduce the need for analy"sis of all the risk involved.
In fact the absence of the market test of a conventional financing
approach makes it more imperative than ever that this should be carried
out in a rigorous and comprehensive manner. The changes in scope we
shall recommend for Task 11 will therefore transfer some of the emphasis
on other aspects of marketing and finance issues to that of risk analysis,
assessment and mitigation.
Question 3 addresses the need for a further Project Overview Report
similar to the first issue made in March 1981. If this were to follow
basically the context of the Feasibility R~pQrt, then it is suggested
that an Executive Summary might possibly meet APA needs for a general
overview of this work condu.cted throughout our assignment.
We would appreciate your tho.ughts on our suggested redirection of the
ACRES AMERICAN INCORPORATED
Col'sull•ng Engineers
The libNty e<Jnk 8uildtng. M2m at Courl
Eu!!:H::> Ne·:,· York H202
Tele-r. 91·C..!23 1-.CRES EUF
Olhf• O'!•::t:s Coturr.b.a, r.m P!ll~!:urgh FA· P.aleigh fJC · Washir·s~on. DC
-" .
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'
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Mr. Terry McGuire
Alaska Power Authority
._ -· ,···:.,-
September 15, 1981
page 2
Task 11 effort. We would be pleased to discuss this matter in detail with you at an early meeti~g.
JGW/jmh
Attachment
ACRES AMERICAN iNCORPORATED
.
-·~.,·---~· -~-·-· . ---.. , --·~·~·"""'~·~-~-· .............. ,!".''" ~-. ·-·-· , ..• , .••
Sincerely~
~~~
John D. Lawrence
Project Man.ager
..
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ATTACHMENT I
Susitna Hydroelectric Project
Task 11 Marketing and Finance
Review of ScoEe -September 1981
Issue
The extent to which the State
legislative appropriation of
$5 billion now obviates need
for those aspects of Task 11
dealing with financing
feasibility.
Question
P5700. TASK 11
Discussion
The original POS and definition of
Task 11 was based on the likelihood
that APA would finance Susitna with
tax exempt revenue bonds. A major
consideration at the outset was the
question of IRS treatment under
Section 103 I.R.C. The POS was
drawn up on the assumption that,
whether or not the tax exempt issue
was resolved, a full financial
analysis of the project would be
required to demonstrate feasibility
under expected market conditions.
Should task 11 scope be no~ modified
to eliminate financial analysis
Issue
based on the proposed State of Alaska
appropriation approach to financing
of Susitna?
Discussion
:.
The need for back-up
consideration of conven-
tional financing approaches
to ensure that the project
receives the appropriate
market test ..
Questions have been raised regarding
the desirability of applying the
market tests usually provided by the
rigorous analysis and judgement of
financing institutions to major
capital projects. There may still
Question
be some benefit to the State of Alask.
from institutional investment finance
of say 1;3 to ~ of a major project
such as Susitna. If this remains a
possibility then financial analysis
· on partial market financing may be
worthwhile.
Should Task 11 scope include fina~cial
analysis on the basis of part State-
part institutional financing, potentially
in a manner ~here tax exempt bonds could
be applied?
,.
i. l ..
(/
2
1ssue
If State financin~ is to be
-: employed as the basis under
which Susitna will most likely
proceed, no need arises for
bond financing documentation
.of the tyP.e foreseen when the
Pos-was prepared.
-
As the Project Overview~s
envisag.ed as a document primarily
for use by financial institutions,
and as the basis for future bond
-support documentation, its format
and content should now be
reconsidered ..
A single issue of a Project
Overview was published in March
1981 in SillTh~ary form. The plan
is, at present,. to prepare a second
issue in early 1982.
Question
. ,'"-
Discussion
The Project Overview was originally
structured as a document which
could provide such entities as
financial institutions, banks
and other third parties with a
comprehensive assessment of Susitna
Hydroelectric Project. It was
envisaged as the basis of later
·documentation necessary to support
a bond offering which would require
explicit definition of the project 6
its economic and financial feasibili·
its risks, the adequacy of contingen-
cies provided and the level of
confidence with which it was being
presented.
Is a further Project Overview in the
prescribed form still required by APA
or ~ill an appropriately edited
executive summary of the Feasibility
Report suffice?
Issue
FERC license application
requirements call for a
statement of the financial
ability of the applicant
to carry out the project and
an explanation of the proposed
method of financing the
construction.
·l
i
Discussion
Exhibit requirements for the FERC
application can probably be met
by a precise outline of the
financing plan now envisaged under
Stat:e legislative appropriation.
The approach now planned is, however
fairly unique and may require a more
detailed explanation than would be
the case for a conventional financin
method. With State backing assured
there is no question of the financia
ability of the applicant but the
explanation of the proposed method
requires particular consideration.
f I
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'
3
Question
WiZZ APA be in a position to provide
in fr.Jll such explanation as i·::
needed or will Acres be required to
research and prepare?
Issue
It is our present understanding
that there are certain power/
energy marketing concepts
implicit in the approach being
taken with State iegislative
appropriati0n funding. Exhibits
supporting the FERC license
application are to include
information on the proposed
"interaction" of the power/energy
deliveries from the project with
the needs of the electric systems
of others with which the project
will eventually interconnect.
·e -
•
[Juestion
.
Description
A substantial portion of the
"marketing" study effort was to
be applied to review and analysis
of the method which would be
employed to fit Susitna energy and
capacity output to the needs.of
the customer utilities in the
Rail belt. This would be necessary
to provide a basis of power contract ·
negotiation which would recognize,
among other things, any residual
requirements for standby capacity
from existing displaced generating
plant. The pricing of Sus~tna output
would be a major consideration under
conventional financing approaches
particularly in view of its impact
on adequate interest cover and debt
service, particularly duri"ng the
early years of operation. The
proposed State financing with a 5%
return on "equity" introduces a
markedly different set of circumstance
.
Should Task 11 still involve the same
degree of analysis of utility profile
and energy/capacity need following on
to recommendations as to pricing
philosophies which could form the basis
for power contract negotiation?
¢ .==w-··-
('i
"
~
Issue
With the proposed mode o£
financing the State would
appear to assume the role of
completion guarantor.
Overruns beyond the predicted
ove~all pr-oject capital cost
would be reflected in any
basic requirements which may
be imposed on the availability
of additional "equity". The
risk of tqis arising is still
no doubt of vital interest
to the State as it would have
been to institutional investors.
Question
•
-.
Discussion
It is clear that the change in the
basis of financing does not affect
basically the risks to which the
Project is exposed .. · Implicit ir,
the new approach is the posi tior1
of the State as the backer and~ no
doubt, ·the guarai1t'Or of project
completion. It would appeal:. thE~n
that while analysis of risks and
exposures may not be essential 1~
assure financing it will still 1>e
of significant interest to APA etnd
the State.
Is Acres correct in assuming that
the fuZZ range of Pisk analyses
proposed in the POS is still required
with possibly some reduction in
I
effopt on analysis of Pisk of default
in providing Pevenue assurance?
·-
-"-·--"·----~--~r-,. .. J
' \1
trr. Eric P. Yould,
Executive Director,
Alaska Power Authority,
333 West 4th Avenue,
S •t ~., . u~ e .... .1.,
Anchorage, Alaska, 99501.
Attention~ Mr. Terry McGuire
Dear Terry:
·() --~~ i\
\10~L~
DRAFT
September 11, 1981.
K~ c...X1,~ r.f-.>Q_Y
~ ~ ~ .. ~~ .... e,r'· 0'\\\..J-
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-.J...-J
Susitna Hydroelectric Project
Revised Task II Sc~pt.:...· _e ____ _
In the process of rescoping Task II we have endeavoured to assess the
implications of the State of Alaska legislation, passed ir:~ August, on
the work now required on marketing and finance., In order to assist
us in reaching a Task II scope which meets the requirements of APA,
FERC, the State and other parties of interest, we have set out six
particular questionB on which we would appreciate a response and/or
comment. These questions are listed on the attachment which also
presents briefly a statement of the issue involved and a short dis-
cussion of the implication for Task II as originally planned.
Task II includes Subtasks 03, 04, {)5 and 08 which involve nnalysis
and assessment of risks to which the Susitna project may be exposed.
The change in the approach to financing through State appror.riation,
in our opinion, does not lessen the need for analysis of all the risk
involved. In fact the absence of the market test of a conventional
financing approach makes it more imperative than ever that i:his
should be carried out in a rigorous and comprehensive manner. The
changes in scope we shall recommend for Task II will therefore trans-
fer some of the emphasis on other aspects of marketing and finance
issues to that of risk analysis, assessment and mitigation.
Question 3 addresses the need for a further Project Overview Repo:ct 6f
the nature of the first issue made in March 1981. If this were to
follow basically the context of the Feasibility Repc17t, then it is
suggested than an E~ecutive Summary might possibly meet APA needs for
) a general overview of the work conducted throughout our assignment.
)> An alternative approach is 1 we feel, worthy of consideration. The
~ / action of the Sta.te of Alaska in providing appropriation of funds
. ~~ ~ for energy projects improves the prospects for an early launch of
~J' of./" Susi tna if the decision to proceed with FERC licence application is
-~ f taken and such licence is grantee~.. The Project C·verv·iew might well
~ ~ then take the form of plan of implementation~ building from the
c; ? position reached during the preparation of feasibility reports and of
a:" licence application to a comprehensive outline of the manner in 'lilhich
subsequent phases of work, including construction, should best pro-
ceed. The resul·ting Project Overview would then evolve from the style
of a report on what had been done to that of a dynamic planning docu-
ment for ongoinq phases, 0rganization and accomplishment.
At the time that you provide responses to the particular questions on
Task II we would appreciate your thoughts on our suggested redirection
of the project overview effort. We would be pleased to discuss this
matter in detail with you at an early meeting.
-
Sincerely,
John D. Lawrence,
Project Manager
;..t
l
\
l i
'~ Susitna Hydroelectric Project
Task 11 Marketing and Finance
Review of Scope -September 1981
Issue
The extent to which the State
legislative appropriation ~f
$5 billion now obviates need
for those aspects of Task 11
dealing with financing
feasibility.
Question
P5700 .. TASK 11
Discussion
The original POS and definition of
Task 11 was based on the likelihood
that APA would finance Susitna with
tax exempt revenue bonds. A major
consideration at the outset was the
question of IRS treatment under
Section 103 I.R.C. The POS was
drawn up on the assumption that,
whether or not the tax exempt issue
was resolved, a full financial
analysis of the project would be
required to demonstrate feasibility
under expected market conditions.
Should task 11 scope be now modified
to eliminate financial analysis
based on the proposed State of Alaska
appropriation approach to financing
of Susitna?
Issue
The need for back-up
consideration of conven-
tional financing approaches
to ensure that the project
recei ve·s the appropriate
market test.
f{.uestion
Discussion
Questions have been raised regarding
the desirability of applying the
market tests usually provided by the
rigorous analysis and judgement of
financing institutions to major
capital projects. There may still
be some benefit to the State of Alaska
from institutional investment finance
of say 1/3 to ~ of a major project
such as S~sitna. If this remains a
possibility then financial analysis
.on partial market financing may be
worthwhile.
Should Pask 11 saope inalude financial
analysis on the basis of part State-
part institutional finanaing~ potentially
in a manner where tax exempt bonds aould
be app Z.;led?
: ..c''"~ ------~-----· ---· l ',_ ..;tnl••n••n••._. .,.,_,_ -
•
Q
2
Issue
If State financing is to be
employed as the basis under
which Susitna will most likely
proceed, no need arises for
bond financing documentation
.of ~he type foreseen when the
POS was prepared.
-
As the Project Overview w~s
envisag.ed as a document primarily
for use by financial institutions,
and as the basis for future bond
support documentation, its format
and content should now be
reconsidered.
A single issue of a Project
Overview was published in :tv:larch
1981 in summary form. The plan
Discussion
The Project Overview was originally
structured as a document which
could provide such entities as
financial institutions, banks
and other third parties with a
comprehensive assessment of Susitna
Hydroelectric Project. It was
envisaged as the basis of later
documentation necessary to support
a bond offering which would require
explicit definition of the project,
its economic and financial feasibility,
its risks, the adequacy of contingen-
cies provided and the level of
confidence with which it was being
-presented.
is, at present, to prepare a second
issue in early 1982e
Question
Is a further Project Overview in the
prescribed form still required by APA
or will an appropriately edited
executive summary of the Feasibility
Report suffice?
Issue
FERC license application
requirements call for a
statement of the financial
ability of the applicant
to carry out the project and
an explanation of the proposed
method of financing the
construction.
·1
w
Discussion
Exhibit requirements for the FERC
application can probably be met
by a precise outline of the
financing plan now envisaged under
State legislative appropriation.
The approach now planned is, however,
fairly unique and may require a more
detailed explanation than would be
the case for a conventional financing
method. With State backing assured
there is no question of the financial
~ ability of the applicant but the
explanation of the proposed method
requires particular consideration.
l
t> li' I~~·~
.
.
' ;\
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'
.
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I
Ques"liion
Wi Z l APA be in a position to provide
in fuZZ such explanation as is
needed or will Acres be required to
research and prepare?
Issue
It is our present understahding
that there are certain power/
energy marketing concepts
implicit in the approach being
taken with State legislative
appropriation funding. Exhibits
supporting the FERC license
application are to include
information on the proposed
11 interaction" of the power/energy
deliveries from the project with
the needs of the electric systems
of others with which the project
will eventually interconnect.
Question
Description
A substantial portion of the
"marketing 11 study effort was to
be applied to review and analysis
of the method which would be
employed to fit Susitna energy and
capacity output to the needs of
±he customer utilities in the
Rail belt. This would be necessary
to provide a basis of power contract
negotiation which would recognize,
among other things, any residual
requirements for standby capacity
from existing displaced generating
plant. The pricing of Susitna output
would be a major consideration under
conventional financing approaches
particularly in view of its impact
on adequate interest cover and debt
service, particularly during the
early years of operation. The
proposed State financing with a 5%
return on 11 equity" introduce.3 a
markedly different set of circumstances.
Should Task 11 still involve the same
degree of analysis of utility profile
and energy/capacity need following on
to recommendations as to p~icing
philosophies which could form the basis
for power contract negotiation?
7------;r·~----·"·--·-·-···-·--·----------
,. ·--··-----·-
•
.II
Issue
With the proposed mode of
financing the State would
appear to assume the role of
completion guarantor.
4
Overruns beyond the predicted
overall project capital cost
would be reflected in any
basic requirements which may
be imposed on the availability
of additional "equity 11
• The
risk of this arising is still
no doubt of vital interest
to the State as it would have
been to institutional investors.
Question
Discussion
It is clear that the change in the
basis of financing does not affect
basically the risks to which the
Project is exposed. Implicit in
the new approach is the position
of the State as the backer and, no
doubt, the guarantor of project
completion. It would appear then
that while analysis of risks and
exposures may not be essential to
assure financing it will still be
of significant interest to APA and
the State.
Is AcPes coPPect in assuming that
the fuZZ Pange of Pisk analyses
pPoposed in the POS is still PequiPed
with possibly some Peduction in
effoPt on analysis of Pisk of default
in pPoviding PeVenue assupance?
."r,· ' ..., ... --.... ..... ··;•mr•••nr·r uawr·,,'tuiYurw· ...
. I
l
INTRODUCTION Susitna Base Risk Analysis \~
Effort and Timing
Prepared by -c. Chapman
September 4, 1981
These notes v.rere prepared as a basis for the discussion of levecls
of effort and timing. They assume the following people will be
involved:-
John Lawrence
Gavin Warnock
Chuck Debelius
Tee Pecora
Mary Ann Hosko
Ann Woodhead
Dale Cooper
Steve Diener
project staff and other unspecified
myself
An immediate start is assumed with a target completion by the
end of February. It is assumed the study will be as simple
as possible given the need to do a suitable and effective job.
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The notes take three forms.
A procedure diagram, breaking subtask 11.03 into 11 tasks.
11 "tasksn
A note on each "task"
A bar chart/scheduling indicating effort spread
All are extremely rough!!
TASK 1: CURRENT BASE PLAN COST ESTIMATE AND SCHEDULE REVIEW
This task could involve T. Pecora plus appropriate Buffalo office
people. Its purpose would be a summary statement of the
current position. Its emphasis would be assumptions of notes for
r~sk analysis purposes. A draft document should be available
within a week or two of the start of the risk analysis, but it
should be seen as a live document, subject to additions by the
risk team as information becomes available, and subject to
revisions by the project team.
T. Pecora:
Others:
1-2 weeks
1-2 weeks
TASK 2: RISK LIST DEVELOPMENT
This task would involve T. Pecora as a coordinator, but the input
should be widely sought. Each risk should be clearly described to
indicate what is and is not included. Of special importance are
those risks normally identified in an activity item structure
which may not occur to us as readily as the proposed framework,
like:
T. Pecora:
Others:
-interactions between subcontractors
-availability of plans when anticipated
-equipment availability
-equipment failures to meet specifications
-material failures
-etc.
1 week
1 week
TASK 3: . METHODOLOGY REVIEWS
Decisions need to be made with respect to documentat~on formats
as soon as possible. One or two changes to the software should
be discussed to allow material changes to be proceeded with as
soon as possible. However, a prior start on tasks 1 and 2 is
probably_ advisable, and task 3 does not have th~ sar~1e priority
as task 1 and 2. It should incorporate an initial review of
tasks 1 and 2. It should also incorporate the allocation of
tasks associated with the rest of the study insofar as it has been
possible to do so befor~. Further, task 4 needs attention.
J. Lawrence, G. Warnock, C. Debelius, T. Pecora: 1 day each
TASK 4: RISK ASSESSMENTS
Each risk identified on task 2 which needs probabilistic treatment
must be addressed by people with appropriate experience. T. Pecora
should coordinate this effort which may involve a number of people
in a number of offices. Risks which do not need probabilistic
treatment may require upper and lower cases. Relatively few risks
will be assessed directly by the project team.
T. Pecora:
Others:
2-3 weeks
12-15 weeks
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TASK 5 : TRANSFORMATION ASSESSMENTS
The selection of cost transformation to reliable time risk to cost
is important,. as is t:he nature of the transformations used,
perhaps the most impox·tant outstanding methodology issue. As this
task depends upon the completion of task .3, and it is advisable
t0 ensure it is complete prior to the start of task 7, it is a
critical task. I think c. Debelius should take the lead on this
task.
c. Debelius:
S. Diener:
1-2 '\\feeks
1 week
TASK 6: SOFTWARE REVISIONS
One or two obvious changes can be discussed at the task 3 stage,
and work started then. Some others may not seem worthwhile at
that stage, but their importance may increase, and some new
twists will undoubtedly need dealing with. It would be a good
idea to begin as soon as possible, especially as M. Hosko may have
to contact Dale in England.
M. Hosko:
D. Cooper:
3-4 weeks
1 week
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TASK 7: CONSEQUENCE RESPONSE/CRITERIA ASSESSMENTS
This task is dependent upon all prior tasks, although it can be
broken down by risk source to a large extent. T. Pecora should
coordinate all those involved, as per allocation of work decided
during t?sk 3. A lot of risks will raise questions which will
have to be dealt with by the project team. This interaction will
need a lot of time if not hours.
T .. Pecora:
Others:
4 weeks
20-25 weeks
TASK 8: REVIEW AND REVISE
~ Before any computing starts, it may be possible to make important
simplications or important complications may need treatment. 'fhe
methodology and the data developed to date needs a joint review
at this stage.
J. Lawrence, G. Warnock, c. Debelius, T. Pecora, c. Chapman:
(2-3 days each on average)
uthers 2-3 weeks possibly
1.
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Especially if we hold off computer input until this stage, initial
"computer and interpret" needs to be given a full month to achieve.
I~ particular interpretation needs more than 3 weeks given results
which do not contain any errors or anomalies, if full value is to
be obtained from the input effort.
M.. Hosko and
A. Woodhead: 4 weeks
T. Pecora: 2 weeks
C. Debelius, D. Cooper, C. Chapman: 3-4 weeks between us
TASK 10: PROJECT RESPONSE AND RISK ANALYSIS UPDATE
The better part of a month should .be allowed for feedback. If
any surprises are found, more time will be desirable.
J. Lawrence, G. Warnock, C. Debelius, T. Pecora: 2-3 weeks between
them
' TASK ll: FINAL COMPUTE AND INTERPRET
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If no surprises arise task 11 should involve much less effort than
task 9. However, it would be a good idea to !nticipate at least as much effort.
M. Hosko and
A. Woodhead: 4 weeks each
T. Pecora: 2 weeks
C~ Debeliusr D. Cooper, c. Chapman: 3-4 weeks between us
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1. BASE PLAN
' .RISK t.IST
3,., METHODOLOGY
5. TRANS.
6. SOFTWARE
7. CONS.
8 .. RENEW
9. INITIAL COMP.
10 PROJECT RES.
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11. FINAL COMP.
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Memo
To: J. G. Warnock
From: Prof. A. J. Merrett
Alaska Power Authority
Susitna Hydroelectric Project
Task 11 -Marketing and Financing
July 1981
SUSITNA -RISK AND FINANCING
Problems of Present Proposed Financing
We should anticipate vigorous criticism of our financing and
project analysis from Tussing and bankers who will naturally
be concerned to demonstrate their superior expertise in this
area. We would expect their objections to take the following
form.
First the financing plan used so far is on a deterministic
basis that is, there is a clearly predictable and limited
span of outcomes out of which the claims of all the entities
financing the project can be met. It could be argued that this
simply cannot be the case in the Alaskan economic environment
and the present day world uncertainties. The possibilities
must be all~wed for the project over-running to an
unpredictable degree as a result of expectional inflation,
labour problems, geological faults, etc. Similarly interest
rates may move up very substantially and t~1e demand for energy
may be down owing to cost or recession. It is only possible
to treat the financing of the project deterministically if
there is a negligible chance of these factors going beyond a
point at ·which the project can be deterministically financed,
that is, financed by debt capital that can, with virtual
certainty, be recovered with.interest. If we are to contend
that this is the case then we need to prepare our ground
extremely thoroughly with all the most outside adverse factors
tak8n in conjunction into account. From the information so
far supplied it s,~e:ms impossible that the project is
sufficiently robust to be financed on a deterministic basis ..
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If this is the case there is a second major problem. This is
quite simply that we are dealing with a risk project for which
there is no supplier of risk capital in the sense of any stated
entity which will take all the residual risks of over-run or
inadequate profitability in return for the residual benefits
that would arise if the project were successful and there was
a surplus over and above all debt financing. The financing
schemes so far proposed seem to be open to the objection that
they amount to the State of Alaska supplying the risk capital
on an inadequate basis since there is an upper limit to what
they will supply while on the other hand the beneficiary of
such capital, of there are benefits, is to be the Alaskan Power
Authority and through it users of electricity. Apart from the
political difficulties of this there is the related problem
that if things went badly wrong the politicians having
directly authorised the State participation would be directly
responsible while there are no corresponding benefits to them
from the up-side if the project is successful .
In sum, there is the problem of devising a form of financing
and responsibility which is non-deterministic with a clearly
de~ined entity accepting all residual risks and recouping
residual benefits while at the same time ensuring that the
project is worthwhile political risk to the legislature which
must authorise and take responsibility for authorising
financing.
While this may not be strictly within the terms of reference
we are given, it is not practical to answer the question as
to whether or not the project is economically viable without
answering it and if we do not answer it we also leave ourselves
open to criticism along the lines already referred to. Our
suggestion would, therefore, be that we briefly review the
possibilities in the report so that we can clearly claim to
have considered all the practical issues .
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As we are touching on very sensitive issues from the standpoint
of the APA we should, of course, clear it with them beforehand
perhaps in the form of a memorandum which would canvass the
issues. In bri~f and after touching upon the issues already
raised this might take the following form reviewing all the
options ..
Susitna Financing Options
Our starting point is that it is unlikely to be accepted by
the providers of debt capital that Susitna is a project which
has a deterministic financial outcome. Therefore there must
be a supplier of risk capital. This supplier would be
required to undertake to supply sufficient risk capital either
to pay of all indebtedness in the event of the project not
being completed, or alternatively, to complete and meet vlha tever
over-runs are involved.
This poses the basic question as to the organisational form
which the supplier of risk capital is to take. The
possibilities are as follows:-
STATE OF ALASKA ITSELF AS SUPPLIER OF RISK CAPITAL
Here the State would itself take on the responsibility
of supplying the risk capital. While technically simple,
this has two major difficulties;
first,those supporting the project in the legislature
would directly asswne political responsibility. The
appropriation for the project is most unlikely to be
open-ended and therefore the proponents of the project
in the legislature would be threatened with the
possibility of having to return, possibly repeatedly,
to the legislature for £urther appropriationsr
seqond, this approach ~s open to the objection that
the State of Alaska is assuming the risks in order
to make the APA and users of elect.:r:ici ty the beneficiary.
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STATE RISK t!"'INANCING THROUGH AN INDEPENDENT AGENGY
OTHER THAN THE APA -------------------------------------------
This would e:nablP the proponents of the project in the
legislature to pass responsibility for it to an indepen-
dent entity. It is possible that some existing entity
·or organisation other than the APA could fulfil this
role.
To meet the objection that the entity was providing the
risk capital in order that a third party (the APA)
procured the benefits, it would be necessary for this
entity to secure effective claim to some residual
benefits after meeting the third party debt
financing. It is possible that this could be achieved
without direct, effective otvnership. A possibility
would be that the entity would receive a royalty geared
to the amount of risk capital put up. But this,
like all royalty arrangements, pre-supposes that the
royalty will not become of a magnitude that threatens
the interests of those supplying third party financew
This requires that the project be deterministic to a
degree that precludes this possibility or alternatively
that the royalty is contingent and residual after the
claims of third parties have been met. In the latter
case it would be less of a royalty and more in t!1e
character of preferred stock interest. It might,
therefore, be better if the remuneration took this more
convent.ional form. Other financing possibilities would
include construction of the project and leasing it out
to the APA etc.
The major difficulty wi ~h this type of separate enti·t:y
is evidently the imposition of a further tier of
organisation with all the delays and c0nflicts which
this might bring about.
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APA FUNDING WITH RISK CAPITAL
Here the legislature would fund the APA with sufficient
r~sk capital for the project making the latter in this
connection something in the nature of a state-owned
public utility. It might be combined with a requirement
'that the project be managed in such a manner as to secure
ar. economic rate of return. It might be conjoined with
a longer term intention of the Susitna projects being
floated off as a privately owned public u'tility under
APA supervision.
This option would have t~e advantage of organisational
simplicity and therefore speed of decision taking. The
legislature would also devolve responsibility to a
separate and competent entity. Also on a large enough
scale of financing this proposal would be not incompatible
with Tussings desire for some entity prepared to finance
hydroelectric projects. If the latter were set up it
could either be the APA or alternatively be an agency
which simply supplies risk capital to the APA ..
The major objection is that the State of Alaska is
getting no equity return for its equity risk. At best
it will get its money back. In return for this it must
be prepared to accept an indeterminate loss.
STATE RESIDUAL RENEWAL FINANCING
Here the APA and the State of Alaska would jointly own
the project (under APA mangement) in the proportions
in which the project is financed respectively by
a) third party debt and b) advances from the State of
Alaska. At the end of, ~ay, 15 years (when the third
party debt has been repaid) it would be open to the
State of Alaska to dispose of its interest in whole
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or in part for its market value. Provision could,
however, be introduced for this interest.to be offered
to the APA which could finance the purchase i) by new
third party debt, and ii) its proportion of the earnings
surplus over the 15 years. Earnings surplus after
.paying off interest and principal of the third party
debt would be deposited (at interest) with the State of
Alaska and be part of the residual value of the project
at the end of 15 years.
This arrangement has the following advantages.
1. It makes each party a beneficiary in proportion to
itsinvestment. If the project is largely financed
by third party debt, the long term benefits of the
project would accrue (in the form of cheap power)
to the the purchasers of electricity who have paid
off the debt and hence paid for the project.
2, Alternatively if the State has to finance a large
proportion of the project it will secure a
corresponding proportion of the value of the project
which it can use with the probability of being able
to compensate the citizens of Alaska for the risk
they have borne. It offers a degree of automatic
compensation for the party financing the overruns.
If the latter occur they should be large symptomatic
of either (a) General US inflation or (b) Inflation
in Alaska in costs of construction. In either c~se
it should result in an increase in alternative energy
costs in Alaska and hence correspondent increase in
the residual value of the project at the end of the
15 years as Alaska i$ forced into higher cost sources
of new energy. Hence there is a degree of automatic
compensation for overr .tls •
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3. To a large extent it should minimise the political
hazards involved in the State of Alaska guaranteeing
t.he residual financing by 2. and hen<~e overrun -
eog. they could not be accused of 'blank check
financing' of power for big business~
4. The provision for depositing the surplus earnings
with the State will offer recoupment of cash to
Alaska over the 15 years and give additional
security to the bond holdersv
CONCLUSIONS
Unless -as seems most improbable -the project clearly can
be financed on a deterministi~ basis, that is without risk
capital, it would not seem advisable to present it on this
basis. Although the deterministic approach has the advantage
of concealing the awkard problems of what entity is to supply
the risk capital and receive the risk benefits, these issues
will undoubtedly be brought out in the course of any
critical review of the report. In sum since the problem is
unavoidable and not capable of concealment we should make
it clear and advance our own solutions to it rather than be
accursed of not recognising it and having to cope with
solutions -which may be unsatisfactory -proposed by our
critics.
AJM/AS/CEW
26 January 1981
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Susitna Hydroelectric Project
Marketing and Financing -. 'Jlask 11
Financial Analysis
A) Following discussion of the approach now appropriate to financing
of the Susi tna Project it was decided to adopt the .following
criteria:-
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1. To reflect the likely mix and cost of State and debt market
financing:-Low
(a) % Funding from State of Alaska
(% of total project cost).
30%
(b) % Return on investment applicable
to State funds
(c) % Interest rate on senior debt
financing 10%
(d) Debt maturity period commences
in the year following the first
full year of operation through semi
annual level de~.:>t services to
amortise the principal over 30 years
from commencement of debt service
(e) Interest a.nd principal payments
on debt services to be levelised over
period set out in sub paragraph (d)
(f) Interest to be capitalised to 1 year
after full operation of-each project
segment (e.g. Watana ~00 MW Watana
800 !.ffi or Devil Canyon 600 MW)
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.Median High
45% 60%
5%
14%
30 years
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(c) To a=-low for dt.~bt service maintain 1.25 times debt
service initially, rising
to 1.5 times cover, on
requirement for annual
. . .
debt service on senior debt.
Note:-Amounts accumulated in funds to be invested with interest used
to redu~e (or subsidise) the rates at which energy is sold.
3. to a~low for various charges on capital account
(a) Inte=est on debt to be capitalised
to c~e year past first year of full
oper~tion for each project segment
(b) Work~ng capital may be treated as
capital required for project
(c) construction cost estimates to be
subject to an allowance for
inflation equal to 10% p.a.
4. to allow for various charges on earnings
account
(a) Revenue to be accounted for
firm energy only
(b) Secondary energy revenue (assessed
with appropriate probability and
rate KWh) should be accumulated in
(c)
a separate fund
Operating cost estimates to be
subject to an allowance for
inflation equal to 8% p.a.
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(d) The 5% indicated return on State
of Alaska investment is required
for "test purposes" only it is
1.
-availabe to cover operating
costs and debt service and no
income will in ~act be paid
to State funds
Financial analysis of cases coverin•r
will involve the following runs:
the range of criteria
Inf1atic
% Funding %ROI % Interest on Debt 1-1aturi ty p.a.
Senior debt Years Construction Operatic
1 30 5 10 30 10
2 30 5 14 30 10
3 45 5 10 30 10
4 45 5 14 30 10
5 60 5 10 30 10
6 . 60 5 14 30 10
2. Energy costs in mills/KWh will be determined initially for
1993 i.e~ year 8 of the schedule. Then to obtain an overall
picture of the likely outcome the FEZIBL program will be
run for
(i) Staring mill rate increased in subsequent years by
inflation @ 8% per annum with this rate of increase
applying also to operating costs
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(ii) Starting mill rate increased in subsequent years
by inflation in operating costs only @ 8% per annum
(iii) Starting mill rate increased in subsequent years by
a median rate between 2{i) and 2(ii) of 3 1/2% with
.
operating costs increasing @ 8% per annum
Any construction costs incurred even subsequent to
commerical operation will be increased at 10% p.a. Renewals
and replacement allowances to increase at 8% p.a.)
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OFFICE MeMORANDUM
Gavin Warnock Date: April 20, 1981
File: P5700.07.11
Steven Diener cc:
ESCALATION IN REAL CONSTRUCTION
COSTS OF THE SUSITNA PROJECT
J. Lawrence
I. Hutchison
As you suggested, I have briefly reviewed historical and
forecast rates of constructi~n cost escalation. This
followed Robert Mohn's letter to John Lawrence (March 25,
1981) asking us to assess Rohan's contention that there
is a trend of real escalation of 2 percent and that this
figure may be more appropriate than our initial assumption
of zero percent.
The attached table sununarizes historical trends and projected
growth rates to 2005. I believe Rohan!s argument stems
from annual growth rates (2.1 percent) based on the 1967
to 1979 periodo But the choice of historical period is
c::-ucial. Between 1967 and 1980 real cost escalation was
1.6 per~ent and in the most recent 1977 to 1980 time span
real costs actually declined at an annual rate of 2.6 per-
cent. That is, construct1on costs grew less rapidly than
overall (consumer) prices. As a comparison, the index of
~eal construction costs for Canadian hydroelectric generating
stations grew by 1.3 percent per year from 1971 to 1979 and
declined by 0. 6 percent per year in the more rr-ecent period
from 1975 to 1979.
In the forecast period, the per annum rate of real cost
escalation increases to 1.4 percent (1985 to 1990) and then
hovers between 0.3 percent (1990 to 1995) and 0.6 percent
(2000 to 2005). The average annual compound rate is 0.65
percent between 1980 and 2005.
Given this much information, an appropriate range of rates
would extend from -2 percent to 3 percent, with zero percent
being·a reasonable base-line assumption. But there are at
least two other points not ~aised by Rohan: First, all of
these figures are national' in scope witbvut reference to
local (Alaskan) economic conaltions during the construction
phase of the project. If the timing of construction is
such that it is a part of a "bunching" of giant projects,
then material, labor and other component.s of investment costs
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could be expected to escalate faster than the U.So averages.
If the timing is such that Susitna is a contracyclical
investment (that is, it is not concurrent with Alcan Pipeline
types of projects), then the material, labor and other cost
cornpo~ents are likely to escalate less rapidly than the O~S.
·· averages.
Second, if we expect construction input costs to escalate
at the rate of general price inflation, then a necessary
condition for Rohan's 2 percent rate to hold is that the
productivity of labor and capital will decrease at about 2
percent per year. As it is more reasonable to asslli~e con-
tinuing technical progress and improving productivity in
construction, we have another reason to be wary of Rohan's
2 percent figure for real cogt~escalation~
Our final feasibility report should therefore examine not
only past and forecast trends ~n u.s. construction cost
escalation. Weshould also deal with the sensitivity of
project cost escalation to the timing of the investment
and its temporal relation to other major Alaskan projects,
and with expectations of productivity improvement in the
construction of hydra generating stations.
SGp~md
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TABLE 1
U.S. RATES OF ESCALATION IN REAL CONSTRUCTION COSTS
1 Consumer Price Index for u.s. Urban Wage Earners and
Clerical Worker·s from Monthly Labor Review, U.S. Department
of Labor, Bureau of Labor Statistics (for historical data), and
Data Re~ources, Inc. (DRI) , U.S. Long--term Review, Fall 19 8 0
(for forecast data).
2 His .:..orical costs refer to the u.s. non-building construction
cost index of the Engineering News-Record from Survey of
Current Business, u.s. Department of Commerce~ Bureau of
l!!conomic Analysis. Forecast costs refer to the U.S.. implicit
price deflator (index) for fixed investment in nonresidential
structures, from DRI, :g.s. Long-term Review, Fall 19~0.
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Professor A. J. Merrett
c/o Mr. Allen Sykes
Willis Faber
10 .Trinity Place
I.ondan, England
EC3P 3AX
Dear Tony,
March 13, 1981
I was ~rlad to hav(:.~ the opport.:uni ty of todays telE?phone
discussion with you and to pass on the information
derived from todavs final OGP-5 runs in the current
"" phase of the planning study. These runs have been made
to test. the sensi ti vi ty of the project to capital costs
in 1981 dollars including transmission costs (for both
the-Sus-i tna and all tl'u~rmal systems, the latter having
basically the addition of the Fairbanks-Anchorage
interti8). Price levels used in the construction cost
estimate have increased from-1980 to 1981 by about
11.3% and in the comp1,1tation it has been (rather
generously) assumed that full prices have esca.lated
further by 30% to provide the ne,.; 1981 base for
opportunity costs for oi.l, gas and coal. There is
evidence that our earlier assumptions of shadow prices
were too low for oil and gas and coal is being in any
case ·tested for sensitivity to 0% escalation in real
tel:nlS e
The capital costs introduced to the latest OGP-5 runs
are regarded as upper limits -not to exceed levels
but n~:.~verthele.ss once "tabled" may easily be assumed as
the basis for future financiability calculations. The
values are;-
Wa·tana 4 0 OMW
Addition 400MW
Devil Canyon 400~~1
Transmission Facility
Capital Costs
1981 $
Hillions
3227
167
1624
441
Date of
1st Po-v;er
1993
1996
2000
1993
These costs include IDC. The net construction cost
comparable to the $2890 r.1 ('i7 & DC) is $4400 rn •
ACRES AMERICAN INCORPOnATED
E:. •· ·. • l:t' • YeA 14202
r ....,.., •
~--
.. . ". /2
Professor A. J. Merrett-2 March 13, 1981
(Intertie cost included above which would still apply
to All-Thermal case is $357 million)
Net present value for 2040 for three cases are:-
With Susitna All Thermal
Hillions $
Base case -Susitna
(B/C ratio computed at 1.5) 7833 9559
With thermal capital costs
lowered by factor of 1.4 7780 8914
With 0% escalation on
coal costs 7669 8883
It is apparent that once again Susitna meets the economic
test, but of course the gaps are narrowing.
On the entry cost side the situation has, of course, worsened
considerable but based on the revised inputs it would appear
that the avoidable qusts have risen to a range of 37 mills/
Kwhr {average all thermal) to about 48 mills/Kwhr {indicated
avoided cost by adding Susitna in 1993)o
I attach the relevant sections of the statement prepared by
APA on Economic Analysis and on Financial and Construction
issues. We have concurred with the wording they have put
together but passed on a warning despite the favourable
economic picture the marketing problem under conventional
fincncing arrangement still looms large.
We have decided that further action on financing studies
should now be deferred until late April which would allow
you to enjoy a peaceful Easter break with the family. In
any event I shall advise you of any interesting developments
in the meantime.
Thanks you for all your assistance with kindest regards.
JGW:dn
Enclosure
ACRES AMERICAN INCORPORATED
Yours sincerely,
~
J. G rnock
Vice sident
Corporate Development
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OFFICE MEMORANDUM
( . John Law-r::.::nce Date: Barch 10, 1981
File: P5700.07.11
FRO!ll: J. G. Warnock cc: C. A. Debelius
SUBJEC~ ALASK~ POWER AUTHORITY
-SUSITNA POWER PROJECT
TASK 11 -MARKETING AND FINANCE
-------·--------------
-· -~-·--· -----·-------------------------
At the meeting convened by First Boston Corporation
Washington on February 4th with interests concerned
the current IRC Section 103 rulings, C. D. Williams
tasked with preparing a first draft of a possible
legislature approach.
·--------·-·----·--
.
ln
over
was
The attached material will keep you advised of the situation
v;hi ch I fear is not too hopefu.' in view of the attitude being
taken by the present administration.
At the February 4th meeting Eric Yould advised that he was
not too concerned over the outcome of the effort being
launched by the hydroelectric interest as a body. He
suggested that APA and the State of Alaska may have an
individual solution for the Susitna case.
for
JGW:dn
...
V+ • ACRES BUF
..
ACRES TOR .
MARCH 6.-1981 ?5700.00
ATTN: I • A. HUTCH I SON
SUSITNA -CAPITAL COST COMPONENTS
---------------------------------
FROM CFLCO RECORDS MANAGEMENT AND ENGINEERING WAS 6 0/0 OF
DIRECT CONSTRUCT! ON COST· OVERHEADS ADf't1J NI STRATI ON AND
MISCELLANEOUS WAS 17 1/2 0/0 OF DIRECT CONSTRUCTION COST
WITH CAPITALIZED OWNERS COST REPRESENTING ABOUT 7 0/0 OF
THIS· PLEASE CALL IF YOUR REQUIRE MORE DETAILS·
J • G • WARNOCK
ACRES TORONTO
+
ACRES BUF
ACRES TOR
i
+
t ACRES BUF auf {
ACRES TOR j1atr~~
ATTN: JOHN HAYDEN
MARCH 6 ~ 1981 PSOXXX P5700.QO
SUSITNA -KX ALTERNATIVE GENERATION PLANS
------------------------------------------
IN REVIEWING CURVES YOU PROVIDED !T OCCURS TO ME THAT (1) WE
SHOULD BE SHOWING CONSISTENTLY PRESENT WORTH VALUES OUT TO
2040 TO CLEARLY EMBRACE REPLACEMENTS OF THERMAL PLANT COSTS
<2> IT IS SURELY DANGEROUS TO DISPLAY COMPARISONS BASED ON
DLR 2.89 BILLION WHEN WE ARE AWARE THAT CAPITAL COSTS FOR
SUSITNA MAY BE 50 0/0 OR MORE HIGHER. WOULD PROBLEM NOT BE
EASED BY PLOTTING A RANGE WITHIN WHICH WATANA MIGHT FALL WITH
FOR INSTANCE FIGURE 2 SHOWING WDC 1200 LINE AS LOWER BOUND AND
SHADED AREA COVERING ZONE WHICH WOULD ACCOMMODATE YOUR HIGHER
CAPITAL COST ESTIMATES <3> FIGURE 3 REQUIRES SOME
ADDITIONAL NOTES TO MAKE IT EASILY UNDERSTANDABLE.
J. G. WARNOCK
ACRES TO RON TO
+
ACRES BUF
ACRES TOR
·'-'·,
v
•
ACRES BUF
ACRES TOR
MARCH 4/81 ?5700.07.11
ATTN: RICK CHASE
CC2 J. D. LAWRENCE
RE: SUSITNA PROJECT ?5700.11
LIMITATION OF fUNDS
IN ORDER THAT YOUR ACCOUNTING MAY INCLUDE APPROPRIATE PROVISION
I WISH TO ADViSE OF COMPUTER COSTS TASK 11 JANUARY/FEBRUARY
OF THE ORDER OF DLR 7500 AND CONSULTANTS IN ADDITION TO
INVOICES SO FAR RENDERED Or APPROXIMATELY DLR 15000
f GENERALLY IN LINE WITH BUDGET PROVISIONs. MARCH EXPENDITURES
TO BE SEVERELY LIMITED TO COMPLETION OF POR BUT STILL
ESTIMATED AT DLR 12000 PCOS PLUS ABOUT DLR 4000 Dl SBURSEMENTS.
J G WARNOCK
ACRES TORONTO
•
ACRES BUr
ACRES TOR
. ••
-~
·~ /
+
ACRES BUr
ACRES TOR
MARCH 3/81
ATTMN: AL KUCZYNSK!
TASK 11 -MARKETING AND FINANCE
--------------~----~-----~----
JANUARY 1981
_,.. _________ _
SUBTASK 11· 01 -~ pROJECT OVERVIEW ? REPARATION AND UPDA.TE
-----------------------~---------------------------------
PREPARATION OF' INPUT TO THE PROJECT OVERVIEW REPORT CONTINUED
WITH CHAPTER AUTHORs PROVIDING THE COORDINATING/EDITORAL TEAM WITH
INPUT. ADVANCE DRAFT CHAPTERS F'OR CHAPTER 13 -POWER AND
ENERGY MARKETING CHAPTER 16 -F'INANCJAL ANALYSIS AND CHAPTER 17 -
SECURITY Or PROECT CAPITAL COST AND REVENUE STRUCTURE WERE
PREPARED AND SUMBI TTED TO APA AND THE MANAGJ NG UNDERWRJ TER
~
GROUP. MEETING TOOK PLACE WITH ARTHUR YOUNG~ MANAGERS OF'
RAJLBELT ALTERNATIVE Ef\!ERGY STUDIES TO INITIATE INTERrACE
BETWEEN SUS I TNA STUD! ES AND COOk INLET TJ DAL POWER REVIEW NOW
BEING CONDUCTED SEPARATELY BY AAJ.
~
SUBTAKE 11·02 -INTERNAL REPORTs
---------------------------------
SUBTAKE 11.02 -INTERNAL REPORTS
---------------------------------
FOLLOWING TESTING Or THE FiNANCIAL MODELS IN LATE DECEMBER WORK
PROCEEDED ON ANALYSIS Or ALTER1.1JATIVE FINANCING STRUCTURES.
INCLUDING TttEATMENT OF SEPARATE FUNDING AND ROUALTY RECOVERY
FOR WATANA DAM.-SUBORDINATED DEBT SUPPORT AND RES I DUAL RECOVERY
,
EQUITY ARRANGEMENTS• SENSITIVITY ANALYSES WERE CONDUCTED ON
VARYING CAP I TAL COST AND ALTERNAT! VE ENERGY COST ESCALATION
,
PATTERNS TO DETERMINE OCr RETURNS• INTERACTION WAS DEVELOPED
BETWEEN THE FINANCIAL/ECONOMIC ANALYSIS AND OGP-5 GENERATION
,
PLANNING MODEL· INPUT ON SOCIO-ECONOMIC ISSUES WERE PROVIDED
,
TO ASSESSMENT OF NET ECONOMIC BENEFITS• PRESENTATION OF
FINANCIAL MODEL RESULTS TO APA TOOK PLACE AT MEETINGS ON
JANUARY 20/21 AND TASK 11 WAS REPRESENTED AT THE EXTERNAL
REVIEW PANEL MEETING JANUARY 22o MEETING WERE HELD WITH
PARTICIPATING SPECIALIST CONSULTANTS TO DISCUSS PROCEDUREs,
~ODEL OUTPUT AND FINANCING CONCEPTS TO RELIEVE HIGH FRONT END
,
LOADINGs. ASSESSMENT CONTINUED OF LIKELY LEVEL OF ENERGY
PRICING ON SYSTEM WHEN SUSITNA COMES INTO OPERATION. OAT
CONCERNING POTENTIAL UTILITY PURCHASERS AND THEIR INTERACTION
WITH ALASKA PUBLIC UTILITIES COMMISSION AND ALASKA POWER
ADMINISTRATION WERE COLLECTED·
SUBTASK 11·03 ALTERNATIVE POWER SERVICE RISK ANALYSIS
--------------------------------------------------------, , ..
OR~ c.s. CHAPMAN CONTRIBUTED TO COORDINATION MEETING HELD
BETWEEN STAFF INVOLVED IN TASKS 6.-9 AND 11•
SUBTASK 11.05
RISK ANALYSIS APPROACHES WERE FURTHER REVIEWED IN CONJUNCTION
,
WITH TASK 11.02 FINANCIAL FEASIBILITY ANALYSIS AND THE
PREPARATION OF CHAPTERS 16 AND 17 OF THE POR.
TASK 11 -MARKETING AND FINANCE
---~-----~--------~-----------
FEBRUARY 1981
...
SUBTASK 11.01 -PROJECT OVERVIEW PREPARATION AND UPD~TE
()
·:~ ....... .._c .:•;:~~,...,.;>.ry'.;<-.?'"~"'Uc.»<::~.\'.'I!Q!")@·.,lfiiW"-' ·c-·;::--c."•'
!'"
AN ASSEMBLY OF FIRST DRAFT CHAPTERS OF THE PROJECT OVERVIEW
WAS PREPARED AND DISTRIBUTED WITHIN THEPROJECT TEAM FOR REVIEW:
THE VOLUME OF COPY PRESENTED BY INDIVIDUAL CHA?TER AUTHORS NOW
REQUIRES SUBSTANTIAL EDITING DOWN TO ANY APPROPRIATELY CONCISE
~
AND PERTJNgNT LEVEL• THE ADVANCED DRAFTS OF CHAPTER 13 -
POWER AND ENERGY MARKETING C:HAPTER 16 -FrNANCIAL ANALYSIS AND
CHAPTER 17 -SECURITY OF THE P RO .. 'ECT CAP I TAL ~OSTS ANfl REVENUE
STR!JCTURE WERE EXPLAINED TO THE MANAGING UNDERWRITERS AND
FINANCIAL ADVISORS AGAINST THE GENERAL BACKGROUND OF THE PLAN
~ .
OF STUDY., DURING WASHINGTON., DC. !'IEETJNGS ON FEBRUARY 5TH·
SUBTASK 11.02 -iNTERNAL REPORTS
FINANCIAL ANALYSIS OF VARIOUS ALTERNATIVES PROCEEDED IN
PREPARATION FOR MEETiNG WITH THE MANAGING IJNOERWRI TERS GROUP
AND.L~TER IN THE MONTH TO TEST SENSJTJVITY'Or PROJECT TO VARIOUS
ENEJ3GY PRICING SCENARIOS AT THE TIME SUSITNA PROJECT WOULD COME
~
INTO OPERATION· THIS INVOLVED ALSO ECONOMIC ANALYSIS RUNS
USING FEZIBL MODEL AS BACK UP TO OGP-5 SYSTEM PLANNING RUNS.,
ATTENTION WAS CONCENTRATED ON THE SIGNIFICANCE OF ENERGY/POWER
PRICING IN EARLY YEARS OF OPERATtON TO OBTAIN RELIABLE DATA
FOR FORMULATING FINANCING OPTIONS•
ANALYSIS OF THE RAILEELT UTILITY MARKET PROSPECTS PROCEEDED
THROUGH REVIEW OF FILINGS WITH APUC AND OTHER DATA WITH A VIEW
OF ASSESSING SIGNIFICANCE OF PURCHASERS/CONSUMERS IN FINANCING
ARRANGEMENiS+ TYPICAL FINANCING/MARKETING SCENARIOS OFFERED BY
OTHER UTI Ll TY SYSTEMS WE·RE REV! EWED IN A STUDY OF PRECEDENT
SITUATIONS·
~
SUBTASK 11.06 -FINANCING RISK ~NALYSIS
---------------------------------------
FINANCING RISKS WERE rUTHER REVIEWED AND PROGRESS MADE TO A
~
COMPREHENSIVE TREATMENT OF OVERALL RISK·
SU9TASK 11·07 -RESOLUTION OF TAX EXEMPT BOARD ISSUE ___________________ " ________________________________ _
ATTENDANCE WAS ?ROVIDED AT WASHINGTON CONFERENCE ARRANGED BY
FIRST BOSTON CORPORATION TO REVIEW THE CURRENT POSITION ON
EFFORTS TO SECURE NECESSARY RELAXATION OF IRS SECTION 103
RULINGS TO PERMIT TAX EXEMPT BOND ISSUE FOR SUSITNA AND OTHER .
HYDROELECTRt C POWER PROJECTS •
J•G• WARNOCK
•
ACRES BUF
ACRES TOR
(· {/
•• March 2-1981
To:
From:
Re:
1)
J. G. Warnock
H. D. Leach !['o.J;:. '-/7~ f' tV. 0 . ~/.._,
SUSITNA
CONCLUDING NOTES ON TASK 11
Scale: From the standpoint vf AP.~ .. we should try to
keep the options open.
This suggests we should try to plan for 400 MW,
even if subsequent event£ make it desirable to
'mov1e-up' to 800 MW or 1200.
N.B. It would be desirable to get APA to stipulate a
'security' guideline (e.g. answer the question nhow
high must the Railbelt peak reach before they agree
to 800 MW -1::>r 1200 MV~ from Susitna"?)
2) Money Rates and Term:
3) Taxes:
Funding is so far ahe=d, that our 10% provision
seems adequate, (equiv~lent to say 12 1/2%
taxable).
Normally, one might predicate 15 years to
20 years term, or even longer. However: a)
this is a new venture~ b) the construction
period ~s effectively part of the term.
So I think 15 years is sufficiently long
term to predicate.
We might be required later to include some
modest allowance in lieu of local taxes.
(but we don't want to ask for it!)
4) Coverage/Equit~:
In principle (this threshhold aside) I don't
believe we need substantial outside equity
for public power projects.
Example: (per our conversation on this topic)
.... /2
T· ~ i. \!"
~ ,..,
. '.
' .
~-~
-2 -
March 2, 1981
% Capital Rate Amount
Debt 67 10 6.70
~quity 33 15 4.95
100 11.65%
In this case the coverage (before tax of, say 50%, is
16.6 ~ 6.7 = 2.48 times).
(ii) But half of the coverage goes to the tax collectors.
So perhaps the following is sufficient:
Debt
Equity
Capital
67
16.5
83.5
(% Capital)
(80.2)
.( 19. 8)
100.0
%
10
15
Equivalent
Return
6.70
2.48
9.18
Effec:tive
Return %
8.1)2)
2. ~7)
(10.99)%
Coverage= 1.37 times
(iii) The above mak~~s no provision for the fact that conunercial
utilities customarily distribute 6§% of earnings in dividends.
So perhaps a public power utility can get by with:
Capital % Capital % __.,..-
Equivalent Effe:tive
Debt 67 91.2 10 6.70 9 . .l2)
Equity 6.5 8.8 15 .98 1.32)
73.5 lOOoO 7.68 (lO.~l~)%
Coverage -1.14 times
(However, it should be recognized that REA is calling for
a TIER -total interest earnings -of 1~5, or more, so we
ought to talk in terms of 1.50 to 1.75)
..... /3
···.T •.... ,l: .,::-··:... ...-.::.:'
'I
....
" '' -·-:1
'I
-' ',....._
'~""' ' .. C•O>'· '-,,
March 2, 1981 - 3 -
5) The 'Watana 400' Package.:
Within a few mills, we know what this package
might cost and what it would produce. We also
believe that it would be good value, long term.
(e.g. it compares favourably with a thermal
alternative on a lifetime basis).
Where we have our problem is how to price it
into the existing system.
So I think we need to know a whole lot more
about the system pricing within the Railbelt
utility networks.
Suggestion:
Example:
What we need is specific and detailed
information on pricing and consumption of
electricity in the Railbelt (not general
market or economic data) . ---
Variations in per customer consumption;
Variations in load profiles;
Variations be·tween zones;
Variations in rate schedules 6 elasticity data,
etc.
6) Pricing for the Railbelt:
Initial studies suggest that it is going to
be difficult to establish a single 2 part rate
for the Railbelt. Possibly the Interconnection
Study has already established that point. In
any event there are going to be considerable
structural shifts in the price mechanism.
What is not yet evident. is:
(i) How sensitive is Alaskan electricity demand
to changes in price?
(ii) What could load management·. do to improve
diversity and other load characteristics
in the Railbelt?
--~-r------~
., PJ WA4llb4 W
••
('
March 2t 1981 - 4 -
Note:
Chugach
--Golden
Valley
Fairbanks
Municipal
U .. S. av ..
(1977)
Av. Price
1979
38.3 mills
75 mills
85.6 mills
39.2 mills
Av. Cons/
Res Customer
11,155 Kwhr
10,427 Kwhr
5,870 Kwhr
8,693 Kwhr
Consumption Profile:
It should be recognized that, while commercial
load is substantial in the Railbelt industrial
load is relatively modest. Moreover in the
1972-77 period the 93% increases in Alaskan
electr~city sales conceals a 54% decline in
industrial consumption for the State.
Elasticity:
Study of articles by J. Hirsheifer,Lester
Taylor and Mount, Chapman and Tyrell indicate
that elasticity is in the range of -1.2 to
-1.8 (or -1 to -2, per the 1976 Battelle
Study).
7) Financial Integrity of Distributors:
Relative to the scale and capital costs of
Susitna, the distribution utilities are
relatively small scale and fragile. Moreover
they are not intertie1, and there is no vlay
for the (future) Alaska power grid to
strengthen its reliability or make sales of
off-peak secondary energy.
Concluding Comment:
One of w.y chief concerns is that we do not
deluge our client with information that is of
questionable relevance to the decisions he has
to make. That involves careful screening of
all POS material. It also requires that the
rationale of the financial and economic
.... /5
·•
...
March 2, 1981
- 5
Concluding Comment (continued} '
HDL:dn
chapters should be well-considered.
In editing for information, there is a danger
that the underlying rationale (logic) of the
Study may be filtered-out. That. may not
matter if it is then re-injected (e.g. in Chapter 2).
We covered a lot of ground in this work and I
believe it provides a good foundation which could
benefit APA, or other clients, at a later stage.
February 27, 1981
......
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~• S.TA1EMENT
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WITH :rH£
-~ 1.
ENERGY
..
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FEBRUARY 27~ 1981
..
PS700 •! 1PD902
..
i
-~ TO:· J. LAWRENCEs ACRES BUFFALO
RE: SUSITNA TASK 11
------~~-------~--~~
RECEIVED YOUR TWO TELEXES 2•26-81 AND COPIES MEMORANDA
J'
FEBRUARY 23 AND 24 SIMULTANEOUSLY TODAY·
(: REGARDING YOUR QUESTIONS RE TELEX JANUARY 141
..
1. NO CONFIRMATION OF RECEIPT AND ONWARD TRANSMITTAL
. ~
·EXPECTED NOR RECEIVED FROM Je GILL AS ROUTING OF RESPONSE
..
TO APA MORE OR LESS ROUTINE •
..
Jllfi!Y'· 2. NO RESPONSE RECEIVED NOR NECESSARILY EXl~ECTED FROM APA AS
WE WERE ALREADY DUE TO MEET THEM ON 20TH AT WHICH TIME OR
ON SUCCEEDING DAYS THERE WAS NO FURTHER DISCUSSION OF
..
MATTER• SUGGEST TH!S INDICATES THAT OUR EXPLANATION
..
HAD BEEN ACCEPTED·
IN SELECTING CONSULTANTS TO BACK UP OUR WORK ON FINANCING
~
CONSIDERATION AND ANALYSIS IN ABSENCE OF S~LAMON BROs.,
.
WE HAVE SELECTED TALENTED SPECIALISTS KNOWN TO US WITH
-PROVEN RECORDS ON SUCH JOBS AS CHURCHILL FALLS WHICH YOU WILL
REC~LL WAS PRINCIPAL PAST EXPERIENCE USED IN JUSTIFYING OUR
~ ill ., .,
P.O~S· PRESENTATION ON THIS ISSUE· THERE IS SURELY NO
.•
CONTRACTUAL REQUIREMENT WHIC~ PRECLUDES US USING NON!' ·
.
AME~ICAN SPECIALISTS PROVIDING THEY HAVE PROPER TALENT AND . . ..
CAPABILITY WHICH I BELIEVE IS NOT IN QUESTIOM AT THIS TIME•
t
PRIOR TO RECEIPT YOUR TELEXES 2-26•81~ HAD DISCUSSED WITH
APA. INTEND TO USE FOR STATE OF ALASKA SUBM.I SS I ON WHICH IS
VERY GENERAL IN REGARD TO Fl NANC I NG ISSUE 1\ND OF ,A SUMMARY,.
WE HAVE BEEN PREPARING THIS WEEK OF THE FINDINGS TO DATE
ON TASK 11 BASED ON FINANCIAL MODELLING AND OTHER DELIVERATIONS
'
FOR1APA GUIDANCE IN CONSIDERING IMPLICATIONS OF CERTAIN ..
"' FINANCING ISSUES· AGREED THIS EXC~ANG£ WOULD PROCEED
..
WITHIN NEXT WEEK OR so. IN VIEW OF YOUR INSTRUCTION WE
SHA~L COMPLETE ASAP THIS WORK WH;CH. INCID~NTALLY HAS INVOLVED
LIMITED SENSITIVITY RUNS OF FINANCIAL MODEL AND THEN CLOSE
FURTHER TASK 11 OPERATIONS OTHER THAN EDITORIAL INPUT TO . ~ ~ ~
P.O.R. UNTIL FURTHER ADVISED. WOULD RECOMMEND THAT IN
.
EARLY MARCH WE AT LEAST SCHEDULE REVIEW MEETING WITH
.I ..
A. ~· MERRETT AND THIS MIGHT WELL BE PLANNED FOR TUESDAY 3RD
IN COLUMBIA WHERE TASK 6 OGP-5 GROUP COULD BE INVOLVED IN
.
ORDER THEY AWARE ALSO OF' I MPLI CATIONS OF' FINANCJ NG CONSTRAI NTS•
"' • WOULD THIS SUIT YOU OR DO YOU HAVE PREFERRED ALTERNATI VEe
FOR YOUR GUIDANCE I BELIEVE THAT TASK 11 EXPENDITURES
APPROXIMATELY ON THE SCHEDULE ANTfCIPATED IN APRIL 1980
DESPITE THE rACT THIS TASK IS HAVtNG TO CARRY HEAVIER
BURPEN THAN PLANNED OF CHARGES t~M OTHER TASKS FOR POR
.,
PREPARATION.
CONCERNED TO LEARN OF FUNDING PJIOBLEMS AND PARTICULARLY
SO AT SUCH A LATE DATE AS BELIEVE REVIEW PANEL OUGHT TO
HAVE BEEN AWARE OF ANY LkMITATIONS TO ACRES EFFORT WHICH
,.,
TH1 S Ml GHT I MPOSE• SUGGEST MAT'CER BE Dl SCUSSED AT' REVJ EW
~
MEETING 3-5-81•
•'
REGARDS .. ..,
J • G. WARNOCK
•
~IIIIP!:WJW,'tniill % 'MS W' r:t •·
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'•
..
' ~
.. ,
'·
. ..
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..
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ACRES AHG
.
ACRES TOR
FEBRUARY 26~ 1981 PS700 • 11PD902
~ -
TOt J. LAWRENCE6 ACRES CANCHORAGE
RE: SUSITNA TASK II
---------------~-~--
RECEIVED YOUR TWO TELEXES 2-26-81 AND COPIES MEMORANDA
~
FEBRUARY 23 AND 24 SIMULTANEOUSLY TODAY·
REGARDING YOUR QUESTIONS RE TELEX JANUARY 14:
-
1• NO CONFIRMATION OF RECEIPT AND ONWARD T~NSMITTAL
~
EXPECTED NOf! RECEIVED FROM J. Gl LL AS ROUTl NG OF RESPONSE . ~
TO APA MORE OR LESS ROUTINE.
NO RESPONSE RECEIVED NOR NECESSARILY EXPECTED FROM APA AS
.
WE WERE ALREADY DUE TO MEET THEM ON 20TH AT WHICH TIME OR
ON SUCCEEDING DAYS THERE WAS NO FURTHER DISCUSSION OF
~
MATTER· SUGGEST THIS INDICATES THAT OUR EXPLANATION HAD
J
BEEN ACCEPTED·
-.
IN SELECTING CONSULTANTS TO BACK UP OUR WORK ON FINANCING
~ CONSIDERATION AND ANALYSIS IN ABSENCE OF SALAMON BROs.~ WE
HAVE SELECTED TALENTED SPECIALISTS KNOWN TO US WITH PROVEN
RECORDS ON SUCH JOBS AS CHURCHILL FALLS WHICH YOU WILL RECALL
WAS PRiNCIPAL PAST EXPERIENCE USED IN JUSTIF.YING OUR P.o.s.
-PRESENTATION ON THIS ISSUE. THERE IS SURELY NO CONTRACTUAL
REQUIREMENT WHICH PRECLUDES US USING NON•A~ERICAN SPECIALISTS
PROVIDING THEY HAV~ PROPER TALENT AND CAPABILITY ~HICH I
-BELIEVE IS NOT IN QUESTION AT THIS TIME.
PRIOR TO RECEIPT YOUR T~LEXES 2-26-81~ HAD DISCUSSED WITH T·
MCGU I DE THE EXCHAI~GE WITH :-II M OF Fl VE PAGE STATEMENT APA
INTEND TO USE FOR STATE OF A!..f\SKA SUBMISSION WHICH IS VERY
GENERAL IN REGARD TO FINANCING ISSUE AND OF A SUMMARY WE HAVE
BEEN PREPARING THIS WEEK OF THE FINDINGS TO DATE ON TASK 11
BASED ON FINANCIAL MODELLING AND OTHER DELIVERATIONS FOR APA
---~:·r·~---··= ----' -, ......
•
GUIDANCE IN CONSIDERING lMPLIC~~TIONS OF CERTAIN FINANCING
~
ISSUES• AGREED THIS EXCHANGE WOULD PROCEED WITHIN NEXT WEEK -OR so. IN VIEW OF YOUR INSTRUCTION WE SHALL COMPLtTE ASAP THIS
WJRK WHICH INCIDENTALLY HAS iNVOLVED LIMITED SENSITIVITY RUNS
-OF FINANCIAL MODEL AND THEN CLOSE FURTHER TASK 11 OPERAT!ONS
-"" .. ~ .
OTHER THAN EDITORIAL INPUT TO P.O.R. UNTIL FURTHER ADVISED.
-WOULD RECOMMEND THAT IN EARLY MARCH WE AT LEAST SCHEDULE REVIEW -MEETING WITH A· J. MERRETT AND THIS MiGHT WELL BE PLANNED FOR
.
TUESDAY 3RD IN COLUMBIA WHERE TASK 6 OGP-5 GROUP COULD BE INVOLVED
..
IN ORDER THEY AWARE ALSO OF IMPLICATIONS OF FINANCING
,
CONSTRAINTS· WOULD TH!S SUIT YOU OR.DO YOU HAVE PREFERRED
~
AL TERNATJ VE •
FOR YOUR GUIDANCE l BELIEVE THAT TASK 11 EXPENDITURES
APPROXIMATELY ON THE SCHEDULE ANTICIPATED IN APRIL 1980
DESPITE THE FACT THIS TASK IS HAVING TO CARRY HEAVIER BURDEN
. .
THAN PLANNED OF CHARGES FROM OTHER TASKS FOR ?OR PREPARATION.
CONCERNED TO LEARN OF FUNDING PROBLEMS AND PARTICULARLY
SO A'T SUCH A LATE DATE AS BELIEVE: REViEW PANEL OUGHT TO HAVE
BEEN AWARE OF ANY LIMITATIONS TO ACRES EFFORT WHICH THIS
.
MIGHT I MF'OSE• SUGGEST MATTER BE Dl SCUSSED AT REVIEW C'1EETI NG
3-5-81·
REGARDS
J.G. WARNOCK
+
ACRES AHG
ACR'F:~ TOR
________ ........... ·-~ .... --.
. : l.:h" !.' ~ II
._. ~·" '"' • T .: ~ 1
l,. .L" .:
-
;cRE.S BUr
~j· 2-2.&-8?.
<• -
ACRES i'OR
.v ATTN: Go lo:ARNOCK • 8T
f
!
IN A TELEPHONE CONVERSATION FEBRUARY 25 TERRY MCGUIRE CONFI~MED
HIS INSTRUCTIONS TO ACRl::.s IN WASHINGTON FEBRUARY' 4 AS FOLLOWS:
. ~
1· COi'IPLE.TE. AND ISSUE THE 1981 VERSION OF POR AS SCHEDULED.
2• APA WILL DECIDE THIS WEEK IF IT IS f;PPROPRIATE. FOR FiNANCIAL
.
CHAPTERS TO BE INCLUDED IN POR.
-
3. FL'RTHER FINANCIAL I'IODEL RUNS SHOULD NOT BE !'lADE PENDING 1\PA
-REVIEW OF POR, AN lNDICATION OF STATE ~OLICY ON SUSITNA
CONSTRUCTION AND FUNDING, AND UNDERW~ITERS lNPUT TO APA .
ON REQUIRED ANALYSES.
~CGUIRE ADDED HIS CONCERN THAT 1riE ACRES MODEL IS !'lORE APPROPRIATE
•• .
FU?. CORPORATE FINANCING THAN STATE OR PUBLIC FINANCING. HE
-EELlEVES THE ~IODEL CAN BE SI;IJ?LIF'IED AND ANTICIPATES ADVICE t'Jf\
~
1HIS FRON THE UNDERWRITERS·
.
YOU SHOULD AL~O BE AWARE. THAT CURRt~T FUNDING COULD WELL BE EX-
' ~UST£D BEFORE APRIL 1, AT CURRENT RATES Of EXPENDITURE·
-ADDITIONAL FUNDING HAS BEEN ~EQUESTED BY APA BEFORE APRIL 1,
... ,., -
atT IF NOT AUTHORIZED, WORK MA'f HAVE TO BE STOPPED· IT IS CLEAR-
. ~
LY ll'lPORTANT TO L!l'l!T ALL BUT 1\lOST ESSENTIAL WORK IN MARCH. TASK 11
WORK AT THIS TINE IS NOT APPROPRIATE AN!': MAY EVEN BE DENIED PAY• l
iiENT BY l'lCGUIRE • ••
.
J• LAWRENCE+
'
••
-
ACRES TOR
FEBRUARY 2~. 1981 ~
P5700o11
-ATTN I PHIL HOOVER• Ql.//
SUSJTNA P5700~
.
CC: H. D. LEACH
T. MERRETT
M. WALTON
AS EXPLAINED IN TELCON WE ARE ENDEAVOURING TO RECONSTRUCT ON A
. -
FINANCING MODEL BASIS THE LITERAL CASH FLOWS CORRESPONDING TO
" -
YOUR OGPS RUNS AT 0 0/0 AND 3 0/0 AND CORRESPONDING TO THE DATA -" ~
PROVIDED FOR LME 1 AND LBJ9 ALsO LATER BUT SOONEST POSSIBLE FOR
WATANI\ 400 MW ONLY• WE REQUIRE FOR EACH PLANT SELECTED ONE BY
- -. ...
ONE AS SOON AS AVAILABLE FOR TELECOPIER TRANSMISSIONo
. .
CAPITAL COSTS IN DOLLAR TOTAL V~LUES INCLUDING AS SEPARATE . . ~
'ITEMS WORKING CAPITAL AND INVENTORY.
EXPENDITURE/TIMING PROFILES FOR CAPITAL COSTS INPUTS USED -~ TO COMPUTE I DC •
ENERGY OUTPUT 'fEAR BY YEAR <AND FOR LATER COMPARISON THE .
~ ANNUAL MILL RATES OGPS PRODUCED>.
~ OPERATING AND MAINTENANCE CASH FUEL COSTS•
~BO!JE DATA REGUI RED FOR EACH OF PLANT ALTERNATIVES SELECTED BY
OGPS 1981 THROUGH 2010 AND ALsO 0 + M AND FUEL COSTS FOR ALREADY
INSTALLED PLANTS• DATA CAN BE PROVIDED IN MOST CONVENIENT FORM
DEFINING FOR INSTANCE IN FORM BASE YEAR VALUES PLUS ANNUAL TRENDS
~
IN PERCENTAGE.
-.
OUR PLAN IS TO CARRY OUT FINANCIAL ANALYSES TO DETERMINE PRICING/ . ..
REVENUE STREAMS APPLICABLE TO ALL. THERMAL AND WITH CHACACHAMMA -
ALTERNATIVES AND TO DETERMINE DEFICITS WHICH ARISE FOR WATANA . .
OPTIONS IF THEY MATCH THESE STREAMS• ANXIOUS TO HAVE THESE RUNS
. .
CORRESPOND AS CLOSELY AS POSSIBLE TO YOUR OGPS RUNS. IF YOU FEEL
ANY OTHER DATA YOU HAVE IS RELEVANT PLEASE ADVISE:
.
NEW SUBJECT
-----------
PLEASE ADVISE WHETHER IN TESTING FOR VARIOUS DISCOUNT R~tES
5 0/0 AND 9 0/0 THESE SAME RATES WERE USED IN DETERMI Nl ~IG -, ANNUAL CHARGES IN PLACE OF THE 3 0/0 AS USED lN BASE CASE·
"" . .., -~
PLEASE COMMUNICATE WITH H• D· LEACH OR A• J. MERRETT AT TORONTO .
OFFICE AT 416-595·2050.
. .
CHARGE TIME TO PS700.1t.02001
REGARDS
J G WARNOCK
....................... _ .... _ ._. ... ····~·--···----······ ......... --, ·-
l -
••. ; ... ,a;.
•
~CR£s BUF
ACRES TOR
-· FEBRUAaY 24~ 1981 .. ..
P5700.07.11 ---,. ., -
ATTN: J. o.·LAWRENCE
--.
THIS IS A COPY OF THE TELEX TRANSMITTED TO d. GILL BY ME ON ..
JANUARY 14/81.
-.
SUSITNA -FOR TRANSMITTAL TO APA-R MOHN/T MCGUIRE/G MANNI . . . -
CONSULTANTS
APA HAVE REQUESTED US TO PROVIDE STATEMENTS AND/OR CjPJNIONS . -.
FOR CONSULTANTS DR C B CHAPMAN AND PROFESSOR A J MERRETT
BOTH EMPLOYED TO PROVIDE INPUT TO CHAPTER 11 OR RISK
--
ANALYSIS/FINANCIAL ANALYSIS AND FINANCIAL PLANNING/
-
ANALYSIS RESPECTIVELY· BOTH CHAPMAN AND MERRETT HAVE TO
.. ... •, -'•
DATE PARTICIPATED DIRECTLY IN OUR TASK STUDY TEAM PJ~OVIDING
~ ~ -..
*
CONCEPTUAL INPUT BOTH TO THE MODELLING'APPROACHES.AND TO ' . . ' ' .. . .
ALTERNATIVE MODES OF FJ NANCI NG. UNL'I K!: OTHER EXTERNAL
~ . .
CONSULTANTS CHAPMAN AND MERRETT WILL NOT BE PROVIDING
~ .
OVERVIEW OF OPINION SO ~UCH AS'A DIRECT·CaNTRlBtltleN TO
" AND REVIEW OF OUR WORK.· THESE CONTRIBUTIONS WILL MAINLY . . -
BE EMBEDDED IN THE REPORTS AND GTHER ELE~ENTs·~; ~UR TASK II . ...... "' . --""
OUTPUT. AT AN APPROPRIATE STAGE OF_TRE W&RK,POSS~8LY'AT !HE
'*'• -•• ._.. . • • .. ..
CONCLUSION OF TH!: FIRST· DRAFT JltOft:Wt;COCJLI!>,'ARRANG£ FOR
'-·. ...
EACH CONSULTANT TO PREPARE A FORMAL' OVERVIEW· F'OR APA
cONsiDERATION: THE CONsuLfANTS'WOUL~·HOWEVER 1 8E REVIEWING WORK
.. tO WHICH THEY HAD MADE A·sesStANtJAL"PEftSONAL'CoNTRIBUTJoN:
.. 4 ...
IN ADDITION TO DR CHAPMAN AND'PROFESSOR M£RRETT·WE HAVE
.. ~ "" -· -. . . .. ... -.................. .. ~....;mr--rt--l'b II
-......... .., -·-.. ·-.. 'l ._
. ,' --.
-"
EMPLOYEE H DERRICK LEACH· WHO· 'I! • A 1'1'1 GMLT 'CDI:JALI FlED· Fl NANC I AL
,_j ANALYsT i-o FORMULATE· AND ARAiYst · t"E; tit-&r>ELs ··wt tiiA'E ~ALREADY
P~0e£SSED DEPICTING SEV'ERAL. ALTE·RNAi-1 VE • Fl NAIQC i NG l PLANS. FOR
.... ., ...... .. . ~ .
SUSITNA• MR LEACH IS eO-i\UTHOR·WITH'MEiet:MEJCHtf»f 1 ti'I!:'INPUT
...... ..... .. ..
FOR CHAPTER 13" '16 AND 17.NOW DtJE:·tC!U~·tASl:.INGlON'JANCJARY 20
... .. ... "' ,
FOR Dl SCUSSI ON WITH AF'A' P1U OR' Tt) 'I SSI!JE I IN I FINAL I DRAFT F~RM·
-
DERRI CJ< LEACM AND If' FELT·I'>£S·JftABt!: ·PRf>FES!flR TONT MERRETT . . -~ .
CAN BE AVAILABLE FOR. LATER Dl SCUSS I OMS; W l tH·' APA 1 AND 1 Y I NANC I AL
-~ -.
ADV f SORS AND I WOULD· RECOMMEND TKAT • THE 1·R KNOWL!:!!>GE 'AND
• J
EXPERIENCE BE BROUGHT TO BEAR !tRONSLt' iN· TfUS ··rASH I ON.
IN ORDER TO IDENTIFY. ALL £XTE1tNAL; I NPrJtS ~ A1' l ti'U s I tiME. WE . '"
ADVISE THAT FEZIBL PROGRAI'I'I3E1NG·OsEI''~S"BASIS'FOk'YINANCIAL
~ -.. " ..
MODELS IS BEl NG ADAPTED, -INPUTTED AN]) ANALYSED FOR MS ·.MARGARET
. ~
WALTON OF KEEPING AND WALTON ASSOCIATES• COMPUTER'AIDED , --..
FINANCIAL ANALYSIS SPEC-IALISTS• "SAMPt.E PRGGRAMS OU1?tJT WILL ---.,
BE TABLED ON JANUARY 20TH 1981• 'TRUST tHAT TAIS TELEX WILL
-~ -
FILL NEED FOR PROMPT ADVICE TO QUERIES'RAISED INITIALLY
. ..
FR~~ GLORIA MANNJ•s REVIEW OF ACRES INVOICES•' WILL BE· .
PLEASED TO SUPPLY ANY FURTHER INFORMATION REQHIRED·
.
J G WARNOCK
ACRES -TORONTO
•
ACRES BUF
. .
ACRES TOR
t
\' c .: .: ~~ ! l ~.
•
•
ACRES COLF
CC: H. D. LEACH ACRES TOF: T .. M.BRRETT
FEBRUARY 24~ 1981 P5700.t1 M. WALTON
ATTN: PHIL HOOVER
,
RE: SUSITNA PS700.11
AS EXPLAINED IN TELCON WE ARE ENDEAVOURING TO RECONSTRUCT ON A
FINANCING MODEL BASIS THE LITERAL CASH FLOWS CORRESPONDING TO
YOUR OGPS RUNS AT 0 0/0 AND 3 0/0 AND CORRESPONDING TO THE DATA
PROVIDED FOR LME 1 AND LBJ9 ALSO LATER BUT SOONEST POSSIBLE FOR
WATANA 400 MW ONLY. WE REQUIRE FOR EACH PLANT SELECTED ONE BY
ONE AS SOON AS AVAILABLE FOR TELECOPIER TRANSMISSION.
CAPITAL COSTS IN DOLLAR TOTAL VALUES iNCLUDING AS SEPARATE
ITEMS WORKING CAPITAL AND INVENTORY.
EXPENDITURE/TIMING PROFILES FOR CAPITAL COSTS INPUTS USED
TO COMPUTE IDC.
ENERGY OUTPUT YEAR BY YEAR <AND FOR LATER COMPARISON THE
.. ANNUAL Ml LL RATES OGPS PRODUCED.> e
OPERATING AND MAINTENANCE CASH FUEL COSTS.
ABOVE DATA REQUJ RED FOR E·ACH OF" PLANT ALT£RNATI VES SELECTED BY
OGPS 1981 THROUGH 2010 AND ALSO 0 + M AND FUEL COSTS FOR ALREADY
.~·J '.. ('
.~ l:llltS •
·:r;
ABOVE DATA REQUIRED FOR EACH OF PLANT ALTERNATIVES SELECTED BY
4' OGFS 1981 THROH6H 2010 AND ALSO 0 + M AND FUEL COSTS FOR ALREADY
-
INSTALLED PLANTs. DATA CAN BE PROVIDED IN MOST CONVENIENT FORM • DEFINING FOR INSTANCE IN FORM BASE YEAR VALUES PLUS ANNUAL TRENDS ..
IN PERCENTAGE.
j -
OUR PLAN IS TO CARRY OUT FINANCIAL ANALYSES TO DETERMINE P Rl C I NG/
---REVENUE STREAMS APPLICABLE ~0 ALL THERMAL AND WITH CHACACHAMMA
ALTERNATIVES AND TO DETERMINE DEFICITS WHICH ARISE FOR WATANA
. -;
OPTIONS IF THEY MATCH THESE STREAMS· ANXIOUS TO HAVE THESE RUNS
.. . .. -
CORRESPOND AS CLOSELY AS POSSIBLE TO XOUR OGPS RUNS• IF YOU FEEL
-.. . ""'
ANY OTHER DATA YOU HAVE IS RELEVANT ~LEASE ADVISE•
NEW SUBJECT
.. f • • " • , .. ------..-.-----. ...
PLEASE ADVISE WHETHER IN TESTING FOR VARIOUS DISCOUNT RATES
-5 0/0 AND 9 0/0 THESE SAME RATES WERE USED IN DETERMINING . -
-..
ANNUAL CMA RGES iN PLACE OF inE 3 0~0 AS USED IN BASE CASE•
--· .. . ..,-., -., .,
PLEASE COMMUNICATE WITH H· D. LEACH OR A· J. MERRETT AT TORONTO
.. .,
OFF1CE AT 416-595-2050.
• ., o#
CHARGE TIME TO PS700.tl.02001
REGARDS
•·
J G WARNOCK
ACRES -tORONTO
-ACRES COLB
ACRES TOR
-
• ..
FROM:
SUBJECT:
(
, •... ·
'·
(
OFFICE MEMORANDUM
Memo to File Date:
File:
J. G. Warnock cc:
SUSI1~A -HYDROELECTRIC PROJECT
TASK 11 -FINANCING AND MARKETING
MEETING WITH MANAGING UNDERWRITERS
AND FINANCIAL ADVISORS
-February 5, 1981
P5700.07.11
A. J. Merrett
We have now concluded two meetings attended by Alaska
Power Authority, their financial advisors First
Southwest Corporation and First Boston Corporation as
Managing Underwriters. At the conclusion of the
meetings Terry McGuire, Director of Finance for APA
reiterated that Acres role on Financing and Marketing
would continue as before and that he expected that we
would be expected to gradually build a strengthening
relationship with First Boston. He advised me privately
that he expected that we would "stay ahead" of First
Boston in the area of conceptual ideas on financing
for some time and that he did not feel that the
managing underwriters would be too aggressive in their
attempts to take over the lead.
McGuire also told First Boston during the meeting that
the main source of innovative financing approaches so
far natl oeen Acres American ana, he obviously declared
his support for the effort we have contributed t.~ date.
The situation in general however is fraught with
considerable difficulty as it is clear that the State
government is taking matters into its own hands in
relation to current hydroelectric projects which may
lead to legislation which would not necessarily favour
support for Susitna. APA do not appear to be too
concerned, believing that they can still manage the
outcome to meet their long term interests.
Acres went into the meetings with serious concern of
specific approaches to financing and the lack of
coheslv.e argume~nt in the draft chapters 13, 16 and 17
of the P.O.R. would receive adverse comment. Not so!
..... /2
-_j.
(
Memo to File February 5, 1981
P5700.07.ll
First Boston admitted to the fact that they had been
unable to get full appreciation of the issues from our
-chapters, but felt that this was due to their general
unfamiliarity with the project. Acres spend February
4th giving them a full briefing on the technical aspects
and they are now much better informed. APA are of the
opinion that anything written on the financing aspects
of the project for publication at this time should not
be too specific and, if they have any criticism, it was
that we had presented too much of our current ideas
too early in the draft chapters.
The opportunity is before us, then, to suggest major
revision and editting as well as the preparation of
better linkage with the economic feasibility chapters.
We have advised APA that we shall, for the time being,
cease modelling and turn attention to the text.
McGuire gave First Boston a positive appreciation of our
financing modelling work and recommended that serious
consideration be given to following through with the
application of FEZIBL to all future analysis. There
did not appear to be any strong offer of an alternative
from First Boston who want to arrange meetings to get
a better feel for the programs capability. Nothing was
released to them at this time~
APA have provided Acres with some flexibility in an
attempt to make further improvement in written analysis
of·the financing issue to date. There is some thbught
of expurgating any discussion of financing which might be
judged too specific in the early edition of the project
overview pending the State's announcement of its
hydroelectric project financing support plan. This may
not be settled until June/July 1981. This would relieve
the pressure on finalisation of a 1981 position and give
us time to advance our ideas to a better consolidated
level.
During the discussion the equity/debt situation carne up.
While First Boston were generally in agreement with our.
assumpt~on that equity was a desirable if not key
ingredient, particularly at this preliminary stage, they
asserted that it was not ess€ntial that it be there
initially. They possibly are thinking in terms of
.... /3
1 • l
} -
- 3 -
Memo to File February·s, 1981
P5700.07.11
strong State support in the form of backing or guarantee.
The presentation to First Boston followed a previous days
meeting when there was a general discussion with a
diversified group of-hydroelectric development interests
seeking improvement in IRS regulations permitting wider
availability of tax exempt bond financing. A copy of
the record of the meetings and participants is attached
(as issued by First Boston Corporation).
JGW:dn
-
~, eUW'ftzfi···atffiR·tt ··; 'V **'•~ .... ~. · r~ ..... P#
~·!
FROA-1:
SUBJECT:
•
..
. '
,/
~''"·-::·.··· .. ,. :.r:
OFFICE MEMORANDUM
..
J. D. Lawrence Date: February 16, 1981
File: .. _ ...
J. G. Warnock cc: C. A. Debe1ius
TASK 11
MARKETING & FINANCING
We attach one xe~ox copy of each of the computer outputs
applying to the fo11owing·"runs" as referred to in our
letter to APA of January -22nd. ·.
., . •· -'
. Run 06 Ru..TJ. . 6E
.:
Run 6A Run . 6F -:--.. ·; ..
Run 60 Run 6G
. \
Run 6Z ..
.,.G .. "' -._ -
·>.U Vi : 01'1. ~:. , ·.-
·.Enclosure
... .. .., .. ...,..,:., -..
'·
.·
.. •
•
. ....
•t
-
·.
·.
• ' .
J
-~ ..
fl '',
February 3, 1981
.
-Mr. Eric P. Yould, Executive Director
Alaska Power Authority
333 W. 4th Avenue, Suite 31
Anchorage, AK 99501
Dear Eric:
Susitna Hydroelectric Project
Task 11: Marketing and Financing
During the past two weeks we have furnished you with samples of finan-
cial analyses based on a range of models which might be considered for
Susitna Hydroelectric Project. We are about to engage in discussions
with the managing underwriting group and your financial advisors, and
it is therefore appropriate to give you our provisional conclusions
and to seek your views on how best we might proceed to develop these
to the best advantage of the Authority.
First, the best way to sum up our preliminary conclusions on economic
and financial viability is in the two tables set out on the attached
page, one for real and one for money DCF rates of return for a range
of outcomes. This is another way of setting out the information al-
ready supplied to you at the time of the external consultants review
meeting (see the attachment for the comp·Jementary B/C ratios), but in
a way it is more useful in assessing financability. It is, in any
case, what bankers expect and need. These DCF returns represent total
cost savings from Susitna compared with thE~ next most efficient energy
sources. Adverse criticism is possible if capital costs are sub-
stantially higher than assumed and if alternative enrgy costs fail
to rise as forecast. Our present view is that these risks are more
than counterbalanced by the gains which would ari3e if alternative
energy costs rose even faster than assumed; i.e., at a rate of 5% or
more in real terms. Then Susitna would be an important insurance to
Alaska against major energy cost escalations in future.
We have discussed with you various financing approaches which could
involve funding support from the State of Alaska. The DCF rates of
return are a most important measure of the value of such participation.
How the Alaskan government would distribute the benefits from the
project is, of course, a policy matter. If the money rate of return
is 15-16%, the State may choose to take only half, permitting APA to
pass on the benefit of the remainder in lower prices. No decision
on such a split is needed now, but you will no doubt wish to develop
the concept as the most effective way of presenting Susitna•s ad-
ACRES AMERICAN INCORPORATED
Mr. Eric P. Yould
Page Two
February 3_, 1981
-
vantages to the legislature and the public.
-~" . .,
c l
Second, we would emphasize the extent to which Susitna offers sig-
--nificant automatic compensation against one of its major risks,
namely markedly greater inflation either worldwide or specifically
in Alaska. While this would add to Susitna's direct capital cost and
interest burden, it could·be offset by the likely r·esultant increased
cost of a 1 ternative ener·gy sources.
Third, when considering the financing question, we feel it is in-
advisable to pursue any single or rigid financing plan which could
be overtaken by events prior to a final commitment decision. For
instance, any scheme involving high and fixed levels of debt would
be vulnerable to major increases in interest rates. It seems sensible,
therefore, to keep all options open. But if one option has to be
accepted at this time, the royalty basis looks to offer maximum
flexibility against unforeseen events.
Fourth, we would like to bring up the question of completion guaran-
tees. This will be raised by the underwriters at some stage, since
some form of guarantee will be a precondition of third party debt.
Accordingly, it is advisable to have a well considered view ready.
The royalty route appears to be the be5t means of rewarding the
Alaska government for providing such a guarantee.
Finally, we must consider the range of information to be provided.
It seems that the project is sufficiently robust to withstand the
hazards and difficulties which its magnitude inescapably involves.
By stating these frankly throughout, we can best prepare to minimize
adversity and to avoid criticisms that such possibilities were sup-
pressed in the presentation.
We are in the process of revising the draft Chapter 16 -Financial
Analysis, and will have this week the benefit of further input from
First Southwest Corporation and First Boston. The revised draft
will be available for further consideration during your forthcoming
visit to Buffalo, and we shall plan to get copies to you earlier if
possible.
Yours sincerely,
J~.Gavin Warnock
ACRES AMERICAN INCORPORATED
_j
CAPITAL COSTS
BASE CAPITAL COST
ESTIMATE
+15% on Estimate
+30% on Estimate
BASE CAPITAL COST
ESTIMATE
+15% on Estimate
+30% on Estimate
ECONOMIC DCF RATES OF RETURN IN %
FOR
*ANNUAL ALTERNATIVE ENERGY PRICE ESCALATION
RATES (INCREASES IN EXCESS OF GENERAL INFLATION)
1.5% 3.0%
6.1 7.1 " 8.0
5.2 6.7 7.1
4.5 5.4 6.35
13.5 14.5 15.6
12.6 13.6 14.6
11.8 12.8 13.8
5.0% 7.0%
IN REAL TERMS
9.4 10.7
8.4 9.7
7.6 8.8
IN MONEY TERMS
17.0 18.4
16.0 17.3
16.4
Compare
8/C Ratio
at 3% Rate
2.1
2.1
*These rates assumed to apply from 1993, date of first power output from Susitna
to 2005, with energy price increases following general inflation rate
thereafter.
--
I
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•
ME.r-10RANDUM
TO: J. Gavin Warnock
FR: A. J. Merrett/Ao Sykes
RE: ALASKA POWER AUTHORITY
SUSITNA HYDROELECTRIC PROJECT
__ ,· TASK II, MARKETING & FINANCING
FINANCIAL FEASIBILITY ANALYSIS
Introduction
January 29, 1981
The purpose of the Financial Feasibility Analysis
is to evaluate the financial viability of Susitna over
ranges of outcomes for capital cost, demand, prices, which
are judged at this stage to have a significant probability
of occurrence. It will not be possible at this stage, how-
ever, to evaluate such viability in terms of probabalistic
models assigning or estimating the specific probabiLities.
It will similarly not be possible to consider optimisation
of Susitna with respect to alternative engineering and
financing schemes. This will only be practicable at a
later stage when the range of financing options is more
specifically defined and outcomes have been considered more
fully. It must also be stressed that the Financial
Feasibility, coming as it does at the end of the sequence of
data, estimates and policy inputs cannot be carried to a
completely definitive state .until nearer the actual incep-
tion of the project. Rather, it must be in a continual
state of review and refinement as with the continuing flow
of data and policy inputs.
As the first and therefore earliest review of
Financial Feasibility this must be the most tentative and
we will be ccncerned not to take the analysis and conclusion
beyond the point justified by the present stage of estima-
tion and policy development.
l
I r
I
i
I .
' '
•
j-\.1ifii ..
Economic Viability
Economic viability of the project is a pre-
condition of financial viability through conventional
financing sources. It should also represent (in the absence
of any policy to subsidise uneconomic sources of power) the
pre-~ondition for interest and involvement of the State of
Alaska. In such purely eponomic analysis we are not
concerned to take.cognisance of the accounting debt cover,
expenditure phasing constraints relevant to financ~.!!9:. the
project. The economic return in effect measures the
economic benefit assuming that all such benefits are capable
of being captured by the owners of the project.
The basis of this economic return is the cost
saving to users of Susitna power which would result from
their having access to Susitna power rather than the next
most economic sources
To describe the origin of this economic return it
is necessary briefly to recapitalate the marketing scenario
and the expected capacity displacement which will result.
This is done on the following estimates and assumptions.
(i) It is assumed that the volume of demand will lie in
the range of the ISER forecasts.
(ii) When Susitna comes on stream in say 1993 it will
pursue a marketing policy such that it displaces
existing generating capacity equal to the increments
of Susitna power being brought in.
(iii) The producers of alternative energy will have planned
£or this eventuality and will be ready to purchase
Susitna power at a price equal to the best alterna-
tive non-Susitna sourcesa (This is estimated to be
the cost of natural gas? some combination of natural
gas and coal? -or?)
-
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(iv) Susitna's prices in subsequent years could escalate
in line with the next most economic source of power
available to its customers. For reasons of public
policy Susi tna may not choose to capture ·the fulJ.:.
cost naving compared with alternative power sources,
but for the purposes of calculating the full economic
re·turn the ~ull pos$ible cost savings must be ust~d.
This is becarise these cost savings represent the
maximum customers would be prepared to pay: thus i·t
measures the full ec·")nomic benefit from Susi tna, and
sets the upper limit to what is availablP to meet
financing charges.
{Memo on point to be included in marketing section:
As soon as Susitna is seen to be likely from a
certain expected future date, ~.g., 1993, existing
producers of electricity will take this into acco~nt
in their renewal and expansion plans. The more
certain Susitna is seen to be, particularly if it is
perceived as providing relatively cheap power, the
less the threat e:\:isting generating capacity 1vill
pose to depressing the entry price for Susitna power.
Existing producers will patch up existing capacity
accepting the higher running costs involved, and will
defer and, in the limit, cancel expansion plans.
Nevertheless, a transitional period of competition
from some existing plant must be expected. It is
necessary to estimate the amount of power involved~
its displacement cost, and for how long this
displacement cost will affect the price existing
producers will pay for Susitna power.)
(v) All ather relevan-t. estimates and assumptions on
·capital and operating ~osts, inflation, peak power
availability, etc.
•
'! 0
1• The two main parameters to be considered are: I ·•
~,...-.,..._~,....._.....~,. ........ ..._. ---~·~
/· ,'-.
'' .. i
(a) Build up of demand (volume and price)
(b) Real capital and operating costs (on assumption that
inflation will increase costs of alternative energy
equally and thus be neutral) .
ASJ/AS:ic
I
I , I
' . '
•
OFFICE MEMORANDUM
TO: H.D. Leach
FROM: D. Crawford
SUBJECT: Susitna HEP
Hydrological Cycles and Thei~
Effects on Energy Output
Date: January 28, 1981
File: P5700. 07. 06
f.
In your memo dated January 23, 1981 to J.G. Warnock you suggested that
energy output from the various Susitna schemes could be described by a
"cos 11 curve. The basis of your suggestion was that hydrological phenomena
also vary in a cyclic and predictable manner.
The majority of hydrologic phenomena in nature are stochastic, that is,
they are governed by the laws of chance. Precipitation, temperature, lake
levels, snow and ice accumulation and runoff are all stochastic process and
so cannot be described by a simple deterministic 11 COS 11 curve.
Figure 1 shows the annual energy plotted against time for the full develop-
ment at Watana. The annual energy produced is both a function of the inflow
and the reservoir storage capacity •
Consequently, we would not recommend an approach whereby energy output or
plant factors follow a "cos 11 curve. We would suggest that for assessing
operating risks a probability concept be developed whereby the energy
associated with a given chance of occurring is assumed (Figure 2 for example).
Annual energy for single development at Watana and the development at Watana
and Devil Canyon are given in Table 1 for your reference.
DC:ccv
---:~-------,--------·-" l(''"'' ---~-"< ----,_
'~
D. Crawford
II.
I.P.G. Hutchison
Task 6 Supervisor
.. •
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M E M 0 R A N D U M
TO: J. Gavin Warnock January 22, 1981
FR: H. Derrick Leach
RE: TELEX QUERY OF JANUARY 20/81
{RECEIVED JANUARY 21/81)--
(ALTE&~ATIVE FINANCING)
Starting from Data 6D in Job 3737, we made a series of
attempts to create a model paying 12 per cent interest on
the State contribution, with interest rolled-in, and
amortized over 40 years.
We are now telecopying you summarized data on three examples
(best of a number of runs).
Model 6E Retires senior debt by Year 22 (2007). There-
after services $10.7 billion of State contribu-
tion (two loans of 40 years' each~-expiring
Years 2046 and 2047).
Model 6F Retires Watana and DC in Year 28 (2013); but
starts to service the State contribution in a
more modest way starting in Year 14 (1999) .
State is fully-paid (including rolled-up
interest) by Year 38 (2023) •
.
Model 6G Same as 6F but paying 10 per cent to the State.
This pays out by Year 31 (2016) •
Comments on 6E; 6F; 6G
6E -is an adaptation of 6D. Line 274 has been added. This
capitalizes the interest on the infrastructure loan
(273). To Year 13 (1998), revenues are the same. How-
ever, price escalation at 3.5 per cent is continued for
all years. Senior debt is 10 per cent; State financing
12 per cent ..
You will note that the Watana and DC loans are paid-off
as fast as possible (Years 10 and 12). But even with
full cash flow, the impact of the 40-year State finan-
cing is to "'collapse n Susi tna' s earnings in Yea:r.-13 and
t subse~1ently. Overall DCF return to 2014 is 9.65 per
cent.. Returns for regulatory purposes are low.
6F -This has the same revenue line as 6E. Watana and DC
are level payment financings phased to retire both
loans by Year 28 (10 per cent on senior debt).
The Infrastructure loan (3) is Dam expenditure only
(excluding capitalized in·terest). Model starts to .
service this 12 per ·cent State contribution in Year 14
{1999). It is retired ~y Year 28 {2013) •
. Capint Loan 2 is the capitalized interest on the
infrastructure to 1998, with further accruals on
(unpaid) interest rolled-in. It pays off by Year 38,
on a full-payment basis.
N.. B. Both Loans 3 and 4 are full pa.yment, so there is
no cash available for Rate Stabilization until
Year 38.
You will notice that drawdowns.on Loan 4 continue after
capital payments have commenced. That is because heavy
interest charges exceed cash available to service the
State Contribution at 12.per cent.
Pending redemp~ion of the two senior debt issues, all
interest on Loan 4 is capitalized.
The DCF return is 11.31 per cent; return on·investment
in real terms (e.g~, 1980 dollars constant) is 4.03 per
cent. The returns for regulatory purposes.have been
constrained at a modest level. Interest. coverage is
low, but steadye Ratios of senior debt to .total
capital seem :to be acceptable right from the start.
Negative earnings in Years 14/15/16 and 29 are not
material.
we·feel 6F is a good model on these parameters. In
real terms, revenue per kWh declines every year--so
that affords APA a "buffer" against unforseen
contingencies.
6G -This is equivalent to 6F, with 10 per cent financing on
the State contribution. You will notice that the
subordinate debt is paid off by Year 31 (2016). This
is partly because we are able to start. servicing the
State contributions (Loan 4) one year earlier. You
will note that debt drawdowns on the Sources statement
for Years 20 to 30 (e.g., 2006-2013) are appreciably
lower than 6F, and Tota.l Debt outstanding in Years l6
and 17 (2001/2002) is over $1 billion lower.
DCF return to Year 34•is 10.74 per cent. Real return
is 3.5 per cent. Regulatory returns are appreciably
higher than 6F and there are no deficit years after
,, Devil Canyon comes on line.
i '
Margaret Walton did a stalwart job and worked mo~ ,, of the
night on these!
HDC:ic
'7'/"";·.:·----~--
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ACRES AHG
( ACRES TOR
JANUARY 21j) 1981 -
?5700. 11
I
,_f_
o·u'l
ATTN:· J G WARNOCK
ADJUSTING JOB 3737 -DATE 60.
PRELIMINARY RESULTS SUGGEST PRICE ESCALATION WOULD NEED
I
TO CONTINUE TO YEAR 2010 OR LATER, TO ACCOMMODATE BIG
SERVICE CHARGE TO STATE WHICH ACCUMULATED PRIOR TO
~
RETIREMENT OF SENIOR BONDS EARLY IN YEAR 2007&
WE ARE TESTING 10 0/0 ROLLED-IN RATE~ ALSO MODEL WHICH SERVICES
STATE CONTRIBUTIOM ON A SUBORDINATE BAS1S PRIOR TO SENIOR
DEBT RETIREMENT. WILL TELECOPY DATA EARLY JANUARY 22·
REGARDS
DERRICK
P·S• HAVE SOME MESSAGES IF YOU WILL BE CALLING TODAY
DALE
+
ACRES AHG
~t. ACRES TOR
TELECOPY __ _;,._ __ P5700. 07, I J
JANUARY 16/81
(·· J D LAWRENCE -BUF'FALO 716-853-7525
· C A DEBELIUS -COLUMBIA 301-,992-5300
SUSITNA.PROJECT
RECORD OF TEI,EPHONE CONVERSATION
R MOHN AND J G WARl'J'OCK JANUARY 15TH 1981
CALLED PLACED BY J G WARNOCK TO TERRY MCGUIRE
WAS TO ASCERTAIN PLANS FOR MEETING WITH MANAGING UNDERWRITERS,
TO DISCUSS POSITION OF SALAMON BROTHERS AND TO ADVISE OF CHANGE
TO TITLE OF CHAPTER 17 OF PRO. T MCGUIRE WAS IN JUNEAU WITH
FINANCIAL ADVISORS CONSUI,TING WITH THE GOVERNOR'S OFFICE ON
FINANCING PLANS.
R IviOHN TOOK THE CALL AND AGREED WITH CHAPTER 13 CHANGED TITLE.
HE THEN \~lENT ON TO SAY THAT APA WERE VERY CONCERNED OVER THE
'
POSSIBLE TREND OF NEXT WEEKS MEETINGS PARTICULARLY IN REGARD
TO SEISMIC IMPACTS ON THE COST OF WATANA AND THE VIAB!LITY OF
THE PROJECT. .HOHN INDICATED THAT IF CONCERN DID DEVELOP
APA MIGHT CALL A HALT TO WORK FOR 4/5 WEEKS WHILE THE ISSUE
OF DAM DESIGNS, COST, SEISMIC RESISTANCE AND VIABILITY OF A
WATANA ALTERNATIVE WAS EXAMINED IN DEPTH. HE FELT THAT OTHERWISE
TIME AND MONEY COULD BE WASTED IN PROTRACTED EXAMINATION OF
A SITE WHICH MIGHT NOT BE BASICALLY ACCEPTABLE. I SUGGESTED
THAT THE SENSITIVITY OF THE PROJECT COST VARITIONS WAS TO
BE INVESTIGATED IN BROAD OVERALL TEID1S v1ITH COST INCREHENTS
WHICH MIGHT NOT BE SPECIFICALLY LINKED WITH DAM FEATURES AND
THAT THIS WOULD SURELY PROVIDE A~ INDICATION OF THE ROUTE TO
TAKE. MOHN APPEARS TO BELIEVE THAT THE DAM ISSUE CAN BE .
ANALYSED MORE SPECIFICALLY. I OBSERVED THAT D H MACDONALD
AND J D LAWRENCE lVILL BE MEETING WITH WOODWARD CLYDE EARLY
NEXT WEEK AND WOULD ARRIVE IN ANCHORAGE WITH THE LATEST
VIEWPOINTS FROM THEM.
J G WARI\JOCK
ACRES -TORONTO
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~ANUA.RY 16/81
A'rTN: A KliCZYNSKI
CLcAR:.JJ U/J'"~Ul-u-ca"'--
SUSITNA HYDROELECTRIC PROJECT
' -
TASK 11 -:MARKETING & FINANCE
'· •J
P5700.tl
D/·1 l
SUBTASK 11 .. 01 -'!?ROJECT OVERVIEW PREPARATION AND UPDATE
WORK PROCEEDED WITHIN TASK 11 ON THE PREPARATION CHAPTERS
IN THE PROJ.ECT OVERVIEW REPORT (PRO) OF CHAPTER 12 -ANALYSIS
OF ECONOMIC FEASIBILITY AND NET ECONOMIC BENEFITS, CHAPTER 13
POWER AND ENERGY MARKETING, CHAPTER 16 FINANCIAL ANALYSIS AlJD
CHAPTER 17 SECURITY OF PROJECT CAPITAL STRUCTUREe OVERALL
EDITING AND CO-ORDINATION OF THE PRO WAS CARRIED OUT BY STAFF
ASSIGNED TO TASK 11.
SUBTASK 11.02 INTERIM REPORTS
IN CO--ORDINATION WITH TASK 6 THE INPUTS REQUIRED FOR
FINA}lCIAL ANALYSIS WERE DETERMINED AND THEN TESTED AS MODELS
ON THE SELECTED FEZIBL PROGRAM.. INITIAL TEST RUNS WERE
FOLLOWED BY A SERIES MODEL ANALYSES COVERING VARIOUS
SCHEDULES OF CAPITAL EXPENDITURES, DEBT ARRANGEMENTS AUD
OTHER FINANCIAL PARAMETERS. CONSULTATION TOOK PLACE ~\TITH
SPECIALIST ADVISORS ON FINANCIAL STRUCTURING AND RISK
ASSESSMENT AND THEIR INPUTS WERE USED IN THE HODELLING PROCESSS.
REASEARCH WAS UNDERTAKEN INTO LIKELY REGULATORY CONSTRAINTS
THAT COULD APPLY TO UTILITIES PROVIDING SUSITNA OUTPUT.
SUBTASK 11.03
DURING DECEr-1BER SOFTWARE PROGRM1S WERE SET UP AND TESTED
ON THE COMPANY'S CENTRAL FACILITIES AND WILL BE NO'VJ AVAILABLE
FOR PROCESSING THE SUSITNA PROJECT RISK ANALYSIS. INPUTS WERE
PROVIDED TO CHAPTER 9 OF THE PRO.
3 --~-:)
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§_p'BTASK 11.05
PREPARATIONS MADE TO INITIATE WORK ON THIS SUBTASK ON THE
FIRST QUARTER OF 1981. RISK CONSIDERATIONS WERE DISCUSSED
IN THE CONTENT OF THE FINANCIAL ANALYSIS DURING DECEHBER 1980 .
.
SUBTASK 11.06
THIS TASK HAS NOT YET BEEN FUNDED BUT WITH THE SELECTION OF
MANAGING UNDERWRITERS IN MID DECEMBER 1980. ACCESS IS NOW
PROVIDED TO SPECIALIST ADVICE ON THE MATTERo
SUBTASK 11.07
IN THE COURS OF PREPARATION OF CHAPTER 17 SECURITY OF PROJECT
COSTS AND REVENUES PRELIMINARY CONSIDERATION HAS BEEN GIVEN TO
RISK SHARING ARRANGEMENTS FOR THE PROJECT.
SUBTASK 11 .. 09
WITH THE APPOINTMENT BY AFA OF A MANAGING UNDERWRITERS GROUP
ACTIVITY UNDER THIS TASK BEGAN THROUGH OPENING DISCUSSIONS WITH
FIRST SOUTHW.EST TO PL.hN FOR BRIEFING HEETINGS WITH FIRST
BOSTON CORPORATION AND THEIR ASSOCIATESo
C.',
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J~CRES COLB
ACRES TOR
JANUARY 15, 1981
PROJECT OVERVIEW REPORT
ATTN: C A DEBELIUS -COLUMBIA
CC: J D LAWRENCE -BUFFALO
CHAPTER 17 BEING RETITLED ''SECURITY OF PROJECTED COST
AND REVENUE STRUCTURES'' AS ''PROJECT CAPITAL STRUCTURES''
HAS DEFINITE MEANING TO FINANCIAL COMMITTEE WHICH DOES NOT
CONFORM TO CONTENT• HAVE ADVISED R MOHN AND HE
AGREES·
G WARNOCK
ACRES
TORONTO
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ACRES TOR
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-.JANUARY 14/81 ?5700.11
ATTNz .J GILL
l SUStTNA -FOR TRANSMITTAL TO APA-R MOHN/T MCGUIRE/G MANNI
.
CONSULTANTS
APA HAVE REQUESTED US TO PROVJ DE SlATEMENTS AND/OR OPI Nl ONS
FOR CONfiULTANTS DR C B CHAPMAN AND PROFESSOR A .J MERRETT
.
BOTH EMPLOYED TO PROVIDE INPUT TO CHAPTER 11 OR RISK
ANALYSIS/FINANCIAL ANALYSIS AND FINANCIAL PLANNING/
. ~
ANALYSIS RESPECTIVELY· BOTH CHAPMAN AWD M~RRETT HAVE to
DATE PARTICIPATED DIRECTLY IN OUR TASK STUDY TEAM
PROVI Dl NG CONCEPTUAL S NPUT B01'H TO THE MOD!LLI NG APPROACHES
. -AND TO ALTERNATIVE MODES OF FINANCING• · •UNLIK~ OTHER
EXTERNAL CONSULTANTS CHAPMAN AND C'IER~ETT'WILL NOT BE
PROVIDING OVERVIEW OF OPINION SO MUCH AS ~ DIRECT'CONTRJBUTION
.
TO AND REVIEW OF OUR WORK· THESE CONTftiBUTIONS'WILl ~AINLY
BE EMBEDDED J N THE ftEPORTS AND OTMEft ELEM!:t.ITS ·OF OI:.JR TASK II -OUTPUT· AT AN ~PPROPRIATE STAGE Of THE'WORK POSSIBLY·AT THE
CONCLUSION OF THE FIRST DRAfT POR WE COULD ARRANGE rOR
. -EACH CONSULTANT TO PREPARE A FORMAL OVERVIEW tOR APA CONSIDERATION.
THE CONSULTANTS WOULD HOWEVER BE KEVIEWING WORK'TO'WHiCH THEY
.
HAD MADE A SUBSTANTIAL PERSONAL CONTRIBUTION• !N ADDITION TO
DR CHAPMAN AND PROFESSOR ~ERRETT WE HAVE EMPLOYEE H DERRICK
..
LEACH WHO IS A HIGHLY QUALIFIED FiNANCIAL ANALYST TO
FORMULATE AND ANALYSE THE MO~ELS'WE HAVE ~LREADY PROCESSED
-OEPJCTJNG SEVERAL ALTERNATIVE FINANCING PLANS FOR SUSITNA• .
MR LEACH IS CO-AUTKO~ WtTH ME Gr ~UCK OF TKE INPUT fOR
CHAPTER 13, 16 AND 1''7 NOW DU! fOR TABLING ON JANl:JAftY'20
. .
FOR o 1 scuss 1 oN w 1 TK i\Pf\ P 511 oPt· Te • ·• ssuE ··aN· FJ ttAt. • t>AAFT · reRM.
DERRICK LEACH ANB IF FELT D!:SiftA!JLE PJtOF£!SOft TONT.PIERR£TT
'
CAN BE AVAILABLE FOR LATER DISCUSSIONS WITH APA·AND fiNANCIAl~
ADVISORS AND 1 WOULD R£COM~END THAT TMEift KNOWLEDGE AND
..
EXPERIENCE BE BROUGHT TO BEAR STRONGLY IN TKlS F'ASHI ON.
IN ORDER TO IDENTIFY ALL EXTERNAL INPtlTS AT THIS TiME WE
ADVISE THAi FEZ I BL PROGRAM BEl NG t:JS!:D AS BAS IS F'OR f'INANC 1 AL
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MODELS IS BEING ADAPTED• INPUTT~D ~ND ANALYSED ~OR ~5 MARGARET
WALTON OF KEEPING AND WALTON ASSOC!ATES~ COMPUTER AIDED
,
F'lNANCIAL ANALYSIS SPECIALISTS• SAMPLE PROGRAMS OUTPUT WILL.
BE 7ABL.ED ON JANUARY 20TH 1981• TRUST THAT THts·TELEX WILL
FILL N~ED FOR PROMPT ADVIC'E TO QUERIES RAISED INITIALLY ..
FROM Gl.O~IA MANNI'S REV~EW OF ACRES INVOICES~ 'IUL.l. BE
' PLEASED TO SUPPLY ANY FURTHER JNFORMATJGN nEQUlRED·
J G WARNOCK
ACRES CONSULTING.
TORONTO
2ND i£l.EX
---~-----
OPERATOR ..
COULD YOU PLE~SE ASK MR GILL'S SECRETARY iO BOOK RESERVATIONS
AT THE SH&RATON ANCHORAGE HOTEL FOR MR• J G WARNOCK FOR
THE ~JtES OF' JANUARY 19~ 201 AND 21·
WOULD APPRECIATE IT iF MR GILL'S SECRETARY COULD CONFIRM
THIS WITH MR WARNOCK'S SECRETAHY iN TORONTO -DALE NOLAN
THANKS
•
ACRES MiG
ACRES TOR
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J d fli.t1u . 1i JANUARY 13.9 1 981
v
TO: J. G. WARNOCK
AS YOU HAVE. k£QUE.STED, I Ht-1VE OBTAINED COt\TRACTS FOR SALE OF POt.._!£~
fkui'l iYlAJOH UTILITIES. THERE IS t\:0 CONTRACT BETWEEN CHUGACH At\D
ANCHORAGE MUNICIPAL LIGHT F POWER. THEIR INTEqTIE IS ONLY GOOn
FDK ABOUT 30 KVA AND CHUGACH HAS RELAYS SET TO DISCDNt\ECT IF A
rrlEQUENCY DEPARTURE IS DETECTED.
NOT Kt-.:OWING MUCH A50U1' RATE.S P TARRIFS.-I JUST WSNT DOWr\ TO Tf-\t: L·Jr.AL
~SLIC UTILITIES COM~ISSION AND GOT COPIES OF EVERYTHlr\G THAT TH~Y
r.h D 0!\: RAIL BE.L T ELECTRIC UTILITY RATES. I GOT ~ECQT-~ DS FOR CEt,, At\iLrP
AND GVEA.
..
ALL MATERIALS AR~ ENROUTE AND SHOULD ARRIVC BY ~EXT MOr\DAY. I
.
A:'-1 SENDING THF..i"l TO BUFFALO AND THENCE TO TORONTO VI A COURRI !:~.
IF MORE IS NEEDED, LfT ME KNOW.
Jli'1 LAND:-.U:\N
))))).+
, . .
l.i-~~ ? f t • . --OFFICE MEMORANDUM • John Hayden Date: January 8, 1981
Ffle: P5700.07.06
~ .. 1: Phil Hoover/Mary Ann Hosko cc: C. Debelius
J~ lawrence ~G. Warnock · -:JECT: SUSITNA PROJECT
GENERATION PLANNING OUTPUTS
Attached are 3 page summaries of model runs on 4 plans:
A -All Thermal LG11
B -Watana/DC LG19
C -DC/Watana LG15
D ~ Chacachamna/DC LG17
Also attached are summary calculation sheets which include PW 1982
benefits and B/C ratios (calculated in the manner as before). Key parameters used in these runs:
1 -Wat/DC costs $5174 in 82 dollars (IDC added to this
figure, $57M held out for extra capacity)
2 -Medium load forecast, Battelle 12/21/81
3 -Ebasco capital costs for thermal
4 -O&M and capital costs escalated as per Ebasco/Battelle
5 -Fuel cost! as Battelle provided, coal escalated at 2.6
and 1.21& as reported by S. Diener from 1/4/82 meeting
, 6 -Chacachamna Case B @ $1.45 Mill ion as per Bechtel
7 -Energies as ~rovided l/5/82 for Devil Canyon ~and
12/22/81 Watana/Devil Canyon
We are presuming these to be the base cases and will proces~ to test
sensitivity and make financial parameter run post-haste. Initial
sensitivity runs \!Jill be on high and low forecasts.
The DC/Wat resu1ts are interesting. Costs are less for first 9 years,
however, carrying the installed capacity burden of extra GT plants ·
during the post-Watana period, puts Wat/DC in the more favorable .light.
This would indicate that Watana would need to be moved up (paying a
penalty in excess unusable energy, o~ that some other measure would
need to b2 taken. You have also mentioned the ,energy -description.._ at
DC \tJhile Wat is filling. This has ·not been taken into account. 'L,\·~\"',.:...-..,..,.,
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PH/kh Phill Hoover
Attachments
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ALASKA RAILBELT
ZERO/. -37.
JOB NUMBER 2MLG17 01/07/82
****************************************
GENERAT~ON ·sYSTEM
NUKE COAL NGASGT OIL GT DIESEL COMCYC TYPES
TYPE 1 2 3 4 S 6 7-10
OPTMZING 0 1993 1993 0 0 1993 ***
PGT TRIM. 0 0 0 0 0 0
1992 MW 0 59 452 141 67 317 155 SUM= 1190
******************************~**************************************** TOTAL
CAF'AB.
YR Y ~ A R L Y H W A D D I T I 0 N S + TIES ** ******* ******* ******* ******* ******* ******* ***** ****** **** 9~ 330* 1503
94 1472
95 1424
96 1354
97 600* 1880
98 1825
99 1825
0 1* 1782
1 1X 70 1852
2 1X 70 1869
3 200* 2016
4 2016
5 2X 70 1* 2069
C 6 1X 70 2116 a 7 2116
8 1X 70 2160
9 2159
• 10 1X 200 1* 2360
********************************************************************** ********************************************************************** I w !DD 0 400 420 0 0 0 933 SUM= 1753
RET 0 -46 -335 -141 -61 0 0 SUM= -583 ****** ****** ****** ****** ****** ****** ****** **** *********** 2010 0 413 536 0 6 317 1088 SUM= 2360
PCT TOT O. 17.5 22.7 O. 0.2 13.4 46.1 SUM=lOO F'CT
***********************************~*********************************** AUTO 0 200 420 0 0 0 0 SUM= 620
PCT TOT Oe 32.3 67.7 O. o~ O, O. SUM=100 PCT
) * COMMITTEI~ MW
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OGF'.-5 GENERATION PLANNING PROGRAM-SUMMARY OUTPUT
************************************************
ALASKA RAILBELT
ZERO/. -3/.
JOB NUMBER 2MLG17 01/07/82
****************************************
TOTAL CAPABILITY
<INCLUIIING TIES> LOSS OF LOAD COST IN
YEAR TIME OF PCT. PROBABILITY YEARLY YEAR LOAD EN!l PEAK RES. DIY H/Y COST :;:*** ***** ***** ***** **** ****** ****=~* ******* 1993 947 1503 1503 58.7 o.ooo o. 166.1 • 1994 965 1472 1472 5? e.· o.ooo o. 172.2 _ . ..,
·: 995 983 1424 1424 44.9 0.002 o. 179.4 1996 1003 1354 1354 35.0 0.019 o. 210.0 1997 1023 1880 1880 83.8 0.001 o. 273.9 1998 1044 1825 1825 74.8. 0.009 o. 279.1 1999 1064 '1825 1825 71.5 0.014 o. 284.9 2000 1084 1782 1782 64.4 0.061 o. 293.0 2001 1121 1852 1852 65.2 0.026 o. 306.6 2002. 1158 1869 1869 61.4 0.038 o. 319.7
li 2003 1196 2016 2016 68.6 0.036 o. 362.0 -2004 1233 2016 2016 63.5 0.061 o. 374.4 2005 1270 2069 2069 62.9 0.044 o. 384.6 2006 1323 2116 2116 60.0 0.042 o. 405.7 2007 1377 2116 2116 53.7 0.095 ·0. 425.2 2008 1430 2160 2160 51.0 0.085 o. 449.2
2009 1484 2159 2159 45.5 0.070 o. 461.8
2010 1537 2360 2360 53.5 0.029 o. 479.6
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MILLION $
CUM. PW
TOTAL
******* 120.0
240. e:
363.0
501.8
677. ~.,
851.5
1023.9
1196.0
1370.8
1547.9
1742.5
1937.9
2132.8
2332.3
2535.4
2743.7
2951.6
3161.2 r
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AkASKA RAILBELT
ZERO% -3/.
JOB NUMBER 2MLG17 01/07/82
****************************************
POOL TOTAL TOTAL YEARLY $/MWH PEAK ENERGY LOA II COSTS ********************************** YR <MW> <GWH> FACTOR 01IL.$) INV. FUEL O+M N.I; TOTAL ** ****** ******* ****** ****** ***** ***** ***** ***** ****** 93 947 4736 57.09 166 14.89 16.01 4.18 o. 35.08 94 965 4829. 57,13 172 14.61 16.84 4.22 o. 35.67 95 983 4922 57.16 179 14.33 17*83 4.29 o. 36.45 96 1003 5031 57.10 210 14.02 23.38 4.33 o. 41.73 97 1023 5140 57.35 274 36.29 12.61 4.39 o. 53.29 98 1044 5250 57.41 279 35.53 13.24 4.40 o. 53.16 99 1064 5360 57.51 285 34.80 13.92 4.44 o. 53.16 0 1084 5468 57.43 293 34.11 15.02 4.45 o. 53.58 ,,, 1 1121 5661 57.65 307 33.55 16.06 4.54 o. 54.15 2 1158 5853 57.70 320 33.04 16.99 4.60 o. 54.63
I 3 1196 6044 57.69 362 40.89 14.06 4.94 o. 59.90 '
' 4 1233 6236 57.58 374 39.63 15.42 4.99 o. 60.04 5 1270 6429 57.78 385 39.60 15.26 4.98 o. 59.84 6 1323 6701 57.82 406 38.54 16.94 5.06 o. 60.54
r
7 1377 6973 57.81 425 37.04 18.80 5.14 o. 60.97 8 1430 7246 57.69 449 36.18 20.58 5.24 o. 62.00 9 1484 7518 57.83 462 34.87 21.33 5.22 o. 8'1,.42
f
10 1537 7791 57.86 480 38.91 17.20 5.46 o. 61.56
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ALASKA RAILBELT
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JOB NUMBER 2MLG11 01/07/82
****************************************
GENERATION SYSTEM
NUKE COAL NGASGT OIL GT DIESEL COMCYC TYPES
TYPE 1 2 3 4 5 6 7-10
OPTMZING 0 1993 1993 0 0 1993 ***
PCT TRIM 0 0 0 0 0 0
1992 ~W 0 59 452 141 67 317 155 SUM= 1190
******************~****************************************************
YR
** 93
94
95
96
97
98
99
0
1
2
Y E A R L Y M W A D D I T I 0 N S
******* ******* ******* ******* ******* ******* ***** 200*
lX 200
1X
1X
1X
70
70
70
TOTAL
CAPAB.
i TIES
****** **** 1373
1542
1495
1624
1629
163'5
1635
1591
1661
1608
3 1X 70 1625
4 lX 70 1695
5 2X 70 1747 ~
6 lX 70 1794
7 1X 200 1994
8 1968
9 1X 70 2037
10 . 2037
**************~***~**********************************l***************** ~ *****************************i****************************************~ f ..
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HW ADD 0 800 630 0 0 0 0 SUM= 1430
MW RET 0 -46 -335 -141 '-61 0 0 SUM= -583 :\'
****** ****** ****** ****** ****** ****** ****** **~* **********~ ; 2010 0 813 746 0 6 3i7 155 SUM= 2037
PCT TOT O. 39.9 36.6 o. 0,3 15.6 . 7.6 SUM=100 PCT
*********************l***********************t*****t*'****************1
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GENERAL ELECTRIC COMPANY
OGP-5 GENERATION PLANNING PROGRAM-SUMMARY OUTPUT
************************************************
ALASKA RAILBELT
ZERO/. -3/.
JOB NUMBER 2MLG11 01/07/82
*************************************f**
YEAR
**** 1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
LOAD
***** 947
965
983
1003
1023
1044
1064
1084
1121
1158
1196
1233 -
1270
1323
1377
1430
1484
1537
TOTAL CAPABILITY
<INCLUDING TIES>
YEAR TIME OF
ENII PEAK
***** ***** 1373 1373
1542
1495
1624
1620
1635
1635
1591
1661
1608
1625
1695
1747
1794
1994
1968
2037
2037
1542
1495
1624
1620
1635
1635
1591
1661
1608
1625
1695
1747
1794
1994
1968
2037
2037
f'CT.
RES.
**** 45.0
59.8
52.0
61.9
58.4
56.6
53.6
46.8
48.2
38.9
35.9
37.$
37.6
35.6
44.8
37.6
37.3
32.5
-
4 ......
LOSS OF LOAit
PROBABILITY
It/Y H/Y
*)f:*.*** ******
0.063 o.
0.027 o.
0.077 o.
0.059 o.
0.084 o.
0.092 o.
0.055 o.
0.059 o.
0.038 o.
0.062 o.
0.087 o.
0.057 o.
0.049 Ot
0.052 o.
0.023 o.
0.066 o.
0.051 o.
0.099 o.
COST IN MILLION $
YEARLY CUM. PW
COST TOTAL
******* ******* 175.7
199.9
206.6
256.8
266.9
278.1
285.0
291.8
304.3
311.4
327.4
342.9
367.0
389.9
423.8
442.0
464.7
484.3
127.0
267.1
407.8
577.6
748.9
922.2
1094.6
1266.1
1439.6
1612.0
1788.0
··1966. 9
2152.9
2344.7
2547.1
2752.1
2961.3
3173.0
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) OGF'-5 GENERATION PLANNING PROGRAM-SUMMARY OUTPUT-
************************************************
) ALASKA RAILBELT
ZERO/. -37.
JOB NUMBER 2MLG11 01/07/82
) ****************************************
POOL TOTAL TOTAL YEARLY $/MWH
PEAK ENERGY LOA II COSTS ********************************** .J YF~ OiW) <GWH> FACTOR <MIL.$) INV. FUEL O+M N.I. TOTAL ** ****** ******* ****** ****** ***** ***** ***** ***** ****** 93 947 4736 57.09 176 9.31 23.36 4.44 o. 37.11 ) 94 965 4829 57.12 200 15.31 21 .. 39 4.68 o. 41.39 95 983 4922 57~16 207 15.02 22.22 4.72 o. 41. 7'7 9 , 1003 5031 57.10 257 22.69 23.14 5.21 o~ 51.05 . 0
97 1023 5141 57.37 267 22.82 23.85 5.25 o. 51.92 98 1044 5250 57.40 278 22.96 24.71 5.31 o. 52.98 99 1064 5360 57.51 285 22.48 25.37 5. 32· o. 53.17 J 0 1084 5469 57.44 292 22.04 26.08 5.24 o. 53.36 1 1121 5661 57.65 304 21.89 26.58 1::: '19 o. 53.76 .,Jt..:.
? , 1158 5853 57.79 311 21.17 26.82 5.21 o. 53.20 , -3 1196 6044 57.69 327 21.09 27.82 5.26 o. 54.17
' 4 1233 6236 57.58 343 21.02 28.63 5.34 o. 54.98
5 1270 6428 57.78 367 21.54 30.13 5.43 o. 57.10 l) 6 1323 6701 57.82 390 21.22 31o45 5.52 o. 58.19 7 1377 6973 57.81 424 25.93 28.97 5.88 Oo 60.78
8 1430 7246 57.69 442 24.95 30.15 5.90 o. 60.99 9 1484 7518 57.83 465 24.58 31.25 5.98 o. 61.81 10 1537 7791 57.86 484 23.72 32.41 6.04 o. 62.17
)
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-
************************************************
ALASKA RAILBELT
ZERO% -·:!X
JOB NUMBER 2MLG19 01/07/82
****************************************
GENERATION. SYSTEM
NUKE COAL NGASGT OIL GT DIESEL COMCYC TYPES
TYPE 1 2 3 4 5 6 7-10
OPTMZING 0 1993 1993 0 0 1993 ***
PCT TRIM 0 0 0 0 0 0
1992 MW 0 59 452 141 67 317 155 SUM= 1190
***********************************************************************
TOTAL
CAPAB. YR Y E A R L Y H W A D D I T I 0 N S + TIES
** ******* ******* ******* ******* ******* ******* ***** ****** ****
93 680* 1853
94 1822
95 1774
96 .1704
97 1630
98 1575
99 1575
0 1531
1 1531 2
601* 2079
3 2026
4 1* 2027
5 1939
6 1* 1917
7 !X 70 1987
8 1X 70 1* 2032
9 2031
10 1X 70 1* 2102
*********************************************************************** *********************************************************************** MW ADD 0 0 210 0 0 0 1285 SUM= 1495
MW RET 0 -46 -335 -141 -61 0 0 SUM= -583
****** ****** ****** ****** ****** ****** ****** **** *********** 2010 0 13 326 0 6 317 1440 SUM= 2102
PCT TOT O. 0.6 15.5 , o. 0.3 15.1 68.5 SUM=lOO PCT
*********************************************************************** AUTO 0 0 210 . 0 0 0 0 SUM= 210
PCT TOT 0. 0. 100.0 O. O. O. 0. SUM=lOO PCT
* COMMITTED MW
-'
--~
·--;
.•
GENERAL ELECTRIC COMPANY
OGP-5 GENERATION PLANNING PROGRAM-SUMMARY OUTPUT
************************************************
ALASKA RAILBELT
ZERO% -3X
JOB NUMBER 2MLG19 01/07/82
****************************************
YEAR
**** 1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
LOAD
***** 947
965
983
100.3
1023'
1041;
1064
1084
1121
1158
1196
1233
1270
1323
1377
1430
1484
1537
TOTAL CAPAB-ILITY
<INCLUDING TIES:1
YEAR
END
***** 1853
1822
1774
1704
1630
1575
1575
1531
1531
2079
2026
2027
1939
1917
1987
2032
2031
2102
TIME OF
PEAK
***** 1853
1822
1774
1704
1630
1575
1575
1531
1531
2079
2026
2027
1939
1917
1987
2032
;!031
2102
"-·--~ ,.,.... ·-· ~--·-· """" . ~.-~ ........ ~ ..... ~··"~ .... -~--........ ~·~·-,,
PCT.
RES.
**** 95.7
88o8
8095
69.9
59.4
5068
48.0
41.2
36.6
79.5
69.4
64.4
52.7
44~9
44.3
42.1
36.9
36.8
LOSS OF LOAD
PROBABILITY
It/Y H/Y
****** ****** o.ooo o.
o.ooo o.
o.ooo o.
o.ooo o.
o.ooo o.
0.001 o.
0.002 o.
0.015 o ..
0.032 o.
o.ooo o.
0.001 o.
0.001 o.
0.017 o.
0.068 o.
0.025 o.
0.029 o.
0.050 o.
0.025 o.
COST IN MILLION $
YEARLY CUM. PW
COST TDTA,L
******* ******* 246.5 178.1
252.8
255.9
268.4
?7''.) 5 --· 277.9
283.7
292.6
302.2
316~9
336.1
317.6
334.6
322.7
349.0
349.3
369.8
375.9
355.4
529.7
707.1
882.1
1055.2
12261.9
1398.7
1571.1 .
1746.6
1927.2
2093.0
2262.5
2421f3
2587.9
2749.9
2916.4
3080.7
d f
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GENERAl ELECTRIC COMPANY
OGP-5 GENERAtiON PLANNING PROGRAM-SUMMARY OUTPUT . . ************************************************ ·-1
A~ASKA RAILBELT
0 ZERO% -3/.
JOB NUMBER 2MLG19 01/07/82
***********************~****************
J. . ' POOL TOTAL TOTAL YEARLY $/MWH ...
PEAK ENERGY LOAD COSTS ********************************** YR <MW> <GWH> FACTOR <MIL.$) INV* FUEL O+M N.I. TOTAL 0 ** ****** ******* ****** ****** ***** ***** ***** ***** ****** 93 947 4736 57.09 247 42.05 5.29 4.71 o~ 52.06 94 965 4829 57.12 253 41.24 6.37 4.74 o. 52.35 95 983 4922 57.16 256 40.46 6.77 4.75 o. 51.98 96 1003 5031 57.10 268 39.59 9.05 4.72 o. 53.36
~ 97 1023 5141 57.37 273 38. 'i4 9.57 4.70 o. 53.01 98 1044 5250 57.41 278 37 •':)4 10.29 4.71 o. 52.94 99 1064 5360 57.51 284 37.16 11.02 4.75 o. 52.93 0 1084 5469 57.44 293 36.42 12.31 4.76 o. 53.49 :, 1 1121 ~o1 57.65 302 35.18 13 .. 41 4.80 o. 53.39 2 1158 52\ 62.61 317 46.28 o. 3.61 o. 49.90 .. 3 1196 I 6455 )61.61 336 45.54 2.83 J.7o o. 52.06 ' 4 1233 \ 6599 60.92 318 44.55 o. 3.58 o. 48.14 5 1270 6698/ 60.21 335 43.89 2.49 3.58 o. 49 ~' 96
~ 6 1323 ~{1 59.36 323 42.73 0.70 3.47 o. 46.90 7 1377 7079 58.69 349 42.07 3.62 3.61 o. 4'l.29 8 1430 7310 58.20 349 41.27 2.95 3.56 o. 47.78 9 1484 7551 58.08 370 39.96 5.39 3.63 o. 48.98 10 1537 7827 58v14 376 39.07 5.33 3.63 o. 48.02
,
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OGP-5 GENERATION PLANNING PROGRAM-SUMMARY OUTPUT
******************************~*****************
ALASKA RAILBELT
ZEROX -3/.
JOB NUMBER 2MLG15 01/07/82
****************************************
GENERATION SYSTEM
NUKE COAL NGASGT OIL GT DIESEL COMCYC
TYPE 1 2 3 4 5 6
OPTMZING 0 0 1993 0 0 0
TYPES
7-10
*** PCT TRIM 0 0 0 0 0 0
1992 MW 0 59 452 141 67 317 155 SUM= 1190 ******************************************************~****************
YR
** 93
94
95
96
97
98
99
0
1
2
TOTAL
CAPAB. Y E A R L Y M W A D D I T I 0 N S t TIES
******* ******* ******* ******* ******* ******* ***** ****** ****
600* 1773
lX
1X
1X
1X
lX
70
70
70
70
70
1742
1694
1694
1690
1706
1706
1732
1802
680* 2429
3 2376
4 1* 2377
5 2289
6 1* 2267
. 7 2267
8 1* 2242
9 2241
10 1* 2242
**************************************************•******************** *********************************************************************** MW ADD 0 0 350 0 0 0 1285 SUM= 1635
MW RET 0 -46 -335 -141 -61 0 0 SUM= -583
****** ****** ****** ****** ****** ****** ****** **** *********** 2010 0 13 466 0 6 317 1440 SUM= 2242
PCT TOT O. 0.6 20.8 · 0. 0.2 14.1 64.2 SUM=100 PCT
*********************************************************************** AUTO 0 0 350 · 0 0 0 0 SUM= 350
f'CT TOT 0. O. 100.0 O. O. O. O. SUM=100 F'CT
* COMMITTED MW
-
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0
0
0
0
0
0
0
0
. ... . .
~~
\
\,, __ \
GENERAL ELECTRIC COMPANY
DGP-5 GENERATION PLANNING PROGRAM-SUMMARY OUTPUT
************************************************
ALASKA RAil-BELT
ZEROX -3/.
JOB NUMBER 2MLG15 01/07/82
****************************************
YEAR
**** 1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
LOA I,)
***** 947
965
983
1003
1023
1044
1064
1084
1 1 ?1" .......
1158
1196
1233
1270
1323
1377
1430
1484
1537
~
TOTAL CAP~BILITY
<INCLUil!NG TIES>
YEAR
EtlD
***** 1773
1742
1694
1694
1690
1706
1706
1732
1802
2429
2376
2377
2289
2267
2267
2242
2241
2242
TIME OF
PEAK
***** 1773
1742
1694
1694
1690
1706
1706
1732
1802
2429
2376
2377
2289
2267
2267
2242
2241
2242
F'CT.
RES.
**** 87.2
80.5
72 t'4~
68.9
~5.2
63.4
60.3
59~8
60o7
109.8
98~7
92.8
80o3
71.4
64.6
. 56~ 8
51.0
45.9
-
LOSS OF LOAII
PROBABILITY
DIY H/Y
****** ****** 0.001 o.
·0.004 o.
0.019 o.
0.029 o.
0.04B 0.
0.062 o.
·o.o9o o ..
0.078 o.
0.039 o.
o.ooo o.
o.ooo o.
o.ooo o.
o.ooo o.
o.ooo o.
o.ooo o.
o.ooo o.
o.ooo o.
0.001 o ..
COST IN
YEARLY
COST
******* 199.4
204.6
211.0
241.5
252.8
262.9
271.0
290.4
304.8
354.4
373.8
355.2
371.9
360.3
382.4
380.9
403.7
403.6
,
MILLION $
CUM. F'W
TOTAL
******* 144.0
287.6
431.3
591.0
753.2
917.1
1081.0
1251.6
1425.5
1621.7
1822.6
2007.9
2196.4
2373.6
2556.3
2732.9
2914.6
3091.0
d -
•
f i~ GENERAL ELECTRIC COMPANY OGP-5 GENERATION PLANNING PROGRAM-SUMMARY OUTPUT
************************************************ .
ALASKA RAILBELT
Z~RO% -3/.
JOB NUMBER 2MLG15 01/07/82
****************************************
POOL TOTAL TOTAL YEARLY $/MWH PEAK ENERGY LOAD COSTS ********************************** YR <HW> <GWH> FACTOR <MIL.$) !NV. FUEL OtH N.I. TOTAL ** ****** ******* ****** ****** ***** ***** ***** ***** ****** 93 947 4736 57.09 199 22.62 14.16 5.32 o. 42.10 94 965 4829 57.12 205 22.19 14.83 5.36 o. 42.38 95 983 4922 57.16 211 21.77 15.69 5.42 o. 42.88 96 1003 5031 57.10 242 21.91 20.61 s.so o. 48.01 97 1023 5141 57.37 253 22.05 21.53 5.59 o. 49.17 98 1044 5250 57.41 263 22.20 22.21 5.67 o. 50.08 99 1064 5360 57.51 271 21.75 23.06 5.75 o. 50.56 0 1084 5469 57.43 290 21.93 25.26 5.93 o. 53.11 1 11.21 5661 57.65 305 21.78 26.03 6.02 o. 53.84 2 1158 6351 62.60 3·54 51.97 o. 3.83 0 •. 55.81 3 1196 6454 61.60 374 51.14 2i85 3.92 o. 57.91 4 1233 65~8 60.91 355 50.03 o. 3.80 o .. 53.83 5 1270 6697 60.20 372 49.28 2.45 3.80 o. 55.53 6 1323 6879 59t35 360 47.98 0.70 3.69 o. 52.37 7 1377 7079 58.69 382 46.62 3.62 3.78 o. 54c-02 8 1430 7310 58.20 381 45.15 3.25 3.70 o. 52&11 9 1484 7551 58.08 404 43.71 5.96 3.78 o. 53.46 10 1537 7827 58.13 404 42.17 5.67 3.73 o. 51.56
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ACRES CQh1SULTI~!r~
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OFFICE MEMORANDUM
•
Krish Krishan
FROM: Chris Chapman
Date:
File:
.cc:
Q,
January 6, 1981
P5700~~
07· 'I
! !
-SUBJECT: _ SUSITNA HYDROELECTRIC
DEVELOPMENT
, I
Gavin has reviewed and amended the enclosed draft as an
outline of tte section 9.29 and 9.3.5 requested. Please
feel free to further command them as you see fit, just
,let me know j f any substan·tial departures in philosphy
are involved.
The chapter sections should be reviewed·by John Hayden
and John Lawrence to ensure that they fit the overall
pattern of ~he technical portions of the Project
Overview Report.
CC:dn
Attachment
-
~
\]
i
, I
... Suhtask 11.01
9
9.2
9.2.9
Project Overview
Susitna Hydroelectric Development
The Selected Development
Analysis of Risks and Assesment of
Project Contingencies
(; .. ··· .
Utility risk an~lysis must demonstrate that the selected
approach to Susitna Hydroelectric Development can be
implemented without excessive risk exposure for any of the
parties involved. If any party is excessively exposed to
risk, the project is unlikely to proceed. However, the
present risk analysis effort in the context of this
chapter is only indirectly concerned with this issue. It
is primarily concenred with assisting the development of
a selected approach.
Assisting with the development of a selected approach
involves ensuring that all potential sources of significant
risk have been identified, and associated with viable
responses, a contingency or preventative nature. If viable
responses cannot be identified, the approach must be
modified or replaced.
Risks of a technical nature have been identified. For
example, the selected design for the Devil Canyon dam may
not stand up to further tests of adequacy in relation to
seismic effect. Realization of this risk would require
a change. in design, implying new cost and schedule estimates.
Current recognition of this risk requires cost estimate
contingency provisions. Other risks of this kind include
unforeseen foundation problems (unstable bedrock, permafrost, .
etc.) discovered prior to construction or during the
initial construction phases, unexpected flooding conditions,
-
•
' I
,:: .,
- 2 -
unusually inclement weather, unexpected rivers icing
conditions, and so on. Al~ such sources of rimk will
involve technical'responses if they are realized, and current
recognition of such risks requires cost estimate contingency
provisions. Some pf these contingency provisions must be
included in the expected expenditures. The residual involves
potential variations about the expected level, which must be
anticipated even if they are not expected.
As the study proceeds, and selected approach details
become available, these sources of risk, associat£J technical
responses, and associated contingency cost provisions, will
all be defined in greater detail. To facilitate this ongoing
process, procedures developed by Acres will be used to build
up structural documentation, as outlined in the POS
(February 1980) task 11.04, revised to lle03, Base Plan Risk
Analysis. This documentation will form the basis of the
ultimate demonstration of project robustness. To date the
emphasis has been signalling, as necessary, the need to
consider revisions in the selected approach. No major
sources of serious technical risk have been detected, but
in the absence of detailed analysis, substantial contingency
cost provisions will have been made.
Not all risks relevant to the selected approach are
technical. F0r example, the risk of providing capacity
before it is needed is an economic consideration, but it
has technical implications. We have recognized that
responding to this risk may~necessitate an approach
which will prove inefficient in a technical sense if this .
risk"is not realized, because it is efficient in an
overall sense at the time the decision must be made.
------------~---·· ----------~--------.--:1 -
~
:.~
.. ..
i
,
f l
- 3 -
Developing Devils Canyon prior to the Watana site may be.
attractive provided both sites are needed by 20Q5, but Watana
on its own may prove preferrable if the second phase is
delayed significantly. The need to mitigate the effects
of a low load growth profile may make a Watana first
approach preferrable~even if it is not the most efficient
approach given the expected load growth profile. Responding
in this way to financial or regulatory risks is also a
possibility. At this stage we are endeavouring to avoid
such pressures as far as possible. Risk analysis 1s
economic and financial contexts (see Chapters 12, 13, 15,
16, 17) is primarily concerned with responses which
minimize the impact on the project•s efficiency in a
technical sense. However, we are sensitive to the need to
relate such considerations to the development of a selected
hydroelectric project development.
-~--·-----·------•·1.
,-~.::,' .
l C &W
•
,J
9.3
9 .. 3.5
Review of Transmission Development Plan
Analysis of Risk and Assessment of Project
Contingencies
The approach to and considerations of risk analysis for
transmission development planning are similar to those
discussed in section 9.2.9. However, at present the
transmission facilities have received limited attention,
in line with their relative significance to other Susitna
Hydroelectric Development considerations.
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FROM:
SUBJECT:
(
OFFICE MEMORANDUM
. Memo to File Date: January 5, 1981
File:
J G Warnock cc:
SUSITNA
HYDROELECTRIC PROJECT
•
This memo records the thoughts emerging after discussions
with APA November/December 1980 and introduces these to
a possible concept £or financial analysis.
Concerning options for financing:-
1) State funds might well provide equity (and
possibly some debt) financing from the
2)
general obligation funds. (It is noted
that, ~t present, the permanent fund cannot
invest in such P+oject activity and is limited
to investment in commercial paper where it
earns about 11 1/2%).
State could undertake to finance the
construction of the major dam (Watana) at a
cost of say $16M and provide the dam to APA
under a first mortgage arrangement whereby.
-repayment schedule would be linked to
differential in cost between the cost
of service from the remaining portions
of the power development and some
proportion of the next lowest cost of
power supply (e.g. coal fired generation).
-APA might finance the "capacity" and State
the "energy". Energy might then escalate
in cost in linkage (or near so) vli th other
energy forms with capacity staying firm.
In this way the State -not APA -would
shoulder responsibility for escalation in
cost ..
-··-··--·-···----···--··-·-··-.... --~---:1 ,,,
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Memo to File-2 January 5, 1981
P5700.11
Note
-capacity installed could possibly be trimmed
back to be closer to market needs yet -
without the cost bux:den of the dam -be
economic and financially feasible.
-lead into a convenient split tariff funding
and form of power contract with utilities.
3) Possibility exists where debt service costs
could be capitalised during early years of
operation on some mortgage arrangement under
which the asset value~of the State owned
dam could be enhanced for a few years before
repayment commences. (i.e. deferred interest
rolled-in to capital ·cost of project).
4) State recognition that, for the initial years
debt service will be held back in return for
an increased return in later years and
possibly some balloon payment a.t time oil
revenues diminish.
5) Provides better opportunity for some variable
interest rate approach with linkage to some
appropriate index.
Certain of these options are now being examined in
·\:1.
ea.rly runs of the fina.ncial analysis study. In particular
variation 2 is being considered on the basis of:-
1) Sequenc_-Watana 800 MW 1997
Devil Canyon 600 MW 2005
2) State creates Susitna Basin Authority (SBA)
as adjunct to APA.
3) SBA creates Susitna Basin Fund $500M set
aside in 198l~and supplemented during construction perlod.
4) SBA takes responsibility .for funding
construction of Watana Dam only.
·-·---~----~---·-····-.............. ---~~-··--·····-----..... , ··-l
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Memo to Fil.e-3 January 5, 1981
P5700.11
5) APA takes responsibility for all other
· installations and for establishing "cost
of power" less "cost of dam".
6) SBA receives from APA a royality in perpetuity
for the provision of the head waters and water
rights at a rate.of starting in 1977 at-
Alternative I
a) Cost of power from
next lowest
alternative x 90%
minus
b) Cost of power
for other power
facilities (less
dam)
and then continuing to escalate ai-general inflation
rate.
Alternative II
Notes
Royalty starting at 1/2% of revenues and gradually
increasing to maximum of 8% of revenues and then
continuing at a steady rate of 8% of revenues "in
perpetuity" •
7) Susitna outp~ts marketed at a level of 6(a)
8) In selected year, say 2007, Susitna energy
costs frozen and then (:J) continue at that
1evel or option (ii) escalate at a rate
less than the general inflation level.
9) Possibly remaining open for APA to acquire
water rights from State on terms judged
for best State and electricity consumers
in say 3045 when original 1981 investment
has adequately proved its "~orth by
tr~~sferring beneficial investment in the
"oil plenty" years to a period when oil
revenues may be depleted.
1)
2)
$900M selected as a notional cost of Watana
Dam.
Schedule of expenditures on construction
site as attachment ·1 •
... , W$4 4
:
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Memo to File-4. January 5, 1981
P5700.11
3) Cost of power on system at time that
Susitna delivery begins determinen
by escalating a 1980 base energy cost
4)
5)
of 45 mills/Kwhr at a rate of 7%(gen ESC)
+ 3% (fuel cost increment).
Funding from Susitna Basin Fund can be
employed to general optimisation of
overall proj eci: th1.·ough application to
early construction costs of non dam
facilities with later recovery from
senior debt financing and application to
later stages of dam constructiono
Susitna Basin Fund investment treated as
subordinate debt (equivalent in seniority
to equity).
6) Use of Susitna Basin Fund and bank
financing used to delay need for senior
7)
JGW:dn
debt draw downs and to shorten Gi.gnificantly
the term of 1st mortgage bond issue.
In order to identify Watana as a viable
investment on its own under these
conditions analysis to consider it
separately from Devil C~nyon where financing
might benefit from Watana cash flow.
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1\l,/\:H\1\ I'U\-JHH AU'l'lJUlU.'l'Y
SUSITNA HYDROELECTRIC PROJECT
Financing
Scheme
l.State
provides
5% Debt
10% Third
Party Debt
Equity
Amount Source
Nune
Consider·-
ation
~· "'~~·
~ ~
SUl-1.\fARY
ANALYSIS OF ·FINANCING SCHEMES
Equity
Requirements
Lenders Requirements (Third Party)_
Compl. Guar. Supp. Cont. Co·~rer Cover
Req. Avail. Req. Avail. Req. Avail.
Yes No Yes ? 1..25 ?.
••
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Viability Li'lni'ts
Interest Cap. Demand Overall
Cost AssesBment ...;,_-----~_,. .. __ _
10% 10%
in money terms
General Comment -Financial viability is marginal to increase in interest rates, capital cost or demand shortfalls.
Viability would also require a completion guarantee
-------------------------------------------------·--------------------------------------------------------------------------------
2.State
funds
Watana
+lO% Thir'd
Party Debt None
General Comment
Yes No Yes ? 1. 25
Financial viability still marginal to interest rates, capital cost, etc.
Completion Guarantees less in scale but still necessary
?
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"
" ALASKA PO\VER AUTHORITY
SUSITNP·. 'YDROELECTRIC PROJECT ,(;,;~ ~
Financing
Schemes Amount
3.Royalty Cost
ResJ.a:uai Debt
FJ.nancJ.ng
(State
Supplies
Cost DeEt,
EquJ.ty &
Guaranteesj
General Comment
Equity Consider-
Source ation
*Cumrnula-
State tive
Residual
Royalty
giving a
Risk Rate
of Return
SUMMARY -(cont'd)
ANALYSIS OF FINANCING SCHE1.ft;S
Equity
Requirements
Assurances
on upper
limit to
costs in
real terms
Lenders Requirements (Third Part~
Compi. Guar. Supp. Cont. Cover Cover
Req. Avail. Req. Avail. Reg. Avail •
Yes Yes Yes ? 1.25 Yes
Viability Limits
Interest Cap. Demand Overall
Cost Assessment
% in real terms
The cummulative residual royalty would be first charge on profits after interest + debt repayment A problem would be to agree the Risk Rate of Return.
----------------------------·-----------------------------------------------------------------------------------------------------
4.Residual
Renewal
FJ.nancJ.ng
(State
Supplies Cost
Debt, EquJ.ty
& Guarantees)
Cost
Debt
General Comment
State Corres-
ponding %
of
Residuals
Assurances
on upper
limit to
costs in
real terms
Yes Yes Yes ? 1. 25 Yes - % in real terms
Financial viability is ensured as long as project is economical~ viable. Higher interest rates or
capital cost resulting from inflation should long terms be more than self comeensating in their effect
on economic viability. By conferring a corresponding proportion of the long term value of the
project we would establish a trade off between State provision of finance and residual rights in the project.
State of Alaska would, however, need to be assured that i : was assuming a determinate risk in real terms (real i·ncreases
in costs would not necessarily be self compensating) by having well attested assurances as to project's range of real cauital cost.
...
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' ·--~ --~ -' --~~'" .... ·····-· -··-··~-.. -"""":'"',.....,..,~·~
... ~
ALASKA POWER AUTHORITY
SUSITNA HYDROELECTRIC PROJECT
Notes
*Cummulative Residual Royalty would be paying off all State contribution by a royalty calculated on expected sales to
recover the contribution with the risk rate of return (18-20%) with carried forward shortfall at this risk rate of return.
The risk rate of return could be escalated at the margin depending on degree by which the real cost exceeds the
forecast level, e.g. the basic return on forecas·t real cost might be 16% but with 20% on any real overrun on grounds
that the overrun is a higher risk.
( . ••
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FROM:
SUBJECT:
l
OFFICE MEMORANDUM.
Memo to Fil~
J G Wa:cnock
SUSITNA
Date:
File:
cc:
December 31, 1980
D Leach
S Diener
C A Debelius
Extract from Alaska Power Administration evaluation of
Susitna made in 1978 provides.following data:
-Based on Watana
Devil Canyon
Transmission
Total investment incl udi.ng
$1.43 bn capital cost
$0.67 bn capital cost
$0.34 bn capital cost
I.D.C. (incl. transmission) $3~33 bn
-7 1/2% interest rate
-Mill rates
(based on 5%
escalation 1978
to project
commissioning
date)
1978
1985
1990
1994
2000
7 1/2%
4.7 c/Kwhr
6.2
8.2
9.7 Project commissioned
9.8 (possibly allowing only
for modest increase in
operating cost during
first 6 years of
operation)
The relevant report is being returned from Buffalo to
S Diener together. '· ·~ ~ "-. ~~')
JGW:dn
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ACRES AHG
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ACRES TOR
DECEMBER 31~ 1980 P5700. 11
ATTN: J LANDi,1AN
R l-~. -· SUSiTNA TASK 11
WE REQUIRE ANY AVAILABLE INFORMATION ON POWER CO~TRACTS
UNOER WHICH ELECTRICITY SUPPLY IS PROVIDED qy AL4SKA POW~R
ADt•q Nl STRATI ON FRC1tfr EKLUTI\IA TO Af\1L + P AND C'THI:.:RS OR FROl·~
SNETTISHAM OPERATED BY USAC TO CONSU~ING UTILITlES INS·~·
4LS0 INTERESTED IN POWER CONTRACT ARRANGEMENTS WHICH ~AY EXIST
RETl-JEEI'J CHUGACfta A~H'l ANCHORAGF i',.1UNICIPALITY OR COVERING ANY
SIGNIFICANT OTHER SUPPLY/PURCHASE ARRANGlMENTS· SUGGEST YOU
CHECK AVAILABILITY OF INFOR~ATION FRO~ PUBLIC UTILITI~S
C0MMISSI0N AND/OR ALASKA POWER AUTHORITY AND ADMINISTRATION.
vJC•ULD APPRECIATE HIGHLIGHTS cy TELEX FOLLO~·JE.D BY COPIES OF
'
FULL TEXT ALLOCATING 16 HOURS FROM P57Q0.11 FOR THIS EFFORT·
HAPPY NEW YEAR TO ALL ALASKA BASED STAFF·
TORONTO
+
ACRES AHC~
ACRES TOP.
-
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.114' .;
'~l
;41 '7' ')P•mt s · 1 '* 'J i'illl! trtt: rest· ~·
+
ACkES TOR
0
-:::z:;: C 0 fr> I "'(
/)~L· 37~
ACRE.S BUF'
12/~0/81J
ACRES TO~ONTO
ATTENTION: G. WA?.NOCK/5. DIENER
SUEJECT: SUSITNA HE?/SCHEDULES AND COSTS
~TA F'OR ?RtLIMINARY ESTIMATE OF' SUSITNA SCHEME SCHEDULE.
~ ,,
WATANA AT EL. 2200, 800 1'1W ONLINE 1997 <12 Y!'~S. CONST. >
DEVIL CANYON AT EL. 1450, 600 MW ONLINE 2005 CB YRS. CONST.)
<ALSO BEING CONSID£REr: ?OSSIAILITY OF ONLY INSTALLINr. 400 ~W
~.,
AT WATANA TO O?ERAT!' AT HIGHER ~T FACTOR AND/Ofi flUILPINI'>
OC.VIL CANYON 250 l'lW FIRST FOR ONLINE 1994. >
COST:
LATEST CAPITAL COSTS (1980 O>
---~'T -
t ... , ...
'<
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' ' -. '~
LATEST CAPITAL COSTS (1960 o>
WATANA 01.9 BILLION C809 MW>
DEVIL CANYON 01.0 BILLION C600 MW>
COSTS INCLUDE 20 PERCENT FOR CONTI~GENCIES AND 12 PE~CENT FO~ .· ENGINE~RING~ ADMiN• AND OWNE~S COSTS.
CASH FLOW .. GI:TEN BELOW .. ASSUMES A SYMI'IET~ICAL S-SHAPED C'ASH FLOW
DISTRIBUTION WITH A THR(E YEAR LEVEL FAYOUT PERIOD PRIOR TO MAIN
ffiuJECT CONSTRUCTION FOR ACCESS ROADS AND OTHER PRELl MI NARY 1.rJO~l<.
<IN PkEVIOUS l'lEMORANDA ACCESS ROADS COSTS WERE NOT SEPERA'rED F~ON
TOTAL COSTS. ACCESS ROADS COSTS HAVE; BEE!'~ ESTIMATED AT oo~
MILLION AND 046 NILLION FOR WATANA AND DEVU.. CANYON, RES1'ECTIVELY>.
CASH FLOW o MILLIONS
YEAR WATANA DEVIL CANYON TOTAL
1985 0 0 0
1986 32.00 0 32.00
1981 52.15 0 52.15
1988 107.17 0 107.17
1989 150. 32 0 150.32
1990 225.50 0 225.50
1991 280. 53 0 280.53
1992 300.67 0 300.67
1993 280.53 0 280.53
1994 225. so 0 225.50
1995 150.32 0 150.32
1996 75.17 0 75.17
1997 20.14 0 20.14
1998 0 15.33 15.33
1999 0 50.26 50.26
2000 0 134. 58 134.58
2001 0 203.57 203.57
2002 0 238.51 238.51
2003 0 203.57 203.57 .
2004 0 11<il.25 119.25
-2005 0 34.93 34.93
2006 0 0 0
TOTALS l900 1,ooo ~, 900
.
l".STIMATES OF NONTHLY ENE"RGIES.
w II
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'
<-!AT ANA
F DEVIL CANYON 1400 !'lW
BOO MW WATA!I:A
AVERAGE PRINARY AVE~AGE PR!MA~Y
MJNTH
.J,3 523 519
JAN 264
250 249 496 494
FEB
WI'R 224 224 443 442
201 201 381 392
A?R
186 186 406 392
M'.Y
187 183 424 371
JJN
JJL 285 183 47 .q 361
JVG 499 190 738 381
SEP 370 204 671 407
CCT 233 233 472 462 -
NOV 266 266 526 522
occ 287 287 571 566
ANNUAL 3.252 2.669 6.125 5, 309
fi:OTES:
1• ELECTRICAL SYSTEM PRODUCTION COST MODELING (OGPV> RESULTS WILL
BE FORWARDE.D AS SOON AS AVAILABLE FROM COLUMBIA·
2· ABOVE COST FIGURES ARE ALL PRELIMir.!A'RY AND WIL~ BE REFit\ED OI':CE
CONSTRUCTION SEQUENCES AND ONLINE DATES HAVE BEEN FI~MED UP ?Y
' GENERATION PLANNING WORK·
3. PLEASE.ADVISE IF ANY ADDITIONAL PATA IS REQUIRED.
I· HUTCHISON
ACRES BUFFALO
91-6423
CORRECT! ONS:
1· UNDER SCHEME: 2ND PARAGRAPH 2 LINE SHOULD READ MMN• • • •
HIGHE~ PLANT FACTOR ....
-
2• IN THE FIRST TABLE• TOTAL fOR WATANA SHOULD ~E 1~900
3. UNDER THE TABLE ENERGv: MONTH OF JANUARY
WATANA SHOULD xEAD 263 NOT 293
ACRE.5 TOR
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FROM:
SUBJECT:
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OFFICE MEMORANDUM
Those Listed
J G Warnock
RECORD OF TELEPHONE CALL
WITH A SYKES, CONSULTANT
DECEMBER 30, 1980
SUSITNA
Date:
File:
cc:
P5700.11
December 30, 1980
S Diener
D Leach
M Walton
C B Chapman
J D Lawrence
C A Debelius
Telephone call related to discussions which A Sykes has
had over the past few days with Dr C B Chapman and
Professor A J Merrett concerriing approaches to financing
analysis of Susitna Hydroelectric Project.
Concerning the paper produced after Sykes/Chapman
disucssions now in mail Allen re-iterated the points at
issue:
.. The regulatory process which will apply will
designate a capital cost base to which an
acceptable annual charge will apply being the
required rate of return plus a-provision for
a sinking fund. It is of vital interest to
the project study team to know what APA rate of
return on capital is desired and allowable under
State of Alaska (and Federal) regulations~
It is likely that for Susitna the initial annual
charges to cover all costs will be high and rise
gently, only to cover increases in operating and
maintenance cost. Furthermore there is the
'*danger" that Susi tna may yet present a higher
present worth value than other equi vatlent energy
producing facilities burning fuels. Obviously
Susitna will be required to meet the test of
a competitive present value.
We are advised to determine what rules apply at
present through the State PUC juri~di~tion .and
whether APA would be allowed to depart from usual
practice and allow revenues from hydroelectric
power generation to increase through the project
life albeit at a modest rate. I
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Page 2 December 30, 1980
It is further desirable to consult either A.:PA
auditors or others familiar with utility audlit.
practice to see whether pay~ent of interests
. (and dividends) would be allowed while the
project operated, during the early years, in
a deficitposition pending later recovery".
Specific questions are posed by Tony Merrett.
1) Wha'E is t~e "gap" between income to match market
prices and outlay to support Susitna costs? How
long does the ggp exist?
2) If initial capital cost is at index 100 to what level
does it rise as maximum and how long does it take for
the capital cost to reach a leve~ wn~re the deficit
ceases? Wha·t is the relative level at that time?
3) What is the "profile" of the tariff which would be
allowed for a typical coal fired generating
supply?
Noted -that we need tG apply proper and firmly agreed
discount rate. If Susitna is best in long run
there must be mechanics in which wiJ.l cause
this choice to be made and yet accommodate the
desired financial parameters. The decision may
yet turn on the issue of whether the ~tate v1ill
allow APA not to cover eost.s for a --period of as
much as 15 years provided project is ~till
economic with all costs rolled in.
A statement prepared by A Sykes will be in our hands early
in week of 5th January-1981.
JGW:dn
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Alaska Power Authority
Susitna Hydroelectric Project
Task 11 Marketing and Financing
P5700.11
Memo from: A. Sykes/C. Bs Chapman
Conclusions on Relevant Financing and Economic Tests for
Long-Lived Projects
1. Introduction
Long-lived projects such as hydro electric projects tend
to have higher capital costs and lower operating costs
than the main competitive projectse The traditional
economic calculations such as those done by the Army
Corps. of Engineers tend to be of the type which
produce an annual costs or a unit cost which is the same
for every year of the project's life or every unit of
product produced. Thus for say the 40 year project the
capital element of this charge would comprise the
required rate of return plus the sinking fund depreciation.
(There are variants on this method which allow for regular
or temporary inflation: but these do not alter the
fundamental principles at work which have the main effect
on the resulting calculations.) In the case of Susitna
the application of this approach will result in a tariff
which is initially 60% higher than the best coal
alternative. The cost of coal to a coal-fired power
station, however, can be reasonably expected to rise
year by year in step with inflation perhaps assisted by
the curx·ent strong upward trend in all energy prices.
Thus the cost of electricity from a coal-fired station
will rise to the point where it overtakes that of Susitna
and continues well beyond it. The questions which must
be considered are whether these conventional calculations
give an acceptable and realistic picture; and whether
there is the freedom to find novel ways of either
finnancing a hydro station or charging for its output •
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Basic Test of Economic Vi,pility
To compare any projects producing the same product which
have different c~pital and operating costs there must
_ be agreement on the long term cost of capital needed to
evaluate. It is customary for those in the public sector,
and probably particularly customary for the Corps of
Engineers, to think of the long term cost of capital in
terms of an interest rate. In other words it is
customary to assume 100% debt financing at a single rate
'
of interest. This rate is usually fixed in money terms.
This type of calculation may be accurate enough in times
of low or negligible inflation but it can lead to some
major distortions at anything like the double digit
inflation rates which have been experienced in the last
decade. Indeed the rate of inflation experienced has
often exceeded the rate of interest assumed as realistic
in many calculations. The fact that projects in the
public sector are financed by fixed interest borrowing
does not mean that the rate of interest paid represents
the opportunity cost of the funds invested. Indeed the
cost of large Federal and State borrowing has been
negative in real terms for many years in the past. To
apply such rates to the evaluation projects will be
tantamount to saying that projects are acceptable to the
long term public interest even at negative real rates
of return. This is patently nonsense. The only
satisfactory rate of return for these calculations are
real rates of return. What is an appropriate real rate
of return for any particular government or entity is a
matter for careful consideration and requires judgement
of a high order. In principles, however, it is easy to
see that some realistic long term rate of return needs
to be chosen to discrimate between the various types
of projects.
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Assuming we have agreement on this rate for Alaska we
are then in a position to compare Susitna with it£
rivals. If it transpires that the net present value of
Susitna is significantly above that of any alternative,
after allowing for any differential risks, then clearly
the Susitna project is in the long term interests of
Alaska. If Susitna does not pass this test further
discussion is redundant. From the work done so far
there is the likelihood that Susitna will pass this sort
of test.
The Constraints of Power Regulations
It is usual in the United States for power authorities
to be regulated by either or both of the State and
Federal governments. We believe, although we are not
certain, that the tariff structure resulting from the
usual type of regulations is for the capital element of
costs (allowed rate of interest plus sinking fund
depreciation) to be fixed on either an annual or a unit
basis. Operating costs are allowed in full~ The
operating costs for hydro electric projects is, of course,
low in relation to capital cost but in the case of most
other types of power generation they are high. In the
case of coal fired station the actual cost of the coal
is the largest single component of cost.
The effect of all this under inflation, particularly
when energy prices are rising faster than inflation, is
for the regulated tariffs of a hydro projects to be
rising only gently (by the small operating cost
component) while that for coal fired station can be
rising very much more rapidly. In consequence the initial
tariff on Susitna could be 60% above either present
l~vels or the levels resulting from a coal fired station.
In the longer term the discounted costs of coal can
turn out to be very much higher.
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This poses the obvious problem that in a conventionally
regulatory environment it might be poli·tically impossible
to gain acceptance for Susitna because of political
opposition to an initial majo£ increase in charges to
electricity consumers. Thus although Susitna may be a
superior long term choice it may never get a chance to
be selected.
Conclusions
a) It is clear that judged by conventional calculations
Susitna may well be unfairly and unreasonably discrimi-
nated against. Therefore it is necessary to try to get
the calculations done on a more realistic basis. This
will involve agreement on an acceptable cost of capital
to Aldska in real terms and to correcting any
misunderstandings about the effects of inflation.
b) Once on agreed and realistic criteria susitna is shown
to be a candidate it must then be considered whether or
not the present power regulations permit any variance
in·the way annual or unit tariffs are fixed. If it is
desired to avoid a large increase in electricity
tariffs if Susitna is brought in, it will !Je necessary
to have a escalating tariff for Susitna starting at
perhaps present levels or the levels from a coal fired
station. These tariffs would not cover the full capital
costs element for perhaps the first 10 to 20 years of
Susitna's life, but this will not matter providing the
shortfall is added, unrecouped capital C()St and is
reflected in a continually rising tariff. In this way
the long term costs of pusitna power and the costs in
each and every year will be no higher, and on average
' lower, than for a coal fired station. For this ·':o
happen Susi tna would have to be empowered to bor.row
money in all 4:he years of shortfall with the right to
recoup it in l~·ter years plus interest. This may be
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asking a great deal of the relevant regulatory
authority. It is vi tal therefore to establish the. rules
governing Susitna and to explore the scope for varying
them on the lines outlined above.
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SUSITNA
CBC/AS Conclusions on Relevant Financial and Economic Tests for Long-Lived Projects
1. Intrc:ri uction
Lo~g-lived projects such as hydro electric projects tend to have higher
capital costs and lower operating costs than the main competitive projects.
The traditional economic calculations such as those done by the Army Corps
of Engineers tend t~ ~e of the type which produce an annual cost or a unit
cost which is the same for every year of the project's life or every unit
of product produced. Thus for say the 40 year project the capital element
of this charge would comprise the required rate of return plus the sinking
fund depreciation. (There are variants on this method which allow for
re;ular or temporary inflation, but these do not alter the fundamental
principles at work which have the main effect on the resulting calculations.)
In the case of Susitna the application of this approach will result in a
tariff which is initially 60% higher than the best coal alternative. The
cost of coal to a coal~flred power station, however, can be reasonably
expected to rise year by year in stP.p with inflation perhaps assisted by
the current strong upward trend in all energy prices. Thus the cost of
electricity from a coal-fired station will rise to the point ~~ere it
overtakes that Df Susitna and continues well beyond it. The q~estions
which must be considered are whether these conventional calculations give
an accepteble and realistic picture; and whether there is the freedom to
find novel ldays of either financing a hydro station or chargirg for its ~_,, output.
2. Basic Test 9f Economic Viability
To compare any projects producing the same product whici1 have different
capital and operating costs there must be agreement on the long term cost
•of capital needed to evaluate. It is customary for those in the public
sector, and probably particularly cu~tomary for the Corps of Engineers,
to think of the long term cost of capital in terms of an interest rate.
J.n other ~1ords it is customary to assume lOD% debt financing at a single
rate of interest. This rate is usually fixed in money terms. This type
of calculation may be accurate finough in times of low or negligible
inflation but it can lead to some major distortions at anything like the
double digit inflation rates which have been experienced in the last decade.
Indeed the rate of inflation experienced has often exceeded the rate of
interest assumed as realistic in many calculations. The fact that projects
in the public sector are financed by fixed interest borrowings does not
mean that the rate of interest paid represents the opportunity cost of the
funds_invested. Indeed the cost.of large Fede~al and State bo=rowing has
been negative in real terms for many years in the past. To ap~ly such
rates to the evaluation projects will be tant~mount to saying that projects
are acceptable to the long term public interest even at negative real
rates of return. This is patently nonsense. The only satisfa=tory rate
of return for these calculations are real rates of return. What is an
appropriate real rate of return for any particular government or entity
is a matter for careful consideration and requires judgment of a high
order. In principle, however, it is easy to see that some realistic long
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term rate of return needs to be chosen to discriminate between the various
types of project.
' Assuming we have agreement on this rate for Alaska we are then in a position
to compare Susitna with. its rivals. If it transpires that the net pr~sent
value of Susitna is significantly above that of any alternative, after
allowing for any differential risks, then clearly the Susitna project
is in the long term interests of Alaska. If Susitna does not pass this
test further discussion is redundant. From the work done so far there is
the likelihood that Susitna will pass this sort of test.
The Constraints of Power Regulations
It is usual in the United States for power authorities to be regulated
by either or both of the State and Federal governments. We believe, although
we are not certain, that the tariff structure resulting from the usual type
of regulations is for the capital element of costs (allowed rate of
interest plus sinking fund depreciation) to be fixed on either an annual
or a unit basis. Operating cost~ are allowed in full. The operating costs
for hydro electric projects is, of course, low in relation to capital
cost but in the case of most other types of power generation they are high.
In the case of a coal fired station the actual cost of the coal is the
largest single component of cost.
The effl1ct of all this under inflation, particularly when energy prices
are risirg faster than inflation, is for the regulated tariffs of a
hydro project to be rising only gently (by the small operating cost
component) while that for coal fired station can be rising very much more
rapidly. In consequence the initial tariff on Susitna could be 60% above
either present levels or the levels resulting from a coal fired station.
In the longer term the discounted costs of coal can turn out to be very
much higher.
This poses the obvious problem that in a conventionally regulatory environ-
ment it might be politically impossible to gain acceptance for Susitna
.because of political opposition to an initial major increase in charges
to electricity consumers. Thus although Susitna may be a superior long
term choice it may never get a chance to be selected.
4. Conclusions
a) It is clear that judged by conventional calculations Susit~a may well
be unfairly and unreasonably discriminated against. Therefore it is
necessary to try to get the calculations done on a more realistic
basis. This will involve agreeme1t on an acceptable cost of capital
to Alaska in real terms and to correcting any misunderstandings about
t~e effects of inflation.
b)
.
Ohce on agreed and realistic criteria Susitna is shown to be a
candidate it must then be ponsidered whether or not the present power
regulations permit any va~iance in the way annual or unit tariffs are
fixed. If it is desired to avoid a large increase in electricity
tariffs if Susitna is brought in, it will be necesssry to have a
escalating tariff for Susitna starting at perhaps present levels or
the levels from a coal fired station. These tariffs would not cover
the full capital cost element for perhaps the first 10 to 20 years of
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AS/CEW
17.12.80
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Susitna's life, but this will not matter providiAg the shortfall is
added, unrecouped capital cost and is reflects~ in a continually
rising tariff. In this way the long term costs of Susitna power
aod the costs in each and every year will be no higher, and on average
lower, than for a coal fired station~ ror this to happen Susitna
would have to be empowered to ~orrow money in all the years of shortfall
with the right to recoup it ln later years plus interest. This may be
asking a great deal of th8 relevant regulatory authority. It is
vital therefore to estFJblish the rules governing Susitna and to explore
the scope for varying them on the lines outlined above.
cc: C 8 Chapman
, J Gavin Warnock
Professor A J Merrett
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July 22, 1980
First Southwest Company
9th Floor
Mercantile Bank Bldgg
Dallas, TX 75201
Attention: Mr. John Hinton
Dear Mr. Hinton:
Re: Susitna Hydroelectric Project
Marketing & Financing Studies
I was pleased to make contact with you today and to have a brief
discussion on the matter of the study task that we have in hand for
the Alaska Power Authority on Susitna Hydroelectric Project.
We see the obvious need for close communication with First Southwest
Company as financial advisors to the Authority and will plan an ini-
tial meeting with you during August. For your future guidance, 1
list the principal individuals within Acres American Incorporated with whom you may have contact on this project:
John D. Lawrence -Project Manager
Charles A. Debelius -Deputy Project Manager
J. M. Gill -Resident Manager, Anchorage
John W. Hayden -Study Director
J. Gavin Warnock -Task Manager,; Marketing & Finance
John Lawrence and John Hayden operate from our Buffalo offices at
Liberty Bank Building, Buffalo, NY 14202 (Telephone 716-853-7525;
Telex 91-6423). Jim Gill is our resident representative at 2207
Spenard Road, Anchorage, AK 99503 (907-276-4888). Chuck Debelius
and I operate from the Columbia office at the address shown below.
Correspondence on the project should be addressed to the "Project
Manager" and marked for the attention of the individual concerned at his operating address.
We ltok forward to working closely with you on the project.
With kind regards,
Yours sincerely, . .
.~,
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f.1 ~ ACRES AMERICAN INCORPORATED
Consultrng Engmeers
J. Ga~ih Warnock, Task Manager
Marketing & Finance
I
Su1te 329 The Clark Suildmg
Columb1a. t.1ar;•fand 21044
Otfler Ullrc;:>s Buffnlc rvY Prllsbur!Jh PA Rc e•gh NC Vlash,ngton DC
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ACRES TOR
~TOBER 1 .-.. 1 980
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ATTN: T. GWOZDEK
I 1 ~o1
PS700 ...i:f""
TASK 11·-MARKETING AND FINANCING
" ~ . . .. ~ ,.. . . . . .. . .. .. . . -' . . .. . . ... . . . . ~------~--~--~~----~-~-~N----------------------------------------
SEPTEMBER PROGRESS REPORT
-. . . . . . . . . . . ' ~------------------------------------------------
-WITH WORK INVOLVING ECONOMIC ANALYSIS REQUIRING PARTICULAR
. . --ATTENTION IN TASK 1.03 AND SUBSEQUENTLY IN TASK 6 .. THE AVAlLABLE
J ~NPOWER RESOURCES HAVE BEEN ALLOCATED IN THIS WAY~ IT IS
ANTICIPATED THAT DURING OCTOBER THE SENIOR PROJEeT ECONOMIST
. --. ...
WILL BECOME AVAILABLE rOR NEAR FULL TIME ASSIGNMENT OF EFFORT
-~ .J
TO ALL TASKS INVOLVING HIS SPECIALIST INPUT.
J J
DURING SEPTEMBER DR. c. B. CHAPMAN'S INPUT ON AMORTIZATION
MODELS .. AN OUTLINE OF RISK ANALYSIS REQUIREMENTS AND ON
-ECONOMIC EVALUATION PARAMETERS WAS MADE AVAILABLE AND WILL
J
FORM THE BASIS FOR FUTURE WORK EFFORT. THE SEVERAL POINTS
CF THE OVERALL STUDY WHERE RISK ANALYSIS WORK IS APPROPRIATE --
J
~VE BEEN IDENTIFIED.
.. -·-..
THE BIANNUA~ REPORT ISSUED BY FIRTH + ASSOCIATES HAS BEEN
REVIEWED AND WILL BE SUBJECT TO FURTHER DISCUSSION AT THE
-J SEATTLE MEETING IN LATE OCTOBER.
WORK CONTINUED ON THE DATA DATHERING AND FORWARD PREDICTIONS OF
-BASIC ENERGY COSTS LINKED WITH OIL AND GAS PRICING FORECASTS
J
TO THE END OF THE 20TH CENTURY.
CONSIDERATION IS BEING GIVEN TO THE SPECIFIC COORDINATION OF
--EFFORTS REQUIRED TO MAINTAIN BALANCED AND INTERLINKED PROGRESS ---
CJJ ALL TASKS RELATING TO MARKETING AND f'INANCING OF SUSITNA ..
PROJECT.
~RNOCK
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;(:RES TOR
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Susitna Hydroelectric Project
Task II Marketing and Financing
Tony Merretes recommendations fol~owing November 28th meeting in
London attended by -
A Sykes
A J Merrett
C B Chapman
J G Warnock
1) In considering the financial analysis
allow for "rolled-up" interest during construction
allow substantial (and identified) provision for
teething problems during initial operation (allow
as contingency pool in capital cost allowance -
increases investor confidence)
2) Provide brief analysis of likely system growth (if any)
or support for such through basic economic growth. The
purpose would be to build a case for early progress on
project.
3)
4)
5)
Examine the potential disbenefit of phasing the project
balance off against advantages of finding alternative
loa.d
note the benefit of Susitna availability should
higher level of economic activity occur
Bxamine economic justification for allowing a gradually
increasing cost of power despite its constant cost
nature (hydroelectric).
Avoid capitalisation of any debt service as accounting
practice is questionable and senior lending institutions
would vie\v this as an adverse factor in judging the
robustness o£ project.
However, government could take the position ~hat they can
provide funds initially and recover latera e.g. provide
funds at no interest for initial years and recoup rolled-up
interest later. If project £ailed government could take
over p~oject after debt obligations had been met.
6) Financial anal7sis program should~allow for the application
of the most i.:nrourable accounting practices which can be
applied (AJM questioned further whether program provides
ROI as well as present value?)
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Report
GROUP Power & Heavy Civil
DIVISION 119
REGIONAL OFFICE Columbia
John Hinton DATE OF CONTACT 7/22/80
coNTACT sv J. G. Warnock
CONTACT
T'TLE
COMPANY
ADDRESS
First Southwest Company TELEPHONE 214-742-6461 or toll fr~
Dallas, Texas (9th fl.~ Mercantile Bank Bldg. 800-529-9053
r-------~---~~7~5):?-'0~11~--------~~--~--------------------------~~------
_PROJECT DISCUSSED 0 NO PROJECT DISCUSSED 0 CHECK OFf
APPROPRIATE
§NFORMATION
TYPE OF CONTACT
[:=:J Repeat
I:::J New
c:::J Lead Only
PROSPECTS
c:=J Excellent
c=J Good
C) Fair
(:J Poor
c:::J Write Off
FOLLOW-UP
CJ Yes
CJ No
Date
Who
Where
Who To
See
DISTRIBUTION
BD File, ACS. Tor.
J Lawrence
J .Hayden
C Debelius
P Tucker
PROJECT TITLE
LOCATION
DESCRIPTION
CAPITAL COST SCHEDULED TO BEGIN
SUMMARY OF DISCUSSION (Brief)
Subject: Susitna Hydroelectric Project Financing-Task ll
We learned of the appointment of John Hinton in charge of First
Southwest Company's activities in Alaska from Griff Morris,
principal of Booz, Allen, Hamilton at a meeting on July 21st.
First Southwest Company's current resident representative in
Alaska has resigned to take a municipal position, and John Hinton
has been charged with appointing a replacement with he, himself,
taking on responsibilities for the company's activity in the mean-
time.
John Hinton has been involved in thf'~ financial advisory role played
by First Southwest with APA. He was well aware of our position on
the Susitna contract and obviously pleused to have the contact ad-
vising of our intention to see First Southwest Co. involved in the
study. He indicated that the chairma~t of the board of First South-
west was taking a prime interest i~ the undertaking and would wish
to be involved in any;meeting that we might wish to set up in the
near future to discuss our relative roles. ·
We discussed the tax exempt revenue bond issue and Hinton outlined
the steps they were taking to secure the necessary legislative
changes. He was not hopeful of the outcome of the present bill
when it reaches the House. He feels that the IRS interests are
very heavily entrenched and will use the most extreme measures to
limit any extension of the tax-exempt bond privilege. He bases his
concerned pessimism on the fact that their previous efforts to
secure changes in attitude of the members of the House of Repre-
sentatives have been unsuccessful in view of the massive logistical
task that is necessary to inform adequately the staff members who
advise congressmen. First Southwest are themselves convinced of
the validity of arguments presented by the Univ. of Illinois and
other specialists in.the field concerning the ultimate effect of
broadening the tax exempt issue to cover all renewable energy re-
sources. Apparently facts can be assembled which prove the asser-
tions of IRS are wrong; and First Southwest are anxious to mobilize
an even greater mass of opinion in support of their case. In this
regard, Hinton mentioned specifically the possibility of Kaufman
of Sa1omon Bros. assisting in the effort. (Kaufman is the bond
specialist of Salomon Bros. whose opinions greatly influence the
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market.)
Hinton proceeded to question the role of Salomon Bros.
and I explained that, whereas they had entered the
Plan of Study as subcontract partners with us, the
scope and form of the study had changed quite signi-
ficantly in subsequent months. Salomon Bros. were now
11 standing in the wings .. in a position where we could
count on their advice and help; but they would not, at
this time, be assigned any fee reimbursement input.
It was agreed that an early meeting during August would
be advisable with representatives of Acres American
and First Southwest Co. reviewing the current position
and endeavoring to arrange a consistent cooperative ap-proach. ·
John Hinton confirmed that First Southwest Co. had, in
fact, employed Griff Morris of Booz, Allen & Hamilton
Inc. to prepare input to their case for tax exempt
revenue bond support of hydroelectric projects.
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'SUSITNA HYDROELECTRIC PROJECT
Minutes of Task 11 Meeting
July 14, 1980
1. Attendance. A meeting was conducted in the Columbia, MD, office of Acres
American Incorporated on July 14, 1980. Attendees included:
Professor Tony Merrett, Economics Consultant
Dr. Chris Chapman, Risk Analyst, AIMS
J. G. Warnock
J. D. Lawrence
C . A . De be 1 i us
A. Vircol
S. Omkar
P. H. Tucker (Part-time)
2. Purpose. The purpose of the meeting was to formulate an overall approach to
the conduct of financing and marketing studies (Task 11). In particular,
the focus was upon the project overview (Subtask 12.01) and a proposed set
of internal repcrts (Subtask 11.02) which together should provide the Alaska
Power Authority (APA) with the necessary information to present a reasoned
and coherent case on the Susitna Project as various decision points are
faced. If the Susitna Project is ever constructed it must be seen to be
11 robust 11 and the financial community as well as State and· Federal decision
makers must see that the case for it is based on sound facts.
3. Giant Project Strategy. Professor Merrett drew a parallel with the long
studied tunnel project which would connect England with mainland Europe.
Some lessons learned may prove useful in the study of the Susitna Project:
a. Early efforts should be applied to identification and analysis of
potential gaps which must be bridged if the project is to succeed. The
views of opponents and proponents alike must be considered and early
preparation is necessary to ensure that later challenges can be
adequately addressed when and if they occur.
b. An overall strategy should be formula ted no\>J to minimize any future
surprises. Even if our studies lead to a 1 ater conclusion that
construction of the project is in the best interests of the State of
Alaska, it will still be necessary to demonstrate convincingly that the
conclusion is valid.
c. There is reason to believe the proposed project is in the national
interest. It follows that the federal government may be a source of
potential support.
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Minutes of Task 11 Meeting, July 14, 1980 -2
d. One particularly difficult problem is that the project is likely to be
heavily loaded at the front end. Government support (State and Federal)
may be important in resolving this issue.
e. We should recognize realistically that our task is to prepare an
"advocate's brief" based on the objective view that our case 1s right.
Some discussion ensured regarding the fact that Acres has intended from the
start to be totally objective. It is inappropriate for us to be advocates
unless we are ourselves convinced that the project should be built. Now
that the study of alternatives has been removed from the Acres work,
however, it appears our mission has changed to that of identifying the most
viable Susitna Basin development which would meet future generation needs in
the Railbelt. Recomnendations as to whether a Susitna project should 'Je
built in lieu of some other alternatives will now be made by others.
4. Gaps. Dr. Chapman observed that it is important to understand all of the
potential reasons for which the project might not be constructed, as well as
to address each such reason in a project overview report. His thoughts
paralleled those of Professor Merrett•s regarding gaps. The following list
of gaps was compiled and discussed (economic issues underlined):
1.
2.
3.
4.
5.
6.
7.
B.
9.
10.
. 11.
12.
13.
14.
Capital Costs
Low Cost Fuels
High Front End Loading
Need for Project
Vulnerabi 1 ity
Environmental Hazards
Native land Ownership
Political Decisions -Alaska Undisturbed
Safety
Re l i a0 i 1 i ty
Federal constraints
Tax exempt bond issue
"Bigness" of Project (Socioeconomic issues)
Fixation of Alaska Political Decision
5. Bridges. The group discussed some of the ways in which potential gaps may
be spanned. Professor Merrett asserted that if the case for Susitna is
found to be clear and overwhelmingly sound, the project will be in the best
interests of the State and Federal Governments. At that point, a position
of advocacy woU1ld be synonomous with patriotism. Identified bridges
include:
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Federal fuel constraints ·
National oil dependence
Resource conservation ·
National emergency
Quality 0f H. E. Dev. site
Environmental credits
Power portability (hydrogen)
Basic need for utter reliability of supply
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Minutes of Task 11 Meeting, July 14, 1980 -3
6. Observations~ A number of random observations were made by various group
members:
a. Professor Merrett suggested that we use a computer program to find those
parameters which might lead to minimization of the front end loading
problem.
b. Th·e Fuel Use Act of 1978 and the way in which it is implemented in
Alaska is an important consideration. J. D. lawrence has requested an
analysis in this area. (The memorandum has been prepared in draft form
by P. M. Hoover, Coordinator for Task 10.)
c. J. G. Warnock stated that one of the proposed internal reports in
Subtask 11.02 will address front end loading. He also suggested that we
must take the world energy situation into account as well as that for
the Nation and the State. The total demand for Alaskan resources must
be considered and the overali future economic climate must be carefully
eva 1 uatecr.
7. Procedure. Professor Merrett addre~sed some procedures which might be
considered:
a. We should define the "optimal commercial project". Such a project might
have long term coJmJercial viability and yield a 30% rate of return.
Though it might be found, it would probably be politically vulnerable
and might not provide bridges for all the identified gaps.
b. Assuming that an "optimal commercial project" exists, we should attempt
to find the "maximally viable project". This latter would be one which
clearly could survive on all issues, has a reasonable rate of return
(possibly 15% or so), may be appropriate to a low demand scenario, and
is not politically vulnerable.
c. If a "maximally viable project" exists, we could move up from it step by
· step as more facts become available to bridge gaps.
d! The "maximally viable project" might be found through trial and error on
an appropriate computer program which takes into account cash flow,
rates of return, etc. A program previously written by Alan Sykes and
Pratt Keeping is available in Toronto and should be checked out.
J. G. Warnock will secure a copy of the program manual. Once we are
able to satisfy the basic economic issues, we should then check the
remaining gaps.
e. Criteria for the maximally viable project establishes its economic
"robustness". Such criteria might include:
{1) Satisfaction of bond holders
(2) Acceptable economic return (>12%)
{3) Ability to finance (and cope with front end load)
(4) No major economic problems (e.g., failing to need consumer demands
and acceptable to utilities.
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Minutes of Task 11 Meeting, July 14, 1980
-4
B. Front End Load Report. J. G. Warnock led a discussion of the contents of
the internal report (Subtask 11.02) which might be prepared. Contents would have to cover such items as:
• Capita 1 Costs
• Schedules
• Cash flows
1 Escalation trends
~ Differential fuel escalation
• Demand projections
• Susitna capacity
• Alternative energy cost and availability
• Risk asessments
• Sensitivity analysis
t Cost of Money
• Operation and Maintenance Costs
e State incentives {describe ways in which State could mitigate
the front end load problem)
1 Long term benefits which the State might enjoy
9. Adjournment. The meeting adjourned at 3:30p.m .
Distribution:
l each participant
Project files
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OFFICE MEMORANDUM
t£ J. D~ Lawrence
FROM: ~J. G. Warnock
SUBJECT: SUSITNA HYDROELECTRIC PROJECT
TASK 11 -MARKETING & FINANCING
Date:
File:
cc:
June 2, 1980
;0$/oO. I I. 0 :V
D. C. Wi11ett
C. A. Debelius
J. W. Hayden
With a view to initiating a detailed task description for the approach
to Task 11, I recommend that we first reassess the Internal Reports for
Management/Financial consideration under A 5.12(ii)b of the P.O.S. The
provisional listing made in September 1979 was merely indicative of typi-
cal report headings and now that we have progressed to Week 21 of the
study, the issues are more clearly defined and the needs which have to be
addressed one year hence better understood.
The attached sheets break Task 11.02 into three major groupings of
topics:
(1) Economic/Marketing Issues
(2) Risk Assessment
(3) Financing Issues
The treatment of these three major topics will ultimately overlap and
proceed concurrently, but initiation of work should be spaced out at
approximately 4 to 5 week intervals. This study of Economic/Marketing
issues should be started immediately (Week 22), Risk Assessment in Week
27 (coinciding with Dr. C. B. Chapman's availability in USA): and
Financing Issues should follow in early August (Week 31) when some
preliminary conclusions from the Economic/Marketing element of the
overall task may well be available.
We have seen the necessity for highly competent professional input at
the outset on major economic issues, and we shall this week secure the
advice and opinions of A. Sykes and A. J. Merrett on the recommended
approach and the most appropriate participants judged from their view
of the North American energy scene and knowledge of the requirements of
major capital projects at this stage of development. As you know, Sykes
is Group Financial Director of Willis Faber, but acts in a professional
consultant role to Acres. He is the prime contributor to the "Giant
Projects'' treatise, which Eric Yould has reviewed with interest, and
has particularly relevant experience gained from Churchill Falls and
other major resource projects undertaken by RTZ Corporation .
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Professor Merrett has now retired from London Graduate School of Business
Studies, resides in New Jersey, and undertakes special consulting ass·ign-
ments, mainly in international energy and consumer demand fields. He is
the co-author$ with· Allen Sykes., of a substantial book, "The Finance and
Ana1ysis of Capital· Projects" (Second Ed., ·1973, Longman).
While both Sykes and Merrett have offered their service as specialist
consultants to Acres, there is the possibility that, on review of our
needs, they m~y suggest others .. It is essential, for instance, that
the consulting group we put together contain adequate specialization in
North American energy issues and in the needs and·future of the Alaskan
economy.
From the r~etings planned for this week, which Dave Willett will hopefully
attenp, we intend to arrive at -
o an assessment of the needs for and identification of
professional consultants in the fiel.d of economics
o a detailed plan for assessment of global energy impact
and of the general economic future which might reasonably
be expected for Alaska ·
o a methodology of determining the economic limits to
Susitna
o an approach to determining Net Alaska Economic Benefits from
Susitna and alternative power/energy sources
o preliminary ideas from the viewpoint of power economics of
possible marketing strategies •
In addition, there are several facets on the general financing issue where
Sykes 1 exper·ience will be particularly valuable; e.g., in relation to comple-
tion guarantees (which was the major problem at Churchill Falls and which
will require very careful consideration for Susitna). Sykes has studied
both our P.O.S~ and the Tussing critique and has substantive comment to
make ..
It is planned to have Dr. C. B. Chapman present at the meeting to make further-
plans for his availability in US this surnmer, to bring him up-to-date with
the revised "post Tussing"· Scope of Work, and to discuss with Sykes/Merrett
the place of risk analysis in determining the economic l·imits to the project.
Following these initial meetings, it would be the intention that you would
receive, prior to your departure for Anch0rage on June 9, a summary of the
Sykes/Merrett discussions and further thctughts on the detailed approach to
Task 11.
Should it be appropriate for Professor· Merrett to continue further personal
consultation, we shall plan his schedule of activities which would no doubt
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inc1ude an early presence in Alaska as soon as practical on his return to
USA from his current sojourn in Ireland. Sykes further contribution during
the next 4 to 5 weeks would have to be from his London base; but he would
be available for meetings on this s·ide of the Atlantic thereafter.
Attachments:
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A-Subtask outline topics-Economic/Marketing
B -Subtask outline topics -Risk Analysis
C -Subtask outline topics -Financing Issues
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SUSITNA HYDROELECTRIC PROJECT
TASK 11 -MARKETING AND FINANCING
SUBTASK 11.02
INTERNAL REPORTS
o Major elements of subtask topics and
sequence of treatment:-
(a) -Global energy-economic assessment
{b) -General economic review US/Alaska
Attachment 11.02.A (6/2/80)
{Draft Outline)
ECONOMIC/MARKETING ISSUE
{c) -Integration of socioeconomic impact study {Task 7.05)
(d) -Overview of ISER findings (Tasks 1.01 and 1.02)
(e) -Economic/inflation cost pressure impact
(f) -Preliminary risk assessment {follows from Task 1.04)
(g) -Economic limits to project
(h) -Evaluation of alternative expansion sequences in
relation to Financial/Marketing issues .(follows from
Task 1.04)
(i) -Determination of Net Alaskan Economic Benefits (based
substantially on Task 1.06)
(j) -Establishment of viable marketing strategies
(k) -Consideration of alternative forms of power contract
o Inputs will be drawn from Tasks 1.01, 1.02, 1.04, 1.06, Tasks
6.01, 6.07, 6.31, Task 7.05, Task 9.
o Inp~t will be provided both to Internal Reports and Project Overview
(Task 11), to Task 1.01, 1.02, 1.04, 1.05, 1.06, Task 7.05, Task
9.05, Task 10.04, and Task 12.
The above topics would be appropriately assembled into specific Internal
Reports, submitted for management review, and used to assemble the
11 Project Overview 11 in its successive updated issues .
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-SUSITNA HYDROELECTRIC PROJECT
TASK 11 MARKETING AND FINANCING
SUBTASK 11.02
INTERNAL REPORTS
o Major-elements of subtask topics:-
Attachment 11.028 (6/2/80)
.
(Draft Outline)
RISK ASSESSMENT
(al -Assessment of risk associated with alternative
power sources and with viable expansion scenarios
(Pl -Risk Analysis and determination of contingency plans
for selected development
(c)_ -Consideration of:
--financing risk
--regulatory risk
--technological risk
(9). -Risk management organization and risk minimization policy
(el -Inflation/schedule/escalation risk assessment
o Inputs will be drawn from Tasks 1.04·, 1o05, 1.06, Tasks 6.01 and
engineering/cost data developed from Task 6 and 9 and Task 9.05 in particular
o Input wi l'1 be provided both to Interna 1 Reports and Project Overview
(Task 11) and to 1.04, 1.05, 1.06, Task 6.05, Task 9.05
The above topics would be appropriately assembled into specific Internal
Reports, submitted for management review, and used to assemble the 11 Project Overview .. in its successive updated issues.
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. SUSITNA HYDROELECTRIC PROJECT
TASK 11 -MARKETING AND FINANCING
SUBTASK 11.02
INTERNAL REPORTS
o Major elements of subtask topics:-
Attachment 11.02.C (6/2/80)
(Draft Outline)
FINANCING ISSUES
(a) Review of tax exempt bond financing issues
(b) Review of sources of security
(c) Financing requirements of Parties-In-Interest
(d) Security of project capital structure
(e) Overall risk analysis and contingency planning
(f) Completion guarantee
(g) Revenue assurance requireme~ts
(h) Funding schedule for project
(i) Form of power contract and interrelationship ~ith
financing plan
o Inputs will be drawn from other Task 11.02 activity and from
Tasks 6.01, Tasks 9.03, 9.04, and 9.05.
o Input will be provided both to Internal Reports and Project
Overview (Task 11)~ to Task 6.31, and to Task 10 (Exhibits G & U).
In addition, financing consideration will be provided for Task 1.05.
The above topics would be appropriately assembled into specific Internal
Reports, submitted for management review, and used to assemble the 11 Project Overview 11 in its successive updated issues.
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t& April 15, 1980
Alaska Power Authority
333 West 4th Avenue
Suite 31 .
Anchorage, AK 99501
Attn: Mr. Robert Mohn
Dear Robert:
Re: Susitna Hydroelectric Project
Plan of Study -Task 11
Marketing and Finance
Following your letter of January 15, enclosing a listing of the
important decision factors in the mind of the Governor and his
immediate staff relating to large projects such as Susitna, there has
been an exchange of correspondence concerning the level of effort in
Task 11 which could provide adequately the necessary information. We
ultimately felt it desirable to review the approach to, and output
from, this task ~n order that there was all the necessary assurance
that the Project Overview and its supporting reports would serve all
the needs arising at the "go-no go 11 decision date and at subsequent
stages of the stiJdy. This has now been done, and this letter sets out
in some detail the views which we would like to put forward for your consideration ..
In the original Plan of Study submitted by Acres American in September
1979, considerable stress was laid on the need for a comprehensive
treatment of issues--many non-technical--which could influence the
financing of the Project. The position was taken that there should be
a broad interdisciplinary effort applied from the start of the study.
This was recommended in order that there could be close integration of
engineering, environmental, financial, insurance, ecortoffiic and other
specialty inputs in order to build a well-balanced, b~sic confidence in
the overall viability of the proj,:ct. Particular emphasis was placed
at that time on the importance of well-qualified advisors on financial
matters, and particularly on the applicability of tax-free revenue bond
financing. We were fortunate in S'2Curing the support, in a
consultative role, of Salomon Brothers possibly the most experienced
financial firm in this field.
The terms of the arrangement made with Salomon Brothers during the
preparation of the original Plan of .Study provided for an equal share
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between Salomon and Acres of the input to the main study effort for
Task 11. It was not possible to assign a specific allocation of duties
or servic~s at that time, and a closely integrated effort was
contemplated. It was intended to make whatever adjustments were
appropriate to the 50-50 split in services and reimbursement as the
detailed implementation of the plan proceeded.
We believe that the arrangement proposed in the original POS would have
led to a most effective means of providing APA with essential elements
of the study output at the various stages where decisions or
redirection were required. The scope of the Task extended to
preparation of draft documentation for the bond offering, as it has
been found from past experience that the stringent discipline required
for this in itself helps to develop confidence in the viability of the
project. The overall scope of the marketing and financing study is, to
some extent, a matter of judqment as to the true significance of this
element of input in reaching-decisions required for-the project. The
timing can certainly be subject to consideration in relation to the
importance of decisions to be taken stage-by-stage. In our considered
opinion, however, the effort shou1d not be unduly constrained.
Expenditures on this element of the study represent monies which would be truly well spent.
~ In the original POS, we presented Task 11 as one which made a
continuing contribution throughout the period of study. The product of
Task 11 takes form and focus through a Project Overview, a series of
reports which is planned to present, as it evolves through the period
of study, a cohesive and up-to-date presentation of the project issues
for evaluation and decision. Curtailment of the Project Overview or
its conversion into spasmodic summary report activity, does detract
from fts true value. While the economy in cost is important, the value
of a properly conducted, continuing overview cannot be underestimated.
We believe it important at this stage to re-emphasize the true nature
of the Project Overview. While many other elements of the Study now
underway will result in reports and documentation attributed to Acres
American as engineers to the Alaska Power Authority, the Project
Overview should be the product of the Authority itself and carry your
views and assessments. Acres American, with our advisors and sub-
contractors, would make a very substantial contribution to the efforts
of your 11 owners team" in formulating and updating the overview--ir
fact, undertaking the majority of the effort. The overview,
furthermore, would be a consolidation of the output from the other
tasks within the POS melded with relevant inputs from many other
sources, some more accessible to the Authority than to Acres Project
Team.
It may be recalled that, at the time that the revised POS was under
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consideration, the question was raised as to the extent of
participation of APA staff in the Project Overview and in the other
products of Task 11. It was suggested that, while pursuing the policy
of maintaining a 11 lean 11 organization, APA would be making staff
additions, particularly in the financial area, who could make a
significant participation to Task 11 activity. Furthermore, questions
were raised regarding the timing of Subtask 11.11; and, with the
intention of minimizing overall cost of the Phase I studies, deferments
in effort and expenditure were agreed. Considerations such as these
allowed Acres American to accept a substantial reduction in the
reimbursement for Task 11, with this effort concentrated mainly in the
final 18 months of the study period.
In making these changes to the original POS and its associated budget,
the basic principles of near-equal levels of effort between Acres and
Salomon Brothers was retained. You have now, however, indicated a
desire to eliminate Salomon Brothers• contribution to Task 11, which
further restricts the freedom of reallocation of work and costs of
performing this assignment. It was intended that, as financial
advisors, Salomon Brothers would take prime responsibility for those
aspects outlined in 11 Plan for Financing the Susitna Project, .. detailed
in the memorandum set out in Section C-1 of the supplemental
information in the original POS. In addition, Salomon Brothers were to
perform an active role in the formulation of the Project Overview and
in the internal reports, particularly those dealing with
-Financing requirements of all parties and the completion
guarantee
-Assessment of capital costs and schedules
-Project contingencies, risk analysis and planning
-Inflation and escalation assessment
-Risk management organization and risk minimization
policy
-Security of project capital structure
-Economic impact review
-General economic review
The absence of the Salomon Brothers' contribution will result in
transfer of this effort almost in full to Acres. We believe that the
level of specialized input originally planned from Salomon Brothers in
respect to tax-exempt bond issues and revenue assurance procedures can
reasonably be set aside at this time. However, we recommend that the
Authority should consider very seriously arranging for their eventual
input on these topics during the final 18 months of study. The
allowance in the revised POS of $112~000 for this effort may then,
however, have to be subject to further negotiation in view of the
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change in Salomon Brothers• overall role within Task 11. The level of
highly specialized input required for this element of the task could no
doubt be obtained from the Project's managing underwriter for debt
financing·and covered by normal fee arrangements if such a firm was
appointed in time. Failing this, our recommendation is to retain, on a
reimbursed consultative basis, specialists in the field.
As indicated in our letter of March 17, we have made a review of the
marketing and financing programs set out in Task 11, taking into
account your views regarding the extent of Salomon Brothers involvement
and the requirement for addressing project evaluation factors in time
to suit the Governor•s needs. We find that little or no change to the
present definition of tasks is necessary. The level of effort applied
will, however, be subject to change for certain subtasks. For example,
Subtask 11.03, Alternative Power Source Risk Analysis, will now treat
the greater ni.Jllber and more varied range of alternatives leading to an
increase estimated at 50% of the levels set at the time of the original
POS. An allowance should also be made for review of Financing Risk
under Subtask 11.06, and we recommend that the amount of $10,000
eliminated during POS review be restored. This will enab1e some
continuing overview of Financing Risk to proceed prior to any later
involvement of Salomon Broth2rs as suggested above. We note that First
Southwest will be available to respond to questions of a fiscal nature.
With the needs now emerging for adequate support of the decision
factors at the 11 go-no go,. point in January 1981 and with the changes
imposed on Salomon Brothers involvement, we have reassessed the costs
of Task 11. The total estimated cost is now $338,300, as compared with
$383,100 in the tabulated Cost Estimate in the ~evised Plan of Study,
not inc 1 udi ng the amount of $142 ,000 set aside for Tasks 11 o07, 11.08,
and 11.09, which would be deferred for later consideration.
The expenditures now foreseen would be_spread over the period of study as follows:
1980
1981
1982
$ 87,300
193,000
58,000
Internal report preparation (11.02) wou.ld begin in week 17, instead of
52, and would largely be complete anq ready for final editing by week 106.
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We attach Table 1, a summary of the changes which applied to Task 11
Marketing and Financing between the September 11 POS and the revised
edition of February 4. Table 2 provides the weighting factors and "audit 11
trail which supports the revised cost for Subtask 11.01 and 11.02.
Table 3 summari2:es the further revisions which are now believed to be appropriate.
In SUI11Tlary, the costs-for Task 11 may now be presented thus: -
Subtasks
11.01
11.02
11.03
11.04
11.05
11.06
Project Overview
Preparation and Update
Internal Report
Preparation
Alternative Power
Source Risk Analysis
Susitna Base Plan
Initial Risk Analysis
Susitna Base Plan
Extension and Revision
Susitna Financing Risk Analysis
SUBTOTAL
11.07 Resolution of Tax Exempt
Bond Issue
11.08 Identify Parties in
Interest
11.09 Revenue Assurance
Procedures
11.10 Liaison With APA Bond
Underwriting Managers
11.11 Draft Documentation for
Bond Offering Support
Cost Estimate
April 1980
$131,500
137,300
25,000
24,500
10,000
10,000
$338,300
*($ 5,000)
*( 20,000)
*( 5,000)
$368,300
*Bracketed amount
would only be
incurred in con-
junction with
corresponding
work from finan-
cial advisor.
Financial Advisory
Cost Estimates
$ 71,300
5,000
35,000
$112,000
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We trust that this explanati··m of the position now foreseen for Task 11
will ser~e its purpose and a,low us to proceed on the recommended
course to provide you with the necessary decision factGrs in January
1981 and a comprehensive and continuing Pr·oject Overview. An
opportunity to discuss this element of our Susitna assignment will
arise during the week of Apfil 14 in Anchorage.
With kind reyards,
j gw/mc
Yours sincerely,
J. Gavin Warnock
Vice President and General Manager
Power and Heavy Civil Gt"oup
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Subtasks
11.01 P1oject Overview
Preparation and
Update
11.02 Internal Report
Preparation
11.03 Alternative Power
Source Risk Analysis
11.04 Susrtna Base Plan
Initial Risk
Assessment
11.05 Susltna Base Plan
Extension and
Revis ion •
11.06 Susltna Financing
Risk Analysis
11.07 Resol utlon of Tax
Exempt Bond Issue
11.08 Identify Parties In
Interest
11.09 Revenue Assurance
Procedures
11.10 Liaison with APA Bond
Underwriting Managers
1 t •. 11 Ora ft Document at l on for
Bond Offering Support
• TABLE 1
SLMMRY OF CHANGES TO TASK 11, MARKETING AND £.1 NANC I NG
Cost In •
Seotember 11 POS
$154,000
$183,000
$ 17,500
$ 24,500
$ 20,000
$ 10,000
$150,000
$ 25,000
$ 75,000
Integrated
$ 136,000
Schedule
Seotember 11 POS
Throughout the
study per lod
Throughout the
study period
Week 0
through 30
Week 53
through 75
Throughout the
study period
After II cense
appl lcation
Weeks 1
through 20
Weeks 10
through 30
Weeks 100
through 120
Continuous
C(,nmence
mcnth 6
Cost
Februarv 4 POS
$99,500
$91,600
$17', 500
$24,::>00
$10,000
$76,300
$25,000
$38,700
Integrated
Schedule
Februarv 4 POS
Week 53
through 130
Weeks 52
through 130
Weeks 20
through 50
Weeks 53
through 75
Throughout the
study per I od
After license
app II cat I on
Weeks 30
through 52
Wee.k.s 10
through 30
Weeks 100
through 120
Continuous
After II cense
appl lcatlon
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Remarl<s
1. Reduces up~tes fran 3 to 1.
2. Permits first overview to foi-
l ow some major data co II ect I on
rather than be concurrent with lt.
Reduces IE''!~! of effort, much of
whIch wou I d heve supported subse-
quent up dates of the proJect
overview.
Schedule chenge only •
No change.
Cuts update effort In huff on Risk
assessment.
Rerrovss effort ent !rei y from
11 1 icense on!y 11 epproech In Section
A6.
Major reduction In Acres Effort.
Puts Issue primarily in the hands
of Salomon Brothers.
No chenge.
Major reduction In Acres effort.
Puts Issue primarily In the ~ands
of Salomon Brothers
No change.
Defers all work, In the 11 11 cense
on I Y" approach In Sect I on A6,
essentially del~ys this effort for
severe I years.
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Subtasks
11.01 Project Overview
(Orlgl nat)
11.02 I nterna I Repor·ts
(Original}
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REVISED ESTiMATES Fer.:<-APRIL 1980-SUBTASKS 11.01 AND 11.02
Original POS
Dollar Value
$154,000
\~elghtlng
8.5
$183,000
Weight! ng
48
Weight Factors
a. Research concurrent with
Initial data col lsctlon.
b. Preparation of first
project overview.
c. Preparation of first
update.
d. Preparation of second
update.
a. Total months of activity
June 80 through December 1 81
b. Support overvle~.
c. Support first update.
d. Support second update.
Unit Total Revised
Weight Weight Value
1. 75
3.0
1. 5
1.0
7.25
7.25
8.5 X S154g000
= $131,500
18
6
6
6
36
36 4 8 x S183,ooo
= $137,300
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