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HomeMy WebLinkAboutAEA Board Meeting Aug 11 2010WK xk ww n GME ENERGY AUTHORITYLorAlaskaIndustrialDevelopmentandExportAuthority 10. 11. AGENDA Alaska Energy Authority Board Meeting Wednesday,August 11,2010 immediately following the AIDEA Board Meeting Anchorage,Alaska CALL TO ORDER BOARD OF DIRECTORS ROLL CALL AGENDA APPROVAL ROLL CALL:STAFF,PUBLIC PUBLIC COMMENTS PRIOR MINUTES --June 8,2010 OLD BUSINESS NEW BUSINESS A.AEA Resolution No.2010-01 Power Project Fund Loan -Haida Energy,Inc. DIRECTOR COMMENTS A.Director's Status Report B.Next scheduled meeting September 22,2010 BOARD COMMENTS ADJOURNMENT 813 West Northern Lights Boulevard e Anchorage,Alaska 99503-2495 www.aidea.org e 907/771-3000 @ FAX 907/771-3044 «Toll Free (Alaska Only)888/300-8534 »www.akenergyauthority.org >]aes”ABIES [=ALASKAGaENERGYAUTHORITY*axe Alaska Industrial DevelopmentandExportAuthorityrene Alaska Energy Authority BOARD MEETING MINUTES August 11,2010 Anchorage,Alaska 1.CALL TO ORDER Chairman Patrick Galvin called the meeting of the Alaska Energy Authority to order on August 11, 2010 at 12:37 p.m. 2.ROLL CALL:BOARD A quorum was established. Members present:Chairman Patrick Galvin (Commissioner,Department of Revenue);Susan Bell (Commissioner,Department of Commerce,Community &Economic Development);and Mike Felix (Public Member). 3.AGENDA APPROVAL The agenda was approved as amended. 4.ROLL CALL:STAFF,PUBLIC Staff present in Anchorage:Steve Haagenson (AEA Executive Director);Jim Hemsath (Deputy Director-Development);Chris Anderson (Deputy Director-Credit);Sara Fisher-Goad (Deputy Director-Operations);Mike Harper (Deputy Director-Rural Energy);Valorie Walker (Deputy Director-Finance);Jim Strandberg (Project Manager);Karsten Rodvik (External Affairs Project Manager);Bill Phelan (Loan Officer);Shauna Howell (Administrative Assistant);and Sherrie Siverson (Administrative Assistant) Others present in Anchorage:Brian Bjorkquist (Department of Law);Mike Nave (Department of Law);Todd Tew (Haida Energy) Participating via teleconference:Robert Venables (Southeast Conference) 5.PUBLIC COMMENTS There were no public comments. 6.PRIOR MINUTES The minutes of June 8,2010 were approved as presented. 813 West Northern Lights Boulevard *Anchorage,Alaska 99503vananasaidarnara@GN7/771 AANN @ EAY GN7/771 ANAA @ TAIL Lenn (AlaAcLA Anh OQOMIAN OLDA a senenne nLAm nein th nets Aen AEA Board Meeting August 11,2010 Meeting Minutes Page 2 7.OLD BUSINESS There was no old business. 8.NEW BUSINESS 8A.AEA Resolution No.2010-01 Power Project Fund Loan -Haida Energy,Inc. Mr.Haagenson stated Resolution 2010-01 allows for the approval of a Power Project Fund (PPF)loan for the Reynolds Creek Power Project owned by Haida Energy (HE).AEA found there were several areas and regulations that need to be improved upon.The original loan application requested zero interest with no guarantees.AEA worked with the economist to determine the appropriate interest rates and worked closely with Alaska Power &Telephone (AP&T),Haida Corporation,and Haida Energy to obtain the appropriate guarantees for using the Power Sales Agreement between Haida Energy and Alaska Power Company (APC),the sub-company of AP&T.The funding is a mixture of the PPF,loans and grants.We are concerned that the right people get the appropriate amount of funds so that we fund the entire project in the end.Mr.Strandberg is working on the project organized management agreement. He will first speak about the Reynolds Creek project findings and Chris Anderson,AEA Deputy Director of Credit,will speak on the loan conditions. Mr.Strandberg discussed the determinations that AEA has made on interest rates to be charged for the $9M loan for Board consideration and approval.He said as project manager the buck stops at his desk for AEA relationship with the Haida Energy project team and to make sure the project gets completed and the flow of funds results in public benefit.The financing package involves this loan and three other AEA grants to different project participants.Haida Energy is the entity that we will be working with.They will be applying for a Certificate of Public Convenience (CPC)and they will become a public utility.Haida Energy is the holder of the Federal Energy Regulatory Commission (FERC)license for the project.AEA has the role as the primary funder for the project while FERC has the sole licensing responsibility for the project. Therefore,the funding and loan conditions made here affect the project financing which also affects the licensing.The financing package is one of the conditions of the FERC license. One of AEA's prime directives is to develop energy projects within the state that will benefit Alaskans.The Reynolds Creek project offers a clear benefit of long run,stable priced electricity for Prince of Wales Island.If the financial package is properly structured,it will deliver this benefit to Alaskans over the entire life.That is a typical hydro power project that we may see again in the loan program and has occurred with the Bradley Lake Project where the characteristics of the project is very high capital costs and very low long run maintenance and operations costs and the manner in which the debt is recovered is a primary determinant of the rate charged to the consumer.The $9M loan is a large part of the financing package.The interest rate set strongly affects the rate that will be charged to Alaskans.In working with Haida Energy to structure this project financially,we've come up with three periods within the life of the project.The first period is the construction period.The second period is the early years before and additional interconnecting intertie to two other communities being built.During the early years the loads will be light on project primarily because there are two other existing hydro projects that have first rights,and because there are power sales agreements that require those AEA Board Meeting August 11,2010 Meeting Minutes Page 3 projects to run.This is a characteristic of literally all hydro projects that because of the very high capital costs you have to build them larger than what you actually need at the moment and you're always going to have over capacity and then later on the project comes into its own.The findings that we made were due to the gestation period of the project.To charge a zero percent interest rate during the construction period would help the company avoid accruing interest charges in the regulatory world called AFUDC.By agreeing to a zero percent interest rate, there are no accrued interest charges and none of the compounding that would occur under an AFUDC process.That will provide major benefits and over the long run will keep the project rates down. The second period is the early load development period.Calculations were made and discussions with Haida Energy occurred that if AEA offered a lower interest rate than the statutory rate,the debt repayment cost could be lowered and thus the effective rate out of the project could be lowered.The basic calculation was that there would be savings in debt costs over these early years that would be combined with an action taken by Haida Energy agreeing to forego collecting rates for a certain period of time and get repaid by the rate payers at a later date when the loads further developed.This is all for the purpose of stabilizing rates so the net effect is that the project can be brought online without having negative impact to the ratepayer at large on Prince of Wales Island.The Reynolds Creek Project will be interconnected with the existing Prince of Wales system and the two other operating hydro projects,Black Bear Lake and South Fork.One of the primary benefits of bringing this hydro on line is that they are literally going to forego having to burn diesel in any significant quantities whatsoever over the foreseeable future. Period three was extended with the lower interest rate until the additional intertie of the communities of Naukati and Coffman Cove are completed and those loads come online.After that time the proposal is to charge the statutory rate of 5.32%for the duration of the project. Mr.Bjorkquist stated the purpose for the finding is to charge a rate less than the statutory rate. Chairman Galvin asked what the statutory rate was.Mr.Bjorkquist stated the statutory rate is based upon the average of the last twelve months of a municipal bond rate which happens to be 5.32%.Mr.Felix asked if that was the average of the trailing 12 months.Chairman Galvin added the statute allows for coming in below that rate and are there criteria specifically identified to justify coming in below the statutory rate.Mr.Bjorkquist said the criteria of the statute deals with the reduced interest rate for project financial feasibility.The criteria are to be established in regulation.The regulation could have more dealing with financial feasibility,but what you can glean from the regulation is that a comparison of the rate that would be charged from the project with the interest rate versus the rate that would otherwise be charged from other energy sources.Chairman Galvin asked if it was a market driven analysis and if the power that would result would be overpriced for the market,then can we charge a lower finance rate.Mr. Bjorkquist said yes and the interest rate would help get closer to that market.Mr.Haagenson said we would like to clarify that in regulations in the future.Chair Galvin asked if that was the interpretation AEA used to rationalize it.Mr.Strandberg said that the foundation of this determination is too keep the energy affordable and to avoid rate shock.Mr.Felix wanted to Clarify that we would be making this loan without any interest for the first two years of the construction period.Mr.Strandberg affirmed.Mr.Felix said then we would be offering it until there's an intertie with the other pieces.We will be below the statutory rate.Mr.Strandberg AEA Board Meeting August 11,2010 Meeting Minutes Page 4 affirmed this also.He said for those three years,but then after that it is going to be a full meal deal. Chairman Galvin asked what the interest rate would be during period two.Mr.Strandberg said it would be 3.33%.Chairman Galvin asked if that would float with the calculations of a statutory number or would it be fixed.Mr.Strandberg said it would be fixed for that short time.Mr.Felix asked if it was fixed because you back into it from the rates you can charge.Mr.Strandberg said that was correct.We started from the rate that the consumer would be charged.Mr.Felix asked if the HE obligation is to keep their rates normalized so that consumers aren't being in any way disadvantaged for them building this project.Mr.Strandberg said he felt HE has done their work.They have a power sales agreement which defines the rate stabilization program to keep the rates basically steady.We have a draft power sales agreement that indicates they will go that way and these are the findings. Mr.Haagenson said after Ms.Anderson's presentation we will open it up to questions. Ms.Anderson said the conditions AEA placed on this loan is absent corporate guarantees and the highest period of risk is during the construction period.Negotiation occurred and AEA required: e A payment and performance bond in form and substance or an irrevocable letter of credit for that period of time to ensure that the project is built and operational. e A non-cancellable 'take or pay'power sales agreement between Haida Energy and Alaska Power Company in the form and substance acceptable to AEA providing a minimum debt service coverage of 1:1 and assigned to the company for security purposes. Evidence of their investment into the project in the amount of $2,000,905 cash. An executed project management agreement in form and acceptance to AEA and award of compliance with all grant terms,as there is a project overlap between grants and loans. e For collateral we would take a deed of trust on the power plant itself and a security agreement and assignment of leases,easements and permits. e Take an assignment for security purposes on the power sales agreement between Haida Energy and Alaska Power Company to mitigate risk,get the plant operational and secure. Chairman Galvin asked if part of the performance bond is some assurance that this project will actually get built for what they say so they will not further obligate themselves with someone else to get the project completed.Mr.Haagenson said that was part of a parent guarantee.He said he would rather see a parent guarantee and that wasn't going to happen -we worked pretty hard on that.They can't bond it,as a performance bond only goes to what you did.The power sales agreement activates once the project is completed,resulting in a gap in the coverage from start to completion.There's a bit of a risk there and we are sharing it.We would prefer the $9M with an irrevocable letter of credit.Mr.Felix said we are sharing more risk than they are when the project is 90%complete and they discover something else to fund. Mr.Strandberg said AEA controls the money using milestones as it is disbursed to them.We are trying to mitigate the risk as best we can,but we are sharing risk on this.Chairman Galvin AEA Board Meeting August 11,2010 Meeting Minutes Page 5 asked Mr.Strandberg to explain the grant sources,the entities involved,and the project management agreement.Mr.Strandberg said it's all about the risk.We are requiring construction performance bonds to assure the project actually gets built;but there's no assurance that we would go over budget other than the project manager requiring reasonable construction contingencies.It's a combination of bonding requirements plus the project management agreement which we are requiring of all of the grantees before any cost reimbursement money flows.The project management agreement will require that the entity establish a project office to have a technical management person,whether it's a construction engineer or a design engineer in that office so they can produce basic standards of construction.Individual grants are to Haida Power,Southeast Conference (SEC)and Haida Energy.AEA will require that all of the grantees sign an amendment to comply with the project management agreement.Not only will they manage the project correctly but they will be required to present a monthly consolidated progress report and invoicing.All requests for cost reimbursements would come through the program office and the individual grantees will agree to not try to make an end run to get money individually from the company.We are requiring a reasonable and rational structure for the accomplishment of a high capital,complex,civil works project.We would monitor the percent complete of the project schedule of values monthly have and as part of that submittal either individual invoices or a comprehensive invoice for cost reimburse with full back up through each of the grantees.Mr.Strandberg's intention is not to allow any reimbursements to flow until we have this worked out and the project management agreement is signed. Chairman Galvin asked Mr.Strandberg to explain the role and relationship amongst Haida Energy,Haida Power,and Southeast Conference and how their grant funds are tied to this and what they get out it.Mr.Strandberg said their role is that they apply for grant funds from the Alaska Energy Authority through Legislative appropriation.Chairman Galvin asked Mr. Strandberg to identify Haida Power.Mr.Strandberg said they are a subsidiary of the Haida Corporation designed to seek renewable energy funds from AEA.They submitted a grant application to the Renewable Energy Fund and were awarded $2M for the Reynolds Creek Project.Chairman Galvin asked if they used those funds for design work and feasibility studies. Mr.Strandberg pointed out that the grant was not awarded until we go the whole project structure together.The grant language is being modified to require Haida power to comply with the project management agreement.Chairman Galvin asked if Haida Power will continue to exist or will they assign the grant monies to Haida Energy.Mr.Strandberg said we will work with them to achieve an appropriate legal resolution to the issue. Chairman Galvin said that if he started asking questions that drew Mr.Strandberg into an uncomfortable situation where he felt we should into executive section,to let him know,as he was unsure as to 'where he was walking in this'.Mr.Bjorkquist said wouldn't it be fair to say that Haida Power was originally going to be the developer of the project and now Haida Energy will be doing that so the grant monies that would have gone to Haida Power now need to be transferred to the entity that is actually going to develop the project.Mr.Strandberg affirmed that.Mr.Haagenson said there is also a grant with SEC and the project management agreement is going to bring all of these grants together,including the PPF.Chairman Galvin asked where the SEC is getting the grant money from -us or from some other entity of the State? AEA Board Meeting August 11,2010 Meeting Minutes Page 6 Ms.Fisher-Goad stated the SEC received a direct $2M Legislative grant for this project.The Co-Chairman of the finance committee in charge required it to go through this non-profit organization for the benefit of this project.Mr.Venables of the SEC is on the line and he has been working with us from the beginning.Mr.Strandberg stated Mr.Venables is the SEC Energy Coordinator and has been working with us to pull the parties together under one single agreement.Mr.Haagenson said there are two parent companies -AP&T and Haida Corporation.|Haida Corporation formed Haida Power,then Haida Corporation and AP&TformedHaidaEnergyinajointventure--75%Haida Corp,25%AP&T.Mr.Strandberg saidthatwassubsequenttothegranttoHaidaPower.Mr.Haagenson said AP&T now also has a subsidiary called Alaska Power Company (APC)which is the utility that Haida Power is going to buy the energy from,that's the power project fund portion.Mr.Strandberg said they are going to buy the power from Haida Energy. Mr.Haagenson said the SEC umbrella will cover all the different funds to make sure we are paying the right money to the right people.Chairman Galvin asked who the loan is with and Mr. Strandberg said it was with Haida Energy,the FERC licensee.Mr.Bjorkquist said FERC will require a complete financing plan to make sure there's enough funds to build the project. Chairman Galvin asked if Haida Energy is diluted in its shareholder position by virtue of all these other entities.Mr.Strandberg said no,they are the sole owner and the other entities are bringing in their grant resources with no equity position.He said it was an interesting situation wherein there's a number of different sources of funds and the project management agreement was the best approach AEA could think of to rationalize the project. Chairman Galvin asked why did Haida Power not transfer and assign everything over to Haida Energy when Haida Corporation decided to move away from Haida Power towards Haida Energy in a joint venture with AP&T -what was the limitation there.Mr.Strandberg said we do not know.There's some maneuvering going on within the Haida Corp and there are individual relationships developing continuously between AP&T and Haida Energy.We required Haida Energy get a Certificate of Public Convenience so it becomes a public utility.Haida Energy agreed to do that.We are requiring that they sign the project management agreement to assure the grant funds can be accessed by the project manager in the Haida Energy program office. Chairman Galvin stated it concerned him that this was not clearer.Mr.Strandberg agreed that it concerns him also and because of that a lot of effort went into executing the project management agreement and with legal assistance we will make sure this goes right. Mike Felix asked by virtue of that -are we taking a more aggressive stance toward management oversight on this project than we ordinarily would.Mr.Strandberg stated we intend to perform a close technical management oversight and will be engaged in the design review as well.Chairman Galvin asked if there were different principles identified with Haida Power as opposed to Haida Energy,i.e.,is there someone that speaks for Haida Power and someone different that is speaking for Haida Energy.Mr.Bjorkquist stated Haida Energy is a parent to AP&T and Haida Corp,as opposed to Haida Power being the sole subsidiary. Chairman Galvin said he understood that,but when you are working a project management agreement,who are you working with who is speaking as a representative for Haida Power and is that person different from the person who is claiming they represent Haida Energy.Mr. Strandberg said that's somewhat a moving target and didn't have an answer.He said he had not spoken directly to Haida Power,but there is a name on the grant application.Mr. Haagenson said they had a meeting and Alvin Edenshaw is the Haida Corporation Board AEA Board Meeting August 11,2010 Meeting Minutes Page 7 Chairman and is also the spokesman for Haida Corp;Todd Tew is our point of contact on behalf of Haida Energy. Mr.Tew addressed the Board and stated that Haida Corporation consists of a seven member Board of Directors.Haida Power consists of those same Directors.Of the seven Directors, three are Haida Energy Directors and the fourth Haida Energy Director is someone from AP&T. Haida Power and Haida Corp are one in the same,if you wanted to talk to someone it would be the same person,me.Chairman Galvin asked him why keep the distinct identity of Haida Power given that everything seems to be moving in the direction of Haida Energy being the successor.Mr.Tew said that he did not believe that we necessarily want to.The reason Haida Energy came into existence is we wanted to partnership and the legal advice they received at the time was rather than say 25%of Haida Power to start a new entity called Haida Energy that is what we did.He said all parties would like to see it consolidated into one.That is why we transferred the FERC permit to Haida Energy and the grants will go there.Mr.Haagenson stated we have not heard negative comments on the need for a comprehensive project management agreement and we would suggest the same thing if it's possible,why keep Haida Power in.Why can't we legally consolidate those grant funds so that access to the money is easier.Mr.Strandberg said as soon as the money is drawn down,he didn't believe Haida Power will exist,that will probably wipe it out.Mr.Tew agreed and said it's just a name that was there before his time. Mr.Strandberg reiterated that's why the project management agreement was considered to get these groups transferred around and we will make sure Haida Power states they were given one consolidated bill so the right people get the right money from the right funds. Chairman Galvin asked Mr.Venables what SEC's interest and role was in this project.Mr. Venables said SEC was very supportive of this project and AEA staff has characterized it precisely.He said SEC is the Legislative vehicle to convey these funds to the project.We will lend our strength at facilitation and coordination.We are eager to sign the project management. Mr.Felix had a question on the three separate tiers of financing and asked if it is viewed as net present value on the project,and how does that stack up in terms of its return versus a straight interest basis project.Mr.Strandberg said he did not have the number but could get it,but pointed out that with the discount rate what occurs early on is important. Chairman Galvin asked how often are we making findings that need to go below the statutory interest rate.Ms.Fisher-Goad replied we are in a transition in loan officers but did not recall that we've had to go below market for loans.This one is unique and larger,where we've needed both Legislative and Board approval.Chairman Galvin asked if,in the Legislative process,was the likelihood of a below statutory level interest rate discussed.Ms.Fisher-Goad stated the interest rate was not part of the discussion;the main goal was project approval.A combination of State grants and loans above $5M requires Legislative approval.Although we haven't encountered a situation of a below statutory interest rate,there are zero percent interest rate loans out of the PPF.Mr.Strandberg stated that the statutory requirement for Legislative approval was the project and loan amount options.Chairman Galvin asked if that was pending AEA Board approval.Mr.Strandberg responded that was also a contingency. Chairman Galvin asked for clarification of 'Legislative approval of the project'and asked if that was the $2M appropriation to SEC or a separate piece of Legislation.Ms.Fisher-Goad AEA Board Meeting August 11,2010 Meeting Minutes Page 8 responded that Legislative approval of the project is in the PPF statute.This is a major project containing over $5M of State money.If it was a $1M loan,it would have still required legislative approval.Ms.Fisher-Goad stated it's the same Legislation that approved the sale of loan portfolio from AEA to AIDEA.The statute allows for an appropriation of the loan amount to actually be the Legislative approval,but because the capitalization was coming in for the sale and there was also a $10M capitalization of the fund in another vehicle,they chose to just do Legislative approval,and tacked it onto our portfolio sale bill.Mr.Strandberg said it was added late on in session and not in the original bill.Chairman Galvin asked if the $2M appropriated to SEC was through a separate appropriation.Ms.Fisher-Goad stated that occurred in 2008 in a separate appropriation bill wnen the Renewable Energy Fund was created.This project received funds through "Round zero,”a joint solicitation between AEA and the Denali Commission and has been through our application process.The SEC grant came into play early on when energy costs were very high,when there was a push to move forward on renewable energy projects. There were no further questions from the Board. MOTION:Commissioner Bell moved to approve Resolution No.2010-01.Seconded by Mr.Felix.A roll call vote was taken and the motion passed with Chairman Galvin,Mr. Felix,and Commissioner Bell voting yay.Commissioner von Scheben and Commissioner Winther were absent. 9.DIRECTOR COMMENTS Mr.Haagenson stated the Alaska Energy Pathway has been in review status for approximately two months.Next week we should have 1,000 copies made and then we can send out the final version with the DVD.We are still working with Native Corporations,Municipalities,and utilities engaging people in Alaska to make this their plan and move forward. On Friday the Renewable Energy Fund Advisory Committee will meet in Fairbanks.On back of the handout is a strategy map and large project list that we are working on.We are strategizing on the Susitna Hydro Project.They are not interested in performing studies for projects that won't be built.We also do not wish to expend funds on projects that have a zero chance of moving forward,so that is requiring a lot of early studies.We are also considering Chakachamna and Glacier Fork hydro projects.We have been given funds this year to perform a nuclear study.We are working with the IOC utilities on a new operating agreement we hope to have complete by October 16.We are partnering with AIDEA on several projects.Our next scheduled meeting is September 22 which will be an organizational meeting with new Board members. 9B.Next meeting Wednesday,September 22,2010. 10.BOARD COMMENTS There were no board comments. AEA Board Meeting August 11,2010 Meeting Minutes Page 9 11.ADJOURNMENT There being no further business of the Board,the meeting was adjourned at 1:28 p.m. LLLSteveHaagenson,Executive Director/Secretary Alaska Energy Authority Alaska Energy Authority BOARD MEETING MINUTES June 8,2010 Anchorage,Alaska 1.CALL TO ORDER Chairman Patrick Galvin called the meeting of the Alaska Energy Authority to order on June 8, 2010 at 10:30 a.m. 2.ROLL CALL:BOARD A quorum was established. Members present:Chair Patrick Galvin':(Commissioner,Department of Revenue);Commissioner Leo von Scheben (Department.'of Transportation &Public Facilities);Emil Notti(Commissioner,Department of Commerce,Community &Economic Development);and MikeFelix(Public Member). inther (Public Memben. Manager);Karsten Rodvik'ie (terval Affaire Project Manager);Bryan Carey (Project Manager);Linda MacMillannsestand Shauna Howell (Administrative Assistant);and May Clark Others present iin1 Anchorage:Brian Bjorkquist (Department of Law);Anne Southam and AprilBrehm(Environmental Resources Management);Mike Cunningham (Chugach Electric Association,Chair Bradley Lake PMC Finance Committee);Eric Whaley and Andrew Hildreth (Bank of America Merrill Lynch). Participating via teleconference:Cynthia Weed (K&L Gates LLP,AEA Bond Counsel). 5.PUBLIC COMMENTS There were no public comments. AEA Board Meeting June 8,2010 Page 2 of 4 6.PRIOR MINUTES The minutes of March 17,2010 were approved as presented. 7.OLD BUSINESS There was no old business. 8.NEW BUSINESS 8A.AEA Resolution No.2010-02 Supplemental Resolution Authorizing the Issuance, Sale and Delivery of Power Revenue Refunding Bonds Sixth Series (Bradley Lake Hydroelectric Project) This action was requested by the Bradley Lake Project Management Committee (Bradley PMC), who directed the Budget Subcommittee of the PMC to analyze a potential refunding transaction for cost savings benefits.The Budget Subcommittee determined refunding the Refunded Bonds results in a projected 7%present value savings (at the time of the analysis)and recommended PMC authorization of the transaction.On June 3,2010,the Bradley PMC approved a resolution authorizing the refunding.On July 1,2010,the call premium on the Refunded Bonds drops by .5%,a savings of $153,200.Therefore,staff anticipates issuing the bonds on July 1,2010. This resolution authorizes the Authority to issue up to $34,000,000 principal amount of the Authority's Power Revenue Refunding Bonds,Sixth Series (Bradley Lake Hydroelectric Project) (the "Sixth Series Bonds”).The Sixth Series Bonds will be revenue obligations of the Authority and supported by revenues from the Bradley Lake Hydroelectric Project.The $34 million was requested to provide cushion for market changes which require original issue discount and authorization for the sales costs is necessary.We are going to refund not only the bonds,but also going to pay for closing costs.We used the same number for the state bond committee for the volume cap allocation request,and the unused amount will be returned to the state for reallocation. The purpose of the Sixth Series Bonds is to redeem and refund the Authority's $30,640,000 outstanding Power Revenue Refunding Bonds,Fifth Series (Bradley Lake Hydroelectric Project) (the "Refunded Bonds”).The Authority issued the Refunded Bonds in 1999 for the purpose of refunding bonds issued in 1989 which financed a portion of the Bradley Lake Hydroelectric Project.The Refunded Bonds are fixed rate bonds.The reason for the refunding is to provide lower interest rates and,therefore,debt service savings. Resolution No.2010-02 establishes the parameters of the Sixth Series Bonds.It delegates authority to a Designated Representative to finalize the terms of the Sixth Series Bonds at the time of marketing pursuant to a Bond Purchase Agreement.It is currently anticipated that the Sixth Series Bonds will be issued in the approximate principal amount of $29,000,000.(The final interest rates,principal maturities and redemption features will be determined on the date of marketing (currently expected to occur on June 16,2010). AEA Board Meeting June 8,2010 Page 3 of 4 The Power Purchasers are expected to receive the benefits of the lower interest rates as soon as August 2,2010,when the old bonds are paid off.A final addition to this resolution was added,a ratification and approval of the outstanding power sales agreement.The underwriter was expecting an opinion regarding the enforceability of that power sales contract.Its been enforced and in place and all of the power purchasers have conformed to that agreement since the late 1980s.Administratively,rather than go back and find all the original signatures on the documents it is administratively easier if we ratify and reconfirm on the part of the Authority Power Sales Agreements so that it needs to be an enforceable agreement of the Authority.The Power Purchasers have separate counsel and they will be providing opinions to the underwriter about the enforceability of the Power Sales Agreements on the part of the Power Purchasers. These obligations are not a direct obligation of the Alaska Energy Authority.They are payable solely from the payments made by the Power Purchasers.This refunding is expected to be undertaken strictly for the benefit of lowering the cost to those Power Purchasers.Staff recommends approval of Resolution No.2010-02. MOTION:Commissioner von Scheben moved to approve Resolution No.2010-02. Seconded by Commissioner Notti.A roll call vote was taken and the motion passed unanimously. 9.DIRECTOR COMMENTS 9A.Director's Status Report of AEA Programs and Projects e Alaska Energy Plan The draft Energy Pathway was released on April 27 at the Rural Energy Conference for comment,which we will be accepting until the end of June. We are currently providing outreach to native entities,utilities and municipalities;utilizing database to determine loan and grant amounts for equal treatment.Continue meeting with different regions to engage them and gain ownership in the final community and regional plans. °Renewable Energy Fund There is a meeting this afternoon of the Renewable Energy Fund Advisory Committee to discuss project status,program improvements and solicit user feedback. e Legislative Wrap-up AEA had a very active Legislative session with several energy bills (HB306 SB220),GRETC bill and the Railbelt IRP,capital budget energy projects and procurement code authorization.Some bills passed and some did not.Sara Fisher-Goad provided an update of the bills,capital and operating budgets: e SB 301:Authorizes the sale of power projects loan portfolio from AEA to AIDEA.It also authorizes the loan for the Reynolds Creek hydro project and authorizes AEA to adopt regulations that would allow AEA to establish a fee schedule to the power project fund. e HB 363:Restructures the board membership,changing it from three commissioners and two public members to two commissioners and five public members. e SB 220:Omnibus Energy Bill establishes a new emerging energy technology fund that will be managed by AEA with a beginning fund of $2.4 million.It also changes AEA's AEA Board Meeting June 8,2010 Page 4 of 4 powers to include the promotion of energy conservation,energy efficiency and alternative energy through training and public education.There will also be an energy report that the Governor's office will be required to submit to the Legislature no later than January 31,2011 "providing recommendations on how to best structure state energy programs and offices to increase the coordination and efficiency of the state's effort and describing state energy services and programs in their entirety.The report must also include an examination of the existing powers and duties and the structure of the AEA and its Board of Directors,specifically its relationship between AEA and AIDEA.” 9B.Next meeting Wednesday,August 11,2010. 10.BOARD COMMENTS Commissioner von Scheben stated discussion should be kept up regarding the Kake- Petersburg intertie project.A short discussion followed regarding routing and possible environmental impact statements. 11.ADJOURNMENT There being no further business of the Board,the meeting was adjourned at 11:10 a.m. Steve Haagenson,Executive Director/Secretary Alaska Energy Authority ALASKA ENERGY AUTHORITY RESOLUTION NO.2010-01 A RESOLUTION OF THE ALASKA ENERGY AUTHORITY REGARDING A LOAN BY THE AUTHORITY TO HAIDA ENERGY,INC. WHEREAS,Haida Energy,Inc.has applied to the Alaska Energy Authority (the "Authority”)for a loan in the amount of $9,000,000 with a term of 35 years under the Authority's Power Project Fund program (AS 42.45.010)at the interest rate established under AS 42.45.010(f)(2)(B)(the "Loan'); WHEREAS,the nature,purpose and terms of the Loan are described in the memorandum from Authority staff attached as Exhibit "A”hereto (the "Memorandum'); WHEREAS,staff of the Authority has recommended that the Authority make the Loan,subject to certain conditions,as described in the Memorandum; WHEREAS,AS 42.45.010(j)provides,inter alia,that the Legislature must approve a project and the amount of a loan from the Power Project Fund before the Authority may enter into a loan for a project for which a loan of $5 million or more is requested; WHEREAS,the legislative approval required under AS 42.45.010(j)for the Reynolds Creek hydroelectric project and a $9 million loan from the Power Project Fund was provided in sec.6,ch.70,SLA 2010; WHEREAS,3 AAC 106.110(d)requires that a loan from the Power Project Fund be approved by the Authority's Board if the subject loan will exceed $2,000,000; WHEREAS,3 AAC 106.110(d)requires that the approval or disapproval of a Power Project Fund loan be in the form of a written determination that contains the findings required by 3 AAC 106.110; WHEREAS,Authority staff have recommended findings required by 3 AAC 106.110(d),as further set out in the Loan Request Memorandum dated July 28,2010,and the Loan Summary Memorandum dated August 11,2010,copies of which are attached as Exhibits C and B,respectively,and incorporated by reference; WHEREAS,AS 42.45.010(f)(2)(B)enables the Authority to impose an interest rate below the statutory formula rate,if the Authority determines that the reduced rate allows a project to meet financial feasibility criteria established in regulations; WHEREAS,3 AAC 106.110(b)(1)(G),inter alia,enables the Authority to make a written determination of the rate of interest necessary for the project to be financially feasible; WHEREAS,Authority staff made a written determination in Exhibit B that the loan for the Reynolds Creek hydroelectric project should have a reduced interest rate for the first five years of the Loan;and WHEREAS,it is in the best interest of the Authority that the Authority make the Loan,subject to conditions recommended by staff as described in the Memorandum. NOW,THEREFORE,BE IT RESOLVED BY THE ALASKA ENERGY AUTHORITY AS FOLLOWS: Section 1.The written findings recommended by staff,required by 3 AAC 106.110(d),and contained in the Memorandum and in the Loan Request Memorandum dated July 28,2010,and the Loan Summary Memorandum dated August 11,2010 (Exhibit B),are adopted and incorporated by reference as part of this Resolution. Section 2.The Authority's Loan from the Power Project Fund to Haida Energy, Inc.for the Reynolds Creek hydroelectric project is approved,subject to the conditions recommended by staff as set forth in the Memorandum. Section 3.This Resolution is the final decision of the Authority regarding the requested loan from the Power Project Fund for the Reynolds Creek hydroelectric project. Section 4.The Executive Director of the Authority and the Deputy Director-Credit of the Authority are authorized to take such actions as may be necessary or convenient to consummate the Loan including,without limitation,issuing a commitment with respect to the Loan.The Executive Director is authorized to approve non-material changes in the terms and conditions of the Loan as the Executive Director,in his discretion,determines appropriate. DATED at Anchorage,Alaska on this 11"day of August,2010. Chair (SEAL) ATTEST Secretary AEA Resolution No.2010--01 Page 2 of 2 xs ="SAEB,Sy Alaska Industrial DevelopmentaxeaExportAuthority ALASKA +ENERGY AUTHORITY EXHIBIT "A” MEMORANDUM TO:Board of Directors Alaska Energy Authority FROM:Steve Haagenson g¢ Executive Director DATE:August 11,2010 SUBJECT:Loan Summary Loan Request Borrower Management Use of Proceeds Haida Energy,Inc. Haida Energy,Inc.requests a $9,000,000 35-year loan from the Power Project Fund to finance a new 5 megawatt hydroelectric project located at Reynolds Creek on Prince Wales Island in southeast Alaska. Haida Energy,Inc. Haida Energy,Inc.is managed by its stockholders,Haida Corporation and Alaska Power and Telephone Company,Inc.(AP&T). Project plant. Construction and long-term financing for a new 5Mw hydroelectric power A new 5 megawatt hydroelectric project located at Reynolds Creek on Prince Wales Island in southeast Alaska Collateral and Value Deed of Trust,UCC-1,Security Agreement and assignment of easements,permits,and power sales agreement;first lien position on the 5Mw hydroelectric power plant constructed with the loan proceeds.The project cost-value is $17,245,000.AEA staff anticipates that state and federal grant monies totaling $5,340,000 will be made available,subject to final terms of the grants.Haida Corporation and AP&T plan to reduce their contribution from its current level of $4,000,000 to $2,905,000 through use of the PPF loan,resulting in a capital structure for non- grant funded capital of 24%equity and 76%debt as summarized below: Finance structure Federal-Grants $1,340,000 State Grants 4,000,000 PPF loan 9,000,000 Haida Energy,Inc.2,905,000 Project cost $17,245,000 atab------AND ANNAN ew PAY ANITA INNAA ew OTe rH FAT Ht813WestNorthernLightsBoulevard®Anchorage,Alaska 99503-2495anainnnareaa Board of Directors August 11,2010 Page 2 Related Debt AP&T,either direct or through its subsidiary Alaska Power Company,has a 22 year credit history with AEA through utilization of the Power Project Fund loan program.Eight loans and one commitment are outstanding totaling $7,004,291.Additionally AP&T is a guarantor on a loan to Alaska Wind Power,LLC of which it is a member.The outstanding balance on this latter loan is $143,503.All loans pay as scheduled. Financial Information Confidential financial information may be provided to Board members under separate cover. Background Haida Energy,Inc.was formed to construct and own a 5MW hydroelectric power plant at Reynolds Creek on Prince of Wales Island in southeast Alaska.Haida Energy is a newly formed corporation.It has no operating history nor any financial wherewithal beyond that of its stockholders,Haida Corporation (75%)and Alaska Power and Telephone Company (25%). On October 24,2000,the Federal Energy Regulatory Commission issued Haida Corporation a license to construct,own,and operate Reynolds Creek.Under the terms of the FERC license,a financing plan must be approved by not later than October 24,2010,and construction must be complete by October 24,2012.Through a 40-year power sales.agreement,one-hundred percent of the power Reynolds Creek generates will be sold to Alaska Power Company (APC), a wholly owned subsidiary of AP&T. Haida Corporation is the village corporation of Hydaburg,Alaska and was created pursuant to the Alaska Native Claims Settlement Act (ANCSA).The company is located in the geographic region encompassed by Sealaska Corporation,a regional corporation,which was also formed under ANCSA. AP&T is a 50 +year old Washington based utility that was formed in Skagway,Alaska and now serves over 30 Alaskan communities stretching from the Arctic Circle to the southernmost tip of southeast Alaska.Through a combination of low impact hydro,wind and experimental underwater river turbine projects,AP&T's 134 employee-owners work to further minimize its environmental footprint while ensuring the availability of energy resources necessary in future years.Serving over 12,000 households and business customers,AP&T offers an array of services to Alaskans,from energy to cutting-edge voice,video and data communications built on a foundation of fiber-optic,landline and wireless technologies.AP&T serves Prince of Wales Island. Loan Covenants None Recommendation Staff approval of this loan subject to the following terms and conditions: Board of Directors August 11,2010 Page 3 Loan terms: Amount:$9,000,000 Term:35 years Interest and Payments: (a)Zero interest rate and no payments,years one and two,and (b)3.33%interest rate and interest only payments,years three through five,and (c)Statutory interest rate (on the date of AEA Board approval)and fully amortizing periodic payments,years six through 35. Conditions: 1.Prior to any advance of loan proceeds,Haida Energy,Inc.shall provide the Authority with: a)a payment and performance bond in form,substance,and amount acceptable to the Authority,or; b)a $9 million dollar irrevocable letter of credit in form and substance acceptable to the Authority that insures repayment. Provisions a)or b)shall be in place to cover all periods until the hydroelectric project is fully operational. 2.A non-cancelable take or pay power sales agreement between Haida Energy,Inc. and Alaska Power Company,in form and substance acceptable to the Authority,that provides a minimum debt service coverage of 1:1 and assigned to the Authority for security purposes. 3.Standard PPF loan conditions and requirements. 4.Borrower to provide evidence of following minimum investment:$2,905,000 borrower cash,exclusive of grants. 5.Executed project management agreement,in form and substance acceptable to AEA. 6.Award of,and compliance with,all grant terms. Board of Directors August 11,2010 Page 4 Collateral: 1.Deed of Trust,UCC-1,Security Agreement and assignment of leases,easements and permits;recorded first lien position on the SMW hydroelectric power plant,its equipment and appurtenances and all replacements thereof,and all revenue generated from the power it produces. 2.Assignment for security purposes on the Power Sales Agreement between Haida Energy,Inc.and Alaska Power Company. *W yy m uss «_IlDEN a=ALASKA qe ENERGY AUTHORITY Alaska Industrial Development and Export Authority EXHIBIT "B” MEMORANDUM TO:Board of Directors Alaska Energy AuthorityaFROM:olAWsg"Executive Director DATE:August 11,2010 SUBJECT:Loan Summary Haida Energy,Inc. Additional Findings:As Required by 3 AAC 106.110,the Alaska Energy Authority hereby makes the following determination:A reduced interest rate for the loan for years one through five is necessary for the project to be financially feasible. Discussions: ANALYSIS OF PROJECT LOAN INTEREST RATE AND FINDING FOR ECONOMIC FEASIBILITY The Reynolds Creek Hydroelectric Project-will be constructed and placed online by Haida Energy.The Power Project Loan from AEA will be key in the economic viability of the project. After consideration of the proposed Power Sales Agreement for the project,and the ability of the Prince of Wales (POW)Island electrical grid consumer to purchase power produced by the project,AEA has decided to structure the loan terms and conditions within three discrete time periods of the life of the loan,and has set the loan interest rate separately within these three time periods: Period 1 Construction -Years One and Two AEA will provide project funds during construction at a zero (0%)percent interest rate for the first two years of the loan.This decision is based on the following findings: e The borrower has no cash flow or liquidated assets to make interest payments during the construction period. e Accruing interest at the statutory rate and deferring it for repayment at a later date would be a financial hardship on the POW Island electrical grid consumer base. 813 West Northern Lights Boulevard e Anchorage.Alaska 99503-2495 www.aidea.org ®907/771-3000 ¢FAX 907/771-3044 e Toil Free (Alaska Only)888/300-8534 «www.akenergyauthority.org Board of Directors Alaska Energy Authority August 11,2010 Page 2 of 2 e The load projections for the POW Island electrical grid do not support the higher power rates needed to repay the deferred interest. Period 2 -Early load development Years Three through Five AEA has found that interest rate charges in the early years of the project will be critical in setting the rates for the project.AEA finds that by setting a lower interest rate for the critical years when the project is constrained in power output,the cost of power from the project can be set not to exceed the cost of power from prevailing sources. The following facts support this finding: e The project revenue during these early years will be limited. e The market for power generated from the project is limited during these years and therefore the revenue generated from the project will be limited. e The limited revenue can service the debt at the reduced interest rate of 3.33%. e The revenue from the anticipated wholesale power rates will be about equal to the cost of power being generated using diesel fuel. e Using the statutory interest rate would result in consumers paying a high rate for hydro power than prevailing power rates. e Paying a high rate for hydro power is inconsistent with AEA goals for power projects. Period 3 -Long-term Project Operation -Years Six to Maturity The project should be able to service the debt at the statutory interest rate beginning in year six, The following facts support this finding: e The project will start benefiting from the completion of the new POW transmission line to Coffman Cove and Naukati Bay in 2013/14. e Revenue will increase by adding ratepayers tied to the expanded POW transmission line. e The cost of generating electrical power from diese!fuel will be eliminated and removed from the consumer power rate structure for the POW area. K ""Es ""IDEN Exhibit C fx ALASKAAlaskaIndustrialDevelopmentWEAlsExportAuthority MEMORANDUM TO:AEA Credit Committee FROM:Bruce Chertkow DATE:July 28,2010 SUBJECT:Haida Energy,Inc.Power Project Fund loan request On April 15,2010,AEA credit committee conditionally approved a $9,000,000 power project_loan to Haida Energy,Inc.The credit presentation with approvalis attached., As a condition of approval AEA required the corporate guarantees of both Haida Corporation and Alaska Power and Telephone Company,neither of which is either unwilling or unable to provide. Also as a condition of approval AEA required a power sales agreement (PSA)that provides a minimum net revenue to repay the term loan.With this PSA and the lack of guarantees,the AEA (State of Alaska)is at risk only during the construction phase of the project;if the project isnotcompletethenthePSAdoesnottakeeffectthusprovidingnosourceofrepaymentforthe $9,000,000 term loan.Therefore,it is necessary to secure a repayment source for the construction phase of this project.7 To elevate the risk to AEA during the construction phase,an alternate to corporate guarantees, is to require Haida Energy,Inc.to provide AEA with either a payment and performance bond that insures project completion or a letter of credit that will repay the construction loan in the.© -event the project is not complete.Accordingly,it is recommended to amend the conditions of the April 15,2010,approval. Recommendation Staff approval of this loan subject to the following terms and conditions: 1.Recapitalization of the Power Project Loan Fund. 2.Loan terms: a.)$9,000,000 zero interest,zero payment 2-year construction loan. b.)$9,000,000 33-year term loan payable; i.3.33%interest for the first 3 years with semi-annual payments of interest only due each January 1 and July 1 then, ii,Statutory rate (on the date of AEA board approval)with 60 equal semi-annual payments of principal and interest. 813 West Northern Lights Boulevard e Anchorage,Alaska 99503-2495 www.aidea.org «907/771-3000 ¢FAX 907/771-3044 e Toll Free (Alaska Only)888/300-8534 e www.akenergyauthority.org Memorandum Haida Energy,Inc. July 28,2010 Conditions: 1.During the construction phase of the project,and prior to any advance of loan proceeds,Haida Energy,Inc.shall provide AEA with either: a)a payment and performance bond in form,substance,and amount acceptable to AEA,or; b)a $9 million dollar irrevocable letter of credit in form and substance acceptable to the authority that insures repayment of the AEA obligation. 2.A non-cancelable take or pay power sales agreement between Haida Energy,Inc. and Alaska Power Company,in form and substance acceptable to the Authority,that provides a minimum debt service coverage of 1:1 and assigned to AEA for security purposes. 3.Standard PPF loan conditions and requirements. 4.$2,900,000 borrower cash equity,exclusive of grants. 5.Signatory on a participant and project management agreement,in form and substance acceptable to AEA,between Southeast Conference,Haida Corporation, Haida Power,Inc.(Grantees)and Haida Energy,Inc. 6.Award of,and compliance with all AEA grants. 7.Loan disbursement shall be made in conjunction with disbursement of State grants on a pro rata basis. Collateral: 1.Deed of Trust,UCC-1,Security Agreement and assignment of leases,easements and permits;recorded first lien position on the SMW hydroelectric power plant,its equipment and appurtenances and all replacements thereof,and all revenue generated from the power it produces. 2.Assignment for security purposes on the Power Sales Agreement between Haida Energy,Inc.and Alaska Power Company. LOAN COMMITTEE ACTION: Date:.9 [SEY jeApproved Declined Steve Haagenson Memorandum Haida Energy,Inc. July 28,2010 \Anderson G&© Bruce Crertkow().a,Chris Metio Petef Crimp Power Project Fund -Haida Energy,Inc. Reynolds Creek Hydro Loan A.Subject Approval $9,000,000 from the Power Project Fund to Haida Energy,Inc.(Haida)to finance in part anew5megawatthydroelectricprojectlocatedatReynoldsCreekonPrinceWalesIslandin southeast Alaska.Haica requests a 0%loan to meet financial feasibility criteria (seerecommendation). B.Background Haida Corporation and Alaska Power &Telephone (AP&T)have joined together and formed Haida Energy,Inc.to construct and own a SMW hydroelectric power plant at Reynolds Creek on Prince of Wales Island in southeast Alaska.Haida Energy is a newly formed corporation.It has no operating history nor any financial wherewithal beyond that of its stockholders;Halda Corporation (75%)and Alaska Power and Telephone Company (25%). On October 24,2000,the Federal Energy Regulatory Commission issued Haida Corporation a license to construct,own,and operate Reynolds Creek.Under the terms of the FERC license, construction must commence no later than October 24,2010,and be complete by October 24, 2012.Through a 40-year power sales agreement,one-hundred percent of the power Reynolds Creek generates will be sold to Alaska Power Company (APC),a wholly owned subsidiary of AP&T. Haida Corporation Is the village corporation of Hydaburg Alaska and was created pursuant to the Alaska Native Claims Settlement Act (ANSCA).The company Is locatedin the geographic regionencompassedbySealaskaCorporation,a regional corporation,which was also formed underANCSCA. AP&T is a 50 +year old Washington based utility that was formed in Skagway Alaska and now serves over 30 Alaskan communities stretching from the Arctic Circle to the southernmost tip of SE Alaska.Through a combination of low impact hydro,wind and experimental underwater river turbine projects,AP&T's 134 employee-owners work to further minimize its environmental footprint while ensuring the availability of energy resources necessary in future years.Serving over 12,000 households and business customers,AP&T offers an array of services to Alaskans,from energy to cutting-edge voice,video and data communications built on a foundation of fiber-optic,landline and wireless technologies.AP&T serves Prince of Wales Island. C.Project Information Reynolds Creek will be a 5.0 Megawatt hydroelectric resource located on Prince of Wales Island, approximately 10 miles east of Hydaburg.It will be interconnected to the grid on the island and power will be sold on a wholesale basls to APC,the certificated electric utility serving communities on the Island.{tis estimated that this project will have the potential to provide 19 Million KWH of electricity annually. Recently,based partly on the notion that Reynolds Creek would move forward,APC was awarded a grant and a PPF loan to interconnect the communities of Coffman Cove and Naukati Bay, heretofore served exclusively with diesel power,to the grid.With these additional loads on the grid, and the availability of Reynolds Creek to compensate for low water levels or other causes of hydropower Inadequacy,the entire system will become diesel-independent except in emergency situations. Prepared for:Alaska Energy Authority March 2010. \ Reynolds Creek Hydro loan Page 2 The Reynolds Creek Hydro project Is projected to cost $17,245,000.Grants of $5,340,000 have been approved and Halda Corporation has Invested $4,000,000 in equity.Halda is seeking to reduce its equity to $2,905,000 through use of the PPF loan,resulting in a capital structure for non- grant funded capital of 24%equity and 76%debt: Finance structure Federal Grants $1,340,000 State Grants 4,000,000 PPF loan 9,000,000 Haida Energy,Inc._2,905,000 Project cost $17,245,000 The map In this section shows a schematic of Prince of Wales Island,including: .Major communities; «The existing electrical grid (solid bold tine)connecting Craig,Kiawock,Thorne Bay,Kasaan, Hollis,and Hydaburg; .The new transmission line to Coffman Cove and Naukatl Bay (dotted line -expected to be :operational in 2013/2014); .The existing Black Bear Lake and South Fork hydroelectric projects; .The proposed Reynolds Creek hydroelectric project (Reynolds Creek). *POINT BAKER*PORT PROTRCTION | "WEALE PASS *CORRMAN COVE |*EDNA BAY} NAUKATI°”f \ ? .\ oassan |\*THORNE BAY |Fowk Hyire \ XLAWOCYSoe °CKASSAN |crac, \THOLLIS] dg Proposed.ceyno.cs CreekOies Reynolds Creek Hydro Loan Page 3 Reynolds Creek will be capable of delivering over 19 Million KWH of energy annually,and will allow all current and projected loads within the interconnected system to be met with renewable hydroelectric power.Power supply for 2008,including interconnected and isolated load centers, required 6,038 MWH of diesel power: Prince of Wales Island sources of power -2008 Total Energy Requirements 27,695 MWH Generation by Source Black Bear Hydro Plant 15,101 South Fork Hydro Plant 6,558 Diesel 6,036 Total Generdtfori 27,695 MWH Under the Power Sales Agreement (PSA)supporting the loan application,Halda will sell Reynolds Creek power to APC under the following terms: «APC will make a fixed payment equal to the annual debt service on a $9 million dollar,zerointerest,30 year loan for the first 6,000 MWH of energy. e Reynolds Creek shall provide additional energy if power from Black Bear Lake and South Fork Is unavailable or fully utilized.Additional energy shall be priced at the rate in effect for Black Bear Lake ($0.0648/kWh in 2009)plus any amounts associated with the Rate Stabilization Methodology (see below).. ¢APC shall pay for all O&M and Land Lease expenses until the annual net revenue (cash flow after debt service payments)to Halda Energy is $500,000.APC shall then pay 50 percent of the O&M costs until the net revenue (cash flow after debt service plus expenses) to Halda once again reaches $500,000 per year.Halda will then be responsible for all O&M costs, The term of the contract is from the date of Commercial Operation through October 1,2050 and may be extended or terminated in accordance with various contractual provisions.When Reynolds Creek is operational,all electrical energy on the Prince of Wales Island interconnected grid will be - met with hydro power.This will allow for cost stability,load growth,and allow for operational dispatch flexiblilty without resorting to diesel fuel except in emergencies. O&M expenses,initially expected to be $309,000 annually,will increase gradually with inflation and Land Lease expense payments to SeaAlaska Corp.and Haida Corp.will be fixed at $9,000 per year. Haida Energy will be a certificated wholesale utility regulated by the Regulatory Commission of Alaska (RCA).Under the rate plan contemplated in the PSA,initial payments by APC to Haida aresufficienttopayonlyfordebtserviceandexpenses,I.e.they leave equity investors with a zeroreturnonInvestment.Future payments for additional energy,|.e.energy over and above the 6,000 MWH base energy amount,are expected to provide equity returns.As mentioned above,additional energy will be priced at the rate APC pays for Black Bear energy plus an amount determined through the Rate Stabilization Methodology (RSM). Reynolds Creek Hydro Loan Page 4 The RSM jis a contractual mechanism under which Halda's revenue and regulated revenue requirement are determined by the RCA each year.An under-collection of the revenue requirement ° during any year Is recorded as a deferred asset in a Rate Stabllizatlon Account,treated as a ratebaseItemforfuturerevenuerequirementcalculationpurposes,rolled Into additional energy payment rates charged In subsequent years,and recovered,with Interest,within the first 20 yearsofcommerclaloperationthroughthesaleandpurchaseofadditionalenergy.Should revenue exceed the established revenue requirement In any glven year,"excess”revenues would, presumably,accrue solely to Haida owners as there Is no provision in the RSM to offset the deferred asset with over-collections of the revenue requirement. One danger of implementation of the RSM is the potential for the deferred asset in the Rate Stabilization Account to,rather than stabilize rates over a long perlod of time,grow so large as to make the purchase of adaltional energy not commercially viable even if it is the most economic source of incremental generation for the area.For example,if sales growth does not allow for Reynolds Creek annual energy usage to exceed 6,000 MWH during any year for the first 5 years of commercial operation,the Rate Stabillzatlon Account will likely have a value of over $3,000,000, exceeding Haida's original equity Investment. Eventually,depending on the RCA's revenue requirement determination,with Interest,and without sufficient load growth,the account could actually exceed the origina!cost of the project Itself,The RCA can be expected to review the rate settlng methodology In connection with approval of Haida Energy's application for a Certificate of Public Convenience and Necessity. Halda Energy expects to complete Installation of generation equipment in the 4"quarter of 2011 and commence commercial operations at the start of 2012,at which time approximately 2,400 Mwh (2.4 Gwh)of diesel generated electricity will be displaced.Once Coffman Cove and Naukati Bay are connected to the grid in 2013 or 2014,approximately 1,500 Mwh (1.5 Gwh)of additional diesel generation (3.9 Gwh total)will be displaced.Other potential loads for Reynolds Creek power include a new Cold Storage facllity In Cralg,2,000 -3,000 MWH/yr,and mining development,7,000 MWH/yr.With Reynolds Creek,the likelihood of this type of economic development Is higher since business entities will not have to rely on diesel to power their Industries. Technical Feasibility HDR Engineering,Inc.has provided design and licensing support for Reynolds Creek since 1997. APC owns and operates two other hydro projects on the island,and the project faces no unusual environmental,construction,or permitting issues that would stand In the way of successful completion. Economic Feasibility Haida Energy requests a zero percent interest PPF loan.Justification for the 0%loan request Is found in the clalm that Increases in interest rates quickly erode the economic feaslbillty of the project because of the Impact on end user rates;increasing Interest rates on a $9,000,000 loan for a 30 year period adds to the annual debt service costs which are directly passed through to customers in the Base Energy Payment in the form of higher rates than would be the case at 0%: Reynolds Creek Hydro Loan Page 5 Interest Rate 0% 2% 4% 6% Annual Debt Service $300,000 $400,457 $517,949 $650,592 Increased Annual Cost to System vs.0% Loan $0 $100,457 $217,949 $350,592 The pure economic feasibility of the Reynolds Creek Hydroelectric Project Is highly dependent on speculative load growth and hydro production assumptions on Prince of Wales Island.Under the terms of the PSA between Haida Energy and APC,APC will make a minimum payment to Haida Energy and be entitled to receive 6 Million Kwh per year barring some operational reason the power cannot be delivered or received.Reynolds Creek will therefore have priority dispatch in AP&T's operations. While the loan application states that the project will "displace over 6 million kilowatt-hours of diesel generation at current loads”,review of current generation and load profiles and discussions with APC Indicate that 2.4 Million kilowatt-hours of diesel will be displaced per year until Coffman Cove and Naukati Bay are Interconnected,and then an additional 3.9 Million kilowatt-hours per of diesel will be displaced per year.Note,however,water avallability In the spring can significantly alter this picture -for example,In 2008 over 6 Milllon kilowatt-hours of diesel was used because of operational considerations and low water flow feeding existing hydro projects.In normal years, therefore,It is lIkely that approximately one-half of the 6 million kilowatt-hours of Reynolds Creek energy will displace other hydro generation. The difference in diesel displacement Is significant with respect to the economics of the project.At a fuel cost of $3/galion,a fuel efficiency of 13.5 kwh/gallon,a 30 year,$9 Million debt at a cost of 5.32%,and an annual equity capitalization ratio of 20%(return,taxes,deprec.),Reynolds Creek deployment will Increase overall cost of operations by $173,479 per year ($0.0066/Kwh)if 6 Gwh of diesel are displaced,$640,146 per year ($0.0244/Kwh)if 3.9 Gwh are displaced,and $973,479($0.037 1/Kwh)if 2.4 Gwh are replaced.: Assume -20%on equity =$581M O&M =$318M DS @ 5.32%=$604M ' $1,503M Impact to EndAnnualGallonsof'Sevings al User Rates -Kwh Diesel @ Cost to 26,254,580 Kwh Displaced Displaced $3/Gallon System Sales @ 5.32%' { 6,000,000 444,444 $1,333 $170 $0.0066 ' 3,900,000 288,889 $867 $636 30.0244 2,400,000 177,778 $533 $970 $0,0371 Higher future fuel costs and/or increased load growth would significantly Improve the economics of ;the project.Unaccounted for in this analysis are savings due to lower maintenance an O&M costs Reynolds Creek Hydro Loan Page 6 for diesel plant which will used for standby emergency purposes rather than for everyday power generation once Reynolds Creek comes online. Because project economics are insuffictent to support debt service,expenses,and return on riskcapltalduringtheearlyyearsofoperation,the project sponsor has created a pricing mechanism - the RSM,discussed above -wherein garnering equity returns from customers are deferred untilloadgrowthcatchesupwithcapacityadditionstoprovideneteconomicbenefits.Non-quantifiable project benefits Include making the interconnected grid totally diesel-independent and allowing Bear Creek to operate within Its licensing specifications without resorting to diesel generation. Financlal Feasibllity . Financial feasibility means not only that the borrower will have sufficient funds to repay the loan but also that consumers will not unnecessarily incur major or unacceptable cost Increases. Power Project Fund.(PPF)statutes provide that the Interest rate on PPF loans will equal the average rate over the prior 12 months of municipal revenue bonds,unless a lower rate is needed for the project to meet financlal feasibllity criteria.Statute also allows that [loan]repayment may be -deferred for 10 years or untll the project has achleved earnings from Its operations sufficient to pay the Joan,whichever is earlier.The "presumptive”rate (i.e.the average municipal revenue bond rate) is currently 5.32%.APC has requested a 30 year,0%loan,which !s somewhat shorter than the expected 40 year economic life of the project. Debt service on a $9,000,000 PPF Joan at 5.32%over 30 years Is $603,940 per year,Annual debt service on a $9,000,000 5.32%interest-only loan Is $478,800. Debt service on a $9,000,000 PPF loan at 0.00%over 30 years,as requested by Haida Energy,is $300,000.A $300,000 per year Interest only payment on a $9,000,000 PPF loan would result in an interest rate of 3.33%, The difference between Haida Energy's requested $300,000 per year debt service and debt service on an interest-only 5.32%loan,$478,800,amounts to an increase in customer rates of $0.007/Kwh: $478,800 -$300,000 =$178,000/26,254,580 Kwh =.007/Kwh Fuel cost savings once Coffman Cove and Naukati Bay are interconnected will allow this cost to be' absorbed by the system without increasing prices to end use customers,As loads grow over time, full amortization of the $9,000,000,5.32%loan can be implemented without adversely Impacting customers (See Table A).Load growth of slightly over 1%(279,609 Kwh/year)would allow the project to break even at current customer rates,and load growth beyond that would provide positive- returns to equity owners. Full amortization of debt costs during the early years of operation would place an undue burden oncustomers.However,future circumstances might ameliorate the need for debt rellef,AEA/AIDEA should consider a 5 year interest-only loan,starting at 3.3%,converting to 5.32%once Coffman Cove and Naukati Bay are interconnected,and converting to a fully-amortizing 30 year Joan beginning in year 6..This would ensure that the PPF's at-risk investment fulfill legtslative directives that loan rates generally reflect market conditions with deference to undue customer impacts. Reynolds Creek Hydro Loan : Page 7 G.Alternative Sources of Financing Commercial lenders such as banks,credit unions or lending cooperatives provide loans of this nature.However,consideration by a commercial lender js unlikely because of the current PSA revenue structure.Additionally,It Is unlikely that Halda could secure funds from alternative sources under terms that reflect the financial benefits to customers described hersin. H.Credit Analysis Reynolds Creek Hydro Loan Page 8 ms ! Reynolds Creek Hydro Loan ) Page 9 lL Loan Officer Comments: The power sales agreement between Haida Energy and Alaska Power is $300,000/Yr.which supports Interest only payments at 3.33%on $9,000,000. Project analysis concludes customer rate Increases are negligible on a 3.33%interest only payment on a $9,000,000 Joan. Project analysis concludes that the project can support a higher level Interest loan and additional debt payment without affecting utility rates as the cost of diesel and/or greater power consumption is required. Alaska statute allows a zero interest rate loan. Alaska statute allows that repayment may be deferred for 10 years or until the project for which the loan Is made has achieved earnings from its operations sufficient to pay the loan,whichever isearlier.; . J.Findings: As required by 3 AAC 106.110,the Alaska Energy Authority hereby makes the followingdeterminations:: 1.Both the project and the applicant meet the program's eligibility criteria. 2.The project will meet the needs of the area and benefit the area. The project is technically feasible.od4,The project is economically and financially feaslble. 5,There are no alternatives to the project that are less costly that also meet the criteria stated above. 6.Any PPF loan for the project will require the borrower to obtain all necessary permits and certificates. 7,Subject to legislative approval,sufficient funds will be available In the Power Project Fund to make the loan 8.The applicant/guarantors have or will have sufficient revenue from all sources to repay the loan. K,Recommendation Subject to AEA board and legislative approvals,it is recommended to conditionally approve: 1.$9,000,000 zero interest,zero payment 2-year construction loan, 2.$9,000,000 33-year term loan payable:| Reynolds Creek Hydro Loan Page 10 a)3.33%interest for the first 3 years with semi-annual payments of Interest only due eachJanuary1andJuly1then; b)Statutory rate (on the date of AEA board approval)with 60 equal seml-annual payments of principal and interest. Conditions: 1.Halda Corporation and Alaska Power and Telephone shall each fully and unconditionally guarantee both the construction and term loans. 2.Standard PPF loan conditions and requirements. 3.$2,900,000 cash equity exclusive of grants. 4.Award of,and compliance with all AEA grants. 5.Loan disbursement shall be made in conjunction with disbursement of State grants on a proratabasis. LOAN COMMITTEE ACTION: Date:Y-/S mv? Approved Declined LLStevéHaagenson .'SG QadirsAnderson uce Chertkow Chris Mell Peter Crimp 2010 Project Strateqy Map {Boxes Indicate:Joint AIDEA and AEA Projects Alaska Intertie 1OC:Jim Strandberg IRP Projects New Agreement(s)By Utilities SVC Design/Permitting Teeland Douglas Bradley Lake PMC:Bryan Carey Southeast IRP:Jim Strandberg Battle Creek SEPA/SEC Bond Refunding:Valorie Walker Kake Petersburg Tie Line Metlakatla-Ketchikan Tie Line Craig-Klawock Large Hydro:__Bryan Carey Fire Island:Jim Strandberg Susitna Interconnection Chakachamna Glacier Fork Kenai Wind Farm:Rich Stromberg Mt.Spurr Geothermal:Neil McMahon Procurement Regs:Chris Rutz Alaska Energy Pathway:_Steve Haagenson Draft Regs Outreach Loan/Grant/Interest Mix Analysis Deployment/Present Economic Development Database:Linda MacMillan Eneragy Efficiency/Conservation:Sean Skaling Inventory Outreach ARRA Grant Admin Budget:Linda MacMillan PCE Reporting and Management:Mike Harper PCE Program,Changes,Coordinator with RCA REF Small Nuclear Power Report:Mike Harper Quality Feedback -Peter Crimp Technica!Analysis -ACEP Round 4 -Peter Crimp Public Process -EPRI Round 3 and Prior -Butch Organization Report:Sara Fisher-Goad Training:Sara Fisher-Goad Form Follows Function Project Management Function of AEA Supervisory-Mentor New Board Customer Service Personnel Org Chart Board Involvement Page 1 of 3 Current August 5,2010 2010 Project Strategy Map [Boxes Indicate:Joint AIDEA and AEA Projects Circuit Rider:Kris Noonan Customer Service:Mike Harper Emergency Response Feedback -Bruce Tiedeman and Karsten Rodvik AEA Annual Report -Karsten Rodvik Performance Measures Emerging Technology Fund:Peter Crimp/Sara Manager Meetings:Sara Fisher-Goad Advisory Committee Consistency Applications/Evaluation Evaluations Selection Kudo Promotion/Thanks Regulations DOE Loan Guarantees/Loans:Mike Harper Human Resources:Sara Call Belden Position Descriptions CFC Loan Guarantee Wage Analysis Tribal Energy Program Personnel Manual CREB's Succession Planning Compressed Work Week Regulations:Bulk Fuel Loans:Chris Anderson Emerging Technology -Sara/Peter/Butch Rejection Notices PPF Economic 0%Interest -Chris Anderson Bridge Loans PCE -Jeff Williams Web Page Design:Sara Fisher-Goad Program:Peter Crimp Design Wind,Hydro,Geothermal Maintenance Asset Disposition:Mike Harper Alaska Energy Statistics:Peter Crimp Larsen Bay,Napakiak,POW Electric Kobuk-Shugnak Heat St.Mary's Waste Heat System Remote Monitoring:Chris Mello Office Renovation:Chris Rutz Trending Expansion to More Utilities Heat Recovery PCE Training Power Project Fund:Mike Harper Sale and Purchase of Loans -Valorie Walker Regulations for Fees -Chris Anderson Promote Use of PPF -Mike Harper Page 2 of 3 Current August 5,2010 RPSU/BF Quality Costumer Service Projects 1/3 -1/3 -1/3 2010 Project Strategy Map {Boxes Indicate:Joint AIDEA and AEA Projects BEU RPSU Bettles (construction)Hoonah (construction) Koliganak (construction)Yakutat (construction) Perryville (design)Igiugig (construction) Twin Hills (construction)Ruby (construction) Pelican (ongoing) Unalakleet (ongoing) Page 3 of 3 Current August 5,2010