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Home My WebLink AboutAPA Draft Conditional Land and Resource Agreement Unalaska 3-1986ALASKA POWER AUTHORITY DRAFT CONDITIONAL LAND AND RESOURCE AGREEMENT FOR THE UNALASKA GEOTHERMAL PROJECT March 25,1986 THIS AGREEMENT is made and entered into as of _the day of »1986,by and between THE ALEUT CORPORATION,an Alaska corpo- ration,hereinafter referred to as "Aleut,"and the ALASKA POWER AUTHORITY,a public corporation of the State of Alaska,hereinafter referred to as the "Power Authority." WHEREAS,the purpose of the Power Authority is to promote,develop,and advance the general prosperity and economic welfare of the people of Alaska by providing a means of con- structing,financing,and operating power projects;and WHEREAS,the Alaska Legislature finds that the establishment of said power projects is necessary to supply power at the lowest reasonable cost to the state's electric utilities,and thereby to the consumers of the states;and WHEREAS,it is the declared policy of the state,in the interests of promoting the general welfare of all the people of the state,and public purposes,to reduce consumer power costs and otherwise to encourage the long-term economic growth of the state,including the development of its natural resources,through the establishment of power projects;and WHEREAS,the Power Authority,in cooperation with Aleut,has completed a four-year geothermal exploration and drilling program near Mount Makushin on Unalaska Island,which re- sulted in the discovery of an extremely productive geothermal reservoir;and WHEREAS,the Power Authority has also completed a reconnaissance study of energy re- quirements and alternatives indicating that a geothermal power system is likely to be the most economic source of electric power for the community of Unalaska/Dutch Harbors and DRAFT Land and Resource Agreement March 25,1986 Page 2 WHEREAS,the Power Authority Board of Directors has allocated funds to conduct a Fea- sibility Program for developing a geothermal power system on Unalaska Island,with the stipu- lation that the Feasibility Program be initiated only after agreements have been negotiated with appropriate landowners for the use of lands and resources during the feasibility,design,con- struction,and operation phases;and WHEREAS,Aleut has received interim conveyance,under the Alaska Native Claims Settle- ment Act,to the surface and subsurface land estates on which the exploration and drilling took place; NOW,THEREFORE,witnesseth that: Article A.FEASIBILITY PROGRAM 1.Administration of Feasibility Program.The Power Authority shall,subject to appro- priation,fund and conduct a Feasibility Program in accordance with Exhibits A and B,attached hereto and made a part hereof by reference,a feasibility analysis,hereinafter referred to as the "Feasibility Program,"for a geothermal power system to be located on and over Aleut's land on Unataska Island.The geothermal power system,hereinafter referred to as the "Project,"shall consist of geothermal wellsites,wells,piping and power generation facilities and transmission lines,roads and other appurtenances required to produce and transmit power to the City of Unalaska distribution system.The Project,if developed by the Power Authority pursuant to the Feasibility Program,shall be located within Township 72 South,Range 118 West,Sections 20,21, 22,23,24,25,26,27,28,29,30,31,32,33,34,35,and 36;Township 72 South,Range 119 West,Sections 2,3,4,9,10,11,14,15,16,22,23,24,25,26,27,33,34,35,and 363 and Township 73 South,Range 120 West,Sections 1,2,and 3;Seward Meridian,hereinafter referred £5 to,the "Project Area."The Power Authority shall designate a project manager whose primary responsibility is administration of the Feasibility Program, 2.Termination of Feasibility Program.The Power Authority Board of Directors,here- inafter referred to asthe "Board,"may,at its option,and upon written notification to Aleut, terminate the Feasibility Program and this Agreement upon the completion of Phases (1)or (2), as set forth in Exhibit A hereunder,or thereafter on the inability to acquire power sales agreements or financing for the Project after diligently pursuing acquisition of such agreements and financing. DRAFT Land and Resource Agreement March 25,1986 Page 3 3,Partictnatinn by Alavt fa the Sarsthilfty Proaran.(a)The Bower Authority shallPoFMTALTIMOE notify Aleut in advance of,and Aleut shall have the right to attend,at its expense,all review meetings between the Power Authority and its Feasibility Program contractors except meetings regarding bid documents or matters the Power Authority deems proprietary or to constitute a conflict of interest with respect to provisions hereof.Unless both parties agree otherwise, the Power Authority and Aleut shall meet monthly during the Feasibility Program,at a time and place convenient to both parties,to review the Feasibility Program analyses.Aleut may make recommendations to the Power Authority with respect to continuation of the Feasibility Program; changes in the Feasibility Program,including scopes of work,schedules,and final report for- mat;and development or nondevelopment of the Project.The Power Authority shall give full consideration to recommendations of Aleut but such consideration shall not restrict or diminish the Power Authority's responsibility to make final decisions on matters concerning the Feasi bility Program and the Project. (b)The Power Authority shall,upon request,at no cost or at a cost not to exceed ten cents per page,provide Aleut with data and materials developed during the Feasibility Program except data and materials the Power Authority deems proprietary or to represent a conflict of interest with respect to provisions hereof.Throughout the Feasibility Program,the Power Authority shall document to Aleut on a monthly basis the direct costs actually incurred in conducting the Feasibility Program. (c)If requested by Aleut,the Power Authority shall provide to Aleut fn writing a description of the nature of the meetings between the Power Authority and its Feasibility Program contractors to which Aleut is prevented from attending and an explanation of the reasons for preventing Aleut's attendance.Likewise,if requested by Aleut,the Power Authority shall provide to Aleut in writing a description of the nature of the information being withheld and an explanation of the reasons for withholding such information. 4.Commitment to the Project.Upon completion of Phases (1)and (2)of the Feasibility Program,as set forth in Exhibit A hereunder,the Board shall commit to a course of action, within the timeframe set forth in Exhibit B hereunder,to develop the Project or to terminate this Agreement.The Power Authority shall notify Aleut in writing of the decision by the Board on or before April 1,1987,as referenced in Exhibit B hereof.In the event the Power Authority commits to a course of action to develop the Project,the Power Authority shall diligently proceed to complete its obligations as set forth in Exhibits A and B hereunder.[n the event the Power Authority fails to commit to a course of action within the timeframe set forth in 1594/572(3) DRART Land and Resource Agreement March 25,1986 Page 4 Exhibit B hereunder,this Agreement shall terminate,unless both parties agree in writing to continue the Agreement. 5.Access to Lands to Conduct Feasibility Program.Aleut shall allow access by the Power Authority,its employees,agents,representatives,and contractors to land Aleut owns on Unalaska {sland sufficient to conduct and complete the Feasibility Program as set forth in Exhibits A and B hereunder.Such access by the Power Authority shall not prevent Aleut from allowing access by others to Aleut land and resources on Unalaska [sland;however,Aleut agrees that access by others,in the event of any access conflicts,shall be subordinate to the needs of the Power Authority to conduct and complete the Feasibility Program.Such access shall be permitted during the Feasibility Program so long as the Power Authority performs its obligations set forth hereunder.If the Feasibility Program is terminated prior to acquisition of financing for the Project or if the Board decides not to develop the Project,Aleut agrees to allow access to lands for plugging and abandonment of the Power Authority's existing exploration well,as an act of last resort in the event the Power Authority and Aleut cannot agree otherwise in writing to maintain the well. 6.Option for Project Development by Aleut.Prior to or within sjxty (60)days after f 2)ot J Se f Ffyasne tal iecompletionbythePowerAuthorityFeasibilityas set forth in Exhibit A hereunder,Aleut,in conjunction with reasonably qualified parties,may present proposals and agreements to provide for the funding,development and/or operation of the Project,any portion thereof,or a reasonably comparable project.In the event an Aleut proposal-ar "Eity;"provides for the development of the Project at a delivered cost of power to the City SLnehsKs that is equal to or less than that which the Power Authority can reasonably expect to deliver #5 See 4feliwerefcostfsSotecminedeftercompletro-)of Sraswecal feesthil ty regopursuanttothe,Feasibilyty Ys for in the event the terms and conditions of a power salesCompleteefSytenceal agreement between Aleut and the City are preferred by the City,then Aleut's proposal for development of the Project shall be accepted.Upon acceptance of Aleut's proposal,the Power Authority shall document to Aleut within thirty (30)days,the direct costs actually incurred on a monthly basis during the Feasibility Program set forth herein.Upon Aleut's reimbursement to the Power Authority for documented direct costs,this Agreement shall terminate. Article B.GRANT OF LEASE AND RIGHTS FOR THE PROJECT 1,Lease and Production Rights.Upon the completion by the Power Authority of the Feasibility Program within the timeframe set forth in Exhibit B hereunder,prior to any drilling or construction and after a commitment by the Board to proceed with development of the Project, DRAFT Land and Resource Agreémons March 25,1986 Page 5 ecsemox Aleut,for and in consideration of the royalties,ren Sy and covenants herein provided,shallfp.fees lease exclusively unto the Power Authority surface lands which are specifically identified in the Feasibility Program analysis as necessary to construct and cperate the Project,-exelusive-of- rights-of-way-emd-easements_granted_inSeetien-3-hereunder,and shall grant separately to the Power Authority the non-exclusive right to drill for,produce,extract,take and remove from the subsurface estate of Aleut:(a)all products of geothermal processes,embracing indigenous steam,hot water and hot brines;(b)steam and other gases,hot water and hot brines resulting from water,gas,or other fluids artificially introduced into subsurface formations;(c)heat or other associated energy found beneath the surface of the earth;(d)water from geopressured zones (the foregoing (a)through (d)are hereinafter referred to as "Energy Resources");and (e) any minerals (exclusive of off!or hydrocarbon gas that can be separately produced)which are found in solution or association with or derived from any of the foregoing (such minerals are hereinafter referred to as ""Byproducts").[In addition to the rights granted to the Power. Authority above,Aleut shall hereby grant to the Power Authority the right to explore the Leased Lands by geological,geophysical or other methods,whether now known or not,and to take water. from said Leased Lands for operations hereunder.The surface lands leased by Aleut to the Power. Authority and the subsurface estate of Aleut in which the Power Authority has the non-exclusive right to conduct the foregoing activities are hereinafter collectively referred to as the "Leased Lands,"and the rights granted herein are hereinafter collectively referred to as the "Lease."Aleut agrees that the drilling for,production,extraction,taking and removal of Energy Resources and/or Byproducts from the subsurface estate of Aleut by a party other than the Power Authority shall be subordinate to the needs and requirements of the Power Authority for so Tong as this Agreement is in effect. Land 2.)Resource Use and Disposal Rights.For the same consideration,Aleut shall grant to the Power Authority the right to store,utilize,process,convert,and otherwise use such Energy Resources and Byproducts on or off the Leased Lands and to sell the same or any part or derivative thereof on or off the Leased Lands during the term of the Lease,with the right of entry thereon at all times for-said purposes,and to construct,use,maintain,erect,repair and replace thereon,and to remove therefrom all roads,pipelines,ditches and lanes,telephone and telegraph lines,utility installations,power lines,poles,tanks,evaporation or settling basins,extraction or processing plants,machinery,equipment,buildings,electric power plants, and equipment for generation and transmission of Energy Resources,Byproducts,and electric power,and for the handling,treatment or storage thereof,and all structures and facilities relating thereto,which the Power Authority may desire to erect,construct,or install in carrying on the Power Authority's business and operations on or from the Leased Lands;and the Power Authority shal?have the further right to erect,maintain,operate and remove a plant or DRAFT Land and Resource Agree.._..- March 25,1986 Page 6 plants,structures and facilities with all necessary appurtenances for the conversion of the Energy Resources into heat,power or another form of energy,and for the extraction of Byprod- ucts from steam,brine or water produced from the Leased Lands,including all rights necessary or convenient thereto,together with rights-of-way for passage over,upon and across and ingress and egress to and from the Leased Lands for any or all of the above mentioned purposes.The Power Authority shall obtain any and all permits,consents or licenses required by any public or Ler PeprivateentitywithauthoritytoregulatetheactivitiesofthePowerAuthorityconductedenthe ¢reject ares}Lbvset Landes Aleut makes no representations or warranties as to the requirements of any such permission,consent or license nor as to the availability of such.The Power Authority shall also have the right,upon obtaining proper permit from appropriate agencies with authority to regulate such activities,to utilize or dispose of waste brine and other waste products from a well or wells on the Leased Lands into a wel!or wells drilled or converted for that purpose on the Leased Lands and the right to inject water,brine,steam,and gases from a well or wells on the Leased Lands for the purpose of maintaining or restoring pressure,increasing or maintaining production,or testing in the productive zones. 3.Right-of-Way Easement Rights.For the same consideration,Aleut shall grant theJockt8tarereLealhtesPowerAuthorityrights-of-way and easements for a road,eed transmission line over Aleut's surface and subsurface estates on Unalaska Island.Said transmission line rights-of-way andgueelpenecctrorPue/easements shall commence at the-kessed=bends,and shall terminate at the point of intertje withfh rsexcestwhereRELY+o a ceotheCitydistributionsystem.Al?easements shall be one hundred (100)feet in width,and granted with the rights,privileges and authorities to:(a)construct,reconstruct,maintain, repair,operate,improve,and update upon or under lands within said easements an electric conductor tytransmissionlineandroadsystemincludingbutnotlimitedtopoles,towers,wiresty ,guys, anchors,bridges,abutments,culverts,supporting apparatus,and such other structures as the Power Authority may now or shall from time to time deem necessary;(b)provide ingress and egress to lands within said easements;(c)cut,trim,remove,and control the growth of,by machinery or otherwise,vegetation on or adjoining lands within said easements which fn the judgement of the Power Authority,might interfere with,threaten,or endanger the operation and maintenance of said line or system;(d)clear and keep lands within said easements free from fences,buildings,pavements,or other structures which in the judgement of the Power Authority, might interfere with,threaten,or endanger the operation and maintenance of said line or system or may increase the safety risks to Aleut or its property;and (e)license,permit or otherwise agree to the joint use or occupancy of said line or system by any other person,firm,or corporation for telephone,electrification,utility,or transportation purposes. Article C.TERMS AND CONDITIONS Liesdet DRAFT Land and Resource Agree March 25,1986 Page 7 1.Terms and Rentals.(a)This Agreement shall commence immediately and,unless terminated under any other provision hereof,this Agreement shall remain in force for so long as1ghtpattithereexistsanactiveLeasehereunder.The Vease vranted herein shal 4 A 4._he Kk.ze é 8 fepoee Pre yim 1 ede "Wf "fenPdpemeoeeveKheese.(Fecuery Ceca)otal,ore Cra ©ew ece Sore initial_peried-efet (30)years j i The PrimaryTern=shetN commence effective January 1 of the year in,whi¢th commercial production firstCargeadhLLawL£here fitve tines ¥tF begins The term shall be extended automatically for a period of ten (10)years if any of the a Energy Resources are being produced in commercial quantities from any of the Leased Lands at the end of the Primary Term,provided that the Power Authority is in complfance with all the terms Bx and conditions of this Agreement.Likewise,the term shall be extended automatically for a second period of ten (10)years if any of the Energy Resources are being produced in commercial quantities from any of the Leased Lands at the end of the initial ten-year extension.If at the end of the second ten-year extension,Energy Resources are being produced or utilized in commercial quantities,and the Leased Lands are not needed for other purposes,the Power Authority shall have a preferential right to negotiate a renewal of the Lease for a further term in accordance with such terms and conditions to which Aleut and the Power Authority may at that time agree, (b)If at the expiration of the Primary Term or the expirationof the initial ten-year extension thereof,none of the Energy Resources is being produced,but on or before the date of expiration reworking operations or operations for the drilling of a well in search of any of the Energy Resources are commenced on said Leased Lands,the Lease will continue in force for an extension of twelve (12)months,provided that such operations of the Power Authority are continuously prosecuted and the Power Authority fulfills all other terms and conditions of this Agreement including the payment of the Minimum Royalty,-Minimum-Remtat,and Rental as defined herein.The operations of the Power Authority shall be considered to be continuously prosecuted if not more than nine (9)months shall elapse between abandonment of a prior production well and beginning of operations for the drilling or reworking of a replacement well.If Energy Resources are not once again being produced continuously in commercial quantities within twelve (12) months from the date when commercial production first closed,the Lease may be terminated at the sole discretion of Aleut.If,as a result of such operations,any of the Energy Resources are being produced once again in commercial quantities,the Lease will remain in force for the extended term of ten (10)years,which extended term shall have commenced on the date of expiration of the previous term period. (c)If Energy Resources are being produced in commercial quantities from the Leased Lands at the expiration of the Primary Term or the initial 10-year extension thereof,and (i) all of such production shall thereafter cease as a result of a depletion of such Enercy his aes feeme uemAnt Land anu Resource agrewucu, March 25,1986 Page 8 ° Resources from the Leased Lands or as a result of an Act of God or naturally occurring phenomenon,or (ii)all of such production shall thereafter be terminated due to well plugging, caving,or other well problems,the Power Authority may,within twelve (12)months from cessation of such production,resume drilling or reworking operations in an effort to obtain or restore production of any of the Energy Resources.If such event shall occur,the Lease shall remain in force for the remainder of the term,inclusive of said twelve (12)months period, provided that (i)such operations of the Power Authority are continuously prosecuted,as defined above,and result in production in commercial quantities of any of the Energy Resources,and (ii)the Power Authority fulfills all other terms and conditions of this Agreement including the payment of the Minimum Royalty,Minimum Rental,and Rental as defined herein."Reworking,"as used herein,shall include,among other things,cleaning,testing,repair,and replacement of wells and related facilities and equipment necessary to produce from such wells. d)Subsequent to completion of the Project design and before commencement of construction,but in aay case not later than July 1,1988,as referenced in Tbit B hereof,heve LOC 6 lite on LothePowerAuthorityshall,pay amapally-to Aleut a Rental (hereinafter referred to as "Rental")bevsead,portres oF in the sum of Five -Huadred Dollars ($50076Q)-per-eere fo #1,surface Leased Lands determined by the Power Authority and Aleut to be necessary for the Project,exclusive of rights-of-way and <f:aoe'de Vibe My.shall ps '4easementsgrantedinArticleB,Section 3 herein. The-ft Rentat-p att-bdowneeLoAlee#Seorg et 4yz 50 pec 4 ¢er,for-the-calendar_year (Jandary 1 to Decemb which made baséd<en-the_days remaining-ina-The First fe Lf aYnenk shal Le cle ex.heer Li FOday 5 otter TA «said year.Each_stbsequent annual calendar year Rental payment shall be du@en January 15 of"Le C4 tw breh She Lbwec each year ereafter,and such obligation shall continue throughout the Primary Term™ and any e énsion term. a Subsequent to completion of the Project design and before commencement of construction,but in any case not later than July 1,1988,as referenced in Exhibit B hereof, and thereafter during the Primary Term or any extension term of the Lease,the Power Authority 4 i]a 'ashallpay-enanvally to Aleut Ae advance'Minimum Rental hereinafter-referred-to-as_'Minimum 42 sO coctipueus 5.¢wee Rentat"}+in the sum of -Five-Theusand Dollars-($5,000}for up to ten waefeee acres of,Leased Landsg 4 The first payment of the -Minimum Rental,shall be due_prior to commencement ofCoSOnMmeCees Ldi)construction,and the amount of said *tntmom Rental>hall be prorated based on the days . 'celleCc Oa 5 we tees ; as!cf emaining in said"year-only.All other payments of-Minimum Rentaly or_adjusted Minimem=Rentat;-via ae Aprlts,Toby (5 Locteber(S osemee XK Sve t ¢oe ::é*shall be due on January 15,of each year. Any advanceMinimumRentet-or-adjusted-HinimumRents]-ot or _” A ' id A heti-t ble-t he-P Lutherit bys ;lead '(January 2 to December_31}-to which-seid-payment-applies-out_of Rentet-cdueAtenut-ia-that year, peyebte-durtng sata year-onty,Following recovery of any advance 4+nimum Rental or adjusted o etleche DRAFT Land and Resource Agree...... March 25,1986 Page 9 Minimum Rental,the Power Authority shall pay Aleut,on or before January 15 of each year,the Rental due and payable for that year. &4?After the end of the Primary Term and each ten (10)years thereafter,the Rental fLecsemen >feectecly of */Zgo ecch +f4 payments -ef-$500,00-and-$5,000,004-respectiveby,thereafter payable as faedfuste«provided herein,shall be adjusted in the following manner,The adjusted Rental wand -ieeertimem- Rentel "payments to be paid after the Primary Term,and each ten (10)year term thereafter,shall_F250betheproductofmultiplying $500;00and-$5,000-00,-respectively,by a fraction,the numerator of which is the most recently published Consumer Price Index,all items,all Urban Consumers (the "CPI-U")which fs published by the U.S.Department of Labor,Bureau of Labor Statistics at the end of the Primary Term,or the end of each ten (10)year term thereafter,and the denominator of which is »the published CPI-U on the date of this Agreement. ¢If publication of the CPI-U is discontinued,the parties hereto shall thereafter accept comparable statistics on the cost of living for the United States as they shal?be computed and published by an agency of the United States or,if such an index does not exist,by a responsible financial periodical or recognized authority then to be mutally selected by Aleut and the Power Authority. £ Ler Should production drilling operations not be commenced on said Leased Lands on or before July 1,1988,as referenced in Exhibit B hereof,this Agreement shall terminate unless the Power Authority,on or before said date,shal!paygto the depository,as provided in Section WO,000 <8 exneal ferta [ats 6 hereof,Minimum Rental,which payment shall extend for twelve (12)months from said date,the time within which drilling operations may be commenced, 2.Royalties.(a)The Power Authority shall pay a Royalty to Aleut,as hereinafter described and referred to as "Royalty,"for any and atl Energy Resources and Byproducts produced and sold from a single well,which shall be the Project's initially installed production well or the equivalent output thereof from a replacement wellsor backup wellS,The Royalty paid to Aleut shall be determined as provided herein and shall be applicable to the maximum output of the initial production well or the equivalent output thereof.Royalty on Energy Resources and Byproducts produced in excess of the maximum output of the initial well,or equivalent output thereof,are not subject to this Section and shall be renegotiated prior to increasing such output capacity beyond the limitations set forth herein. (b)For Energy Resource are converted to electric power before sale by the Power Authority,the Power Authority shall pay Aleut quarté Royalty,an amount /ersemn,; Fe, DRAFT Land and Resource Agreen March 25,1986 >Page 10 (hereinafter referred to as the "Power Share")which shall be the sum of Royalty calculation (hereinafter referred to as "Block Shares")for blocks of power produced and sold -diring any calendar quarter,which k shares shall be the product of the amount of .inmsaidblockduringsnbythedecimalequivalentofapercentageRoyaltyrate,4 kilowatt-hours,produced and sold described efein below,assigned to said block of power;multiplied by the City's average cost,rs per kilowatt-hour,of generating powerfromsourcesotherthantheProjectasaidpowertheBusbarduringsaidquarter.Whenever used herein,the worn %ccbar shall mean,for all purpose eof,the point at which electric power is supplied to the City's electric distribution system.e equation for ees Power Share is contained in Exhibit C attached hereto and made a part hereof byee For the first five (5)million kilowatt-hours,or any proportion thereof. produced and sold i y calendar quarter,the percentage used to calculate th ock Share shall be three percent (3%).the block of power,or any proportt6n thereof,greater than gt!five (5)million kilowatt-hours and less to ten (10)million kilowatt-hours it produced and sold in any calendar quarte to calculate the Block Share for said block shall be four an e half percent (44%).For any amount of é greater than ten (10)million kil tt-hours produced and sold in any calendar quarter,the percentage cale e the Block Share shall be six percent (6%). he City's average cost of electric power generation for any given quarter be the quotient obtained b ividing the sum of all costs directly attributable-to generating electric power from sources other than t roject and supplying MEW the Busbars;by the total number of kilowatt-hours produced from sources-other than the Project and supplied toatheBusbarduringsaidquarter.Costs attributable to electric power generation for the purposes of this calculation shall include all fuel costs,all costs crued under expense ” categories 1 and 2 of Exhibit D (attached hereto and made a part hereof by referentse),and costs a accrued under expense categories 7 and 8 that are attributable to power generation and supplying said power to the Busbar. Yo ater frme- (c)For Energy Resources that are not converted to electric power,befere-sale_by the - Power Authority,the Power Authority shall pay to Aleut,as Royalty,an amount (hereinafter referred to as the "Energy Share")which shall be fifteen percent (15%)of the market value atSolversorpointofremovesoteLliveaStomtystemthepointofremovalfromtheearththereinafterreferredtoastheWellhead")of said EnergyResourcesderivedfromtheLeasedLandsandextractedandsavedandsoldorused.The [HEE ket prelveshellbeveretee¥o Ls hen byJZ,fhe Feeer Abo Fy Foany Hh irl porhy,PAA me ey 1594/572(10) DRAFT Land and Resource Agreetnem March 25,1986 Page 11 (d)For Byproducts,the Power Authority shall pay to Aleut,as Royalty,an amount (hereinafter referred to as the "Byproduct Share")which shall be five percent (5%)of the market value at the Wellhead for all Byproducts extracted from or allocated to the Leased Lands and saved and sold or used.the "nH ccke x ve [o«of seed by prodacts 2b benegetoatedltooawiea(Copy toon @) 3.Payment of Royalty.(a)Upon beginning commercial production and thereafter during the Primary Term or any extension term of the Lease,the Power Authority shall pay quarterly to Aleut an advance Minimum Royalty bial?referred to as "Minimum Royalty")inSeonhySree(bolethesumof-Thirty.Thousand Dollars ($30,000.00)he"First payment of the Minimum Royalty shall be due within thirty (30)days after beginning commercial production,and the amount of said Minimum Royalty shall be prorated based on the days remaining in said quarter only.All other payments of Minimum Royalty,or adjusted Minimum Royalty,shall be due on January 15,April 15, July 15,and October 15 of each year.Any advance Minimum Royalty or adjusted Minimum Royalty so paid to Aleut shall be recoverable by the Power Authority only in the calendar quarter to which said payment applies and only out of said quarter's production of the Energy Resources or Byproducts,and the Power Authority is hereby authorized and directed to deduct the same from Royalty due and payable during said quarter only.Following recovery of any advance Minimum Tau tFy April ss)Royalty or adjusted Minimum Royalty,the Power Authority shall pay Aleut,on or before the-ast-Tely (5)¢Oc#,77day_d£-eoeh-and-every-catendar-menth;the Royalty accrued and payable for the preceding calendar.geacter (b)Concurrently with making each royalty payment,the Power Authority shall deliver to Aleut a detailed statement with substantiating documents setting forth the basis for the determination of the Royalty then paid by the Power Authority,including,but not limited to,an accounting for all Energy Resources and Byproducts extracted,produced,consumed and/or sold from the Leased Lands.The Power Authority shall install and maintain any and all equipment necessary to accurately measure and quantify the Energy Resources and Byproducts extracted from the Leased Lands.Periodically,in accordance with industry practices and in no event less frequently than yearly,the Power Authority shall cause an independent State or Federal governmental certification of the accuracy of such measuring equipment.Aleut may,at its option and expense and at a time convenient to the Power Authority scheduled in advance,cause such measuring equipment to be inspected and tested for accuracy by independent inspection. (c)After the end of the Primary Term and each ten (10)years thereafter,the Minimum Zz Royalty payments of $30,000 thereafter payable,as provided herein,shall be adjusted in the following manner,The adjusted Minimum Royalty payments to be paid after the Primary Term,and 1594/572(11) DRAFT Land and Resource Agreement March 25,1986 Page 12 25eachten(10)year term thereafter,shall be the product of multiplying $30;000 by a fraction, the numerator of which is the most recently published Consumer Price Index,all items,a1]Urban Consumers (the "CPI-U")which is published by the U.S.Department of Labor,Bureau of Labor Statistics at the end of the Primary Term,or the end of each ten (10)year term thereafter,and the denominator of which is »the published CPI-U on the date of this Agreement.If publication of the CPI-U is discontinued,the parties hereto shall thereafter accept comparable statistics on the cost of living for the United States as they shall be computed and published by an agency of the United States or,if such an index does not exist,by a responsible financial periodical or recognized authority,then to be mutually selected by Aleut and the Power Authority 4,Purchase of Aggregate Materials.The Power Authority shall pay Aleut one dollar fifty cents ($1.50)per cubic yard for aggregate materials extracted from Aleut land,as measured emplaced in construction of the Project.Payment shall be due and payable within thirty (30)days after the last day of the month in which said aggregate materials are actually extracted.The purchase price herein stated is effective only until commencement of operation of the Project. !(i Sect.J,ir"7zeRight-of-Way Easement Fee.If the Power Authority completes the Feasibility Program and proceeds with development of the project,the Power Authority shall pay Aleut on or Boucta before January 15 of each year thereafter during the term of this Agreement a fee of ten dollars ($10.00)for the rights granted herein for road and transmission line rights-of-way over Aleut's surface and subsurface estates within the Project Area but off Leased Lands. KL.Depository.All payment s/required to be made by the Power Authority to AleutpecemoeDeposFoce/Mert shel face rep BF +o aosipur FehereundershallbepaidtdAleutby-meilingor-detivertng-the-PowerAutherity's check thereforalccastedepositoryAwhichsaidpayoutsshellbeDe@.,.atothe Bank at > ; ;;epository,for deposittnto-a-speetat--_ 'account.Aleut hereby granting to said depository fullpower-and-autherityen-behalfof-Ateut,--_ cand _al ceceedin $hereunder w Cable witho -No change in the ownership of. the Leased Lands or of any payments due Aleut hereunder shall be binding on the Power Authority until?it shall have been furnished adequate written evidence thereof.In the event more than one person or entity shal?at any time be entitled to receive sums of money payable hereunder to Aleut,all such persons shall have the right,jointly,to designate any other single depository TS94/ST2L7737 DRAFT Land and Resource Agreewous March 25,1986 Page 13 to receive all payments hereunder on their joint and several behalf,and by jointly executed and acknowledged instrument so to advise the Power Authority,it being intended that the Power Authority shall never be required to make payment to more than one person or entity nor to draw more than one check for any separate payment becoming due hereunder.Until such notice shall be furnished to the Power Authority,the Power Authority shall continue to make all payments to the depository last designated hereunder. 7.Lesser or After-Acquired Interest.If it should hereafter appear that Aleut,at the commencement of Project development,owns a lesser interest in the Leased Lands than the fee simple estate therein and thereto,or less than the entire interest in the Energy Resources or ecsematFteey Byproducts contained in and under the Leased Lands,then the Minimum Rental ,,Minimum Royalty, Rentat,and Royalty accruing to Aleut hereunder shall be paid to Aleut in the proportion which Aleut's interest bears to the entire fee simple estate in the Leased Lands or to the entire interest in said Energy Resources or Byproducts.Notwithstanding the foregoing,should Aleut hereafter acquire any additional right,title or interest in or to the Leased Lands or said. Energy Resources or Byproducts,then any increase in payments of money hereunder necessitated thereby shall commence with the payment next following receipt by the Power Authority of satisfactory evidence of Aleut's acquisition of such additional interest. 8.Taxes.(a)The Power Authority shall pay all taxes levied and assessed against the Power Authority's leasehold interest in the Leased Lands.The Power Authority shall pay all taxes levied and assessed against all structures,improvements and personal property placed upon the Leased Lands by the Power Authority.Aleut shall pay all taxes levied and assessed against the Leased Lands as if such Leased Lands were unimproved and shall pay all taxes levied and assessed against all structures and improvements placed on the Leased Lands by Aleut. yesoucees(b)Aleut agrees to pay the Power Share,Energy,Share,and Byproduct Share of any and all taxes assessed upon any Royalty received by Aleut for Energy Resources and Byproducts from said Leased Lands. 9.Operations,(a)The Power Authority shal?comply with all laws and regulations applicable to its operations hereunder as required by the laws of the State of Alaska and the - laws of the United States. (b)The Power Authority,its agents,representatives,and contractors shall ever indemnify,save harmless and defend Aleut from and against any and al?manner of claims,judg- ments or suits whatsoever arising out of the Power Authority's activities or operations 1594/572(13) DRAFT Land and Resource Agree...... March 25,1986 Page 14 hereunder other than those arising in whole or in part from Aleut's act or failure to act and this Section shall survive termination of this Agreement. (c)Prior to exercising any access rights under this Agreement,the Power Authority, its agents,representatives and contractors shall provide Aleut with certificates for general liability and property damage insurances in reasonable amounts and form,and a Power Authority contractor shall name Aleut as an additional insured.All such insurance policies and certificates shall include the following cancellation or change clause or a similar clause approved by Aleut:"This insurance will not be cancelled by this insurance company nor any changes made in the policy which will change the name of the insured,without first giving thirty (30)days notice in writing to The Aleut Corporation,One Aleut Plaza,Suite 300,4000 Old Seward Highway,Anchorage,Alaska 99503,as evidenced by return receipt of registered or certified mail."The insurance required under this paragraph shall be maintained in full force and effect throughout the term of this Agreement and any extension hereof. (d)All of the labor to be performed and all of the materials to be furnished in the operations of the Power Authority hereunder shall be at the Power Authority's sole cost and expense unless otherwise specified herein,and Aleut shall not be chargeable with or liable for Alec?any part thereof.The Power Authority shall protect the said Leased Lands,against liens of every character arising from its operation thereon. (e)Whenever used herein,the expression "drilling operations"shall mean,for al] purposes hereof,any work or actual operations undertaken or commenced for the purpose of drill- ing of a well on or into said Leased Lands,including without limiting the generality hereof, the preparation of the ground therefor,the building of roads and other facilities therefor,the construction of a derrick and other necessary structures for the drilling of a well followed by the actual operation of drilling in the ground.Any such work or operations preliminary to the drilling in the ground may be undertaken in any order the Power Authority shall see fit.All such work and operations shall be prosecuted with reasonable diligence after the Power Authority has obtained all permits,consents,and/or licenses which may be required, 10.Testing.The Power Authority shall be entitled,without accounting to Aleut therefor in any manner,to flow and/or blow wells without restriction for testing purposes. 11.Uneconomic Operations.(a)Nothing herein contained shall require the Power Authority to produce,recover,save,and market any of the Energy Resources or Byproducts con- tained in the produced brines or effluent from operations on the Leased Lands,which,in the fate TE dey ing DRAFT Land and Resource Agreetuous March 25,1986 Page 15 Power Authority's judgment,is not economic to produce,recover,save,or market.The Power Authority shall have the right to waste or dispose of any such uneconomic Energy Resources or Byproducts by such lawful manner or means as the Power Authority shall deem appropriate in the circumstances. (b)It is recognized that the market demand for the Energy Resources or Byproducts ard =derivatives developed therefrom may vary from time to time and during such periods as there is olnomarketforanyoftheEnergyResourcesyByproducts -or-derivatives,the Power Authority's obligation to produce,process,and extract such Energy Resources or Byproducts shall be suspended.The Power Authority shall have no obligation to save or process Byproducts described in Section 1,item (e)of Article B above. (c)Subject to the foregoing and except as herein otherwise provided,the Power Au- thority agrees to drill wells and operate each completed well with reasonable diligence and in accordance with good operating practice and a11 applicable laws so long as such wells shall produce Energy Resources and/or Byproducts in commercial quantities while this Agreement is in force as to the portion of said Leased Lands on which such well or wells are situated. 12.Damages Resulting From Operations.The Power Authority shall not be liable to Aleut for damages to any geothermal resources reservoir underlying said Leased Lands or for the loss of Energy Resources or Byproducts therein or therefrom or for any subsidence or surface damages resulting from fits operations hereunder unless such damage or loss is caused by the Power Authority's gross negligence or willful misconduct. 13.Unitization.(a)The Power Authority shall have the right,at its sole option, from time to time,either before or after production,to pool,unitize or combine all or any part of the Leased Lands with other land or lands or lease or leases (whether held by the Power Authority or others and whether or not the surface of such lands may be used for development or operating purposes)adjacent or adjoining the Leased Lands to comprise one or more operating or development units of not more than 1920 acres each,and drilling operations or production on any such unit shall constitute compliance herewith to the same extent as though such operations or production were on the Leased Lands.Aleut shall participate in the Minimum Royalty and Royalty,jou tal &Crem eat Soe a from any such unit either fn the proportion to which the number of acres owned by Aleut within the unit bears to the total number of acres in such unit or in the proportion to which the volume of Energy Resources that are produced on the Leased Lands owned by Aleut within such unit bears to the total volume of Energy Resources produced on such unit,whichever Aleut chooses. !n any event,Aleut shall be entitled to receive,during the Primary Term or any extension term 1594/572(15) DRAFT Land and Resource Agreement March 25,1986 Page 16 of the Lease,the Minimum Royalty er-adjustedMinimumRoyalty and the-Minimum Rental or edjusted-CFS Ct eat fe <d -Minimum--Rentalyas provided for in Sections 1(4),2 and 3 of this Article C.Such unit shall become in existence upon the Power Authority's written notice to Aleut and execution in writing and recordation in the conveyance records of the District in which the Leased Lands are situated,of an instrument identifying and describing the pooled or communitzied acreage.The Power Authority shall at all times keep Aleut informed of the lands embraced in any unit of which the Leased Lands form a part.Whenever used herein,the term "District"shall mean,for all purposes hereof,the State of Alaska Recording District. (b)As to each and any such operating or development unit,the Power Authority shall have the right to commingle for the purpose of utilizing,selling or processing,or causing to be processed,the steam or steam power and/or extractable minerals produced from such operating or development unit with the steam or steam power and/or extractable minerals produced from other lands or units,so long as the production from the unit which includes all or portions of the Leased Lands is measured,metered or gauged as to such unit production;unit production so measured,metered or gauged shall then be allocated to the Leased Lands in accordance with the provisions of paragraph (a)above, (c)Allocation,as foresaid,shall cease upon any termination,either in whole or in part (by surrender,forfeiture or otherwise),of this or any other agreement covering lands in such operating or development unit as to the lands covered by such terminated agreement or part thereof.In the event of the failure of Aleut's or any other owner's title as to any portion of the land included in any such operating or development unit,such portion of such land shall likewise be excluded in allocating production from such unit;provided,however,the Power Authority shall not be held to account for any production allocated to any lands to be excluded, edge-of-the__.__OK (d)If any taxes of any kind are levied or assessed (other than taxes on the Leased Lands as such or any rights thereto not covered by this Agreement),any portion of which isartele< chargeable to Aleut under Section-8-hereof,then the share of such taxes to be borne by Aleut as provided in this Agreement shal]be in proportion to the share of the Royalty from such unit allocated to the Leased Lands. (e)The Power Authority may,at its sole option,at any time when there is no produc- tion in such unit of Energy Resources or 8yproducts in quantities deemed commercial by the Power 1594/572 (16) DRAFT Land and Resource Agree.....- March 25,1986 Page 17 Authority,terminate such unit by a written declaration thereof,in the manner in which it was created. 14.Additional Operations.Aleut hereby grants to the Power Authority,its successors and assigns,sole and exclusive right to locate a well or wells on the surface of said Leased Lands and to slant drill said well or wells into,under,across and through said Leased Lands and into and under other Aleut Lands together with the right to repair,redrill,deepen, maintain,inject in,rework and operate or abandon such well or wells for the production of Energy Resources or Byproducts together with the right to develop water from said Leased Lands for any of the Power Authority's operations pursuant to this Section and together with the right to construct,erect,maintain,use,operate,replace,and remove all pipelines,power lines, telephone lines,tanks,machinery,and other facilities,together with all other rights necessary or convenient for the Power Authority's operations under this Section and together with the rights-of-way for passage over and upon and across and ingress and egress to and from said Leased Lands.Said rights may be exercised at any time or from time to time during the duration of this Agreement and as long thereafter as the Power Authority exercises any of the rights granted in this Section. 15.Aleut's Right to Bid.Aleut shall be notified as a potential bidder on any phases or tasks contemplated under this Agreement which the Power Authority or fts agents or contractors may let for competitive bidding.Any bid that Aleut may submit,in conjunction with a reasonably qualified party or parties,for which the Power Authority determines there would be no conflict of interest in awarding the bid to Aleut,shall receive equal consideration to other bids submitted. 16.Title Warranty.Aleut shall grant and agrees to defend title to the Leased Lands except for rights-of-way and easements of record,and further agrees that the Power Authority at its option may pay and discharge any delinquent taxes,mortgages,trust deeds or other delinquent liens or encumbrances existing,levied or assessed on or against the said Leased Lands;and,in the event the Power Authority shall exercise such option,the Power Authority shall be subrogated to the rights of any holder or holders hereof and shall have the right,in addition to other remedies provided by law or equity,to reimburse itself by applying to the discharge of any such mortgage,tax,or other lien or encumbrances any and all payments accruing to Aleut hereunder,. 17.Force Majeure.The Power Authority's obligations hereunder shall be suspended, and the term of this Agreement,the schedule contained in Exhibit B hereunder,and the period 1594/572(17) DRAFT Land and Resource Agree.../AS:March 25,1986 1G a Page 18 che for removal of the Power Authority's preferty in the event of termination shal]be extended while the Power Authority is prevented from complying therewith by strikes;lTockoutss;riots; action of the elements;weekterts;delays in transportation;inability to secure labor or materials in the open market;laws,rules or regulations of any Federal,State,Municipal or other governmental agency,authority or representative having jurisdiction;litigation or administrative proceedings affecting title to lands covered hereby or operations thereon;or by other matters or conditions beyond the reasonable control of the Power Authority,whether or not similar to the conditions or matters in this Section specifically enumerated. 18.Surrenders.The Power Authority may,at any time,surrender this Agreement to Aleut in its entirety or,from time to time,surrender only so much of the Leased Lands as the Power Authority may elect fin the instrument of surrender.Such surrender shall be accomplished by executing and delivering to Aleut or placing on record in the District in which the Leased Lands are located a quitclaim deed or deeds covering all or any part of the Leased Lands so selected by the Power Authority for surrender and the Power Authority shall thereby be relieved of all obligations as to the acreage so surrendered,except for obligations already accrued by the terms hereof or as provided by Section 20 hereof.Notwithstanding such surrender,the Power Authority shall nevertheless retain such rights-of-way,easements and privileges over,upon, through and across the lands so surrendered as shall be necessary or convenient for the Power Authority's operations on so much of the Leased Lands as shall then be retained by the Power Authority under this Agreement and on the Power Authority's other lands in the vicinity.Prior to the execution of the power sales agreement with the City,the Power Authority may surrender this Agreement to Aleut upon thirty (30)days written notice.After execution of the power sales agreement,the Power Authority may surrender this Agreement only upon one hundred eighty (180)days written notice to Aleut. 19,Breach of Agreement.If the Power Authority has defaulted in any material re- spect in its obligations hereunder,Aleut shall so notify the Power Authority in writing,set ting out in what respects Aleut deems the Power Authority to be in such default.If,within sixty (60)days after receipt of such notice,the Power Authority shall commence to correct the default alleged by Aleut and continue the same with due diligence until the alleged default is corrected,the Power Authority shall not be deemed in default hereunder.The service of said notice and the lapse of sixty (60)days without the Power Authority's commencing to correct the alleged default shall be a condition precedent to any action by Aleut for or on account of such default.Neither the service of said notice nor the doing of any acts by the Power Authority aimed to correct all or any of the alleged defaults shall be deemed an admission or presumption that the Power Authority has failed in any respect to perform it obligations hereunder. 1594/572(18) DRAFT Land and Resource Agreetnci.ne March 25,1986 Page 19 Termination or cancellation of this Agreement shall be the sole remedy of Aleut for failure of the Power Authority to drill any well,make any payment,or perform any obligation set forth herein.The Power Authority shall be obligated to and shall pay to Aleut all Royalty,end Rental £cesemowXSees a due up to the date of termination and surrender.In the event of termination or surrender,the Power Authority shall execute and deliver to Aleut a recordable instrument whereby the Power Authority relinquishes all of its rights and interests in Aleut lands and this Agreement. 20,Removal of Property and Restoration.(a)The Power Authority may at any time during the term of this Agreement remove all or any of the property and fixtures placed by it in or upon the Leased Lands,fncluding the right to draw and remove all casing. (b)Following termination of this Agreement or any part thereof for any cause,and following abandonment of any well drilled pursuant to the provisions hereof,the Power Authority shall,within twelve (12)months thereafter or in accordance with a schedule agreed upon by both parties,remove all personal property which the Power Authority shall have brought upon the lands affected by such termination or upon the drillsite of such abandoned well;shall fill alt sumps,remove all foundations and so nearly as practicable restore the areas affected by such termination or abandonment to the condition in which they were prior to the commencement of its Operations hereunder;and,in the case of a partial surrender,shatl deliver to Aleut a quitclaim deed,in recordable form,surrendering to Aleut all right,title and interest of the Power Authority in that part of the said Leased Lands as to which this Agreement shall have been so surrendered,saving and excepting necessary easements and rights-of-way on the Leased Lands for the Power Authority's further operations on any part of the said Leased Lands as to which this Agreement shall not have been surrendered and on the Power Authority's other lands in the vicinity.The ownership of any of the Power Authority's property not removed by it during the period herein provided shall,in the absence of force majeure as defined herein,be deemed abandoned by the Power Authority and shall pass to Aleut without further act of the parties or either of them effective upon expiration of such period. 21.Assignment.(a)The Power Authority shall have the right to assign all or any part of its rights or interest in and to this Agreement,including but not limited to the Power Authority's right to occupy such portions of the surface of the Leased Lands as may be necessary for the construction of plants and other facilities,only to another state agency,department, office,authority,or representative having jurisdiction.No assignment by either party hereun- der shall be effective for any purpose whatsoever until and unless a certified copy of the recorded instrument of assignment;or,if such assignment shall have been recorded only in short form,a true and complete copy of the instrument described in such short form under the true 1594/572(19) DRAFT Land and Resource Agree@wuns March 25,1986 Page 20 signatures of each of the parties thereto,together with a certified copy of such recorded short form,shall be given to the other party,in the same manner as is provided for a notice hereun- der. ¢coos 5?or jts Se (b)!n the event of assignment by the Power Authority ,of this Agreement as to a seg- regated portion of the Leased Lands,payments due Aleut hereunder shall be apportionable among the several leasehold owners according to the surface area of each of their respective lease- holds,and default fn such payment by one or more of such leasehold owners shall in nowise affect the right of any other leasehold owner hereunder. 22.Native Practices.In selecting employees to carry out its obligations hereunder,the Power Authority shall give preference to Aleut shareholders and to other Alaska Natives,for all positions for which they are equally qualified and available.When reasonable and practical,the Power Authority shall provide training for such employees.The Power Authority shall make good faith efforts to employ Aleut shareholders and other Natives in skilled,technical and administrative positions.The Power Authority shall,also,avoid substantial infringement upon the traditional practices,cultures and hunting and fishing places of Aleut shareholders,and Aleut shall use its best efforts to keep the Power Authority informed of such hereditary practices,cultures and hunting and fishing places. 23.Surveyof Leased Lands.The exact location of the Leased Lands and right-of-way easements within the Project Area,as described in Section 1 of Article A of this Agreement,as well as the location on said Leased Lands of the facilities and other improvements to be constructed as contemplated in the Project,shall be subject to approval by Aleut.Aleut shall exercise its approval rights so as best to facilitate the purpose for which the Leased Lands are to be leased and in accordance with the determinations set forth in the Feasibility Program analysis.It is agreed by both parties to this Agreement that a survey shall be conducted to establish by legal description a more precise location of the Leased Lands and right-of-way easements and the costs of such survey shall be borne by the Power Authority.The survey shall<<Anheconpleted-on_or_hefare uly 1,1988,/2¢-referenced-tn-Exhibit B-hereut)6 & 24,Memorandum of Agreement for Recording.Neither the Power Authority nor Aleut, nor the successors or assigns of either,respectively,shall record this Agreement without the written consent of the other.However,the Power Authority or Aleut shall,at the request of either at any time during the term of this Agreement execute a memorandum or "short form"of this Agreement for purposes of,and in a form suitable for being recorded.The memorandum or "short form"of this Agreement shall describe the parties,set forth a precise description of 1594/572(20) DRAFT Land and Resource Agreetuc.n March 25,1986 Page 21 the Leased Lands,specify the term of this Agreement and incorporate this Agreement by reference. 25.Notices.Any notice or other communication hereunder from Aleut to the Power Authority shall be given in writing by sending the same by prepaid registered or certified mail with return receipt requested addressed to the Alaska Power Authority at P.0.Box 190869,701 East Tudor Road,Anchorage,Alaska 99519-0869,and any notice or other communication hereunder from the Power Authority to Aleut shall be given in like manner to Aleut addressed to The Aleut Corporation,One Aleut Plaza,Suite 300,4000 Old Seward Highway,Anchorage,Alaska 99503.Any notice mailed as aforesaid shall be deemed given and received within seventy-two (72)hours after the deposit thereof in the United States mail if mailed within the State of Alaska and if deposited in the United States mail outside of the State of Alaska,such notice shall be deemed to have been given and received within one hundred twenty (120)hours after deposit in the United States mail.The parties may,by like notice at any time,and from time to time,change their respective addresses for the purposes hereof.Postmark dates on registry receipts for such notices shall be conclusive as to the date of mailing. 26.Entirety Clause.If the Leased Lands shall hereafter be owned in severalty or in separate tracts,the Leased Lands nevertheless shall be developed and operated as one Lease,and all royalties accruing hereunder shall be treated as an entirety,and shall be divided among and paid to such separate owners in the proportion that the acreage owned by each such separate owner bears to the entire leased acreage.Any payment required to be made by the Power Authori- ty pursuant to the foregoing shall be paid in accordance with the provisions in Section 6 hereof.There shall be no obligation on the part of the Power Authority to off-set wells on separate tracts unto which the Leased Lands may be hereafter divided by sale,devise, unitization,or otherwise,or to furnish separate measuring or receiving facilities. 27.Severability.If any part,portion or provision of this Agreement shall be found or declared null,void,or unenforceable for any reason whatsoever by any court of competent jurisdiction or by any governmental agency having authority thereover,then only such part, portion,or provision shall be affected thereby and the remainder of this instrument shall con- tinue in full force and effect.The foregoing provisions of this paragraph shall be severable we for the purposes of the provisions of this Section. 28.Binding Effect.This Agreement and all of the terms,covenants and conditions hereof shall extend to and be binding upon the respective heirs,executors,administrators, grantees,successors and assigns of the parties hereto, 1594/572(21) DRAFT Land and Resource Agreeéincwe March 25,1986 Page 22 29.Definition.For purposes of this Agreement,"commercial production," "commercial operations,"or "commercial activities"shall mean the extraction of Energy Resources and/or Byproducts,and/or delivery of the products derived therefrom,for the benefit of the Power Authority and/or third party for purposes other than start-up or testing. 0 rminati pn by Mutual Agreefieht .T greemenht (may terminatedjat a ime mutual Agre nt ofboth\parties hereto. IN WITNESS WHEREOF,the parties hereto have executed this instrument as of the date hereinabove first written. The Aleut Corporation The Alaska Power Authority By By 1594/572(22) DRAFT Land and -Ty March 21,1986 *Page 23 1594/572(23) Resource Agreer EXHIBIT A FEASIBILITY PROGRAM SCOPE OF WORK PHASE (1)TECHNICAL AND ECONOMIC FEASIBILITY ANALYSES. (2)PLAN OF FINANCE, (3)ACQUISITION OF POWER SALES AGREEMENTS. (4)FINANCIAL FEASIBILITY ANALYSIS. (5)ACQUISITION OF FINANCING FOR THE PROJECT. EXHIBIT B DEADLINES FOR FEAS!IBIL!TY PROGRAM AND DEVELOPMENT OF PROJECT ON OR BEFORE January 1,1987 Complete Technical and Economic Feasibility Analyses,accept final report. April 1,1987 Comptete Plan of Finance.Commit to course of of action for proceeding with the Project or terminating this agreement. November 1,1987 Acquire power sales agreements,complete5PADfinancialfeasibility' -necessary},-securefunding.- July 1,1988 Complete project design,commence construction phase. July 1,1991 Complete construction,commence operation. EXHIBIT C ROYALTY CALCULATION FOR QUARTERLY POWER'SHARES (For Energy Resources that are converted te electric power) PS =(E,x .03 x C)¢(E,x .045 x C)¢x .06 x C) where: C =Average cost for City to generate power from sources other than the project and to sypply said power to the Busbar during given quarter,($/kWh). E,=Quantity of electr produced and sol al energy less than or equal to 5,000,000 kWh in given quarter,(kWh). and sold in given quarter,(kWh). S =Power Share,($). \ aseeuis 2Leael ScAevuac A Pase 1 SCNESULE OF ELICISLE rower COSTS UTILITY Nace +CERES CATE 20. ACCOUNT NUtrse2 Pe: REACo-ep (IsoreareFPC/FERC CLASS A/B 300 500 362 $02 303 $03 S04 S04 Sas 50S 3cs $06 S07 $07 316 $10 $11 S11 S12 $12 $13 $13 $14 $15 53S 535 $36 536 §37 $37 538°:$38 $39 $39 $40 §40 S41 $41 $42 $42 $43 §43 She 544 S45 $45 $46 $46 548 $48 549 $49 550 $50 581 §51 $52 $52 853 $53 $54 554 556 556 $57 557 $60 560 361 S61 $62 $62 $63 563 ses $64 S66 ry567$67563.568$69 °$69 é EXPENSE CATCS REPORTING PERiCO (Test Year) are , ANOInIT lL.POWER PROCUCTION EXPENSES A.STEAM POWER CENERATION Operation supervision &engineering Steam expenses Steam frem other sources Steam transferred -Credit Electric expenses Mise.stean Rents Maintenance Maintenance Maiatenance Maintenance Maincenance power expenses supervision &engineering . of structzures of boilers plaat of electsic plant of mise.steam plsat '3B.MEDRAULIC POWER GENERATIONOperationsupervision&&eagineeringWaterforpower Hydraulic expenses Electric éxpenses Misc.hydraulic power gen.expenses Rents Maintenance Maintenance Maintenance Maintenance Maintenance of supervision &engineering of structures of reservoirs,dams &waterways of electric plant of mise.hydraulic plaat C.OTHER POWER GENERATION Operation supervision &engineering Generation Expenses Misc.other power generation expensesRentsMaintenancesupervision&engineesi Maintenance of structures Maintenance of generating &electric plant Maintenance of misc.other power generation planc D.OTIER POWER SUPPLY EXPENSES ° System control and load dispatching Other expenses 2.TRANSMISSION EXPENSES Operstion supervision &enginceriag Load dispatching Station expenses Overhead line expenses Underrzround line expenses Tranzaission of eleetricrty by others Mise.transmission expenses APPESRentsoese:Maintenance supervision &engineering Maes""sintenance of structures fl.(6. ' . Aor ...dix 2 ..mainoeeeeSensudeaA Page ” SGHESULE OF ELICISLE PoweR COSTS ere .--ryUvawdldMANE©COATIFICATS QO. ACCOINT NUMSES REFERENCE EXPENSE CATICSRY AMOUTT FeC/FiaG REA OTHER CLASS A/B Co-op (INDICATE). 2.TRAVSNISSION ExFENses CONT'D $70 $70 Maintenance of station equipment$71 571 Maintenance of overnesd lines $72 $72 Maintenance of underground lines$73 $73 Maintenance of mise.transmission equipment 3.DISTRISUTION EXPENSES $&0 5&0 Operation supervision &engineering 581 581 ;Load dispatching $82 582 Station expenses $83 $83 Overhead line expenses $84 §84 Undergscund line exzenses 585 $85 Streec lighting and signal systea expenses 586 $36 Meter expenses $87 587 *Customer installation expenses ' 5&8 588 Mise.distribution exsenses 589 589 Rents $90 $90 Maintenance supervision &engineering $91 $91 Msintessance.of structures 592 592 '"Maintenance of stacion equipment 593 . 593 Maintesiace of overhesd lines $94 $94 Maintenance of undesground lines 595 595 Maintesance of line transformers $96 $96 ,Maintenance of street lighting and signal systes 597 $97 Maiatesance of metess $33 $98 _Maintenance of mise.distribution plant '&.CUSTOMER ACCOITTS EXPENSES 901 901 Supervision 902 902 Meter readiog expesses 903 903 Customer records ard collection expenses 904 904 Uncollectible accounts- 905 905 Mise.customer accounts expenses §.CUSTCMER SERVICE & INFORMATIONAL EXPENSES 907 907 ;Supervision 90S 908 ".Customer assistance expenses $03 909 Informational &instructional ° ; °advertising expenses. 910 910 Misc.customer service & informational exsenses 6.SALES EXPENSES 911 911 .Supervision 912 gl2 Demonsersting &seliins expenses 913 912 Advertising expenses 916 916 .Misc.sales expenses -"CdAorenuix 2 Seneuuie a Page 3 SCHECULE OF ELISICLE POwER COSTS Uliners is -CoAlificare ws ACCSNT NUMEER PREFERENCES EXPENSE CATCSORY AMOSFEC/Fenc REA Ovid CLASS A/3B Co-op (INDICATE . 7.ACMINISTRATIVE &GENERAL EXPEXSES 920 920 Administrative &general salaries 921 92%Office supplies &expenses 922 922 ,Administrative expenses transferred -Cr. $23 923 Outside services employed 925 924 Property Insurance 928 925 Injuries &danages 926 926 Esployee pensions &benefits $27 $27 .Franchise requizsenents 928 928 Regulatory comzission expenses 929 923 Duplicate chasges -Cr.- 930.1 930.1 General advertising expenses *930.2 930.2 Mise.general expenses 931 .931 2 foe Rents.. 932 *932 Maintenance of general plant 8.ALLOWABLE FIED COSTS (to the extent expensed) Depreciation Taxes Taterest on debe 2 Total Expenses,Excludisg Fuel Costs. NOTz:An adjustseat for current fuel costs will be made by Commission Staff.The following information is therefore required: "3.Reezulated utilieies with surchsrees in effect l.Cusresnct prace per gailon of fuel soown in most recest surenarge calculation approved by the Cocmission. 2.Yearly gallons consumed and Khd sales shown in most recent surcharge calculation approved by the Commission. b. Ueilities vith no surcharce ia effece or-unreeulated 1.Fuel storage espacaty 2.Actual price per gallon of fuel on hand,assuring thac Latest purchases are sold last (i.e.FIFO) Attsch schedule showing components of total.Sch.Ref. 3.Latest invoiced price of fucl per gallon Attach copy of invoice.Seh.Ref. an <ha Repel th (b)For Energy Resources that are converted to electric power before sale by the Power Authority,the Power Authority Shall pay Aleut quarterly,as Royalty,an amount (hereinafter referred to as the "Power Share")as determined below for the power produced and sold during the subject calendar quarter. The Power Share shall be the product of the total kilowatt hours (kwh)produced during the calendar quarter multiplied by the appropriate Royalty Rate further multiplied by the City's Busbar cost.Whenever used herein,the term "Busbar™shall mean the point at which electric power is supplied to the City's electric distribution system,whether by the City or by the Project.The appropriate Royalty Rate shall be determined as follows: ROYALTY TOTAL KWH PER QUARTER RATE Zz 5,000,000 0.0325 5,000,000 <6,000,000 0.0350 6,000,000 £7,000,000 0.0375 7,000,000 <<8,000,000 0.0425, 8,000,000 9,000,000 0.0475 9,000,000 -10,000,000 0.0550 (0,004 000 ©11,002,000 6,06 CO=p¢,000,000 0.0630 df Calculation of the Power Share shall be as follows: POWER =TOTAL KWH x ROYALTY Xx CITY SHARE PER QUARTER RATE BUSBAR COST As an example:If 7,000,000 total kilowatt-hours (kwh)are produced in any calendar quarter,the appropriate Royalty Rate shall be 0.0425.Assuming the City's Busbar cost is $0.2035 per kwh,the Power Share due Aleut shall be: POWER =(7,000,000)xX (0.0425)x ($0.2035)=$60,541.25 SHARE (i)The City's average cost of electric power generation for any given quarter shall be the quotient of the sum of all costs directly attributable to generating electricCxclesre26power-Erom-sources-cther-thanthe Project and supplying said power to the Busbar divided by the total number ofShetaceorwoldde kilowatt-hours,produced from sources other than the Project and supplied to the Busbar during said quarter.Costs attributable to electric power generation for the purposes of this calculation shall include all relevant costs aeerued-tmdeE wer/er expense categories as set forth in Exhibit D (attached hereto and made a part hereof by reference).The Power Authority andLOC?fvre s Aleut shall consult for the purpose of establishing,accounting controls to appropriately determine the City's busbar cost, VOC edvres Such agreed upon,accounting controls shall be required of the City as a covenant and condition of any Power Sales Agreement. 3f2s/sb .a tess them tive mmilluin (65,000,002 bush)th Mall Lk__bad to_catutote Lh eel are LE sadly)shabl be three winkfivegencent(328Ie)«Pet Ne NG.ZAencekinchagpictkeyhegaeateathentivearil (2 50,av bewhs)_ Khay adhe.CaAS uosd ty cahoshidi the Agreed Shane (kayablyy)shellbecaleubatednafobsa._a|Gilnwectt =hours prrdusddluwgloyallyhoe=(0.Y 2)x calendin quant Mink $+3,5 (25 <I!)|five mubhen C5,00000 bah)blanc bane_| th Royath,Ride 20 abloula ted shitl hn be prrddheoll widJvantamtenofapuacnctardsacltecalorwdAgserd tetrad quatre gaidilis bam clive anid lion (2 Ul,200 000 buh)LE Royallte,ach te caboulrte She Agnecd Shane (be abty)shall Mn ove powat-LRree eA conc.LA 3%).'the Alay 7abbotfolfromvenienw_2 Kilewatt-hows /Quarles Raya.bt £S 32.9 7, 7S <3)he (0.47)(ohh buh-S,070,009)+3.5 >)76.3G &.Royalties.(a)The Fawer Authority shall pay a Reyalty ta Aleut,as hereinafter described and referred to as "Royalty," for any and all Energy Rescurces and Eypreducts produced and sold from a single well,which shall be the Fraject's initially in- stalled production well or the equivalent cutput thereof fram a replacement well or backup well.The Royalty paid ta Aleut shall be determined as provided herein and shall be applicable ta the maximum output of the initial production well or the equivalent cutput therecf.Royalty on Energy Resources and Bypraducts pra- duced in excess of the maximum cautput af the initial well,or equivalent cautput thereof,are not subject to this Section and shall be renegotiated pricr ta increasing such output capacity beyond the limitations set forth herein. (b)For Energy Resources that are converted ta electric pawer before sale by the Fawer Authority,the FPoawer Authority shall pay Aleut quarterly,as Royalty,an amount (hereinafter referred ta as the "Fawer Share")which shall be the sum af Royalty calculations (hereinafter referred to as "Bleck Shares")for blacks af pawer produced and sald during any calendar quarter,which Bleck Shares shall be the product of the amount af electrical energy,in kilowatt-hours,preduced and scald from said block during said Quarter;multiplied by the decimal equivalent of a percentage Royalty rate,as described hereinbelow,assiqned ta said black af powers:multiplied by the City's average cost,in dollars per kilawatt--hour,of generating power fram sources cther than the Project and supplying said power to the Busbar during said quarter. Whenever used herein,the term "Busbar"shall mean,for all purpose hereof,the point at which electric power is supplied ta the City's electric distribution system.Equations for calculating the Fower Share are contained in Exhibit C attached hereto and made a part hereof by refererice. (i)Fer the first five (5)million kilcawatt--hours,oar any proportion thereaf,produced and sold in any calendar quarter,the percentage used ta calculate the Block Share shall:be three percent (34).For the block of power,or any proportion thereof,greater than five (35)million kilowatt-hours ard less than or equal to ten (10)million kilowatt-hours praduced and seld in any calendar quarter,the percentage used ta calculate the Block Share for said block shall be four and one-half percent (48%).For any amount af energy greater than ten (10)million kilowatt-hours produced and seld in any calendar quarter,the percentage used ta calculate the Black Share shall be six percent (6%). (ii)The City's average cast of electric power generation far any given quarter shall be the qucatient abtained by dividing the sum of all casts directly attributable to generating electric pcawer from sources ether than the Praject and supplying said power ta the Busbar;by the total number of kilawatt-hours produced from scaurces ether than the Praject and supplied ta the Busbar during said quarter.Casts attributable toa electric power qeneration far the purposes of this calculation shall include all fuel casts,all cests accrued under expense categories 1 and 2 of Exhibit D (at- tached hereto ard made a part hereaf by refererice),and casts accrued under expense categories 7 and 8 that are attributable to power generation and supplying said power to the Busbar. (c)For Energy Resources that are not converted to electric pcwer before sale by the Fower Authority,the Power Autherity shall pay to Aleut,as Royalty,an amount (hereinafter referred to as the "Energy Share")which shall be fifteen percent (15%)of the market value at the point of removal from the earth (hereinafter referred to as the "Wellhead")of said Energy Resources derived fram the Leased Lands and extracted and saved and sold or used. (d)For Bypreducts,the Fower Autherity shall pay to Aleut, as Royalty,an amount (hereinafter referred to as the "Bypreduct Share")which shall be five percent (5%)of the market value at the Wellhead for all Byproeducts extracted fram or allecated to the Leased Lands and saved and sald or used. EXHIBIT C ROYALTY CALCULATIONS FOR QUARTERLY POWER SHARES. (For Energy Resources that are converted to electric power) >=(EF,x .03 x CC)+(EL x .045 x C)+(Ej x .06 x C)1 2 3 where: C =Average cost for City ta generate power from sources other than the project and to supply said power to the Busbar during given quarter, ($/kWh) Ey =Quantity of electrical energy less than cor equal ta 5,000,000 kWhproducedandsoldingivenquarter,(kWh)mIl2 Quantity of electrical energy greater than 5,000,000kWh and less thanorequalto10,000,000 kWh produced and sold in given quarter,(kWh) E 3 Quantity of electrical energy greater than 10,000,000 kWh preduced andsoldingivenquarter,(kWh) PS =Power Share,(%) ALEUT FROFPOSAL Equivalent kWh/year kW (Millions)%af Grass 9 -8,0000 2 ASE 2,000 -4,500 17.52 -30.66 3.0% 3,500 -5,000 30.66 -43.80 3.8% 5,000 -ONE >43.80 4.5% AFA PROPOSAL kWh/year (Millions)%*af Grass BO SK Za -30 3.0% 30 -40 3.5% 40 --SO 4,02 (a)Fer Energy Resources that are converted to electric power before sale by the Fower Autharity,the Power Authority shall pay Aleut armually,as Royalty,an amcunt (hereinafter referred to as the "Agreed Share")which shall be the sum of Rayalty shares far blacks of energy preaduced and sald during any calendar year,which Royalty shares,for individual blocks of energy,shall be the product abtained by multiplying the ameunt of energy,within said black,produced and sold from the Proaject,in kilowatt-hours per year,times the decimal equivalent af a percentage,as described hereunder,assiqned ta said black of energy,times the City's average cast af power generatian at the busbar for said year,in dollars per kilowatt-hoaur. For the first twenty (20)million kilowatt-hours,ar ary preportian thereaf,praduced and sold in any calendar year,the percentage used ta calculate the Reyalty share for said bleck shall be two and ane-half percent (2%%).Fer the bleck cf energy,ar ary prapertion thereaf,greater than twenty (20)million kilowatt-hours and less than or equal ta thirty (30)millicn kileawatt--hoaurs preduced and sold in any calendar year,the percentage used toa calculate the Royalty share far said black shall be three percent (S34).For the black of energy,or any proaparticon thereaf,greater than thirty (30)million kilawatthours and less than or equal tea forty (40)million kilawatt -heurs produced and sald in ary calendar year,the percentage used ta calculate the Royalty share for said bleck shall be three and one-half percent (3%%).For the black of energy,or any proportion therecaf,greater than forty (40)million kilowatt-hours and less than or equal ta fifty (S50)million kilawatt - heurs praduced and sold in any calendar year,the percentage used ta calculate the Reayalty share for said bleck shall be faur percent (4%).For any amaunt of energy greater than fifty (50)millian kilawatt-haurs produced and sold in any calendar year,the percent-- age used to calculate the Royalty share far said black shall be four and cme-half percent (44%). The City's cost of electric power generation for any given year shall be calculated by dividing (1)all costs directly attributable to generating electric power,and supplying said power toa the busbar,fram sources cther than the Praject times (ii)the tatal nunber af kilowatt-hours produced and supplied te the busbar during said year from scaurces ather than the FPraject.Casts attributable to electric power generation for the purposes of this calculation shall include but not be limited ta... Rayalty shares for each black af pawer as herein described shall be the preduct obtained by multiplying the amcunt of energy,in kilowatt-hours,praduced and scold within said bleck during ary Calendar year,times the decimal equivalent,as herein described, assigned ta said black,times the City's annual average cast,in dellars per kilawatt-hour,of electric power generation for said year.The Agreed Share far any year shall be the sum af the Royalty shares for each bleck af pawer preduced in said year. COMPARABLE CITY PRICE AT BUSBAR 2125 0031 0038 -0047 =>5000-ONE WELL 0045 -0056 March 18, 0045 0056 -0068 1986 -0066 .0079. .0060. .0075 .0090 0075 .0094 0113 Akeke AALS Bayt pyrite.OPC6 Jed !pW bles Cowl,se iLangit ae Lk Agee pee plikLbWhSfobam oexLEExCh,bork.v2 - KW ZKrewocwaseDhidann BOM.wit eal frese/ Siere/. IN-AGB Ali tl oO arg le GLE |aE,£4 OO37Sf [FE essflewwaits4oo.ff we Deen hh-IH of 156,000 Lor LCA LE,Ae AL [ CONDITIONAL LAND AND RESOURCE AGREEMENT FOR THE UNALASKA GEOTHERMAL PROJECT THIS AGREEMENT is made and entered into as of the day of ,1986,by and between THE ALEUT CORPORATION,an Alaska corporation,hereinafter referred to as "Aleut,"and the ALASKA POWER AUTHORITY,a public corporation of the State of Alaska,hereinafter referred to as the "Power Authority." WHEREAS,the purpose of the Power Authority is to promote, develop and advance the general prosperity and economic welfare of the people of Alaska by providing a means of constructing, financing and operating power projects;and WHEREAS,the Alaska Legislature finds that the establishment of said power projects is necessary to supply power at the lowest reasonable cost to the state's electric utilities,and thereby to the consumers of the state;and WHEREAS,it is the declared policy of the state,in the interests of promoting the general welfare of all the people of the state,and public purposes,to reduce consumer power costs and otherwise to encourage the long-term economic growth of the state,including the development of its natural resources, through the establishment of power projects;and WHEREAS,the Power Authority,in cooperation with Aleut has completed a four-year geothermal exploration and drilling program near Mount Makushin on Unalaska Island,which resulted in the discovery of an extremely productive geothermal reservoir;and WHEREAS,the Power Authority has also completed a reconnaissance study of energy requirements and alternatives indicating that a geothermal power system is likely to be the most economic source of electric power for the community of Unalaska/Dutch Harbor;and - WHEREAS,the Power Authority Board of Directors has allocated funds to conduct a Feasibility Program for developing a geothermal power system on Unalaska Island,with the stipulation that the Feasibility Program be initiated only after agreements have been negotiated with appropriate landowners for the use of lands and resources during the feasibility,design, construction and operation phases;and WHEREAS,Aleut has received interim conveyance,under the Alaska Native Claims Settlement Act,to the surface and subsurface land estates on which the exploration and drilling took place,- NOW,THEREFORE;witnesseth that: Article A.FEASIBILITY PROGRAM 1.Administration of Feasibility Program.The Power Authority shall,subject to appropriation,fund and conduct in accordance with Exhibits A and B,attached hereto and made a part hereof by reference,a feasibility analysis,hereinafter referred to as the "Feasibility Program,"for a geothermal power system to be located on Aleut's land on Unalaska Island.MThe Geothermal power system,hereinafter referred to as the "Project,"shall consist of geothermal wellsites,wells,piping and power generation facilitiés and transmission lines,roads and other appurtenances required to produce and transmit power to the City of Unalaska distribution system.The Project,if developed by the Power Authority pursuant to the Feasibility Program,shall be located within Township 72 South,Range 118 West,Sections 30 and 31;Township 72 South,Range 119 West, Sections 25,26,27,33,34,35 and 36;and Township 73 South, Range 120 West,Sections 2 and 3;Seward Meridian,hereinafter referred to as the "Project Area."The Power Authority shall designate a project manager whose primary responsibility is administration of the Feasibility Program. 2.Termination of Feasibility Program.The Power Authority Board of Directors,hereinafter referred to as the "Board,"may, at its option,and upon written notification to Aleut,terminate the Feasibility Program and this Agreement upon the completion of Phases (1)or (2),as set forth in Exhibit A hereunder,or thereafter on the inability to acquire power sales agreements or financing for the Project after diligently pursuing acquisition of such agreements and financing. 3.Participation by Aleut in the Feasibility Program.The Power Authority shall notify Aleut in advance of,and Aleut shall have the right to attend,at its expense,all review meetings between the Power Authority and its Feasibility Program contractors except meetings regarding bid documents or matters the Power Authority deems proprietary or to constitute a conflict of interest with respect to provisions hereof.Unless both parties agree otherwise,the Power Authority and Aleut shall meet monthly during the Feasibility Program,at a time and place convenient to both parties,to review the Feasibility Program analyses.Aleut may make recommendations to the Power Authority with respect to continuation of the Feasibility Program;changes in the Feasibility Program,including scopes of work,schedules and final report format;and development or nondevelopment of the Project.The Power Authority shall give full consideration to recommendations of Aleut but such consideration shall not restrict or diminish the Power Authority's responsibility to make final decisions on matters concerning the Feasibility Program and the Project.The Power Authority shall.provide Aleut,upon request and at no cost to Aleut,data and materials developed during the Feasibility Program except data and materials the Power Authority deems proprietary or to represent a conflict of interest with respect to provisions hereof.Throughout the Feasibility Program the Power Authority shall document to Aleut on a monthly basis the direct costs actually incurred in conducting the Feasibility Program. If requested by Aleut,the Power Authority shall provide to Aleut in writing a description of the nature of the meetings between the Power Authority and its Feasibility Program contractors to which Aleut is prevented from attending and an explanation of the reasons for preventing Aleut's attendance. Likewise,if requested by Aleut,the Power Authority shall provide to Aleut in writing a description of the nature of the information being withheld and an explanation of the reasons for withholding such information. 4..Commitment to the Project.Upon completion of Phases (1)and (2)of the Feasibility Program,as set forth in Exhibit A hereunder,the Board shall commit to a course of action, within the timeframe set forth in Exhibit B hereunder,to develop the Project or to terminate this Agreement.The Power Authority shall notify Aleut in writing on or before November l, 1986,of the decision by the Board,In the event.the Power Authority commits to a course of action to develop the Project, the Power Authority shall diligently proceed to complete its obligations as set forth in Exhibits A and B hereunder.In the event the Power Authority fails to commit to a course of action y within the timeframe set forth in Exhibit B hereunder,this Agreement shall terminate,unless both parties agree in writing to continue the Agreement. 5.Access to Feasibility Program.Aleut shall allow access by the Power Authority,its employees,agents,representatives and contractors to land Aleut owns on Unalaska sufficient to conduct and complete the Feasibility Program as set forth in Exhibits A and B hereunder.Such access by the Power Authority shall not prevent Aleut from allowing access by others to Aleut land and resources on Unalaska,so long as access by others is subordinate to the needs of the Power Authority to conduct and complete the Feasibility Program in the event of any access conflicts.Such access shall be permitted during the Feasibility Program so long as the Power Authority performs its obligations set forth hereunder.If the Feasibility Program is terminated prior to acquisition of financing for the Project or if the Board decides not to develop the Project,Aleut agrees to allow access to lands for plugging and abandonment of the existing exploration well,as an act of last resort in the event the Power Authority and Aleut cannot agree otherwise in writing to maintain the well. 6.Option"for Project Development by Aleut.Prior to or within sixty (60)days from completion by the Power Authority of Phase (2)of the Feasibility Program as set forth in Exhibit A hereunder,Aleut,in conjunction with reasonably qualified parties,may present proposals and agreements to provide for the funding,development and/or operation of the Project,any portion thereof,or a reasonably comparable project.In the event an Aleut proposal provides for the development of the Project at a delivered cost of power to the City of Unalaska that is equal to or less than that which the Power Authority can reasonably expect to deliver pursuant to the Feasibility Program,or in the event the terms and conditions of Aleut's proposal are preferred by the City of Unalaska,then Aleut's proposal for development of the Project shall be accepted.Upon acceptance of Aleut's proposal,the Power Authority shall document to Aleut within thirty (30)days the direct costs actually incurred on a monthly basis during the Feasibility Program set forth herein.Upon Aleut's reimbursement to the Power Authority for documented direct costs,this Agreement shall terminate. Article B.GRANT OF LEASE AND RIGHTS FOR THE PROJECT 1.Lease and Production Rights..Upon the completion by the Power Authority of the Feasibility Program within the timeframe set forth in Exhibit B hereunder,prior to any drilling or construction and after a commitment by the Board to proceed with development of the Project,Aleut,for and in consideration of the royalties,rents and covenants herein provided,shall lease exclusively unto tHe Power Authority surface lands which are specifically identified in the Feasibility Program analysis as necessary to construct and operate the Project and shall grant separately to the Power Authority the non-exclusive right to drill for,produce,extract,take and remove from the subsurface estate of Aleut:(a)all products of geothermal processes, embracing indigenous steam,hot water and hot brines;(b)steam and other gases,hot water and hot brines resulting from water, gas or other fluids artificially introduced into subsurface formations;(c)heat or other associated energy found beneath the surface of the earth;(d)water from geopressured zones (the foregoing (a)through (d)are hereinafter referred to as "Energy Resources);and (e)any minerals (exclusive of oil or hydrocarbon gas that can be separately produced)which are found in solution or association with or derived from any of the foregoing (such minerals are hereinafter referred to as "Byproducts").The surface lands leased by Aleut to the Power Authority and the subsurface estate of Aleut in which the Power Authority has the non-exclusive right to conduct the foregoing activities are hereinafter collectively referred to as the "Leased Lands."In addition to the rights granted to the Power Authority above,Aleut shall hereby grant to the Power Authority the right to explore the Leased Lands by geological,geophysical Or other methods,whether now known or not. Aleut agrees that the drilling for,production, extraction,taking and removal of Energy Resources and/or Byproducts from the subsurface estate of Aleut by a party other than the Power Authority shall be subordinate to the needs and requirements of the Power Authority for so long as this Agreement is in effect. 2.Resource Use and Disposal Rights.For the same consideration,Aleut shall grant to the Power Authority the right to store,utilize,process,convert and otherwise use such Energy Resources and Byproducts on or off the Leased Lands and to sell the same or any part or derivative thereof on or off the Leased Lands during the term of this Agreement,with the right of entry thereon at all times for said purposes,and to construct,use,maintain,erect,repair and replace thereon,and to remove therefrom all roads,pipelines,ditches and lanes, telephone and telegraph lines,utility installations,power lines,poles,tanks,evaporation or settling basins,extraction or processing plants,machinery,equipment,buildings,electric power plants,and equipment for generation and transmission of Energy Resources,Byproducts and electric power,and for the handling,treatment or storage thereof,and all structures and facilities relating thereto,which the Power Authority may desire to erect,construct or install.in carrying on the Power Authority's business and operations on or from the Leased Lands; and the Power Authority shall have the further right to erect, maintain,operate and remove a plant or plants,structures and facilities with.all necessary appurtenances for the conversion of the Energy Resources into heat,power or another form of energy,and for thé extraction of Byproducts from steam,brine or water produced from the Leased Lands,including all rights necessary or convenient thereto,together with rights-of-way for passage over,upon and across and ingress and egress to and from the Leased Lands for any or all of the above-mentioned purposes.The Power Authority shall obtain any and all permits, consents or licenses required by any public or private entity with authority to regulate the activities of the Power Authority conducted on the Leased Lands;Aleut makes no representations or warranties as to the requirements of any such permission, consent or license nor as to the availability of such.The Power Authority shall also have the right,upon obtaining proper permit from appropriate agencies with authority to regulate such activities,to utilize or dispose of waste brine and other waste products from a well or wells on the Leased Lands into a well or wells drilled or converted for that purpose on the Leased Lands, and the right to inject water,brine,steam and gases from a well or wells on the Leased Lands for the purpose of maintaining or restoring pressure,increasing or maintaining production,or testing in the productive zones beneath the Leased Lands. 3.Right-of-Way Easement Rights.-For the same consideration,Aleut shall grant the Power Authority rights-of-way and easements for a road and transmission line over Aleut's surface and subsurface estates.Such rights-of-way and easements shall commence at the Leased Lands and shall terminate at the point of intertie with the City of Unalaska distribution system.Said easements shall be one hundred (100) feet in width and granted with the rights,privileges and -10- authorities to:(a)construct,reconstruct,maintain,repair, operate,improve,and update upon or under lands within said easements an electric transmission line and road system including but not limited to poles,towers,wires,guys, anchors,bridges,abutments,culverts,suporting apparatus,and such other structures as the Power Authority may now or shall from time to time deem necessary;(b)provide ingress and egress to lands within said easements;(c)cut,trim,remove and control the growth of,by machinery or otherwise,vegetation on or adjoining lands within said easements which in the judgment of the Power Authority,might interfere with,threaten or endanger the operation and maintenance of said line or system; (d)clear and keep lands within said easements free from fences, buildings,pavements or other structures which in the judgment of the Power Authority,might interfere with,threaten,or endanger the operation and maintenance of said line or system or May increase the safety risks to Aleut or its property;and (e) license,permit or otherwise agree to the joint use or occupancy of said line or system by any other person,firm or corporation for telephone,electrification,utility or transportation purposes. Article C.TERMS AND CONDITIONS 1.Terms and Rentals, (a)Unless this Agreement is terminated under any other -1ll- provision hereof,this Agreement and the lease granted herein shall remain in force for an initial period of thirty (30)years (the initial period of enforcement of this Agreement being hereinafter referred to as the "Primary Term").The Primary Term shall commence effective January 1 of the year in which commercial production first begins.The term shall be extended automatically for a period of ten (10)years if any of the Energy Resources are being produced in commercial quantities from any of the Leased Lands at the end of the Primary Term, provided that the Power Authority is in compliance with all the terms and conditions of this Agreement.Likewise,the term shall be extended automatically for a second period of ten (10) years if any of the Energy Resources are being produced in commercial quantities from any of the Leased Lands at the end of the initial ten-year extension.If at the end of the second ten-year extension Energy Resources are being produced or utilized in commercial quantities,and the Leased Lands are not needed for other purposes,the Power Authority shall have a preferential right to negotiate a renewal of this Agreement for a further term in accordance with such terms and conditions to which Aleut and the Power Authority may at that time agree. (b)If at the expiration of the Primary Term or the expiration of the initial ten-year extension thereof,none of the Energy Resources is being produced,but on or before the date of expiration'reworking operations or operations for the drilling of a well in search of any of the Energy Resources are -12- commenced on said Leased Lands,this Agreement will continue in force for an extension of twelve (12)months,provided that such operations of the Power Authority are continuously prosecuted and the Power Authority fulfills all other terms and conditions of this Agreement including the payment of the Mininum Royalty and Rental as defined herein.The operations of the Power Authority shall be considered to be continuously prosecuted if not more than nine (9)months shall elapse between abandonment of prior production well and beginning of operations for the drilling or reworking of the replacement well.If Energy Resources are not once again being produced continuously in commercial quantities within twelve (12)months from the date when commercial production first closed,this Agreement may be terminated at the sole discretion of Aleut.If,as a result of such operations,any of the Energy Resources are being produced once again in commercial quantities,this Agreement will remain in force for the extended term of ten (10)years,which extended term shall have commenced on the date of expiration of the previous term. (c)If Energy Resources are being produced in commercial quantities from the Leased Lands at the expiration of the Primary Term or the initial ten-year extension thereof,and all of such production shall thereafter cease,asa result of a depletion of such Energy Resources from the Leased Lands or as a result of an act of God or naturally occurring phenomenon,the Power Authority may,within twelve (12)months from cessation of 13- such production,resume drilling or reworking operations in an effort to obtain or restore production of any of the Energy Resources.If such event shall occur this Agreement shall remain in force for the remainder of the term,inclusive of said twelve (12)month period,provided that such operations of the Power Authorityare continuously prosecuted,as defined above, result in production in commercial quantities of any of the Energy Resources,and the Power Authority fulfills all other terms and conditions of this Agreement including the payment of the Minimum Royalty,Royalty and Rental,as defined herein. "Reworking,”as used herein,Shall include,among other things, cleaning,testing,repair and replacement of wells and related facilities and equipment necessary to produce from such wells. (d)Should production drilling operations not be commenced on said Leased Lands on or before January 1,1988, this Agreement shall terminate unless the Power Authority,on or before said date,shall pay to Aleut the sum of One Hundred Twenty-Five Thousand Dollars ($125,000.00)plus the sum of Four Thousand Eight Hundred Dollars ($4,800.00)per acre per year for all Leased Lands then held,which payments shall extend for twelve (12)months from said date,the time within which drilling operations may be commenced. (e)Subsequent to completion of the Project design and before commencement of construction,but in any case not later than January 1,1988,as referenced in Exhibit B hereof,the 14- Power Authority shall pay annually to Aleut a Rental (hereinafter referred to as ""Rental")in the sum of Four Thousand Eight Hundred Dollars ($4,800.00)per acre for all surface Leased Lands determined by the Power Authority and Aleut to be necessary for the Project.The first Rental payment shall be prorated for "the calendar year (January 1 to December 31)in which made based on the days remaining in said year.Each subsequent annual calendar year Rental payment shall be due on January 15 of each year thereafter,and such obligation shall continue throughout the Primary Term and any extension term. 2.Royalties. The Power Authority shall pay a Royalty to Aleut,as hereinafter described and referred to as "Royalty,"for any and all Energy Resources and Byproducts extracted from the Project's initially installed production well or the equivalent flow capacity thereof from its backup well.The Royalty paid to Aleut shall be determined as provided herein and shall be applicable to the initially constructed and installed gross electric generation capacity of the Project plus fifty percent (50%)thereof,up to a maximum gross electric generation capacity equivalent to that of the initial production well or twelve (12)megawatts,whichever is less.Royalty on Energy Resources and Byproducts produced in excess of the initially constructed and installed gross electric generation capacity, plus any increaseas herein allowed,are not subject to this -15 Section and shall be renegotiated prior to increasing such capacity beyond the limitations set forth herein.'The parties agree that any uses of geothermal fluids extracted for purposes other than electric generation shall be derived from the effluent or waste waters from electric generation operations, and such fluids shall be extracted from the initially installed production well and its backup well,only. (a)On Energy Resources:As Royalty,the Power Authority shall pay Aleut twelve and one-half percent (12-1/23%) of the market value (hereinafter referred to as the "Agreed Share")at the point of removal from the earth (hereinafter referred to as the "Wellhead")of the Energy Resources extracted and saved and sold or used,except as provided herein for operations which are derived from the Leased Lands.Up to ten percent (10%)of the total Energy Resources extracted at the Wellhead may be used by the Power Authority without payment of Royalty therefor to Aleut,so long as such Energy Resources were necessary and used in the electric generation operations of the Plant located on the Leased Lands and the Power Authority adequately documents such need and use.If the Feasibility Program reveals that the Project would be economically feasible at an Agreed Share higher than twelve and one-half percent (12-1/2%),the-Royalty rate shall be adjusted upward to the maximum percentage under which the Project would be economically feasible or to 'fifteen percent (15%),whichever is less.If the Feasibility Program reveals that the Project is not economically 16- feasible at an Agreed Share of twelve and one-half percent (12-1/2%),the Royalty rate shall be adjusted downward to the maximum percentage at which the Project would be feasible or to ten percent (10%),whichever is greater.If the Feasibility Program reveals that the Project is not economically feasible at an Agreed Share between ten percent (10%)and fifteen percent (15%)inclusive,this Agreement shall terminate,unless both parties hereto agree in writing to continue the Agreement under a specified Agreed Share. (b)On Byproducts:As Royalty,the Power Authority shall pay to Aleut five percent (5%)of the market value (hereinafter referred to as "Byproducts*")at the Wellhead for all Byproducts extracted from or allocated to the Leased Lands and saved and sold or used. 3.Payment of Royalty.Upon beginning commercial production and thereafter during the Primary Term or any extension term of this Agreement,the Power Authority shall pay annually to Aleut an advance Minimum Royalty (hereinafter referred to as "Minimum Royalty")in the sum of One Hundred Twenty-Five Thousand Dollars ($125,000.00).The first payment of the Minimum Royalty shall be due within ten (10)days of beginning commercial production and the amount of said Minimum Royalty shall be prorated based on the days remaining in said year only.All other payments of Minimum Royalty,or adjusted Minimum Royalty,shall be due on January 15 of each year.Any -17- advance Minimum Royalty or adjusted Minimum Royalty so paid to Aleut shall be recoverable by the Power Authority only in the calendar year (January 1 to December 31)to which said payment applies and only out of said year's production of the Energy Resources or Byproducts;the Power Authority is hereby authorized and directed to deduct the same from Royalty due and payable during said year only.Following recovery of any advance Minimum Royalty or adjusted Minimum Royalty,the Power Authority shall pay Aleut,on or before the last day of each and every calendar minonth,the Royalty accrued and payable for the preceding calendar month.Concurrently with making each Royalty payment,the Power Authority shall deliver to Aleut a detailed statement with substantiating documents setting forth the basis for the determination of the Royalty then paid by the Power Authority,including,but not limited to,an accounting for all Energy Resources and Byproducts extracted,produced,consumed and/or sold from the Leased Lands.The Power Authority shall install and maintain any and all equipment necessary to accurately measure and quantify the Energy Resources and Byproducts extracted from the Leased Lands.Periodically,in accordance with industry practice but in no event less frequently than yearly,the Power Authority shall cause such measuring equipment to be inspected and tested for accuracy by independent inspection and the results thereof shall be delivered to Aleut.Within the same time constraints the Power Authority shall cause an independent State or Federal -18- governmental certification of the accuracy of such measuring equipment. After the end of the Primary Term,the Minimum Royalty payments of $125,000 thereafter payable,as provided herein, shall be adjusted,and each ten (10)years thereafter,in the following manner: The adjusted Minimum Royalty payments to be paid after the Primary Term,and each ten (10)year term thereafter,shall be the product of multiplying $125,000 by a fraction,the numerator of which is the most recently published Consumer Price Index,all items,all Urban Consumers (the "CPI-U")which is published by the U.S.Department of Labor,Bureau of Labor Statistics at the end of the Primary Term,or the end of each ten (10)year term thereafter,and the denominator of which is .the published CPI-U on the date of this Agreement.If publication of the CPI-U is discontinued,the Parties hereto shall thereafter accept comparable statistics on the cost of living for the United States as they shall be computed and published by an agency of the United States or,if such an index does not exist,by a responsible financial periodical or recognized authority,then to be mutually selected by Aleut and the Power Authority. | 4.Purchase of Aggregate Materials.The Power Authority shall pay Aleut one dollar fifty cents ($1.50)per cubic yard -19- for aggregate materials extracted from Aleut land,as measured emplaced in construction of the Project.Payment shall be due and payable on or before the last day of the month in which said aggregate materials are actually extracted.The purchase price herein stated is effective only until commencement of commercial operation of the Project. 5.Right-of-Way Easement Fee.If the Power Authority completes the Feasibility Progam and proceeds with development of the project,the Power Authority shall pay Aleut on or before January 15 of each year thereafter during the term of this Agreement a fee of ten dollars ($10.00)for the rights granted herein for a road and transmission line right-of-way over Aleut's surface and subsurface estates within the Project Area but off Leased Lands. 6.Depository.All payments required to be made by the Power Authority to Aleut hereunder shall be paid to Aleut by mailing or delivering the Power Authority's check therefor to The Aleut Corporation,its successors or assigns,herein designated by Aleut as depository.Aleut hereby granting to said depository full power and authority on behalf of Aleut,and all those succeeding to Aleut's rights hereunder whether by voluntary act or operation of law,to collect and receive all sums of money which may become due and payable from the Power Authority hereunder,and said power is hereby declared by Aleut to be coupled with an interest and to be irrevocable without the -20- consent of the Power Authority.No change in the ownership of the Leased Lands or of any payments due Aleut hereunder shall be binding on the Power Authority until it shall have been furnished adequate written evidence thereof.In the event more than one person or entity shall at any time be entitled to receive sums of money payable hereunder to Aleut,all such persons shall have the right,jointly,to designate any other single depository to receive all payments hereunder on their joint and several behalf,and by jointly executed and acknowledged instrument so to advise the Power Authority,it being intended that the Power Authority Shall never be required to make payment to more than one person or entity nor to draw more than one check for any separate payment becoming due hereunder.Until such notice shall be furnished to the Power Authority,the Power Authority shall continue to make all payments to the depository last designated hereunder. 7.j\Lesser or After-acquired Interest.If it should hereafter appear that Aleut,at the commencement of Project development,owns a lesser interest in the Leased Lands than the fee simple estate therein and thereto,or less than the entire interest in the Energy Resources or Byproducts contained in and under the Leased Lands,then the rentals,Royalty and the like accruing to Aleut hereunder shall be paid to Aleut in the proportion which Aleut's interest bears to the entire fee simple estate in the Leased Lands or to the entire interest in said Energy Resources or Byproducts.Notwithstanding the foregoing, - 21- should Aleut hereafter acquire any additional right,title or interest in or to the Leased Lands or said Energy Resources or Byproducts,then any increase in payments of money hereunder necessitated thereby shall commence with the payment next following receipt by the Power Authority of satisfactory evidence of Aleut's acquisition of such additional interest. 8.Taxes. (a)The Power Authority shall pay all taxes levied and assessed against the Power Authority's leasehold interest in the Leased Lands.The Power Authority shall pay all taxes levied and assessed against all structures,improvements and personal property placed upon the Leased Lands by the Power Authority. Aleut shall pay all taxes levied and assessed against the Leased Lands as if such Leased Lands were unimproved and shall pay all taxes levied and assessed against all structures and improvements placed on the Leased Lands by Aleut. (b)Aleut agrees to pay the-Agreed Share and the Byproduct Share of any and all taxes assessed upon any Royalty received by Aleut for Energy Resources and Byproducts, respectively,from said Leased Lands. 9.Operations. (a)The Power Authority shall comply with all laws and -22- regulations applicable to its activities hereunder as required by the laws of the State of Alaska and the laws of the United States. (b)The Power Authority,its agents,representatives and contractors shall ever indemnify,save harmless and defend Aleut from and against any and all manner of claims,judgments Or suits whatsoever arising out of the Power Authority's activities or operations hereunder other than those arising in whole or in part from Aleut's act or failure to act and this Section shall survive termination of this Agreement. (c)Prior to exercising any access rights under this Agreement,the Power Authority,its agents,representatives and contractors shall provide Aleut with certificates for general liability and property damage insurances in reasonable amounts and form,and a Power Authority contractor shall name Aleut as an additional insured.All such insurance policies and certificates shall include the following cancellation or change clause or a similar clause approved by Aleut:"This insurance will not be cancelled by this insurance company nor any changes made in the policy which will change the name of the insured, without first giving thirty (30)days notice in writing to The Aleut Corporation,One Aleut Plaza,suite 300,4000 Old Seward Highway,Anchorage,Alaska 99503,as evidenced by return receipt of registered or certified mail."The insurance required under -23- this paragraph shall be maintained in full force and effect throughout the term of this Agreement and any extension hereof. (d)All of the labor to be performed and all of the materials to be furnished in the operations of the Power Authority hereunder shall be at the Power Authority's sole cost and expense unless otherwise specified herein,and Aleut shall not be chargeable with or liable for any part thereof.The Power authority shall protect Aleut and said Leased Lands against liens of every character arising from its operation thereon.. (e)Whenever used herein,the expression "drilling operations"shall mean,for all purposes hereof,any work or actual operations undertaken or commenced for the purpose of drilling of a well on or into said Leased Lands,including without limiting the generality hereof,the preparation of the ground therefor,the building of roads and other facilities therefor,the construction of a derrick and other necessary structures for the drilling of a well followed by the actual operation of drilling in the ground.Any such work or operations preliminary to the drilling in the ground may be undertaken in any order the Power Authority shall see fit.All such work and gperations shall be prosecuted with reasonable Giligence after the Power Authority has obtained all permits, consents and/or licenses which may be required. -24- 10.Testing.The Power Authority shall be entitled,without accounting to Aleut therefor in any manner,to flow and/or blow wells without restriction for testing purposes only. ll.Uneconomic Operations. (a)Nothing herein contained shall require the Power Authority to produce,recover,save and market any of the Energy Resources or Byproducts contained in the Wellhead brines or effluent from operations on the Leased Lands,which,in the Power Authority's judgment,are not economic to produce, recover,save or market.The Power Authority shall have the right to handle or dispose of any such uneconomic Energy Resources or Byproducts by such lawful manner or means as the Power Authority shall deem appropriate in the circumstances. (b)It is recognized that the market demand for the Energy Resources or Byproducts may vary from time to time and during such periods as t'ere is no market for any of the Energy Resources or Byproducts the Power Authority's obligation to produce,process'and extract such Energy Resources or Byproducts shall be suspended.The Power Authority shall have no obligation to save or process Byproducts described in Section l, item (e)of Article B,above. (c)Stibject to the foregoing and except as herein otherwise provided,the Power Authority agrees to drill wells -25- and operate each completed well with reasonable diligence and in accordance with good operating practice and all applicable laws so long as such wells shall produce Energy Resources and/or Byproducts in commercial quantities while this Agreement is in force as to the portion of said Leased Lands on which such well or wells are situated. 12.Damages Resulting From Operations.The Power Authority shall not be liable to Aleut for damages to any geothermal resources reservoir underlying said Leased Lands or for the loss of Energy Resources or Byproducts therein or therefrom or for any subsidence or surface damages resulting from its operations hereunder unless such damage or loss is caused by the Power Authority's gross negligence or willful misconduct. 13.Unitization. (a)The Power Authority shall have the right,at its sole option,from time to time,either before or after production,to pool,unitize Or combine all or any part of the Leased Lands with other land or lands or lease or leases (whether held by the Power Authority or others and whether or not the surface of such lands may be used for development or operating purposes)adjacent or adjoining the Leased Lands to comprise one or more operating or development units of not more than 1920 acres edch,and drilling operations or production on any such unit shall constitute compliance herewith to the same -26- extent as though such operations or production were on the Leased Lands.Aleut shall participate in the Minimum Royalty and Royalty from any such unit,either in the proportion that the number of acres owned by Aleut within the unit bears to the total number of acres in such unit or in proportion to the volume of Energy Resources that are produced on the Leased Lands owned by Aleut within such unit bears to the total volume of Energy Resources produced on such unit,whichever Aleut chooses.In any event,Aleut shall be entitled to receive, during the Primary Term or any extension term of this Agreement, the Minimum Royalty,or adjusted Minimum Royalty,and Rental as provided for in Sections l(e),2 and 3 of this'Article C.Such unit shall become in existence upon the Power Authority's written notice to Aleut and execution in writing and recordation in the conveyance records of the District in which the Leased Lands are situated,of an instrument identifying and describing the pooled or communitized acreage,The Power Authority shall at all times keep Aleut informed of the lands embraced in any unit of which the Leased Lands form a part.Whenever used herein,the term "District"shall mean,for all purposes hereof, the State of Alaska Recording District. (b)As to each and any such operating or development unit,the Power Authority shall have the right to commingle for the purpose of utilizing,selling or processing,or causing to be processed,the steam or steam power and/or extractable minerals produced from such operating or development unit with -27- the steam or steam power and/or extractable minerals produced from other lands or units,so long as the production from the unit which includes all or portions of the Leased Lands is measured,metered or gauged as to such unit production;unit production so measured,metered or gauged shall then be allocated to the Leased Lands in accordance with the provisions of paragraph (a)above. (c)Allocation,as aforesaid,shall cease upon any termination,either in whole or in part (by surrender, forfeiture or otherwise),of this or any other agreement covering lands in such operating or development unit as to the lands covered by such terminated agreement or part thereof.In the event of the failure of Aleut's or any other owner's title as to any portion of the land included in any such operating or development unit,such portion of such land shall likewise be excluded in allocating production from such unit;provided, however,the Power Authority shall not be held to account for any production allocated to any lands to be excluded,as aforesaid,from such unit unless and until the Power Authority has actual knowledge of the aforesaid circumstances requiring such exclusion. (d)If any taxes of any kind are levied or assessed (other than taxes on the Leased Lands as such or any rights thereto not covered by this Agreement),any portion of which is chargeable to Aleut under Section 8 of this Article C,then the -28- share of such taxes to be borne by Aleut as provided in this Agreement shall be in proportion to the share of the Royalty from such unit allocated to the Leased Lands. (e)The Power Authority may,at its sole option,at any time when there is no production in such unit of Energy Resources or Byproducts in quantities deemed commercial by the Power Authority,terminate such unit by a written declaration thereof,in the manner in which it was created. 14.Additional Operations. (a)Aleut hereby grants to the Power Authority,its successors and assigns,the following rights,rights-of-way and easements in,under,upon,through and across said Leased Lands which may be exercised at any time or from time to time during the duration of this Agreement and as long thereafter as the Power Authority exercises any of the rights granted in this Section:The sole and exclusive right to locate a well or wells on the surface of said Leased Lands and to slant drill said well or wells into,under,across and through said Leased Lands and into and under other Aleut lands together with the right to repair,redrill,deepen,maintain,inject in,rework and operate Or abandon such well or wells for the production of Energy Resources or Byproducts together with the right to develop water from said Leased Lands for any of the Power Authority's operations pursuant to this Section and together with the right -29- to construct,erect,maintain,use,operate,replace and remove all pipelines,power lines,telephone lines,tanks,machinery and other facilities,together with all other rights necessary or convenient for the Power Authority's operations under this Section and together with the rights-of-way for passage over and upon and across and ingress and egress to and from said Leased Lands. 15.Aleut's Right to Bid.Aleut shall be notified as a potential bidder on any phases or tasks contemplated under this Agreement which the Power Authority or its agents or contractors may let for competitive bidding.Any bid that Aleut may submit, in conjunction with a reasonably qualified party or parties,for which the Power Authority determines there would be no conflict of interest in awarding the bid to Aleut,shall receive equal consideration to other bids submitted. 16.Title Warranty.Aleut shall grant and agrees to defend title to the Leased Lands except for rights-of-way and easements of record,and further agrees that the Power Authority at its option may pay and discharge any delinquent taxes,mortgages, trust deeds or other delinquent liens or encumbrances existing, levied or assessed on or against the said Leased Lands;and,in the event the Power Authority shall exercise such option,the Power Authority shall be subrogated to the rights of any holder or holders hereof 'and Shall have the right,in addition to other remedies provided by law or equity,to reimburse itself by 30- applying to the discharge of any such mortgage,tax or other lien or encumbrances any and all payments accruing to Aleut hereunder. 17.Force Majeure.The Power Authority's obligations hereunder shall be suspended,and the term of this Agreement and the period for removal of the Power Authority's property in the event of termination shall be extended while the Power Authority is prevented from complying therewith by:strikes;lockouts; riots;action of the elements;delays in transportation; inability to secure labor or 'materials in the open market;laws, rules or regulations of any Federal,State,Municipal or other governmental agency,authority or representative having jurisdiction;litigation or administrative proceedings affecting title to lands covered hereby or operations thereon;or by other matters or conditions beyond the reasonable control of the Power Authority,whether or not similar to the conditions or matters in this Section specifically enumerated. 18.Surrenders.The Power Authority may,at any time, surrender this Agreement to Aleut in its entirety or,from time to time,surrender only so much of the Leased Lands as the Power Authority may elect in the instrument of surrender.Such surrender shali be accomplished by executing and delivering to Aleut and placing on record in the District in which the Leased Lands are located a quitclaim deed or deeds covering all or any part of the Leased Lands so selected by the Power Authority for -3l- surrender and the Power Authority shall thereby be relieved of all obligations as to the acreage so surrendered,except for obligations already accrued by the terms hereof or as provided by Section 20 hereof.Notwithstanding such surrender,the Power Authority shall nevertheless retain such rights-of-way, easements and privileges over,upon,through and across the lands so surrendered as shall be necessary or convenient for the Power Authority's operations on so much of the Leased Lands as shall then be retained by the Power Authority under this Agreement and on the Power Authority's other lands in the vicinity.Prior to the execution of the Power Sales Agreement with the City of Unalaska,the Power Authority may surrender this Agreement to Aleut upon thirty (30)days written notice. After execution of the Power Sales Agreement the Power Authority may surrender this Agreement only upon one hundred eighty (180) days written notice to Aleut. 19,Breach of Agreement.If the Power Authority has defaulted in any material respect in its obligations hereunder, Aleut shall so notify the Power Authority in writing,setting out in what respects Aleut deems the Power Authority to be in such default.If,within sixty (60)days after receipt of such notice,the Power Authority shall commence to correct the default alleged by Aleut and continue the same with due diligence until default is corrected,the Power Authority shall not be deemed in default hereunder.The service of said notice and the lapse of sixty (60)days without the Power Authority's -32- commencing to correct the alleged default shall be a condition precedent to any action by Aleut for or on account of such default.Neither the service of said notice nor the doing of any acts by the Power Authority aimed to correct all or any of the alleged defaults shall be deemed an admission or presumption that the Power Authority has failed in any respect to perform its obligations hereunder.Termination or cancellation of this Agreement shall be the sole remedy of Aleut for failure of the Power Authority to drill any well,make any payment or perform any obligation set forth herein.The Power Authority shall be obligated to and shall pay to Aleut all Royalty and Rental due up to the date of termination and surrender.In the event of termination or surrender,the Power Authority shall execute and deliver to Aleut a recordable instrument whereby the Power Authority relinquishes all of its rights and interests in Aleut lands and this Agreement. 20.Removal of Property and Restoration. (a)The Power authority may.at any time during the term of this Agreement remove all or any of the property and fixtures placed by it in or upon the Leased Lands,including the right to draw and remove all casing. (b)Following termination of this Agreement or any part thereof for any cause,and following abandonment of any well drilled pursuant to the provisions hereof,the Power Authority -33- shall,within nine (9)months thereafter or in accordance with a schedule agreed upon by both parties,remove all personal property which the Power Authority shall have brought upon the lands affected by such termination or upon the drillsite of such abandoned well;shall fill all sumps,remove all foundations and so nearly as practicable restore the areas affected by such termination or abandonment to the condition in which they were prior to the commencement of its operations hereunder;and,in the case of a partial surrender,shall deliver to Aleut a quitclaim deed,in recordable form,surrendering to Aleut all right,title and interest of the Power Authority in that part of the said Leased Lands as to which this Agreement shall have been so surrendered,saving and excepting necessary easements and rights-of-way on the Leased Lands for the Power Authority's further operations on any part of the said Leased Lands as to which this Agreement shall not have been surrendered and on the Power Authority's other lands in the vicinity.The ownership of any of the Power Authority's property not removed by it during the period herein provided shall,in the absence of force Majeure as defined herein,be deemed.abandoned by the Power Authority and shall pass to Aleut without further act of the parties or either of them effective upon expiration of such period. 21.Assignment. (a)The Power Authority shall have the right to assign -34- all or any part of its rights or interest in and to this Agreement,including but not limited to the Power Authority's right to occupy such portions of the surface of the Leased Lands as may be necessary for the construction of plants and other facilities,only to another state agency,department,office, authority or representative having jurisdiction.No assignment by either party hereunder shall be effective for any purpose whatsoever until and unless a certified copy of the recorded instrument of assignment;or,if such assignment shall have been recorded only in short form,a true and complete copy of the instrument described in such'short form under the true signatures of each of the parties thereto,together with a certified copy of such recorded short form,shall be given to the other party,in the same manner as is provided for a notice hereunder. (b)In the event of assignment by the Power Authority of this Agreement as to a segregated portion of the Leased Lands,payments due Aleut hereunder shall be apportionable among the several leasehold owners according to the surface area of each of their respective leaseholds;however,the Power Authority shall remain responsible under the terms of this Agreement for performance by the Assignee. 22.Native Practices.In selecting employees to cary out its obligations hereunder,the Power Authority shall give preference to Aleut shareholders and to other Alaska Natives, -35- for all positions for which they are equally qualified ana available.When reasonable and practical,the Power Authority shall provide training for such employees.The Power Authority shall make good faith efforts to employ Aleut shareholders and other Natives in skilled,technical and administrative positions.The Power Authority shall,also,avoid substantial infringement upon the traditional practices,cultures and hunting and fishing places of Aleut shareholders,and Aleut shall use its best efforts to keep the Power Authority informed of such hereditary practices,cultures and hunting and fishing places. 23.Survey of Leased Lands.The exact location of the Leased Lands and Right-of-way Easements within the Project Area, as described in Section 1 of Article A of this Agreement,as well as the location on said Leased Lands of the facilities and other improvements to be constructed as contemplated in the Project,shall be subject to approval by Aleut.Aleut shall exercise its approval rights so as best to facilitate the purpose for which the Leased Lands are to be leased and in accordance with the determinations set forth in the Feasibility Program analysis.It is agreed by both parties to this Agreement that a survey shall be conducted to establish by legal description a more precise location of the Leased Lands and Right-of-way Easements and the costs of such survey shall be borne by the Power Authority.The survey shall be completed on or before . -36- 24.Memorandum of Agreement for Recording.Neither the Power Authority nor Aleut,nor the successors or assigns of either,respectively,shall record this Agreement without the written consent of the other.However,the Power Authority or Aleut shall,at the request of either at any time during the term of this Agreement execute a memorandum or "short form"of this Agreement for purposes of,and in a form suitable for being recorded.The memorandum or "short form"of this Agreement shall describe the parties,set forth a precise description of the Leased Lands,specify the term of this Agreement and incorporate this Agreement by reference. 25.Notices.Any notice or other communication hereunder from Aleut to the Power Authority shall be given in writing by sending the same by prepaid registered or certified mail with return receipt requested addressed to the Alaska Power Authority at 334 West Fifth Avenue,Anchorage,Alaska 99501,and any notice or other communication hereunder from the Power Authority to Aleut shall be given in like manner to Aleut addressed to The Aleut Corporation,One Aleut Plaza,Suite 300,4000 Old Seward Highway,Anchorage,Alaska 99503.Any notice mailed as aforesaid shall be deemed given and received within seventy-two. (72)hours after the deposit thereof in the United States mail if mailed within the State of Alaska and if deposited in the United States mail outside of the State of Alaska,such notice shall be deemed to have been given and received within one hundred twenty (120)hours after deposit in the United States -37- mail.The parties may,by like notice at any time,and from time to time,change their respective addresses for the purposes hereof.Postmark dates on registry receipts for such notices shall be conclusive as to the date of mailing. 26.Entirety Clause.If the Leased Lands shall hereafter be owned in severalty,or in separate tracts,the Leased Lands nevertheless shall be developed and operated as one lease,and all Royalty accruing hereunder shall be treated as an entirety, and shall be divided among and paid to such separate owners in the proportion that the acreage owned by each such separate owner bears to the entire leased acreage.Any payment required to be made by the Power Authority pursuant to the foregoing shall be paid in accordance with the provisions in Section 6 hereof.There shall be no obligation on the part of the Power Authority to offset wells on separate tracts unto which the Leased Lands may be hereafter divided by sale,devise, unitization,or otherwise,or to furnish separate measuring or receiving facilities. 27.Severability.If any part,portion or provision of this Agreement shall be found or declared null,void or unenforceable for any reason whatsoever by any court of competent jurisdiction or by any governmental agency having authority thereover,then only such part,portion or provision shall be affected thereby and the remainder of this instrument shall continue in full force and effect.The foregoing provisions of this paragraph -38- shall be severable for the purposes of the provisions of this Section. 28.Binding Effect.This Agreement and all of the terms, covenants and conditions hereof shall extend to and be binding upon the respective heirs,executors,administrators,grantees, successors and assigns of the parties hereto. 29.Definition.For purposes of this Agreement "commercial production,""commercial operations,"or "commercial activities" shall mean the extraction of Energy Resources and/or Byproducts, and/or delivery of the products derived therefrom,for the benefit of the Power Authority and/or third party for purposes other than start-up or testing. 30.Termination by Mutual Agreement.This Agreement may be terminated at any time by mutual agreement of both parties hereto. IN WITNESS WHEREOF,the parties hereto have executed this instrument as of the date hereinabove first written. THE ALEUT CORPORATION THE ALASKA POWER AUTHORITY By By -39- PHASE EXHIBIT A FEASIBILITY PROGRAM SCOPE OF WORK (1)TECHNICAL AND ECONOMIC FEASIBILITY ANALYSES. (2)PLAN OF FINANCE. (3)ACQUISITION OF POWER SALES AGREEMENTS, (4)FINANCIAL FEASIBILITY ANALYSIS. (5)ACQUISITION OF FINANCING FOR THE PROJECT. ON OR BEFORE EXHIBIT B DEADLINES FOR FEASIBILITY PROGRAM AND DEVELOPMENT OF PROJECT August 1,1986 November 1,1986 June 1,1987 January 1,1988 January 1,1991 Complete Technical and Economic Feasibility Analyses,accept final report. Complete Plan of Finance.Commit to course of of action for proceeding with the Project or terminating this agreement. .Acquire power sales agreements,complete financial feasibility report,issue bonds (if necessary),secure funding. Complete project design,commence construction phase. Complete construction,commence operation. 4 Alaska Power Authority State of Alaska January 7,1986 Mr.Agafon Krukoff,President The Aleut Corporation One Aleut Plaza 4000 Old Seward Highway Anchorage,AK 99503 Dear Mr.Krukoff: Enclosed for your review is a proposed draft for Article C, Sections 1,2 and 3 of the Conditional Land and Resource Agreement for the Unalaska Geothermal Project (Agreement).These three sections incorporate the four major issues on which we have not yet reached agreement:(1)Royaities,(2)Term,(3)Rent,and (4)Ce- pacity Limitation.In developing this draft we have consulted Mr. aksell's letter of December 6,1985 in which he outlined expec- tations cof the Aleut Corporation,and we have followed the guide- lines given by our Board of Directors at its meeting of December 12,1985. Other than the four issues listed above,the only issue mentioned in the December 6 letter that does not appear to be adequately ad- dressed in the previous draft Agreement (dated October 28,1985)is the issue of taxes.As a result of our meeting at your offices on December 10,1985,we understand your concern with respect to the tax issue and agree in concept with the expectation set forth in the December 6 letter.Consequently,I am confident that this is- sue Can be quickiy resolved with some minor language changes to thepreviousGraftAgreement. With the enclosea draft,we would propose a compromise whereby we would relinquish cur request for term extensions for "so long as any Of the Substances are produced in commercial quantities"and accept vour proposal for a term equal to project financing with two ten-year extensions.(In eddition,we would request preferential rights tc @ new lease upon termination of this Agreement if Aleut hac no ather plans for the property.)Rather than complicating the agreement with a requirement for @ minimum average annual produc- tion of 2 MW,we would propose the industry standard whereby, snould reworking of wells be necessary,the Power Authority wouldsimplybeellowcdacertainperiodfercessationofcommercialpru- duction auring which reworking could occur.Based on weather and ether conditions at Unalaska and the remoteness of the site,we be- itove that a twelve month period for restarting commercial produc- tion is reasunable.We are alsa proposing,at Mr.Aksell''s re- guest,to delete paragraph (d}of Article C,Section 1,from the Mr.Agafon Krukoff,President January 7,1986 Page 2 previous draft Agreement;thus,the lease would be terminated if we were forced to shut down due to uneconomic production. In turn for our concessions with respect to the term of the agree- ment,we would hope that The Aleut Corporation would be willing to accept our proposal with respect to rental payment.As is standard in private industry geothermal leases,rent would serve as an annu- al advanced minimum royalty and would be recoverable from annual production and deducted from royalties due.The annual rental rate would be ten percent of the existing market value of the property as a remote,unimproved parcel.We would also be willing to con- sider a rental based on State and Federal standards which are $3.00 and $2.00,respectively,per acre per year,which is also paid only when royalties do not accrue. With this draft,we are also proposing ea royalty provision thet would meet the expectations outlined in the Aleut Corporation's De- cember 6 letter and its presentations to our Board on November 6 and December 12,1985.That is,it provides for a royalty within the range of 10%to 15%of the value of the resource at the wellhead,with a specific royalty determined only after conipletion of detailed cost estimates during the feasibility study.Following our Board's instructions,we have written the provision with a 123% royalty that can be adjusted upward or downward pending the outcome or the feasibility study.In addition,at The Aleut Corporation's suggestion,we have returned to the concept of basing the value of geothermal resources on the weighted average price of diesel fuel and generator efficiency in Unalaska/Dutch Harbor. With these concessions on tne term end royalty issues,we hope The Aleut Corporation can accept our compromise position with respect to capacity limitations.As you will recall,our original pro- pesals did not contain @ capacity limitation and we compromised on this issue as a result of The Aleut Corporation's request for a ca- pacity limit equal to the initial instailed cépacity of the proj- ect.We have been directed by our Board to negotiate an agreement that "reflects industry practices and nationel and state stan- dards”.We have never seen nor heard af 2 private,state,er fed- eral geothermal lease that limited production or generation capaci- ty in any way.However,we would be wiiling te attempt to persuade the Board to accept a limitation based on production from @ single well in the interest of reaching 2a nego viated agreement. I believe these draft provisions represent @ rair and equitable compromise on the remaining,major outstanding issues with respect Mr.Agafon Krukoff,President January 7,1986 Page 3 to the Agreement.I look forward to meeting with you to discuss these issues and to finalize the agreement as soon as possible. Sincerely, et 7 ". &J tr )fo RobSrt 0D.HeathExecutiveDirector DDC/RDH/cde cc:Lee Nunn,Alaska Power Authority Board of Directors -Ed Morris,Alaska Power Authority Brent Petrie,Alaska Power Authority Dave Denig-Chakroff,Alaska Power Authority John Carpenter,The Aleut Corporation Carl Cardinelli,The Aleut Corporation Allan Aksell,The Aleut Corporation Paul Fuhs,City of Unalaske Nancy Gross,City of Unalaska Jeff Currier,City of Unalaska 2441/529 Power Authority/Aleut Agreement Proposed Revisions to Article C,Sections 1,2,and 3 January 6,1986 Article C.TERMS AND CONDITIONS 1.Terms and Rentals.(a)Unless this Agreement is terminat- ed under any other provisions hereof,this Agreement and the lease granted herein shall remain in force through the term of Project. financing (the period of enforcement of this Agreement being hereinafter referred to as the "Primary Term").The term shall be extended automatically for a period of ten (10)years if any of the Substances are being produced in commercial quantities from any of the Leased Lands at the end of the Primary Term.The term shall be extended automaticaliy for a second period of ten (10)years if any of the Substances are being produced in commercial quantities from any of the Leased Lands at the end of the initial ten-year extension.If at the end of the second ten-year extension Substances are being produced or utilized in cormercial quantities, and the Leased Lands are not needed for other purposes,the Power Authority shall have a preferential right to a renewal of this Agreement for a second term in accordance with such terms and conditions to which Aleut and the Pawer Authority may at that time agree. 2442 /528/)] (b)If at the expiration of the Primary Term or the initial ten-year extension thereof,none of the Substances is being pro- duced,but on or before that date reworking operations or opera- tions for the drilling of a well in search of any of the Substances are commenced on said Leased Lands,this Agreement will continue in force for so long as such operations are continuously prosecuted; and,such operations shall be considered to be continuously pros- ecuted if not more than twelve (12)months shall elapse between abandonment of one well and beginning of operations for the drill- ing or reworking of another well.If as a result of such opera- tions,any of the Substances are produced in commercial quantities, this Agreement will remain in force for the extended term of ten (10)years. (c)If said Substances,or any of them,are being so produced from any part of said Leased Lands at the expiration of the Primary Term or the initial ten-year extension thereof,and all of such production shall thereafter cease,the Power Authority may,within twelve (12)months from cessation of such production,resume drilling or reworking operations in an effort to obtain or restore such praduction of any of the Substances in which event this Agreement shall remetn in force for so longa as such operations are continuous?y prosecutec,as prayvided abave and,1f such operations shall result in production in commercial quantities of anv of the Substances,for the remainder of the ten-year extension.""Rework- ing,"as used herein,shall include,among other things,cleaning, 29480 /528/2 testing,repair,and replacement of wells and related facilities and equipment necessary to produce from such wells. (d)If drilling operations are not commenced on said Leased Lands on or before April 1,1988,this Agreement shall terminate unless the Power Authority,on or before said date,shall pay to the depository,as provided in Section 6 hereof,the sum of Four Hundred Dollars ($400.00)per acre for al?Leased Lands then held, such sum being hereinafter called "Rental,"which payment shall extend,for twelve (12)months from said date,the time within which drilling operations may be commenced. 2.Royalties.(a)The Power Authority shall pay royalty to Aleut,as hereinafter described,out of the proceeds received from the sale of Substances produced from a single well,which shall be the Project's initially installed production well or a replacement well or backup well for the initially installed production well. Royalties on Substances produced from additional wells other than the Project's initially installed production well or its replace- ment or backup well are not subject to this Section and shall be reneqetiated prior to installation of an additional production well or wells. (i)On Erergy Resources:As rovalty,the Power Authority shall pay Aleut tweive and one-half percent (123%),hereinafter called the "Agreed Share',""ofthe market value,at the point of " 2442 /878/3 removal from the earth (hereinafter referred to as the "Wellhead") of the steam,hot water,hot brines,thermal energy,or geo- pressured water,produced and saved and sold or used (except for operations hereunder)off the Leased Lands.If Phase (1)of the Feasibility Program reveals that the Project would be economically feasible at an Agreed Share higher than twelve and one-half percent (124%),the royalty rate shall be adjusted upward to the maximum percentage under which the Project would be economically feasible or to fifteen percent (15%),whichever is less.If Phase (1)of the Feasibility Program reveals that the Project is not economical- ly feasible at an Agreed Share cf twelve and one-half percent (123%),the royalty rate shall be adjusted downward to the maximum percentage at which the Project would be feasible or to ten percent (10%)whichever is greater.If Phase (1)of the Feasibility Program reveals that the Project 1s not economically feasible at an Agreed Share between ter percent (10%)and fifteen percent (15%) inclusive,this Agreement shall terminate,unless both parties hereto agree in writing to continue the Agreement under a specified Agreed Share. (ii)Cn All Other Substances:As royalty,the Power Authori- ty shall pay te Aleut five percene (5°),hereinafter called the "Market Shave."of the market value at the Wellhead of al!Suh- stances other than steam.hot water,het brines,thermal eneray,or ceopressured water praduced fron ar allocated to the Leased Lands 2442/578,'4 and saved and sold or used (except for operations hereunder)off the Leased Lands. (b)For any such Substances that are processed,manufactured or converted to electric power or other forms of energy on or in the vicinity of said Leased Lands before sale by the Power Authori- ty,the market value thereof,in cents per kilowatt-hour,for any current year shall be the quotient of the weighted average price of diesel fuel,in cents per gallon,delivered to the municipal utility power house during the preceding calender year;divided by the weighted average efficiency rating,in kilowatt-hours per gallon,of the municipal diesel generators during the preceding calendar year;minus the sum,in cents per kilowatt-hour,of direct,documented costs incurred by the Power Authority for transporting,processing,manufacturing,and converting Substances and transmitting power to the point of sale,including the cost of facilities and equipment used for same which shall include overhead and amortization charges.However,for the purpose of this calcu- lation,the weighted average price of diesel fuel used for any year shall not be greater than nor less than the prices representing a three percent (3°)real increase or decrease,respectively,fram the prior year weichted averace price when evaluated with respect te the inflation rete for the priar year as cetermined hy the Consumer Price Index,al}items,all Urban Consumers (CPT-U)as published by the U.S.Department of Labor Statistics.The weichted average diesel generator efficiency shal?not be greater than or less than DAAD ARP t& the efficiency rating representing a twenty percent (20%)increase or decrease,respectively,from the prior year weighted average efficiency rating.The market value thereof for any current year shall be calculated each year as soon as the data are available from the preceding year and shall be applied retroactively to January 1 of the current year. (c)If the Power Authority sells any such Substances at the Wellhead,the market value thereof shall be deemed to be the sales price received by the Power Authority. (d)If the Power Authority sells any such Substances at any other point,the market value thereaf shall be deemed to be the Sales price received hy the Power Authority less the cost of transporting the same from the Wellhead to the point of sale. (e)The Power Authority may use,free of royalty,Substances and electric power developed from said Leased Lands for ali op- erations hereunder,and the Power Authority shell not be required to account to Aleut for cr pay royalty on any Substances reasonably Tost or consumed in operations hereunder. 3.Payment of Royalties.Upon commencement of commercial rd operations,the Power Authority shall pay Aleut.on or before January 15 of each year during the term of this Aqreement,an advance minimum royalty in an amount equal to the Rental as set 2442 7528/6 forth in Section 1,paragraph (d)hereof.Any advance minimum royalty so tendered to Aleut shall be recoverable by the Power Authority out of future production of any or all of the above said Substances and the Power Authority is hereby authorized and direct- ed to deduct the same from royalties thereafter due and payable. Following recovery of any advance minimum royalty,the Power Authority shall pay Aleut,on or before the last day of each and every calendar month,the royalties accrued and payable for the preceding calendar month.Concurrently with making each royalty payment,the Power Authority shall deliver to Aleut a statement setting forth the basis for the determination of the royalty then paid by the Power Authority. 2442 /528/7 ALASKA POWER AUTHORITY ANALYSIS OF GEOTHERMAL LEASE PROVISIONS January 20,1986 A.Royalties 1.Federal (from Geothermal Steam Act of 1970 and regulations). (a)A royalty of not less than 10 percent or more than 15 percent of the amount or value of steam,or any other form of heat or energy derived from production under the Tease and sold or utilized by the lessee or reasonably susceptible to sale or utilization by the lessee. (Actual sample federal Tease we obtained has royalty of10percent.) (b)A royalty of not more than 5 percent of the value of any byproduct derived from production under the lease and sold or utilized or reasonably susceptible of sale or utilization by the lessee except for minerals named intheMineralLeasingActofFebruary25,1920 as amended. (c)The value of geothermal production from the leased premises for the purposes of computing royalties shall be the reasonable value of the energy and as determined by the Supervisor.In determining the reasonable value of the energy and the byproducts the Supervisor shall consider: (1)the highest price paid for a majority of the production of like quality in the same field or area; (2)the total consideration accruing to the lessee from any disposition of the geothermal production; (3)the value of the geothermal production used by the lessee; (4)the value and cost of alternate available energy sources and byproducts; (5)the cost of exploration and production,exclusive of taxes; (6)the economic value of the resource in terms of its ultimate utilization; 2625/503(1) (7)production agreements between producer and purchaser;and (8)any other matters which he may consider relevant. 2.State (from ADNR Geothermal Lease No.355051). (a)The lessee shall pay to the state as royalty 10 percent in amount or value of...geothermal resources that are converted to other forms of energy which are subsequently sold...the state will determine the value of the geothermal resources,taking into account the consideration being paid for geothermal resources in the Same general area or other relevant areas (includingareasoutsideAlaska),reasonable transportation costs, and other relevant factors,including the costs of conversion of the geothermal resources to the other forms of energy and the consideration paid for the other forms of energy. 3.Private Sector (from Republic Geothermal Inc.standard lease). (a)Lessee shall pay royalty to Lessor out of the proceeds received by him from the sale of Substances,as follows: (i)On Energy Resources:As royalty,Lessee shall pay to Lessor ten percent (10%),hereinafter called the "agreed share,"of the market value at the point of removal from the earth (hereinafter referred to as the "well")of the steam,hot water,hot brines, thermal energy,or geopressured water produced from or allocated to the Lands and saved and sold or used (except for operations hereunder)off the Lands. (ii)On All Other Substances:As royalty,Lessee shallpaytoLessorfivepercent(5%)for the first ten (10)years of the lease term and ten percent (10%) thereafter,hereinafter called the "market share," of the market value at the well of all Substances other than steam,hot water,hot brines,thermal energy,or geopressured water produced from or allocated to the Lands and saved and sold or used (except for operations hereunder)off the Lands. (b)If Lessee sells any such Substances at the well,the market value thereof shall be deemed to be the sales price received by Lessee.If Lessee sells any such Substances at any other point,the market value thereof shall be deemed to be the sales price received by Lessee less the cost of transporting the same form the well to 2625/503(2) - the point of sale.If any such Substances are processed, manufactured or converted to other form on or in the vicinity of said Lands before sale or use by Lessee,the costs thereof incurred by Lessee shall be deducted from the sales price received by Lessee or from the market value thereof if taken and used by Lessee.The costs of transporting,processing,manufacturing or converting Substances shall include the cost of facilities and equipment used,including overhead and amortization charges,computed and allocated to the Substances sold or used in accordance with Lessee's standard accounting practices. (c)Lessee may use,free of royalty,Substances and electric power developed from said Land for all operations hereunder,and Lessee shall not be required to account to Lessor for or pay royalty on any Substances reasonably lost or consumed in operations hereunder. 4.Aleut Proposal (letter dated December 6,1985). "Royalties -As a fair and reasonably protection to eachparty,we propose that the royalty provisions of the'Geothermal Steam Act of 1970'(specifically Section 1004 (a)(b)be incorporated into the Agreement.Such provisions would ensure that a royalty of not less than 10%nor greater than 15%of the amount or value of steam and 5%for the value of byproducts,or equivalent sums based on an alternate means of calculation,would be factored into the Feasibility Study. At the conclusion of the Feasibility Study and by mutual agreement of the parties,the specific royalty provisions would be negotiated." B.Rents 1.Federal (from BLM geothermal lease No.CA 966). (a)Annual Rental -For each lease year prior to the commencement of production of geothermal resources in commercial quantities on the leased lands,the Lessee shall pay the Lessor on or before the anniversary date oftheleasearentalof$2.00 for each acre or fraction thereof. 2.State (from ADNR Geothermal Lease No.355051). (a)The lessee shall pay annual rental to the state in theamountof$3.00 per acre or fraction of an acre,provided that the state may adjust the annual rental rate as provided by applicable law and regulation beginning 20 2625/503(3) (b) years after the commencement of production in paying quantities and at 10 year intervals thereafter. Annual rental paid in advance is a credit on the royalty or net profit share due under this lease for that year. 3.Private Sector (from Republic Geothermal Inc.standard lease). (a) (c) If drilling operations are not commenced on said Lands on or before one (1)year from the date hereof,this Lease shall terminate unless the Lessee,on or before said anniversary date,shall pay to the depository...the sumof$per acre for all Lands then held under this Lease,such sum being hereinafter called "rental,"which payment shall extend,for twelve (12)months from said anniversary date,the time within which drilling operations may be commenced.Annually thereafter,in like manner and upon the payment of the sum of $per acre for all Lands then held under this Lease,the commencement of such drilling operations may be further deferred for successive periods of twelve (12)months each during the Primary Term but not beyond. If Lessee shall encounter a geothermal resource in any well drilled on said Lands or on any unit area hereinafter provided for,Lessee may suspend further operations hereunder;provided,however,that Lessee shall annually pay to Lessor on or before each anniversary date of this Lease an advance minimum royalty in an amount equal to the rental as set forth inparagraph(a)above.Any advance minimum royalty so tendered to Lessor shall be recoverable by Lessee out of future production of any or all of the above said Substances and Lessee is hereby authorized and directed to deduct the same from royalties thereafter due and payable. Notwithstanding the limitation of the terms of this Lease...,this Lease shall not be terminated for lack of production in commercial quantities after its Primary Term if Lessee shal]have shut-in any or all producing wells for engineering or economic reasons sufficient in its good faith opinion to warrant such action;provided, however,that in the case of such shutdowns,Lessee shall have the option in,each year,in lieu of drilling or reworking,to pay Lessor,on or before the anniversary date of this Lease,the advance minimum royalty set forthinparagraph(b)above and each such payment shall extend the term of this Lease for an additional year. 2625/503(4) 4.Aleut Proposal (letter dated December 6,1985). "Rental -Aleut expects fair market value rental for the surface acreage leased for facilities,well sites,piping and other necessary appurtenances.Aleut considers such property to be industrial in nature and such rental costs will factor into the overall project costs during feasibility.Such rental payments for Leased Lands shall include only surface rights and no relationship to the location and/or quantity of subsurface resources or any rights thereto are coincident with the surface lease.” C.Term 1.Federal (from BLM geothermal lease No.CA 966). (a)This lease shall be for a primary term of ten (10)years from the effective date and so long thereafter as geothermal steam is produced or utilized in commercial quantities but shall in no event continue for more thanforty(40)years after the end of the primary term. However,if at the end of that forty-year period geothermal steam is being produced or utilized in commercial quantities,and the leased lands are not needed for other purposes,the Lessee shall have a preferential right to a renewal of this lease for a second forty-year term in accordance with such terms and conditions as the Lessor deems appropriate. (b)If actual drilling operations are commenced on the leased lands or under an approved plan or agreement on behalf of the leased lands prior to the end of the primary term, and are being diligently prosecuted at the end of theprimaryterm,this lease shall be extended for five (5) years and so long thereafter,but not more than thirty-five (35)years,as geothermal steam is produced or utilized in commercial quantities.If at the end of such extended term geothermal steam is being produced or utilized in commercial quantities,the Lessee shall have a preferential right to a renewal for a second term as in (a)above. 2.State (from ADNR Geothermal Lease No.355051). (a)This lease is issued for a primary term of ten (10)years from the effective date of this lease.The term...shall be extended automatically if and for so long as there iscommercialproductionofgeothermalresourcesfromthe Teased area. 2625/503(5) FPWNY(b)This lease may be renewed for a single additional term of five years if,at the end of the primary term,the lessee is diligently conducting operations necessary to drill a geothermal well,with equipment at the lease area of sufficient size and capacity to drill to the total depth proposed for the well. Private Sector (from Republic Geothermal Inc.standard lease). (a)This lease shall be for a term of ten (10)years from and after the date hereof (hereinafter referred to as the "Primary Term")and for so long thereafter as (i)any of the Substances shall be produced in commercial quantities from any of the Lands or (11)for so long as this Lease may be kept in force under any other provisions hereof. (b)If at the expiration of the Primary Term hereof none of the Substances is being produced,but on or before that date reworking operations or operations for the drilling of a well in search of any of the Substances are commenced on said Lands,this Lease will continue in force for so long as such operations are continuously prosecuted. Aleut Proposal (letter dated December 6,1985). "Term -Aleut expects that the Agreement will have an initial term of 30 years,commencing with commercial operation and APAshallhavetherighttotwo(2)10-year extensions.APA shall maintain the Agreement throughout its primary term and extensions thereof by maintaining an annualized production of at least two megawatts." Limitations and Production Federal -No limitations on production. State -No limitations on production. Private Sector -No limitations on production. Aleut Proposal (letter dated December 6,1985) "Generation Capacity Limitation -APA's rights of production from the resource,independent of any surface acreage leased, shall be limited to the initially installed generating capacity,whether initially active or idle,which can be feasibly and economically constructed as demonstrated by the Feasibility Study.APA may drill wells and build facilities which,in APA's judgment,are necessary and prudent for 2625/503(6) - operation of the facility;however,APA's rights to generate and sell electricity under the current agreement being negotiated shall be strictly limited to the initially installed capacity regardless of resource or well potential. 2625/503(7)+ May BaSN Alaska Power Authority State of Alaska CHRONOLOGY OF EVENTS Unalaska Geothermal Project Land and Resource Agreement January 21,1986 3,1985:The Board of Directors approved Reconnaissance Findings and Recommendations for Unalaska/Dutch Harbor and reservation of funds in the rural feasibility account for an Unalaska geothermal feasibility study.The Board directed staff to obtain signed agreements for access,use of lands and a long-term lease for the project prior to expending funds on the feasibility study. May 8,1985:Staff informed the Aleut Corporation by letter of the Board's action and the requirement to negotiate an agreement. May 15,1985:Power Authority staff met with the Aleut Corporation June June June July to initiate discussions on conceptual issues and necessary provisions of the agreement.The Power Authority and theAleutCorporationagreedthatsincea_long-term leaseagreementwasrequired,the agreement should provide for royalties and other standard provisions of a geothermal lease. 7,1985:The Power Authority met with the Aleut Corporation and presented its Director of Lands and Minerals with draft provisions for the agreement including royalty clause that would provide Aleut a 10%royalty share based_on kilowatt-hours sold from the system,with the value of geo- thermal fluids being derived from a specified formula based on the value of alternative diesel fuels with consideration for geothermal station service and transmission line losses. 11,1985:At the Aleut Director's request,the Power Authority sent an example of a calculation of royalties based on the June 7 draft. June 24,1985:Power Authority staff provided an information item to the Board presenting the status of their negotiations. 24,1985:The Aleut Corporation submitted,in writing, proposed terms and conditions to be included in the agreement, including a provision for royalties of between 10%and 15%of gross revenues for the minimum-feasible initial installed capacity of the project and a ground lease rental of ten dollars per acre per year.The proposed term of the agreement was 20 years. 15,1985:The Power Authority delivered a draft Agreement to the Aleut Corporation based on its June 24 submittal,previous P.O.Box 190869 =701 EastTudorRoad Anchorage,Alaska 99519-0869 =(907)5641-7877 July July meetings,and numerous telephone conversations.The draft conceptually incorporated all the provisions proposed by Aleut,although it contained counterproposals to specific terms and conditions.Due to a lack of specificity with respect to Aleut's proposed royalty provision and the Power Authority's rejection of the concept that the Agreement be limited to the minimum initially feasible project,the July 15 draft contained the royalty provision proposed on June 7.The term proposed by the Power Authority was the continuing operating life of the project. 15,1985:The Power Authority delivered the draft Agreement to the Attorney General's Office for review. 24,1985:The Power Authority met with the Aleut Corporation and delivered a new draft agreement,dated July 24,1985. Since there had been no counterproposal since the July 15 draft submitted to Aleut,the July 24 draft contained no substantive changes to that draft.The July 24 draft was reorganized and contained clarifying language suggested by the AG's Office.At the July 24 meeting,Aleut submitted a counterproposal to the July 15 draft.It contained provisions for a 15%royalty on the value of geothermal fluids based on the formula proposed on June 7 but without consideration for geothermal station service and transmission line losses.The Aleut proposal also provided for a three dollar ground leaserentalanda$100,000 minimum annual royalty,but again stipulated that the agreement apply only to the minimum initially feasible project and only for a term of 20 years. August 6,1985:The Aleut Corporation delivered a counterproposal to the Power Authority's July 24 draft,dated August 5,1985. It contained a royalty provision for 123%of the "gross revenues and subsidies received for the sale of electricity” for a minimum initially feasible project.It also contained a term of 30 years,after which Aleut would have the right to own the project,and gave Aleut the right to proceed with development of the project after completion of the Power Authority's feasibility study with repayment to the Power Authority for feasibility study expenses. August 19,1985:Power Authority staff met with Aleut staff in an attempt:to resolve differences,particularly with respect totheroyaltyprovision, August 20 --September 20,1985:Power Authority staff extensivelyresearchedstandardprovisionsofgeothermalleasesutilized elsewhere in an attempt to formulate a royalty provision acceptable to both parties. 2227/518 2 September 18,1985:The Aleut Corporation submitted new terms and provisions for consideration.They provided that Aleut would receive the following combination of royalties,rents,andpayments:(1)10%to 123%royalty based on the value of diesel generation with a ceiling and base on diesel escalationfactors,(2)50%to 75%of the potential power cost savings totheCityfromtheproject,(3)$125,000 minimum annual royal-ty,and (4)$5,000 per acre per year property rental.This proposal offered a term equal to the term of initial financing of the project as well as the provision for Aleut to proceed with development of the project after feasibility with repay- ment to the Power Authority for feasibility expenses. October 29,1985:The Power Authority delivered a draft agreement to Aleut dated October 28,1985.This draft was reorganized and restructured into formal contract format and added numer- ous standard boiler-plate provisions for such agreements.It also contained compromises on major contested issues in an effort to reach expeditious agreement.It provided for a royalty of 10%on the market value of geothermal resources which would be the price received for electricity less the costs incurred by the Power Authority for producing and transmitting electricity to the point of sale.As a compro- mise to Aleut's request that the royalties apply to the minimum initially installed capacity,the royalty provision in the October 28 draft would apply only to production from a single primary production well or from a_back-up or replacement well for the primary well.Drilling a second production well would require renegotiation of royalties with Aleut.During periods of no production it provided for land rental equal to the present market value of the land,and it provided a minimum annual royalty equal to the rental amount. The term of the agreement would be for the operating life of the project;however,Aleut would have the option upon completion of the feasibility study to develop the project if it could provide power at an equal or better rate than that proposed by the Power Authority and if it reimbursed the Power Authority for feasibility study expenses. November 6,1985:The Aleut Corporation addressed the Board with respect to negotiations requesting that agreement on a fixed royalty be postponed until after the feasibility study is completed and more firm cost estimates can be established. November 15,1985:The Power Authority met with the Aleut Corporation to discuss their Board request.The Power Author- ity offered revised wording regarding royalty providing that Aleut would receive from 10%to 15%of the value of geothermal resources but that the fixed royalty or formula for computing the royalty would be negotiated after detailed cost estimates are obtained from the feasibility study.The provision sets 2227/518 3 forth factors that would be taken into account in determining the royalty.This language was derived from the federal Geothermal Steam Act statutes and regulations. December 9,1985:The Power Authority received a letter (dated December 6,1985)from the Aleut Corporation setting forth its expectations with respect to a final Agreement,including royalties,rentals,capacity limits,and term and met with Aleut to discuss the letter.It appears that three majorissuesremaintoberesolved:(1)the content of the royalty provision and capacity limitation to which it applies,(2)a determination of a rental rate and whether rental would be in lieu of royalties or in addition to royalties,and (3)the term of the agreement. December 10,1985:Power Authority and Aleut Corporation staff met to discuss the December 6 letter and the upcoming Board meeting.Both sides agreed that there were four major issues yet to be resolved:(1)Royalties,(2)Term,(3)Rent,and (4) Capacity Limitations. December 12,1985:The Power Authority Board of Directors discussed the status of negotiations (particularly the royaltyissue)at some length,requested that the Executive Director become directly involved in negotiations,and passed a motiondirectingstaffto:(1)continue to seek a contractual royalty agreement before initiating the feasibility study,(2)seek provisions that reflect industry practice and national andstatestandards,(3)provide for a fixed royalty that can be adjusted up or down between 10%and 15%depending on theoutcomeofthefeasibilitystudy,and (4)consult with City of Unalaska officials during the negotiations. January 7,1986:The Power Authority provided the Aleut Corporation with proposed revisions to sections of the draft agreement addressing the four remaining issues to be resolved. Power Authority and Aleut Corporation staff met to discuss the proposals and the schedule for completing negotiations.There was little discussion on the proposal since Aleut Corporation staff had not had time to review it thoroughly.A meeting was later scheduled for January 22 to discuss it in detail. 2227/518 | 4 TO: THROUGH: FROM: ALASKA POWER AUTHORITY MEMORANDUM Robert D.Heath DATE:January 21,1986 Executive Director Ed Morris LtAssociateExecutive Director/ Planning &Operatio Brent N.Petrie (> Director/Systems Planning Dave Denig-Chakro SUBJECT:Aleut Corporation Project Manager Negotiations: Briefing Memo On May 3,1985,the Board approved a reconnaissance study for Unalaska/Dutch Harbor,recommending a feasibility study for geothermal development.The Board directed staff to obtain signed agreements for access,use of lands,and a "long-term lease"for the project prior to commencing the feasibility study.Power Authority staff approached The Aleut Corporation,owner of the surface and subsurface estates at the geothermal exploration site, to negotiate such an agreement. Between May and December 1985,Power Authority and Aleut Corpo- ration staff met on numerous occasions and exchanged proposals and drafts for a long-term land and resource agreement (see "Chro-nology of Events"enclosed).By December,a comprehensive lease agreement had been developed based on standard private geothermal leases used elsewhere in the U.S.,which are normally negotiated prior to any exploration for geothermal resources.The Aleut Corporation addressed the Board on November 6,1985,expressing concern over being required to commit to a fixed royalty prior to the feasibility study.Later in discussions with staff and ina letter dated December 6,1985 (enclosed),the Corporation indi- cated three additional issues with which they were not in agree- ment:Term,Rents,and Capacity Limitations.: The Board discussed the agreement on December 12,1985,and asked the Executive Director to become directly involved in and to expedite negotiations.The Board directed staff (1)to continue to seek a contractual royalty agreement prior to initiating thefeasibilitystudy,(2)to seek provisions that reflect industrypracticeandnationalandstatestandards,(3)to provide for a fixed royalty that can be adjusted up or down depending on theoutcomeofthefeasibilitystudy,and (4)to consult with City of Unalaska officials during the negotiations. 2677/537/1 wr Aleut Corp.Negotiacions January 21,1986 Page 2 2677/537/2 After a thorough analysis of federal,state,and industry stan-dards and practice (see "Analysis of Geothermal Lease Provisions"enclosed),Power Authority staff prepared a compromise proposal for provisions of the draft agreement addressing the four remain-ing unresolved issues (letter dated January 7,1986,enclosed). The proposal would accept Aleut proposals for Royalty and Term provisions,providing a royalty between 10%and 15%to be fixed after completion of the feasibility study and providing a term of 35 years with two ten-year extensions.The January 7 proposal holds firm on previously compromised positions with respect to Rents and Capacity Limitations.It would provide for payment of rent based on the market value of the undeveloped property as a minimum annual royalty and for a project capacity limited to a single production well. At a meeting on January 7,the Aleut Corporation took the position that they had not yet committed to any portion of the document. They agreed to review the document and the new proposals in their entirety and to identify specific sections they could not agree to within two weeks.A meeting was later scheduled for January 22, 1986. Enclosures as stated DDC/tg wet ¢ TO: FROM: 02-001 A(Rev.10/79) MEMORANDUM State of Alaska File pate:January 17,1986 FILE NO: TELEPHONE NO: ve Denig-Chakroff suByect:Meeting with the Project Manager Aleut Corporation January 7,1986 At 2:00 p.m.,January 7,1986,Ed Morris,Brent Petrie and I met with Carl Cardinelli and Allan Aksell of the Aleut Corporation in their conference room to discuss the land and resource agreement we are negotiating for the Unalaska Geothermal Project.I had hand-delivered a draft proposal and transmittal letter to the AleutCorporationat11:00 a.m.that morning (see letter dated January 7,1986).The proposal contained new draft language for sections of the Agreement dealing with royalties,rents,term,and capacity limitation.Immediately prior to leaving for the meeting,I called Allan to see if he had had time to review that proposal.He said he had read it quickly but had not discussed it with others in the corporation.I suggested that we postpone the meeting until such time as they could analyze the proposal and give us substantive feedback.Allan seemed determined to have the meeting,stating that he wanted to discuss the negotiation "schedule"and other matters. At the meeting,Allan asked for an oral summary of the proposal and for a summary of the major points contained in the Board's December 12,1985 motion instructing staff with respect to the Agreement. He indicated that he would like to see a specified term in the Agreement rather than a term tied to an unknown term of finance. Ed agreed suggesting a 35-year primary term with two 10-year extensions. Allan suggested that it was time in the negotiations to begin going through the agreement section-by-section to determine which pro- visions are acceptable and which are not.He wants to do this through exchange of drafts.Ed expressed our understanding that we were way beyond that point in the negotiations and that we had nar- rowed the list of conceptually unresolved issues to four.Although we realize that some modifications in language will be necessary in finalizing the agreement,we thought the Aleut Corporation concep-tually agreed to all provisions except the four addressed in the current transmittal.Carl indicated agreement,but said some other sections may have an effect on the four unresolved issues.Allan indicated that they still wanted a substantial guaranteed minimumannualroyalty.I pointed out my understanding that that issue hadbeendroppedbecausetherewasnomentionofitinAllan's letter of December 6,1985 in which he set forth the "expectations of TheAleutCorporation."Allan indicated that it was addressed in terms of a two MW minimum annualized output. 2620/529 ” Memo to File January 17,1986 Page 2 Carl appeared to recognize the futility of discussing technical issues at this meeting since they had not yet reviewed the draft in detail.He promised that they would review the entire Agreement and identify parts they can agree with and parts they cannot within one to 14 weeks.In turn he would like to know the schedules,for the next few months,of Heath and others participating in the nego- tiations so we can plan a schedule for completing the negotiations. He also expressed the need,when we meet,for the presence of some- one with the authority to make final decisions.Allan asked when Heath would be back and whether he had been briefed on the nego- tiations.Brent said that he had been briefed and that the current transmittal was the result of that briefing. Ed promised to provide written schedules of our staff by the end of the week and asked about times when Aleut staff would be unavail- able.They will be tied up in planning sessions from January 20-27 and will be involved in preparing for and attending a Board meeting from February 11-14.Ed said he would arrange for a discussion of the status of negotiations at our Board Planning Committee meeting on January 23 and expected that representatives of the Aleut Corpo- ration would attend.Carl and Allan indicated that one or both would attend. The meeting ended at 2:45 p.m. DDC/cdc (tL.Ed Meees "Sreur PeTBie a The Aleuw.poration =-One Aleut Piaza Suite 300 «4000 Old Seward Hwy,'7,Anchorage,Alaska 99503 2,Phone (907)56 ae2a°Ne 1-4300 ge :s:Dean'<M.won Com Coe CARL T.CARDINALLI GENERAL COUNSEL EVESSYR 2620/529 ea Fear At KA POVER puTHaRiry AED MEET:ug TRARSCRI PT DVElCer tee 12,(Ges ALLISON: ARNOLD: NUNN: HEATH: NUNN: HARRISON: 2263/523 We have...a motion has been made and seconded currently on the floor. I second it. Motion carried.Any further discussion?Question MR.HEATH. MR.ARNOLD (inaudible),MR.HARRISON (yes),MR. HUFMAN (yes),MR.ALLISON (yes),COMMISSIONER KNAPP (yes),MR.CHAIRMAN (yes). Last item under Old Business is the Unalaska Geothermal Project.MR.HARRISON. MR.CHAIRMAN,this is a tough one and I will take a crack at it.Why don't I try to describe the issue in a situation and then to an extent that I don't do it accurately,we can hear from staff on this on the APA side and in the audience are representatives from the area,both the Aleut Corp.and the City of Unalaska.The issue concerns negotiations over a royalty provision for the Geothermal Resource,| guess the steam in the ground in this case which is owned by the Aleut Corporation.Further,whether or not a royalty provision should be negotiated in someYaicyp - 74 - 2263/523 sort of a final or fixed form prior to the ini- tiation of the feasibility study.When this pro- posal to initiate the feasibility study came before the Board,we authorized that with the advise that the staff secure rights-of-way over the land to give access to the contractor of the Power Authority in dealing with this prospect,geothermal prospect.I guess in those negotiations,it was the Aleut Corp. that also brought up and included the royalty ques- tion.Whether it should be resolved.As I under- stand in reading the background information prepared by the Power Authority,it was at their request that that be part of the negotiations.As those pro- ceeded,the Aleut Corp.came to the position and has come to the Board in requesting that we not fix any royalty provision prior to the conclusion of the feasibility study.Now,the position of the Aleut Corp.is that a contract terms or a royalty pro- vision really cannot be negotiated ........how should I say it .......entirely fairly for all parties involved until the economic dimensions of the project are understood.That is to say,is the royalty fair and reasonable,is it too high or is it too low.That only after you examine the cost of the wholesale cost of this power delivered to the Vand aged foe Pasee Rak ein -Yen ays 7.mia pataCANEROligaSgeddiwaeGicernative,cise avoicea -75 - 2263/523 cost is,only then can you begin to negotiate in a fair royalty.To negotiate it now puts them in a situation of potentially leaving too money on the table.That is to say that if the royalty that is agreed upon in advance is too high,clearly the project won't go ahead and there would be pressure then for them to adjust the royalties downward. However,if the agreement that is reached is one that is lower than might have been negotiated other- wise,the ........there is not going to be any in- centive for the Power Authority or anybody else to negotiate with them to raise it so they are in the position of potentially at risk whereas no one else is in fixing the royalty prior to the feasibility study.The position of the Power Authority has been that there is an accepted standard by and large for geothermal royalty provisions and that the Aleut Corp.is a profit corporation and that the interest of the people of the City of Unalaska are at stake insofar as the royalty is going to directly effect the price of the electricity that is delivered. Furthermore,we have an unfortunate history in the Four Dam Pool is the best example where agreements become very,very difficult to get after the state has expended itS money and the dimensions of the aA 7 1,on Th.ke é +,.g £abe aay -aaloarco tees.That is to gay,if we were to -76 - 2263/523 proceed without a fixed royalty agreement and that the feasibility shows that this is really a gold mine that this project is very economic in that the delivered cost of power is way below what the alter- native in Unalaska,then it is very,very difficult to negotiate an agreement that conforms to say in- dustry standards or prior practice in these matters that would be lower than would otherwise be negoti- ated.It is a very complicated way of saying that, I guess,that this is a very difficult for me to ar- rive at and I have gone back and forth on it.I think on the one hand we are a public agency and that we do need to consider the public interest broadly including the interest of the Aleut Corp. and their shareholders and in the face of it,I don't think the public body wants to be in a posi- tion of advancing the position that is unfair and unreasonable to one of the parties.On the other hand,I think that the State may end up and the ratepayers of Unalaska may end up holding the short end of the stick once again if the state spends not only the $600,000 that we are proposing to spend but we have already spent $5 million and suddenly we have a very difficult set of negotiations ahead of us after all of this money has been spent and ba- Sicaily a weaker position.I guess my -77 - 2263/523 recommendation would be,or is,that at this point the Board directs the Executive Director to become directly involved in these negotiations.And,that we provide the Executive Director with some guid- ance.I don't think that this Board is the place to negotiate these kinds of things,they are too com- plicated.I do think that if we provide them with some broad guidelines,it could be very helpful and I think those should include the following:(1)is that we do direct him to seek a contractual royalty agreement prior to the initiation of the feasibility study and that further we direct him to seek royalty provisions that reflect standard industry practice and national and state standards,however,these may be expressed in statutes and policy statements and so on.And that he include,if necessary,a formula for adjustment of a base royalty up or down depend- ing on the outcome of the feasibility study.Fur- ther that he consult with the City Officials at Unalaska during the negotiations during this royalty provision.What I am saying is that we do need to try to tie something down before we get into this any further.On the other hand,we recognize the interest,the legitimate interest of the Aleut Corp. in its judiciary responsibility to its shareholders ué for its resource and thatAAyeoyPAAty?u gee d reasonedie va -78- NUNN: HARRISON: HUNN: ARNOLD: NUNN: 2263/523 we try to seek an agreement about how much that roy- -alty provision could be adjusted in the event of certain outcomes of the feasibility study and that we recognize the interest of the City Officials of Unalaska in this whole matter since they are going to be ....they represent the ratepayers there that are going to be paying the bill.So I guess this is my way out of this and hoping that the Executive Di- rector could reach an agreement quickly on these principles. MR.HARRISON,do you wish to make a motion to that effect that the Executive Director be directed then to enter into negotiations seeking a contractual royalty provision like in standard industry practice and with provision for upward or downward adjust- ments as appropriate? Yes,I will so move. Is there a second? I will second. Motion has been made and seconded,further Les We we ee bate SF ee -79 - ALLISON: 2263/523 MR.CHAIRMAN,I,myself,......ina difficult position here ......it was my motion that generated this situation several meetings ago.The reason for the motion was that some projects that should have been progressing in a-timely manner were being held up because we did not obtain right-of-way and other clearances prior to initiating our feasibility and development work.Now,I think we have gone a lit- tle bit beyond the original motion that was prepared and adopted at that time.At that time all we were going to do was to not proceed with the feasibility study until we had clearly obtained the rights to enter onto and use that land.That was really the goal ....to avoid the situation we had run into with the prior appropriation.That was done expedi- tiously so we were able to proceed.Somehow the APA got caught up in holding a feasibility study hostage to these royalty agreements.Actually I don't find that a bad policy.On the other hand,the State of Alaska...the APA has already paid for the feasibil- ity studies without much question passed and only really got into the negotiations on these specific issues of payments after the feasibility study was conducted.[don't see any projects where we ac- tually insisted on a power sales agreement,which is readily what we are dealing with here is the -80 - 2263/523 equivalent of a power sales agreement,prior to proceding with a feasibility study.So I guess that in support of the policy change that we are evident- ly moving toward here,I would endorse the motion that was made but in order to avoid the disruption in a project that I think is really important and beginning to apply a new standard to a rural village that we really haven't applied to any of the urban sectors that we proceed and instruct our staff to procede with the feasibility study,not holding it hostage,still instructing the Executive Director to get involved immediately and directly in the nego- tiation process to attempt to help the parties re- solve this question about royalty.They do seem very close MR.CHAIRMAN.In yesterday's hearing there were accommodations occurring on both sides.I think that that can be reached but in case there is a hold up.I don't believe that we should hold up a different standard here than we have in the past.I think we should proceed with a feasibility study. One of the reasons that I say that,MR.CHAIRMAN,as you know I missed the last meeting of the APA Board. At that time I was in Japan and among the things that were being discussed at that time were the ne- gotiations on Surimi plants in Alaska.There are two af *-Riess ea sated ta ba -81 - NUNN: HUFMAN: 2263/523 Unalaska-Dutch Harbor area.There is going to be a tremendous demand for electricity there and is usually the case with industry,they are looking now to make arrangements for how that energy is going to be sold and distributed.I think that it is impor- tant that we have this feasibility study underway, MR.CHAIRMAN,so that we can avoid the possibility that those new plants might begin installing their own diesel capacity which has been the tradition in the past for small plants.They will be high con- sumers of energy.I would like to proceed with the feasibility study and continue with the negotiations in parallel if the originator and secondary of the motion accept that. MR.HUFMAN and then MR.ARNOLD.| As it waS pointed out previously,we have expended some $5 million on this project and it appears to me that a large part of the full feasibility has been determined because we do know what the resource is there and I look upon this not as holding just as written,not as holding feasibility study particu- larly hostage in this case because we have come a longs ways already and expended that $5 million. However,it is encumbant upon this Board to make the -82 - NUNN: ARNOLD: 2263/523 best deal that we can for the communities involved and I think that the motion,as made,is appropriate in this case.All things taken into consideration. MR.ARNOLD Yes,MR.CHAIRMAN,I understand the points that HR. ALLISON is making and recall the action that we took at an earlier time.Though I was at the meeting yesterday,I have had the benefit of looking at this document and it seems to me that we are not really comparing it.That it should not be compared with power sales agreements but as essential components that a feasibility study would be conducted.For otherwise the feasibility study,it seems to me, would of necessity hypothesize a whole range of com- binations when we are talking about oil produced power,we Can ........we may have to have a little bit of range of cost there.But we have a product whose value is fixed within a range and geothermal, I quess there are some standards which are referred to at this time.For these reasons,it seems to me that GORDON HARRISON's motion is a very responsible approach to take with regard to the study.Finally, I (inaudible)to hear MR.ALLISON say that real pro- gress has been made in the negotiations with perhaps -83 - NUNN: HEATH: Allison: NUNN: ALLISON: 2263/523 the Executive Directors involvement that can al} come to a ready conclusion, Thank you MR.ARNOLD.I was,if no one else had suggested,was going to propose that we include a provision for reopening it if it exceeded some per- centage of what was actually agreed to before hand so I think that we are fairly close to the mark. Any further questions,comments?MR.HEATH,call questions. I think procedurally I have called the question. MR.ALLISON. (inaudible).............if the chair does not want to hear from the public on this issue,then I pro- pose that because we....that is one of the comments that was made yesterday.....(inaudible) MR.ALLISON,your arguments are just overwhelming. I will go ahead and hear your comments. MR.CHAIRMAN,also,I would like to restate key provisions on this motion so we are clear what... for the record what it is that we are voting on. -84 - NUNN: ALLISON: NUNN: ALLISON: NUNN: 2263/523 Very well.MR.ALLISON and MR.HARRISON. Well,I was just going to say that (1)the motion is that we do seek a contractual agreement before the feasibility study is initiated and that they ....that this agreement reflects some industry practice and that there is a formula,if necessary, for adjustments based on the outcome of information in that study and that finally that we do consult with the City Officials and consider their views in these negotiations.It was the Jast point that I wanted to make sure was in the record. I understood that MR.HEATH is going to enter into these negotiations.Is consultation with the City Officials something in addition to that? That MR.HEATH is to negotiation with the Aleut Corporation but he is to consult with them in the course of the negotiations.That is to say that their views ....he should be mindful of their views in his negotiations. Further comments?Is it the consensus of the Board -85 - Mayor(?): 2263/523 that we want to open this part of meeting for public comment on this subject?Very well,if you would Tike to come forward MR.MAYOR. Thank you for taking this up and putting it up on your agenda.It is real important issue to us,eS- pecially if an economic development of our community and if we can pull this thing off and do it and end up with a good stable energy source,at a cheaper rate than we are paying now,it is going to fit in with State policy on shore based bottom fish devel- opment.We have spoken with the Governor's Office and the Department of Commerce and Economic Develop- ment and they really want to see this happen and I see this electrical power as a key element in providing incentives to bring this processing on shore where it will do something for our communities and eventually build a base that can help pay for State government when the oi!money dries up.So we are in support of this thing going through.At the same time we understand and appreciate what the staff has done to look out for our interest in try- ing to get some kind of an agreement before the fea- sibility study goes through.At the same token,we don't want to end up in an endless "catch 22"so that nothing ever happens on the project.We kind -86- 2263/523 of like the idea -just formula,if we can come up with something.Otherwise the Aleut Corp.can come up and say,""o.k.here is our royalty",maybe make it intentionally high,then we go through the fea- sibility study and say "no,I won't support that" and we go back and negotiate something reasonable. I mean,....if we got some kind of a formula and what the Aleut Corp.has mentioned is something where the feasibility study would show the low end of what it would cost.We know what diesel costs and we will split the difference.We end up with cheaper power,we end up with stable power prices that we can go to industry with and say this is what you would be paying for power if you come to our community.Even conservative estimates of this field show that it will produce power in a range of 500 years.That is a conservative estimate.So, my concern of MR.HARRISON's motion is that I didn't hear him say "do the study as soon as you get an agreement".All I heard your motion saying is try to get an agreement and then I guess we would have to come back to the Board and bring it to you again to o.k.the study going through.So if it is the sense of the Board to go with MR.HARRISON's mo- tion,we would like to have it state that the study will commence upon getting an agreement. -87- NHARRISON: Mayor (?): NUNN: KNAPP: 2263/523 To respond to that,I think that the Board is on record of proving the study and I think it is to be initiated as soon as these agreements can be in place,so I really don't think that is necessary.I think the consensus of the Board is to get on with it as quickly as possible. And just another thing,is that I can guarantee you that we will be participating in this as far as get- ting our view point across because we can't have the State come to us and say "this is what we negoti- ated for you,how do you like it?By the way you can't change it,because this is what we already agreed to".So we will be participating and we will be taking the initiative on that.I did attend the last negotiating session between the staff and the Aleut Corp.and we intend to do that in the future. COMMISSIONER KNAPP. Just a question,probably of GORDON or staff.It would seem to me that implicit in any feasibility study are going to be the economics of the adventure and if that is solved,why wouldn't all of this Structure on royalties and so forth be considered right within the study and be an implicit part of -88- HARRISON: 2263/523 the study working along the lines to say,now look, here it is technologically feasible to do this,the economics of it range somewhere between here and here.If we have to pay out this kind of royalty, the power rates.are going to be this much,which means you don't really get anything.So,why couldn't this particular exercise be a significant and material part of the feasibility study.Just throw that on the table for discussion MR.CHAIRMAN. Well,you could easily do a feasibility study without knowing for sure what the royalty is going to be and you could structure the analysis to test the outcome against various royalty provision.That would be very simple,straight forward.But the problem is,do you agree on something before you do the analysis.The point is,it is not important to set a royalty provision for the sake of getting a good analysis because you can do an analysis without one because you can just make an assumption.The question is,do we want to get something in writing and in solid before we do the feasibility study be- cause the feasibility study then could make it very difficult to reach agreement later on and delay the project at that stage.The State has already spent -89 - NUNN: ALLISON: Mayor (?): 2263/523 its now $5.5 million and so on,so I think yes,you could do it.The question is,do we want to. MR.ALLISON. Just a direct question.It is my understanding that the city is prepared to go ahead with MR.....and operate with MR.HARRISON's resolution and with the understanding that.(1)it is .the intention of the Board that this proceed immediately upon the agree- ment being reached and (2)that the Board under- stands that the City will]be participating in nego- tiations. Right,and I don't feel that we are that far off and one difference,even if the study did go through like COMMISSIONER KNAPP is saying,and we made that part of it,I still feel fairly comfortable with the outcome of the negotiations because it is not like the other one where you completely build a huge project and then you just need a right-of-way to get there.It is only the feasibility study and if we don't agree to a power use agreement,that steam can sit there for the next million years.It is in their interest to come our way also or they will -90 - NUNN: SUTCLIFF: 2263/523 receive no revenue from the resource for which they Own. And that is the City's position,so we can go ahead with this as far as the City is concerned. We want the feasibility study to go ahead. Thank you MR.MAYOR.Is there anyone else wishing to make public comment?State your name and who you represent. Yes,my name is ERIC SUTCLIFF,and I was the Legislator that represented the Aleutians when this appropriation was made.At that time,the $5 million to build or to explore for the resource was assumed,we all knew at that time that the Aleut Corp.would own the resource so there was never any speculation that there would be any other landholder other than the Aleut Corp.The legislature as well as the Power Authority was fully aware of this at that time.Not written into it but totally assumed since the feasibility study automatically follows the exploration study was,if there was money left over in the project fund of the $5 million,that money would be spent for the feasibility study and -91 - 2263/523 at that time the Power Authority was suggesting this to as a way to insure that the money did not lapse back into the General Fund.That knowing that the resource there is wee does virtuallyno good unless you know of the economic feasibility of it.There is many islands in the Aleutians that have the po- tential but if there is just nobody there,the eco- nomics are not there to do it.So you have to know that so it was assumed from the very beginning that the Aleut Corp.would own the resource and that there would be a feasibility study done.I can't stress enough that at that time I was fully cogni- zant of the idea that the Aleut Corp would want to maximize their profits on this resource.But I was also very confident that the Alaska Public Utilities Commission and the City of Unalaska would not cut a deal with the Aleut Corp.unless it made economic sense unless the cost of geothermal power was sub- Stantially less than diesel and I maintain that that is still the case and that if when the feasibility study is done and everybody starts really writing down firm figures which they know to be true.Today it just seems like a guess.The State has never done a geothermal project before.We are all new to this thing and until those figures are set and we know the approximate or actual cost of the project, -92 . 2263/523 it is all a guess.Once those are made,I would ex- pect that the Aleut Corp.would want to maximize their profits and bring it right up to a level that equals what the city is willing to pay.The city will only be willing to pay that amount if it is substantially less and makes sense to do something as an alternative project.So,I would hope ....it was certainly my intent and I would love to see the project go through,I initiated it,and I feel a slight ownership of the project and I want it to go through because basically we have nothing now.We knew that there was energy over there.We can see the steam from town so we have nothing yet and I hope the Aleut Corp.does maximize their profits but I also know that they are not going to get anything more than the City and the Alaska Public Utilities Commission will give them.It is as simple as that. That is your safeguard right there.The project won't go unless it makes sense to those that are go- ing to use the power.I can guarantee you that those people that are putting in those Surimi plants out there,if you think the city is not cognizant of the cost and what it costs to do business,they sure will be putting in their two-cents as to what the city can afford to pay,that they will buy it -93 - NUNN: AKSELL: 2263/523 because right now,they produce their own electric- ity.They don't buy it from the city. Thank you.Any questions,further public comment on this topic?Yes,please state your name and who you represent. I am Alan Aksell of the Aleut Corp.and just to Start it off,I would like to reply to something MR. HARRISON said earlier.The royalty question was raised by APA,by the staff,when we originally en- tered into these negotiations we thought it was strictly for right-of-way to start feasibility study underway and that we would be negotiating throughout feasibility and after feasibility.So the royalty question was raised by the staff,that is how they took,as I understand it ....(inaudible)...from the Board.Second point is you just had a motion that we negotiate within a range or within a worldly range that is standard for industry.We have accom- plished that already at the current state of nego- tiations.We have agreed in principal that the 10-15%that the U.S.Act in 1974 would accommodate for geothermal resources is adequate at this time and we are willing to sign to that and move forward with the feasibility study.There are some -94 - 2263/523 technical things that need to be worked out in the agreement but the royalty question,as far as we are concerned,is adequate at that range.There is one conceptual problem that we are still pretty far apart,is that the Aleut Corp.views this feasibil- ity study as looking at the economic liability of a certain size of plant which is yet undetermined. That is in your hands and we would prefer that the project and this royalty apply only to that first unit that is developed because once you have devel- oped that infra-structure in a remote region,the economics of upgrades,doubling that output of that plant or whatever increase in megawattage at the output would be ...the economics of those increases are far different that the initial feasibility study would determine for the first phase of the project and we wish to retain flexibility to renegotiate un- der the terms of those new economics for upgrades. So we are willing to go forward with 10-15%based on what you feel is feasible to design and build in Unalaska within the next five years and for the forseeable growth that you can sign a power sales agreement to and agree to sell to the City and they will agree to purchase.We wish to establish flexibility to renegotiate ............cee eee -95 - END OF SIDE THREE.....eee eek ccc c cece cee eee BEGINNING OF SIDE AKSELL: NUNN: HARRISON: 2263/523 ss eeceees upgrades to that generation capacity based on the economics of those upgrades.Since those up- grades are totally hypothetical,totally speculative projections in growth,the Surimi Plants were not known a year ago when you did your load growth anal- yses.Things happen quickly out there.There can be a big impact ......load and that has a substan- tial impact on the economics of the upgrades.So we would like to see feasibility get rolling now.We have adopted 10-15%in principal in our negotiations and we think that is adequate for both parties and we would like to have the right to renegotiate after this first phase.Conceptually,it is a definition of the first phase as far as the Aleut Corp.is con- cerned. Question MR.ALLISON .....MR.HARRISON? I stand corrected on who initiated this,I was just going by some written material that I had in front of me.I think that this issue of first phase,sec- ond phase and there are other issues as I understand about standing the length of the agreement and so on -96 - NUNN: MYERS: 2263/523 and so forth.Our issues that this Board is really not equipped to deal with and I think that what we are trying to do is to turn this over to the Execu- tive Director to try to finalize some agreements.I am hoping that we are not very far apart.It sounds like we are not,however,I think that for their to be incentive al]around to complete these nego- tiations that we do need to delay the start of the study until we have something and I would assume that the final agreement does reflect your interest and I think it is important and we do understand what your interest and your position is in these things.I think that we are not the ones to try to wrestle with the question of whether this should be......this agreement should be limited to the initial project or to subsequent phases of it. Thank you.Any other questions from the Board,any other public comment?This is on the same topic? State your name and who you represent. For the record,my name is ERIC MYERS,I am an administrative assistant to Representative Adelide Herman who represents House District 26,and I would just like to add......... -97- NUNN: MYERS: NUNN: 2263/523 Are you speaking on behalf of the representative? I am representing the representative,yes.I would like to contribute a perspective on this and the concern here basically is moving forward as quickly as possible with the feasibility study in light of the experience that occurred last year as to the Ex- ecutive Director of the Alaska Power Authority well knows,the Alaska Power Authority came within a rat's eyebrow of loosing the feasibility study money last year and in that concern is .....still re- mains.I am not aware of any particular move in that direction this year,but we all know that there is an extreme interest in the revenue picture and the extent to which there are delays in the encum- brance of these funds,anything is possible.So without stating a particular preference in regards to the question of the City's interest or the Corpo- ration's interest,Representative Herman's concern that the Alaska Power Authority move forward as quickly as possible with the commitment to the fea- sibility study.Thank you. Thank you.Further public comment on this topic? Further comments,questions from the Board?MR. ALLISON. -98 - ALLISON: NUNN: ALLISON: NUNN: KNAPP: NUNN: 2263/523 It sounds to me like we have the range free to proceed forward,parties have all agreed to that, that they have not agreed to a specific number with- in that range.I don't know that that is our job to force the parties to come to a number prior to a feasibility,again it seems that if we move immedi- ately,we should be able to get an agreement in principals sufficient to proceed with the feasibil- ity study by this weekend,while everybody is stil] in town.I would just hope that that is the ap- proach that would be taken by staff to get it done. It doesn't seem like they are that far apart.With that understanding,I ......... Do you want to insert the word "expeditiously"to your motion? I will insert the word "expeditiously"in every paragraph. Very well,further comments?COMMISSIONER KNAPP. MR.CHAIRMAN,I would like to hear the motion again please. You would like to hear the motion again.MR. -99 - HARRISON: NUNN: HARRISON: ALLISON: NUNN: 2263/523 HARRISON. 0.k.,the motion is to direct the Executive Director of the Alaska Power Authority to renegotiate with the Aleut Corporation over contract terms regarding geothermal royalties for the Unalaska Project.Un- der the following general guidelines from the Board; (1)that he is to seek a contractual royalty agree- ment before the feasibility study is initiated,(2) he is to seek royalty provisions that reflect indus- try practice and national and state standards as we expressed in various statutes and policy statements, (3)he may include if necessary a formula for ad- justment of a based royalty,up or down,depending upon the outcome of the feasibility study,(4)he is to consult with City officials of Unalaska during the negotiations with the Aleut Corp. Expeditiously. Expeditiously. In each paragraph. Questions,COMMISSIONER KNAPP. -100 - KNAPP: NUNN: HEATH: NUNN: HUFMAN: NUNN: ARNOLD: 2263/523 No. MR.HEATH. MR.ARNOLD (yes),MR.HARRISON (yes),MR.HUFMAN (yes),MR.ALLISON (yes),COMMISSIONER KNAPP (yes), MR.CHAIRMAN (yes). This concludes the Old Business before the Board. We have one Information Item,the Susitna Hydro Up- date and one item of New Business being Consid- eration of Middle Kuskokwim Electric Coop Power Project Loan Fund.Is it the pleasure of the Board to dispense with these two items prior to adjourning and adjourn for the day or do you prefer to come back after lunch. MR.CHAIRMAN,I would prefer to continue,hopefully we can continue the order of business in front of us here in maybe another 45 minutes. If we can do it in another 15 minutes,I would think we probably could proceed.MR.ARNOLD. MR.CHAIRMAN,I understand the logic of MR.HUFMAN -101 - ALASKA POWER AUTHORITY DRAFT CONDITIONAL LAND AND RESOURCE AGREEMENT FOR THE UNALASKA GEOTHERMAL PROJECT December 11,1985 THIS AGREEMENT is made and entered into as of the day of »1985,by and between the ALEUT CORPORATION,an Alaska corpo- ration,hereinafter referred to as "Aleut,"and the ALASKA POWER AUTHORITY,a public corporation of the State of Alaska,hereinafter referred to as the "Power Authority." WHEREAS the purpose of the Power Authority is to promote,develop,and advance the general prosperity and economic welfare of the people of Alaska by providing a means of con- structing,financing,and operating power projects;and WHEREAS the Alaska Legislature finds that the establishment of said power projects is necessary to supply power at the lowest reasonable cost to the state's electric utilities,and thereby to the consumers of the states;and WHEREAS it is the declared policy of the state,in the interests of promoting the general welfare of all the people of the state,and public purposes,to reduce consumer power costs and otherwise to encourage the long-term economic growth of the state,including the development of its natural resources,through the establishment of power projects;and WHEREAS the Power Authority,in cooperation with Aleut has completed a four-year geothermal exploration and drilling program near Mount Makushin on Unalaska !sland,which re- sulted in the discovery of an extremely productive geothermal reservoir;and WHEREAS the Power Authority has also completed a reconnaissance study of energy re- quirements and alternatives indicating that a geothermal power system is likely the most econom- ic source of electric power for the community of Unalaska/Dutch Harbor;and 1594/498 DRAFT Land and Resource Agree December 11,1985 Page 2 WHEREAS the Power Authority Board of Directors has allocated funds to conduct a Fea- sibility Program for developing a geothermal power system on Unalaska Island,with the stipu- lation that the Feasibility Program be initiated only after agreements have been negotiated with appropriate landowners for the use of Tands and resources during the feasibility,design,con- struction,and operation phases;and WHEREAS Aleut has selected and expects to receive interim conveyance,under the Alaska Native Claims Settlement Act,to the surface and subsurface land estates on which the explora- tion and drilling took place; NOW,THEREFORE,witnesseth that: Article A.FEASIBILITY PROGRAM 1.Administration of Feasibility Program.The Power Authority shall,subject to appro- priation,fund and conduct a Feasibility Program in accordance with Exhibits A and B hereunder for a geothermal power system,hereinafter referred to as the "Project,"on Unalaska Island.The Project shall consist of geothermal wellsites,wells,piping and power generation facilities and transmission lines,roads and other appurtenances required to produce and transmit power to the City of Unalaska distribution system.The Project would be located within Township 72 South, Range 118 West,Sections 20,21,22,23,24,25,26,27,28,29,30,31,32,33,34,35,and 36; Township 72 South,Range 119 West,Sections 25,26,27,33,34,35,and 363;and Township 73 South,Range 120 West,Sections 1,2,and 3;Seward Meridian,hereinafter called the "Study Area."The Power Authority shall designate a project manager whose primary responsibility js administration of the Feasibility Program. 2.Termination of Feasibility Program.The Power Authority Board of Directors,here- inafter referred to as the "Board,"may,at its option,and upon written notification to Aleut, terminate the Feasibility Program and this Agreement upon the completion of Phases (1)or (2), as set forth in Exhibit A hereunder,or thereafter on the inability to acquire power sales agreements or financing for the Project after diligently pursuing acquisition of such agreements and financing. 3.Participation by Aleut in the Feasibility Program.The Power Authority shall notify Aleut in advance of,and Aleut shall have the right to attend,at its expense,all review meetings between the Power Authority and its Feasibility Program contractors except meetings regarding bid documents or matters the Power Authority deems proprietary or to constitute a 1594/498 DRAFT Land and Resource Agree December 11,1985 Page 3 conflict of interest with respect to provisions hereof.Unless both parties agree otherwise, the Power Authority and Aleut shall meet monthly during the Feasibility Program,at a time and place convenient to both parties,to review the Feasibility Program analyses.Aleut may make recommendations to the Power Authority with respect to continuation of the Feasibility Program; changes in the Feasibility Program,including scopes of work,schedules,and final report for- mat;and development or nondevelopment of the Project.The Power Authority shall give full consideration to recommendations of Aleut but such consideration shal]not restrict or diminish the Power Authority's responsibility to make final decisions on matters concerning the Feasi- bility Program and the Project.The Power Authority shall provide Aleut,upon request,data and materials developed during the Feasibility Program except data and materials the Power Authority deems proprietary or to represent a conflict of interest with respect to provisions hereof,at a cost not to exceed the Power Authority's direct costs for reproduction. 4,Commitment to the Project.Upon completion of Phases (1)and (2)of the Feasibility Program,as set forth in Exhibit A hereunder,the Board shall commit to a course of action, within the timeframe set forth in Exhibit B hereunder,to develop the Project or to terminate this Agreement.The Power Authority shall notify Aleut in writing on or before November 1, 1986,of the decision by the Board.In the event the Power Authority commits to a course of action to develop the Project,the Power Authority shall diligently proceed to complete its obligations as set forth in Exhibits A and B hereunder.in the event the Power Authority fails to commit to a course of action within the timeframe set forth in Exhibit B hereunder,this Agreement shall terminate,unless both parties agree in writing to continue the Agreement. 5.Access to Study Area,Aleut shal!allow access by the Power Authority,its employ- ees,agents,representatives,and contractors to land Aleut owns within the Study Area suffi- cient to conduct and complete the Feasibility Program as set forth in Exhibits A and B hereun- der.Such access by the Power Authority shall not prevent Aleut from allowing access by others to Aleut land and resources within the Study Area;however,Aleut guarantees that access by others shall be subordinate to Power Authority needs in the event of any access conflicts.Such access shall be permitted during the Feasibility Program so long as the Power Authority performs its obligations set forth hereunder.If the Feasibility Program is terminated prior to acquisi- tion of financing for the Project or if the Board decides not to develop the Project,Aleut agrees to allow access to lands for plugging and abandonment of the Power Authority's existing exploration well,unless the Power Authority and Aleut agree otherwise in writing. 6.Option for Project Development by Aleut.Prior to or upon completion by the Power Authority of Phase (2)of the Feasibility Study as set forth in Exhibit A hereunder,Aleut,in 1594/498 DRAFT Land and Resource Agree December 11,1985 Page 4 conjunction with reasonably qualified parties,may present proposals and agreements to provide for the funding,development and/or operation of the Project,or a reasonably comparable proj- ect.In the event an Aleut proposal and power sales agreement with the City of Unalaska pro- vides for the development of the Project at a delivered cost of power to the City of Unalaska that is equal to or less than that which the Power Authority can reasonably expect to deliver pursuant to the Feasibility Program,then Aleut's proposal for development of the Project shal] be accepted.Upon acceptance of Aleut's proposal,the Power Authority shall document to Aleut the direct costs actually incurred on a monthly basis during the Feasibility Program set forth herein.Upon Aleut's reimbursement to the Power Authority for documented costs,this Agreement shall terminate. Article B.GRANT OF LEASE AND RIGHTS FOR THE PROJECT 1.Lease and Production Rights.Upon the completion by the Power Authority of the Feasibility Program within the timeframe set forth in Exhibit B hereunder and a commitment by the Board to proceed with development of the Project,Aleut,for and in consideration of the royalties herein provided and of the covenants and agreements hereinafter contained,shall grant,demise,lease,and Jet unto the Power Authority,sufficient and appropriately located acreage,hereinafter called "Leased Lands,"to construct and operate the Project,with the sole and exclusive right to the Power Authority to drill for,produce,extract,take and remove therefrom:(a)all products of geothermal processes,embracing indigenous steam,hot water and hot briness;(b)steam and other gases,hot water and hot brines resulting from water,gas,or other fluids artificially introduced into subsurface formations;(c)heat or other associated energy found beneath the surface of the earth;(d)water from geopressured zones;and (e) by-products of any of the foregoing such as minerals (exclusive of oi]or hydrocarbon gas that can be separately produced)which are found in solution or association with or derived from any of the foregoing.Each of the foregoing is hereinafter collectively referred to as "Sub- stances."In addition to the rights granted to the Power Authority under items (a)through (e) above,Aleut shall hereby grant to the Power Authority the sole and exclusive right to explore the Leased Lands by geological,geophysical or other methods,whether now known or not,and to take water from said Leased Lands for operations hereunder. 2.Resource Use and Disposal Rights.For the same consideration,Aleut shall grant to the Power Authority the right to store,utilize,process,convert,and otherwise use such Substances on or off the Leased Lands and to sell the same or any part or derivative thereof on or off the Leased Lands during the term of this Agreement,with the right of entry thereon at all times for said purposes,and to construct,use,maintain,erect,repair and replace thereon, 1594/498 DRAFT Land and Resource Agree December 11,1985 Page 5 and to remove therefrom all roads,pipelines,ditches and lanes,telephone and telegraph lines, utility installations,power lines,poles,tanks,evaporation or settling basins,extraction or processing plants,machinery,equipment,buildings,electric power plants,and equipment for generation and transmission of Substances and electric power,and for the handling,treatment or storage of the Substances,and al?structures and facilities relating thereto,which the Power Authority may desire to erect,construct or install in carrying on the Power Authority's busi- ness and operations on or from the Leased Lands and other lands in the vicinity of the Leased Lands;and the Power Authority shall have the further right to erect,maintain,operate and remove a plant or plants,structures and facilities with al]necessary appurtenances for the conversion of the Substances into heat,power or another form of energy,and for the extraction of products from steam,brine or water produced from the Leased Lands and other lands in the vicinity of said Leased Lands,including all rights necessary or convenient thereto,together with rights of way for passage over,upon and across and ingress and egress to and from the Leased Lands for any or all of the above mentioned purposes.The Power Authority shall also have the right to utilize or to dispose of waste brine and other waste products from a well or wells on the Leased Lands or on other land in the vicinity into a well or wells drilled or converted for that purpose on the Leased Lands or on other land in the vicinity,and the right to inject water,brine,steam and gases from a well or wells on the Leased Lands or such other land for the purpose of maintaining or restoring pressure,increasing or maintaining production, or testing in the productive zones beneath the Leased Lands or other land in the vicinity there- of. 3.Right-of-way Easement Rights.For the same consideration,Aleut shall grant the Power Authority rights-of-way and easements for a road and transmission line over Aleut's surface and subsurface estates within the Study Area but located off Leased Lands.Said ease- ments shall be one hundred (100)feet in width and granted with the rights,privileges and authorities to:(a)construct,reconstruct,maintain,repair,operate,improve,and update upon or under lands within said easements an electric transmission line and road system including but not limited to poles,towers,wires,guys,anchors,bridges,abutments,culverts,supporting apparatus,and such other structures as the Power Authority may now or shall from time to time deem necessary;(b)provide ingress and egress to lands within said easements;(c)cut,trim, remove and control the growth of,by machinery or otherwise,vegetation on or adjoining lands within said easements which in the judgement of the Power Authority,might interfere with, threaten,or endanger the operation and maintenance of said line or system;(d)clear and keep Tands within said easements free from fences,buildings,pavements,or other structures which in the judgement of the Power Authority,might interfere with,threaten,or endanger the operation and maintenance of said line or system or may increase the safety risks to Aleut or its 1594/498 DRAFT Land and Resource Agree December 11,1985 Page 6 property;and (e)license,permit or otherwise agree to the joint use or occupancy of said line or system by any other person,firm or corporation for telephone,electrification,utility,or transportation purposes. Article C.TERMS AND CONDITIONS 1.Terms and Rentals.(a)Unless this Agreement is terminated under any other pro- visions hereof,this Agreement and the lease granted herein shall remain in force through the term of Project financing (the period of enforcement of this Agreement being hereinafter re- ferred to as the "Primary Term")and for so long thereafter as (i)any of the Substances shall be produced in commercial quantities from any of the Leased Lands or (ii)for so long as this Agreement may be kept in force under any other provisions hereof. (b)If at the expiration of the Primary Term hereof none of the Substances is being produced,but on or before that date reworking operations or operations for the drilling of a well in search of any of the Substances are commenced on said Leased Lands,this Agreement will continue in force for so long as such operations are continuously prosecuted;and,such op- erations shall be considered to be continuously prosecuted if mot more than nine (9)months shall elapse between abandonment of one well and beginning of operations for the drilling or reworking of another well.If,as a result of such operations,any of the Substances are produced in commercial quantities or production is restarted,this Agreement will remain in force for so long as any of the Substances shall be so produced.If said Substances,or any of them,are being so produced from any part of said Leased Lands at or after expiration of the Primary Term hereof and all of such production shall thereafter cease,the Power Authority may, within nine (9)months from cessation of such production,resume drilling or reworking op- erations in an effort to obtain or restore such production of any of the Substances in which event this Agreement shall remain in force for so long as such operations are continuously prosecuted,as provided above;and,if such operations shall result in production in commercial quantities of any of the Substances,for so long as any of them are produced in commercia} quantities."Reworking,"as used herein,shall include,among other things,cleaning,testing, repair,and replacement of wells and related facilities and equipment necessary to produce from such wells. (c)If drilling operations are not commenced on said Leased Lands on or before January 1,1988,this Agreement shall terminate unless the Power Authority,on or before said date, shall pay to the depository,as provided in Section 6 hereof,the sum of Four Hundred Dollars ($400.00)per acre for all Leased Lands then held,such sum being hereinafter called "Rental," 1594/498 DRAFT Land and Resource Agree December 11,1985 Page 7 shall pay to the depository,as provided in Section 6 hereof,the sum of Four Hundred Dollars ($400.00)per acre for all Leased Lands then held,such sum being hereinafter called "Rental," which payment shall extend,for twelve (12)months from said date,the time within which drili- ing operations may be commenced. (d)Notwithstanding the limitations of the term of this Agreement as set forth in paragraph (a)of this Section,this Agreement shall not be terminated for lack of production in commercial quantities after its Primary Term if the Power Authority shall have shut-in any or all producing wells for engineering or economic reasons sufficient in its good faith opinion to warrant such action;provided,however,that in the case of such shutdowns,the Power Authority shall have the option,in each year,in lieu of drilling or reworking as described in paragraph (b)of this Section,to pay Aleut,on or before January 15 of each year,Rental as set forth in paragraph (c)of this Section and each such payment shall extend the term of this Agreement for an additional year. 2,Royalties.(a)The Power Authority shall pay royalty to Aleut out of the proceeds received from the sale of Substances,as follows: (i)On Energy Resources:As royalty,the Power Authority shall pay to Aleut not less than ten percent (10%)or more than fifteen percent (15%),hereinafter called the "Agreed Share,"of the amount or value,at the point of removal from the earth (hereinafter referred to as the "Wellhead")of the steam,hot water,hot brines,thermal energy,or geopressured water produced and saved and sold or used (except for operations hereunder)off the Leased Lands.A fixed royalty or formula for calculating the Agreed Share shall be negotiated upon completion of the Feasibility Program prior to development of the Project. (ii)On All Other Substances:As royalty,the Power Authority shall pay to Aleut five percent (5%),hereinafter called the "Market Share,"of the value at the Wellhead of all Sub- stances other than steam,hot water,hot brines,thermal energy,or geopressured water produced from or allocated to the Leased Lands and saved and sold or used (except for operations hereun- der)off the Leased Lands. (b)For the purpose of computing royalties,the following factors will be taken into account in determining the value of Substances produced from the Leased Lands: (i)The consideration being paid for Substances of similar quality in the same general area or other relevant areas (including outside Alaska); 1594/498 DRAFT Land and Resource Agree December 11,1985 Page 8 (ii)The total consideration accruing to the Power Authority from any disposition of the Substances; (iff)Reasonable transportation and transmission costs; (iv)The costs of conversion of Substances to other forms of energy and the consideration to be paid for the other forms of energy;and (v)Other relevant factors. (c)The Power Authority may use,free of royalty,Substances and electric power devel- oped from said Leased Lands for all operations hereunder,and the Power Authority shal?not be required to account to Aleut for or pay royalty on any Substances reasonably lost or consumed in operations hereunder. 3.Payment of Royalties.Upon commencement of commercial operations,the Power Authority shall annually pay to Aleut,on or before January 15 of each year during the term of this Agreement,an advance minimum royalty in an amount equal to the Rental as set forth jn Section 1,paragraph (c)hereof.Any advance minimum royalty so tendered to Aleut shall be recoverable by the Power Authority out of future production of any or all of the above said Substances and the Power Authority is hereby authorized and directed to deduct the same from royalties thereafter due and payable.Following recovery of any advance minimum royalty,the Power Authority shall pay Aleut,on or before the last day of each and every calendar month,the royalties accrued and payable for the preceding calendar month.Concurrently with making each royalty payment,the Power Authority shall deliver to Aleut a statement setting forth the basis for the determination of the royalty then paid by the Power Authority. 4.Purchase of Aggregate Materials.The Power Authority shall pay Aleut one dollar fifty cents ($1.50)per cubic yard for aggregate materials extracted from Aleut land,as measured emplaced in construction of the Project.Payment shall be due and payable on or before the last day of the month in which said aggregate materials are actually extracted.The pur- chase price herein stated is effective only until commencement of operation of the Project. 5.Right-of-way Easement Fee.If the Power Authority completes the Feasibility Program and proceeds with development of the project,the Power Authority shall pay Aleut on or before January 15 of each year thereafter during the term of this Agreement a fee of ten dollars 1594/498 DRAFT Land and Resource Agree December 11,1985 Page 9 ($10.00)for the rights granted herein for a road and transmission line right-of-way over Aleut's surface and subsurface estates within the Study Area but off Leased Lands. 6.Depository.All payments required to be made by the Power Authority to Aleut hereunder shall be paid to Aleut by mailing or delivering the Power Authority's check therefor to the Bank at ' its successors or assigns,herein designated by Aleut as depository,for deposit into a special account.Aleut hereby granting to said depository full power and authority on behalf of Aleut, and all those succeeding to Aleut's rights hereunder whether by voluntary act or operation of Taw,to collect and receipt for all sums of money which may become due and payable from the Power Authority hereunder,and said power is hereby declared by Aleut to be coupled with an interest and to be irrevocable without the consent of the Power Authority.No change in the ownership of the Leased Lands or of any payments due Aleut hereunder shall be binding on the Power Authority until it shall have been furnished adequate written evidence thereof.In the event more than one person or entity shall at any time be entitled to receive sums of money payable hereunder to Aleut,all such persons shall have the right,jointly,to designate any other single depository to receive all payments hereunder on their joint and several behalf,and by jointly executed and acknowledged instrument so to advise the Power Authority,it being intended that the Power Authority shall never be required to make payment to more than one person or entity nor to draw more than one check for any separate payment becoming due hereun- der.Until such notice shall be furnished to the Power Authority,the Power Authority shall continue to make all payments to the depository last designated hereunder. 7.Lesser or Afteracquired Interest.If it should hereafter appear that Aleut,at the commencement of Project development,owns a lesser interest in the Leased Lands than the fee simple estate therein and thereto,or less than the entire interest in the Substances contained in and under the Leased Lands,then the rentals,royalties and the like accruing to Aleut here- under shall be paid to Aleut in the proportion which Aleut's interest bears to the entire fee simple estate in the Leased Lands or to the entire interest in said Substances.Notwithstanding the foregoing,should Aleut hereafter acquire any additional right,title or interest in or to the Leased Lands or said Substances,then any increase in payments of money hereunder neces- sitated thereby shall commence with the payment next following receipt by the Power Authority of satisfactory evidence of Aleut's acquisition of such additional interest. 8.Taxes.(a)The Power Authority shall pay,except the Agreed Share and the Market Share,all taxes levied and assessed against the Power Authority's leasehold interest in the Leased Lands.The Power Authority shall pay all taxes levied and assessed against all 1594/498 DRAFT Land and Resource Agree December 11,1985 Page 10 structures,improvements and personal property placed upon the Leased Lands by the Power Author- ity.Aleut shall pay all taxes levied and assessed against the Leased Lands as such and against any rights thereto not covered by this Agreement and shall pay all taxes levied and assessed against all structures and improvements placed on the Leased Lands by Aleut. (b)Aleut agrees to pay the Agreed Share and the Market Share of any and all taxes assessed upon any Substances produced and sold by the Power Authority from said Lands and ad valorem taxes on Substances together with the agreed share and the market share of all sever- ance,production and license taxes or other taxes or assessments levied or assessed on account of the production of Substances from or allocated to said Leased Lands,and to pay ail of any other taxes assessed against said Leased Lands,whether the same are assessed to Aleut or the Power Authority or otherwise,and the Power Authority is hereby authorized to pay all such taxes and assessments on behalf of Aleut and to deduct the amount so paid from any royalties or moneys due Aleut hereunder. 9.Operations.(a)The Power Authority shall comply with all laws and regulations applicable to its operations hereunder as required by the laws of the State of Alaska. (b)The Power Authority,its agents,representatives,and contractors shall ever indemnify,save harmless and defend Aleut from and against any and all manner of claims,judg- ments or suits whatsoever arising out of the Power Authority's activities or operations hereun- der other than those arising in whole or in part from Aleut's act or failure to act and this Section shall survive termination of this Agreement. (c)Prior to exercising any access rights under this Agreement,the Power Authority, its agents,representatives and contractors shall provide Aleut with certificates for general liability and property damage insurances in reasonable amounts and form,and a Power Authority contractor shall name Aleut as an additional finsured if such request is made in writing to the Power Authority by Aleut at least thirty (30)days in advance of execution of the contract with said contractor.All such insurance policies and certificates shall include the following cancellation or change clause or a similar clause approved by Aleut:"This insurance will not be cancelled by this insurance company nor any changes made in the policy which will change the name of the insured,without first giving thirty (30)days notice in writing to The Aleut Corpo- ration,One Aleut Plaza,Suite 300,4000 Old Seward Highway,Anchorage,Alaska 99503,as evi- denced by return receipt of registered or certified mail."The insurance required under this paragraph shall be maintained in full force and effect throughout the term of this Agreement and any extension hereof. 1594/498 DRAFT Land and Resource Agree December 11,1985 Page 11 (d)All of the labor to be performed and all of the materials to be furnished in the operations of the Power Authority hereunder shall be at the Power Authority's sole cost and expense unless otherwise specified herein,and Aleut shal]not be chargeable with or liable for any part thereof.The Power Authority shall protect the said Leased Lands against liens of every character arising from its operation thereon. (e)If the Power Authority or anyone purchasing Substances from the Power Authority constructs on said Leased Lands a plant for the conversion of Substances into heat,power or another form of energy or for the extraction and processing of by-products,or both,and if any such plant utilizes Substances produced or obtained from said Leased Lands and from other land in the vicinity,the Power Authority or such purchaser shall have the right and easement to continue to maintain and operate such plant and connected pipeline,transmission line and other associated facilities so long as it utilizes Substances from other land notwithstanding any cessation of production from said Leased Lands or the expiration,termination or forfeiture of this Agreement.In such event,Aleut shall be paid an annual Rental,as provided in Section 1, paragraph (c)hereof,for each surface acre of said Leased Lands so occupied. (f)Whenever used herein,the expression "drilling operations"shall mean,for all purposes hereof,any work or actual operations undertaken or commenced for the purpose of drill- ing of a well on or into said Leased Lands,including without limiting the generality hereof, the preparation of the ground therefor,the building of roads and other facilities therefor,the construction of a derrick and other necessary structures for the drilling of a well followed by the actual operation of drilling in the ground.Any such work or operations preliminary to the drilling in the ground may be undertaken in any order the Power Authority shall see fit.ATI such work and operations shall be prosecuted with reasonable diligence. 10.Use of Production for Operations.The Power Authority shall be entitled,without accountability to Aleut therefor whether by payment of royalty or otherwise,to use in its drilling,production and processing operations hereunder such amounts of water,steam or other thermal energy produced from the Leased Lands as may be reasonably required by the Power Author- ity for such purposes.The Power Authority shall be entitled,without accounting to Aleut therefor in any manner,to flow and/or blow wells without restriction for testing purposes. 11.Uneconomic Substances.(a)Nothing herein contained shall require the Power Authority to produce any Substance or to recover,save and market any of the Substances con- tained in the brines or other well output produced from wells on the Leased Lands,which,in the Power Authority's judgment,is not economic to produce,recover,save or market.The Power 1594/498 DRAFT Land and Resource Agree December 11,1985 Page 12 Authority shall have the right,without accountability to Aleut therefor,to waste or dispose of any such uneconomic Substances by such lawful manner or means as the Power Authority shall deem appropriate in the circumstances. (b)The Power Authority shall not be obligated to produce Substances it is unable to market at the well or wells,plant or plants,or to convert Substances to other form it is unable to market.It is recognized that the market demand for the Substances and derivatives developed from the Substances may vary from time to time and during such periods as there is no market for any of the Substances or derivatives,the Power Authority's obligation to produce, process and extract such Substances shall be suspended.The Power Authority shall have no obligation to save or process by-products described in item (e)of Article B,Section 1 above. (c)Subject to the foregoing and except as herein otherwise provided,the Power Au- thority agrees to drill wells and operate each completed well with reasonable diligence and in accordance with good operating practice and all applicable laws so long as such wells shall produce Substances in paying quantities while this Agreement is in force as to the portion of said Leased Lands on which such well or wells are situated. 12.Damages Resulting From Operations.The Power Authority shall not be liable to Aleut for damages to any geothermal resources reservoir underlying said Leased Lands or for the Toss of Substances therein or therefrom or for any subsidence or surface damages resulting from its operations hereunder unless such damage or loss is caused by the Power Authority's gross negligence or willful misconduct. 13.Unitization.(a)The Power Authority shall have the right,at its sole option, from time to time,either before or after production,to pool,unitize or combine all or any part of the Leased Lands with other land or lands or lease or leases (whether held by the Power Authority or others and whether or not the surface of such lands may be used for development or operating purposes)adjacent,adjoining or in the immediate vicinity of the Leased Lands to comprise one or more operating or development units of not more than 1920 acres each,and drill- ing operations or production on any such unit shall constitute compliance herewith to the same extent as though such operations or production were on the Leased Lands.In lieu of the roy- alties (less taxes),elsewhere herein provided,Aleut shall participate in the royalty from any such unit in the proportion that the number of acres owned by Aleut within the unit bears to the total number of acres in such unit.Such unit shall become in existence upon the Power Authori- ty's execution in writing and recordation in the conveyance records of the District tn which the Leased Lands are situated,of an instrument identifying and describing the pooled or 1594/498 DRAFT Land and Resource Agree December 11,1985 Page 13 communitzied acreage.The Power Authority shall at all times keep Aleut informed of the lands embraced in any unit of which the Leased Lands form a part.Whenever used herein,the term "District™shall mean,for all purposes hereof,the State of Alaska Recording District. (b)As to each and any such operating or development unit,the Power Authority shall have the right to commingle for the purpose of utilizing,selling or processing,or causing to be processed,the steam or steam power and/or extractable minerals produced from such operating or development unit with the steam or steam power and/or extractable minerals produced from other lands or units,so long as the production from the unit which includes all or portions of the Leased Lands is measured,metered or gauged as to such unit production;unit production so measured,metered or gauged shall then be allocated to the Leased Lands in accordance with the provisions of paragraph (a)above. (c)Allocation,as foresaid,shall cease upon any termination,either in whole or in part (by surrender,forfeiture or otherwise),of this or any other agreement covering lands in such operating or development unit as to the lands covered by such terminated agreement or part thereof.In the event of the failure of Aleut's or any other owner's title as to any portion of the land included in any such operating or development unit,such portion of such land shall likewise be excluded in allocating production from such unit;provided,however,the Power Authority shall not be held to account for any production allocated to any lands to be excluded, as aforesaid,from such unit unless and until the Power Authority has actual knowledge of the aforesaid circumstances requiring such exclusion. (d)If any taxes of any kind are levied or assessed (other than taxes on the land as such or any rights thereto not covered by this Agreement),any portion of which is chargeable to Aleut under Section 8 hereof,then the share of such taxes to be borne by Aleut as provided in this Agreement shall be in proportion to the share of the royalty from such unit allocated to the Leased Lands. (e)The Power Authority may,at its sole option,at any time when there is no produc- tion in such unit of leased Substances in quantities deemed paying by the Power Authority, terminate such unit by a written declaration thereof,in the manner in which it was created. 14,Additional Operations.(a)Without any additional consideration to be paid, except as provided below,Aleut hereby grants to the Power Authority,its successors and as- signs,the following rights,rights-of-way and easements in,under,upon,through and across said Leased Lands which may be exercised at any time or from time to time during the duration of 1594/498 DRAFT Land and Resource Agree December 11,1985 Page 14 this Agreement and as long thereafter as the Power Authority exercises any of the rights granted in this Section:(i)The sole and exclusive right to locate a well or wells on the surface of said Leased Lands and to slant drill said well or wells into,under,across and through said Leased Lands and into and under lands other than said Leased Lands together with the right to repair,redrill,deepen,maintain,inject in,rework and operate or abandon such well or wells for the production of Substances from such other lands together with the right to develop water from said Leased Lands for any of the Power Authority's operations pursuant to this Section and together with the right to construct,erect,maintain,use,operate,replace,and remove al] pipelines,power lines,telephone lines,tanks,machinery,and other facilities,together with all other rights necessary or convenient for the Power Authority's operations under this Section and together with the rights-of-way for passage over and upon and across and ingress and egress to and from said Leased Lands;and (ii)The sole and exclusive right to drill into and through said Leased Lands below a depth of five hundred (500)feet from the surface thereof,by means of a well or wells drilled from the surface of Tands other than said Leased Lands,and the right to abandon or repair,redrill,deepen,maintain,inject in,rework and operate such well or wells for the production of Substances from lands other than said Leased Lands. (b)If the Power Authority does not pool or unitize in accordance with Section 13, paragraph (a)hereof and exercises the rights granted by Aleut in item (i)of paragraph (a)of this Section;the Power Authority shall pay to Aleut annual Rental,as provided in Section 1, paragraph (c)hereof,for each surface acre of said Leased Lands being exclusively occupied by the Power Authority pursuant to such grant.Any well drilled under the provisions of this Section shall be drilled so that the producing or injecting interval thereof shall lie wholly outside the boundary of said Leased Lands and Aleut recognizes and agrees that Aleut has no interest in any such well or wells drilled pursuant to this Section or any production therefrom. (c)Any surrender or termination under any other provision of this Agreement shall be effective notwithstanding the fact that the Power Authority in and by such surrender or termina- tion reserves the rights granted to the Power Authority under this Section,and regardless of such surrender or termination,the rights granted under this Section shall continue for the term hereinabove granted in this Section. 15.Aleut's Right to Bid.Aleut shall be notified as a potential bidder on any phases or tasks contemplated under this Agreement which the Power Authority or its agents or contractors may let for competitive bidding.Any bid that Aleut may submit,in conjunction with a reasonably qualified party or parties,for which the Power Authority determines there would be 1594/498 DRAFT Land and Resource Agree December 11,1985 Page 15 no conflict of interest in awarding the bid to Aleut,shal?receive equal consideration to other bids submitted. 16.Title Warranty.Aleut shall grant and agrees to defend title to the Leased Lands except for rights-of-way and easements of record,and further agrees that the Power Authority at its option may pay and discharge any delinquent taxes,mortgages,trust deeds or other delinquent liens or encumbrances existing,levied or assessed on or against the said Leased Lands;and,in the event the Power Authority shall exercise such option,the Power Authority shall be subrogated to the rights of any holder or holders hereof and shall have the right,in addition to other remedies provided by law or equity,to reimburse itself by applying to the discharge of any such mortgage,tax or other lien or encumbrances any and all payments accruing to Aleut hereunder. 17,Force Majeure.The Power Authority's obligations hereunder shall be suspended, and the term of this Agreement and the period for removal of the Power Authority's property in the event of termination shall be extended while the Power Authority is prevented from complying therewith by:strikes;lockouts;riots;action of the elements;accidents;delays in transporta- tion;inability to secure labor or materials in the open market;laws,rules or regulations of any Federal,State,Municipal or other governmental agency,authority or representative having jurisdiction;litigation or administrative proceedings affecting title to lands covered hereby or operations thereon;inability to secure or absence of a market for commercial sale of Sub- stances,or any of them,produced from the Leased Lands or of derivatives developed by the Power Authority therefrom;or by other matters or conditions beyond the reasonable control of the Power Authority,whether or not similar to the conditions or matters in this Section specifical- ly enumerated, 18.Surrenders.The Power Authority may,at any time,surrender this Agreement to Aleut in its entirety or,from time to time,surrender only so much of the Leased Lands as the Power Authority may elect in the instrument of surrender by executing and delivering to Aleut or placing on record in the District in which the Leased Lands are located a quitclaim deed or deeds covering all or any part of the Leased Lands so selected by the Power Authority for surrender and the Power Authority shall thereby be relieved of all obligations as to the acreage so surrendered,except for obligations already accrued by the terms hereof or as provided by Section 20 hereof.Notwithstanding such surrender,the Power Authority shall nevertheless retain such rights-of-way,easements and privileges over,upon,through and across the lands so surrendered as shall be necessary or convenient for the Power Authority's operations on so much 1594/498 DRAFT Land and Resource Agree December 11,1985 Page 16 of the Leased Lands as shall then be retained by the Power Authority under this Agreement and on the Power Authority's other lands in the vicinity. 19,Breach of Agreement.If the Power Authority has defaulted in any substantial respect in its obligations hereunder,Aleut shall so notify the Power Authority in writing, setting out in what respects Aleut deems the Power Authority to be in such default.If,within sixty (60)days after receipt of such notice,the Power Authority shall commence to correct the default alleged by Aleut and continue the same with due diligence,the Power Authority shall not be deemed in default hereunder.The service of said notice and the lapse of sixty (60)days without the Power Authority's commencing to correct the alleged default shall be a condition precedent to any action by Aleut for or on account of such default.Neither the service of said notice nor the doing of any acts by the Power Authority aimed to correct all or any of the alleged defaults shall be deemed an admission or presumption that the Power Authority has failed in any respect to perform it obligations hereunder.In the event of cancellation or termination of this Agreement for any cause other than surrender by the Power Authority,this Agreement shall nevertheless remain in effect as to forty (40)acres surrounding each well then producing, being drilled or reworked,as to which the Power Authority shall not be in default,and saving and excepting rights-of-way across the Leased Lands necessary for the Power Authority's op- erations on the Leased Lands so retained by the Power Authority and on the Power Authority's other lands in the vicinity.Termination or cancellation of this Agreement pursuant hereto shall be the sole remedy of Aleut for failure of the Power Authority to drill any well hereunder or to pay rental or delay rental in lieu thereof. 20.Removal of Property and Restoration.(a)The Power Authority may at any time during the term of this Agreement remove all or any of the property and fixtures placed by it in or upon the Leased Lands,including the right to draw and remove all casing. (b)Following termination of this Agreement or any part thereof for any cause,and following abandonment of any well drilled pursuant to the provisions hereof,the Power Authority shall,within nine (9)months thereafter or in accordance with a schedule agreed upon by both parties,remove all personal property which the Power Authority shall have brought upon the lands affected by such termination or upon the drillsite of such abandoned well;shall fill all sumps,remove all foundations and so nearly as practicable restore the areas affected by such termination or abandonment to the condition in which they were prior to the commencement of its operations hereunder;and,in the case of termination,shall deliver to Aleut a quitclaim deed, in recordable form,surrendering to Aleut all right,title and interest of the Power Authority in that part of the said Leased Lands as to which this Agreement shall have been so terminated, 1594/498 DRAFT Land and Resource Agree December 11,1985 Page 17 saving and excepting necessary easements and rights-of-way on the Leased Lands for the Power Authority's further operations on any part of the said Leased Lands as to which this Agreement shall not have been terminated and on the Power Authority's other lands in the vicinity.The ownership of any of the Power Authority's property not removed by it during the period herein provided shall,in the absence of force majeure as defined in Section 17,be deemed abandoned by the Power Authority and shall pass to Aleut without further act of the parties or either of them effective upon expiration of such period. 21,Assignment.(a)The Power Authority shall have the right to assign all or any part of its rights or interest in and to this Agreement,including but not limited to the Power Authority's right to occupy such portions of the surface of the Leased Lands as may be necessary for the construction of plants and other facilities,only to another state agency,department, office,authority or representative having jurisdiction.No assignment by either party hereun- der shall be effective for any purpose whatsoever until and unless a certified copy of the recorded instrument of assignment;or,if such assignment shall have been recorded only in short form,a true and complete copy of the instrument described in such short form under the true signatures of each of the parties thereto,together with a certified copy of such recorded short form,shall be given to the other party,in the same manner as is provided for a notice hereun- der. (b)In the event of assignment by the Power Authority of this Agreement as to a seg- regated portion of the Leased Lands,payments due Aleut hereunder shall be apportionable among the several leasehold owners according to the surface area of each of their respective lease- holds,and default in such payment by one or more of such leasehold owners shall in nowise affect the right of any other leasehold owner hereunder. 22,Notices.Any notice or other communication hereunder from Aleut to the Power Authority shall be given in writing by sending the same by prepaid registered or certified mail with return receipt requested addressed to the Alaska Power Authority at 334 West Fifth Avenue, Anchorage,Alaska 99501,and any notice or other communication hereunder from the Power Author- ity to Aleut shall be given in like manner to Aleut addressed to The Aleut Corporation,One Aleut Plaza,Suite 300,4000 Old Seward Highway,Anchorage,Alaska 99503.Any notice mailed as aforesaid shall be deemed given and received within seventy-two (72)hours after the deposit thereof in the United States mail if mailed within the State of Alaska and if deposited in the United States mail outside of the State of Alaska,such notice shall be deemed to have been given and received within one hundred twenty (120)hours after deposit in the United States mail.The parties may,by like notice at any time,and from time to time,change their 1594/498 DRAFT Land and Resource Agree December 11,1985 Page 18 respective addresses for the purposes hereof.Postmark dates on registry receipts for such notices shall be conclusive as to the date of mailing. 23.Entirety Clause.If the leased premises shall hereafter be owned in severalty, or in separate tracts,the premises nevertheless shall be developed and operated as one lease, and all royalties accruing hereunder shall be treated as an entirety,and shall be divided among and paid to such separate owners in the proportion that the acreage owned by each such separate owner bears to the entire leased acreage.Any payment required to be made by the Power Authori- ty pursuant to the foregoing shall be paid in accordance with the provisions in Section 6 hereof.There shall be no obligation on the part of the Power Authority to off-set wells on separate tracts unto which the Leased Lands may be hereafter divided by sale,devise, unitization,or otherwise,or to furnish separate measuring or receiving facilities. 24,Severability.If any part,portion or provision of this Agreement shall be found or declared null,void or unenforceable for any reason whatsoever by any court of competent jurisdiction or by any governmental agency having authority thereover,then only such part, portion or provision shall be affected thereby and the remainder of this instrument shall con- tinue in full force and effect.The foregoing provisions of this paragraph shall be severable for the purposes of the provisions of this Section. 25.Binding Effect.This Agreement and al!of the terms,covenants and conditions hereof shall extend to and be binding upon the respective heirs,executors,administrators, grantees,successors and assigns of the parties hereto. 26.Termination by Mutual Agreement.This Agreement may be terminated at any time by mutual agreement of both parties hereto. IN WITNESS WHEREOF,the parties hereto have executed this instrument as of the date hereinabove first written. The Aleut Corporation The Alaska Power Authority By By 1594/498 eDRAFT Land and Resource Agree December 11,1985 , Page 19 1594/498 PHASE (1) (2) (3) (4) (5) ON OR BEFORE EXHIBIT A FEASIBILITY PROGRAM SCOPE OF WORK TECHNICAL AND ECONOMIC FEASIBILITY ANALYSES. PLAN OF FINANCE. ACQUISITION OF POWER SALES ACREEMENTS. FINANCIAL FEASIBILITY ANALYSIS. ACQUISITION OF FINANCING FOR THE PROJECT. EXHIBIT B DEADLINES FOR FEASIBILITY PROGRAM AND DEVELOPMENT OF PROJECT October 1,1986 January 1,1987 August 1,1987 March 1,1988 March 1,1991 Complete Technical and Economic Feasibility Analyses,accept final report. Complete Plan of Finance.Commit to course of of action for proceeding with the Project or terminating this agreement. Acquire power sales agreements,complete financial feasibility report,issue bonds (if necessary),secure funding. Complete project design,commence construction phase. Complete construction,commence operation. gd a SD St.George So oe ode On a oaPNPIeTyBECEEVE we aa ,o Ta avs . 7 : coors pon :"Hen eta FOS 2 shoe 3gLeoningCovengaoOONEALEUTPLAZAAkutanos4000OldSewardHighway,Suite 300,Anchorage,Alaska 99503 (oJBoTelephone(907)561-4300 8 goreGpv)Q essfo)a RY Ss le id o Rukotsks Atha Nelson Lagoon December 6,1985 Mr.Brent Petrie Director of Power Systems Planning Alaska Power Authority 334 W.5th Avenue Anchorage,AK 99501 Dear Brent: Herein set forth are expectations of The Aleut Corporation (Aleut)to be incorporated in the Conditional Land and Resource Agreement for the Unalaska Geothermal Project (Agreement), between the Alaska Power Authority (APA)and Aleut: 1.Royalties -As a fair and reasonable protection to each party we propose that the royalty provisions of the "Geothermal Steam Act of 1970"(specifically Section 1004(a)(b))be incorporated into the Agreement.Such provisions would ensure that a royalty of not less than 103% nor greater than 15%"of the amount or value of steam"and 5%for the value of any byproducts,or equivalent sums based on an alternate means of calculation,would be factored into the Feasibility Study.At the conclusion of the Feasibility Study and by mutual agreement of the parties,the specific royalty provisions would be negotiated. 2.Rental -Aleut expects fair market value rental for the surface acreage leased for facilities,well sites,piping and other necessary appurtenances.Aleut considers such property to be industrial in nature and such rental costs Willi factor into the overall project costs during feasibility.Such rental payments for Leased Lands shall include only surface riyhts and no relationsnip to the location and/or quantity of subsurface resources or any rights thereto are coincident witn the surface lease, 3.Easements -Aleut expects an easement rental of $10 per year total for the 1L0U-foot wide road and transmission line corridor across Aleut lands.Such easement corridor will commence at the Leased Lands encompassing the project site and terminate at the point of tie-in to the Citydistribution'system. Mr.Brent Petrie December 6,1985 Page 2 4.Aggregate Materials -Aleut will make available to APA during construction at a firm price of $1.50 per c.y.(as Measured emplaced in construction of the Project)all aggregate materials necessary,wherever located on Aleut lands. Generation Capacity Limitation -APA's rights of production from the resource,independent of any surface acreage leased,snall be limited to the initially installed generating capacity,whether initially active or idle,which can be feasibly and economically constructed as demonstrated by the Feasibility Study.APA may drill wells and build facilities which,in APA's judgment,are necessary and prudent for operation of the facility;however,APA's rights to generate and sell electricity under the current agreement being negotiated shall be strictly limited to the initially installed generating capacity regardless of resource or well potential.As we have previously discussed,should there be a need or opportunity to upgrade the generating capacity as demand grows,such upgrades will be negotiated at a later date between Aleut,APA or other parties,and should Aleut choose to proceed to upgrade independent of APA,the Opportunity still exists for unitization of facilities. Aleut's commitment to APA in the current agreement is to ensure that no subsequent activities will hinder or infringe upon APA's rights to sufficient geothermal resources,if available,to supply APA's initially installed generating capacity. Taxes --Aleut expects to pay only its normal tax obligations for royalty and rental income to Aleut.APA will pay on its own behalf,and on behalf of Aleut,all other taxes of whatever nature which may arise out of APA's activities. Right to Bid -Aleut expects the right to deliver a bona fide funded development proposal with supportiny Power Sales Agreement to APA.If such proposal by Aleut is equal or better than other proposals received by APA,then Aleut shall be allowed to buy back the project and reimburse ail APA's costs for the Feasibility Study.Since APA's goal is to deliver power to the City of Unalaska at the lowest reasonable cost,the delivered cost of Aleut's proposal in comparison to APA's proposals shall be the threshold in determining Aleut's "equal or better"right to buy back and develop the project.This opportunity of Aleut's may also Mr.Brent Petrie December 6,1985 Page 3 be used in conjunction with the City of Unalaska to allow the City to be a principal in the development and operation of the project. 8.Term -Aleut expects that the Agreement will have an initial term of 30 years,commencing with commercial operation and APA shall have the right to two (2)10-year extensions.APA shali maintain the Agreement throughout its primary term and extensions thereof by maintaining an annualized production of at least two megawatts. 9.Commencement of Feasibility Study -Aleut expects,upon signing an agreement with APA,that a date certain will be established for commencement by APA of the Feasibility Study in lieu of any other agreements or obligations of APA. This letter,at the reyuest of Mr.David Denig-Chakroff, reiterates Aleut's expectations and concerns.As you are aware, many of these items have been discussed previously in depth and, we feel,many of these have been agreed to previously by the parties.Aleut views this Agreement as an initial project or "unit"to provide for the foreseeable electric needs (as determined by the Feasibility Study)for the City of Unalaska. We have never viewed this Agreement,nor do we feel it is necessary for APA to require,that APA receive unlimited resource rights to provide for unforeseen and speculative growth in the City's electric needs.Since unforeseen and speculative growth have no bearing on the acquisition by APA of a firm power Sales agreement or project financing,we maintain that such factors have no bearing on the rights to be granted by Aleut to APA in this Agreement.Certainly Aleut hopes to meet the future needs of the City and would welcome future negotiations for upgrades or unitization beyond this initial project to be developed by APA;however,Aleut desires to retain its flexibility to look at those options independent of this Agreement.We do not feel this is unreasonable and we believe that the provisions set forth above provide APA with the necessary assurances and flexibility to accomplish its goal of providing dependable electric power at reasonable cost for the foreseeable future to the City of Unalaska. We find your draft agreement of October 28,1985,ambiguous in regards to several of the crucial issues enumerated above. ey Mr.Brent Petrie December 6,1985 Page 4 These problems may be conceptual or semantic and we hope tney can be expeditiously resolved. We look forward to meeting with you and discussing these matters further. Very truly yours, THE ALEUT CORPORATION Mar C Vell Allan Cc.Aksell Director of Lands &Minerals ACA:ct From teavs rer oe APA Gyaedme WE,ped,¢,14 ALLEN AKSELL: 1874/496 MR.CHAIRMAN,Member of the Board,I am ALLEN AKSELL.I am the Director of Lands and Miner- als for the Aleut Corporation and I would like to address the Board on the feasibility study for the Unalaska Geothermal project.As you are aware,the Aleut Corporation has free title to the land and the resource of the project site.Aleut Corporation would like to ask the Board to reconsider,in part,it's decision of May 3,1985.That decision stipulated that a feasibility study be initiated only after agreements have been negotiated with land own- ers for the use of the land and the resource during the feasibility,the development and the operating phase of the project.I am here to assure the Board that we share the same con- cerns and the same purpose and that being to promote and advance the general prosperity and economic welfare with the region.The Aleut Corporation has a vested interest in producing electric power from this resource.If this long-term source of power can be developed at a reasonable cost,it will stimulate the local economy and encourage bottom fishing industry which we use shore-base processors resulting in economic growth to produce Sport businesses and -131 - more jobs out there.The Aleut Corporation in fact has a holding on subsidiary Panama Marine which is located out there and would benefit from this resource also.The greater economic activity will also heighten 'demand _for Yi Cr pordiono Sand and gravel resources.We recognize that the geothermal power will only be developed if it is the least costly alterna- tive.However,if that development of the re- source proves too costly the resource will lie dormant and that will be to no one's benefit. A feasibility study,therefore,if the only vi- able means to assess and project the cost of power generated from this resource.For the last six months the Aleut Corporation and the staff of APA have been asked to negotiate an agreement without the benefit of the feasibil- ity study.Both sides are being asked to used highly variable development costs and operating costs estimates and to inject a pia td nemeafiedrathfed 00caegotiatedfixedroyaltyto'insure Coeprojects variability...or viability.The Aleut Corpo- \-ration feels it cannot bear alone the burden ofmfcoabsorbingtheriskg.inherent in these cost es- timates.I would like to remind the Board that there is no direct precident in Alaska for the 1874/496 -132 - td economics for the developed geothermal re- source.Furthermore analogies which have been drawn from the lower 48 require far more study and refinement than a preliminary cost estimate on which we have been forced to base our nego- tiations.I would like to appeal to your per- sonal experiences and ask if you would be will- ing to lease your most valuable asset without knowing its true value.Although the in- tentions of the Power Authority and the Aleut Corporation are alike,and that being to pro- mote the economic welfare of this region.Each of us is forced into overly protective po- sitions in lieu of the more reliable informa- tion which would be generated by the feasibil- ity study.The Power Authority is forced to seek the lowest cost for access to and use of the resource which the Aleut Corporation in turn is being forced to seek the highest value for such resource.I remind you,these protec- tive measures that we are basing on very prema- \Tan .rt ture cost estimates.We believe that a fea- 1874/496 ww \ sibility study will promote an agreement which arrives at a reasonable cost for viable proj- ect.We further believe that neither party can responsibly negotiate without the vital -133 - KNAPP: MORRIS: 1874/496 information which needs to be generated by the feasibility study.Once again,rest assured that the Aleut Corporation will fulfill its re- sponsibilities to utilize the corporation's as- sets in the best of its shareholders and the best interests of the regions.For these rea- sons,Aleut Corporation will greatly appreciate your reconsideration of the past decision and your direction at this time to move forward with a feasibility study.We would be avail- able to participate in any meetings,a planning subcommittee or whatever way may be possible to surmount this impasse over a fixed r . -<_- Questions by'the Board?COMMISSIONER KNAPP. In the negotiations,have you been talking any kind of numbers at all on a royalties to staff? We have been trying to approach it from the standpoint of a royalty payment and percentage basis to ...for the amountsof geothermal flu- ids that would be used and we have been trying to base that against some measures that would then determine a price.It is basically look- wy ing at the net use of that resource to generate -134- KNAPP: MORRIS: NUNN: HARRISON: 1874/496 electricity to then sell to the communities of Dutch Harbor and Unalaska and consequently,we have been struggling over a period of time working with Aleut Corporation trying to get to a reasonable measure of that cost. Would that be binding?Lets say you came up with an agreement with the Aleut Corporation and then went on to a feasibility study.Would the initial agreement be binding prior to any kind of development? Acting on the action that the Board took on May 3rd in Juneau,we have been trying to drive to a binding agreement that would contractually set out the terms and conditions for the use for the geothermal fluids as well as the use of the land and access and rights-of-way for the entire project.Yes,it would be a binding agreement as we have been trying to negotiate with them. MR.HARRISON. If the....I am sorry,my mind is not clear on -135 - MORRIS: AKSELL: 1874/496 the details of this,but if we were to go ahead with a project out there,a geothermal project, who would own it?Would we make a grant in ef- fect to the utility like when we are electrify- ing Elfin Cove and some.....whatis the deal? O.k.We have two stages to go through.The first one is the economic feasibility on the project.The next one would be.the financial feasibility of the project.As far as part of what we have been proposing in the contract so far is the Aleut Corporation has requested the right to develop the project on their own.If after completion of the economic stage that the project is feasible and they wish to exercise that right.If they do not exercise that right,we would proceed into the financial fea- sibility aspect and have to determine then how the project itself could be financed. Can I comment on that?One of our requests in that regard is that we would like to have the option to seek development of the resource as a private entity along with other private part- ners if we could demonstrate that we could do it responsibly and efficiently to where power -136 -, ARNOLD: HEATH: 1874/496 would be produced at equal or better than APA's projections.Not that we have a carte blanche to take back the project and develop it.It was strictly on an equal or better basis be- cause we realize that there is a potential partnership here where the state brings certain things to a project like this that are very beneficial but they may also bring Davis Bacon wages which we would not bring and so there are various aspects of private versus public devel- opment. MR.CHAIRMAN,a question for MR.MORRIS.You are seeking this negotiated firm price for the value of the resource because you construe the Board's decision of May to require that or be- cause it is fundamental to economic feasibility study which you are doing. Well MR.ARNOLD,I think it is partially true that until you know the cost of the resource it is very difficult to develop feasibility.And the surrounding grounds and right-of-ways and all the rest of it.You couldn't just enter into just a part of the feasibility study. -137 - ARNOLD: HARRISON: I know we had this similar problem with North Slope Gas....what is it worth.(inaudible)a range of values and learn what the impact is on the respective feasibility of the installation. I didn't realize that this involved actual royalties and so on which implies some value of the resources.I thought that what we were do- ing or my recollection of what -we were doing was not getting into a situation where we were off and running spending money and then finding out that we were being held up even to get to cence Beginning of Si HARRISON: 1874/496 the project.That we were being told that,you know,sort of in an AHTNA situation where de V....'aeOe ae cc eeeee the access was going to cost us a lot of ames money.Could we...maybe it is a good idea to refer this to the Planning Committee and then we can all have a chance to talk about it some more. -138 - HUFMAN: MORRIS: HUFMAN: MORRIS: NUNN: 1874/496 Yes,I would agree with that.Who has the subsurface rights on that property? That is the Aleut Corporation. O.k.,they have the surface and subsurface? Yes. It occurs to me that what we set out to do,as MR.HARRISON points out,was to try to secure as does the federal agencies and other people that are preparing to do work,access and pro- tection of the investment that is there and it may be that the May 3rd agreement is incor- ad ed porated a bit too much but I would support the recommendation be referred to the Planning Com- mittee for some more (inaudible)....and see how it conforms to the initial intent.Perhaps we should treat these projects somewhat differ- ently then we do the others but I think the ba---aes, sic intent should be protected.The Planning Conmittee can come back to us with further de- tail.Any further questions of MR.AKSELL or MR.MORRIS?MR.HEATH,any comment?0.k., -139 - _-_slut aad AKSELL: 1874/496 well we will refer this then to the Planning Committee as an action item for them. Can I pose a question of the Board?I would like to know just clarification,is the staff under an obligation to...at this preliminary stage,bring what appears to be a clearly via- ble project because we sense that there was an obligation possibly or a feeling on the staff's - part that the project had to appear viable even at this early stage.We are willing to consid- ene er a range of royalties.We had a problem with a a hard and fast royalty,we don't know if we are selling it for too little and we don't know if we are charging the project too much.The staff's preliminary cost projections include a 30%contingency factor based on analogies drawn from the lower 48 from a contractor that had not successfully built a project so we serious- ly question the data and a range of royalties might be appropriate but it may not be a clear cut viable project until we get into feasibil- ity.I would just like to ask for clarifica- tion of what the staff is working under so we will understand it. -140- NUNN: NUNN: 1874/496 I think it may be the chicken and the egg type problem,you are not going to get feasibility level of information before the Power Authority gets access to the resource to do that work and...but perhaps the initial stage should be to negotiate access and for the purpose of ob- taining additional information and if that is clearly all that we need,perhaps the staff is taking it through to project completion and perhaps this royalty determination would be more...a power sales agreement for a project that is further along in feasibility and de- sign.I think we will let our Planning Commit- tee address that in more detail.1 appreciate your perspective and your people coming for (inaudible)we will work with you on this. Now,is there any other public comment?Seeing none,I will entertain the motion to adjourn. Moved again. Moved again,seconded.Without objection,we will stand adjourned.Call adjournment. -141-