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HomeMy WebLinkAboutUnalaska Geothermal Financial Update 1992MER Lm re re ry . j - 4 .r 4 '-' -.'+ . el .F + 2 r ' Bal . & ty om t & : a a a &A Recycled Paper Product -UNALASKA GEOTHERMAL PROJECT 'FINANCIAL UPDATE OCTOBER 1992 RW BECK | AND ASSOCIATES,INC.. ov]wea RW.BECK AND ASSOCIATES,INC. 2522 Arctic Boulevard,Suite 210 m Anchorage,Alaska 99503-2516 @ USA Telephone (907)272-6225 w Fax (907)276-1751 WS-1559-AA1-AD December 22,1992 Mr.David Eberle Alaska Energy Authority Post Office Box 190869 Anchorage,Alaska 99519 Dear Dave: Enclosed is the final report of our financial analysis update of the Unalaska Geothermal Project.The analysis incorporates the construction costs developed by the EnergyAuthorityandupdatedfinancialparameters.Please note that several of the financing concepts investigated are based on certain Jevels of commitments by the users.These commitments have not been verified at this time and should be prior to any further analysis. I appreciate the help that both you and John Olson of AIDEA provided as we put this report together. Very truly yours, R.W.BECK AND ASSOCIATES,INC. Whe thle Michael D.Hubbard,P.E. Director,Alaska Operations Austin,TX @ Boston,MA @ Columbus,NE @ Denver,CO @ Indianapolis,EN @ Irvine,CA @ Minneapolis,MN Nashville,TN @ Orlando,FL a Phoenix,AZ @ Sacramento,CA @ San Jose,CA @ Seattle,WA I.INTRODUCTION PROJECT DESCRIPTION The Unalaska Geothermal Project (the "Project")is a 14-megawatt electric generating plant located on the Makushin Volcano,approximately 12 miles west of the City of Unalaska.Steam to drive the electric turbines is to be derived from geothermal fluid located in an underground reservoir located near the Project.The fluid will be drawn from the reservoir with wells,piped through a heat exchanger,and then reinjected into the reservoir through a reinjection well.The Project facilities and wells will be located at a site to allow the fluid to be drawn from a fracture zone located 1,950 feet below the surface and connected to the underground reservoir.This fracture zone is in a more accessible area than the reservoir which reduces construction problems. The potential users of the Project output include the City of Unalaska (the "City"),which is the local utility,and several fish processors located in Unalaska/Dutch Harbor.These processors currently meet their energy requirements with their own generators as well as emergency purchases from the City.All of the installed generation is diesel fired at this time,and some waste heat is utilized for space heating and fish processing purposes. Because the potential users are located approximately 12 miles from the Project site,a 13.5-mile transmission line is also part of the overall development.Due to terrain limitations,3.5 miles of the transmission line will be an underwater crossing.Additionally, construction of a dock facility and approximately 12.5 miles of road to the Project site are required as part of the Project.A site map is provided in Figure 1 on the following page. BACKGROUND Early Studies.During the early 1980's,the Project's technical and economic feasibilities were reviewed.In 1988,the Alaska Energy Authority ("AEA")had a report prepared which summarized the resource and technical analyses performed thus far and provided an updated economic analysis.It was found that the geothermal resource was adequate to provide sufficient geothermal fluid for well past the life of any project constructed. Furthermore,the project being investigated at the time showed net economic benefits over its expected 30-year life. DofolyFEULINIONDHBysejeuy,To8egFigure 1 PROJECT LOCATION MAP aaa agent adAw_-nates --napa Ne et eepeene- Sfeate -ARIFTWOOD BAY ||"ESA SHSM"UNALASKA ISLAND Wak @®Temperature Gradient _weOGeothermalExploratoryWell(8T-1) Approximate Site Location -SCALE 1:250 000 5 Qo Ld 10 15 20 MILES SES _--SSSSSSSSS=--_--_---- 5 °$10 5 20 KILOMETERS La ---ne|SSSI SSS Subsequent to this report,in April 1988,the financial feasibility was investigated by AEA. This investigation found that while the benefit/cost ratio of the project was greater than 1.0,the inclusion of the project into the City's system would cause rates to significantly increase during the early years of operation.This was based on bond financing the entire amount,as no state grants or other sources of equity could be identified as being available at the time.Therefore,the project was put on hold until some other source of financing was available or events occurred which were significantly different from those assumed in the analysis. QESI Development Proposal.In 1991,OESI Power Corporation proposed to AEA that a project be built using a flash/binary modular system based on the use of OEST's proprietary technology.OESI had acquired the development rights to the steam field from the Battle Mountain Gold,Ltd.,in exchange for royalty payments from future steam sales.The plant was proposed to be built in modules,depending on the peak and energy requirements of the users,and four-and five-module concepts providing 15 and 17.5 megawatts of capacity were reviewed.The financing package advanced by OESI took advantage of tax credits available to private developers as well as the tax-exempt financing available to AEA.In general terms,OESI's proposal called for:1.)OESI to construct the project at a fixed price;2.)AEA to issue tax-exempt bonds to fund the construction of the project and certain up-front payments to OESI;and 3.)the geothermal field to be developed and paid for by OESI who in turn would receive payments for fluid delivered to the project. AEA,through a letter agreement with OESI,began a new investigation of the project,and R.W.Beck and Associates,Inc.,and GeothermEx,Inc.,were retained in late 1991 to assist with this investigation.Part of the project analysis included the update of the electric loads in the area,and it soon became apparent that without the processor loads the financial feasibility of the project was in question.Accordingly,the processors that currently have their own installed generation were contacted at their offices in Seattle. Because bond financing required certain commitments to take power over the life of the bonds (expected to be a minimum of 15 years plus the construction period),there was a reluctance on the processors part to commit to the project. During the spring of 1992,OESI began to have financial difficulties on projects they were developing elsewhere,and their ability to develop the project was becoming questionable. Because of these difficulties and the reluctance of the processors to commit to long-term power sales agreements,the project analysis was put on hold. Current Joint Venture Proposal.Recently,the GEOlectric Corporation was formed by certain principals of OESI and acquired certain rights of steam field development from OESI.GEOlectric,on September 11,1992,made a joint venture proposal to the Alaska Industrial Development and Export Authority ("AIDEA")where AEA would develop the Unalaska Geothermal Project Page 3 generating portion of the Project,AIDEA would develop the steam field,and GEOlectric would provide the interface between the two as well as provide certain expertise in field and project development.Based on GEOlectric's proposal,the AIDEA Board of Directors felt that there was sufficient merit to the concept to warrant further analysis by staff.Because of AEA's and R.W.Beck's previous involvement in the Project,AEA was requested by AIDEA to assist in the preliminary financial assessment of the GEOlectric development concept. PURPOSE OF REPORT The Project development proposed by GEOlectric essentially transfers cost overrun risks in development back to the State of Alaska.Furthermore since OESI equity is no longer available,the anticipated plan of finance has changed significantly. The purpose of this report is to provide an updated order-of-magnitude estimate of the construction costs under this new plan of development and to provide estimates of the cost of power under various financing scenarios. Unalaska Geothermal Project Page 4 Il.COST ESTIMATES CONSTRUCTION COSTS AEA developed revised construction cost estimates for the Project to be used in determining the cost of power.The AEA estimates are based primarily on cost information previously developed by OESI combined with two additional factors: 1.The Project construction schedule has slipped by at least one year,and 2.The risk of cost overruns has been transferred to the State,and higher contingency factors were deemed prudent. Two budget estimates were developed for the Project.AEA's low estimate represents the anticipated direct construction cost plus the minimum level of contingencies and Project reserves believed necessary by AEA for construction of a State-sponsored project.The high estimate incorporates a more conservative level of contingencies and reserves which may be appropriate at this early stage of Project development. Summarized below in Table 1 is a comparison of the AEA budget estimates to the OESI estimate of December 20,1991.The AEA estimates are shown in greater detail in Appendix A to this report. Table 1 Unalaska Geothermal Project Construction Costs (Thousands) AEA AEA OESI Low High 20/91) Power Plant $55,836 $63,481 $53,195 Reservoir Development 13,800 15,500 9,504 Project Reserves 5,221 5,927 ___9) Total Development $74,857 $84,908 $62,699 (1)Not provided as a separate line-item. Unalaska Geothermal Project Page 5 OPERATING COSTS Operating costs were based on estimates provided in 1991 by OESI.However certain operating costs were not included as line-item expenses by OESI since they expected to recover such costs through a fluid fee.We have made estimates of these expenses by using OESI's documents provided in support of the fluid fees. At this time,the royalty agreement between Battle Mountain and OESI has not been made available to AEA or AIDEA.It is AEA's understanding that these royalties are a percentage of the Project's annual energy revenues (costs per kilowatt-hour delivered to the City substation)as shown in Table 2 below,but these have not been verified. Included with the operating costs is an additional amount to cover the City's expenses of transmitting power over their system to the processors.This estimate was provided to us by the City. Table 2 Unalaska Geothermal Project Annual Operating Costs (Thousands) Plant Operations and Maintenance $1,700 Wellfield Maintenance 350 Administrative and General 135 Plant Insurance 150 Wellfield Insurance 30 General Price Escalation 4.5%per year Royalties: Years 1-5 3.5%of busbar costs Years 6-10 4.5%of busbar costs Years 11 and thereafter 7.5%of busbar costs Additional City Costs (1994 dollars)1.5 cents/kWh During the life of the Project,certain periodic repairs and well rehabilitations must be made.These costs are assumed to be funded from special accounts established for these purposes.For purposes of our analysis,the source of funds for these accounts includes both bond proceeds and annual deposits from Project revenues.The annual deposits are set at $250,000 during the initial years of Project operation and increase over several years to a maximum of $650,000 per year.This amount is sufficient to fund the repairs and rehabilitations estimated by OESI in 1991.Details of the flow of funds are provided in Appendix B to this report. Unalaska Geothermal!Project Page 6 II.TYPES AND SOURCES OF FINANCING There are several possible sources and types of funds available to finance the construction of the Project,each with its own set of advantages and disadvantages.The following discussion identifies these sources,discusses their applicability,and sets forth the assumptions used for each source in determining the cost of power. BONDS Bonds are one of the major sources of financing available for the development of the Project and offer several advantages over others.Although certain conditions must be met,Project bonds could be tax-exempt if issued by either AEA or AIDEA.Therefore, the interest rate may be lower than the cost of capital of private equity participants. Additionally,bonds offer the opportunity to save available cash for other projects that may be difficult to bond finance. One of the primary disadvantages of bonds is that the debt service is relatively constant over the amortization period.In many cases,this causes delivered power costs of a particular project to be higher than the cost of alternatives during the initial years of operation.After a period of time,the alternative costs become more expensive due to inflationary effects on variable costs and other factors.If this cost differential in the early years is significant or the length of time until the alternative costs are higher is too long, then the ability to afford the project in the short-term is put in jeopardy.One method to help offset the early-year impacts is to ramp bond debt service.However,ramping debt service increases the overall cost of capital for two reasons.These include: e The average length of maturity lengthens.Since cost of capital generally increases the longer term it has,this increase in maturity would raise the average interest rate. e Ramping debt service signifies to the bondholders that the economics of a project may be more dependent than normal on load growth,inflationary effects on alternative costs,and/or other factors.Thus,a risk premium will be assigned which raises the interest rate. Unalaska Geothermal Project Page 7 Conversations with AEA's bond underwriter,John Nuveen &Company,have indicated that the following assumptions are warranted to be used in current financial markets. e Interest Rate:6.5 -7.0% e¢Amortization Period:15 -20 years e Bond Insurance Cost:1.25%of total debt service e Debt Service Reserve Fund:Maximum annual debt service EQUITY/LOANS Equity and loans are treated in the analysis the same since their characteristics in estimating the cost of power are similar.Equity typically includes an ownership share by the participant,and repayment can be subordinate to bonds and loans.Because of this subordination,the risk is higher to the participant;and the desired return on investment might be higher than with a loan. As part of our analysis,several repayment structures were considered with equity and loans.These include: Level payback -Since the effective interest rate would probably be higher than the interest rate incurred on tax-exempt debt,this type of payback does not offer any advantages over bonds.Therefore,it has not been used in any of the financing scenarios., Deferred payback -This type of financing,when combined with bonds,could offer significant advantages in keeping the cost of power at acceptable levels during the early years of operation.However,the overall acceptability will be dependent on the effective interest rate and the structure of repayment the equity participant or note holder is willing to have. No payback -The effects of a grant on the cost of power would be the same as an equivalent deferred payback loan during the early years of Project operation.The main benefit of a grant would not be realized until the debt service on the bonds had been retired,at which time the cost of power would drop dramatically. Consequently a grant,per se,was not investigated. Sources of equity and/or loans include State appropriations,AIDEA,the fish processors, the City of Unalaska,or other private third-party developers.AEA has no pool of capital to draw from and would require a specific State appropriation. Private developers typically seek relatively high rates of return,and the cost of capital would invariably be higher than interest rates found with tax-exempt bonds.This is Unalaska Geothermal Project Page 8 tempered somewhat by certain forms of tax credits which private developers may take advantage of,thereby lowering their cost of capital. COMBINATION Since certain advantages and disadvantages exist for both bonds and equity,the best financing plan may be a combination of the two.The best combination and repayment structure will depend on Project costs,usable energy,desired return on investment,and other related factors.The next section investigates these factors by analyzing the delivered cost of power under various financing structures. Unalaska Geothermal Project Page 9 IV.COST OF POWER MAJOR ASSUMPTIONS The cost of power delivered to the City and processors has been estimated under several different financing scenarios using the high and low development costs described earlier. The cost of power calculations are based on the following assumptions common to all financing scenarios. Development Period -June 1993 through June 1995 Bond interest capitalized through September.1995 Bond interest only payments September 1995 -June 1996 General inflation -4.5 percent per year Bond interest -6.5% Amortization Period -15/20 years Bond Insurance -1.25%total debt of total debt service Debt Service Reserve Fund -Maximum annual debt service of bonds Length of Power Sales -30 years Earlier conversations with the fish processors indicated that a delivered cost of 12 cents per kilowatt-hour (at 1992 price levels)might be acceptable to them.This price was used as a target level in estimating the general acceptability of the various financing scenarios. ANALYSIS Several different financing scenarios were developed and investigated.These are described in greater detail in the case descriptions that follow;but in general,they include the following categories. A.Bond financing the entire project B.Bond financing the power plant only and equity/loan on the remaining portion with a ramped payback over 30 years C.Equity/loan for part of the Project with deferred payback so that the delivered cost of power is equal to or less than 12 cents per kilowatt-hour (1992 dollars) D.Equity/loan for part of the Project with ramped payback such that the delivered cost of power is always equal to 12 cents per kilowatt-hour (1992 dollars) Unalaska Geothermal Project Page 10 E.Bond financing the entire Project with bonds and establishing a rate stabilization fund to hold delivered costs to 12 cents per kilowatt-hour (1992 dollars). Where a particular scenario showed promise,its sensitivity to various external factors were tested.These factors include: e Development cost e Bond amortization period e Usable energy e Target rate of return e Acceptable delivered cost of power A total of 15 different cases were run and are described below.Table 3,at the end of this section,provides a summary of the results of these cases,and the estimated cost of power for the first six years of operation are shown in Tables 4 and 5.Table 4 represents the costs on a 1992 dollar basis while Table 5 is on a nominal dollar basis. A.Bond Finance Entire Project Case 1 -All development costs of the Project are financed with tax-exempt bonds.Costs are based on AEA's low estimate of project development. Bonds are amortized for 20 years after June 1996,and a total energy usage of 75 million kilowatt-hours is assumed. Case 2 -This case is the same as Case 1 but uses AEA's higher development cost estimate.The resulting higher annual debt service on the bonds accentuates the problem seen in Case 1. B.Equity/Loan With Ramped Payback and Bonds Case 3 -Two sources of financing are utilized in Cases 3 -5.Bonds are used to fund the power facilities of the Project while the steam field is developed with equity.It is assumed that the equity participant or note holder gains its return by charging some amount per kilowatt hour produced from the Project.In Case 3,the low estimate of Project development costs are used and the target rate of return is 10 percent. Case 4 -This case is the same as Case 3 but uses AEA's higher development costs.The target rate of return is held the same at 10 percent. Unalaska Geothermal Project Page 11 Case 5 -Case 5 is the same as the previous case using the high development cost estimate but investigates the effect of a lower target rate of return. Here,the return is held to 7 percent. C.Equity/Loan With Deferred Payback and Bonds Case 6 -Cases 6 -11 represent runs performed where the delivered cost of power is limited to no more than 12 cents per kilowatt-hour in 1992 dollars.The cost of power is allowed to fluctuate below that amount but never go above it. In these cases,the 12-cent figure limits the amount of bonds that can be issued.The remaining development costs are assumed to be funded from some other source of equity.No repayment on the equity/loan is made until the bonds are paid off,at which time annual debt service is continued through year 30 and paid to the equity participant or note holder.This concept is similar to that found with Bradley Lake. Case 6 is based on AEA's low development cost estimate and a 20-year bond amortization period. Case 7 -This case is the same as Case 6 but has AEA's higher development cost. Case 8 -This is the same as Case 6 with AEA's low development cost estimate but has a 15-year bond amortization period.The bond size is decreased significantly because of the higher debt service associated with the shorter amortization period. Case 9 -Case 9 is the same as the previous case with the exception of using AEA's higher development cost. Case 10 -One of the major risks of the Project is the amount of energy that can be used from the Project.Although it may be capable of producing more,the amount that can fit into the users'loads will be limited by daily load patterns.This case investigates the effect of 65 million kilowatt-hours of usable energy instead of 75 million. Case 11 -This is the same as Case 10 but uses 85 million kilowatt-hours of usable energy. Unalaska Geothermal Project Page 12 D.Equity/Loan With Bonds -Constant Delivered Cost of Power (1992$) Case 12 -Whereas in Cases 6 -11 the per unit cost of power was allowed to fluctuate below 12 cents per kilowatt-hour (1992 dollars),Case 12 holds the real cost at that amount throughout the Project life.As the costs begin to decline in real terms,the difference between the 12-cent level and the actual cost of power is assumed to be paid to the equity participant and/or note holder as their return on investment. It should be noted that no large rehabilitation costs have been included that might be expected approximately mid way through the Project's life.The inclusion of such costs could decrease the expected rate of return by some amount for Cases 12-15. Case 13 -This is the same as Case 12 but holds the cost of power to 11 centsperkilowatt-hour (1992 dollars). E.Rate Stabilization Fund Case 14 -For this case,the entire development costs are funded from bonds and a separate rate stabilization fund is established.At the time of bond issue,an amount of money is set aside for a rate stabilization fund to be 'used to hold Project costs at 12 cents per kilowatt-hour (1992 dollars). The source of this rate stabilization fund is something other than bonds (i.e.,equity/loan or grant).Similar to the previous cases,once the Project costs are less than 12 cents,then the source of the rate stabilization funds is paid back from the difference between the actual cost and 12 cents.In Case 14,the amortization period of the bonds is increased back to 20 years. Case 15 -This is the same as the previous case using a rate stabilization fund, but the amortization period is reduced to 15 years. Several of the most promising cases are provided in graphs on Figures 2 and 3.Figure 2 represents the delivered cost of power on a real basis (1992 dollars),and Figure 3 provides the same data on a nominal basis. Unalaska Geothermal Project Page 13 polorg[eULIaYJONDHeyseyeuy,pla8egTable 3 Unalaska Geothermal Project Summary of Results Dev Bond Bond Amott Equity/Loan Usable Power Case Cost Finance Interest -Period Amount =Retum Energy Cost (SMil).(%)(Ys)(SMil)(%)(GWh)(c/kWh) !Low All 6.5%20 ----75 Delivered costs higher than thought to be acceptable. 2 High All 6.5%20 -:--75 2 Same as Case |but delivered costs even higher. 3 Low PP 6.5%20 14.8 10.0%715 3 Retum on foan/equity adds 1.5 cent/kWh +inflation.Slightly better than Case 1 but still higher than acceptable. 4 High PP 6.5%20 16.7 10.0%75 >Retum on foan/equity adds 1.68 cents/kWh +inflation.Stightly higher than Case 2 but still higher than acceptable. 5 High PP 6.5%20 16.7 7.0%75 Lower effective interest rate fowers retum on loan/equity to 1.16 centskWh.Still higher than that acceptable. 6 Low Partial 6.5%20 16.5 4.9%75 Approximately $6.5 mitlion of loan/equity required with expected return on investment equal to 4.9%. 7 High Panial 6.5%20 25.6 3.2%75 g Higher construction costs increases loan/equity required to $25.6 million and reduces expected retum to 3.2%. 8 Low Pantial 6.5%IS 24.6 5.7%15 i Shorter bond amortization period than in Case 6 increases loan/equity to $24.6 million.Retum increases to 5.7%due to &shorter bond amortization period and increased years of loan/equity repayment. 9 High Partial -6.5%15 34.2 4.2%715 8 Loan/equity increased to $34.2 million from that in Case 7.Expected retum increases to 4.2%. to High Partial 6.5%15 43.2 2.3%65 a Lower usable energy increases loan/equity to $43.2 million from that in Case 9,and expected retum decreases to 2.3%. tl High Partial 6.5%15 25.3 6.3%85 Higher usable energy decreases loan/equity to $25.3 million and increases expected return to 6.3%. 12 High Partial 6.5%15 34.2 9.2%75 12 Same equity/loan as in Case 9 but fixed 12-cent/kWh rate increases retum to 9.2% 13 High Partial 6.5%15 41.4 1.5%75 il Reducing target delivered cost to 11 cents/kWh increses loan/equity to $41.4 million and reduces expected retum to 7.5%. I4a High Alt 6.5%20 15.7 9.3%715 12 Equity Aoan =present value of rate stabilization payments.Repayments occur when costs<12 cents/kWh (19923). l4b Low All 6.5%20 74 13.5%75 12 Lower construction costs requires fess rate stabilization and increases expected retum. 1S High Ali 6.5%15 31.8 7.9%75 12 Decreased bond amortization period increases rate stabilization required and decreases expected retum. Notes: Bond Finance All -All of project costs are financed through revenue bonds. PP -Power plant only is financed with revenue bonds. Partial -Project costs above that of grant are financed with revenue bonds. Equity/Loan Percent retum based on power sales through year 30. Power Cost Variable -Power cost variable. 12-cent maximum -Power cost held to 12 cents/kWh or less (19925). 12/11 cents -Power cost held at constant level in 1992 dollars. poforgFeULIAyOEDByseyeUs)GIo8egTable 4 Unalaska Geothermal Project Delivered Cost of Power -1992 Dollars Bond Delivered Rate -1992 Dollars Dev Bond Issue Bond Amort Equity/Loan Usable Power (cents/k Wh) Case Cost Finance Size Interest Period Amount Retum -Energy Cost 1995 1996 1997 1998 1999 2000 (SMil)(SMH)(%)(Yrs)(SMil)(%)(GWh)(chkWh) |Low Alt 100.3 6.5%20 ----15 8.1 13.2 14.2 13.8 33.4 13.2 2 High All 113.4 6.5%20 ----75 2 85 «14.3 15.5 15.0 14.5 14.3 3 Low PP 81.0 6.5%20 14.8 10.0%75 a 8.8 12.9 13.7 13.4 13.1 12.9 4 High PP 91.7 6.5%20 16.7 10.0%75 >9.3 14.0 14.9 14.5 14.2 14.0 5 High PP 91.7 6.5%20 16.7 7.0%15 8.8 13.5 14.4 14.1 13.7 13.5 6 Low Pantal 77.2 6.5%20 16.5 4.9%15 73 11.2 12.0 11.7 11.4 11.2 7 High Partial 77.2 6.5%20 25.6 3.2%75 5 73 11.2 12.0 11.7 11.4 11.2 8 Low Partial 65.7 6.5%15 24.6 5.7%15 &6.9 10.8 12.0 11.7 11.4 1.2 9 High Partial 63.7 6.5%15 34.2 4.2%715 d 6.9 10.8 12.0 11.7 11.4 11.2 10 High Partial 53.1 6.5%15 43.2 2.3%65 a 7.2 10.9 12.0 11.7 11.4 W133 It High Partial 78.2 6.5%15 25.3 6.3%85 6.6 10.7 12.0 11.7 1.3 Hl 12 High Partial 65.7 6.5%15 34.2 9.2%15 12 12.0 12.0 12.0 12.0 12.0 12.0 13 High Partial 56.3 6.5%15 41.4 715%°175 Hi 11.0 11.0 11.0 11.0 11.0 11.0 I4a High All 113.4 6.5%20 15.7 9.3%75 12 12.0 12.0 12.0 12.0 12.0 12.0 14b Low All 100.3 6.5%20 7.4 13.5%75 12 12.0 12.0 12.0 12.0 12.0 12.0 15 High All 114.3 6.5%15 31.8 1.9%15 12 12.0 12.0 12.0 12.0 12.0 12.0 Bond Finance All -All of project costs are financed through revenue bonds. PP -Power plant only is financed with revenue bonds. Partial -Project costs above that of grant are financed with revenue bonds. Case 1 Bond finance entire project.Low construction cost estimate. 2 Same as Case I but high construction cost estimate. 3 Equity financing of steam field.Assumes equity participant receives retum by charging stated additional cost per kWh. 4 Same as Case 3 but high construction cost estimate. 5 Same as Case 4 but lower rate of retum to equity participant. 6 Bonds are sized such that the cost of power in 1997 is 12.0 cents/kWh in (19925).Grant/equity financing provides the remaining construction funds.Retum to equity/grant is provided for by continuing debt service after bonds paid off. 7 Same as Case 6 but with high construction cost estimate. 8 Same as Case 6 but with 15-year amortization period of bonds. 9 Same as Case 8 but with high construction cost estimate. 10 Same as Case 9 but with lower usable energy.Bond issue is lower to have the rate equal to 12 cents/k Wh,therefore grant/equity higher. 11 Same as Case 9 but with higher usable energy. 12.Hold annuat cost of power at 12 cents'Wh in 1992 dollars.Difference between actual costs and 12 cents is retumed to equity/grant. 13°Same as Case 12 but held to 11 cents/kWh in 1992 dollars. 14 Bond finance entire project and set aside money in 1993 to fund rate stabilization fund used to hold rates at 12 cents/kWh.In later years when power costs less than 12 cents,difference is retumed to grant/equity. 15 Same as Case 14 but with 15-year bond amortization period. Note:NO costs are included for major rehabilitation to project. yooforgJRULIaYJOEDByseyeUlQIo8egCase CoenNDU&WN=1S Table 5 Unalaska Geothermal Project Delivered Cost of Power -Nominal Dollars Bond Delivered Rate -Nominal Dollars Dev Bond Issue Bond Amort Equity/Loan Usable Power (cents/k Wh) Cost Finance Size Interest Period Amount Retum Energy Cost 1995 1996 1997 1998 1999 2000 (SMil)(SMI)(%)(Yrs)(SMil)(%)(GWh)(c&Wh) Low All 100.3 6.5%20 ----718 9.2 15.7 17.7 18.0 18.2 18.7 High All 113.4 6.5%20 ----15 2 9.7 17.0 19.3 19.5 19.8 20.3 Low PP 81.0 6.5%20 14.8 10.0%718 £10.0 15.4 17.1 17.4 17.8 18.3 High PP 91.7 6.5%20 16.7 10.0%rp)>10.6 16.6 18.6 18.9 19.3 19.9 High pe 91.7 6.5%20 16.7 7.0%75 10.1 16.1 18.0 18.3 18.6 19.2 Low Panial 77.2 6.5%20 16.5 4.9%75 8.3 13.4 15.0 15.2 15.5 15.9 High Partial 77.2 6.5%20 25.6 3.2%75 g 8.3 13.4 15.0 15.2 15.5 15.9 Low Pantial 65.7 6.5%15 24.6 5.7%78 £7.8 12.8 15.0 15.2 15.5 18.9 High Partial 65.7 6.5%15 -34.2 4.2%75 z 1.8 12.8 15.0 15.2 15.5 15.9 High Partial 53.1 6.5%15 43.2 2.3%65 a 8.2 12.9 14.9 15.2 15.5 16.0 High Partial 78.2 6.5%15 25.3 6.3%85 7.5 12.8 15.0 15.2 15.4 15.9 High Partial 65.7 6.5%15 34.2 9.2%15 12 13.7 14.3 15.0 15.6 16.3 71 High Paniat 56.3 6.5%15 4h.4 7.5%75 I 12.6 13.1 13.7 14,3 15.0 15.6 High All 113.4 6.5%20 15.7 9.3%75 12 13.7 14.3 15.0 15.6 16.3 {7 Low All 100.3 6.5%20 74 13.5%75 12 13.7 14.3 15.0 15.6 16.3 17.1 High Alt 114.3 6.5%15 31.8 7.9%75 12 13.7 14.3 15.0 15.6 16.3 Wl Bond Finance Alt-All of project costs are financed through revenue bonds. PP -Power plant only is financed with revenue bonds. Partial -Project costs above that of grant are financed with revenue bonds. Bond finance entire project.Low construction cost estimate. Same as Case }but high construction cost estimate. Equity financing of steam field.Assumes equity participant receives retum by charging stated additional cost per kWh. Same as Case 3 but high construction cost estimate.° Same as Case 4 but Jower rate of retum to equity participant. Bonds are sized such that the cost of power in 1997 is 12.0 cents/kWh in (19925).Grant/cquity financing provides the remaining construction funds.Retum to equity/grant is provided for by continuing debt service after bonds paid off. Same as Case 6 but with high construction cost estimate. Same as Case 6 but with [5-year amortization period of bonds. Same as Case 8 but with high construction cost estimate.. Same as Case 9 but with lower usable energy.Bond issue is lower to have the rate equal to 12 cents/kWh,therefore grant/equity higher. Same as Case 9 but with higher usable energy. Hold annual cost of power at 12 cents/kWh in 1992 dollars,Difference between actual costs and 12 cents is retumed to equity/grant. Same as Case 12 but he!d to 11 cents/kWh in 1992 dollars. Bond finance entire project and sct aside money in 1993 to fund rate stabilization fund used to hold rates at 12 cents/kWh.In later years when power costs less than 12 cents,difference is returned to grant/equity. Same as Case 14 but with 15-year bond amortization period. Note:NO costs are included for major rehabilitation '>project. Woalolg[WIOYOSHeysefeuyLIa8egDeliveredCost(cents/kWh)16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 Figure 2 Delivered Cost of Power -1992 Dollars wm.._tee,meee \ os 7 UN ™++Case 2:All Bonds (High Cost){ e m "i eee-e "fe ete sL "SR ayJ.wea 3s.&a 12 cents/k Wh (1992S):Cases 12,14,15 Ter Se TTS .mee OESI >1991 Se,°"ee "Mar ae,I "ee me,1996---on2020-+ woefoig[eWINYI0IDeysejeul)DeliveredCost(cents/kWh)8]a8egFigure3 50.0 +::Delivered Cost of Power -Nominal Dollars 45.0 + 40.0 +12 cents/kWh(1992S):Cases 12,14,15 35.0 - 30.0 - Cases 6-9:Delayed Payback°° 25.0 4 oo” ae ''V\case 5:Ramped P:6 Bove20.0 -;e 5:ped ayback ani jonds -"iaeo 15.0 "pe Case 2:All Bonds (High Cost)aa f 10.0 {-p}-+++++++++++++$++++--+++++++++H \o oS _fo]&g R § V.OBSERVATIONS/RECOMMENDATIONS Based on the investigation of the various financing scenarios and their sensitivity to various external factors,the following observations and recommendations can be made. The list should not be considered as all-inclusive,and others may be prudent depending on risk tolerance,availability of funds,and other factors. 1.In order for the delivered costs of the Project to be at acceptable levels in the early years,some sort of equity/loan financing in addition to bonds will be required.Bond financing the entire Project causes delivered costs to be significantly higher than 12 cents per kilowatt-hour during the first several years of Project operation. 2.The cost of power and equity requirements are directly related to the usable Project energy.The City's current energy requirements are approximately 20 million kilowatt-hours,only a fraction of the 75 million kilowatt-hours used in determining the cost of power.Therefore,the fish processors are an integral part of this Project,and steps should be taken immediately to determine their interest in and commitment to the Project. 3.The bond amortization period has been assumed to be either 15 or 20 years after the first year of Project operation,and the total length of power sales has been assumed to be 30 years.The bond interest rate,the risk to investors,and the actual return on investment will be dependent on the duration of the power sales agreement,the strength of its terms and conditions,and other related factors. 4.The Project construction cost is a key variable in determining the financing requirements and cost of power.Construction costs should be verified by an independent source. 5.The preferred financing scenario cannot be determined until discussions are held with the City,fish processors,and equity/loan sources.Information that must be obtained includes,but is not limited to,the following: Unalaska Geothermal Project Page 19 City and Fish Processors e The highest acceptable cost of power e Whether or not the highest cost can be exceeded for some duration of time e Whether or not a constant price in real dollars is acceptable e The length of time they are willing to commit to purchase power e The amount of power that they will commit to purchase Equity/Loan Sources e Effective interest rates sought e Whether the repayment should be level,ramped,or deferred e The acceptable risk with regard to length of power sales The needs and desires of these two entities are directly interrelated in that what one party is willing to do or accept will affect the requirements of the other.The information presented in this report can be used as an introduction of discussions between all the parties involved.Once these discussions take place and boundaries of acceptance set,a more definitive finance plan can be established to determine if it is feasible for the Project to proceed.It is therefore recommended that these discussions be held as soon as possible. Unalaska Geothermal Project Page 20 APPENDIX A Construction Cost Estimates UNALASKA GEOTHERMAL PROJECT AEA Budget Estimate 10/7/92 FEATURE LOW HIGH NOTES* ($1,000)($1,000) |.PLANT (Direct costs) 1.Generation Facility a.Site preparation 1,775 1,775 b.Bldg's &structures 555 750 high:addt'l bld'g allowance c.Mechanical 3,157 3,157 d.Electrical 1,534 1,534 e.Scada /controls 564 564 f.Modular plant 12,448 13,000 high:addt'l wind protection subtotal $20,033 $20,780 2.Fluid gathering (all work)$2,745 $3,444 low 9/23,high 12/20 3.Transmission /substations a.Buried T/L 3611 4197 low:mixed quotes,high:pierrli b.Submarine cable 2363 2950 low:mixed quotes,high:pierrli c.Substations 732 732 subtotal $6,706 $7,879 4,Distribution a.City improvements 1500 1500 b.Dispatch center 0 250 high:add dispatch subtotal $1,500 $1,750 5.Roads &dock a.Road const.7460 7460 b.Dock const.415 415 c.ROW acquistion 0 250 high:add ROW cost d.Borrow matl's 90 228 low:9/23,high:228000 CY @$1 subtotal $7,965 $8,353 *except as noted,all costs based on OESI 9/23/92 estimate Page 1 UNALASKA GEOTHERMAL PROJECT 6.Construction support a.Camp &catering 1200 1500 low:9/23,high:ext.schedule b.Transportation 1243 1500 low:9/23,high:ext.schedule c.Temp.utilities,etc.1611 1750 low:9/23,high:ext.schedule subtotal $4,054 $4,750 7.Start-up &testing (all work)$705 $705 8.O &M supplies a.Equipment 622 622 from 12/20 est. b.Spares 940 940 from 9/23 est. subtotal $1,562 $1,562 Total (direct const.)$45,270 $49,223 9.Design a.Generation plant 880 909 low/high:7.5%+2.5%modules b.Fluid gathering 137 258 low:5%,high:7.5% c.T/L &subs 350 350 low/high:9/23 est. d.Distribution 113 131 tow/high:7.5% e.Road &dock 400 626 low:5%,high:7.5% f.Permitting 120 200 low/high:addt'l allowance g.Misc.100 100 low/high:addt'l allowance subtotal $2,100 $2,574 10.Const.management (all work)$1,584 $2,079 low:5%(no module cost) high:7.5%+2.5%modules 11.Administration (all work)$988 $1,086 low/high:2%all items Total (admin,design,CM)$4,672 $5,739 TOTAL PLANT (Direct)$49,942 $54,962 Page 2 UNALASKA GEOTHERMAL PROJECT ll,FIELD DEVELOPMENT 1.Purchase rights 1500 1500 low/high:JV est. 2.Field design 618 1000 low:7.5%drilling,high:JV est. 3.Drilling &mat'is 8238 8238 low/high:9/23 est. 4.Testing &evaluation 1289 1289 low/high:9/23 est. 5.Admin,CM,insurance 400 842}low:12/06,high:CM 5%admin 2% TOTAL FIELD (Direct)$12,045 $12,869 BUDGET SUMMARY (with escal.&contingency) I.PLANT Direct cost 49942 54962 Escalation 1998 2748 low:4%,high:5% Contract contingency 3896 5771|low:7.5%,high:10% TOTAL PLANT $55,836 $63,481 il.FIELD DEVELOPMENT Direct cost 12045 12869 Escalation 481 643 low:4%,high:5% Contract contingency 1253 2027 low:10%,high:15% TOTAL FIELD $13,779 $15,539 il.PROJECT RESERVES $5,221 _$5,927 low/high:7.5%all costs GRAND TOTAL $74,836 $84,947 Page 3 APPENDIX B Reserve Funds Renewal and Replacement Fund Well Rehabilitation Fund Beg of Yr Annual Interest End of Yr BegofYr Annual Well Interest Endof Yr Year Balance Deposit Renewal Earnings Balance Balance Deposit Rehab Earnings Balance 1 1,000 0 34 1,034 0 250 4 254 2 1,034 0 47 1,080 254 250 11 516 3 1,080 0 (315)42 807 516 250 17 783 4 807 0 36 843 783 250 23 1,056 5 $43 0 38 881 1,056 250 29 1,335 6 881 50 (365)33 599 1,335 250 36 1,621 7 599 50 28 677 1,621 300 =(1,707)5 219 8 677 50 32 758 219 300 12 531 9 758 75 (422)26 438 531 300 19 850 10 438 75 21 534 850 300 26 1,176 11 534 75 26 635 1,176 300 33 1,509 12 635 100 (489)20 265 1,509 300 .41 1,850 13 265 100 14 380 1,850 300 48 2,198 14 380 100 19 499 2,198 350 =(2,322)5 231 15 499 100 (566)12 45 231 350 13 594 16 45 200 7 251 594 350 21 965 17 251 200 16 467 965 350 30 1,345 18 467 200 (655)11 23 1,345 350 38 1,733 19 23 200 6 229 1,733 350 47 2,130 20 229 200 15 443 2,130 350 56 2,535 21 443 250 (758)9 (56)2,535 350 =(3,160)(6)(281) 22 (56)250 3 197 (281)350 2 70 23 197 250 14 462 70 350 9 430 24 462 250 (878)7 (160)430 350 18 797 25 (160)250 (2)89 797 350 26 1,173 26 89 250 10 348 1,173 350 34 1,557 27 348 300 (1,016)0 (368)1,557 350 43 1,950 28 (368)300 (10)(78)1,950 350 52 2,352 29 (78)300 3 225 2,352 350 61 2,763 30 225 300 (1,176)(10)(660)2,763 .350 70 3,183 APPENDIX C Cost of Power Unalaska Geothermal Project Projected Cost of Power 1992 Dollars Case 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 1995 8.1 8.5 8.8 9.3 8.8 7.3 13 6.9 6.9 7.2 6.6 12.0 11.0 12.0 12.0 1996 13.2 14.3 12.9 14.0 13.5 11.2 11.2 10.8 10.8 10.9 10.7 12.0 11.0 12.0 12.0 1997 14.2 15.5 13.7 14.9 14.4 12.0 12.0 12.0 12.0 12.0 12.0 12.0 11.0 12.0 12.0 1998 13.8 15.0 13.4 14.5 14.1 11.7 11.7 11.7 11.7 11.7 11.7 12.0 11.0 12.0 12.0 1999 13.4 14.5 13.1 14.2 13.7 11.4 11.4 11.4 11.4 11.4 11.3 12.0 11.0 12.0 12.0 2000 13.2 14.3 12.9 14.0 13.5 11.2 11.2 11.2 11.2 11.3 M1 12.0 11.0 12.0 12.0 2001 12.8 13.9 12.6 13.7 13.2 11.0 11.0 11.0 11.0 11.0 10.9 12.0 11.0 12.0 12.0 2002 12.5 13.5 12.3 13.3 12.9 10.7 10.7 10.7 10.7 10.8 10.6 12.0 11.0 12.0 12.0 2003 12.1 13.1 12.1 13.0 12.6 10.4 10.4 10.4 10.4 10.5 10.3 12.0 11.0 12.0 12.0 2004 11.8 12.7 11.8 12.7 12.3 10.2 10.2 10.2 10.2 10.3 10.1 12.0 11.0 12.0 12.0 2005 11.7 12.6 11.8 12.7 12.2 10.1 10.1 10.1 10.1 10.3 10.0 12.0 11.0 12.0 12.0 2006 11.4 12.3 11.6 12.4 11.9 9.9 9.9 9.9 9.9 10.1 9.8 12.0 11.0 12.0 12.0 2007 11.1 12.0 11.3 12.2 11.7 9.7 9.7 9.7 9.7 9.8 9.5 12.0 11.0 12.0 12.0 2008 10.9 11.7 ILI 11.9 11.4 9.5 9.5 9.5 9.5 9.7 9.3 12.0 11.0 12.0 12.0 2009 10.6 11.4 10.9 11.7 11.2 9.2 9.2 9.2 9.2 9.5 9.1 12.0 11.0 12.0 12.0 2010 10.4 11.1 10.7 11.5 11.0 9.1 9.1 9.1 9.1 9.3 8.9 12.0 11.0 12.0 12.0 2011 10.1 10.8 10.5 11.3 10.8 8.9 8.9 8.9 8.9 9.1 8.7 12.0 11.0 12.0 12.0 2012 10.2 10.9 10.5 11.3 10.8 8.9 8.9 8.9 8.9 9.1 8.7 12.0 11.0 12.0 12.0 2013 9.9 10.6 10.3 11.0 10.6 8.7 8.7 8.7 8.7 9.0 8.5 12.0 11.0 12.0 12.0 2014 9.7 10.3 10.1 10.8 10.3 8.5 8.5 8.5 8.5 8.8 8.3 12.0 11.0 12.0 12.0 2015 9.5 10.1 10.0 10.6 10.2 8.4 8.4 8.4 8.4 8.7 8.2 12.0 11.0 12.0 12.0 2016 7.0 7.3 8.0 8.4 19 8.2 8.2 8.2 8.2 8.5 8.0 12.0 11.0 12.0 12.0 2017 4.7 47 6.1 6.3 5.8 8.1 8.1 8.0 8.0 8.3 7.8 12.0 11.0 12.0 12.0 2018 4.7 4.7 6.1 6.3 5.8 19 79 19 19 8.2 17 12.0 11.0 12.0 12.0 2019 4.7 4.7 6.1 6.3 5.8 7.8 7.8 17 17 8.1 7.5 12.0 11.0 12.0 12.0 2020 4.7 4.7 6.1 6.3 5.8 71.6 76 7.6 7.6 7.9 14 12.0 11.0 12.0 12.0 2021 4.7 4.7 6.1 6.3 5.8 7.5 15 15 15 71.8 7.2 12.0 11.0 12.0 12.0 2022 4.7 4.7 6.1 6.3 5.8 14 1.4 1.4 7.4 7.7 7.1 12.0 11.0 12.0 12.0 2023 4.7 4.7 6.1 6.3 5.8 7.2 7.2 7.2 7.2 7.6 7.0 12.0 11.0 12.0 12.0 2024 4.7 4.7 6.1 6.3 5.8 1 71 vA 71 15 6.8 12.0 11.0 12.0 12.0 Unalaska Geothermal Project Projected Cost of Power Nominal Dollars Case 1 2 3 4 5 6 7 8 9 10 il 12 13 14 15 1995 9.2 9.7 10.0 10.6 10.1 8.3 8.3 78 18 8.2 1.5 13.7 12.6 13.7 13.7 1996 15.7 17.0 15.4 16.6 16.1 13.4 13.4 12.8 12.8 12.9 12.8 14.3 13.1 14.3 14.3 1997 17.7 19.3 17.1 18.6 18.0 15.0 15.0 15.0 15.0 14.9 15.0 15.0 13.7 15.0 15.0 1998 18.0 19.5 17.4 18.9 18.3 15.2 15.2 15.2 15.2 15.2 15.2 15.6 14.3 15.6 15.6 1999 18.2 19.8 17.8 19.3 18.6 15.5 15.5 15.5 15.5 15.5 15.4 16.3 15.0 16.3 16.3 2000 18.7 20.3 18.3 19.9 19.2 15.9 15.9 15.9 15.9 16.0 15.9 17.1 15.6 17.1 17.1 2001 19.1 20.7 18.8 20.3 19.6 16.3 16.3 16.3 16.3 16.4 16.2 17.8 16.3 17.8 17.8 2002 19.4 20.9 19.2 20.7 20.0 16.6 16.6 16.6 16.6 16.7 16.4 18.6 17.1 18.6 18.6 2003 19.7 21.3 19.6 21.2 20.4 16.9 16.9 16.9 16.9 17.1 16.7 19.5 17.9 19.5 19.5 2004 20.0 21.6 20.0 21.6 20.8 17.2 17.2 17.2 17.2 17.5 17.0 20.4 18.7 20.4 20.4 2005 20.8 22.4 20.9 22.5 21.7 17.9 17.9 17.9 17.9 18.2 17.7 21.3 19.5 21.3 21.3 2006 21.2 22.8 21.4 23.0 22.1 18.3 18.3 18.3 18.3 18.6 18.1 22.2 20.4 22.2 22.2 2007 21.6 23.2 21.9 23.5 22.6 18.7 18.7 18.7 18.7 19.0 18.4 23.2 21.3 23.2 23.2 2008 22.0 23.6 22.5 24.1 23.1 19.1 19.1 19.1 19.1 19.5 18.8 24.3 22.2 24.3 24.3 2009 22.4 24.0 23.0 24.7 23.6 19.5 19.5 19.5 19.5 20.0 19.2 25.4 23.2 25.4 25.4 2010 23.0 24.6 23.7 25.4 24.3 20.1 20.1 20.1 20.1 20.6 19.7 26.5 24.3 26.5 26.5 2011 23.4 25.0 24.3 26.0 24.9 20.5 20.5 20.5 20.5 21.1 20.1 27.7 25.4 27.7 27.7 2012 24.5 26.2 25.4 27.2 26.0 21.5 215 21.5 21.5 22.1 21.0 28.9 26.5 28.9 28.9 2013 25.0 26.7 26.0 27.8 26.6 22.0 22.0 22.0 22.0 22.6 21.4 30.2 27.7 30.2 30.2 2014 25.5 27.2 26.7 28.5 27.2 22.5 22.5 22.5 22.5 23.1 21.9 31.6 29.0 31.6 31.6 2015 26.1 27.8 27.4 29.3 28.0 23.1 23.1 23.1 23.1 23.8 22.5 33.0 30.3 33.0 33.0 2016 20.1 21.0 22.9 24.1 22.7 23.6 23.6 23.6 23.6 24.4 23.0 34.5 31.6 34.5 34.5 2017 14.2 14.2 18.4 18.9 17.5 24.2 24.2 24.2 24.2 25.1 23.5 36.1 33.1 36.1 36.1 2018 14.8 14.8 19.2 19.8 18.2 24.8 24.8 24.8 24.8 25.7 24.1 37.7 34.5 37.7 37.7 2019 15.4 15.4 20.1 20.6 19.0 25.4 25.4 25.4 25.4 26.4 24.6 39.4 36.1 39.4 39.4 2020 16.1 16.1 20.9 21.5 19.8 26.1 26.1 26.1 26.1 27.2 25.2 41.2 37.7 41.2 41.2 2021 16.9 16.9 21.9 22.5 20.8 26.9 .26.9 26.8 26.8 28.0 25.9 43.0 39.4 43.0 43.0 2022 17.6 17.6 22.9 23.5 21.7 27.6 27.6 27.6 27.6 28.8 26.6 44.9 41.2 44.9 44.9 2023 18.3 18.3 23.8 24.5 22.6 28.3 28.3 28.3 28.3 29.6 27.3 47.0 43.1 47.0 47.0 2024 19.1 19.1 24.9 25.6 23.6 29.1 29.1 29.1 29.1 30.5 28.0 49.1 45.0 49.1 49.1