Download Alcoa Amendment - Chelan County Public Utility District

Chelan County PUD
Alcoa Power Sales Agreement
Credit Rating Premium Amendment
December 15, 2014
Background and Purpose
• The District and Alcoa entered into a Power Sales Agreement
dated July 14, 2008
• The Agreement is a “cost-plus” slice of the combined output of
Rocky Reach and Rock Island Hydro Systems
• District staff and Alcoa have been evaluating opportunities to
provide cost certainty for Alcoa and the District and reduce risk
for District customers
• Two areas being currently proposed
–
Refinement of Performance Assurance Provisions
•
–
No Board Action Required - Informational Only
Amendment to the Credit Rating Premium
•
Board Action Required – Resolution for Amendment
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Performance Assurance
Information only – no action on this item
• In May 2013, Moody’s downgraded Alcoa to Ba1 from Baa3, thus
triggering performance assurance requirements in the agreement
• Alcoa executed a Collateral Deposit Agreement (“CDA”) with the District
and provided performance assurance through a letter of credit (“LC”)
• In November 2014, Alcoa and the District agreed to amend the collateral
process from a monthly calculation to annual, requiring an amendment
to the CDA
• Change benefits both parties:
– Alcoa can eliminate the LC surplus amount required to accommodate potential
monthly fluctuations, effectively saving them the LC cost of the surplus
– Alcoa and the District realize process efficiencies and reduced administration
costs by performing the collateral requirement one (1) time per year rather than
twelve (12) times
• Amendment reverts back to original language if performance assurance is
returned to Alcoa per triggering events stated in the contract
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Credit Rating Premium
Action Required
• The Credit Rating Premium is a component of the
Alcoa Agreement
• The purpose is to compensate the District for the
value of its high credit rating and management of
the debt associated with Rocky Reach and Rock
Island
• Computed based upon the differential between
Alcoa’s credit rating and the District’s and then
applied to the associated hydro system’s debt
• It is reset in January of each year
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Historical Spread Differential
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Current Status
• Credit rating premiums and revenues
2011*
2012*
2013
2014
Budget 2015
Percentage
1.73%
1.83%
1.84%
1.24%
1.0%
Dollar
$ 217k
$2.35M
$3.22M
$2.06M
$1.57M
*Based on partial years, Rocky Reach contract effective 11/1/11, Rock Island effective 7/1/12.
• The 2015 budget was adopted assuming a conservative
rate of 1%
• The revenues contribute to meeting the District’s key
financial metrics
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Proposed Amendment
• Fix the Credit Rating Premium differential at 1.45% per year for
2015-2019 which provides:
– certainty in revenues
– reduces risk by eliminating the downside if actual differential is less
– conversely, foregoes benefit if actual differential is greater
2015
2016
2017
2018
2019
Percentage
1.45%
1.45%
1.45%
1.45%
1.45%
Dollar
$2.28M
$2.14M
$2.00M
$1.87M
$1.75M
• The fixed rate period does not have a negative impact on
forecasted revenues for 2015-2019
• For 2020, the Credit Rating Premium charge would revert to
the annual computation provision in the Agreement
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Decision Evaluation Criteria
1. What is the impact on our Customer-Owners?
+
+
+
–
=
Provides revenue certainty for five years
Reduces downside risk of revenue reduction
No negative impact to forecasted revenue
Foregoes upside potential of increased revenue
Overall neutral impact on customer-owners
2. What are the implications for the environment?
•
None
3. What are the legal implications?
• Requires contract amendment
• Provision to revisit the rate should either party’s rating
change
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Decision Evaluation Criteria
4. What are the workforce/operations implications?
•
•
Establishing the fixed rate will reduce the need for as indepth annual monitoring
Simplifies forecasting efforts
5. What are the other stakeholder implications?
•
•
Alcoa will see benefit of cost certainty
No impact to other Power Purchasers
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Recommendation/Resolution
• Fix the Credit Rating Premium at 1.45% per year for the five
year period 2015-2019
• Benefits include:
•
•
•
•
Cost certainty for Alcoa
Revenue certainty for the District
Neutral impact on our customer-owners
Revisit the rate should either party’s rating change
• In January 2020 and thereafter, the Credit Rating Premium
charge will revert to the original Agreement provision and be
computed on a variable, annual basis
• Alcoa staff is also seeking approval of this recommendation
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Request Board Approval
RESOLUTION AUTHORIZING AMENDMENT
THREE TO THE LONG-TERM POWER SALES
AGREEMENT WITH ALCOA DATED JULY 14, 2008
TO AMEND THE CREDIT RATING PREMIUM
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