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Chelan County PUD Alcoa Power Sales Agreement Credit Rating Premium Amendment December 15, 2014.

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Presentation on theme: "Chelan County PUD Alcoa Power Sales Agreement Credit Rating Premium Amendment December 15, 2014."— Presentation transcript:

1 Chelan County PUD Alcoa Power Sales Agreement Credit Rating Premium Amendment December 15, 2014

2 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 Background and Purpose 2

3 Performance Assurance 3 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

4 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 Credit Rating Premium Action Required 4

5 Historical Spread Differential 5

6 Credit rating premiums and revenues *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 Current Status *2012* Budget 2015 Percentage1.73%1.83%1.84%1.24%1.0% Dollar$ 217k$2.35M$3.22M$2.06M$1.57M

7 Fix the Credit Rating Premium differential at 1.45% per year for which provides: – certainty in revenues – reduces risk by eliminating the downside if actual differential is less – conversely, foregoes benefit if actual differential is greater The fixed rate period does not have a negative impact on forecasted revenues for For 2020, the Credit Rating Premium charge would revert to the annual computation provision in the Agreement Proposed Amendment Percentage1.45% Dollar$2.28M$2.14M$2.00M$1.87M$1.75M

8 Decision Evaluation Criteria 8 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

9 Decision Evaluation Criteria 9 4. What are the workforce/operations implications? Establishing the fixed rate will reduce the need for as in- depth 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

10 Recommendation/Resolution 10 Fix the Credit Rating Premium at 1.45% per year for the five year period 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

11 11 RESOLUTION AUTHORIZING AMENDMENT THREE TO THE LONG-TERM POWER SALES AGREEMENT WITH ALCOA DATED JULY 14, 2008 TO AMEND THE CREDIT RATING PREMIUM Request Board Approval


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