Minutes 01/09/1979 - Laserfiche WebLink

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TUESDAY JANUARY 9, 1979 ECONOMIC ANALYSIS Scope The basic financial assumptions of purchased power costs, inflation rates, financing rates and terms, cost projections presented in the Beck Study, and the financial sensitivity of the results based on differing assumptions are analyzed. The project is analyzed on a "business basis"; that is, will the project be "profitable" to the City on a financial basis only? ....-- Variables The variables recognized as important in conducting a financial analysis were: Inflation - anticipated future inflation rates. Cost of Purchased Power - future "savings" attributable to reduced purchased power from APCo. Financing Terms and Rates - anticipated coupon rate and term (30-50 years). Cost of Project - construction cost of facilities. - The following ranges of possible variables were examined: Inflation: 3, 4, 5, 6, 7, 10% inflation. The Beck Study assumed 7%. It is important to evaluate the project at various levels of inflation. We have been accustomed during the past six years to consider higher levels of inflation in considering business projects. While this is reasonable when considering short-term projects, the evaluation of a 50-year hydroelectric project should consider alternate assumptions other than "continued" high inflation. The average inflation rate for the United States during the past 50 years has been under 4%. Cost of Project: The Beck Study estimated 1985 construction cost of $40,000,000. Since the cost of long-term construction is really no more than best estimates, also evaluated was a final construction cost of $44,000,000.---- Financing Rates and Terms: The Beck Study assumed coupon bonds of 6.25% on a 30, 40, and 50-year basis. Since the eventual rate will be determined by the economic environment when the bonds are issued, also evaluated were coupon rates of 4, 5, 6, and 7%. Cost of Purchased Power: One of the key assumptions to the hydroelectric project is the cost of future purchases from APCo. Table VIII-3 of the Beck Report (EXHIBIT 17) assumed a $/KW-year demand cost of $129.60 in 1985 (a 23% compounded rate increase per year). This was based on Beck's assumption of 1981 APCo construction costs of $803/KW. Subsequent interviews with APCo officials and Beck Associates determined that $675/KW was a more reaonsable figure. The committee therefore reduced the 1985 demand charge to $lOO/KW-year for its analysis. It should be mentioned that this reduction still assumes an 11% compounded increase in demand charge from APCo during the next seven years. .' 1"'. .A !&:"