Minutes 01/09/1979 - Laserfiche WebLink

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~"'r & ,) TUESDAY JANUARY 9, 1979 Type of Analysis Discounted cash flow (DCF) as well as internal rate of return for analysis purposes were utilized. Discussion of Results Inflation High rates of inflation are favorable for the project. Internal rate of returns vary from 4-7% for 0-3% inflation to 11-14% return for 7-10% inflation. (EXHIBIT 19) DCF improves by $2,800,000 in the first 10 years as inflation is increased from 6% to 10%. The basic reason for this phenomenon is that once the dam is built and bonds financed, the cost of the project is basically fixed while APCo power costs continue to rise. Term of Financing The difference between 30-year bond terms and 50-year over the 50-year life of the project are negligible. there is a significant short-term cash flow advantage 50-year bonds. (EXHIBIT 20) Cost of Project Increasing the cost of the project to $44,000,000 from $40,000,000 does not significantly impare the long-term outcome of the project on a DCF basis or internal revenue basis. However the short-term results are significantly worse on a $44,000,000 cost basis. (EXHIBIT 20) Summary Pros - over the 50-year mlnlmum life, the project will be a profitable economic venture for the City (except possibly under very low inflation rates, 0-3%). (EXHIBIT 19) Cons - Electricity generated by the project in 1985 will increase 127% over the current purchased cost from APCo. The viability of the project is based on the assumption that APCo's rates will similarly increase from current levels by 1985 or shortly thereafter. This assumption may be completely valid now based on projected construction costs by APCo, continued inflation in fossil fuels and interest costs. However, any substantial reduction in inflation and financing costs during the next seven years would drastically alter this assumption. bonds However, favoring Under most assumptions the project shows significant cash shortfall in the first 5 to 10 years (EXHIBIT 20). This shortfall can be reduced with 50-year bonds and deferral of principal payments for the first five years. However, even with this technique, the shortfall could remain as large as $3,000,000+ under most assumptions, because of the relatively small principal repayments in the initial years. Recommendations The Committee is in agreement that the long-term profitability of the project is good. However, the committee also believes there is a high probability that short-term cash shortfall to the City during the early years of the project could be very significant, $3-5,000,000. The committee would recommend proceeding with the Phase II study only after Council thoroughly analyzed the financial impact upon the City, and options available to cope with a short-term cash deficit. (EXHIBIT 21)