Losing power: Juneau's utility faces consequences of past actions

Posted: Sunday, May 18, 2008

Bad luck, bad timing and its own bad bets have left Juneau's venerable Alaska Electric Light & Power Co. shaken like never before in its history.

Michael Penn / Juneau Empire
Michael Penn / Juneau Empire

The utility, founded by members of current majority owner Bill Corbus' family in 1894 is facing enormous debt, angry customers and questions about its ability to serve Juneau, following the April avalanches that cut Juneau off from its primary hydroelectric source.

"We've never experienced a disaster like this before," Corbus said.

People who have watched the company locally have even raised questions about its ability to weather the storm it's facing.

"From a business perspective, AEL&P is a basket case and I seriously doubt they will survive as a going concern," said Brad Fluetsch, a Douglas financial planner who has watched the company.

Corbus acknowledged AEL&P was facing serious challenges, but declined to provide specifics.

"Financially, it's putting a strain on us, that's all I can say," he said.

In a letter to shareholders telling them AEL&P's corporate parent, Alaska Energy and Resources Co., was suspending its dividend this year, Corbus described the situation facing the utility as "desperate."

On the financial edge

AEL&P was operating close to the edge financially even before a series of avalanches took down a series of transmission lines feeding power to Juneau.

With the loss of the Snettisham hydroelectric project's 78,299 kilowatts of power, the company - and the city - were left to rely on the few thousand kilowatts it could squeeze out of three old, small power dams and several big diesel generators. And suddenly, diesel had become frighteningly expensive.

Not too many years ago, the utility was paying less than a dollar a gallon for diesel. Now, it's paying $3.90 and oil prices are rising.

While Snettisham went instantly from being an asset to a liability, a new power project expected to provide Juneau with power to spare has been plagued with problems.

And questions have been raised about how the company is managing its monopoly business, and even whether the government has done an adequate job of oversight of AEL&P.

And one more bad bet: Anticipating a shortage of hydro power after a low water year, AEL&P began burning diesel last December, trying to conserve what water there was, according to rate increase requests filed with the Regulatory Commission of Alaska, the state's utility regulator.

The avalanches mean that expensively saved water is now out of reach.

Who's responsible

Snettisham was built in the early 1970s by the federal Alaska Power Authority, which chose to place the transmission towers in the avalanche path. It sold Snettisham to the state's Alaska Industrial Development and Export Authority in 1998.

AEL&P then signed a "binding take-or-pay" contract with AIDEA that requires the utility to pay the state for the power Snettisham produces - whether it can get the power or not. Now, AEL&P is on the hook for $8.9 million this year, even when it can't get the power, according to the company's annual reports filed with state regulators.

More recently, AEL&P began work on a new hydroelectric plant of its own, the Lake Dorothy hydroelectric project, also southeast of Juneau.

That effort required borrowing an additional $46.6 million through bonds.

AEL&P's high amount of debt and weak financial state meant that its credit rating of BBB- by Standard and Poor's was the lowest possible grade still considered "investment" grade.

Any lower, and the bonds would be considered "speculative," or, as they're more commonly known, "junk" bonds.

The lower a company's rating, the higher interest rate it has to pay to borrow money to compensate the lenders for the risk they might not get their money back. Issuing junk bonds costs companies the most.

To counter its low credit rating, AEL&P was forced to buy bond insurance. It went to Ambac, the nation's largest bond insurer, and at a cost of $720,000 bought insurance guaranteeing the bonds would be paid.

That, in essence, converts the bonds into the equivalent of an AAA rating, Corbus said.

"If we had a Triple A rating we wouldn't have gone for bond insurance," he said.

AEL&P's parent company, Alaska Energy Resources, had to put substantial resources of its own into Lake Dorothy to get the bonds sold, leaving it with less ability to help out now, Corbus said.

"We had to do it in order to get the debt financing," he said.

Dealing with debt,and taking on more

Paying off the Lake Dorothy bonds, issued in 2006, now costs AEL&P an additional $2.7 million annually, before the project begins producing any power.

AEL&P's financial statements say it now takes more than 38 percent of the company's revenues just to pay back the debt.

Corbus acknowledged that AEL&P's debt levels were higher than normal for utilities, but said it has decades to pay it.

"Keep in mind the Snettisham obligation is a very long term obligation, it's not like all that money is due tomorrow," he said.

While waiting for the bond proceeds to be spent on Lake Dorothy construction, AEL&P made another bet. Instead of investing the entire $45 million proceeds in ultra-safe U.S. Treasury Bills, it decided to get a higher return by investing $37.5 million of that in mortgage-backed securities.

"We got a little bit higher interest rate than we would have got on treasuries," Corbus said.

Corbus said they only invested in top-rated securities, but the RCA filings show that some lost value when the U.S. housing industry took a nose dive in the last year and a half.

In its required financial reports to the Federal Energy Regulatory Commission, AEL&P said it anticipated the losses would be "insignificant." AEL&P said the losses were only on paper and it had the ability to hold the securities until maturity so there might not be any losses at all.

"If they are in mortgage-backed securities, they're probably under water," said Fluetsch, who also is a former bond manager with the Alaska Permanent Fund Corp.

Corbus wouldn't say precisely how that deal came out, but said he believed the utility was able to get back both its principal "and the time value of money."

The Lake Dorothy construction project has other, more serious problems, however. AEL&P has been indicted on charges of "wanton" destruction of a bald eagle's nest that was in the way of construction and is facing misdemeanor criminal charges in federal court.

That's embarrassing to the company, but likely to only cost AEL&P $125,000 in fines and restitution, according to a tentative plea agreement filed with the federal court.

The construction itself has been difficult as well, and has led to delays and an increasingly bitter legal battle between the company and its road and site contractor, Glacier State Contractors of Juneau.

Glacier State, a longtime Juneau construction contractor owned by James Mason, was once a favorite of AEL&P. They were originally hired to prepare the site for the Lake Dorothy project, even though they weren't the low bidder, the company said.

After a series of problems and delays, Glacier State was fired last summer and replaced with Southeast Road Builders of Haines.

Glacier State's contract called for it to complete its work by December 2006, but AEL&P said it was only 30 percent complete when Glacier State was terminated in January 2007.

AEL&P is now suing Glacier State, its performance bond holder, and trying to sue Mason personally. Glacier State blames the problems on inadequate and changing plans for the project.

As evidence, it points to problems Southeast Road Builders has had on the same job and says the job was switched to a cost-plus basis.

Corbus said the Lake Dorothy problems are not to blame for AEL&P's current difficulty, however.

"It would be nice if we could get it on line, but compared to the other issues we're facing, it's not on the same order of magnitude," he said.

A cash flow crunchlike never before

More cash will be going out the door to repair the damaged Snettisham transmission, a job likely to cost $7 million. Like the plant itself, the transmission lines are owned by the state but are the legal responsibility of AEL&P.

According to the contract with AIDEA, AEL&P was responsible for funding a renewal and replacement fund and providing insurance for the project.

There was no insurance for the transmission towers, said Scott Willis, AEL&P vice president for generation.

Utilities typically don't insure transmission lines and towers, but the power plant and transformers are all insured, Willis said.

Willis said an earlier statement he's made that insurance was unavailable was not correct, but it was prohibitively expensive, not customarily purchased by utilities, and not required, he said.

"We do have all the other insurance AIDEA requires," he said.

That's true, said Jim Hemsath, AIDEA's deputy director for development.

An insurance review commissioned by AIDEA several years ago determined that transmission lines are "generally not insurable at any reasonable cost and are not insured now."

The state RCA would likely not have allowed the company to set aside significant amounts of money for self-insurance, Willis said.

"They're very particular about saying today's rate payers should only be expected to fund today's costs," Willis said.

AIDEA is now exploring a way to help out AEL&P with the repairs, Hemsath said.

A bond consultant has been hired to determine whether another loan is allowable under existing bond covenants, Hemsath said.

Corbus said he's hoping AIDEA will be able to finance the repairs.

"It's going to be a loan, so ultimately it's going to be paid back," Corbus said.

Borrowing to stay in business

While financially stretched with ongoing construction projects and low rainfall years, AEL&P began the year in fairly good shape financially. The RCA had granted a cost of power adjustment for the small amount of fuel it thought it would burn during the year.

Also, AEL&P began the year with a $9.5 million line of credit, none of which it had yet tapped, at half a percent below prime rate.

After the avalanches, company President Tim McLeod estimated that they'd have to spend $25 million on extra fuel.

AEL&P has been able to boost its line of credit to $14 million since the avalanches, Corbus said.

He declined to say what the interest rate would be.

"That's between us and our bank," he said.

AEL&P is now spending $200,000 a day buying high-priced diesel. It's consuming so much diesel that state officials have asked Alaska Marine Highway System vessels to fuel up at other ports so as to not overburden local fuel suppliers, state officials said.

While the RCA has granted a temporary rate increase to pay for the increased fuel usage, it will be a month or more before those payments start coming in.

"Undoubtedly, cash is going to be very tight," Corbus said.

Public statements by utility officials have indicated they don't have the financial strength to let customers delay paying those bills.

What AEL&P is facing

"They've got a three-fold challenge," said Bruce Botelho, Juneau's mayor and for nine years Alaska's attorney general.

"One is to pay (fuel) suppliers on delivery, second is to manage the cost of repairs, and then to continue Lake Dorothy," he said.

The Juneau Assembly earlier proposed loaning AEL&P $3 million to help reduce customer's bills, but then switched to provide assistance directly to social service agencies instead.

Botelho said that loan was in part to help AEL&P with its cash flow problems.

Despite the challenges, independent Juneau economist Gregg Erickson said AEL&P's franchise in Juneau is strong.

"The RCA will not let them go belly up," he said.

• Contact reporter Pat Forgeyat 523-2250 or e-mail patrick.forgey@juneauempire.com.



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