HEA MANAGER’S REPORT
July 14, 2009

Wow, what a terrific summer we are having. I hope all of you have been taking advantage of this weather before the reduction in daylight hours becomes too easily noticeable. With the recent warm weather, it has been unseasonably dry so please keep this in mind as there has been a rash of wildland fires lately that have been assisted by the dry conditions. Although many of our employees have been busy with summer vacations, we have still managed to keep projects moving toward completion.

Some of the highlights over the past few weeks include the following:

1. Financial Update – HEA’s May, 2009 monthly margin of just over $309,800 reflects a rebound in our year to date margins to $1.4 million. The new total is within approximately 14% of forecasted margins of $1.7 million.
Members have been informed on their June and July bills about the new rates going into effect July 1, 2009. Press releases have also been issued explaining the 1.84% decrease in Base Rates, the WPCRA increase from 3.970 cents to 4.439 cents per kWh and the Regulatory Cost Charge (RCC) increase from .0362 cents to .0432 cents per kWh.

2. Alaska Energy Authority (AEA) Railbelt Integrated Resource Plan (RIRP) – AEA held their Technical Conference July 8th and 9th. As of this writing, I attended the first day of the program that included a status report on the Regional Integrated Resource Plan (RIRP) from AEA and Black & Veatch, reports from representatives of Chugach Electric Association and an update from Usibelli Coal. Several HEA Directors, along with myself, will have additional comments on this conference at the Board Meeting. Some interesting tidbits presented include:

By the end of 2010, enough data will have been collected to indicate whether a 100 MW geothermal project is a viable option on Mount Spur;

400 MWs of new generation will be required to replace the currently aging fleet over the next 15 years;

Tidal and wave technology is expected to be commercialized within the next 5-7 years;

The South Central Alaska Power Project (SCAPP or South Anchorage) is expected to be online sometime in 2013 at a cost of $450M;

Stored hydro electric energy used to meet demand during peak periods is extremely valuable;

Long term, we must reduce our expose to the price volatility of natural gas;

Natural gas will continue to be a significant component in meeting our future energy
needs.

3. Natural Gas Supply Company – As I mentioned last month, representatives from HEA met with the Alaska Natural Gas Development Authority (ANGDA) about the creation of the Natural Gas Supply Company (NGSC). We recently received a Confidentiality Agreement from NGSC which would permit disclosure of confidential information that has been acquired by ANGDA. By next week staff should have a recommendation on HEA’s membership in the not-for-profit natural gas supply and/or services cooperative.

4. Power Supply Update – Great news! HEA was able to secure the services of the Owner’s Engineer position with the individual mentioned last month. We are excited to bring Mr. Flynt on board and we expect his arrival around or before mid August. Filling this position at the present time is key if we are to stay on schedule. In addition to filling this position and working on several other related tasks, we have initiated the process of obtaining required environmental permits. As with any generation project, obtaining permits in a timely manner will be critical.

5. Renewables Update:

Wind Power Update – Significant activity continues on two projects in particular. The first being Fire Island whereby Wind Energy Alaska (WEA) continues their efforts to obtain the permits necessary to expand the project to roughly 50 MWs and work out the challenges of integrating the non-firm source of energy into the transmission grid. Last I heard the completion date has been pushed back to 2011.
The other wind project that is gaining momentum is the Kenai Winds (i.e. BQ Energy) Project located in Nikiski. Compared to Fire Island, this project is much smaller and therefore should be much easier to integrate with the existing electrical infrastructure. This project is expected to be on-line before Fire Island and is worth getting excited
about.

Small Scale Hydro (Kenai Hydro, LLC) Update – Field data collection activities continue at Grant Lake and Falls Creek. As mentioned last month, these activities will include foot surveys for fish aggregation, stream gauging and instantaneous water flow measurements. Data collected over the next 4 months will assist in re-establishing stream hydrology and assist with building the stream flow model required by the agencies to determine project impact. In addition, work continues on two FERC required documents (Notice of Intent and the Preliminary Application Document). The permit application is lengthy and I would anticipate that if after two years of analysis and successful receipt of all required permits, the economics of these projects will be the same as almost all other hydro projects. Grant funding, or some creative financing, will be necessary to make them economically viable. Updates on this hydro project can be found at www.kenaihydro.com.

6. BOD Workshop – Special thanks to all the directors who found time to attend the Board Workshop held two weeks ago. Mr. Aadland had nothing but complements describing the participating Directors and I was very pleased with the questions and discussion during the afternoon session that I attended. I hope everyone in attendance felt the workshop was a good use of their time.

7. Chugach Electric Association (CEA) Rate Case – It appears CEA is projecting the following
increase to their members:
CEA Retail customers 5.4%
HEA 7.8%
MEA 2.0%
Seward 9.7%
MEA’s projected increase is lower because:

Their increase was larger in the previous rate case and as a result, CEA sees us as just “catching-up”; and

HEA’s load has not materially increased, while MEA’s has. As a result, MEA has more kWh & W to spread the fixed costs over. There are decided advantages to a growing electrical system. CEA is very interested in settling the issues between us. They realize how beneficial it was in the previous rate case. There will be $450,000 included in the 2010 budget for the CEA rate case.

8. Facilities Plan – At the July Operations Committee meeting, I anticipate having a Facilities Evaluation/Plan completed for Committee review. Our goal is to continue with ongoing required maintenance between now and 2014 with the intent of not making any significant investment in building facilities until after our new generation resources have been constructed.

9. HEA Rate Case Update – The Depreciation Study, the first component of the Rate Case, is finalized and upon acceptance by the Board of Directors will be filed with the RCA. As a result of the Study, we anticipate a reduction in depreciation expense in future years. Data collection continues for the Equity Management Plan which is the second component of the Rate Case. Using projected power costs, load forecasts and our long range capital plan, RW Beck will forecast our equity levels over the next 10 years. This is an essential tool needed to determine our revenue requirements portion of the HEA Rate Case. RW Beck will present an update of the Equity Management Plan at the August Board meeting. The Cost of Service and Rate Design elements follow the Equity Management Plan for presentation later this fall.


As usual, please feel free to give me a call anytime with questions. I look forward to seeing you next Tuesday evening in Homer.

Thanks,
Brad