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Home My WebLink About20040609Sutherland Direct.pdfConley E. Ward (ISB No. 1683) GIVENS PURSLEY LLP 601 W. Bannock Street O. Box 2720 Boise, ID 83701-2720 Telephone: (208) 388-1200 Fax: (208) 388-1300 cew(g1givenspursley.com HECEIVED H r.~ - ~, . LJ "'nor II Ht .;;t lUu9JUr-i - .'f;': 33 ,.. It: iiU rUbL1C U rlLJTIES cor~lr'11SSI0N Attorneys for U.S. Geothermal, Inc. S:\CLIENTS\6667\2\Sutherland Testimony.DOC BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION S. GEOTHERMAL, INC., an Idaho corporation Case No. IPC-04- Complainant vs. IDAHO POWER COMPANY, an Idaho corporation Respondent. BOB LEWANDOWSKI ~d MARK SCHROEDER Case No. IPC- E-04-1 0 Complainants vs. IDAHO POWER COMPANY Idaho corporation Respondent. DIRECT TESTIMONY OF WILLIAM R. SUTHERLAND ON BEHALF OF U.S. GEOTHERMAL, INC. June 9, 2004 ORIGINAL PLEASE STATE YOUR NAME AND ADDRESS FOR THE RECORD. My name is William R. Sutherland. My business address is 200 Bloor Street East Toronto, Ontario, Canada. BY WHOM ARE YOU EMPLOYED AND IN WHAT CAPACITY? I am the Vice President, Project Finance for Manulife Financial. PLEASE DESCRIBE MANULIFE FINANCIAL. Manulife is C~ada s third largest life insurance company. The Comp~y operates in 15 countries worldwide providing 7 million customers a diverse range of insurance products and wealth management services. For the year ended December 31 2003, Manulife earned C$1.55 billion on revenues ofC$16.7 billion and had C$156.7 billion in assets under management. Manulife is now the second largest life insurance company in North America following the recent merger with John Hancock. WHY IS MANULIFE FINANCIAL INTERESTED IN THIS PROCEEDING? The Manulife Capital Project Finance Group is mandated to arrange project financing and investment in independent power ~d infrastructure projects. In the independent power sector our group focuses on the renewable power sector, primarily wind generation but also hydro ~d geothermal generation. In 2003 , the Project Finance Group funded four energy transactions (two wind, one combined cycle, and one coal) totaling U$90 million. Prior to October 2002, the Project Finance Group was with Clarica Life Insurance Company for approximately five years ~d arranged and participated in 18 independent power transactions totaling US$800 million. DOES MANULIFE FINANCIAL HAVE A SPECIFIC INTEREST IN U. GEOTHERMAL'S PROJECT? DIRECT TESTIMONY OF WILLIAM R. SUTHERLAND - 2 IPUC Case Nos. IPC-O4-08 and IPC-O4- Yes. We are in discussions with U.S. Geothermal regarding our possible participation in the project's debt financing. HAVE YOU REVIEWED THE COMPLAINT IN THIS PROCEEDING? Manulife has reviewed the Complaint to the Idaho Public Utilities Commission against Idaho Power Company by U.S. Geothermal, Inc. The purpose of our review was to consider how the three proposed provisions by Idaho Power Company will influence the ability of U.S. Geothermal, Inc. to raise debt financing for the Raft River Facility. WILL THE ISSUES RAISED IN THE COMPLAINT HAVE AN EFFECT ON THE FINANCING OF THE PROJECT? Yes. In our view, all three of the Idaho. Power Comp~y proposals cited in the Complaint will have a negative effect on US Geothermal's ability to secure debt financing for its Raft River Facility. WHY IS THAT? When a lender considers financing a project such as the Raft River Facility, the primary consideration is the security and dependability of the Facility s projected revenue stream that will be used to service the debt financing costs. Any thing that negatively impacts the revenue stream, or that increases the risk that the revenue stream may not materialize will, at the very least, increase interest rates and financing costs. If the risk/reward tradeoff becomes too unfavorable, US Geothermal may not be able to attract financing at all. TURNING TO THE SPECIFIC COUNTS CONTAINED IN THE COMPLAINT WOULD YOU PLEASE EXPLAIN THE IMP ACT OF IDAHO POWER'S PROPOSAL DIRECT TESTIMONY OF WILLIAM R. SUTHERLAND - 3 IPUC Case Nos. IPC-O4-08 and IPC-O4- TO LIMIT PURCHASES FROM THE FACILITY TO 10 PEAK MEGA WATTS RATHER THAN 10 AVERAGE MEGA WATTS? As always, the first question is one of costs. Limiting the Facility s sales to 10 peak megawatts will materially limit the amount of debt financing that the Facility will be able to obtain. Weare not in a position to quantify the amount of such impairment and would require additional due diligence and consultation with our technical advisor to quantify this impact. IS THE ISSUE RAISED BY THE SECOND COUNT OF THE COMPLAINT ALSO A CONCERN? Very definitely. As we understand Count Two of the Complaint, Idaho Power would require US Geothermal to pay it 85% of the prevailing market price, less the contract rate, for any shortfall in monthly energy deliveries below 900/0 of the pre-scheduled monthly power deliveries. In our opinion, this provision is problematic because it has the potential to be extremely punitive. If this provision were included in a final Energy Sales Agreement, it would make it difficult for us to provide financing for the Facility because of the unpredictable nature of the potential negative economic impact of this provision. FINALL Y, WOULD YOU PLEASE EXPLAIN HOW THE "REGULTORY OUT" PROVISION WOULD AFFECT FINANCING? If the third disputed provision allowing Idaho Power Company to terminate the ESA in the event of changes to Idaho s regulatory laws were included in the final Agreement Manulife would be unable to provide debt financing for the Facility. We are not willing to take the risk that the Facility might lose its revenue stream before its debt is retired particularly when we have no reasonable means of evaluating the likelihood of that risk. DIRECT TESTIMONY OF WILLIAM R. SUTHERLAND - 4 IPUC Case Nos. IPC-O4-08 and IPC-O4- WOULD YOU PLEAZE SUMMARIZE YOUR TESTIMONY? Capping the Facility s sales at 10 peak megawatts , rather than 10 average megawatts, will artificially limit US Geothermal's access to debt financing. The "liquidated damages and "regulatory out" provisions are even more serious. Both would greatly increase the risk assumed by a debtor and, speaking only for Manulife, we would not be likely to assume either of these difficult-to-quantify risks. DOES THIS CONCLUDE YOUR TESTIMONY? Yes, it does. DIRECT TESTIMONY OF WILLIAM R. SUTHERLAND - 5 IPUC Case Nos. IPC-O4-08 and IPC-O4- CERTIFICATE OF SERVICE I HEREBY CERTIFY that on this day of June 2004, I caused to be served a true and correct copy of the foregoing document by the method indicated below and addressed to the following: Jean Jewell Idaho Public Utilities Secretary 472 W. Washington Street O. Box 83720 Boise, ID 83720-0074 S. Mail Hand Delivered Overnight Mail Facsimile Barton L. Kline Idaho Power Comp~y 1221 W. Idaho Street O. Box 70 Boise, ID 83707 S. Mail H~d Delivered Overnight Mail Facsimile Peter 1. Richardson Richardson & O'Leary 99 E. State Street, Ste. 200 O. Box 1849 Eagle, ID 83616 S. Mail Hand Delivered Overnight Mail Facsimile DIRECT TESTIMONY OF WILLIAM R. SUTHERLAND - 6 IPUC Case Nos. IPC-O4-08 and IPC-O4-