Electric City Power, Incorporated

JOURNAL OF BOARD PROCEEDINGS

December 3, 2007

Electric City Power, Incorporated (ECPI): Regular meeting of the Board of Directors
Great Falls Civic Center, Gibson Room

CALL TO ORDER: 5:30 PM

ROLL CALL: Directors present: Chairman Bob Pancich, George Golie, Bill Ryan, Randy Gray and Dawn Willey. Also present were the ECPI Executive Director, City Manager, Assistant City Manager and the City Clerk.

EXECUTIVE DIRECTOR REPORT

Executive Director Coleen Balzarini updated the Board on the following:

Highwood Generating Station. The Rural Utility Service is funded under the U.S. Department of Agriculture. The farm bill and Ag budget are still being considered. That has delayed RUS’s ability to provide financial backing of Highwood at this time. Because of this budget issue, Southern Montana is looking at other possible alternatives for the construction financing. CFC and CoBank are typical for this type of project when RUS is a guarantor on the back end. This is not to say that RUS will not be there, but the timing will be a little different than what was anticipated. The goal is still to have construction start this Spring.

Mr. Gray inquired if those were private banking sources, or are there other governmental programs available to them. Ms. Balzarini responded that CoBank and CFC may still be there, but it will be under a different structure for instance than the RUS take out that was previously envisioned. In addition, there could be investment bankers or corporate banks. SME is looking at all of those potential options as to what type of a package can be put together.

I.   UNFINISHED BUSINESS

Mr. Ryan inquired if there was any progress in the rule making process and asked Ms. Balzarini to provide an update. Ms. Balzarini stated that the PSC is working on their rule making. There were no problems with the written rules, but ECP/City counsel asked for some clarification. In addition, large customers were also asking for clarification of the same or similar items. We anticipate it will be cleared up, but at this point we haven’t heard back.

Ms. Balzarini further updated the Board on the existing customers that may be adding new meters. NorthWestern Energy has denied the requests because the size of the meter and the amount of energy that will be consumed by each of the new meters will be less than 5 MW. We wrote a letter asking for reconsideration and laid out our reasoning that these meters/customers were eligible before October 1, and we look at a customer as one entity not as one meter. Their legal counsel wrote back stating they disagree and perhaps the PSC will have to clear that issue up. We have a draft being prepared to go to the PSC, but we are first going to make another attempt to talk to the newly designated contact person at NorthWestern Energy.

Mr. Ryan inquired if a meeting with NorthWestern Energy would be done before the end of the month, and Ms. Balzarini answered affirmatively.

Mr. Gray discussed the proposed plant in Butte and its algae digesting system as part of its operational process, and asked if we have inquired of SME what potential this plant has of that technology being incorporated. Ms. Balzarini explained the algae process. She stated that we are looking at the carbon capture and sequestration partnership with boiler manufacturer Alstom. Alstom is partnering with Southern Montana and two other entities in making applications to DOE for that demonstration project. With the boiler and turbine they have and looking at the capture and sequestration process because of the proximity to the Kevin Dome, there is also the financial potential of using the captured CO2 for enhanced oil recovery for some period of time. So, there is a financial business proposition in there as well.

II.  NEW BUSINESS

Accept Board Meeting Minutes of November 5, 2007. George Golie moved to accept the Board minutes from the November 5th meeting. Dawn Willey seconded the motion, and the minutes were unanimously approved by roll vote of the Board.

City Commission Reappointment – Robert Pancich to the Electric City Power, Inc. Board of Directors. Ms. Balzarini explained that at the last City Commission meeting Mr. Pancich was reappointed for a six year term. At the January meeting an election of officers will need to be held. An election is required every year based on the bylaws. Also, people that served in those offices can only serve for two consecutive terms. So, we will have to look at a new chairman and new vice-chair. Ms. Balzarini stated that in her roll as the executive director with assigned responsibility as the recording secretary, nothing needs to be done with that position.

Chairman Pancich stated that nominations will be held at the next meeting and an election of chair and vice-chair.

III. BOARD MEMBER REPORTS

IV.  COMMUNICATIONS

Public Comment.

Mary Jolley asked for information on the City’s portion of the financing and the quest for bonds. Ms. Balzarini responded that process is still moving forward. She explained there are contracts in place, and a couple of other entities may be signing on. We still need to get the finance structure of how much our customer base will be and then that needs to be blended in with the coop financing portion. Ms. Jolley stated the City’s ownership is based upon the customers it has so it might not be 15%. Ms. Balzarini responded that it is possible it might not be 15%, but we could continue to have 15% and have a customer base that is up to double that percentage as well because of having more contracts than capital investment. It is a good way to provide mortgage insurance for our share of it. Ms. Jolley then asked what the City’s credit rating is. Ms. Balzarini answered that the City’s general obligation rating is A2. Ms. Jolley inquired about revenue bonds. Ms. Balzarini answered revenue bonds are A3. Ms. Jolly said someone told her the City recently needed bond insurance. Ms. Balzarini explained that sometimes the City has purchased bond insurance for some particular bond issues.

Ms. Jolley then referred to the condensed version of the budget book and a graph with regard to water, sewer, storm drains, electricity and golf, and asked for a short explanation why the electric fund is so much in the hole. Ms. Balzarini responded the deficit occurs due to the deferring of revenue. Ms. Jolley stated it has to do with the water credit, and asked if it also has to do with purchasing more power than could be sold. Ms. Balzarini answered there are times when we have electricity that goes out into the market to be sold. Ms. Jolley stated that in the adopted FY 08 budget, you projected that you would buy about one million dollars less power than you did in the 07 budget and that is at the same time we have RW Beck helping us sell power. Why did you project less power or one million dollars less in purchases? Ms. Balzarini reminded her that we went from 25% down to 15% projected ownership between 2007 and 2008.

Charles Bocock stated that, in light of the new information that Coleen just presented, would it be appropriate then if Southern Montana Electric has to go to outside financing like banks or other corporate entities with a different interest rate than predicted in their spreadsheet when they planned this, does the Board feel it would have to get a new packet of information to tell potential customers that the rate would be higher. Would you have to get a new perspective as to how you would sell power to people at a different rate. In lieu of that, if SME is built with a higher rate of return of repayment, would the Electric City Power Board have to go back to their present customers and change their rates to offset their membership of the City to partnerships with SME. Ms. Balzarini responded that the percent rate has never been fixed. The interest rate on any portion of HGS will not be known until the debt is actually financed. The rate could change whether it was with RUS, a commercial bank or institutional investor. The only time the rate is known is when it is finally locked into place. In the meantime, you can look at market rates for competitive purposes. There is a difference in rates between RUS financing and commercial financing. Having said that, the market continues to stay very flat or to decline. Prior to, but closer to the time the debt is sold and the rate is known, the prospectuses will go out to the potential investors. They will also be compared to current market rates for electricity. All of that will be looked at by a number of different groups of people, including customers, investors, mortgage holders and insurers. Electric City Power has been responsible for its own financing, and it has always been known that the City finance portfolio would be part taxable and part tax exempt. So, our scenario has very little change to it.

ADJOURN: Chairman Bob Pancich adjourned the meeting at 5:50 p.m. The next meeting is set for January 7, 2008, at 5:30 p.m. in the Gibson Room of the Great Falls Civic Center.