Electric City Power, Incorporated

JOURNAL OF BOARD PROCEEDINGS

June 9, 2008

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

CALL TO ORDER: 5:30 PM

ROLL CALL: Directors present: Vice Chair Dawn Willey, Bill Ryan, Randy Gray and Bob Pancich. Also present were the ECP Executive Director, City Manager, Assistant City Manager and the City Clerk.

EXECUTIVE DIRECTOR REPORT

Executive Director Coleen Balzarini updated the Board on the following:

Ms. Balzarini briefly discussed articles from several media sources: Billings Gazette – Wind farm pitches capacity expansion to NWE; Helena Air – NWE won’t buy power from wind farm expansion; KFBB – Wind farm markets expansion; Billings Gazette – Ruling won’t delay plant; and, PSC News – PSC to discuss court action to stop NorthWestern Corporation’s plans to sell Colstrip 4. Ms. Balzarini discussed a Memo she authored regarding a communication from Montgomery Energy. Prior to issuing the memo, she talked with Taylor Cheek and discussed some of the obvious discrepancies in his cost projection PowerPoint printout. Mr. Pancich asked what the typical equity requirement was for a coop financed plant as opposed to another business looking for financing. Ms. Balzarini responding that, if there was RUS financing, there would be no equity requirement. The customers’ contracts are the security for the financing. If it was a municipal revenue bond financing, there would be interest earnings and debt service coverage required, but there would not be an equity requirement. Whether there will be an equity requirement in the new financing source remains to be seen. Mr. Pancich discussed the flawed assumptions with ME’s comparisons. Mr. Ryan added that this information should also be distributed to SME for review and input.

In response to the public’s request to have information more readily available, Ms. Balzarini explained the new RSS feed that was created for Electric City Power on the City’s website. Those interested can now request to sign up for automatic notifications of minutes and agendas.

Ms. Balzarini updated the Board on the Public Service Commission’s request for Montana’s Renewable Energy Procurement Plan requirement that, beginning in 2010, each public utility and competitive electricity supplier shall procure a minimum of 10% of its retail sales of electrical energy from eligible renewable sources.

NorthWestern Energy declined to allow ECP to serve new meters of its existing customers if it was a new meter after October 1 and if it was not over 5 megawatts on that one meter. Taking this position is contrary to what NorthWestern Energy allowed prior to October 1. ECP filed an appeal with the Public Service Commission. The parties agreed to stipulated facts that are set forth in the Joint Statement of Stipulated Facts-Phase I that the PSC will now review. The parties discussed meters, billing locations, time frames, and correction of NorthWestern Energy’s record with regard to the meters.

Ms. Balzarini discussed Mr. Slovak’s correspondence regarding long term liability if there were to be hazardous clean up at HGS, who would be the responsible party for the clean up, and whether the City has done its due diligence of what its liability obligations are. The parties researched this issue several years ago and concluded that SME would be the insurer. If, on the other hand, the City were the insurer the City would have the ability to insure for hazardous materials events. HGS is owned by SME and will be insured by SME. Mr. Pancich inquired if the other coops are in the same situation as the City. Mr. Gregori answered that SME is made up of a number of members who are all joint and severally liable for the activities of SME. Mr. Gregori stated the main hazardous material is the ash created in the burning of the coal to generate electricity. HGS has been issued a license by MDEQ to bury the ash. SME will be the insurer.

Ms. Balzarini reviewed the proposed Fire Services Agreement between SME and Great Falls Fire Rescue. The City has trained staff and has taken the costs of servicing HGS into consideration. This contract has the same terms and conditions as any other business outside of the City limits. The City Commission will take action on this contract at the June 17 meeting.

Mr. Ryan asked for an update from the City Manager with regard to attending SME Board meetings. Mr. Doyon answered that he has been attending the SME Board meetings with Coleen in an attempt to get up to speed and learn the dynamics of the coop. He has asked the City Commission for direction with regard to his role on the Board. There is a need for an additional member to attend the SME meetings and Mr. Doyon suggested that an ECP Board member be appointed by the City Commission. Tim Gregori added that each coop appoints one member to serve on the SME Board. ECP is entitled to appoint one member to participate in SME Board meetings. These are typically additional representatives present from each of the coops and the City. At the meetings, there is one voting member. One member equals one vote regardless of size. Others can participate in discussions but not vote.

Mr. Pancich explained that Congress directed the RUS to cut off all financing for coal plants. Mr. Pancich asked for an update regarding the bond rating agencies, equity for coops and terms for coops. Mr. Gregori responded that HGS was not refused funding by the RUS on the merits of the project. U.S. Congress told the RUS that it would not make any funding available on any generation facility. The RUS shut down their loan program for all generation. SME reviewed its project to determine if it was fundable accessing traditional financing sources. SME representatives met with two rating agencies on Wall Street to determine if this was an investment grade project. They were told it did look like an investment grade project, somewhere between an AA and BBB investment rating. Since that meeting, Yellowstone Valley Cooperative (YVC) voiced that it did not want to be an equity participant. YVC has a contract to buy its power from SME until 2030. There are now two entities interested in replacing YVC’s ownership share and perhaps more of the project. SME is prohibited from releasing the name of the bank until it has a bond letting. SME is now a single financing entity that will receive a single credit rating from two of the three rating agencies on Wall Street. They will take that rating to the bond community to sell the bonds to qualified investors who will provide the money for the project. The projected date to get a preliminary rating from the rating agencies is the end of July or first part of August. If there should be shortcomings, the rating agencies will request additional information to enhance or improve the credit rating. That is what the bank will take to pre-qualify investors. The City of Great Falls’ load will be considered as part of the revenue stream to pay back that financing. Financing is moving forward. Progress is being made with the DEQ and BER as well. Electric utilities have a defined customer base. SME does not have an equity requirement. The strength of the financial transaction is the contracts. Mr. Gregori explained the difference with financing a merchant gas plant that typically requires a 20% down payment and generally has a 20 year retirement cycle. Coops have a 30-35 year financing term and serve an identified customer base.

Mr. Gray asked if this was equivalent to a revenue bond and Mr. Gregori answered affirmatively. Mr. Gray asked if any faith in credit or assets of the City were on the hook besides the revenue flow expected from its customers. Mr. Gregori answered no and explained that it will be a corporate financed project that will be standing on the strength of SME contracts. Mr. Gregori was asked if there were any other coops looking at Wall Street for financing in this same fashion. Mr. Gregori responded that there were seven, including one in Wyoming. Mr. Gregori was asked if the bond rating was similar or better. Mr. Gregori answered that Basin Electric will probably have a AA rating because they own 1,000 megawatts of generation and have 50% equity in existing generation facilities. As this is SME’s first facility, the rating will probably be at a level below that, but SME has the opportunity to buy rating insurance to enhance it up to that grade.

Ms. Willey stated that the ECP bylaws need to be looked at with regard to a designated representative on the SME Board. Now that there are no longer opportunities for different types of financing, one of the reasons ECP was created no longer exists. Mr. Doyon added that the City Commission is reviewing the information contained in his memo.

Mr. Pancich inquired if the initial investment of HGS was limited to $2 million, how would that affect the City as a member of SME. Mr. Gregori responded that the structure for investment in HGS works along the lines of load ratio share. The individual system member’s load is taken as a percentage of SME’s total load. As the ratio share changes over time, the load ratio share will always be commensurate with the investment. Prior to when HB 25 was passed prohibiting the City of growing residential load, SME fixed the City’s percent of investment at that time. The City was anticipating to be approximately 25% invested in HGS and the load was anticipated to be roughly 65 megawatts. Because the City’s ability to grow its load was curtailed by HB 25, SME fixed the number of dollars the City had invested and, as investments continue, the percentage will come down to the point where the investment will be commensurate with the load. Right now the City’s investment in HGS’s development costs is between 10%-15%. If the City did not want to invest any more money, SME would then fix the total amount the City had invested in the development costs. At the point when SME obtains long term financing or even intermediate financing that the City’s load was pledged to support, then SME would reevaluate the total number of dollars that had been invested by all of the other coops. That would fix the equity position in the facility. Right now SME is down to the final stages of the development costs. The remaining development costs are fairly limited. The City’s share may shrink, but it will never go to zero. SME has spent approximately $20 million dollars to get HGS to where it is today. Before construction begins, SME needs long term financing. If the City wishes to continue, SME believes the continued investment would be in the range of $600,000. In addition, there is a major deposit coming up for the transmission interconnection. That is a deposit that is refundable. If the City pays a portion of that deposit money, it gets it back with interest. The City currently has approximately $2 million equity in the facility. Whatever that turns out to be as a percentage of the total development costs at the time that long term financing kicks in, that is the investment.

Mr. Gray asked what would cause SME to lose its position in the transmission queue. Mr. Gregori responded that if SME let the date come and go without any type of action on SME’s part to reserve that spot, SME would lose it. He explained that, in the past, the Montana First Megawatts project extensions were first in line and SME was in line behind them. It wasn’t until they withdrew their application for a large generator interconnection agreement that SME moved into that queue position. At this point SME remains confident that if the project is moving forward a line of credit will be secured between the time construction begins and long term financing is obtained.

I.   UNFINISHED BUSINESS

Mr. Ryan inquired about the potential customer discussed at the last meeting. Ms. Balzarini updated the Board that the business did not make a commitment for a long term contract.

The parties discussed the relationship with the Great Falls Development Authority.

II.  NEW BUSINESS

Accept Board Meeting Minutes of April 7, 2008. Randy Gray moved, seconded by Bill Ryan, to accept the Board minutes from the April 7th meeting. The minutes were unanimously approved by the Board.

Motion to Appoint an ECP Board Member to Attend the SME Board Meetings. Bill Ryan moved, seconded by Bob Pancich, to nominate Chairman Golie as the ECP representative to attend the SME Board meetings. The motion was unanimously approved by the Board.

III. BOARD MEMBER REPORTS

IV. COMMUNICATIONS

Public Comment.

Neil Taylor, commented that Tim Gregori left out the estimated percentage of pay back on the money borrowed for 30-35 years. Mr. Neil provided a handout of his cost analysis. He asked that Tim Gregori review his handout and fill in the blanks so that he can adjust his spreadsheet.

Larry Rezentes, 2208 1st Avenue North, discussed his recent guest editorial in the Tribune. Mr. Rezentes asked: (1) What are the Board and the City Commission intending to do as they are operating in violation of Ordinance 2925; (2) when will the public see forecasted numbers for ECP for the coming fiscal year by month and expenditure line item; and, (3) how can the ECP Board members and City Commission manage a business without having monthly, or at least quarterly, financial statements. Mr. Rezentes read a portion of Mr. Doyon’s memo that referenced ownership in the plant. Mr. Rezentes commented that the radically diminished ownership percentage and limited opportunity to generate a positive financial return is outrageous and not what the citizens understood. Mr. Rezentes concluded that Tim Gregori grossly glossed over the difficulty he will have in raising money for this facility. Mr. Rezentez commented that the starting point of Mr. Doyon’s memo should be changed to what does the public want given what it has learned over the last 18 months in terms of the negative health, environmental, and historic consequences. Mr. Rezentes asked that Mr. Doyon or Mr. Gregori provide answers to his questions.

Richard Liebert, 289 Boston Coulee Road, commented that the State Committee for Renewable Energy will be meeting in Great Falls tomorrow about wind energy and that Brett Doney will be attending. Mr. Liebert discussed the proposed costs per ton for carbon emission, RUS canceling funding, and transmission lines. Mr. Liebert provided handouts regarding busbar cost for wind energy purchased by Judith Gap from NorthWestern Energy, an article regarding hydro-electric, and a spreadsheet. Mr. Liebert concluded that too many assumptions are being made. Mr. Liebert asked for redacted SME minutes to see what City staff is saying and doing on behalf of the citizens of Great Falls.

Cheryl Reichert, 51 Prospect Drive, requested the Board consider the possibility of putting this issue to vote in November now that the public has been through an educational process.

Ed McKnight, 906 3rd Avenue North, commented that he did not refer to Mr. Gregori as incompetent as reflected in the minutes that were approved and requested a correction. Mr. McKnight explained that he asked if it was more competent to read factual numbers off of a piece of paper or listen to how Mr. Gregori feels about those numbers. Mr. McKnight commented on Mr. Gregori’s statement that the ash is not harmful because they use it to mix cement. He stated that there are warning labels on bags of cement to not breath cement dust as it is harmful. Mr. McKnight talked about the blogs and the reputations of those sitting on the Board of Electric City Power.

Ron Gessaman, 1006 36th Avenue N.E., stated that he has spoken to this Board several times about following the bylaws. Mr. Gessaman commented that it is again in violation because this meeting wasn’t announced as a special meeting. Also, several members of this Board are in violation of a City Ordinance regarding attendance. Mr. Gessaman provided a table of attendance and noted that Dawn Willey and Randy Gray are in violation. Mr. Gessaman read a portion of the code of ethics and commented that responses are not received to questions. He then read a portion of a Boards and Commissions booklet regarding ECP’s purpose. He submits that the Board is not doing that either. He reminded the Board that they are advisory and, unless they are informed, they can’t advise.

Ron Mathsen, 122 Treasure State Drive, commended the Board for trying to move in the direction of public power for the City of Great Falls, but questioned why coal. He asked the Board to look at the direction in which they are moving.

Ken Thornton, 31 Paradise Lane, commented that the cost of CO2 is unknown and has not been put into the equation. He discussed the carbon law that has been tabled and stated that the problem with coal plants is 50 years. No matter what technology comes down the road, it is his understanding that the City will have to get power from this plant. He provided Montana Power and fiber optics as an example. Mr. Thornton commented on the liability when millions of tons of CO2 will be put down in the ground. He provided an example in Africa when a natural pocket of CO2 at the bottom of a lake reached a point when it all came up and killed almost 2,000 people. He again reminded the Board about the costs that have not been looked at. Wind will be the same price, and will be less 10 years from now. He opined that Montgomery Energy is the best thing to do. Mr. Thornton concluded that there are now two secret entities to replace Yellowstone Valley. This is a public entity and there should be no secrets.

Kathleen Gessaman, 1006 36th Avenue N.E., commented that clean coal is an oxymoron. Ms. Gessaman hoped the Board would take Mr. Doyon’s advice to take time to reflect and make a critical change, limit investment and move on to wind.

John Hubbard, 615 7th Avenue South, asked the Board how they dodged the bullet when the Supreme Court ordered the EPA to deter this type of plant because it is against the Clear Air Act. Wind and solar are clean and he suggested going with geothermal.

Michael Witsoe, 510 11th Street South, asked how many people couldn’t hear the people talking and asked Mr. Doyon to note the raised hands. Mr. Witsoe commented that, with diesel now over $4 per gallon, the plant will be $1 billion dollars. Mr. Witsoe asked Mr. Doyon to listen to the public objections and take a stand because if he is here in 10 years his kids will be breathing this particulate. He asked that the next ECP meeting be held in the Commission Chambers.

Tim Gregori clarified that cooperatives are private corporations, unlike the City of Great Falls. In response to Mr. Taylor’s comment regarding the percentage rate, Mr. Gregori stated that the percentage rate will be a direct function of the bond rating from the rating agency. Mr. Gregori requested a copy of Mr. Liebert’s spreadsheet and stated that, with regard to some of the costs, he would have the mechanical engineers review it and he would prepare a response. At the preliminary meeting, the rating agency asked what SME intends to do about carbon emissions from the facility. Any entity requesting financing from major banks on Wall Street has to be able to demonstrate that it has a business plan to deal with carbon from the facility for the life of the facility. SME hired the Big Sky Carbon Sequestration Partnership out of Montana State University to work with engineers and consultants to develop a business plan which is nearing completion. Mr. Gregori provided a handout of a map that identified the years when the region/subregion drops below target capacity margin levels required to meet peak demand using committed resources. The new projection for the amount of reserves capable of meeting the Western Electricity Coordinating Council is now down to reserves running out in 2009. Because of the debate, Mr. Gregori stated that folks are simply not doing anything and there is a price for not doing anything or waiting for the perfect solution. Mr. Gregori discussed the economy and inflation. With regard to Mr. Hubbard’s statement regarding the Supreme Court, the order did impact the plant with regard to CO2. The rule making is not yet complete on CO2. SME knows it will have an impact and they are being proactive in funding for sequestration. SME now has a plan to store ash and mercury in a State approved solid waste facility, and is in the process of doing an analysis of PM2.5 and will also be controlled at the facility.

ADJOURN: Bob Pancich moved, seconded by Bill Ryan to adjourn the meeting. Vice Chair Dawn Willey adjourned the meeting at 7:50 p.m. The next meeting is set for July 7, 2008, at 5:30 p.m. in the Gibson Room of the Great Falls Civic Center.