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Business PlanPrepared for

Haa Aani, LLC

Prepared by

In Association withRedPoint Associates

Anchorage

February 2012

Photos courtesy A

laska Seafood Marketing Institute

Kake Seafood Plant

Business Plan

Prepared for:

Haa Aani, LLC

PREPARED BY:

Juneau Anchorage

In Association With: RedPoint Associates

Anchorage

February 2012

Table of Contents

Executive Summary .................................................................................................................. 1 Fish Supply ............................................................................................................................... 1 Equipment and Facility ............................................................................................................. 1 Labor and Employment ............................................................................................................ 2 Management ........................................................................................................................... 2 Marketing ................................................................................................................................ 2 Summary Assessment ............................................................................................................... 3 Financial Summary ................................................................................................................... 4

Feasibility Evaluation ................................................................................................................ 5 Summary of Preliminary Findings ............................................................................................. 6

Strategies for Fish Supply ......................................................................................................... 8 Key Assumptions ...................................................................................................................... 8 Paying up for District 11 Gillnet Fish ........................................................................................ 8 South Chatham Troll Fisheries .................................................................................................. 9 Seine Supply Strategy............................................................................................................... 9 Early, Late, and Overflow Agreements .................................................................................... 10 Hatchery Cost Recovery ......................................................................................................... 10 Icy Straight Troll Fishery ......................................................................................................... 11

Preliminary Evaluation of Other Major Factors ..................................................................... 12 Equipment and Facilities ........................................................................................................ 12 Labor Supply .......................................................................................................................... 12 Management ......................................................................................................................... 12 Marketing .............................................................................................................................. 14 Internal 2011 Season Summary .............................................................................................. 14

Business Plan ........................................................................................................................... 15 Plant Management and Labor ............................................................................................... 16

Plant Management ................................................................................................................. 16 Labor Requirements and Job Creation .................................................................................... 17

Equipment and Facility ........................................................................................................... 20 Repair and Maintenance Summary......................................................................................... 21

Salmon Market Conditions ..................................................................................................... 22 Financial Evaluation ................................................................................................................ 27

Summary ............................................................................................................................... 27 Key Factors and Assumptions ................................................................................................. 27 Pro-Forma Income Statement ................................................................................................ 29

Appendix: Contact List ........................................................................................................... 30

Kake Seafood Plant Business Plan McDowell Group, Inc. • Page 1

Executive Summary

This report provides an initial Feasibility Evaluation, followed by a detailed Business Plan, for Rocky Pass

Seafoods, a company owned jointly by Kake Tribal Corporation and Haa Aani, LLC. The company was formed

in 2011 and operates out of the Kake Seafood Plant. In addition to the feasibility evaluation and detailed

financial data, the report includes suggested strategies for maximizing the opportunity for financial success.

These strategies address fish supply, labor, equipment and facility, management structure, and marketing.

Also included is reference material on salmon market conditions.

Fish Supply

Fish supply is the single most important key to success. Onsite fleet management and quality tender service

are especially critical to obtaining a sufficient fish supply. Most harvesters have well-established relationships

with existing processors, and the following strategies are suggested to meet the challenge of developing an

adequate fleet as well as obtaining supply from other processors and hatcheries.

• Early and late agreements with larger plants and individual seine boat owners.

• Recruiting trollers to target chum salmon in South Chatham Strait, and buying troll-caught chum salmon

from the Icy Strait fishery near Hoonah.

• Initially paying up for gillnet fish from District 11 (Taku River and Snettisham) in order to build a fleet in

that area.

• Negotiating with other regional plants to buy fish when their plants are in danger of exceeding capacity.

• Selectively buying hatchery fish with no competitive market, such as king salmon from the Port

Armstrong hatchery.

Equipment and Facility

A number of equipment issues and facility repairs will need to be addressed before the season if the plant is

to operate efficiently and open on time in 2012. These items can be resolved with an estimated offseason

repair and maintenance budget of $221,000 to $266,000.

Onsite holding tanks need to be plumbed and hooked up to chilled seawater (CSW) or refrigerated seawater

(RSW) system in order to improve the plant’s storage capacity of unprocessed fish. These improvements will

improve product flow, maximize tender utility, and improve quality.

• The plant has two processing lines, but only one was operational in 2011. Both lines need to be

overhauled by company repair technicians and plumbing issues need to be resolved to ensure the

machines work properly.


• The refrigeration system is a safety hazard with a variety of fixable problems that currently drive up

utility costs. Problems include ammonia leaks, incorrectly installed valves, corrosion, and worn out

compressors making the refrigeration system dangerous and inefficient.

• A roe dryer is essential for the plant to produce significant volumes of highly profitable ikura (chum

salmon roe).

A complete list of suggested R&M items and costs can be found in the Equipment and Facility section.

Labor and Employment

The Kake Seafood Plant could create 51 seasonal and year-around jobs in the seafood processing and

commercial fishing sectors. This amounts to 18 full-time year-round equivalent jobs crucial to rural Southeast

Alaska. In addition, the plant would improve the jobs of 40 to 65 skippers and crew working in the seine and

gillnet fisheries. It is expected the plant will need to hire about 20 to 30 workers during the salmon season.

Expected Staffing Needs for Kake Seafood Plant - 2012

Position Number of Workers

Plant Manager 1

Fleet Manager and Dock Foreman 1

Quality Control and Administrative 2-3

Repair and Maintenance 1-2

Receiving Dock and Shipping (glazing/packing) 5-8

Processing Line and Other Floor Workers 10-16

Source: Study team estimates.

Management

Sealaska representative Dennis Gray proved to be a valuable managerial asset last year and has a firm grasp of

the obstacles present in the current operation. The study team considers Mr. Gray an exceptionally

competent manager for the plant in the short term if Sealaska is willing to put him in that position for at least

the first two years of full-scale operation.

Going forward, the operation could benefit from implementing a clear chain of command and creating

policies for fleet management, quality control, and product handling. These should resolve issues relating to

inconsistent quality, fleet relationships, and organizational consistency cited as significant issues in the initial

2011 operation.

Marketing

Last season the plant sold its product to Cannon Fish Company, based in Seattle, WA. The study team

suggests approaching additional wholesalers in 2012 regarding markets and prices. Marketing efforts may


need to be customized based on species or product type. For example, one wholesaler may have strong

buyers for premium sockeye salmon, but be less willing to pay for pale chum salmon.

Farmed salmon prices have declined significantly in the past eight months, but markets for wild pink and

chum salmon should be strong, as 2012 will be a down year in the even/odd year pink salmon supply cycle

common to both Alaska and Russia, the world’s only significant pink salmon producers. In recent years, Russia

significantly out-produced Alaska in both pink and chum volume. This anticipated pink supply shortage is

expected to support prices for pink and chum salmon despite depressed farmed salmon prices. Roe is

particularly important to sustaining pink and chum prices.

Chum and Pink Salmon Supply, 2006-2011 (In Millions of Pounds)

2006 2007 2008 2009 2010 2011

Chum Salmon

Alaska and Russia Harvest 297 254 286 321 335 287

Pink Salmon

Alaska and Russia Harvest 716 1,086 655 1,238 840 1,290

Source: NMFS, ADFG, and Russian Pacific Fisheries Research Center.

In the long-term, wild Alaska salmon should remain a viable product due to high feed costs in the farmed

salmon industry and improving consumer attitudes regarding healthy and sustainable seafood. Downside

risks could include a global financial crisis, a rising US dollar, and lower demand for high-value species.

Summary Assessment

Assets include the plant’s location near good fishing, a local labor force (no need for costly housing and food

service), political connections, Sealaska organizational support, industry contacts, and current top

management. Challenges are significant – high utility costs (that might have a political solution), no

established committed fleet, a small local fleet, and lack of local airfreight service for fresh product.

Kake Seafood Plant Major Assets and Challenges

Major Assets Major Challenges

Close to Productive Fishing Grounds Utility Costs are High in Kake

Supply of Local Labor Force No Established Fleet & Small Local Fleet

Building and Equipment Already in Place Location Limits Ability to Ship Fresh Product


Financial Summary

Assuming the suggested strategies are implemented and a fish supply in excess of two million pounds is

secured, the operation can be profitable in 2012 even with high initial R&M expenses. In future years, the

plant should benefit from the initial R&M investment and earn higher profits as it adds to fish supply.

Kake Seafood Plant Pro-Forma Income Statement, 2012-2014

2012 2013 2014 As % of 2012

Sales

Total Sales $4,690,000 $5,770,000 $5,730,000 $4,690,000

Total Pounds Purchased 2,280,000 3,010,000 2,690,000 2,280,000

Operating Expenses

Cost of Fish Purchased (plus taxes) $2,523,000 $3,016,000 $3,023,000 54%

Labor Costs (including R&M) 755,000 865,000 805,000 14%

3rd Party Ikura Processing 422,000 516,000 529,000 9%

Tendering (2 boats) 410,000 410,000 410,000 9%

Utilities 139,000 142,000 144,000 3%

Startup and Offseason R&M 134,000 40,000 40,000 4%

Supplies, Packaging, & Other Costs 40,000 133,000 124,000 1%

R&M Equipment and Parts 30,000 30,000 30,000 1%

Total Operating Expenses $4,423,000 $5,122,000 $5,075,000 94%

Gross Profit (Loss) $236,000 $618,000 $625,000 5%

Indirect Expenses

Accounting, Legal, & Insurance 54,000 54,000 54,000 1%

Other Indirect Costs 31,000 31,000 31,000 1%

Depreciation (est.) 40,000 40,000 40,000 1%

Total Overhead Expenses $125,000 $125,000 $125,000 3%

Total Expenses $4,578,000 $5,277,000 $5,230,000 98%

Net Profit (Loss) $112,000 $493,000 $500,000 2%


The Kake plant will depend heavily upon ikura (pronounced ick-oorah) for profitability. Ikura revenues are

projected to account for over $1 million in 2012. High grade ikura can be very lucrative, but as the pro-forma

income statement indicates, hiring third-party contractors to process ikura is very costly ($422,000 in 2012,

for example). The study team suggests hiring a third-party roe processor for at least the next two years to

learn processing techniques.


Feasibility Evaluation


Feasibility Evaluation

In early January, Haa Ani, LLC was provided with an internal document entitled, Preliminary Feasibility

Evaluation of the Kake Seafood Plant. Content of this preliminary document remains unchanged and is

presented in its entirety in this chapter as part of the final report.

The purpose of this preliminary report was to determine the approximate financial feasibility of the proposed

Kake Seafood Plant operation before completing the full Kake Seafood Plant Business Plan. If the early

research and analysis revealed an operation with little chance of financial success, the study team would cease

the business plan effort and recommend to Haa Aani, Ltd. not to proceed with further investment. As the

following preliminary analysis reveals, profits appear likely above the volume of two million pounds of raw

fish. Assuming management is effective at following the recommended fish supply strategies described in

detail in this document, the study team considers this volume as a realistic goal for the first year of operation

in 2012. Running higher volumes through the plant in subsequent years is also realistic, again provided

management is successful at securing fish supply and dealing effectively with other major factors influencing

financial feasibility discussed in this document.

Summary of Preliminary Findings

Based on this preliminary analysis of the major factors determining financial feasibility in this document –

Kake Seafood Plant Preliminary Feasibility Evaluation – the proposed Kake Seafood Plant operation appears to

be financially feasible with a breakeven volume of approximately two million pounds of raw fish, primarily

obtained from gillnet and troll fisheries, supplemented by some seine volume. Since fish supply is the single

most important factor, this preliminary feasibility evaluation provides a discussion of recommended fish

sources and strategies necessary to capture at least the breakeven volume of two million pounds. In addition,

this preliminary document provides discussions of four other major factors essential to financial feasibility –

Equipment and Facility, Labor Supply, Management, and Marketing.

Summary of Major Factors Affecting Feasibility

Fish Supply: The 2012 salmon forecast is smaller than previous years. However, the study team

provides a detailed analysis of selected fisheries and strategies that should supply the plant with two

million pounds of fish, or more. District 11 gillnet fish, nearby troll activity, and shoulder season

strategies are key to achieving sufficient volume.

Equipment and Facility: With some pre-season work and modest additional investment in

equipment purchases and upgrades the plant should be able to process up to 100,000 pounds per

day. Addressing lingering equipment and facility issues during the late winter and early spring

months is necessary if this plant is going to process fish in 2012.

Labor Supply: According to management, there is sufficient local labor available to operate the plant

over an extended season – especially important for capturing volume in the shoulder seasons.


Management: While the current management structure may need to be re-evaluated by Kake Tribal

and Haa Aani, there is no question the current manager, Dennis Gray, provides effective and

competent leadership.

Marketing: Wild salmon markets remain strong, particularly for pink/chum salmon and roe products,

so marketing is projected to be less of concern in 2012 than other operational issues such as fish

supply, fleet management, tendering, equipment/facility condition, and dockside delivery.


Strategies for Fish Supply

Key Assumptions

This discussion of raw fish supply assumes that the lower end of the target supply for the plant is on the order

of two million pounds of raw fish. The upper end of target supply will be a function of the plant’s daily

freezing capacity with existing equipment fully functioning.

This discussion also assumes that salmon is the primary species to be processed. The study team considered

halibut, sablefish, Pacific cod, Dungeness and Tanner crab, rockfish and lingcod. In all cases, there is potential

for minor volumes to be intermittently purchased and processed at the plant but none of these species

represent an opportunity to reliably secure a substantial supply of raw product.

The study team assumes the Kake plant will operate every year, rather than try to capitalize on years of

projected high volume and shut down or reduce capacity in years of projected low volume.

Fleet management and tender service are assumed to be well done, with fleet management onsite the entire

operating season.

Existing Situation

This operation faces significant challenges with respect to seafood supply, as there are few unutilized or under-

utilized fisheries in the area or within reasonable tendering distance of the plant. With some notable

exceptions, opportunities to acquire fish will involve diverting harvest volume from an existing buyer to the

new operation.

The plant at Kake has some distinct competitive advantages, namely location and the presence of a viable local

labor pool that enables the plant to operate in shoulder seasons when other plants are closed.

Paying up for District 11 Gillnet Fish

The recommended strategy for securing a substantial supply of raw fish for the Kake plant is to pay a

significant premium – such as an additional $0.10 per pound – above the prevailing ex-vessel price to recruit a

gillnet fleet in District 11, the Taku/Snettisham and lower Lynn Canal fisheries. Kake had some success buying

gillnet fish from this area in the 2011 season. After the initial paying up policy to enter the market, Rocky Pass

Seafoods can then adjust pricing to control fish flow, just as airlines adjust seat pricing overt time to insure

good and consistent load factors.

Paying a price premium, and providing good tender service and reliable ice supply will all be important factors

in recruiting and maintaining a District 11 fleet. Juneau-based processors have the advantage of being able to

easily provide fleet support services (such as parts and groceries) to their fishermen. Any boats that Kake can

successfully recruit away from those processors will lose that support. While this is not a tangible cost to the

fisherman, it will be considered as part of the equation when fishermen are deciding whether to fish for Kake.


Paying a significant price premium will offset the loss of fleet support services and is really the heart of the

strategy.

Kake may also target District 10 gillnetters who are more likely to fish for Petersburg-based processors, who

might provide fish to the Kake plant on overflow contracts or shoulder-season operating agreements.

Mounting an aggressive effort to recruit boats in District 10 may be counter-productive with respect to peer

relations with processors who might otherwise be business partners.

It should be noted that a long-term strategy that relies primarily or exclusively on over-paying for raw material

would not be viable. The intended effect of this approach is to create an initial foundation by generating

volume sufficient to achieve economies of scale so that additional volume purchased at prevailing ex-vessel

prices can be processed profitably.

South Chatham Troll Fisheries

For lack of a better term, the study team is using ‘South Chatham Troll Fisheries’ to describe troll fisheries in

and near South Chatham Strait including Cape Omaney, Tebenkof Bay, Kingsmill Point, and Southeast

Frederick Sound near Kake.

The South Chatham troll fisheries represent a significant opportunity for the Kake plant. The troll fishery is

generally much less sensitive with respect to processor loyalty and trollers regularly sell to different buyers

during the season. Compared to Sitka and Petersburg, Kake is substantially closer to the typical South

Chatham fishing areas.

An item of particular interest relevant to the troll fleet is the potential development of a chum troll fishery near

Port Armstrong. A considerable portion of the troll fleet is now targeting chum salmon and the Port Armstrong

hatchery is successfully developing a chum return. With a significant local fleet in the immediate area (Port

Alexander) the study team believes there is good potential to develop a troll fishery on this stock.

The study team believes there is a viable opportunity in the troll fishery, particularly with the combination of

existing South Chatham troll effort, prospective development of the Port Armstrong chum fishery, and

potential to mobilize the local Kake troll fleet. Collectively, these troll fisheries represent a substantial volume

and steady supply of available raw product that can be purchased at the prevailing ex-vessel price within easy

tendering distance of the plant.

Seine Supply Strategy

While it is clear that recruiting a dedicated seine fleet has the potential to supply major volume to the plant,

there is a significant logistical and financial commitment required in the form of fleet support and tender

service for the seiners. Recruiting and retaining a dedicated seine fleet may also require that plant capacity be

substantially expanded. In a strong fishing year, each seiner can be expected to produce over 50,000 pounds

per day during peak fishing (more with good tender service). With that potential volume from the seiners and

with volume from other target fisheries (gillnet and troll) existing plant production capacity would need to be

significantly expanded.


Should the operation pursue developing a dedicated seine fleet, it is likely that two or three of the local seiners

could be recruited. This would provide one to two million pounds of raw product to the plant annually.

It may better serve the operation to pursue contingency relationships with local and other seiners as a backup

market. In the event that their primary processor is on buying limits or is not buying in the early or late season

those seiners could work with Kake without putting their primary-market relationship at risk.

Early, Late, and Overflow Agreements

There is significant potential for the Kake plant to process salmon for other processors on overflow contracts

during peak season, and to process shoulder-season fish for harvesters whose processor has shut down some

or all of their operations for the year.

Peak-season overflow contracts with other processors should be considered a temporary means to boost

volume while Kake works to build its own fleet. Presumably, the Kake fleet will enjoy the same strong fishing

that puts other processors into overflow status during peak times. As the Kake fleet reaches an appropriate

size, surplus plant capacity during peak fishing times will no longer exist.

The more viable long-term approach is to focus on shoulder-season seine fish purchased from boats still fishing

after their processor has closed for the season. This makes use of Kake’s competitive advantage in local labor,

extending the processing season without the fixed cost of maintaining a non-resident labor force. This

approach could provide substantial volume to the plant without the logistical and fiscal burdens of supporting

a dedicated seine fleet.

There is also potential to negotiate custom-process contracts with other processors for shoulder-season fish.

Harvest volume is generally light in the late season and in some cases the few boats still fishing do not

generate volume sufficient to justify a long tender run to a distant plant. In those cases, it is sensible to

contract with a nearby processor to handle the fish. Kake’s location is a valuable asset in this respect.

Hatchery Cost Recovery

Pursuing cost-recovery fish from nearby hatcheries could produce substantial volumes for the plant, but at this

point is a longer-term strategy. Local hatcheries (Port Armstrong and Gunnuk Creek) are believed to have

existing multi-year contracts with a major processor for pink and chum cost recovery.

There are two possibilities for cost recovery fish from Port Armstrong hatchery – king and coho. Since volume

is relatively light (especially for kings) and run entry is in the shoulder seasons, Armstrong’s king and coho

returns are unlikely to have existing multi-year contracts with major processors. Should Kake pursue

purchasing troll salmon near Port Alexander, tender service for Port Armstrong king and coho cost recovery

could be handled with the same tender.


Icy Straight Troll Fishery

In recent years, a significant chum troll fishery has developed in Icy Straight from late June through July. The

study team recommends providing tender service to this fishery to secure valuable chum and to establish long-

term relationships with individual trollers. In addition to the Icy Straight chum troll fishery, some trollers also

fish other salmon species in the general area, particularly as late season coho begin moving through inside

waters.

Pacific Cod Near Kake

In waters near Kake there is known to be a significant Pacific Cod resource. While there is currently little effort

or management of this fishery, it is important for Rocky Pass Seafoods to monitor management and harvesting

activity and be assertive in serving the fishery as it develops.


Preliminary Evaluation of Other Major Factors

Equipment and Facilities

The study team toured the plant with Sealaska (Haa Aani, LLC) representative Dennis Gray, and the plant’s

maintenance technician, Bruce Ward, in December. The building and dock are in good condition and are in a

good location, but a number of issues need to be resolved before the 2012 season. Most of the equipment

either works or could be serviceable with offseason overhauls. While there is work to be done before the plant

is ready to run fish in 2012, the study team believes the necessary equipment issues can be resolved this

winter.

In cooperation with Mr. Gray, we are documenting the necessary work items and will refine the cost

estimates of these projects in the final business plan section of this report.

Labor Supply

In 2010, the village of Kake had a population of 557. The local unemployment rate was 16.8 percent and the

average median household income was $39,625, according to the American Community Survey. The City of

Kake, Kake School District, and Kake Tribal Corporation are the village’s largest employers.

Interviews with Mr. Gray indicated there is an adequate supply of labor in Kake. The plant was able to attract

workers, even though it processed a relatively small volume of fish in 2011. Mr. Gray said there were at least

a dozen workers who were very reliable in 2011 and that with steady volumes of fish attracting a full crew of

dedicated employees would not be a problem. The study team is confident in Mr. Gray’s assessment of the

local labor supply.

The availability of labor in Kake is a major strength of the plant. Many plants in Alaska need to import a large

percentage of their workforce from the “lower 48”. Imported labor requires bunkhouses and meals, and most

importantly, a large, steady supply of fish to process. These plants can only operate profitably during peak,

high-volume periods of the year. Having a supply of local labor will allow Kake to operate on a year-round

basis (if supply can be found) or at the very least open earlier and remain open later than other plants in the

region.

Management

Plant management has been a problem for the Kake plant in the past; however, the study team believes Mr.

Gray is an exceptionally competent manager for the plant in the short term if Sealaska is willing to put him in

that position for at least the first two years of full-scale operation. Mr. Gray effectively became the plant

manager by the end of the 2011 season, after the first shipment of processed hatchery fish was rejected by

the buyer and other operational issues surfaced. Given the circumstances, the fact any fish were processed at

all was encouraging.


In 2011, plant management consisted of the following individuals:

• Michelle McDonald – Plant Manager

• Dennis Gray – Sealaska Representative

• Bob Jongewaard – Plant Consultant

Management issues quickly arose in 2011, as the plant was intended to be operated and managed by a third-

party contractor who would hire local labor. Bob Jongewaard and Michelle McDonald were the third party

contractors.

In summation, Ms. McDonald did not have experience running an entire plant before taking the position,

was slow to address issues outside of the processing line (as her background was only that of a line manager),

and lacked computer skills, which led to a loss of inventory control. Her relationship with Mr. Jongewaard was

strained, and arguments often broke out. As a result, she was not able to utilize Mr. Jongewaard’s experience.

Going forward, a new management structure will obviously need to be crafted. Specific policies will need to

written to insure that issues the plant dealt with in 2011, such as, quality control, inventory control, cost

control, fleet management, and administrative requirements, are resolved in 2012. There are still issues that

need to be addressed, but the study team believes that Mr. Gray would make a good interim manager for the

2012 season, but he will need significant and competent onsite support for a number of the functions that

were poorly handled in 2011.

Fleet management – be it handled directly by Mr. Gray or by another experienced professional – must be

onsite due to the complexities of serving multiple fisheries, establishing new relationships with harvesters (all

of whom have existing processor relationships), and directing tender service that includes ice, fuel, water, and

delivery of supplies and parts to boats on the grounds. Fleet management in the first full year of operation

must be effective to give the plant a long-term opportunity for success.


Marketing

Current prices for wild salmon remain high, despite a sharp drop in farmed salmon prices during the summer

of 2011. Whether this divergent trend will continue in 2012 remains to be seen, as prices of farmed salmon

and wild salmon historically have moved together. Despite the situation in the farmed Atlantic salmon

market, the market for fresh/frozen pink salmon and chum salmon should remain robust.

Frozen pink and chum products carry the cachet of a wild product, and are still able to beat farmed salmon

on price. New products utilizing pink and chum salmon have gained market prominence in recent years,

further increasing the value of these fish. Pink salmon harvests in Russia and Alaska should decline in 2012,

and chum salmon harvests are not projected to increase substantially. Therefore, markets for pink and chum

salmon should readily absorb product in 2012, regardless of the low price pains felt in the farmed salmon

market.

The aura of “Alaska” has shown to be a valuable seafood marketing point, and Alaska salmon is currently

enjoying strong demand. If marketers can continue to differentiate wild and farmed salmon and if the public

becomes more aware of the differences between the two, wild Alaska salmon should continue to retain their

market value.

The Kake Seafood Plant can readily sell product to wholesalers or brokers, as they did in 2011 when they sold

their fish to Cannon Fish Company of Seattle. The plant is not set-up to produce canned salmon, value-added

products, or vacuum packed portions. This plant is best suited to producing high-quality frozen H/G fish.

There are many wholesalers and brokers who can either buy fish or market them to other buyers for a

reasonable price. These wholesale and secondary markets are well developed, competitive, and should be

hungry for pink/chum supply in 2012.

With strong demand for wild Alaska salmon and competitive wholesale and secondary markets, this operation

should not have a problem obtaining fair market prices for their salmon.

Internal 2011 Season Summary

The study team benefited greatly from an internal summary report of the 2011 season. This report

highlighted a variety of complications and successes which occurred during the operation’s first year.

Relevant issues pertaining to equipment, facilities, management, staffing, training, and fish supply covered in

the internal document have been expanded upon and/or summarized in this report.


Business Plan


Plant Management and Labor

Opening the Kake seafood plant creates a significant number of jobs in Kake, and can improve the jobs of

fishermen in the region. The plant is expected to create 51 seasonal and year-around jobs, equivalent to 18

(FTE) full-time positions.

It is conservatively estimated the plant will create 2 year-round jobs in Kake, 25 seasonal jobs at the plant, 6

tender jobs, and provide a new market for 12 additional salmon trollers1. In addition, the plant is expected to

improve markets for an additional 15 to 25 seine and gillnet boats in 2012, employing roughly 40 to 65

skippers and crew. These are significant job creation figures, even more so in a community like Kake where

private sector employment opportunities are scarce.

Plant Management

Difficulties with plant management and inadequate planning led to a variety of problems last season (2011).

The following issues challenged the operation in 2011, and need to be addressed in subsequent seasons. The

study team suggests the following:

• Establish a clear hierarchy of authority. The plant manager needs to be in charge of the plant and

be accountable to owners and investors. In 2011 the management team appeared to lack a clear

chain of authority, and interpersonal relationships were a factor.

• Address potential repair and maintenance issues proactively. Several equipment and facility issues

came up in 2011 which hurt the plant’s efficiency. Some mechanical problems were to be expected,

since the plant had not been in operation since 2007. Management has recommended a

comprehensive preseason R&M program that anticipates plant R&M needs in advance.

• Insure managers have the temperament, training, and skills for the position. A lack of experience

and computer skills led to a loss of inventory control last season. In cases where an individual may be

light on skills but possess an aptitude for the subject, additional training should be provided. One

example would be Hazard Analysis and Critical Control Point (HACCP) training (and perhaps basic

computer/administrative) training for the QC/administrative staff during the offseason. This item

could be extended to all plant workers.

• Continue to learn and refine the operation. Each season is an opportunity to work on ways to

make the operation more efficient and more profitable. The plant manager, fleet manager, and

production manager should meet periodically during the season and during the off-season to discuss

ways to improve the operation. When new policies and practices are crafted, they should be

effectively communicated to workers so that new processes are understood and uniformly adopted.

1 The average salmon troller employs 0.5 crew, so 18 total seasonal jobs would be created if 12 new trollers entered the fishery.


Labor Requirements and Job Creation

Processing Plant Labor

The Kake seafood plant will require approximately 20 to 30 workers at the plant to operate at full capacity

during the 2012 salmon season. All of these jobs will be new for Kake residents, in that they would not be

there if the plant did not operate. The study team expects the plant will require the following staffing pattern:

Expected Staffing Needs for Kake Seafood Plant - 2012

Position Number of Workers

Plant Manager 1

Fleet Manager and Dock Foreman 1

Quality Control and Administrative 2-3

Repair and Maintenance 1-2

Receiving Dock and Shipping (glazing/packing) 5-8

Processing Line and Other Floor Workers 10-16


On peak days in 2011, the processing operation employed 18 to 20 people plus three managers. Running

four times more volume through the plant in 2012 will slightly increase the overall need for workers if

offseason capacity and efficiency issues are addressed as currently planned.

The plant operated for 70 days in 2011. Given the expectations for volume and timing, the study team

expects the plant could operate for 100 to 120 days in 2012, June through late September. The ability to

operate early and late is an advantage as major processors prefer to open later and close earlier, focusing on

the major volume period for salmon runs.

If the operation can secure adequate volumes of fish, the plant should not have a problem finding good, local

workers to fill these jobs. The plant had a core group of about 12 workers last season, but hours were limited

due to intermittent deliveries and equipment/facility malfunctions. The plant employed at total of 51 people

in 2011, paying out $136,700 in wages. With more hours available in 2012, total wages will increase

significantly, resulting in much lower turnover.

Given the importance of keeping the refrigeration system and processing lines operational, the plant should

consider additional training for R&M personnel. It is crucial that R&M personnel know how to anticipate

problems to keep the plant running and be able to quickly repair and restart equipment critical to

production. In addition, the plant needs to have a sufficient inventory of parts on hand to do in-season

repairs. Developing orientation and basic training materials for all workers will also improve efficiency and

insure consistent product quality.


Tender and Fishing Fleet Requirements

Given the need for at least two million pounds of raw fish, the plant will require a fishing and tender fleet

employing an estimated 60 to 90 workers in 2012. The study team estimates that the following number of

gillnetters, trollers, seiners, and tenders should support the necessary fish supply.

Fishing and Tender Vessels and Workers, 2012

Vessels Workers

Gillnetters 10-15 20-30

Power Troll and Hand Troll 10-20 20-30

Purse Seiners 3-5 15-25

Tenders 2-3 4-7


FLEET RECRUITMENT STRATEGIES

Recruiting boats for the 2012 season is absolutely critical, and is currently underway. However, the process

will be ongoing, and once boats begin making deliveries it is the job of the fleet manager to retain that fleet.

This means providing adequate tender service, coordinating deliveries, and maintaining communication with

each captain.

The study team suggests a straightforward approach for building a gillnet fleet: overpay for awhile. The

nearest gillnet fisheries are well serviced by existing processors and Kake does not have a geographic

advantage in these fisheries. Fishermen in the Taku River and Tree Point gillnet fisheries are much more likely

to switch processors than seiners who may owe outstanding equipment debts to processors. If the plant

manager and fleet manager make contact with area gillnetters and offer a $0.05/lb to $0.10/lb premium,

they should be able to recruit 10 to 20 boats for the 2012 season. Paying up for these fish is more than offset

by the money Kake saves by having access to a local labor force. Other large plants spend significant money

to board nonresident seasonal workers.

Building a troll fleet for the South Chatham area will be an outreach effort. The plant manager and fleet

manager need to make sure trollers in Kake, Port Alexander, and Petersburg are aware that there will be a

ready market if fishermen wish to troll the South Chatham area. The major competitors for troll-caught fish

are Seafood Producers Cooperative (Sitka), North Pacific Processors (Sitka), and Alaska Glacier Seafoods

(Juneau).

Early/late/over seine deliveries can be coordinated through Silver Bay Seafoods in Sitka, Ocean Beauty

Seafoods in Petersburg, Trident Seafoods in Petersburg, Icicle Seafoods in Petersburg, or Bobby Thorstenson,

who is an advocate for a successful Kake operation. A competent fleet manager will be able to secure

early/late delivers when larger processors close down, while offering a competitive price.

Unlike jobs created at the plant, the majority of these jobs will not be new jobs. However, the South Chatham

troll fishery does present a significant opportunity for residents living in Kake and Port Alexander to utilize

their commercial fishing permit. Kake residents fished only nine troll permits in 2010, while 23 troll permits


were not fished. By virtue of its proximity to the South Chatham fishing grounds, the Kake plant could create

a viable opportunity for additional troll boats to enter the fishery.

In addition, by taking early/late seine deliveries the plant can improve prospects in the seine fishery. Many

large plants in the area close down once the peak run is over, and that leaves seine boats that wish to

continue fishing for late chum or coho salmon with no market. By providing a market for early/late seine

landings, the Kake plant would improve earnings in the seine fishery for those boats that wish to fish early

and/or late.

Potential for Expansion in Angoon

In the future, Rocky Pass Seafoods may consider re-opening a fish buying station in Angoon. In 2010, there

were 12 unused troll permits owned by Angoon residents and 35 unused permits in Hoonah. Operating a fish

buying station in Angoon would produce incremental amounts of fish by allowing residents in the region to

commercially harvest fish near Angoon and the Hidden Falls hatchery. The station would require at least one

full-time employee to buy fish and operate and maintain the ice machine and other equipment.

In addition to providing volume for the plant and economic opportunity for Angoon and Hoonah residents,

the fish buying station will allow Rocky Pass Seafoods to better utilize their South Chatham troll tender. A

tender servicing the South Chatham troll fishery need not provide daily service, and with proper coordination

a single tender could deliver fish from South Chatham and Angoon to the plant. The following is a

hypothetical tender schedule showing how this could work:

- Monday: Tender buys fish from South Chatham trollers

- Monday night: Returns to Kake plant

- Tuesday early morning: Unloads fish at plant

- Tuesday late morning and afternoon: Travels to Angoon to pick up fish in ice totes

- Tuesday night: Offload fish at Kake plant and return to South Chatham

- Wednesday: Tender buys fish from South Chatham trollers

Many unused troll permits in these communities are of the hand-troll variety. Participation in the hand-troll

fishery has been in steady decline, primary due to the following factors: 1) lack of infrastructure and ice, 2)

lack of markets/tenders, and 3) fuel costs associated with traveling to areas serviced by tenders and fished by

power trollers. Due to the location of Kake and the operation of Rocky Pass Seafoods, hand-trolling may

become feasible for more boats.


Equipment and Facility

Offseason repairs need to begin soon so the Kake plant can open by June to process troll-caught chum

salmon from Icy Strait.

Preseason R&M needs are estimated at $220,800 to $260,700, depending on how the plant is configured.

Preseason Repair and Maintenance Summary, 2012

Estimated Cost

with CSW* System Estimated Cost

with RSW* System

Refrigeration $95,900 $140,800

Plant Flow 19,000 19,000

Roe Processing/Dryer 28,700 28,700

Freight and Other Costs 27,700 27,700

Plumbing and Electrical 19,500 19,500

Contingency Funds 30,000 30,000

Total Offseason R&M Cost $220,800 $265,700

*CSW is “chilled seawater” (using ice) and RSW is mechanically refrigerated seawater Source: Study team estimates.

Currently in the plant there are bottlenecks limiting production, and injury risks exist as well.

• The plant has enough insulated totes to store 90,000 pounds of fish, but storing fish in totes for

several hours can degrade quality. Since there are holding tanks inside the plant that could be

hooked up to chilled seawater (CSW) or refrigerated seawater (RSW) system, the study team

recommends utilizing the tanks for tender offloads. The tanks will also be useful if the processing line

gets behind and fish need to be stored for several hours.

• The processing lines need to be re-plumbed, straightened, and overhauled. Plumbing issues, poor

fish flow, and worn out belts and other components limited processing capacity last season. With

both lines operational the plant could process up to 10,000 pounds of fish per hour.

• The refrigeration system is a costly safety hazard that needs to be addressed. There are ammonia

leaks, incorrectly installed valves, corrosion, and worn out compressors making the refrigeration

system inefficient and an injury risk.

• A roe dryer will be needed to produce significant volumes of ikura (chum salmon roe), a product

critical to profitability.

• Loading container vans with finished product is cumbersome and the process needs to be improved.


Repair and Maintenance Summary

Preseason Repair and Maintenance Summary

Work Items Labor Costs Remove old egg house to open floor space for processing $900 Construct new glazing breakout table 2,000 Replace joints and hoses for fish pump 2,000 Re-grade loading dock area 1,000 Change processing line layout for better flow 600 Certified overhaul for line equipment 10,000 Replumb water supply system and replace valves 6,000 Plumb holding tanks 2,500 Electrical work to resolve safety issues 9,000 Install new back-up generator 2,000 Install communications (VHF/Satellite phone) 200 Fix leaking roof and cleaning/housekeeping 2,000 Hook up Roe Dryer (go from 10 hrs to 2 hrs) 300 Build covered area on dock for wash table 1,500 Overhaul second ice house surge (not needed with RSW) 10,000 Re-plumb/re-label various ammonia fittings, pipes, and valves - Replace plate freezer hoses - Replace at least 6 freezer doors - Raise false ceiling in freezer #2 so racks fit inside - Address issues with ammonia pipe insulation/corrosion - Replace #1 condenser (because ammonia leaks) - Overhaul 75hp ammonia compressors - Estimated refrigeration labor costs 31,700 Total Cost for Work Items (ex. major equip. costs) $86,700 Equipment and Parts Capital Costs RSW chiller for holding tanks (not needed with CSW) $54,900 Refrigeration parts and materials for overhauls/etc 18,300 Replacement freezer doors (6 doors) 28,800 Send out 250hp compressor for servicing 7,100 Fish pump hoses and joints 2,000 New motherboard for shipping floor scale 500 Roe Dryer 28,400 Insulated fish totes (40 totes – not needed with RSW or CSW) 24,000 Communications Equipment 500 Miscellaneous materials, parts, and tools 5,000 Total Capital Costs $169,500 Other Costs Other Costs Estimated equipment freight (10 percent of Capital Costs) $18,200 Contingency Funds 30,000 Total Offseason Repair and Maintenance Costs (with CSW) $220,800 Total Offseason Repair and Maintenance Costs (with RSW) $265,700

See Appendix 1 for a list of equipment and service providers.


Salmon Market Conditions

Market Outlook

High prices combined with growing supplies of imported farmed Atlantic salmon in 2011 led to a crash in

farmed salmon prices, but left wild salmon prices fairly intact. The Urner Barry farmed salmon index dropped

from an all-time high of $5.10/lb in May 2011 to $3.68/lb in July 2011, and by November 2011 the index

had fallen to $3.05/lb. Farmed salmon prices tend to decline during the summer, as wild supply hits the

market but the farmed salmon price decline was extreme compared to prior years. Wild Alaska salmon prices

weathered the storm very well in 2011, given the circumstances.

Farmed Salmon Imports and Prices 2008 - 2011

Note: the farmed salmon index price refers to an average price for a variety of products (dressed, fillets, fresh/frozen) and should not be used to reference the price of a specific product, but rather as an index of overall farmed salmon commodity values. Source: Urner Barry and NMFS.

The chart shows a significant increase in 2011 import volume from the second to the third quarter. This

increased volume comes from Chile where production is beginning to come back online after the majority of

its production was wiped out by the ISA virus a few years ago.

Despite the market cachet of wild Alaska salmon, wholesalers have reason to be concerned heading into

2012. There may be some downside risk present in 2012 more than upside potential; given lower farmed

salmon prices, the teetering economies of G-7 countries, and the value of the dollar. Prices for Alaska salmon

are generally higher than they have ever been in the modern salmon era2, so it would not be surprising to see

2 Since the proliferation of farmed salmon.

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

$5.00

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100.0

105.0

110.0

115.0

120.0

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Quarterly Farmed Salmon Import Volume Farmed Salmon Index Price

2008 2009 2010 2011


market prices retreat for some products in 2012. However, there are several reasons to be optimistic that the

wild salmon industry will not see significant price erosion.

• The global supply of pink salmon should be down significantly from 2011 levels. Lower pink salmon

supplies should drive demand for both pink and chum salmon in the frozen market.

• The dollar is still relatively weak versus the Japanese yen, Chilean peso, Norwegian kroner, and

Canadian dollar. If this trend continues, the export market for Alaska salmon should once again be

strong.

• Alaska has made great strides in marketing their product based on its qualities as a natural, healthy,

sustainable food source from a pristine environment. As consumers become more conscious of where

their food comes from, the inherit qualities of Alaska salmon become more valuable.

• The farmed salmon price situation could be temporary. Retailers have not adjusted prices much since

wholesale prices plunged in May. This accelerated the price decline, as not enough product was

being sold at retail compared to the volume of product hitting the wholesale market. As retail prices

come down and sales volumes pick up, the wholesale market for farmed salmon should improve

somewhat.

Fishermen and processors still remember the salmon value crisis of the early 2000s. Given the sharp drop in

farmed salmon prices, Alaska salmon processors have reason to be nervous about the upcoming season.

However, the long-term future remains bright for wild Alaska salmon for the following reasons:

• Since January 2002, prices of fishmeal have increased 108 percent3. Producing salmon feed for fish

farms requires large amounts of fishmeal and fish oil. Feed accounts for roughly half of all farmed

salmon production costs.

• Since January 2002, the US dollar has weakened 31 percent against the Chilean peso and 33 percent

versus the Norwegian kroner. All things being equal, this would make farmed salmon products over

30 percent more expensive in the US market, providing insulation for Alaska processors.

• Returning to an environment where the dollar remains a strong currency for an extended period of

time would likely result in job losses in those industries which rely on export markets. Since job

creation is the top agenda for both political parties, it is likely the federal government would try to

prevent a strong dollar in the long-term.

• Consumers are becoming more conscious about the foods they eat, as evidenced by the prevalence

of “organic” options now available at almost all grocery stores. Free of antibiotics, dyes, and

synthetically created feedstocks, Alaska salmon are much more likely to appeal to consumers looking

for a more natural and healthy product.

If price erosion in the farmed salmon markets spread to the market for wild salmon, it is likely the sockeye and

coho species would bear the brunt of the impact. However, sockeye harvested in Southeast fill a higher-end

segment of the sockeye market, and would probably not be as affected. 3 In Chilean peso terms; the rise in US dollar terms has been even higher.


Pink and Chum Salmon

A large percentage of pink and chum salmon is exported to China. In 2010, roughly two-thirds of the total

pink and chum harvest was exported, and over half of that was shipped to China as frozen product. In recent

years, less pink salmon has been going into a can and more has been exported to China for reprocessing.

Utilizing pink and chum salmon as a commodity in value-added products and cost-effective fillet operations

in China has led to higher prices for processors and fishermen in Alaska.

Chinese cities like Dalian and Qingdao are home to large reprocessing plants, where frozen product from

Alaska, Russia, and other countries is processed into a number of different frozen fillet products. These

factories represent a significant investment, but need to process large volumes of product in order to utilize

their economies of scale to generate a profit. Through November 2011, over 131 million pounds of pink

salmon was exported to China – a 51 percent increase from the previous high of 87 million pounds in CY

2010.

Market Value Trends for Pink and Chum Salmon 2005 - 2011

Total AK Harvest

(millions lbs)

Total SE Harvest

(millions lbs)

Avg. Ex-Vessel Price (SE)

Avg. First Wholesale

Price (All AK)

Equivalent Price

Difference

Chum Salmon

2005 96.0 57.1 $0.30 $1.10 $0.37

2006 181.8 124.9 0.35 1.28 0.53

2007 130.5 77.1 0.39 1.41 0.59

2008 147.8 77.9 0.69 2.01 0.72

2009 131.0 71.2 0.57 1.72 0.53

2010 139.7 78.3 0.76 2.20 0.73

2011 124.3 80.1 0.81 N/A N/A

Pink Salmon

2005 556.1 207.1 $0.12 $0.93 $0.33

2006 269.6 46.9 0.17 1.21 0.54

2007 504.8 161.4 0.21 1.24 0.51

2008 293.1 58.8 0.37 1.84 0.72

2009 309.1 120.4 0.29 1.53 0.61

2010 400.6 101.1 0.40 1.78 0.75

2011 394.7 218.9 0.42 N/A N/A

Notes: Data for 2011 is preliminary. Ex-vessel price data generally does not reflect bonuses or retro payments. The ‘Equivalent Price Difference’ is adjusted for the difference between the weight of landed product and the weight of processed product. This figure may also be looked at as an indicator of gross profit per round pound purchased. Source: ADFG.

Export prices for pink and chum salmon were strong in 2011, despite the increase in export volume. The

average export price increased 12 percent for chum salmon and 8 percent for pink salmon. The price increase

in pink salmon is very notable, because 2011 was an up year in the two-year pink salmon supply cycle. Pink


harvests in Alaska and Russia, which account for the vast majority of global pink salmon supply, increased 450

million pounds in 2011 – yet the price increased. This suggests there is growing demand for pink salmon.

Export Prices and Supply for Pink and Chum Salmon, 2006-2011

2006 2007 2008 2009 2010 2011

Chum Salmon

Avg. Export Price/lb $1.26 $1.26 $1.37 $1.21 $1.49 $1.67

Alaska Harvest (in millions lbs) 181.8 130.5 147.8 131.0 139.7 124.3

Russia Harvest (in millions lbs) 115.5 123.2 138.4 189.8 195.5 162.9

Alaska and Russia Harvest 297.3 253.7 286.2 320.7 335.2 287.2

Pink Salmon

Avg. Export Price/lb $1.20 $1.16 $1.35 $1.13 $1.30 $1.40

Alaska Harvest (in millions lbs) 269.6 504.8 293.1 309.1 400.6 394.7

Russia Harvest (in millions lbs) 446.5 580.8 361.9 928.8 439.5 895.5

Alaska and Russia Harvest 716.1 1,085.6 655.0 1,237.9 840.1 1,290.2

Source: NMFS, ADFG, and Russian Pacific Fisheries Research Center.

The 2012 season projects to be a down year for Southeast Alaska, and Russian production will very likely

follow the same pattern.

Wholesale prices for pink and chum salmon are typically lower than comparable whole farmed salmon

product forms. As a result, the potential for price appreciation is constrained by the farmed salmon market.

However, as long as pink/chum salmon prices remain lower than farmed prices, the market for pink and

chum should remain robust as the most affordable salmon resource.

The farmed salmon market is unlikely to have a big impact on pink/chum markets unless farmed fillet prices

fall below the $3.30/lb range. Currently farmed fillet prices are selling at wholesale for $4.00/lb and up.

Given the price of farmed salmon has dropped so much, it is likely that a fillet price below $3.30/lb would

not be sustainable in the long term.

Coho, King, and Sockeye Salmon

Southeast sockeye, coho, and king salmon are generally sold into high-end, niche markets. These markets

include upscale retailers like Wegmans and Whole Foods, as well as restaurants whose clientele are willing to

pay a premium for Alaska salmon. These business models help create a valuable marketing image for Alaska

salmon, but price erosion in the farmed salmon market may affect demand for these higher-end Alaskan fish.

Bristol Bay processors in particular have made inroads with the domestic market in recent years by producing

and selling more sockeye fillets. This is a growing market adding value to product produced in Alaska. The

2012 Bristol Bay sockeye forecast is similar to 2011. On the other hand, Southeast processors pay a significant

premium for Southeast sockeye as traditional buyers consider these fish as premium quality.


Market Value Trends for Coho, King, and Sockeye Salmon 2005 - 2011

Total AK Harvest

(millions lbs)

Total SE Harvest

(millions lbs)

Avg. Ex-Vessel Price (SE)

Avg. First Wholesale

Price (All AK)

Equivalent Price

Difference Coho Salmon

2005 31.7 18.4 $0.95 $2.13 $0.67

2006 32.1 14.3 1.55 2.84 0.60

2007 24.5 12.8 1.32 2.50 0.54

2008 35.4 19.0 1.64 3.18 0.67

2009 27.5 16.8 1.05 2.72 0.96

2010 30.3 19.4 1.27 3.10 0.96

2011 21.4 13.6 1.27 N/A N/A King Salmon

2005 10.7 6.5 $2.53 $3.76 $0.69

2006 10.1 5.7 3.65 5.08 0.35

2007 8.7 5.3 3.52 5.00 0.71

2008 5.6 4.1 5.45 6.60 -0.21

2009 5.1 3.8 3.18 5.08 1.20

2010 5.3 3.7 4.21 4.87 0.66

2011 6.1 4.4 3.80 N/A N/A Sockeye Salmon

2005 266.9 9.1 $1.05 $2.26 $0.60

2006 237.7 7.6 1.14 2.38 0.57

2007 279.5 12.2 1.14 2.52 0.55

2008 225.8 2.7 1.37 2.83 0.53

2009 258.3 5.5 1.24 2.89 0.69

2010 242.6 4.2 1.68 3.46 0.73

2011 248.3 7.5 1.53 N/A N/A

Notes: Data for 2011 is preliminary. Ex-vessel price data generally does not reflect bonuses or retro payments. The ‘Equivalent Price Difference’ is adjusted for the difference between the weight of landed product and the weight of processed product. This figure may also be looked at as an indicator of gross profit per round pound purchased. Source: ADFG.


Financial Evaluation

Summary

The plant appears to have a financial break-even point of about two million pounds of raw fish. Given the fish

supply assumptions based on recommended supply strategies in this report, the study team assumes

purchase of 2.3 million pounds resulting in a net profit of $110,000 in 2012. Forecasts for 2013 and 2014

anticipate growth in fish supply and account for fluctuations in the seine pink harvest.

Pro-Forma Profit/Loss Estimate 2012 - 2014

2012 2013 2014

Total Pounds Purchased 2,280,000 3,010,000 2,690,000

Total Revenue $4,690,000 $5,770,000 $5,730,000

Total Costs $4,580,000 $5,280,000 $5,230,000

Estimated Net Profit $110,000 $490,000 $500,000


Key Factors and Assumptions

Financial forecasts are highly dependent on the model’s assumptions concerning key factors in the

environment in which the company will operate. Four key factors are discussed below.

• Ikura Processing: Paying a contractor to process ikura is the third highest cost center in the pro-

forma income statement, after raw material and labor costs. Beginning with an expert third party

processor will eliminate quality and production problems. While choosing to process ikura without

hiring an outside roe technician could potentially result in a lower grade and lower price, it could also

increase the bottom line significantly. However, ikura revenue is a crucial component for this plant, so

the decision must be carefully considered. It is in the best interests of the operations to develop a

high quality reputation as soon as possible, and that would be done with a third party contractor.

• South Chatham Troll Fishery: The financial forecast assumes that Rocky Pass Seafoods will be

successful in developing a South Chatham troll fleet. That fishery is expected to supply over 20

percent of the plant’s volume in year one, and nearly 30 percent of the plant’s volume by year three.

Of all the supply strategies, this one is probably the most uncertain. The study team believes there is

significant potential for consistent supply from this fishery, but it will require Rocky Pass Seafoods to

develop relationships with at least 10 to 12 trollers, preferably power trollers.

• Relationship Between Wholesale and Dock Prices: Net profit is highly sensitive to the wholesale

price and dock price. Conservative estimates about future wholesale prices have been used, but a five

percent drop in the expected average wholesale price would swing the plant from $110,000 in profit

in 2012 to a loss of $100,000. Typically, wholesale prices and ex-vessel prices move together. In


general, the total cost of buying fish (including fish-related taxes) is equal to 45 to 55 percent of total

revenue.

• Fleet Growth: The financial forecasts assume the operation will be successful in growing the fleet

each year. Some years may generate less product due to natural abundance fluctuations, but the

study team projects modest growth in troll, seine, and gillnet deliveries as the plant establishes itself

in the region as a consistent and reliable enterprise.

Estimated Sales Revenue and Raw Material Cost by Gear Type and Major Species

Raw Material ---------- 2012 ---------- ---------- 2013 ---------- ---------- 2014 ----------

Gillnet Cost Cost/lb Cost Cost/lb Cost Cost/lb

Chum Salmon $597,000 $0.95 $627,000 $0.95 $660,000 $1.00

Sockeye Salmon 266,000 1.85 280,000 1.85 280,000 1.85

Purse Seine

Chum Salmon 383,000 0.85 383,000 0.85 383,000 0.85

Pink Salmon 50,000 0.50 270,000 0.45 88,000 0.50

Coho Salmon 100,000 1.00 115,000 1.00 127,000 1.00

Troll

Chum Salmon 517,000 0.95 620,000 0.95 718,000 1.00

Coho Salmon 273,000 1.30 328,000 1.30 360,000 1.30

Sales Revenue ---------- 2012 ---------- ---------- 2013 ---------- ---------- 2014 ----------

Gillnet Revenue Price Revenue Price Revenue Price

Chum Salmon $767,000 $1.65 $781,000 $1.60 $806,000 $1.65

Sockeye Salmon 409,000 4.00 429,000 4.00 429,000 4.00

Purse Seine

Chum Salmon 500,000 1.50 500,000 1.50 500,000 1.50

Pink Salmon 97,000 1.35 540,000 1.25 170,000 1.35

Coho Salmon 150,000 2.00 173,000 2.00 190,000 2.00

Troll

Chum Salmon 704,000 1.75 821,000 1.70 930,000 1.75

Coho Salmon 567,000 3.00 680,000 3.00 748,000 3.00

Roe

Green Roe 195,000 3.85 372,000 3.50 340,000 4.00

Ikura 1,013,000 14.50 1,135,000 13.25 1,266,000 14.50

Note: Totals from this table will not match the overall pro-forma totals because harvest volumes from smaller supply sources are not shown on this table.


Pro-Forma Income Statement

The study team developed revenue and cost estimates through extensive market analysis of wholesale and

dock prices (see previous page); examination of 2011 operating statements and extensive interviews with

management; detailed research into each cost item; utilizing the knowledge of the study team as experienced

processors, harvesters, and tender operators; and detailed costing of R&M items in the preseason preparation

plan prepared by management and the study team. Costs include an estimated $40,000 annually for

depreciation.

Kake Seafood Plant Pro-Forma Income Statement, 2012-2014

2012 2013 2014 As % of 2012

Sales

Total Sales $4,690,000 $5,770,000 $5,730,000 $4,690,000

Total Pounds Purchased 2,280,000 3,010,000 2,690,000 2,280,000

Operating Expenses

Cost of Fish Purchased (plus taxes) $2,523,000 $3,016,000 $3,023,000 54%

Labor Costs (including R&M) 755,000 865,000 805,000 14%

3rd Party Ikura Processing 422,000 516,000 529,000 9%

Tendering (2 boats) 410,000 410,000 410,000 9%

Utilities 139,000 142,000 144,000 3%

Startup and Offseason R&M 134,000 40,000 40,000 4%

Supplies, Packaging, & Other Costs 40,000 133,000 124,000 1%

R&M Equipment and Parts 30,000 30,000 30,000 1%

Total Operating Expenses $4,423,000 $5,122,000 $5,075,000 94%

Gross Profit (Loss) $236,000 $618,000 $625,000 5%

Indirect Expenses

Accounting, Legal, & Insurance 54,000 54,000 54,000 1%

Other Indirect Costs 31,000 31,000 31,000 1%

Depreciation (est.) 40,000 40,000 40,000 1%

Total Overhead Expenses $125,000 $125,000 $125,000 3%

Total Expenses $4,578,000 $5,277,000 $5,230,000 98%

Net Profit (Loss) $112,000 $493,000 $500,000 2%



Appendix: Contact List

Note: Contacts with a person listed either contributed to this report, or have contributed relevant information for prior reports produced by the McDowell Group, Inc.

Wholesalers Bornstein Seafoods, Inc. Bellingham, WA 503.325.0403 Cannon Fish Company Seattle, WA 206.281.9322 E&E Foods Seattle, WA 206.768.8979 Favco, Inc. Anchorage, AK 907.278.1525 Kelley-Clarke Seafood, Inc. Seattle, WA 206.622.2581 Pacific Harvest Seafood Brad Boroughs Domestic Sales Manager [email protected] The Plitt Company Chicago, IL 773.276.2200 Ocean Fox Trading Company Mikio Tanaka Marketing Director 626.282.7900 [email protected] Ocean Products North America Seattle, WA 206.547.5307


Nihon Marine (Roe Processing and Salmon Wholesale) Edmonds, WA Toshi Kanai 425.582.0020 Sagaya Wholesale Anchorage, AK 907.272.5173 SeaBear Anacortes, WA 360.293.4661 Seafresh Marketing, LLC Seattle, WA 206.523.0863 Select Fish Seattle, WA 206.767.2642 SOGDA Limited, Inc. Kirkland, WA 425.828.6500 The Auction Block Co. Homer, AK 907.235.7267

Machinery and Supplies Longview Fibre Company Longview, WA 360.425.1550 MTC Equipment Todd Comstock Poulsbo, WA 360.697.6319 Marel, Inc. Donn LaRue Salmon Processing Sales Representative 206.619.0373 [email protected]


Pacific Scale Co. Harry Baughn Clackamas, OR 800.537.1886 TekNortherm (RSW and Refrigeration Services) Seattle, WA Jan Roar Ellefsen Vice President 800.728.1997

Other Services Bellingham Cold Storage Bellingham, WA 360.733.1640 Global Insurance Specialists, LLC Damon Nasman President 206.381.8700 [email protected] Hagen, Kurth, Perman & Co. (Tax and Accounting Services) Seattle, WA 206.682.9200 McGladrey & Pullen LLP (Tax and Accounting Services) 800.274.3978 Wells Fargo Insurance Services 866.226.7342

Regulatory Assistance & Relevant Fish/Game Personnel Alaska Department of Environmental Conservation Amy Hill Seafood Permit Coordinator 907.269.6288 [email protected] Alaska Department of Commerce, Community and Economic Development Kevin O’Sullivan Seafood Development Specialist 907.465.5464 [email protected]

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