HomeMy WebLinkAboutAgenda Report - April 5, 2006 City Manager CommentsContinued April 5, 2006
accomplishments have been made toward energy efficiency. Mr. Hansen stated that
municipal utilities are "under attack" by investor-owned utilities. He expressed disappointment
that the National Organization of the Chamber of Commerce supported the bill and stated that
he would speak to the Lodi Chamber of Commerce President about it.
H. COMMENTS BY THE CITY MANAGER ON NON -AGENDA ITEMS
• Mr. King reported that the Electric Utility currently has a BBB+ rating with an outlook of
negative. A delegation from Lodi recently went to New York to meet with Wall Street rating
agencies to respond to questions and describe plans for the future to improve the financial
health of the Electric Utility. In response to that meeting, Fitch released a report discussing
what Lodi's strategic plan is and what it reviews the outlook to be. He read the following
statement from the report:
Over the next 12 to 18 months, Fitch will monitor Lodi's progress implementing its
strategic plan to procure more stable power supply and the City Council's willingness to
set and maintain rates to fully recover costs and approve the Utility's finances. Fitch
recognizes that fhe City and the electric system have already taken many positive steps
over the past few months. These steps include the City Council passage of a 17910 rate
increase, the creation of a risk oversight committee and a risk management policy, the
authorization from the City Council to procure power beyond the City's current fiscal year,
and the recent hiring of a new general manager. If the Utility and the City are able to
implement the current financialand powersupply plan, a revision of the rating outlook to
stable is attainable.
In reply to Mayor Pro Tempore Johnson, Mr. King stated that the Electric Utility's rating was
changed from A- to BBB+ on October 28,2002.
Mr. King reported that staff has been in communication with East Bay Municipal Utility District
and the State of California Water Resources Agency and is monitoring the condition of
Pardee and Camanche Reservoirs and the Mokelumne River. The City will be prepared to
respond to any high water warnings.
PUBLIC HEARINGS
None.
COMMUNICATIONS
J-1 Claims filed against the City of Lodi — None
J-2 The following postings/appointments were made:
a) The City Council, on motion of Council Member Hansen, Mounce second, made
the following appointment by the vote shown below;
Ayes: Council Members— Hansen, Johnson, Mounce, and Mayor Hitchcock
Noes: Council Members — None
Absent: Council Members — Beckman
Lodi Arts Commission
Petra Gillier Term to expire July 1,2009
b) The City Council, on motion of Council Member Mounce, Hitchcock second,
made the following appointments to the Northern California Power Agency and
the Transmission Agency of Northern California by the vote shown below:
Ayes: Council Members— Hansen, Johnson, Mounce, and Mayor Hitchcock
Noes: Council Members — None
Absent: Council Members — Beckman
Northern California Power Agency
Larry Hansen, Delegate
Susan Hitchcock, Alternate
`George Morrow, Alternate
S
F,I't(--,-,b Rati
Public Finance
XNGW YOUR RISK
Public Power
Lodi, Calif.
Credit Analysis
Lodi Electric Utility
Ratings
■ Rating Rationale
Security cu""A Prewom pde
On Jan. 24, 2006, Fitch Ratings revised the Rating Outlook for the
Class Rating Rating chanpd
Lodi Electric Utility (LEU) to Negative, reflecting Fitch's increasing
$78 6 Million
concern regarding the system's credit profile. The utility's net short
Electric
System
system
osition has become increasingly costly, as the rice of natural as and
p g Y Y� P g
COPS BBB+ A- 10128f02
wholesale energy increased over the past year. Over the next
Cop - Certificate ofpartiaipation.
12-18 months, Fitch will monitor LEU's progress in implementing its
Rating Watch.... _ . ..... ...None
strategic plan to procure a more stable power supply and the city
RatingOutiook. .... ..... ........Negative
councils' willingness to set and maintain rates to fully recover costs
and improve the utility's finances.
Analysts
Hiran Cantu
Fitch recognizes that the city and the electric system have already taken
+1 212 908-0371
many positive steps over the past few months. These steps include the
hiran.cantu@fitchratings.com
city council passage of a 17% rate increase, the creation of a risk
oversight committee and a nsk management policy, the authorization
Lina Santoro
from the city council to procure power beyond the city's current fiscal
+1 212 908-0522
year, and the recent hiring of a new general manager. If the utility and
lina.santoro@fitchratings.com
the city are able to implement the current financial and power supply
plan, a revision of the Rating Outlook to Stable is attainable.
Profile
LEU serves and provides retail electric service
The electric's system's rating is supported by the ability to set its own
to a customer base of approximately 27,500
customers in and around the city of Lodi,
electric rates and recent willingness to raise rates. In addition, the system
which is located in the San Joaquin Valley of
has a diverse customer base with modest industrial loads and competitive
California, 35 miles south of Sacramento.
industrial rates. Also, the lack of retail competition in California alleviates
Revenues by customer class are composed of
the potential threat of load loss from competition for the near future.
residential (33%) commercial (43%) and
industrial (24%)revenues
Credit concerns include the substantial net short power supply position
that still exists and a financial profile projected to remain below
average over the next few years.
Key Credit Strengths
Diverse customer base and stable
Financial Summary
■ Management and city council focus service territory.
Mana
In the fiscal year ended June 30, 2005, the electric system achieved
an improving electric system's
debt -service coverage of 1.1 times (x) and currently has an
financial profile.
approximately $7 million in operating and rate -stabilization reserves
(equal to more than a month of operating expenses). Fitch notes that
Key Credit Concerns
Lodi's reserves are expected to decrease to $3.3 million by the end of
■ Current net short power position.
fiscal -year 2006 despite the recent rate increase. These measures do
Below-average financial
not compare favorably with most public power systems. Fitch views
■ Continued exposure to natural gas
the system's liquidity as a concern, especially given its exposure to the
market.
volatile natural gas and short-term wholesale market and the lack of an
automatic fuel -adjustment mechanism in its rate structure.
Management expects its rates and future decreases in natural gas and
electricity prices should improve the system's margins and cash
balances over next 3-5 years (see Cash Reserves table on page 2).
Fitch reviewed LEU's assumptions regarding future commodity prices
and believes they are reasonable, although volatility in the energy
March 30,2006
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itch datings
K14OW YOUR RISK
terms. The utility department is under the direction of
the electric utility director, who is appointed by the
city manager. In the past two years, management ofthe
city and the utility have undergone significant changes
with a new city manager, finance director and utility
general manager.
Fitch recently met with city and utility officials and
believes there is substantial support to improve the
utility's financial profile and reduce its risk position.
Fitch will monitor city councils' willingness to set
and maintain rates to fully recover costs and improve
the utility's finances.
• Rates
LEU's electric rates (which do not include any automatic
fuel -adjustment mechanism) are set by the city council.
To meet rising energy costs, in November 2005, the city
council passed a 17% rate increase increased the average
rates to 14 centslkiiowatt-hour (kwh) from
11.8 centsWh. It is important to note that the rate
increase was heavily weighted toward LEU's industrial
customers In the past, the electric system did not charge
the full cost of service to its industrial customers.
After accounting for the recent rate adjustment, LEU's
electric retail rates remain in line with neighboring
mvestor-owned utility, Pacific Gas & Electric
(PG&E). LEU's residential rates are slightly higher
than PG&E rates, commercial rates are approximately
even and industrial rates are lower. Further assisting
LEU's competitiveness is that PG&E's rates are
expected to increase over next year, as it continues to
pass fuel cost increases to its customers.
■ Service Area and Customers
Fitch views the Lodi service area and customers as
credit neutral. Lodi is located in California's Central
Valley, approximately 90 miles east of San
Francisco. The regional economy is based primarily
in agricultural products, in particular, the wine grape
industry. Income levels are 72% and 78% of state and
U.S. levels, respectively, although unemployment
and poverty levels are comparable with state and
national averages. Population and energy sales
growth has been moderate averaging 1.6% and 3%,
respectively, over the past five years.
LEU serves the entire city, or approximately 27,500
customers. Revenues by customer class are drivers
and consist of residential (33%) commercial (43%)
and industrial (24%) revenues. LEU has minimal
Public Finance
customer concentration, with the 10 largest customers
representing 11 % of revenue and the largest General
Mills processing plant (comprising 8% of energy
sales and 3.4% of revenues). Fitch also notes that the
largest utility customers have been part of community
for several decades.
■ Security Features
Revenue Pledge
Net revenues of electric system.
Rate Covenant
Electric system must set rates to equal 1.I Ox annual
debt service. Net revenues include available funds
authorized for the electric fund.
Debt -Service Reserve Fund
Lesser of 10% of COP proceeds, maximum annual
debt service (MADS) or 1.25x average annual debt
service.
Additional Bonds Test
Additional parity obligations are permitted if net
revenues in the 12 consecutive months of the
previous 18 equal L I Ox MADS for existing and
proposed debt or an engineer's report certifies that
adjusted net revenues for the next five years equal
1.10x MADS on existing and proposed debt.
Flow of Funds
All revenues are deposited to the electric fund and
used in the following priority:
• Operation and maintenance expenses.
• Debt -service fund (amounts required to pay
principal and interest).
• Reserve fund (amounts required to restore
reserve fund requirement).
• Surplus fund (any lawful use ofthe city).
What Could Lead to a Positive Rating
Action?
• Procuring a more stable power supply.
• City council's setting and maintenance of
rates to fully recover costs and improve the
utility's finances.
What Could Lead to a Negative Rating
Action?
■ Deterioration of cash and coverage beyond
current projections.
■ Continued volatility and higher for natural
gas and wholesale energy prices.
Lodi. Calif.
Fitch RatinaysPublic Finance
I;'MW YOUR RISK
Financial Summary - Lodi Electric Utility
(5Mil , Fiscal Years Ended June 30)
Unrestricted Funds
2005
2004
2003
2002
Moll
Cash Flow (x)
11.873
16,200
18.356
22.962
N.A.
Debt -Service Coveraae( x)
1.10
1.56
1.83
(e.93)
(1.19,)
Adpalled Debt-Serviicoe Coverage`
1.03
1.26
1.29
0.18
0.82
Fun Coverepe Obligadon"
0.72
0.97
1.00
0.06
0.68
OebtlFunds Available For Debt Service
11.4
6.4
6.9
(3.2)
(26.2)
Adji>siled DaWAdjusted Funds Available for Debt Service'
SA
7.2
7.4
52.0
12A.
Liquidity
Days Cash/Liquidity On Hand
37
49
7
14
N.A.
LewrMD (%)
Equity/Capitalization
14.4
15.7
17.1
10.4
42.5
Equity/Adjusted Capihalization"
6.7
7.9
8.7
2.7
16.1
Other (%)
General Fund Transfer/Revenues
11.2
11.1
11.6
N.A.
N.A.
Grass Variable -Rate Debt/Capitalization
50.9
46.7
44.9
0.0
0.0
Vanable-Rate ExposurelCapitalization
0.0
0.1
0.0
0.0
0.0
Selected Balance -Sheet Items
Total Operating Revenues
53,908
52.899
48.872
47.267
40.115
Total Operating Expenses
54.163
52.682
48.558
64,901
46.991
Operating Income
(255?
217
315
(17,635)
(6,876)
Adjustment to Operating Income IorDebt-Service Coverage
7.178
12.697
12.274
776
5,217
Funds Available for Debt Service
6.923
13,114
12,569
(16.856)
(1,659)
General Fund Transfer
6.059
5.865
5.672
N A
N A
Total Annual Debt Service
6,274
7,680
6.897
2.431
1,391
Unrestricted Funds
4.897
6.347
772
2.423
N.A.
Restricted Funds
11.873
16,200
18.356
22.962
N.A.
Total Cash
16.770
22.547
19.127
25.385
NA
Total Debt
78,664
84.336
86.267
54.060
43.425
Equity and/or Retained Earnings
13,275
15.694
17,783
6,295
32.059
'Adjusted for purchase power obligations. "Adjustedfor purchase power obligations and general fund transfer. N.A.- Not applicable. Source:
Cornorehensive annual financial renorts.
CopyriIii1tl C 2006by Filch, Int, Fitch Ratings Ltd and its subsidiaries- One Stere Suva Plata. NY, NY 10004_
Tnkptune: I-MI53-024, (212) 90#-0500. Far: (2t2) 4604435. Reproduction or rctwramisaton in whole m in pat is prohttbited except by pavmiaaion. AN rights raervpd All of the
iin[mafen ounamed letdn is based an lufongaidon obtained km issuers, other oblieprs, mdwwritps, nod other swam which Fitch believes to be rdi&k Fitch does not shrill or verify the
truth or aonucy of any such iakrtnatien. Asa result, the i ilamalion in"repon is p rovided "as ia" widwA 6my ralimseniation or warranty of aay kind. A Fitch ruing is an aphrion as to We
stand nvprdunese of a scarify. The rating does not addess the tide of loss de to ruts other than credit risk, u hiss such rYk is specifically nsentioned Filckis not »ngaged in tlit of&r or sak of
soy stcurky. A report providing a Plum ruing is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issue and in agents in connection
with the sale of fine securities. Ratings may be changed smpendnd, or w Jsd nvn at anytime for any roan in dee sok disunion or Filch Fitch dots our provide investment advice of any sort
Ratings aro not a recd mendnion to buy, sell, or hold any security. Ratings do not comnem on the adequacy ormarka price, the suitability oraey severity for a particular investor, or de tax-
esaemipi nam" or tz mbilhy orpayments made in respect to any security. Filch raxives fns from issuers. insurers, guarantors, other obligors, and underwriters fpr rating aecuritits. Such fees
genealhy vary from USSI,ow to USS750,000 (or the applicable currency equivalent) per issue. In certain cans, Filch will rate all or a aur6er of issues inured by a particular rarer, or insured
or guacantoed by_a particular insurer or guarantor, for a single ann" fee. Such fees are expected to vary limn USS10,000 to USSI,500,000 (or the applicable currency atpivalent). The
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publishing and distribution, Fisch research may be available to eledm is subscribers up to three days earlier than to print subscribers.
Lodi, Calif.