The URL can be used to link to this page

Home My WebLink AboutMinutes - May 10, 2005 SSCITY OF LODI INFORMAL INFORMATIONAL MEETING "SHIRTSLEEVE" SESSION CARNEGIE FORUM, 305 WEST PINE STREET TUESDAY, MAY 10, 2005 An Informal Informational Meeting ("Shirtsleeve" Session) of the Lodi City Council was held Tuesday, May 10, 2005, commencing at 7:01 a.m. A. ROLL CALL Present: Council Members — Hansen, Hitchcock, Johnson, Mounce, and Mayor Beckman Absent: Council Members — None Also Present: City Manager King, City Attorney Schwabauer, and City Clerk Blackston B. TOPIC(S) B-1 "Review and update regarding Electric Utility issues" Electric Utility Director Vallow recalled that in 1999 the Utility's capital program was reviewed. The City issued $42 million (net proceeds) of bonds and the funds were deposited into a capital account held by the irustee Bank of New York. Within the $42 million was $12 million to build a 60 kV transmission line from Lodi to White Slough, hooking up to the Western Area Power Administration. The City established a reimbursement resolution in 1997. The first $6 million of proceeds went to reimburse the City for capital expenses. Refinancing was done in 2002. The City received a lower interest rate and returned $6 million to lower the debt. Mr. Vallow reviewed the following documents (all filed): 1) Capital expenditures 1999-05; 2) Five year capital plan 2006-10; and 3) a list of projects paid for from the borrowed funds from 1999 to March 31, 2005 with a total cost of $21,593,942. Approximately $11.9 million is projected to be in the bond fund at the end of this year and will be spent down in 2005-08. After that time, it is expected that the capital program will be funded 100% from revenues/electric rates. Approximately $8 million is budgeted in Operations and Maintenance (O&M) of which $6.5 million is for O&M and $1.5 million is for capital. City Manager King reported that the City made the finding, when it offered the bond resolution and indentures, that it could reasonably expend the money in five years. He wants to ensure that the City i§ spending down the money within the appropriate time period and that it is performing to the list of projects that borrowers were told the City would spend the money on. Mayor Pro Tempore Hitchcock recalled that previous discussions occurred related to spending the borrowed money on new street lighting. She did not believe it was listed in the original borrowing; however, staff informed her it was for "Dusk to Dawn Lighting". In reviewing the budget it appears that very little money was expended on the Dusk to Dawn Lighting program, yet street lighting costs totaled approximately $5 million. She pointed out that neither of the major projects for which the money was borrowed have been accomplished, i.e. the 60 kV transmission line and the new Electric Utility building. Ms. Hitchcock asked staff to provide her with the original list of projects that were outlined in first borrowing, so that she could compare it to the list Mr. Vallow presented today. Mr. Vallow replied that the transmission line project ceased when the energy crisis and Pacific, Gas & Electric bankruptcy occurred. Jim Pope, General Manager of the Northern California Power Agency (NCPA), stated that he had been asked by the City Manager to look at the financial situation of the Lodi Electric Utility. The Utility's credit rating was downgraded a couple of years ago from A- to BBB+, Continued May 10, 2005 which in turn downgraded NCPA's rating. With the aid of overheads (filed), Mr. Pope outlined a list of goals for the Utility. He stated that a plan needs to be developed to accomplish what the rating agencies were told by the Utility in 2002. He recalled that in the late 1990s restructuring was put in place by A131890, which significantly changed the market and industry and created more risk on customers' power supply cost. Adequate reserves need to be maintained so the Utility can deal with uncertainties and contingencies that come forward in the future. It appears that Lodi Electric Utility has a gap of $6 million to $7 million between dectric revenues and expenses, which is g)ing to require a rate increase for retail customers over the next several years. There is also concern about the Utility meeting the debt coverage ratio of 110% of debt service coverage. Rating agencies were told that the City would increase rates via Market Cost Adjustments (MCA) to build a cash reserve of $15 million by 2008. Currently the Utility has a $6.5 million total cash reserve. Lodi's wholesale power costs do not have an adequate cushion for future power purchases, due to unknown forward market prices. He reviewed projected revenues/expenses for 2005-11 and reported that a shortfall would occur by 2007 and increase in the future. Failure to meet the minimum debt service coverage would mean a technical default, which could possibly cause immediate disclosure to the bondholders, an early call on the bonds, downgrading of the bonds to junk status (i.e. BBB- or C), as well as an impact on the NCPA bond rating. It would negatively affect the Utility's ability to obtain energy in the wholesale energy market. A 25% rate increase would result in a $15 million reserve by 2009-10. An option would be to increase rates 10% in 2006, 10% in 2007, and 5% in 2008. He explained that a MCA is limited to the energy cost market that the Utility is covering. A full rate increase would cover the cost of energy and other increasing costs such as inflation, contingencies, or building a reserve for capital needs. Council Member Hansen commented that one of the reasons the Utility finds itself in this situation is that MCAs were not made during a very volatile time period. He felt it was imperative that the Utility's credit rating not drop below B+. In answer to questions posed by Council, Mr. Pope stated that one way to assure cost certainty is to acquire energy on a longer term basis. For major projects electric utilities can either reserve the money going forward or borrow the money and put the debt service and principal in rates for 30 years. He stated that a distribution substation costs between $12 million to $15 million. He reported that all other members of NCPA are rated A, or above. Council Member Mounce expressed concern that an explanation for the current situation of Electric Utility has not been clearly delineated. She was opposed to increasing electric rates until financial responsibility resumes, and it is determined that prudent management of the Utility has been undertaken. Addressing Mr. Vallow, Mayor Pro Tempore Hitchcock asked why the rate structure was not sufficient to cover costs of doing business and why Council has not been kept informed of the situation. Mr. Vallow replied that very few people understood what was going to be happening (to the market) from February to March. For the last several years decisions have been made based on history and it has been the practice to buy out two quarters in advance. Mr. Vallow stated that his mission has been to keep electric rates low. He reported that the strategy undertaken this year has saved a "couple million dollars". Mr. Vallow commented that if there is a policy shift in which rate increases are acceptable in exchange for higher certainty, he would follow it. W Continued May 10, 2005 Council Member Hansen suggested that it might be beneficial to tier residential rates to minimize the increases. He pointed out that commercial and industrial customers' rates in Lodi are much lower than PG&E, pursuant to Council policy in an effort to attract businesses to the community. Mr. King reported that he would be centralizing accounting functions by bringing an Electric Utility employee into the Finance Department under the direction of Finance Director Krueger. Checks and balances need to be in place regarding bulk purchase power buying decisions. It is planned to involve the Finance Department, City Manager's Office, and NCPA to a greater degree in making those decisions. In addition to Electric Utility, the City needs to develop healthy reserves in the Water and Wastewater funds to pay for the PCE/TCE contamination cleanup costs. Mayor Pro Tempore Hitchcock did not think that moving an Electric Utility employee under the Finance Director was a good long term way of handling the situation. Mr. King estimated that it would be necessary for one or two years. C. COMMENTS BY THE PUBLIC ON NON -AGENDA ITEMS None. D. ADJOURNMENT No action was taken by the City Council. The meeting was adjourned at 8:37 a.m. ATTEST: Susan J. Blackston City Clerk Electric Utility Department Capital Overview of the Electric Utility City Council Shirtsleeve Meeting May 10, 2005 Electric Utility Department Capital Expenditures 1999-2005 (Amounts in Thousands) Initial Bond Proceed 8/31/99: $42,000,000 Projected Balance June 30, 2005: $11,900,000 *Reimbursernent for capital expenditures 1011/1991 - 8/11/1999 "Return of proceeds during 2002 re -financing I 1999 2000 2001 2002 2003 2004 2005 Total Capital Expenditures (3,562) (3,056) (3,384) (3,104) (3,090) (2,607) (2,789) (21,592) Other Expenditures -(6,000) **(6,000) (12,0 Projected Balance June 30, 2005: $11,900,000 *Reimbursernent for capital expenditures 1011/1991 - 8/11/1999 "Return of proceeds during 2002 re -financing I C TP/, I L Electric Utility Department Five Year Capital Plan Fiscal Year 2006-2010 (Amounts in Thousands) 2005/2006 200612007 2007/2008 200812009 200912010 Total Total Capital Expenditures 3,500 5,500 5,500 4,000 3,500 22,000 Included in O&M Budget (rates) 1,500 1,500 3,000 2,500 2,500 11,000 Net added cost 2,000 4,000 2,500 1,500 1,000 11,000 Funded existing bond proceeds 3,500 5,500 2,900 - - 11,900 Capital Fund Balance 9,900 5,900 3,400 1,900 900 00161 Utilltv Outlav Reserve Fund Description 1999 2000 2001 2002 2003 2004 2005* Total by acct 161001 Electric Contingency - - - - - ---- 43,7 17,381 61,162 161037 JD Edwards Implementation 119,651 - 119,661 iSiO4S Siockton St/Lodi-Lockefor - i ri'm - 10,923 161060 Elm St Recon/Church 224,373 - - 224,373 16iOG2 SCADA & UPS System 82,601 7,000 - 89,601 161062 Stockton SVrokay to Lodi 86,858 - - 86,858 161069 Lodi Station Parking Structure 104,027 5,864 - 1091891 161369 Pw-Local Area Network �ystem 4,752 9,44-- - - 14,186 161392 Wide Area Network - 45,044 7,465 - 52,509 161633 Street Light Improvement - 23,412 56,383 79,795 161646 EUIP-EUD Syst Studies - - - - 22,331 22,331 161647 E1.1113 -Interconnect -Substation 90,527 81,253 30,934 31,248 42,331 4,088 30,477 310,858 161648 Interconnect -Trans Line 147,202 - 3,978 - - - 151,180 161649 Interconnect-Misc 293,753 2,391 - - 296,144 161650 Electric Service Center - 226 219 1,196 13,642 45,5 220 61,246 161661 EUIP-Line Extensions 469,465 602,794 933,784 509,731 300,512 451,858 466,230 3,734,374 161652 EUIP-Distribution SjTtm 973,746 916,399 1,096,427 841,911 996,980 463,869 265,831 5,555,162 161653 EUIP-Service Connections 87,867 172,829 184,547 151,470 1D5,440 123,167 127,846 953,166 161654 EUIP-Dusk to Dawn Lighting 0 �540) 2,628 685 377 498 1,432 1,582 5,662 161655 EUIP-Substructures 163,848 110,940 188,193 145,992 149,530 263,154 161,687 1,183,344 161656 EUIP-Service Connections 30,452 88,526 41,888 56,580 66,015 73,640 45,713 396,814 161657 EUIP-Substation Const 1, TR,116 80,850 57,953 50,840 9,0891 257,674 7,699 1,650,221 161658 Substation Const -Protection 15,599 - 15,599 161669 Substation Block Wall - - 6,115 56,728 30,4681 93,311 161672 EUIP-Street Light Improve 27,383 289,528 625,181 1,198,797 138,860 658,009 2,937,758 161674 Streetlight Standards Upgrade I - - - 3,765 2,384 6,149 an 161675 EUIP-MSC Expankik 51,107 39,518 75,150 166,775 161677 Killelea Substation Construction 187,590 79,590 267,180 161676 EUIP-Property-E -Lodi Ave - 38,083 - 38,083 161679 Operations Ctr Modfication - - - - 13,916 13,916 101680 EUIP-60KV Line Ind Subs - 134,562 3,081 58,423 35,7 75,814, 307,646 161681 EUD Operations 70enter Improvement 161682 Remote Radlo Motors ProLect - 9,899 - 2,098 21,534 - 4,763 11,997, 26,297 161585 Fiber Optic System 164019 LED Traffic Signal - 0 - 91,329 - 0 - 0 - 0 379,477 0 160,334 0 539,811 .... ... 91,32 1611201 EUIP-Coeltal Equipment Year Total 100,7241 1 3,562,510 1 615,709 3,056,676]_ 365,253 3,WW-3,-103,981 72,795 58,197 -S,�090,340 78,5011 2,606,045 1 618,561 2,789,6571 1,909,740 21,593,942 * note: 2005 YTD MerrIn 31, 2005 F7&1-01 (0 -aT- City.of Lodi Electric Utility Department Financial Overview Presentation By Jim Pope General Manager, NCPA Prepared by Donna Stevener, AGM/CFO, NCPA May, 10, 2005 CPA 1 List of Goals for Lodi Electric Utility • Develop a financially sound Electric Utility that can contribute to overall city success and provide dividends to customer/owners • Develop a plan to accomplish what Rating Agencies were told in 2002 — build reserves! • Develop sound fiscal policies and long-term plans • Develop long-term power supply plan to obtain cost certainty for customers • Improve current bond rating • Develop and maintain adequate reserves • Balance achievement of above Goals with impacts to customers CPA - . - *., .1 List of Concerns/issues Overall concerns: Lodi appears to have a large gap ($6 to 7+ million) between Electric revenues and expenses which requires rate increases to retail customers over the next several years • Meeting of debt coverage ratio covenant • Rating Agencies were told that increased rates via Market Cost Adjustment (MCA) would build cash reserves to $15 million — currently only $6.5 million in total cash (3/31/05) * CPA UNTMIN CAMONLA POWER AGENCY .- .1 List of Con"cerns/Issues Overall concerns: Power budget may not have adequate cushion for future power purc,hases due to unknown forward market prices — no price/cost certainty due to unhedged power costs during next year and beyond Rating downgrades for Lodi impact NCPA ratings and impact all other NCPA members as well * CPA -.1 $90,000 $8%000 $709000 S V $60,000 $50,000 0 $409000 $309000 $20,000 $1 %000 $0 Lodi Electric Utility Department Projected Revenues/Expenses FY ending 2005 to 2011 Revenues needed to obtain minimum 1. 10 debt service coverage Nei .,N ell eb so ss� so M Power Supply E Debt Service H Operations & Maintenance IM PILOT or transfer to General Fund 5 0 Capita' Pro am 9 Public Benefits PA N Total Revengues Lodi Electric Utility Department Projected Cash Balances — Do Nothing Scenario FY ending 2005 to 2011 $30.0 $20.0 $10.0 $0.0 .2 -$10-0 E -$20.0 -$30-0 -$40.0 -$50.0 -$60.0 CPA Cash Reserves - no changes -a- Cash Reserve Targets A What is driving this? Purchased power is the main cost driver for the electric utility Current and forward $120 purchased $110 $100 power market "0 $80 is very $70 volatile and $60 $50 increasing $40 costs are $30 $20 projected for $10 the f utu re * CPA .. - .1 , Baseload Wholesale Electricity Prices Cf) Lr) r- CD Cf) Lr) 1- 0) 1%. 0) 'r- V) o) m 0) 0) 0 0 0 0 T- T- cm N CY) 0) o) 0) 0 CD 0 0 0 0 a 0 0 0 0 0 T- T- T- r- CM 04 04 04 04 04 04 04 N N N N 7 So...Why should we care? Lodi has agreed in official bond documents to: Rate Covenant Orworvi.irl-ts a 4: '.01 pirescribc vid coil-ect raws and c,hart"r.'s for the ScrVices, facillfies acid electricity of the Ele4tric System during cai;�h Fiscal Year which �;Wl -he at itist mfflciert tn 004:- (a) Adjusted Anuoal Rcvenues for such Fiscal Year at ),(,.ast equal to the swn of the following for such Fiscal Year- (1).Adjusted Maintenance anJ Operation Costs; (ii) Adjusted Annual Debt Smice voith respect to the InstaHment Payments and Parity Obligations, and (iii) all other payments required to meet any other obligations of the City which are cbarges, hens or enfeumbnxices upon or payaWe ftlom the Electrio Revenue Fund including all arnounts owed to atty issuer of a Financial Guaranty then in effect and deposited in the Reserve Fund ander the teryns of such Financial Guaranty; and (b) Adwsted rAuintal Net Revellucs for such Fiscal Year equal to at lea-st 110% of t1w Adjusted Annual Debt Senvice %�,ith respect to the Installmm Payments and Pm* Obligations for S'Ucb. FisrW Year. The City may make adjustiments, firom time to time in such fees and charges and may make such clas-sification there -of as it deerns necessary but may not reduce the rates and charges then in eflea unless the Adjusted Annual Revenues and the Adjvaod Annual Net Revenues frorn such rcdticeJ rates and cbarges will at all fimes be sufficient to meet the requiremciats dc -scribed in the preceding sontence. 8 What does this mean to Lodi? Failure to provide mi6imum debt service coverage on bonds would mean a technical default on outstanding debt Possible consequences — — Immediate disclosure to bondholders — Early call on bonds — Downgrading of bonds to junk bond status — Impact on NCPA bond rating as well as fellow NCPA member munis — Increased future bond costs for Lodi customers — Impact on ability to obtain energy/ increased purchased power costs due to Lodi's counterparty risk What should Lodi's picture look like? Projected Revenues/Expenses FY ending 2005 to 2011 A SUM Ygap ove dfikiha rlyears,:.�plus building reserves: *9 17 1 -Mi FA $60 $60 0 $40 $30 $20 $10 k� 0�,Vdp At & 4� eop 4P -CP 4�e ob ob ob, ep Vol Ve . 4V * Power Supply 0 Debt Service * Operations & Maintenance El PILOT or transfer to General Fund * Capital Proqram M Public Benefits * Revenues - Phase in 10 Revenues needed: to obtain minimum 1. 10. debt service coverage PA Lodi Electric Utility Department Rate Increase Options 3 Year Rate/Revenue Increase * 10% in FY 2006 9 10% in FY 2007 9 5% in FY 2008 9 No increase in years 2009 or 2010 One-time Rate/Revenue Increase 9 25% in FY 2006 No increase in years 2007 thru 2010 .Lodi Electric Utility Department Projected Cash Balances — Possible Scenarios FY ending 2005 to 2011 $25.0 $20.0 0 $15.0 pawn E $10.0 $6.0 $0.0 e Actuai 2004 Propcted Proocted Projected Projected Projected Projected Projected . 2005 2006 2007 2008 2009 2010 2011 ED Cash Reserves - 3 year rate increase�, M Cash Reserves - One-time increase --a- Cash Reserve Targets i 12 How do we get there? Recommendations by NCPA mendat: A Adopt a 3 -year rate increase plan as soon as possible B Prepare a long-term financial plan (5 years at least) I C Develop and implement strategies for long-term power needs D Adopt a fiscal policy and set specific reserve goals for capital, rate stabilization, energy risk, etc. Prepare a long-term -capital plan, including source of funding balanced between rates and bonds S / N ACPA ATH�EMAN CANIPORNIA VVS ACENCY 13 Thank You Questions? 14 PA