01-17-2018 HUCM Special Meeting 3:30 pmMINUTES
Special Meeting — Hutchinson Utilities Commission
Wednesday, January 17, 2018
Call to order — 3:32 p.m.
President Morrow called the meeting to order. Members present: President Monty
Morrow; Vice President Anthony Hanson; Secretary Mark Girard; Commissioner Robert
Wendorff; Commissioner Don Martinez; General Manager Jeremy Carter.
Others present: Randy Blake, John Webster, Jared Martig, Matt Jaunich, Steve Cook,
Mary Christensen, Dan Kasbohm from UFS and Angie Radke.
GM Carter introduced Dan Kasbohm from Utility Financial Solutions, LLC (UFS). Mr.
Kasbohm has helped gather, analyze, and summarize our Cost of Service (COS) study.
There is a lot of information that has gone into this, with that Dan has offered to have an
on-site presentation for us.
Mr. Kasbohm thanked everyone for having him. Mr. Kashbohm reviewed the Cost of
Service (COS) process and the results. The next phase will lead UFS in the direction of
what the rated design will be. UFS uses three key points in the 5 -year financial projection
1) Debt Coverage Ratio, 2) Minimum Cash Reserve and 3) Target Operating Income.
From there, COS results are reviewed and lastly there is discussion recommendations on
proposed rate track and recommendations on customer charges.
Looking at the Electric projection assumptions, this is showing a growth of 6.1 % in 2019,
power costs hold stable through 2020, and in 2021 and 2022 has an increase change of
3%. The new 2017 generation assets are included along with the bonding. There were
adjustments for plant #2, removing units 1 & 9 from the historical investments and the
utility's net book value (NBV). Along with that, the depreciation rate in plant #2 generating
assets was doubled for COS from 30 years to 60 years. Mr. Kasbohm continued to review
the electric projection summary without rate adjustment; here there is no rate adjustment
in the 5 years. Now looking at the three targets, there is minimum cash policy-, which is
the goal. Projected Cash Balances are $9M in 2018 to $15M in 2022. Capital plan is
less than depreciation -cash is increasing. The Project Operating Income went from
negative in 2018 to positive. Looking very good financially. Not always good to have too
much cash. The recommendation is to have a Projected Rate Adjustment of 1 % increase
in 2022. The reason for a 1 % increase is to maintain 2022 operating income.
Mr. Cook inquired about the bond rating. Mr. Kasbohm communicated the minimum debt
coverage ratio they use is 1.4 to maintain some buffer. Debt coverage ratio in 2018 is
4.03 this includes 20 -year bond of $16.7 million acquired in 2017 for additional generating
units.
Mr. Kasbohm continued to speak about HUC's minimum cash reserve levels. There is
$9M in O&M. There was discussion about Purchase Power and the Historical Rate base
of 3%. Utilities have a life cycle; brand new, aging -depreciation, and old -that needs to be
replaced. HUC has slightly older assets than typical utilities but they are maintained well
so assets are living longer.
Mr. Cook inquired about how many units there are in Plant 2. GM Carter informed him
that there are 2 units, unit 9 is a back-up and unit 1 is the baseload, combined cycle unit.
When energy markets came out in 2005, HUC could start to buy cheaper than to run, so
unit 1 is not used as much. If HUC stays in generation, base load power production plants
will not be used in the same fashion they were prior to the establishment of energy
markets. HUC has lots of useful life in the baseload plant yet, but we have to consider
what needs to happen down the road if it is too much to maintain or we cannot continue
to leverage the plant with outside contracts.
Mr. Kasbohm reviewed Target Operating Income. This is a great target to see if HUC
should bond or pay from cash. Moving on to the summary results of the COS study, Mr.
Kashbohm pointed out that HUC has 7 classes. Residential class has a change of 19.3%
and goes down to Large Industrial of a change of 7.9%. Overall, for the utility to meet the
cost of service analysis between all classes, a 9.6% increase is needed. The top 4
classes are based on KWH's, bottom 2 classes are based on rate charge. The difference
in rate classes are based on similar load profile. When a system is built, it is built to
provide on the peak of what may be needed.
Mr. Cook inquired about solar or any other renewables. A system sized for peak demand
is what any city would have however there is a subsidy out there because most of the
revenue collected is based on the energy charge not a fixed system charge. Mr. Kasbohm
replied In Hutchinson, Large General and Large Industrial make up about 70% of the Cost
of Service.
Mr. Kasbohm, concluded the Electric Division with the COS Charges. The current
customer charge for Residential is $6.50, this includes reading, billing, maintaining
meters, and maintaining minimum system infrastructure; these are fixed costs no matter
what. The recommendation is to have this charge at $14.35. Residential class does not
have a demand meter so this is put mostly into the energy charge currently, the more they
use the less fixed revenue is collected.. The recommendation for Small General Service
class is to increase the fixed charge from $10 to $24.43 over time. Again, here there is
no demand meter so that is included in the energy charge. For the two Large General
Service and Large Industrial classes everyone is energized with power. The fixed costs
are shared with customers it does not matter what a customer's load is this fixed cost
supports a minimum system requirement. Larger customers also have an additional
demand charge for the additional upsizing or unique infrastructure requirements specific
to them. If the Demand charge goes up on large customers, this is usually a small
component of their bill not like residential customers. Recommend increasing customer
charges annually over next 3-5 years to meet COS. Consideration should be given to a
+/- 2% bandwidth on customer classes. Best time to make adjustments is when there is
a zero percent increase.
Mr. Kasbohm reviewed the Gas Financial projection and COS summary. For Gas
Projection Assumptions, 2018 projected sales are compared to actual 2016 sales, have
the PILOT increasing over next 3 years from 2.75% to 4.5%, and bond issue of $4.5M in
2021 for $8.5M project. The projected 2018-22 inflation rate is 2.5%, the retail growth for
2018 is an increase projection of 12.5%. This also shows an increase to PILOT of $700k
between both divisions.
When looking at the Gas Projection Summary, Mr. Kasbohm pointed out the projected
rate adjustments for 2020,21 and 22 has a rate increase of 2.1% with a potential new
project included, however without the project only a 1 % increase is projected in 2022.
Mr. Cook questioned if the rate increase is coming, why not bump up sooner so future
increases can be reduced. Mr. Kasbohm responded that it can, it comes down to how
fixed the project is 4 years from now. This part of the study needs to be looked at every
year. COS should be completed every 3-5 years. Overall gas utility is in very good shape
like electric.
Mr. Kasbohm discussed the three targets. The debt coverage ratio target shows a
minimum debt coverage ratio of 1.4 for all 5 years. This includes a bond issue of $4.5M
in 2021 to fund $8.5M capital project. The second target shows the minimum cash reserve
level for 2018 of $3.6M and the 5 -year capital improvements- net of bond proceeds
allocated at 20%. Lastly, the target operating income over the 5 years shows a rate of
return of 4.4%-4.6%. Mr. Kasbohm continued with the summary that is used in the
analysis. Here the gas side is reversed from the electric side. Large Industrial has a
larger adjustment. The COS results identify some customer classes are subsidized by
others. It is recommended to have a revenue neutral adjustment on system revenue and
have a bandwidth of +/- 2.0% to move rate classes towards COS, These changes can be
done in the next 4 years to correct subsidizations. The COS results identify monthly
customer charges need to be implemented or increased. The recommendation is to
increase customer charges over 3-5 year timeframe towards COS and to increase max
daily MCF (demand) charge. Currently the customer charge for residential is $6.50 and
commercial is $31.50, the COS customer charge is $13.81 for residential and $72.87 for
commercial. Long term, large customers need to be worked on to get to COS. Mr.
Kasbohm summarized the recommendations. For electric department, PCA is a great
thing to look at often. Both departments should have a revenue neutral rate adjustment
in 2018 with a +/-2% bandwidth to move classes closer to cost of service and increase
customer charges in 2018. Electric department should increase demand charges, while
gas department should increase maximum daily MCF charges in 2018. Again electric
department should discuss PCA, as gas department should discuss adjusting negative
PGA.
Mr. Kasbohm invited additional information to be given to Jeremy, Jeremy will pass on
the information and from there the rate design can be built.
Mr. Cook inquired about the depreciation of the assets as they get older, what other plans
are in place. In addition, why more would not be done to keep depreciation in line.
Commissioner Wendorff commented that by looking at the trend line, we are stable.
Commissioner Hanson inquired about the percentage that goes to plant 1 and 2. GM
Carter replied about a 3rd or roughly $900k.
Commissioner Hanson commented about maintaining reliability. GM Carter responded
that the CAP X plans for that. Lots of assets are in generation. The staff maintains a
good maintenance program and we monitor statistics to benchmark against locally and
nationally. The way certain units are run today is vastly different from in years past.
President Morrow asked if there was anything else for Mr. Kasbohm. President Morrow
thanked Mr. Kasbohm for all the good information and his time.
Commissioner Hanson inquired if this is something that will be discussed at the next
meeting. GM Carter explained the next phase is a rate track discussion. The board needs
to consider if any of the consultant's recommendations will be taken into consideration
and if a 5 -year rate track plan is desirable by the Commission. From there, that information
will be communicated to the consultants to put together a rate track plan and rate design
based on Commission feedback.
President Morrow stated this is a good start and to add on the agenda
Mr. Cook expressed that rates have only been raised 1 time in 20 years which is pretty
unheard of. Mr. Cook inquired about solar energy, how much is really out there, how is
that shift made. GM Carter confirmed there is some solar in town. Mr. Cook expressed
those that use more pay more. GM Carter explained one scenario is being revenue
neutral, that the customer's bill overall be kept neutral but change the fixed rate Mr.
Kasbohm is talking about tweaking classes to keep everything neutral. Mr. Cook stated
except if we do it every year or every 5 years. Mr. Martig pointed out on a list of municipals
HUC is 3rd from bottom when it comes to the fixed charge. GM Carter added HUC is
below COS study numbers because HUC is maximizing its assets, if that were not the
case, the rates would not be where they are.
Ms. Christenson commented Hutchinson does have good rates and with the value of
service it is a good rate.
Mr. Cook commented that Hutchinson has been spoiled with low rates and very good
reliability.
President Morrow thanked everyone for joining.
There being no further business, a motion was made by Commissioner Girard, seconded
by Commissioner Martinez to adjourn the meeting at 5:23 p.m. Motion was unanimously
carried. _
Mark Girard, Secretary
ATTEST:
Monty Morn6w, President