Commission recap 9/24/2019: 2020 budget outlook: Lower debt with minimal effect on rates
Commissioners got their first look Tuesday at a proposed $291 million budget for 2020 with staff recommendations to reduce debt by using surplus cash savings and limit an electric-rate-revenue increase to customers to one-tenth percent.
Budget hearings for public comment are scheduled Oct. 8 in Ephrata and Moses Lake and Oct. 10 in Quincy (see schedule, below).
"These are very encouraging results," John Mertlich, senior manager of Financial Planning and Analysis, told commissioners.
Total capital spending of $140.9 million accounts for nearly half of draft 2020 budget.
Of that total, $61.3 million would go for expansion and improvement to the electric system, including $12.2 million to continue a five-year plan to expand Grant PUD's fiber-optic network and another $4.1 million to connect customers to the existing fiber network.
The capital budget includes $79.6 million for continued upgrades and improvements for Power Production, including continued turbine/generator upgrades at Priest Rapids and Wanapum dams and $20.7 million for initial construction of a federally mandated, secondary earthen embankment on the Yakima County side of Priest Rapids Dam for better seismic resistance.
Operations and maintenance expenses are budgeted at $127.9 million. Of that $71.2 million is for labor expenses.
Payment on Grant PUD's total $1.26 billion in debt is budgeted for $81.3 million.
The 2020 draft budget assumes $79 million in expense "offsets" — revenues that include $2.3 million paid by customers to build electric infrastructure, $20.9 million for federally mandated sales to contracted power-purchasers at cost, $55.7 million for net sales of surplus power on the regional wholesale market and $125,000 from customers paying back low-interest conservation loans.
Years of careful financial management and better-than-expected revenues in 2019 from net surplus power sales and favorable conditions in the financial markets help push Grant PUD's favorable forecast through at least 2024.
By year end, Grant PUD expects to have $95 million in cash excess to its needs. Following talks last year with debt-rating agencies, staff recommends using this excess in the near term to pay off some debt and in the longer-term self-fund (rather than debt-fund) a greater amount of capital spending. Staff also recommends taking advantage of low interest rates to refinance existing long-term debt. The recommendations would save Grant PUD an estimated $44.7 million through 2024 in lower debt service. This recommendation could change if market conditions worsen by early next year, Grant PUD analysts said.
"The current market movements within the past several months have resulted in a significant opportunity to lower debt costs with historically low rates paired with an opportunity to reduce overall debt," Grant PUD Treasurer Bonnie Overfield told commissioners.
The staff recommendation of a one-tenth percent electric-rate revenue increase — about $220,000 in extra rate revenue in 2020 — would have a minimal impact on customers while addressing bond-rating agencies desire for utilities to be willing to consistently adjust rates, as needed.
Grant PUD will continue to fund part of its capital expenses with long-term debt. But with greater use of excess cash, the targeted ratio of total debt to book-value of plant assets would fall from 55% to 47% by 2024, Overfield said.
The 2020 budget assumes a very strong average annual load growth of 4.7% through 2029 at a time when load growth remains flat at many utilities. This is driven mostly by data center expansion in Quincy.
"These are all good scenarios," Commission President Dale Walker said of the medium-term outlook. "Commissioners in the past have always raised rates when we've needed to."
Commissioners will consider staff's recommendations and vote on the 2020 draft budget in November, after accepting public comment at three upcoming budget hearings:
Oct. 8, 2019 at 2 p.m.
Ephrata Headquarters Commission Room
30 C Street SW, Ephrata, WA 98823
Oct. 8, 2019 at 6 p.m.
Moses Lake Local Office Auditorium
312 W 3rd Avenue, Moses Lake, WA 98837
Oct. 10, 2019 at 6 p.m.
Port of Quincy Board Room
101 F Street SW, Quincy, WA 98848
Freshly baked, local cookies and beverages will be served at each hearing.
Tuesday's commission meeting took place at Grant PUD's Hydro Office Building near Wanapum Dam and was not recorded. Find the complete budget presentation here.
— Unanimously awarded a $1.9 million contract with Axiom Division 7 for roof replacement at Wanapum Dam. The bid was the lowest of four bids received and was under Grant PUD's engineers' estimate of $2.6 million. (Read more on Pages 8 to 21 of the commission packet).
— Unanimously agreed to add $800,000 to a contract with Cornforth Consultants, Inc. for a total new contract amount of $1.8 million for geotechnical-related engineering support for dam safety. (Read more on Pages 23-27 of the commission packet).
— Unanimously agreed to a $263,053 increase in a with Knight Construction and Supply, Inc for a new contract total of $16.62 million. The company is rehabilitating the TG-8 spillgate at Wanapum Dam to repair trunnion pins. Despite completing work according to Grant PUD specifications on two separate occasions, the pins continue to show signs of early failure. The contract is now 90% complete. (Read more on Pages 28-37 of the commission packet).
— Heard from Craig Bressan, senior manager of Industrial Training and Safety that no serious injuries were recorded in August and safety statistics have improved and are close to industry standards as his team continues work to make safety a top priority at Grant PUD. (See the complete presentation on Pages 1-26 of the presentation materials).
Learned from Grant PUD Security Manager Fallon Long and Manager of Emergency Preparedness Dave Ponozzo that most all Grant PUD buildings will be fitted with state-of-the-art access and monitoring controls by year end, and work is well underway to assemble and train an Incident Management Team and create emergency-response plans. (See the full presentation on Pages 28-35 of the presentation materials).
Heard from External Affairs Director Andrew Munro and Public Affairs Supervisor Chuck Allen that work by Grant PUD's Public Affairs Team won seven awards at the Northwest Public Power Association's "Northwest Communications and Energy Innovations Conference, Sept. 16-18. The team won two first-place awards for its customer newsletter and social media work; three second-place awards for customer welcome mailers, informative employee screensavers and its new website; and one third-place award for its "Fill the Bucket" food-drive campaign last year. (See the full presentation on Pages 37-55 of the presentation materials).