Chelan County PUD

Chelan County PUD

2016 Budget Presentation November 16, 2015

What we will cover today…

Timeline

Changes since the Nov. 2nd Hearing

Key Financials

Update

2016 Budget

Summary Update

Next Steps

No Board Action Required Today 2

Budget Timeline

September Business Plans

Finalized Budget Initiated

Board Presentation of Business Plans

(9/21)

October Preliminary

Budget Review & Development

Budget Overview

Presentation (10/5)

November Budgets

Compiled & Presented to

Board

Formal Board / Public Hearings

(11/2) (11/16)

December Finalize Budget

Prepare Budget Journals

Request Budget Approval

(12/7)

Indicates Board Meetings

3

11/20/2015 4

2016 Budget Process Adjustments Since Nov 2nd Presentation

Capital Expenditures adjusted ~$3.0M Rocky Reach Crane work schedule updated (2017 to 2016)

Operating Expenditures adjusted ~$1.6M (<1%) Mid-C Coordination & Energy Conservation work

Operating Revenues adjusted ~($0.4)M (<1%) Anticipated delay in some energy related revenue

Non-Operating Activity consistent

Bottom-Line revised down slightly ~$2M ($77.8M to $75.8M)

Keys to the 2016 Budget

Continue debt reduction strategy with a net reduction of over $23 million in 2016

Focus on deferred projects and continue with turbine & generator refurbishments

Operating expenditures & staffing to be in alignment with the District’s business plans

Continue strategic plan Public Power Benefit investments

5

(in 000’s)

Adopted Budget

2015

Prelim Budget

2016 $

Change %

Change

Service Revenue 62,189 63,285 1,096 1.8%

Net Surplus Energy Revenue 242,635 233,169 (9,466) (3.9%)

Other Operating Revenue 21,238 23,152 1,914 9.0%

Operating Expense (145,966) (167,879) (21,913 15.0%

Depreciation & Tax Expense (54,059) (55,390) (1,331) 2.5%

Operating Income 126,036 96,337 (29,699) (23.6%)

Non–Operating Activity (27,524) (20,542) 6,982 (25.4%)

“Bottom-Line” 98,512 75,795 (22,717) (23.1%)

“Bottom-Line” as of 11/2/15 77,752

Combined Financial Results

11/20/2015 6

Major Revenue Categories

Service Revenue ~$63M moderate customer growth

Surplus Energy Revenue ~$233M lower market conditions

Other Operating Revenue ~$23M environmental attribute increase

Total Revenue down ~$6M (3%) compared to the 2015 Budget

7

Major O&M Cost Drivers

Rocky Reach Large Unit Repairs 2016 projects ~$16M

Public Power Benefit Program 2016 placeholder of ~$5M

Expanded District Operations driven by reinvestment, regulation, compliance,

technology, energy management, succession planning

8

Non-Operating Activity

Interest Earnings ~$7M improved earnings rate

Customer Contributions ~$4M increased customer work

Interest & Other Expense ~$31M decreasing debt balance

Total Net Expense Down ~$7M compared to the 2015 Budget

9

2016 Major Capital Projects

10

• ~$12 million (Total Project ~$100M)

Rock Island B5-B8 Refurbishment


Rock Island PH2 Governor Controls


Rocky Reach Gantry/Bridge Crane

• ~$2.5 million (Total Project ~$4M)

Rocky Reach Headgates


11

• ~$1.0 million (Annual Project Budget)

Electric Underground Cable Replacements

• ~$1.3 million (Annual Project Budget)

Water Main Replacements

• ~$1.0 million (Total Project ~$1.3M)

Lake Wenatchee Lagoon Liner Replacement

• ~$0.4M million (Total Project ~$5.1M)

Peshastin/Dryden Wastewater Upgrade


12


BPON to GPON Fiber Upgrade


Microwave Replacement


Customer Information System


Security Infrastructure

Combined District Expenditures

(in 000’s) Adopted

2015 Budget Preliminary 2016 Budget

% Change

Operating Expense 145,966 167,879 15%

Tax Expense 7,423 8,025 8%

Non-Operating Exp/(Inc) 32,951 24,542 (25%)

Net Capital & Reg Assets 57,649 64,946 13%

Total Expenditures 243,989 265,392 9%

Net Debt Reduction * 122,583 22,550 (82%)

Total Expenditures & Net Debt Reduction 366,572 287,942 (21%)

11/20/2015 13

• Existing debt activity associates with prior capital expenditure budgets

Strong Financial Policies

Rate of Return

2016 7.0% Target > 4%

Combined Cover

2016 2.84 Target > 2.0

Liquidity Target

2016 $352M > $175 M

Debt Ratio Target

2016 41.8% < 55%

< 35% by 2019

14

The 2016 Budget exceeds all District and Business Line financial metric targets

11/20/2015 15

Conclusion Fundamental perspective – How can we increase value for our customer-owners?

• Drives long-term planning and 2016 budget

Projecting substantial positive net revenue over the next 5 years

• Key measure of financial health

• Within a few % of the District’s Business Plan for 2016-2020

Decreasing risk of asset or compliance failure

through planned investments

Accomplishing all of above while decreasing

debt outstanding by approximately $270

million by 2020

Budget Next Steps

Respond • Provide any additional budget detail requested

Approve • Requesting Board Approval on December 7th

16

Questions?

17

Appendix

Detailed schedules and additional information

from prior presentations

11/20/2015 18

(in 000’s)

Prelim Budget

2016

Forecast 2017*

Forecast 2018*

Forecast 2019*

Forecast 2020*

Service Revenue 63,285 64,296 65,431 66,505 67,700

Net Surplus Energy Revenue 233,169 233,877 219,745 209,800 194,284

Other Operating Revenue 23,152 24,701 25,786 26,479 27,814

Operating Expense (167,879) (174,671) (169,688) (174,051) (177,352)

Depreciation & Tax Exp (55,390) (58,856) (57,630) (58,786) (61,677)

Operating Income / (Loss) 96,337 89,346 83,644 69,946 50,770

Non–Operating Activity (20,542) (17,769) (17,614) (14,529) (12,456)

“Bottom-Line” 75,795 71,577 66,030 55,416 38,314

2016-20 Business Plan 75,620 74,254 69,912 60,450 50,446

Combined Financials 2016-20

11/20/2015 19

* - Forecast as of Oct, 2015

Keys to 2016-2020 Planning Creating value for our customer-owners

20

Measure: Net Revenues (our bottom line)

Net revenues (million $) Budget 2015

Budget 2016

Forecast 2017*

Forecast 2018*

Forecast 2019*

Forecast 2020*

Total 2015-19

Budget Adoption, Dec-2014 98.5 86.8 83.9 80.1 81.5 430.8

Prelim Budget, Nov 16, 2015 99.5 75.8 71.6 66.0 55.4 38.3 368.3

Change since last year 1.0 (11.0) (12.3) (14.1) (26.1) (62.5)

~$63 million forecast reduction for 2015-2019 Total revenues consistent - market revenue down ~$20M, cost based

revenue up $15M, and service & other revenues up ~$4M

Total expenses up - Hydro Facilities ~$40M, Transmission & Distribution ~$20M, Public Power Benefit expense activity ~$10M (excludes Fiber expansion which is capital) and other various increases that are more than offset by the reduction in interest expense

*Forecast as of Oct-2015


21

Measure: Liquidity

Total Liquidity (million $) Budget 2015

Budget 2016

Forecast 2017*

Forecast 2018*

Forecast 2019*

Forecast 2020*

Budget Adoption, Dec-2014 304.8 315.9 313.9 323.1 286.9

Prelim Budget, Nov 16, 2015 318.9 352.3 332.6 283.3 248.2 232.1

Change since last year 14.1 36.4 18.7 (39.8) (38.7)

Projected 2019 balance has decreased ~$40 million since last year’s budget forecast for 2015-2019 Bottom-Line forecast down ~$63M (2015-19) Capital spending offset due to applying forecast adjustment factor of

90%-2016/80%-2017-19 totaling ~$60M



22

Measure: Debt Reduction

Debt Balance (million $) Budget 2015

Budget 2016

Forecast 2017*

Forecast 2018*

Forecast 2019*

Forecast 2020*

Budget Adoption, Dec-2014 612.1 584.3 518.2 479.5 382.4

Prelim Budget, Nov 2, 2015 612.1 589.6 537.2 452.4 382.4 341.9

Change since last year --- 5.3 19.0 (27.1) ---

Planned debt reduction of ~ $23 million for 2016 Planned debt reduction of ~$270 million for 2016-2020

Projected to achieve debt ratio of less than 35% by 2018 (one year earlier than target of 2019)


Service Revenue

(in 000’s)

Adopted Budget

2015

Prelim Budget

2016 Variance

Residential Electric 25,975 25,835 Modest customer growth with offsetting impacts from energy

conservation efforts.

Potential impacts from High Density Loads (HDL) pending

moratorium actions.

Commercial Electric 16,718 16,927

Industrial Electric 5,763 6,211

Other Electric 1,661 1,725

Electric Service 50,117 50,698

Water Service 5,142 5,479 Modest growth / 2% rate adjust

Wastewater Service 545 600 Modest growth / 5% rate adjust

Fiber & Telecom 6,385 6,508 PPB “System Expansion” impacts

Service Revenue 62,189 63,285

2016-20 Business Plan 63,464

11/20/2015 23

Net Surplus Energy Revenue

(in 000’s)

Adopted Budget

2015

Prelim Budget

2016 Variance

Slice Contracts 83,719 75,731 2015-25% / 2016-25%

Block/Pre Sch/Real Time 39,850 34,439 2015 locked in at higher

market prices

EP&T Net Wholesale 123,569 110,169

LT Hydro Contracts 120,562 124,360 Increased operating cost

Rocky Reach large unit repairs

Less: Nine Cyns & Other PP (1,496) (1,361) Consistent with 2015

Net Surplus Energy Revenue 242,635 233,168


11/20/2015 24

Other Operating Revenue

(in 000’s)

Adopted Budget

2015

Prelim Budget

2016 Variance

Transmission/Wheeling 7,846 8,888 Increase investments in operations/compliance

Real Time Contract – Fixed 4,000 4,000 Consistent with 2015 budget

Real Time Contract – Variable 4,000 4,000 Consistent with 2015 budget

Environmental Attributes 2,482 3,013 Consistent with 2015 budget

Service/Late Charges 570 339 Consistent with 2015 budget

Misc Other Items 2,339 2,912 Detail expectations still in review

Other Operating Revenue 21,238 23,152


11/20/2015 25

Operating Expense

(in 000’s)

Adopted Budget

2015

Prelim Budget

2016 Variance

Hydro O&M 48,143 57,345 Rocky Reach large unit repairs

Hydro Fish & Wildlife 15,041 17,135 Rock Island fish ladder extensions

Hydro Parks & Recreation 7,109 7,093 Planned PPB investments

Electric Distribution 11,933 14,919 2015-16 PPB placeholder

Electric Transmission 10,764 12,003 Operations/Compliance support

Power Supply Mgmt 4,918 6,325 Energy management/conservation

Water/Wastewater O&M 2,610 2,697 Consistent with 2015 Budget

Fiber Network O&M 3,783 4,497 Fiber system expansion

Continued on next slide

11/20/2015 26

Operating Expense

(in 000’s)

Adopted Budget

2015

Prelim Budget

2016 Variance

Customer Accts & Svc 4,012 3,855 Consistent with 2015 Budget

Conservation 1,565 2,845 Recognition of investments

Insurance 6,027 6,055 Consistent with 2015 Budget

FERC Fees 2,090 1,706 Revised expectation down

Other Admin & General 27,970 31,404 Expanded technology , safety and

project support services

Total 145,966 167,879


11/20/2015 27

Non-Operating Activity

(in 000’s)

Adopted Budget

2015

Prelim Budget

2016 Variance

Investment Earnings 5,096 6,977 Higher cash reserves

Contribution Income 5,427 4,050 Consistent with Business Plan

Interest Expense (32,081) (28,060) Debt reduction strategy

Other Inc/(Exp) (5,966) (3,509) Debt reduction strategy

Total (27,524) (20,542)

2016-20 Business Plan (20,545)

11/20/2015 28

Capital Expenditures

(in 000’s)

Adopted Budget

2015

Prelim Budget

2016 $

Change Major Project Focus

Electric Distribution 13,611 10,832 (2,779) Cable replacement, system upgrades & customer work

Electric Transmission 9,545 2,520 (7,025) Mid-C transmission, video

system & system upgrades

Rocky Reach Hydro 9,576 13,787 4,211 Gantry/Bridge cranes,

headgates & park upgrades

Rock Island Hydro 13,822 15,105 1,283 B5/B6 modernization &

governor controls

Lake Chelan Hydro 515 371 (144) Shoreline erosion

Corporate/Shared Assets 6,116 13,002 6,886 CIS upgrade, vehicles & facility improvements

Integrated Electric 53,185 55,617 2,432

Continued on next slide 11/20/2015

29

Capital Expenditures

(in 000’s)

Adopted Budget 2015

Prelim Budget 2016

$ Change Major Project Focus

Fiber & Telecom 4,847 5,120 273 PPB Fiber Expansion &

complete GPON upgrade

Water 487 1,531 1,044 Water main replacements

Wastewater 377 1,315 938 Lake Wen. lagoon liner &

Peshastin/Dryden upgrade

Total Capital 58,896 63,585 4,687

Less: Contributions (5,427) (3,481) 2,246 Capital Paid By Others

Regulatory Assets & Other 4,180 4,842 785 Conservation / Lic.

Obligations

Net Capital & Reg. Assets 57,649 64,946


11/20/2015 30

Combined Financial Policies

2016 Preliminary Budget

Rate of Return ¹

Debt Ratio ²

Combined Cover

Financial Liquidity

Base Case – expected (50% probability)

Target

7.0%

> 4%

41.8%

< 55%

2.84

> 2.0

$352M

> $175M

Base Case – unusual (5% probability)

Target

6.1%

> 2%

42.1%

< 55%

2.66

> 1.25

$343M

> $175M

11/20/2015

¹ - Associated with an expected bottom line of approximately $98 million ² - Includes the expected debt reduction of approximately $123 million

31

Business Line Financial Policies 2016 Preliminary Budget

Rate of Return

Debt Ratio

Cover Liquidity Oper Exp Coverage

Integrated Electric Target

7.7% 4.5%

45.3% < 50%

2.82 > 1.97x

$342 M $171 M

n/a

Fiber & Telecom Target

n/a ---% < 35%

n/a $4.6 M $2 M

131% > 120%

Water Target

n/a 14.2% < 35%

n/a $3.3 M $1.25 M

144% > 120%

Wastewater Target

n/a ---% < 35%

n/a $2.6M $200 K

92% > 100% by 2019

11/20/2015 32

Strategic Focus

2016-2020 planning and the 2016 Budget are built around strategic initiatives and business plans presented September 21st

Public Power Benefits placeholder for 2016 has been included – specific projects pending determination and may require budget adjustments during the year

The foundation of our strategic initiatives and budget is at the top of our balanced scorecard – Customer-Owner Satisfaction

33

Strategic Objectives with 2016 Initiatives

• No general electric rate actions included

• Establish an ongoing process for the Public Power Benefit program

• Advance selected public power benefit investments

• Complete BPON to GPON upgrade

• Enhance the customer experience

1. Commit to highest level of customer satisfaction

• Rocky Reach large unit repairs

• Rock Island modernization

• Initiate Rock Island relicensing effort

• Investigate 2-way metering capabilities

• Evolve asset management programs

• Expand conservation programs

2. Invest in creating

long-term value

34


• Successfully meet hydro license requirements

• Wastewater capital improvements for compliance

3. Protect natural

resources impacted by operations

• Execute debt reduction plans

• Meet financial policy targets

• Participate in electric markets development

• Advance Columbia River treaty strategies

4. Ensure financial stability

35


• Upgrade Customer Information System (CIS)

• Evolve business intelligence capabilities (BI)

• Evolve Reliability Compliance programs

• Evaluate and enhance Mid-C coordination efforts

5. Make continuous

improvement in

operations

• Advance employee skill development programs

• Plan and prepare for the future through succession planning

• Support education and outreach efforts to enhance customer experience and workforce diversity

6. Enhance capability of staff

36


• Implement the safety strategic plan to advance our culture of safety excellence

• Integrate accountability, modeling of District values and cycle of personal ownership into daily processes

7. Make our values the

focus of relationships

37

New Positions

38

Hydro Succession Planning (8 positions)

• Eleven of 21 Hydro Operators will be eligible for retirement by 2020

• Forecasting 7 current dive team Hydro Mechanics to move out of program by 2020

Construction Project Support (7 positions)

• Volume of work is increasing with large reinvestment projects and increased expectations of planning, engineering, completeness of job packets and compliance

New Positions

39

Regulation/Compliance Support (5.5 positions)

• New Critical Infrastructure Protection Standards (CIP versions 5 and CIP- 10), Rock Island fishway operations, documentation requirements for reliability/CIP standards, training requirements for system operators and public records retention and production

Technology/Cyber Security Support (3 positions)

• Support expanding technologies and devices, enhance cyber security and establish technical support for business intelligence strategic initiative

New Positions

40

Energy Management/Conservation (2 positions)

• Respond to power purchasers needs to enhance value

• Adding residential advisor to meet new energy efficiency stretch goals

Enhance Customer Satisfaction (1 position)

• 0.5 to administer the public power benefit program

• 0.5 to expand diversity outreach

Staffing Levels – Full-Time Equivalents

11/20/2015 41

FTE’s

(1 FTE = 2080 hours)

Regular

FTE’s

Overtime

FTE’s

Total

FTE’s

Head-

count

Actual

FTE’s

2016 (preliminary budget) 756 25 781 774

2015 (adopted budget) 727 23 750 743

2014 (adopted budget) 702 21 723 711

2013 (adopted budget) 692 22 714 694

2012 (adopted budget) 692 24 716 704

2011 (adopted budget) 698 26 724 707

2010 (adopted budget) 709 30 739 712

2009 (contingency budget) 721 25 746 725

2006-09 budgets and actuals were all at or above the 2009 level

FTE’s differ from positions as new positions are filled throughout the year

2016 Pay Increase Assumptions

Non-bargaining unit pay increase forecasts indicate continued slow growth in wages.

Industry Min – Max Average

All Industry 2.8% - 3.5% 3.1%

Utility/Energy 2.4% - 3.2% 3.0%

2016 Projected Pay Increases

11/20/2015 42

11/20/2015 43

Labor - Non-Bargaining Unit (assumptions)

2.50% Merit Budget

0.50% Market Budget

0.50% Promotions

0.25% One-time structural or other misc. adjustments

Labor - Bargaining Unit (per collective bargaining agreement)

0.25% Effective January 1, 2016

3.00% Effective April 1, 2016

Step increases throughout year

Contract expires 3/31/17

2016 Pay Increase Budget

Final non-bargaining unit pay increase decisions will be informed by actual data

Employer Benefit Costs

11/20/2015 44

Costs (in 000's)

2015

Budget

2016

Budget $ Change % Change

Medical Benefits 12,045 12,760 715 5.9%

Retirement

PERS 6,285 7,363 1,078 17.2%

401(a) 1,706 1,827 121 7.1%

Total $ 20,036 $ 21,950 $ 1,914 9.6%

Key Budget Assumptions • Average flows and current market price

• Hedge program fully implemented

• Unit outages impacts included

• Hydro fish spill consistent

Wholesale Revenue

• ~1% Electric

• ~2% Water

• ~1.5% Wastewater

• ~1,040 new connections-Networks

System Load Growth

• New rate for High Density Usage rate class

• 2% change in Water rates

• No change in Fiber rates

• 5% change in Wastewater rates

Business Line Service Revenues

45

Key Budget Assumptions • Collective Bargaining Agreement includes

increases of 0.25% effective 1/1 and 3.0% effective 4/1.

• Budget includes estimated benefits forecasts.

Labor Bargaining Unit

• Estimate based on market forecast data of 3.0% for merit and market increases and 0.5% for promotions (all planned for 4/1) and 0.25% for the General Manager reserve (planned for 1/1).

• Budget includes estimated benefits forecasts.

Labor Non-Bargaining Unit

• Debt Reduction Charge (DRC) – 3.0%

• Capital Recovery Charge (CRC) - 50%

• Credit Premium Charge (Alcoa) – 1.0%

• Debt Admin Charge (Puget) – 1.0%

Long-term power contract terms &

conditions

46

Key Budget Assumptions • Driven by 2016-20 business plans

• Expenditures increase as we accelerate investments in assets, catch up on deferred maintenance & implement turbine/generator repairs/refurbishments

Capital & Operating

Expenditures

• Net debt reduction of $23 million • Interest earnings estimated just over 1%

Debt and Interest Income

• Includes 2016 initial allocation and placeholder for remainder pending studies

• Budget revisions will be added for any newly designated projects

Public Power Benefit

Investments

47

Documents

Chelan County PUD