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Minutes Utility and Public Works Advisory Group Meeting

May 15, 2012

Members: John Huber (Chair), Scott Brinkman, Al Cornish, Diane Cornwell, Pete Mahurin, Joe Wise

Wendell Wright

LWC, MSD, DPW Staff: Saeed Assef (MSD), Brian Bingham (MSD), Julie Blanford (MSD), Jim Brammell

(LWC), Ed Chestnut (LWC), Chad Collier (MSD), Sharon Dawson (MSD), Kelley Dearing-Smith (LWC),

Barbara Dickens (LWC), Steve Emly (MSD), Lynn Fleming (MSD), Bonnie Gimbel (LWC), Lanita Grimes

(MSD), Vince Guenthner (LWC), Amber Halloran (LWC), Greg Heitzman (LWC/MSD), Lopez High (MSD),

James Hunt (MSD), Maria Mullaney (MSD), Moira Owen (LWC), Lisa Pence (LWC), Paula Purifoy (MSD),

Johnnie Rice (LWC), Jenni Schelling (MSD), Melissa Schultz (LWC, Recorder), Bruce Seigle (MSD), James

Skinner (MSD), Steve Tedder (MSD), René Thomas (MSD), Dennis Thomasson (MSD), Dave Vogel (LWC)

Others Present: Mayor Greg Fischer, Dan Arbough (MSD Board), Bill Bardenwarper (Attorney), Mike

Borchers (Black & Veatch), Billy Bright (Tes-Tech/JTL), Lonnie Calvert (LIUNA), Cyndi Caudill (MSD

Board), James Craig (MSD Board), Chris Dickinson (AMEC), Joe Eigel (Eigel Associates), Doc Gahafer (LWC

Board), Mike Herrington (Stites & Harbison), Joan Karman (Business First), David Lutman (Courier-Journal),

Creighton Mershon (LWC Board), Rich Storm (BA Engineers), Glenn Sullivan (LWC Board), Marita Willis

(LWC Board)

A meeting of the Utility and Public Works Advisory Group was held on May 15, 2012, at Louisville Water

Company Headquarters, 550 South Third Street, Louisville, Kentucky 40202.

I. Call Meeting to Order/Overview of Agenda

Mr. John Huber reviewed the meeting Agenda and called the meeting to order at 3:30 pm.

II. Review and Approval of May 8, 2012 Minutes

Mr. Al Cornish moved to approve the meeting Minutes of May 8, 2012. Mr. Wendell Wright seconded the

Motion. The motion unanimously carried.

III. Overview of Advisory Group Findings and Recommendations

Mr. Huber provided brief background information on Mayor Greg Fischer’s directive to engage an active

advisory group and provided an update of same. Mr. Huber introduced the Advisory Group members and the

consultants from Black & Veatch. Mr. Huber stated that there is also a Coordinating Committee made up of a

group of individuals from MSD, LWC and DPW. He stated that the coordinating committee gathered and

provided information and background to the consultants.

Mr. Huber discussed the guiding principles used to analyze and form recommendations for opportunities for

new relationships and structure between LWC, MSD and DPW.

Mr. Huber stated that although the annual cost savings range from $14 - $24 million, the savings will not be

realized until at least 2014. There will be an increase in costs for a short period of time with start-up costs in

2013 of approximately $900,000. Mr. Huber described the potential savings for each strategic option, which

included limited inter-local agreements expanded inter-local agreements, and consolidation of LWC and MSD.

The Advisory Group made a total of 15 recommendations

1. Synergies and improvements should be accomplished with a five year phased approach.

Phase I - Interlocal Agreements (2013-2014)

Phase II - Expanded Interlocal Agreements (2013-2017)

Phase III – Combine LWC and MSD (2013-2017)

Due Diligence and Risk Assessment

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Review Legislative Changes

2. Phase I & II – Pursue partnerships between LWC, MSD and DPW

Purchasing

Safety

Energy Cost

Paving Restoration

Fleet Operations

Customer Education and Communications

Centralized Plan Review and Inspection

3. Phase III – Develop plan to combine MSD and LWC within five years

Conduct comprehensive risk assessment and due diligence assessment

Develop business plans and management models of a combined “One Water” utility

Pursue enabling legislation

4. Continue to Benchmark and Integrate Industry Best Practices

5. Adopt common Quality Management Systems for both LWC and MSD

6. Adopt common Management Control Systems for both LWC and MSD

7. Adopt common Leadership Development for both LWC and MSD

8. Develop cost sharing, allocation and reimbursement model for interlocal agreements to assure mission

and utility cost of service principles are maintained

9. Adopt effective change management process to assure success and minimize risk to stakeholders

10. Incorporate recommendations into LWC, MSD and Metro Strategic Business Plans and establish

executive and senior management accountability

11. Develop an Implementation Plan, including resources necessary for success

12. Identify and develop the leadership structure for the implementation plan

13. Establish quarterly reporting for benchmarks and key milestones to measure progress and success of

recommendations

14. Communicate plan and seek approval of LWC and MSD Boards

15. Develop Communications Plan for Key Stakeholders

IV. Comments/Questions from the Mayor/Advisory Group

Mr. Huber stated that the recommendations of the Advisory Group will be presented to Metro Council in the

next few weeks after Mayor Fischer has reviewed the data.

Mayor Fischer discussed the state audit of MSD. He stated that the auditor came back with findings which led

to management and board changes at MSD. Mayor Fischer stated that he uses two principles to guide his

decisions: data and how it will impact the customers.

Mayor Fischer stated that world class performance at the best possible cost is what should be expected in

Louisville. He stated that if moving toward consolidation between LWC and MSD is the result of Black &

Veatch’s findings, it will not happen for several years. Mayor Fischer will take the next 60 days to assess the

risks, stating that LWC’s balance sheet is completely different than MSD’s balance sheet.

Mayor Fischer stated that a combined water and sewer system should be better for customers since both entities

have similar processes and both interface with customers. The report from the Advisory Group lays out a good

foundation for the future, which is to be leaner and more efficient.

Mayor Fischer commented to employees of LWC, MSD and DPW, no major changes will occur in the next

couple of months, but that it will be a transition that will take time. There will be plenty of time to plan over the

next few years.

Mayor Fischer reminded everyone that no one was paid to be part of the Advisory Group stating that this is a

great act of citizenship from a group of people who have a love for the City.

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Mayor Fischer recognized Mr. Huber, stating that he has made numerous contributions to the community by

serving on a variety boards and organizations. Mayor Fischer presented the Advisory Group members with a

Key to the City to show his appreciation. He then thanked Mr. Heitzman, stating that Mr. Heitzman is a great

citizen and business leader. Mayor Fischer stated that when he asked Mr. Heitzman to run MSD, Mr. Heitzman

stepped up and did what was necessary.

V. Public Comments

There were no public comments.

VI. Adjourn

The meeting was adjourned at 4:15 pm.

Copies of the presentation were distributed to Advisory Group members and the public and included as an

appendix to the minutes.

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Appendix

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Louisville Utilities and Public Works

Advisory Group

May 15, 2012

Agenda

I. Background

II. Guiding Principles

III. Key Constituents

IV. Findings A. Black and Veatch B. Advisory Group

V. Advisory Group Recommendations

VI. Implementation

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Background Kentucky State Audit of MSD was made public on December 16, 2011

Mayor Greg Fischer appointed Greg Heitzman, President/CEO Louisville

Water Company to also serve as Interim Executive Director of MSD on December 16, 2011

Mayor Greg Fischer formed a Task Force, known as the Louisville Utilities and Public Works Advisory Group on January 12, 2012. The Advisory Group is comprised of the following members: John Huber, Chair Scott Brinkman Al Cornish Diane Cornwell Pete Mahurin Joe Wise Wendell Wright

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Background

Mayor’s Directive: Examine the operations of Louisville Water Company (LWC), Metropolitan Sewer District (MSD) and Louisville Metro Department of Public Works (DPW). Review should include an evaluation of synergies, partnerships, shared resources, reduced costs and possibly merger

LWC retained Black and Veatch consulting firm to assist with the

operational review of LWC, MSD and DPW

Black and Veatch researched and benchmarked data, interviewed staff of LWC, MSD and DPW and made a series of observations and presentations to the Advisory Group

The Advisory Group held 10 public meetings from January 25 to May 15, 2012, including an evening meeting to solicit public input on April 25

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Guiding Principles Opportunities for new relationships and structures between LWC, MSD and DPW were considered. These are guiding principles used to analyze and form recommendations. Enhanced Governance and Process

Significant, Realistic Savings for LWC, MSD and DPW

Local Ownership (municipal control) is in the best interest of the community

Minimal Risk to LWC Charter and Business Model

No Adverse Impact to MSD Federal Consent Decree

Mitigate Future Rate Increases

Sustainable Business Model

Manageable Employee Issues (transition and change)

Minimal Legislative and Regulatory Risk

Improvement of Service and Reliability to Customers/Citizens

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Key Constituents Customers, Citizens and Employees

Louisville Metropolitan Sewer District Board

Louisville Water Company Board of Water Works

Louisville Metro Council

Jefferson County Legislative Delegation

Federal, State and Local Governments

Utility Regulators (EPA and KY Division of Water)

Regional Wholesale Customers

Community Stakeholders (Area Community Ministries, GLI, Urban League)

Environmental Constituencies

Homebuilders Association

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Black and Veatch Findings Governance Options:

Limited Interlocal Agreements (ILA) – Requires approval from KY Attorney General Expanded Interlocal Agreements - Requires approval from KY Attorney General Consolidation – Requires approval from KY General Assembly

A phased approach moving from limited ILA’s, to expanded ILA’s, with ultimate consideration of moving to consolidation was evaluated

Phased approach has least impact on operations, is flexible, and has greatest long-term savings

Opportunities for Synergies/Cost Savings Include: Shared or Consolidated Purchasing Shared or Consolidated Fleet Maintenance Shared or Consolidated Energy Management Shared or Consolidated Billing/Customer Service Shared or Consolidated Back Office Functions Shared or Consolidated Operations

Annual Cost Savings Range from $14-$24 Million after full implementation (estimated to be in 2022)

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Potential Savings for Each Strategic

Option (2013-2022)

Because of Costs to Achieve, savings are not realized until 2014

2013 start up costs are estimated at $900,000

Phase II and III will also require significant start up, due diligence and evaluation costs

Limited Interlocal Agreements

Annual savings for all three entities (MSD, LWC and DPW) after 10 years are estimated to be $9.3 million

Expanded Interlocal Agreements

Annual savings for all three entities (MSD, LWC and DPW) after 10-years are estimated to be $13.2 million

Phased Consolidation of LWC and MSD

Annual savings for all three entities (MSD, LWC and DPW) are estimated to be $25.5 million

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Annual Net Savings By Strategic Option (2013-2022)

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Phased Consolidation Concept 2013 2017

Current State PHASE 1 Limited ILAs

PHASE 2 Expanded ILAs

PHASE 3 Consolidation

DPW

MSD

DPW

LWC

MSD

DPW

LWC

MSD

LWC

DPW

UTILITY HOLDING CO.

Limited Cooperation

Emergency Support

Form Integration Committees

Cost/Savings Allocation Model

Draft ILAs

Board Approval

AG Approval

Implement & Sustain

Identify Back Office/Support Areas

Business Plan and Staffing Plan

Draft or Revise ILAs

Align Non-ILA Functions

Board Approval

AG Approval

Implement and Sustain

Strategic Plan & Objectives

Procure Legal, Financial, Engineering

Customer/Stakeholder Information

Draft Consolidation Agreement

Align Operational Functions

Achieve Legislative Approval

Legal/Governance Creation

Financial Transaction

Integration

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Existing DPW, MSD and LWC Partnerships/Shared Resources

Following are DPW, MSD and LWC partnerships and instances of shared resources

Billing/Collections/Customer Service

LOJIC/GIS Mapping

Ditch and drainage work by Metro for MSD

Road paving

Shared Water and Sewer Services

Flood protection

Drainage service

Louisville Loop and Wharf maintenance

Hansen system – MSD call center/Metro 311

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Potential Cost Sharing and Allocation Model

Interlocal agreement will require that cost sharing and cost allocation models be developed. There are three fundamental methods:

Work performed by single agency (or contractor) and a cost sharing and

reimbursement model is developed 1. Metro Paving Contract used by MSD, LWC 2. Joint Fuel Purchase.

A portion of the work is transferred from one agency to another and a reimbursement cost model is developed.

1. Metro 311 Calls transferred to MSD after hours 2. Snow removal assistance by MSD

Work processes are consolidated into a common business model and a cost sharing and reimbursement model is developed

1. LOJIC GIS 2. Combined Call Centers

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Advisory Group Findings

1. Potential for significant operational efficiencies and savings for the three operations could be achieved using a phased approach

2. Legislative changes would be necessary for combining LWC and MSD

3. Coordinated debt planning is necessary to protect bond ratings, affordable rates and bond covenants that facilitate these recommendations

4. There is a significant need to define and fund the long-term infrastructure needs for all three organizations

5. Louisville Metro, DPW and MSD/LWC Board and Senior Management Support for these recommendations as a strategic goal is critical

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Advisory Group Findings cont.

6. Each organization must have strong executive leadership in place dedicated to moving through the recommended phased process

7. Appropriate management structure is needed to lead the change at MSD and concurrently implement the Advisory Group Recommendations

8. MSD Leadership (Board and Senior Management) is currently under transition

9. MSD resources are presently dedicated to Action Plans for the State Audit and EPA Consent Decree and these must remain top priorities

10. MSD Re-engineering of Systems and Processes is necessary for long-term sustainability and success

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Recommendations

These recommendations emanate from the work of Black and Veatch and other information gathered by the Advisory Group 1. Synergies and Improvements should be accomplished within a five year

phased approach

• Phase I – Interlocal Agreements (2013-2014) • Phase II – Expanded Interlocal Agreements (2013-2016) • Phase III – Combine LWC and MSD (2013-2017)

• Due Diligence and Risk Assessment • Review Legislative changes

2. Phase I & II - Pursue Partnerships between LWC, MSD and DPW. High Priority areas include:

• Purchasing • Safety • Energy Cost • Paving Restoration • Fleet Operations • Customer Education and Communications • Centralized Plan Review and Inspection

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Recommendations cont.

3. Phase III - Develop plan to combine MSD and LWC within five years

Conduct comprehensive risk assessment and due diligence assessment Develop business plans and management models of a combined “One

Water” utility Pursue Enabling Legislation

4. Continue to Benchmark and Integrate Industry Best Practices

5. Adopt common Quality Management Systems for both LWC and MSD

6. Adopt common Management Control Systems for both LWC and MSD

7. Adopt common Leadership Development for both LWC and MSD

8. Develop cost sharing, allocation and reimbursement model for interlocal agreements to assure mission and utility cost of service principles are maintained

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Recommendations cont.

9. Adopt effective change management process to assure success and minimize risk to stakeholders

10. Incorporate recommendations into LWC, MSD and Metro Strategic Business Plans and establish executive and senior management accountability

11. Develop an Implementation Plan, including resources necessary for success

12. Identify and develop the leadership structure for the Implementation Plan

13. Establish quarterly reporting for benchmarks and key milestones to measure progress and success of recommendations

14. Communicate Plan and seek approval of LWC and MSD Boards

15. Develop Communications Plan for Key Stakeholders

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Next Steps Feedback from the Mayor – May 2012

Metro Council Presentation – May/June 2012

Black and Veatch Finalize the Report – June 2012

Board Presentations – June 2012

Stakeholder Communications – June/July 2012

Develop Transition and Implementation Plan – July to Dec 2012

Launch Transition and Implementation Plan – January 2013

Quarterly Progress Reports to Mayor and LWC and MSD Boards

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