HomeMy WebLinkAbout02272023 City Council Laydown - Bower - Electric Sale Lfiv&0/0
City of Seward City Manager's Office
PO Box 167 Janette Bower, City Manager
Seward, Alaska 99664 Phone: 907-224-4012
x4a(ast"* Email: jbower@cityofseward.net
City of Seward
Electric Sale — Homer Electric Association Information
On May 9, 2022, City Council passed Resolution 22-067 directing the City Manager to develop a
timeline and process for examining the advantages and disadvantages of selling the City electric
utility. Since that time and after a thorough assessment that included three executive sessions,
the Council decided to proceed with a special election scheduled for May 2 of this year and
selected Homer Electric Association (HEA) as its preferred electric service provider following a
formal Request for Proposal. In addition to receiving a bid from HEA, the City received a proposal
from its current wholesale power provider, Chugach Electric Association (CEA).
In comparing the two proposals, the total financial submissions were very close, with each coming
in between $37 million and $38 million over 10 years less depreciation, as shown in Attachment
A. Each utility also committed to increasing its fixed cash offer at closing to cover any additional
investments made by the City for electric system improvements. For the Council, the two
proposals were close enough that other factors stated in the offers were used to determine which
utility would be the right choice for Seward.This process included hearing from each utility directly
during an executive session on October 27, 2022.
Some of the key factors included:
Community Fit—While the Council believed both utilities would be able to provide Seward with
long-term energy security, Council members felt HEA was better suited for the Seward
community. There was a concern from Council members that CEA, being a much larger utility,
would not place as much emphasis on Seward's community.
HEA was clear in its presentation that it wanted to be a strong partner for the community, even
committing to rebranding its utility from Homer Electric Association to Kenai Peninsula Energy
Cooperative. HEA also pointed to the many political and business relationships and other synergies
HEA and the City of Seward already share across the Kenai Peninsula due to their location on the
peninsula.
Board Representation — HEA also committed to adding a membership district for the Seward
area, ensuring representation on the HEA board of directors. While the seat would ultimately
need approval through a vote of HEA's members, HEA said that Seward-area electric customers
would be allowed to participate in that board vote once the sales transaction is formally approved
by the Regulatory Commission of Alaska.
Also, prior to regulatory approval, HEA said the City would be able to appoint a non-voting interim
board participant through a selection made by Seward's City Council.
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Long-term Rate Strategy—While the Council is fully aware that HEA's rates today are higher
than CEA's rates, the Council believes—based on the presentations from each utility—the gap in
rates between the two today will close in the future. During its presentation, HEA discussed in
great detail the investments it has made over the past decade in generation resources, energy
storage capabilities, customer-focused technology and cybersecurity. HEA further explained how
these investments have positioned the utility well for meeting future industry and regulatory
requirements.
With many key operational and technology investments already made, HEA pointed to the stability
it will realize in its member rates as other utilities across Alaska are beginning to make similar
investments. The Council recognizes that HEA's rates may never be as low as CEA's, but Council
members believe rates between the two utilities will become more competitive and that HEA's
strong focus on the community and customer service is worth the tradeoff.
In conclusion, a key concern of selling the electric utility that Council discussed on several
occasions is how would the City offset the Electric Department's annual contribution to the City's
general fund, which in 2021 was approximately $2.1 million. One solution that would offset a
sizeable portion of the annual general fund contribution is the creation of a trust fund using sale
proceeds after debt is paid. Annual dividends from the income generated by the fund would go
into the City's general fund. Accounting estimates project that as much as 40 to 60 percent of
the 2021 contribution could be offset through this dividend.
Other offsets to the general fund contribution, such as a 10-year premium payment, a cruise ship
incentive, and a lease of City office space, are outlined in the HEA proposal and are shown in
Attachment A.
Throughout the Council's assessment, its primary focus was to ensure a more secure energy
future for the City's electric customers. The Council firmly believes this is best achieved through
a merger with a larger electric utility, where there are more human and financial resources, an
opportunity for longer-term rate stability due to a larger customer base, and expanded operational
resources that ensure system reliability.Today, Seward is trying to manage the changes occurring
in the rapidly changing electric utility industry with only 10 employees and other limited resources.
While City Council feels a merger with HEA is in the best interest of Seward, Council members
also believe this is a decision best left up to the citizens in the May 2 special election.
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City of Seward City Manager's Office
PO Box 167 Janette Bower, City Manager
Seward, Alaska 99664 Phone: 907-224-4012
1401 rF Nay Email: jbower@cityofseward.net
Homer Electric Proposal W Summary
1. Purchase Offer:
Fixed Amount per Proposal $ 25,250,000
Subtotal Original Offer $ 25,250,000
Additional Assets Purchased since Proposal (estimated)
Add: New Capital Assets $ 15,000,000
Less: Depreciation $ (3,200,000)
Purchase Offer at Closing 1/1/2024 $ 37,050,000
2. General Fund Contribution: *
Deferred Acquisition Payments (10 Years) $ 1,100,000
Cruise Ship Power Use Incentive - Ongoing** $ 200,000
Annex Building Lease (10 Years) $ 45,000
Interest from Electric Trust*** $ 1,039,800
GF Contributions: 10 Years
GF Contributions: After 10 Years $ 1,239,800
3. City's Net Funds to Establish Electric Trust:
Purchase Offer $ 37,050,000
Cash Balance 1/1/2024 (estimated) $ 4,000,000
Accounts Receivable 1/1/2024 (estimated) $ 1,590,000
Less: Retire Bond Principal 1/1/2024 $ (16,345,000)
Less: Accounts Payable (Estimated) $ (300,000)
Estimated Residual Electric Trust $ 25,995,000
*General Fund Contributions in 2022 were approximately $1,988,000
**80/o of Gross Revenue - Gross Revenue estimated at $2.5mm annually.
***Estimated as 4% interest annually earned from the residual Electric Trust Funds