HomeMy WebLinkAbout09252023 City Council Laydown Montgomery - Mike Hubbard Financial Engineering Company Laydown 09252023 Montgomery
the Flnanclal Englneering Company 235 Rockland Street,Rockport,Maine 04856
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www.FinEngCo.com E-mail: mlrubbard(&/FinEngCo.com
September 18, 2023
Mr. Rob Montgomery, Electric Utility Manager
City of Seward
PO Box 167
Seward, Alaska 99664
Dear Rob:
I have reviewed the Excel file entitled "Rebuild Budget 9-9-23" prepared by the ad hoc
committee and offer the following comments. There is no supporting documentation
included in the spreadsheet, so there may be reasons I have not thought of for the
Committee's assumptions.
1. Total revenues are based on the 2024 budgeted revenues plus $950,000 of additional
revenues gained from an assumed rate increase of 15 percent. However, the 2024
budgeted revenues before the increase are higher than the column labeled "Most
recent actual 2022." When excluding customer charges and fuel factor revenues, the
2024 budgeted revenues are approximately 16 percent higher than the historic
figures. (When including customer charge revenues, total historic is very close to the
amount calculated by me and included in my report.) Therefore, it appears that the
$950,000 increase represents at least a partial double counting of additional revenues
from a rate increase.
2. $72,000 in revenues is added for sales to new homes and "DRP's." No supporting
information is provided. Since the average Residential customer pays $1,032/year
(excluding COPA),the added revenues represent 70 new homes. Are these now under
construction?
3. $10,000 of additional expenses is included for the sales to the new homes. Since the
analysis should look at base rates only (non-COPA),this added expense should not be
included. Conversely if the added revenues include COPA, the additional revenues
should be reduced to exclude COPA revenues. I might add,too, that COPA represents
slightly under half of the typical Residential bill, so $10,000 appears to be low.
4. $40,880 of additional sales tax revenues is also included for the sales to new homes.
This amount should be excluded from the analysis unless the Administrative Fee
assessment is dependent on this amount.
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5. Expenses are reduced by $250,000 for an assumed reduction in line losses. Directly
below this line are the words "(Power Factor Fee)." No supporting information is
provided. Without knowing where the reduced losses come from, it is difficult to
know whether the cost of any required capital improvements should be included.
More importantly, however, is what the reduced losses represent.
a. If it represents finding additional sales due to poor metering or power theft,
then it does indeed represent additional revenues. At 10 cents/kWh for the
Residential customer, this represents 2.5 million kWh of unreported energy
sales, or 4.6 percent of total sales.
b. If the reduced losses represent upgrades to SES infrastructure, purchases
from Chugach would be reduced and the reduced expenses should be applied
to COPA and not included in the analysis. At a total COPA rate of 10.55
cents/kWh, the $250,000 represents 2.37 million kWh.
c. If the losses are a result of power factor penalties, the amount appears to be
a bit high. For comparison, the City of Unalaska with 40 million kWh sales to
Large General Service and Industrial (compared to 30 million kWh for SES) has
budgeted $36,000 in power factor penalty revenues.
When comparing SES losses to other utilities, I caution those making comparisons to
make sure the comparisons are valid. Many times, utilities report energy amounts in
several different categories including sales, station use, and own use. Losses would
then represent the difference between generation/purchases and the sum of those
three categories. This would provide a much lower loss amount than when based
simply on the difference between generation/purchases and sales.
6. One lineman is added to the budget while at the same time overtime for linemen is
reduced by $50,000. Is this reasonable?
7. Two positions are added, an assistant director and a lineman plus contractor services
for cyber security. Total expenses for these (including benefits) plus increased salaries
for the director total $639,750, significantly less than the $1.2 million included in my
analysis.
8. PILT is excluded from expenses, but it is, however, later used as a reduction in cash
flow. Thus PILT is included in the overall analysis.
9. Cash flow is shown to be $184,460 with a total budget of $14.4 million. This is quite
low and a higher amount should be sought.
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10. 1 have not reviewed your debt covenants as to what to include and not include when
calculating the Debt Service Coverage Ratio ("DSC"). Based on overall cash flow,
however, a DSC of 1.24 is achieved. The City's 2021 Annual Comprehensive Financial
Report states that DSC must be at least 1.30, and therefore, the budget prepared by
the Committee does not meet that requirement.
If you have any questions, please do not hesitate to call.
Very truly yours,
THE FINANCIAL ENGINEERING COMPANY
A-)
MICHAEL D. HUBBARD
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