Tacoma Public Utilities Public Utility Board Presentation

Transcription

1 Audit Results Tacoma Public Utilities Public Utility Board Presentation May 18, 2018

2 May 18, 2018 To the Chair and Members of the Public Utility Board Tacoma Public Utilities - Power, Water, and Rail Divisions Dear Board Members: Thank you again for your engagement of Moss Adams LLP. We are pleased to present to you the results of our audits of the Utilities financial statements for the year ended December 31, The accompanying report, intended solely for the use of the Board and management, presents important information regarding the Utilities financial statements that we believe will be of interest to you. 2 We conducted our audits with the objectivity and independence you expect. We received the full support and assistance from the Utilities personnel. We are pleased to serve and be associated with the Utilities, and we look forward to our continued relationship. Sincerely, Olga A. Darlington Moss Adams LLP

3 Auditor s Report on the Financial Statements Unmodified Opinions Financial statements are presented fairly and in accordance with US GAAP following pronouncements promulgated by the Governmental Accounting Standards Board (GASB) Tacoma Public Utilities - Power, Water, and Rail Divisions reports issued April 18 and 20, Audit and report on internal control and compliance over financial reporting in accordance with Government Auditing Standards No material weaknesses in internal control

4 Our Responsibility Under Auditing Standards 1 2 To express our opinion on whether the financial statements prepared by management with your oversight are fairly presented, in all material respects, and conform to US GAAP. However, our audit does not relieve you or management of your responsibilities. To perform an audit in accordance with generally accepted auditing standards issued by the AICPA and Government Auditing Standards issued by the Comptroller General of the United States and design the audit to obtain reasonable, rather than absolute, assurance about whether the financial statements are free of material misstatement To consider internal control over financial reporting as a basis for designing audit procedures but not for the purpose of expressing an opinion on its effectiveness or to provide assurance concerning such internal control. To communicate findings that, in our judgment, are relevant to your responsibilities in overseeing the financial reporting process. However, we are not required to design procedures for the purpose of identifying other matters to communicate to you.

5 Area of Audit Emphasis Internal Control Environment Cash receipts/revenues, cash disbursements/payables, payroll, power trading, treasury, financial close and reporting; General computer controls, IT environment Treasury Coordination with SAO testing of cash and investment balances for existence, valuation, restrictions; evaluation of fair value 5 Management Estimates Allowance for doubtful accounts Unbilled revenues Depreciable lives and estimated residual value of plant Accrued liability for injuries and damages Actuarial valuations for pension and OPEB amounts Environmental liabilities

6 Area of Audit Emphasis, continued Capital Assets Consideration of capitalization policies, as well as testing of work orders for additions, retirements, overhead application, capitalized interest, depreciation 6 Net Pension Liability Recognition of share of the liability for employees future pension obligations as part of the Tacoma Employees Retirement System (TERS); Employer liability and related deferred inflows/outflows including selections of new hires from the census and contributions made by the Utilities to TERS Debt Activity New debt issued and defeased in Power Fund; debt repayments, arbitrage liability, capitalized interest, discounts and premiums, compliance with covenants

7 Required Audit Communications Planned Scope and Timing of Audit The planned scope and timing of the audit was communicated through our communication letter to those charged with governance dated December 7, 2017, and was included in the engagement letter dated October 31, Significant Accounting Policies See notes to the financial statements Accounting Estimates Note 2 discloses the Utilities significant accounting policies: Allowance for doubtful accounts Unbilled revenues Depreciable lives and estimated residual value of plant Actuarial valuations for pension and OPEB amounts Environmental liabilities

8 Required Audit Communications, continued Consultation with Other Accountants None noted 8 Disagreements with Management No disagreements or difficulties in performing the audit Potential Effect of Any Significant Risks and Exposures The Utilities are subject to potential legal proceedings and claims that arise in the ordinary course of business.

9 Audit Adjustments and Passed Audit Adjustments Audit Adjustments None 9 Passed Audit Adjustments One passed audit adjustment: Water Fund to reduce beginning net position and record accumulated depreciation in the amount of $1,208,381 for uncapitalized IDC assets from and unrecognized depreciation.

10 New Accounting Standards GASB 75 - OPEB Addresses accounting and financial reporting issues related to other postemployment benefit plans. Effective for 2018 financial statements 10 GASB 83 Asset Retirement Obligations Addresses accounting and financial reporting for certain asset retirement obligations. Effective for 2019 financial statements GASB 87 - Leases Addresses accounting and financial reporting for leases recognizing that leases are financings of the right to use an underlying asset. Effective for 2020 financial statements

11 Acknowledgements The audit progressed on time and in an orderly fashion; requested schedules and draft financial statements were received on a timely basis. Thank you! All Utilities personnel across all departments were courteous, responsive, and fulfilled all of our requests in a timely manner. 11 Tone at the Top and attitude from management was one of helpfulness and openness in response to audit requests and discussion points.

12 12 Olga A. Darlington, Partner (425)

13 TACOMA WATER BUDGET PREVIEW Scott Dewhirst, Superintendent May 23, 2018

14 TODAY S DISCUSSION State of the Utility Strategy Budget Drivers Base Case Rate Scenario Budget & Rate Impacts Next Steps 2

15 STATE OF THE UTILITY: DEMAND Average Day Demand (in MGD) Number of Accounts (in thousands) * Excludes demand from RWSS partners. 45 3

16 STATE OF THE UTILITY: INCREASING COSTS 85 $100 Average Day Demand (in MGD) Second Supply Project Covering Reservoirs Green River Filtration Facility $90 $80 $70 $60 $50 $40 $30 $20 Annual Operating Expense (in millions) 45 $ $0 Average Day Demand Operating Expense 4

17 STATE OF THE UTILITY: CAPITAL SPENDING $80 100% Capital Expenses (in $ millions) $70 $60 $50 $40 $30 $20 $10 $0 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% * 2019** 2020** Renewal & Replacement ($) New Capital ($) Projected Spending Renewal & Replacement (%) New Capital (%) * 2018 reflects spending through Q1 ** 2019/2020 budgeted projections are preliminary Renewal & Replacement vs New Capital (%) 5

18 STATE OF THE UTILITY: RATE PRESSURE & RELIEF RELIEF PRESSURE Current State Asset Management Declining Residential & Commercial Demands All Hazards Risk Mitigation Regulation Potential Asset Management New Large Volume Customer Increased Wholesale Revenue 6

19 STRATEGY: EVOLUTION VISION: Growing trust through extraordinary service Mission: Providing clean, reliable water now and in the future Strategic Plan 7

20 STRATEGY: 2018 STRATEGIC THEMES EUM Assessment SWOT Org. Feedback 8

21 STRATEGY: EFFECTIVE UTILITY MANAGEMENT Largest gaps (importance and achievement) 9

22 STRATEGY: COMMUNITY UNDERSTANDING & SUPPORT Areas of Improvement Promoting our Value Proposition to Stakeholders Identification of New Revenue Opportunities Communication of our Long-Range Financial Decisions Lack of External Communication (TPU, GG, SIGs) Community Understanding & Support Maintaining low & stable rates in a payment challenged community Strategic Theme 10

23 STRATEGY: WORKFORCE DEVELOPMENT Areas of Improvement Inconsistent Hiring Philosophy & Processes Identification & Development of Future Leaders Current Classification Structure Hinders Recruitment & Retention Lack of Bench Strength Workforce Development Area-wide Labor Environment Strategic Theme 11

24 STRATEGY: OPERATIONAL INNOVATION Areas of Improvement Workforce Connect Lack of Data Maturity (architecture & analytics) Lack of Technology Integration AMI Operational Innovation Cross-utility Technology Coordination Strategic Theme 12

25 STRATEGY: OPERATIONAL OPTIMIZATION Areas of Improvement Lack of Documented Processes, Policies, and Procedures Lack of Data- Driven Decision Making (KPIs, Levels of Service) Siloed Org Structure (communication, change management) Project Management Immaturity (standardization, reporting, tracking) Operational Optimization Lack of Safety Prioritization Strategic Theme 13

26 BUDGET DRIVERS Financial Modeling Scenario Description Rate Pressure & Relief 2019/2020 Base Case Expected customer growth, base CIP, base O&M High Customer Growth Assumes account growth with historical modeling New Large Volume Customer Assume additional large volume customer with demand similar to Niagara Increased Wholesale Revenue High Case CIP Expanded wholesale sales through market-based and traditional wholesale agreements, assumes additional $1.2M per year additional revenue Includes high range capital mitigation from the Vulnerability Assessment, assumes additional capital of $128M over the next 10 years Pulp Mill Shutdown Models 2019 closure, assumes loss of $6M per year AWSP Finalization Fish Passage, Howard Hanson Dam Biological Assessment, assumes additional capital of $2.6M in

27 15 BASE CASE RATE SCENARIO

28 16 BASE CASE RATE SCENARIO

29 6.00% BUDGET & RATE IMPACTS Systemwide Average Rate Increase Spread 5.00% 4.00% 3.00% 2.00% 1.00% 0.00%

30 BUDGET & RATE IMPACTS: MONTHLY BILL 18

31 NEXT STEPS June 13 th Public Outreach Planning July 25 th Revenue Requirement Rate Design September 12 th TPU Board Study Session Budget Presentation October 16 th Joint Council/PUB Study Session Presentation October 24 th Public Utility Board approval of preliminary budget 19

32 TACOMA POWER BUDGET PREVIEW Chris Robinson, Superintendent May 23, 2018

33 AGENDA Expenses are Increasing Revenues are Declining Strategic Solutions Long-Range Financial Plan Next Steps 2

34 Expenses are Increasing OPERATING EXPENSES POWER SUPPLY EXPENSE $50 M 13% $77 M 20% $32 M 8% $41 M 10% $127 M 32% $49 M 12% $19 M 5% Purchased Power Generation Transmission & Distribution Administrative & General Other Expenses Taxes Debt Service $187 M 47% $69 M 18% $139 M 35% BPA Power & Transmission Owned Power Supply Other * Source: 2016 Tacoma Power Annual Financial Report * Source: 2016 Production Unit Cost Report (FERC) 3

35 Total Expenses are Increasing $450 M $400 M $350 M $300 M $250 M $200 M $150 M $100 M $50 M $0 M Average Annual Increase: 3.0% 4

36 $/MWh Purchased Power & Transmission $180 M $160 M $140 M $120 M $100 M $80 M $60 M $40 M $20 M HISTORICAL PROJECTION $45.00 $40.00 $35.00 $30.00 $25.00 $20.00 $15.00 $10.00 $5.00 $0 M BPA Power Costs BPA Transmission Costs BPA Power Unit Cost ($/MWh) $0.00 Average Annual Increase for : 3.0% Average Annual Increase for : 3.7% 5

37 $/MWh Owned Generation $80 M $30.00 $70 M $25.00 $60 M $50 M $40 M $18 M $19 M $22 M $19 M $20 M $27 M $20.00 $15.00 $30 M $20 M $10 M $0 M $27 M $29 M $34 M $25 M $23 M $21 M $9 M $10 M $10 M $11 M $11 M $8 M $10.00 $5.00 $0.00 Average Annual Increase: 8.0% 6 Administrative & General O&M and Taxes Debt Service Tacoma Power Unit Cost ($/MWh)

38 Taxes $60 M $50 M $40 M $30 M $24 M $25 M $25 M $27 M $25 M $30 M $34 M $20 M $10 M $17 M $17 M $20 M $19 M $20 M $20 M $21 M $0 M B&O and Other Taxes Gross Earnings Taxes Average Annual Increase: 5.2% 7

39 $/FTE Personnel $100 M $140,000 $120,000 $80 M $100,000 $60 M $80,000 $40 M $83 M $83 M $91 M $95 M $94 M $96 M $97 M $60,000 $40,000 $20 M $20,000 $0 M $0 Average Annual Increase: 3.9% 8 Personnel Costs Cost/FTE

40 Capital Expenses $180 M $160 M $159 $155 $162 $140 M $120 M $100 M $80 M $60 M $40 M $20 M $126 $120 $0 M Average Biennial Increase: 7.4% Actuals Actuals Actuals Actuals/Projected Projected Additions & Replacements Aging Infrastructure Upgrades Advanced Metering Infrastructure Conservation Portfolio Natural Resource Requirements Pooled Contingency Technology

41 2017 REVENUE COMPONENTS $22 M $27 M 5% 6% $57 M 13% $341 M 76% Retail Sales Wholesale Sales Click! Other 10

42 $/MWh Wholesale Prices Decline $120 M $60 $100 M $50 $80 M $40 $60 M $30 $40 M $20 $20 M $10 $0 M Wholesale Revenue Unit Value per MWh Sold ($/MWh) Wholesale Price Trend $0 Average Annual Decrease: 5.5% 11

43 Wholesale Percent of Total Revenue Wholesale Percent of Total Revenue $500 M $450 M $400 M $350 M $300 M $250 M $200 M $150 M $100 M $50 M $0 M Wholesale Revenue Other Revenue Wholesale % of Total Wholesale % of Total Trend 30% 25% 20% 15% 10% 5% 0% 12

44 $/million Btu GWh Market Drivers HENRY HUB NATURAL GAS PRICES WESTERN STATES RENEWABLE PRODUCTION , , , , ,000 20, Source: US Energy Information Administration Other Renewables Wind Solar 13

45 amw Retail Demand HISTORICAL PROJECTION Average System Load Load Forecast Average Annual Increase for : 0.4% Average Annual Decrease for : 0.8% 14

46 Most Costs are Fixed in the Short-term $500 M $450 M $400 M $350 M $300 M $250 M $200 M $150 M $100 M $50 M $0 M Source: 2017 Tacoma Power Financial Report BPA Slice Power & Transmission Purchased Power (Other than BPA) Supplies, Other Services & Charges Personnel Costs Current Funded Capital Projects Debt Service Taxes Fixed BPA Block Variable 15

47 Cost per MWh Served ( To t a l E x p e n s e / To t a l M W h B i l l e d ) $80.00 $70.00 $60.00 $50.00 $40.00 $30.00 $20.00 $10.00 $ Average Annual Increase: 5.3% 16

48 Tacoma Power Strategy 17

49 Managing Expenses Implement Asset Management Roadmap Stand-up Construction Project PMO Prioritize O&M Cost Saving Initiatives Create Utility Analytics Strategy 18

50 Managing Revenue Challenges Review Policies & Procedures that Impact Economic Development Create Economic Incentive Alternatives Underground Electric Facilities Pursue New Wholesale Products & Services Develop Transportation Electrification Proposals 19

51 How are we developing our budget? Capital FTE Other O&M Business Cases Risk Analysis Capital Steering Committee Review Project Presentations Preliminary Recommendation Final Approval FTE Requests Work Plan Review Preliminary Recommendation Final Approval Budget Requests Justification Review Preliminary Recommendation Final Approval 20

52 Preliminar y Budget Information PRELIMINARY CAPITAL REQUEST $180 M $160 M $140 M $120 M $100 M $80 M $60 M $40 M $20 M $162 PRELIMINARY FTE REQUEST AMI 4 Digital Modernization 10 Environmental Projects 6 Wholesale Market Opportunities 4 Operational Efficiencies 8 $0 M Projected Technology Pooled Contingency Natural Resource Requirements Conservation Portfolio Advanced Metering Infrastructure Aging Infrastructure Upgrades Additions & Replacements Utility Operations 17 Total 49 21

53 Budget & Revenue Requirement Decoupled Preliminary Revenue Requirement: $746.5 Million Separate from budget, based on historical spend, inflation, and new projects Objectives: Minimize the rate increase Reduce the revenue requirement to actual spend projection 22

54 Projected Rate Increases: Additional shading in future years represents uncertainty associated with revenues and expenses, mostly due to potential for adverse or critical water conditions. 5.9% 5.9% 3% 2% - 4% 2% - 4% 0% Projected Rate Increase 23

55 NEXT STEPS Budget Development Capital program O & M June 27 th Study Session: Cost of Service Review September 26 th Study Session: Budget Presentation October 9 th Joint Council/PUB Study Session Presentation October 24 th Public Utility Board approval of preliminary budget 24