Final – Approved by Board 5/25/04

MINUTES OF THE BOARD OF COMMISSIONERS' MEETING

LANSING BOARD OF WATER AND LIGHT

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Thursday, March 25, 2004

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The Board of Commissioners met in the Boardroom of the Administrative Offices, 1232 Haco Drive, Lansing, Michigan.

Present:	Commissioners Gary L. Calkins (Speakerphone) Ronald C. Callen, Nancy W. Duncan, Tim Haggart, Ifield P. Joseph (Arrived 5:45), Connie Marin, Robin M. Smith and Nancy Wonch
Absent:	None

The Secretary declared a quorum present.

Chairperson Callen called the meeting to order at 5:30 p.m.

APPROVAL OF MINUTES

Motion by Commissioner Wonch, seconded by Commissioner Smith, to approve the minutes of the regular Board meeting held January 29, 2004.

Carried unanimously.

PUBLIC COMMENTS

THE CHAIR ANNOUNCED THAT MEMBERS OF THE PUBLIC ARE WELCOME TO SPEAK TO THE BOARD ON ANY AGENDA SUBJECT OR ON ANY OTHER SUBJECT NOW, OR AT THE END OF THE MEETING.

BWL employee Joe Davis, President of IBEW Local 352, commented on the status of union negotiations. After an unsuccessful mediation, the union filed a petition for Fact Finding to listen to both sides of the issue. Mr. Davis stated that as each day passes, it becomes more important for the union and management to have some kind of dialogue to resolve the stalled negotiations and find common ground. He noted that each day the labor agreement is unresolved, it is detrimental to the well-being and mental health of those employees who are involved. Mr. Davis wished Commissioner Marin the very best as she relocates to Texas.

COMMUNICATIONS

Letter received from Commissioner Connie Marin announcing her resignation as Commissioner of the Board of Water and Light effective March 31, 2004 because she is retiring from Ingham Regional Medical Hospital. Commissioner Marin plans to return to her home state of Texas.

Received with regret and placed on file.

COMMITTEE REPORTS

FINANCE COMMITTEE REPORT

(Resolution 2004-03-01)

Committee Members Present: Commissioners Callen, Duncan, Haggart, Joseph, and Smith. Commissioner Marin was also in attendance. Excused Absence: Commissioner Wonch.

The Finance Committee met on February 24, 2004, at 5:30 p.m. to discuss the following items:

1. Financial Plan Assumptions
2. Financial Report – January 31, 2004
3. Sole Source Report
4. Inter-Utility Transfers
5. City Request for Additional Dollars
6. Update on Proposals for Ottawa Station

Financial Plan Assumptions. Senior Vice President of Finance and Management McFarland presented an overview of FY 2005 financial plan assumptions. In summary:

Financial Goals

• Maintain credit quality

• Ensure liquidity to meet potential contingencies

• Maintain rate competitiveness with a goal of 20% less than competitors

• Efficient and appropriate use of capital while maintaining safety and reliability.

Sales Forecast

Utility	FY’05 Forecast	FY’04 Budget	% ’05 Budget to ’04 Budget
Electric – Retail	2,455,000	2,545,000	-3.5%
Electric – Wholesale	681,000	591,000	15.2%
Electric (mwh)	3,136,000	3,136,000	0.0%
Water (ccf)	11,139,870	11,244.467	-0.9%
Steam (mlb)	2,056,000	1,926,700	6.7%
Chilled Water (mhrs)	11,931,000	11,931,000	0.0%

Basic assumptions include normal weather, trended ten-year growth rates, General Motors (GM) consumption provided by GM, and that all available electric capacity not sold at retail is sold at wholesale.

Revenue Assumptions

• No electric or water rate increases; to be revisited later.

• Steam rate increase anticipated; rate design is in process

• Chilled Water rates to be reviewed; no growth anticipated

• Chilled Water at minimum bill levels

• Two percent increase in Wholesale Electric prices

Operating Expenses

• No increase in full-time equivalent employees

• Appropriate effects of negotiated union settlement upon bargaining unit, non-bargaining unit and retirees

• Non-bargaining salary increase based on market study

• Significant increase in health care cost.

• Reallocation of discretionary resources

Capital Expenditures

• Revenue producing capital additions to be justified by cost/benefit analysis

• Remaining capital targeted at annual depreciation expense (FY 2005 budget ~ $25 million)

• Capital expenditures included to address result of August 14, 2003 outage analysis.

Other Considerations

• No bond issues planned

• The payment in lieu of taxes (PILOT) to the City will remain at 4% of gross revenue

• Interest Expense/Income

• Wholesale water contract restructuring

Following discussion, the Committee consented with the fundamental FY 2005 financial plan assumptions presented.

Financial Report. Mr. McFarland reviewed the BWL’s financial performance for fiscal year-to-date through January 2004. For the six months into this fiscal year, BWL revenues are up 1% compared to budget, while expenses are on budget. Consequently, net income at $10.6 million is 13% ahead of budget. Electric sales were higher due to wholesale sales; water sales were down due to cool weather last summer. Steam sales were up slightly due to weather. Chilled water sales are down. He pointed out that the 8% variance in the budgeted operating income was due to the August 14^th blackout, premium sharing on health insurance, which has yet to occur, and timing issues involving the conversion of Erickson Station to Western Coal and the Electric Energy Cost Adjustment. Certain factors reflect timing and actual performance is expected to be close to budget with planned expenditures and unit down time as the fiscal year ends.

BWL Sole Source Report. General Manager Novick reported that he wants to ensure the Board is receiving relevant information from the Sole Source Report to accomplish its oversight responsibilities. He noted that prior to July 2003, the purchasing policy required reporting purchases equal to or greater than $15,000. The new purchasing policy contains emphasis on the requirement for competitive bidding for purchases over $5,000. He suggested evaluating the lower $5,000 threshold to determine if it should be increased or if there is a better way to summarize the documentation to assure purchasing procedures are being followed and that the report is more meaningful to the Board. Mr. Novick suggested continuing with the current Sole Source Report requirement while staff explores other appropriate reporting mechanisms. A recommendation will be brought to the Committee in the future for review and input. The Committee emphasized the importance of having proper internal controls and an appropriate reporting mechanism that is understandable to assure procedures are being followed.

Inter-Utility Transfers. Mr. Novick and Mr. McFarland stated that to ensure present accounting and planning processes comply with past actions taken by the Board and current Board preferences, the issue of inter-utility transfers needs to be clarified. Board Resolution 2003-4-1 on Inter-Utility Transfers, approved April 8, 2003 has created an accounting issue that needs to be addressed. That resolution provided that all inter-utility transfers prior to FY 2004 be waived with two exceptions: (1.) existing formal inter-utility loans and interest-bearing notes and (2.) those associated with GM’s Lansing Grand River Plant incentive package. It further provided that the budget for each utility will be balanced at the start of the fiscal year with an interest-bearing note if needed.

They noted that the accounting process is best used to help identify and track business problems and not to fix business issues. The Committee was asked to clarify two questions: (1.) whether BWL has three or four utilities for financial reporting purposes starting with FY 2006 and (2.) whether formal promissory notes are required for existing and future inter-utility transfers.

Overhead Cost Methodology. Mr. McFarland reported that the Overhead Cost Methodology approved by the Board on July 22, 2003 (Resolution 2003-7-14) does not appropriately reflect certain items such as general facilities and management salaries. Moreover, he stated that the related allocation factors do not appropriately reflect the four-utility structure. He recommended a review of the overhead methodology to adjust it to a more appropriate accounting practice. Mr. Novick noted that accounting issues such as overheads and allocation factors generally should not require Board approval.

Following discussion, the Committee requested the following for consideration at the next regular meeting:

1. A resolution to amend Resolution 2003-4-1 on Inter-Utility Transfers to stipulate that the BWL operates four financially independent utilities; namely, Electric, Water, Steam and Chilled Water. Appropriate accounting entries will replace formal promissory notes to record transactions among the four utilities.


2. A resolution to rescind Resolution 2003-7-14 on Indirect Cost Allocations stating that the Board delegates to management the responsibility of handling the allocation factors and overhead methodology. The resolution should clarify why it is being rescinded with emphasis that staff will conduct an analysis of allocation factors to set the process to change the methodology for FY 2006.

City Request for Additional Dollars. General Manager Novick reported that he has been meeting with various city officials and Council Members to talk about the BWL’s financial obligations to the City of Lansing and the citizens of Lansing. The purpose for these discussions is to clarify a confusion that exists about the equity ownership of the BWL. As with a private company, the equity of the company is owned by the owners of the company. Essentially, only the owner of a company can sell the company, by City Charter, only the citizens of Lansing can sell the BWL. Consequently, the citizens of Lansing own the BWL and its equity. The Board, as the citizens’ agent, manages the citizens’ equity investment. Mr. Novick noted that he has met with City officials to discuss the City’s fiscal dilemma during the past couple of weeks.

Update on Proposals for Ottawa Station. General Manager Novick reported that the City has put forth a draft proposal for an Ottawa Station development feasibility study. He introduced discussion as to whether there is interest by the Board of becoming involved in the development business. Following input, the sense of the Committee was for the BWL to focus its efforts on providing reliable utility services at a reasonable price. The BWL should work with the City by retaining the services of someone who would be interested in marketing the development of the Ottawa Station with the right combination of uses, people and financing or pursue any other option that keeps the BWL out of the development business but finds a party to develop Ottawa Station.

Closed Session - Status of Union Negotiations. By motion of Commissioner Smith, seconded by Commissioner Joseph, that the Finance Committee convene in closed session to discuss the status of collective bargaining negotiations (7:40 p.m.).

Action: A