FINAL Approved 11/08//05
MINUTES OF THE BOARD OF COMMISSIONERS' MEETING
LANSING BOARD OF WATER AND LIGHT
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The Board of Commissioners met in the Boardroom of the Administrative Offices, 1232 Haco Drive, Lansing, Michigan.
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Present: |
Commissioners Gary Calkins, Ron Callen, Joseph Graves, Jr., Tim Haggart, Ifield Joseph, and Robin Smith. |
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Absent: |
Commissioners Nancy Wonch and Santiago Rios |
The Secretary declared a quorum present.
Chairperson Smith called the meeting to order at 5:30 p.m.
APPROVAL OF MINUTES
Motion by Commissioner Haggart, seconded by Commissioner Calkins, to approve the minutes of the regular meeting held July 26, 2005.
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.
No persons spoke
COMMUNICATIONS
A letter from John M. Gear regarding lead replacement.
Referred to staff for response with a copy directed to the Board.
COMMITTEE REPORTS
Chair Smith announced that the report of the Human Resources Committee regarding its meeting of September 20, 2005 has been pulled. A Special Board Meeting has been scheduled for October 11, 2005 to receive the report and to conduct performance evaluations for the three Board-Staff Appointees.
Resolution 2005-9-1
FINANCE COMMITTEE REPORT
A meeting of the Finance Committee of the Board of Water and Light was held at the Executive Offices, Lansing, at 12:00 noon, Monday, September 26, 2005.
Finance Committee Chair Ron Callen, called the meeting to order and asked the secretary to call the roll. The following committee members were present: Commissioners Robin Smith, Nancy Wonch, Ron Callen and alternate member Joseph Graves, Jr.
Public Comment
There was no public comment.
Audited financial statements for fiscal 2005
Senior Vice President of Finance and Administration Dennis McFarland introduced Bob Pekrul, Manager in charge of Plante & Moran’s BWL audit engagement. Mr. Pekrul informed the Committee that Douglas Rober, Partner of Plante & Moran was unable to attend the meeting due to the untimely passing of his mother. Mr. Pekrul introduced members of his team, auditors Jaclyn Simon and Henderson Harris.
Mr. McFarland reported that the audit of the financial statements of the BWL Enterprise Fund for the year ended June 30, 2005 was a clean audit with respect to issues raised in the management letter and year-end entries that had to be made. He referred to the experience from last year involving various environmental entries that were made in addition to adjustments to the carrying value on the Ottawa Plant and other issues. He noted that staff got through the audit process much more quickly this year than in prior years with completion of three weeks earlier than last year. Mr. McFarland thanked his staff and representatives of Plante & Moran for working diligently in the joint venture of delivering the financial statements to the Board before the end of the first quarter of the subsequent year. Mr. McFarland reported that the audit of the financial statements for the Defined Benefit Plan, Defined Contribution Benefit Plan and the Retiree Benefit Plan and Trust (VEBA) would be submitted to the Pension Fund Trustees at their annual meeting in November.
In reviewing the scope and results of the audit, handouts were distributed as a companion to Plante & Moran’s presentation. Ms. Jaclyn Simon reported that the communication to the Finance Committee dated September 2, 2005, explains the auditor’s objective in an audit and management’s responsibilities in financial reporting. She noted that the end goal of a sound internal control structure is to assure the reliability of financial reporting, compliance with applicable laws and regulations, and effectiveness and efficiency of operations. Ms. Simon explained the methods used to account for significant unusual transactions and the effect of significant accounting policies in controversial or emerging areas for which there is a lack of authoritative guidance or consensus. She informed the Committee that there were no unusual transactions or controversial or significant emerging areas for which new accounting policies were needed except as disclosed in the financial statements as follows:
Note 1 regarding the adoption of SFAS No. 71 in accounting for water capital contributions.
Note 6 regarding the adoption of SFAS No. 71 in accounting for the energy cost adjustment.
Note 11 to the financial statements regarding the adoption of GASB No. 40, Deposit and Investment risk Disclosures.
Ms. Simon further reported on management judgments and accounting estimates. She stated that auditing standards call for a report on accounting estimates that are particularly sensitive because of their significance to the financial statements or because of the possibility that future events affecting them might differ markedly from management’s current judgments. She reported that management, with the guidance and analysis provided by the BWL environmental department and contracted consultants, feel they have come to a reasonable estimate of the liability to be incurred in relation to the environmental remediation liability of the North Lansing Landfill. She also reported that as a result of their audit, no significant adjustments were made to the financial statements. She presented a summary of unrecorded possible adjustments through the course of the audit, which were determined by management to be immaterial, both individually and in the aggregate, to the financial statements taken as a whole and the auditors concur with management’s opinion. She noted that there were no disagreements with management over the application of accounting principles or the basis for management’s judgments about accounting estimates. Also, there were no disagreements regarding the scope of the audit, disclosures to be included in the financial statements or the wording of the auditor’s report.
Mr. Bob Pekrul reviewed the following financial information:
Comparison of Operating Revenue by expense category from 2002 - 2005. The Committee requested a staff report on changes to operating expenses in the Administrative and General categories in FY 2004 and 2005 to determine what portion of the cost is for base labor, health care, environmental and other expense.
Comparison of Operating Income (Loss) by utility category from 2001 – 2005.
Bond Debt Service Requirements comparison from 2003 to 2010. It was noted that a large piece of the Bond Debt Service Requirement is due to the Central Utilities Complex of which General Motors reimburses the BWL.
Comparison of Kilowatt Hours Generated vs. Purchased from 2000-2005.
Comparison of Significant Fuel Costs from 2000 – 2005.
Mr. Pekrul reviewed Management Letter comments concerning the following issues and management’s responses, which is on file with the official Board materials:
Following lengthy discussion, Mr. McFarland stated that relative to where the organization was last year and the prior year, comments made in the Management Letter are manageable. With regard to the Committee’s sensitivity to issue #2 regarding coal inventory control, he gave assurance that management will continue to address this problem. Committee members pointed out that this issue has appeared in past Management Letters the last several years. Mr. McFarland noted that the Internal Auditor is evaluating coal inventory controls and will be submitting the findings and recommendations on this issue.
Moved by Commissioner Wonch, seconded by Commissioner Smith to authorize the General Manager to bring forth a resolution to the full Board on the acceptance of the 2005 audited financial statements for the BWL Enterprise Fund and to direct appropriate filings with the State Treasurer.
Carried unanimously.
JULY FINANCIAL REPORT
Senior Vice President of Finance and Administration Dennis McFarland reviewed the financials for the one-month ended July 31, 2005. He reported that net income was $2 million higher than budget. The increase is the result of the sale of excess S02 Allowances of $3.6 million, which was offset by timing differences in fuel cost purchases of $1.2 million. The revised net income projection for Fiscal 2006 stands at $2.3 million due to the $2 million July over-budget, interest earnings accrual of $346,000, and the City of Lansing Rider at $688,000, which was not initially budgeted as current income. Mr. McFarland reported that the cash balance as of July 31, 2005 is down about $9 million from June due mostly to debt service, which took place July 1, 2005. Otherwise the cash balance is stable. There was lengthy discussion concerning the cash reserves. Mr. McFarland explained that the rationale for the reserves is to maintain the BWL’s AA bond rating and to stabilize rates.
The Committee raised questions regarding the Belle River cash reserves. Mr. McFarland explained that cash reserves being held by the Michigan Public Power Agency (MPPA), are allocated for the Belle River project. Funds on reserve with MPPA cannot be accessed by the BWL without Project approval. He stated that a certain amount of reserve is necessary to maintain at MPPA as similar to the BWL. It was noted that earnings on the cash balances would likely flow back to Belle River project participants. Following discussion, staff was requested to prepare talking points for the Commissioners to use when asked questions about the BWL cash reserves.
FINANCIAL SYSTEMS
Senior Vice President of Finance and Administration Dennis McFarland presented an overview of the BWL Financial Needs Assessment Study results conducted by Forrester Research, Inc. Mr. McFarland reported that staff had become convinced that weaknesses in the financial reporting systems existed. On a looking forward basis, staff has concerns as to whether the functionality of the financial systems can be maintained. Areas not included in the study were the Customer Information System and operations system related to work management and GIS. The study objectives were to:
· Understand the BWL’s functional and technical requirements regarding finance systems
· Assess capabilities of the current systems
· Identify key gaps and deficiencies
· Identify alternative scenarios
· Recommend a plan of action
There was lengthy discussion concerning the significance of identified deficiencies, which include:
· GAAP accrual-basis accounting is not supported
· Management reporting is not useful to run the business
· Asset records are fragmented and out-of date
· The budgeting capability does not support proactive planning and forecasting
· The system has incomplete internal control capabilities
· Payroll is labor-intensive and prone to errors
· The technical environment is obsolete and inflexible.
The IT environment assessment concluded the following:
· The current systems date to the 1970’s and were designed in an 80-column, punched card image.
· The environment will increasingly become more difficult to maintain and sustain
The current staff is experienced and responsive, but skills (i.e., COBOL) and knowledge replacement will become an issue.
The Unisys mainframe-operating environment is not mainstream for applications.
Modifications are difficult, due to limitations in field sizes and program interdependencies.
· Homegrown financial and payroll systems are increasingly rare as packages and outsourced services are very mature.
· Project management and package support skills are deficient in IT. The benefits and challenges of packaged applications were reviewed.
Mr. McFarland reported that three primary alternatives for addressing the current systems deficiencies were analyzed by the consultant:
1. Enhance existing systems. This alternative is not recommended because design flexibility is limited by obsolete technology and legacy renewal projects have a mixed track record.
2. Develop new customer applications. This alternative is not recommended because (a) writing customized financial systems is rarely attempted anymore, (b) cost and time to completion and risk are high, and (3) packaged functionality is readily available.
3. Replace with a package. This is the recommended option because (a) financial application packages are mature and can support the vast majority of BWL requirements without modification and (b) the package solution will support substantial qualitative improvements in financial processes. It was noted that headcount reductions or decreased operating costs should not be key drivers for a financial replacement project.
The estimated costs of recommended alternatives were itemized:
Software license fees: $250K to $400K
Hardware and platform costs: $200K to $250K
Implementation costs: 3 to 6 times software costs, or $600K to $1.5M
Total project costs: $1 million to $2.2 million
Ongoing costs are estimated at 25% to 30% of the initial investment, including maintenance fees, staff training, upgrades, etc.
The consultant has made the following recommendations prior to staff starting the RFP process:
Expedite the software procurement process by avoiding a lengthy RFP.
Utilize mainstream technologies, preferably aligned with the BWL’s IT strategy.
Consider separate packages for budgeting, time and attendance, financial reporting and HR/payroll. This could take up to two years to implement.
Select packaged software that is configurable and extensible.
Discussion followed regarding the need to modify the IT skill sets to accommodate the migration from the old environment to the new. Mr. McFarland stated that existing skills such as COBOL and technical knowledge must be supplemented with project management and systems integration skills.
Once responses to the RFP are received and evaluated, staff will come back to the Board with a recommended vendor for action to let the contract anticipated sometime in February, 2006. Mr. McFarland noted that although the new system will not address all of problems, it is a step in the right direction.
Lansing Lugnuts Sponsorship Agreement
General Manager Novick presented an overview of the BWL’s sponsorship agreement with the Lansing Lugnuts that expires at the end of the 2005 season. The last agreement was five years in duration at an annual amount of $53,000. He asked Communications Director John Strickler to give the Committee a brief background on the BWL’s history with the Lugnuts. He reported that the BWL had initially a three-year sponsorship contract with them. The original sponsorship was for just over $13,000. It was renewed in 2000 for a five-year period. The Lugnuts ownership has proposed a five-year renewal of the sponsorship agreement at a price of $56,000 per year. Mr. Strickler reported that the BWL is below average in terms of sponsorship packages with the average sponsorship package being approximately $67,000. Also, it complements the BWL’s overall marketing goal that positions the BWL as Lansing’s hometown utility, while contributing to the continuing economic health of the City of Lansing’s downtown area.
Discussion followed regarding including an option that allows the BWL, at its sole discretion, to cancel the sponsorship agreement in the event current ownership sells the franchise during the time frame of the agreement.
Moved by Commissioner Wonch, seconded by Commissioner Smith to authorize the General Manager to bring forth a resolution to the full Board to approve the renewal of the BWL’s sponsorship agreement with the Lansing Lugnuts for a five-year period at an annual cost of $56,000.
Carried unanimously.
On motion by Commissioner Wonch, seconded by Commissioner Smith, the Finance Committee adjourned at 2:00 p.m.
Respectfully submitted,
Ronald C. Callen, Chair
Finance Committee
Motion by Commissioner Graves, seconded by Commissioner Haggart, to receive the report of the Finance Committee as presented.
Action: Carried unanimously.
MANAGER’S RECOMMENDATIONS
Background materials on items presented are on file in the Office of the Corporate Secretary.
Resolution 2005-9-2
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A. |
LANSING LUGNUT SPONSORSHIP |
RESOLVED, that the General Manager is authorized to renew the BWL’s sponsorship agreement with the Lansing Lugnuts for a five-year period at an annual cost of $56,000 subject to an option that allows the BWL, at its sole discretion, to cancel the agreement in the event current ownership sells the franchise during the timeframe of the agreement.
Staff Comments: General Manager Novick reported that the sponsorship agreement names the BWL as the exclusive utility sponsor of the Lugnuts and includes nightly promotions and special events that promote the utility and its community involvement. The sponsorship package complements the BWL’s overall marketing goal that positions the BWL as Lansing’s hometown utility, while contributing to the continuing economic health of the city’s downtown area. The sponsorship cost is below the average Lansing Lugnut sponsorship package of $67,000 per year.
Motion by Commissioner Haggart, seconded by Commissioner Calkins, to approve the resolution.
Discussion:
Action: Carried unanimously.
Resolution 2005-9-3
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B. |
FISCAL YEAR 2005 AUDITED FINANCIAL STATEMENTS |
RESOLVED, That the fiscal year 2005 Audited Financial Statements for the Board of Water and Light Enterprise Fund have been reviewed and are hereby accepted as presented.
FURTHER RESOLVED, That the Corporate Secretary is hereby directed to file a copy of the fiscal year 2005 Audited Financial Statements of the Board of Water and Light Enterprise Fund and the report on auditing procedures with the State Treasurer as required by the Uniform Budgeting and Accounting Act (Public Act 2 of 1968, as amended).
Motion by Commissioner Calkins, seconded by Commissioner Graves, to approve the resolution.
Action: Carried unanimously.
No unfinished business.
Commissioner Smith suggested that the following items be included on the agenda for an upcoming Board Retreat: Board of Commissioner self-assessment, travel policy, and litigation update.
No new resolutions.
Railroad Delivery Problems and Steam Outlook. General Manager Novick stated that as part of management’s ongoing effort to improve communication with employees, several meetings were held with respect to two significant issues facing the BWL. Director of Production Dick Peffley gave a presentation on struggles the BWL has faced to receive adequate coal deliveries. Marketing Specialist Sue Warren reported on continuing efforts to market the BWL’s steam business.
Dick Peffley reported that the Union Pacific Rail Company, which delivers coal from the mines in Wyoming to Chicago, restricted coal deliveries nationwide following a series of derailments that necessitated the railroad to rebuild sections of its track. He noted that the BWL has also had difficulties with erratic delivery schedules from Canadian National, which deliveries coal on the last segment of its journey from Chicago to Lansing. Coal delivery restrictions has caused the BWL to curtail its export sales to ensure there is enough generating capacity to meet retail and contracted wholesale obligations. Mr. Peffley reported that Union Pacific has begun to increase coal deliveries over the last few weeks due to the addition of one train set to its schedule of deliveries bringing the BWL’s stockpile to over 76,000 tons. It is anticipated that delivery restrictions will continue at least through November.
Sue Warren reported that despite a substantial loss of load when General Motors closed its Lansing Car Assembly plants, the steam utility continues to market steam as a heating source to new development in the downtown area. Since year 2000, seven new office buildings have contracted to take BWL steam. Mr. Warren said that a new marketing strategy will be developed based on the pending completion of the Steam Integrated Resource Plan. She noted that it is very likely the steam utility will face major rate increases over the next five years. The goal is to continue to look for opportunities to reduce the BWL’s steam costs and add new net revenue. General Manager Novick commented that skyrocketing natural gas prices continue to provide room for the BWL to substantially increase steam rates while remaining competitive with natural gas as a heating source.
River Street Triangle Releases Parcel for Ottawa Station Development. General Manager Novick reported River Street Triangle, L.L.C., has agreed to release its interest in a parcel of land between the Ottawa Power Plant and the Stackable Building on North Grand Avenue. The parcel had been referred to as Parcel B, which is the southerly part of an overall parcel that extends from the Ottawa Plant north to Shiawassee Street. Mr. Novick commented that River Street Triangle held an option on both parcels for development of residential housing, however, recently the development company and its President, Joel Ferguson, expressed interest only in the northern portion of the site, known as Parcel A. Mr. Ferguson has now released his interest in Parcel B. This action makes it possible to package the land with the Request for Proposals to develop the Ottawa Plant into a combination of state offices and mixed development. Mr. Novick noted that there continues to be a lot of interest in the Ottawa Plant among developers from outside the community. Following discussion, the Commissioner requested a list of facilities that have been converted from a power plant to marketplace destinations. Commissioner Graves gave a brief recap of development attempts that have transpired dating back to 1997.
On motion by Commissioner Joseph and seconded by Commissioner Callen, that the absences of Commissioners Rios and Wonch be excused.
Carried unanimously.
No comments.
Chair Smith reminded the Commissioners of the Special Board Meeting set for October 11 to consider the report of the Human Resources Committee and to conduct performance evaluations with the three Board-Staff Appointees.
On motion by Commissioner Joseph, seconded by Commissioner Graves, the meeting adjourned at 6:55 p.m.
/s/ Mary Sova, Corporate Secretary
Filed with Lansing City Clerk
October 7, 2005