January 18, 2011
Dear Members of the Kirkwood Community,
Thanks to all of 322 of you who signed the community letter to the KMPUD Board of Directors (kirkwoodenergy.wordpress.com). We would like to report on the many positive outcomes of that letter as reflected in last Saturday’s Board meeting. We will also comment on issues that have yet to be adequately addressed.
Many of you used the blog: http://kirkwoodenergy.wordpress.com to express your ideas and concerns. We encourage you to continue to do this. All information we collect will be posted there, and we will deliver comments from the blog at each Board meeting.
In-Valley Power Facility
KMPUD presented a revised plan for the In-Valley power facility that included all of the points we presented in our January 7th community letter. Highlights include:
- Construction and the first three years operations will be managed under contract with PowerSecure, Inc. (NASDAQ: POWR) who will enter into a Service Level Agreement (“SLA”) performance contract with KPMUD.
- Cost of the facility has been reduced by about $2M from the estimate presented at the last meeting. Estimated price for electricity was presented (see chart) as well as estimated price for propane (see chart). These prices make assumptions about the cost for financing that will need to be adjusted when an actual financial plan is developed.
- The facility will use a mixture of large Caterpillar and smaller Volvo engines (referred to as the “hybrid” option) that can be tuned to be more fuel-efficient than either alone. The Caterpillars will provide the base-load power during lift operations augmented by the Volvo engines to cover the variable demands. During summer, the Volvo engines will meet the primary demand. During peak demand, most engines will be operating. The design has redundancy enabling it to supply full power in the event of an engine failure.
- Both types of engines can be sold on the used market once we are connected to the grid – assuming we are convinced that they are no longer necessary for backup. Because they will have relative low usage, they should command good resale values.
Many of you commented that the facility is overbuilt if its primary purpose is for backup to the grid. In addition, the capacity of the powerhouse will be 5.1 megawatts while the maximum demand is under 4 megawatts. (In addition, KMPUD has 1 megawatt of generation currently in place that might be used as backup.) While these are valid criticisms, the final design is one we can support because it comes closer to a minimum cost and the possibility exists to recover money later if we downsize the equipment.
In summary, this portion of the project is substantially improved over what was presented last September.
Financial Plan
A portion of what was requested in the community letter was approved at the Board meeting. Board Member Eric Richert prepared a resolution and the Board approved a combination citizen and Board “energy financial committee” focused on the Out-Valley project and the electric and propane rate structures. The Board refused to force competition on funding the In-Valley project.
KMPUD Bond Counsel, Bob Haight attended the meeting and presented financial options (see project financing alternatives). He concluded that “Certificates of Participation” were the best financial structure to use. There was no disagreement with this position. It requires that KMPUD guarantees that it will set rates for revenues from electricity and propane such that it will raise 20% more than required to meet the debt service payments.
Mr. Haight proposed a series of bond offerings that will cover the cash needed for the next 12 -14 months. He claimed that in order to complete the first portion of an offering by the end of April, he needed to maintain his exclusive relationship with a financial institution called Cantella and any effort to solicit a competitive offering from Raymond James or First Southwest (firms that have written letters to KMPUD asking to bid) would prevent the offering from happening on time. He also claimed that his current structure would ensure a competitive offering.
We strongly disagreed with his claims; however, the Board voted for Mr. Haight to proceed with an offering to close by end of April under his proposed structure.
The rushed timing of the financing is directly due to the lack of planning on the part of KMPUD. The April date is driven by the need to refinance the $5.6 million “anticipation note” that was issued in August 2010 and is due on July 1, 2011. The timing is no surprise. The surprise is the fact that the financing was presented for the first time at this Board meeting with zero options for alternative financial advisors or a competitive bidding process among multiple underwriters to lower our cost of capital. Since this coming financing will be for at least $15 million, it is significant and two substantial bond firms, First Southwest and Raymond James have expressed interest and are now being excluded from any consideration. To read the letters click here for First SouthWest and here for Raymond James.
All KMPUD Board members bear substantial “fiduciary duties.” We believe these “fiduciary duties” can only be fulfilled with a competitive bidding process for underwriting services conducted by a reputable Financial Advisor. We also believe that the structure and cost for the first $15 million of borrowing will drive the larger “Out-Valley” financing structure and cost, so it is critical to get this first piece right.
On a more positive note, there was general agreement that KMPUD should work towards achieving an investment grade rating so that long-term capital costs will be lower on the Out-Valley bond. In current market conditions, a long-term unrated bond is 7.75% while a BBB- rated bond is 6%. If we have to use an unrated bond for the “Out-Valley” project it would cost us an extra 8 cents per kilowatt hour over a BBB- rated bond.
The Board approved an energy finance committee consisting of a representative from KMR, three community members, the Board Finance Committee (Larry Lacey and Frank Majors) and the Bond Counsel, Bob Haight.
Expansion of KMPUD Staff
By hiring Power Secure as the manager for the In-Valley construction and operation of the power generation for the first three years, KMPUD has significantly increased the expertise available and contractually accountable to the project. This is a very positive development. The Board declined to make any other decisions about expanding staff – in particular hiring expertise in-house for the power business.
Several citizens made the point during the meeting that existing KMPUD personnel already have full time responsibilities and overloading them with a $50 million project and a new power business was not advisable. While we cannot say this point was totally ignored, the Board did not take any action.
Much of the lack of transparency and competitive bidding on this project is due to the lack of resources with energy specific expertise dedicated to the project. Electrical and propane generation/distribution is a new business for our KMPUD. The debt associated with the project will impact our community for 30 – 40 years. It requires personnel with expertise in these businesses, and we should be bringing this expertise on board now.
Project Plan and Timeframe
In response to the community letter, an oversimplified timeline of the In-Valley and Out-Valley projects was presented (see timeline). KMPUD will take over electricity and propane services on July 1 and the new powerhouse will be operational by November 1.
Assuming a best-case scenario, the Out-Valley construction contract will be issued this Fall and some construction will start in 2011 with a goal of completion by Fall 2012. This is a best-case scenario and while unlikely it is in the best interest of the community to try to achieve it.
KMPUD General Manager Tom Henie committed to provide a detailed project plan by the next meeting.
Summary
This was the best Board meeting ever on the power project. A significant amount of progress was made since the disappointing December and November Board meetings. This positive change of events is due to many factors:
- KMPUD did a lot of collaborative work with PowerSecure, KMR, and the KMPUD energy consultant Russ Givens. The collaboration resulted in much better communications and a better design.
- Many members of the community pitched in from the sidelines to help, pressuring KMPUD to take actions.
- The community, as expressed in the January 7th letter, voiced intolerance with the current process. This pressure was apparent in the Board meeting and while it created some anxiety and some “strong language,” it did kick things into a higher gear that will benefit everyone.
We continue to be greatly concerned about financing and management of the project. However, as a community, we expect to be able to resolve these issues and achieve our ultimate goal of affordable, reliable, high-quality power for the Kirkwood Community.
Sincerely,
Bob Epstein and Standish O’Grady
