Kirkwood Community Update – Results from Feb 26th Board Meeting

Dear Members of the Kirkwood Community,

There has been a lot of progress in the last two weeks. We start this letter with a summary of the February 26^th KMPUD Board meeting and then discuss what comes next.

Board Meeting

Over the last two weeks, the newly formed Energy Finance Committee (EFC) consisting of:

• Frank Majors, KMPUD Board and Finance Committee Chair
• Larry Lacey, KMPUD Board
• Tony Tucher, Homeowner
• Allan Sapp, Homeowner
• Bob Ende, Homeowner
• Bob Epstein, Homeowner
• Dave Likins, KMR representative

completed the competitive process for selecting an underwriter for the next bond issue scheduled for April 27^th. (See our previous letter to the community for background.) The EFC was unanimous in recommending First Southwest (FSW) as our underwriter, and in turn the Finance Committee made the formal recommendation to the Board. The Board unanimously voted to appoint First Southwest. The focus will now turn to completing the documentation so FSW can solicit buyers for the bonds and complete a final pricing in early April in anticipation of a close on April 27^th. 

This is significant for three reasons:

1. The Board used a competitive process for selecting the underwriter rather than their original plan of appointing an underwriter without bids.
2. Our financing costs are now lower. The fees charged by FSW are over $100,000 lower, and the Energy Finance Committee expects that FSW will be able to sell the bonds at a lower interest rate.Over the last six weeks, the 2011 financing structure has evolved from 40 year Certificates of Participation with estimated interest rates of 7.25% – 7.5%, presented at the January KMPUD Board meeting (see: funding options), to 3 year Bond Anticipation Notes with estimated tax-exempt interest rates of 3.75 – 4.5% (both based on current market conditions). Comparing mid-points of these ranges saves the Kirkwood community an estimated 3.25% of interest rates, which is about $680,000 of interest costs per year (or 10 cents/kwh) on $21.2 M of bonds.
3. The process allowed both the homeowners and KMR an opportunity to work collaboratively with KMPUD Board and staff to achieve a better result. We expect this new, collaborative process to continue throughout the project.

The Board also approved the contract with Power Secure to complete the new powerhouse and to buy and install the necessary equipment to connect and operate the new powerhouse. KMPUD will purchase the actual generators with funds supplied by the new financing, and Central Sierra Construction will construct the powerhouse.

Electric & Propane Rate and Expenses

The next focus is to examine all past and future costs associated with both In-Valley and Out-Valley programs. Cost will be allocated to one of four categories:

1. In-Valley electricity
2. In-Valley propane
3. Out-Valley electricity
4. KMPUD operating costs

The goals are to minimize all costs, defer expenses that are not critical and to make sure that costs are properly allocated. We expect all costs related to (1) and (2) to be fully covered by the electric and propane rates. We anticipate that costs for (3) and (4) will be covered primarily by existing revenues from property taxes already being collected. When electricity is provided by the Out-Valley project, then costs for (1) and (3) will be covered primarily by the electric rates.

The detailed information will be presented at a public EFC meeting scheduled for Wednesday March 2 at 1PM. Interested parties are encouraged to attend the meeting at the Kirkwood Community Building. After input is collected, there will be public hearing on the proposed electric and propane rates as part of the KMPUD Board meetings.

Summary

We want to recognize the significant progress made on both financial issues related to the In-Valley project and construction of the In-Valley powerhouse. In the next two months, KMPUD will finalize electricity and propane rates and issue bonds. In June or July, KMPUD is expected to take over the electricity and propane businesses from Mountain Utilities. By November, KMPUD will be operating out of the new power house. 

The final public hearings for the Out-Valley permitting will occur this spring. When permits are final, we will be able to request competitive bids for the construction of the Out-Valley project. Once we have bids, we will sell bonds for the Out-Valley construction – probably in 2012. Sometime between Fall 2012 and Fall 2014 we are likely to have power from the grid! Of course, many details remain between now and then. We will keep you informed and encourage your active participation. 

Sincerely,

Bob Epstein and Standish O’Grady

Kirkwood Community Update – Progress on Financing

February 8, 2011

Dear Members of the Kirkwood Community,

We would like to update you on the Kirkwood In-valley energy project. Several significant events have happened in the last few weeks that will be discussed this Saturday, February 12 at the KMPUD Board meeting scheduled for 8:30 A.M. at the KMPUD’s community services building. We encourage you to attend.

Many of you used the blog: 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 Board meetings. To add your comments please scroll to the end of this article.

The current focus is on the process, structure and costs for issuing approximately $21 million of bonds to: rebuild and operate local diesel generation ($7.6 million), refinance existing debt ($7.4 million), acquire Mountain Utilities’ electricity and propane businesses ($2.9 million), and continue progress on the Out-valley interconnection project ($2.8 million).   These are obviously large amounts of money for our community.   Getting it right the first time will be critical to our community for decades to come.

Energy Finance Committee

At the January Board meeting, the KMPUD voted to establish an Energy Finance Committee (EFC) that consists of 5 members from the community and two Board Members. After two preliminary meetings, the first official meeting of the EFC took place today at 2PM. The committee members are:

Frank Majors, KMPUD Board and Chair
Larry Lacey, KMPUD Board
Tony Tucher, Homeowner
Allan Sapp, Homeowner
Bob Ende, Homeowner
Bob Epstein, Homeowner
Dave Likins, KMR representative

All meetings of the EFC are open to the public. A subset of the committee also held conversations with three financial firms interested in supporting KMPUD financing needs for 2011. In addition to meeting with Cantella, the underwriter KMPUD used last year, we talked with First SouthWest and Raymond James. Both submitted letter requesting an opportunity to work with KMPUD. To read their letters, please click on the following:

First SouthWest Board Letter January 26, 2011
Raymond James KMPUD Board Letter January 26, 2011

This is a significant change from the January Board meeting where the Board voted unanimously to proceed with Bob Haight’s recommendation of an exclusive, non-competitive relationship with Cantella as the Bond underwriter. This change in direction has lead to an actual competitive process for bonds issued in 2011. All three firms will be asked to submit proposals in time for Saturday’s meeting.  We do not expect a decision at the meeting but rather we expect the EFC will have an opportunity to review the proposals and offer advice so a final decision can be made quickly. We strongly recommend that the Kirkwood community continue to urge a competitive process. We now know from both firms and from KMPUD bond council that it is possible to have a competitive process and meet the April 27^th Bond offering date.

Financial Plan

At the January Board meeting, KMPUD Bond Counsel, Bob Haight, presented financial options (see project financing alternatives). He concluded that 40-year “Certificates of Participation” (COP) were the best financial structure to use. There was no disagreement with this position. It requires that KMPUD guarantee that it will set rates for electricity and propane revenue such that KMPUD will collect 20% more than required to meet the debt service payments.

At the next Board meeting, Mr. Haight will present an alternative that we strongly favor to long-term COP financing. The alternative is to issue short-term bonds (three years maximum) that would then be replaced at a later date by long-term COP bonds. There are several possible advantages of this approach compared to the plan presented and approved by the Board at the January meeting:

1.     Significantly lower interest rates in the short term.  Interest rate costs are anticipated to be 4.2 – 6.0% under this alternative, compared to 7.4 – 7.5% under the January plan.

2.     Over $2 million less of bond principal issuance due to no Reserve Fund requirements.

3.     The combination of 1. and 2. above results in less than half the average annual interest rate payments; i.e., < $1 million compared to > $2 million.

4.     This approach allows KMPUD more time to develop a stronger offering that could be at a lower long-term cost.

Project Plan and Timeframe

At the January Board meeting KMPUD General Manager Tom Henie committed to provide a detailed project plan for this meeting. We look forward to seeing it this Saturday.

Summary

The EFC is a very positive development and it will provide a good vehicle to insure a competitive and cost effective financing for both In-valley and Out-valley projects. Board Member Frank Majors and Assistant Manager Michael Sharp have done a good job of pulling the EFC together.  The members of the committee are all willing to invest time and energy to help.

We continue to be greatly concerned about financing and management of the project. However, as a community, we have made progress since the last Board meeting.  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