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2020 09 30 BAWA MinutesMINUTES OF THE SPECIAL MEETING OF THE BOARD OF DIRECTORS OF THE BAYTOWN AREA WATER AUTHORITY September 30, 2020 The Board of Directors of the Baytown Area Water Authority (BAWA) met in a Special Meeting on Wednesday, September 30, 2020, at 4:31 P.M., in the Council Chamber of the Baytown City Hall, 2401 Market Street, Baytown, Texas with the following in attendance: Brenda Bradley Smith President Mike Wilson Vice President Frank McKay III Secretary Brandon Benoit Director Nick Woolery Presiding Manager Karen Horner Interim General Counsel Leticia Brysch Assistant Secretary President Bradley Smith convened the September 30, 2020, BAWA Board Special Meeting with a quorum present at 4:31 P.M., all members were present. 1. MINUTES a. Consider approving the minutes of the Baytown Area Water Authority Regular Meeting held on August 19, 2020. A motion was made by Vice President Mike Wilson, and seconded by Secretary Frank McKay III to approve the minutes of the Baytown Area Water Authority regular meeting held on August 19, 2020, as submitted. The vote was as follows: Ayes: President Brenda Bradley Smith, Vice President Mike Wilson, Secretary Frank McKay III, Director Brandon Benoit Nays: None Approved 2. PROPOSED RESOLUTIONS a. Consider a resolution to approve the First Amendment to the Consulting Services Agreement with Carollo Engineers, Inc., for the Baytown Area Water Authority East Surface Water Treatment Plant Project. Assistant Director of Engineering Andres Brinkley presented the item and stated that she wanted to point out that the Authority's engineers were presented. Mrs. Binkley noted that earlier in the year, the Authority had entered into an agreement with Corolla Engineers for some technical assistance related to some anticipated commissioning, startup and interactions with the TCEQ and BAWA Board Special Meeting Minutes September 30, 2020 Page 2of8 the item before the members of the Authority, is an enhancement to that agreement as an amendment. Mrs. Brinkley noted that the amendment covered some additional interaction with the TCEQ, which they have so far provided the staff with some very good assistance. She noted that bringing a surface water treatment plant into operation is kind of tricky from the point of regulatory approval. She also noted that additionally, the amendment would cover some staff training in order to provide for kind of a softer handoff in terms of the operations of the new equipment, operational training, so staff has asked for workshops, such as Water 101 workshops, for staff to attend. Mrs. Brinkley noted that the amount of the contract amendment is $72,000, for a total contract amount of $121,000 and staff recommended approval. President Smith asked staff if this engineering company is separate and apart from the design engineers that designed the Water Treatment Plant. Mrs. Brinkley responded that when staff first engaged Corolla in the contract, they were not able to have the operational support from the Design Engineer. She noted that staff was just ending the major construction items and had just started commissioning or were about half -way through, so what staff needed was not available from the Design Engineer. Therefore, Carollo was brought in to help, and now that staff is about half -way through the commissioning, and we know that we will need additional support to complete the regulatory process with TCEQ, staff needs Carollo to continue to provide that support needed to navigate some of the plant's conditional approvals, as well as, to provide the operational training workshops for staff. A motion was made by Vice President Mike Wilson, and seconded by Director Brandon Benoit to approve Resolution No. 2020-14, related to Item 2.a. The vote was as follows: Ayes: President Brenda Bradley Smith, Vice President Mike Wilson, Secretary Frank McKay III, Director Brandon Benoit Nays: None Approved RESOLUTION NO. 2020-14 A RESOLUTION OF THE BOARD OF DIRECTORS OF THE BAYTOWN AREA WATER AUTHORITY AUTHORIZING THE FIRST AMENDMENT TO THE PROFESSIONAL SERVICES AGREEMENT WITH CAROLLO ENGINEERS, INC., FOR THE BAYTOWN AREA WATER AUTHORITY EAST SURFACE WATER TREATMENT PLANT PROJECT, SUBJECT TO THE APPROVAL BY THE CITY COUNCIL OF THE CITY OF BAYTOWN, TEXAS; AUTHORIZING PAYMENT IN AN AMOUNT NOT TO EXCEED SEVENTY-TWO THOUSAND AND NO/100 DOLLARS ($72,000.00); MAKING OTHER PROVISIONS RELATED THERETO; AND PROVIDING FOR THE EFFECTIVE DATE THEREOF. BAWA Board Special Meeting Minutes September 30, 2020 Page 3 of 8 3. REPORTS a. Receive an update on the Baytown Area Water Authority rate study. Assistant Director of Public Works Sterling Beaver presented the item and stated that back earlier in the summer, staff came before the board with an item to examine BAWA's current rate structure. He noted that Corolla Engineering did the study and introduced Ms. Jennifer Ivey, a representative from Carollo Engineering to give the Authority an overview of that work. Corrollo Engineering Representative Jennifer Ivey presented the item and noted that she was going to go through their findings from their study and present the resulting recommendations. Ms. Ivey noted that to begin they are going to first talk about their assumptions and the goals of the study and then, we will go through the financial plan, followed by a discussion on the proposed rates and the bill impacts for BAWA customers. Ms. Ivey stated that a quick explanation of the process that they go through for one of these studies is that they first start off looking at the policies, the existing rate structure, and just trying to get a feel for what they need to try to accomplish as part of the study. She noted that they then, go into a what they call a Revenue Requirement Analysis, which is basically a financial plan. This plan is where they are looking at all of BAWA's O&M expenses, looking at its capital, projecting that out, and then they are also looking at BAWA's revenues and projecting out what it should be bringing in with its existing rates and doing a comparison to see if BAWA is going to be bringing in insufficient revenue to fund those expenses or is there going to be a gap that they need to try to fill. Ms. Ivey noted that as a part of that process is also to look at BAWA's demands, so, they usually do a Demand Analysis and for an agency like BAWA with just a few customers. The Demand Analysis is fairly simple, but is still an important process to make sure that if they see any trends, like significant conservation, they want to be sure that they are accounting for that in the analysis and that they still come up with sufficient rates that would provide sufficient revenue. Ms. Ivey stated that once they have that financial plan and they know those revenue requirements, that tells them what percentage increase BAWA might need if it does need an increase. She noted that they can then take that information and go through a Cost of Service Analysis, which is where they allocate costs based on if those costs were associative with providing average -day demand versus a peak demand. She noted that they can use that allocation to then allocate the costs to BAWA's different types of customers, based on the demands that they are putting on BAWA's system. Ms. Ivey stated that once this is completed, they can then design the rates, in order to recover that amount of revenue from each customer group, and then finish with a Public Outreach and Messaging, which is what brings her before the Authority today. Ms. Ivey showed the Authority a list of the big assumptions that they made as part of the study, and they are: o that customer growth will increase at about one percent per year; o they used 3% for general inflation and also for labor for escalating your costs, ® for water, a 2.8% annual escalation for your water purchasing costs, BAWA Board Special Meeting Minutes September 30, 2020 Page 4 of 8 o for financial targets, the BAWA policy is to maintain an operating reserve of at least ninety days of O&M expenses, • for capital reserve it is targeted to be between 0.5% and 1 % of asset value, and • finally, the Debt Service Coverage is 1.25 times, so that means that the BAWA net revenue should be at least 1.25 times the annual debt service in each year. Ms. Ivey noted that given those assumptions, when they put together the financial plan, they plugged in all the numbers and projections, and then they ran it through three separate tests, and they are as follows: (1) The first is a basic Cash Flow Test that asks if BAWA is bringing in more revenue than its expenses, which is not always required. She noted that there is some usual re -plan to have a deficit in that given year if it is known that there are Capital Reserves or even Operating Reserves that BAWA might want to dip into, but generally, she noted that they want to make sure that they do not see a trend of having a deficit every year. (2) The second test is the Debt Coverage Test, which calculates the projected debt coverage in each year to make sure that they stay at least 1.25 times of that which was discussed during the assumption. (3) The third and final test is the Reserve Fund Test where they project out BAWA's reserve funds for both operating and capital to make sure that you are also staying above your targets. Ms. Ivey showed the Authority a chart with two scenarios, and they are as follows: The "Do Nothing" scenario is one in which, BAWA has the three percent increase for fiscal year ending 2021, but then after that, there are no noted increases. So, if BAWA did not do any type of rate increase after this year, what would that look like financially? Per the table, they projected out the Debt Service Coverage in each of those years and generally, it stays pretty high until you get to that last year, fiscal year ending 2027. Ms. Ivey noted that what they are proposing is a debt issuance in that year, and that is because BAWA will see a big spike, and that is where you start to have increased capital costs for the East Plant Expansion Project. So, BAWA is in pretty good shape until you get to that project, in fact, if it was not for that project, this "Do Nothing" scenario would work fine for BAWA; however, you would get to that year where you needed to start construction for that project and you would have a problem. Director McKay asked if BAWA was going to be running short of water and is that why they need to do this expansion. Mr. Beaver noted that at this time, there are projections for existing service contracts that demands the East Plant expansion in order to meet those demands, contract requirements, and obligations. Director of Public Works and Engineering Frank Simoneaux stated that he thought the expansion costs for the East Plant noted in the chart would be for the design cost only. He stated that this is not assuming BAWA is going to construct in FY 2026, but would only be looking at the design. So, if you look three years out from that, then there would be the construction cost, and staff is working to rework some of the existing contracts, in order to delay that cost as much as possible, BAWA Board Special Meeting Minutes September 30, 2020 Page 5 of 8 and not have excess capacity. Mr. Simoneaux further noted that he believed that the noted costs was a combination of rehabbing all the grand storage tanks and starting the design on BAWA East. President Smith requested that staff give a brief overview of the Commission's requirements on at what percentage BAWA has to be in design and what percentage it has to be in construction. Mr. Simoneaux responded that it is seventy-five percent that BAWA has to be in design and ninety percent during construction, so with those thresholds we cannot wait until we run out of capacity to begin. Director Wilson stated that one of the beauties of what has been done with the East Plant is making it expandable, as opposed to creating a whole new plant. Mr. Simoneaux stated that the plant does not necessarily have to double in size, and noted that the way that things were constructed, would allow a 12-MGD plant to exist. He stated that there are some synergies that staff put in place, such as the forebay. Mr. Simoneaux explained that there is only one forebay for a 12-MGD Plant, which has already been built, so we do not have to build that anymore; but we will have to build another treatment train; however, going from six to twelve will not be as expensive as building a 6-MGD Plant. Ms. Ivey stated that when they do get out to FYE 2026 and BAWA will have to start funding those design costs, assuming that this plays out the way that it is now projected to, the board members can see that in that year is when BAWA will exhaust its capital reserve and it will start to dip down to that 1.25 coverage. So, it would have to use rate revenues to help offset those capital costs, and this is how much the rate revenues we would need to use in order to fund all of the capital projects listed in that box there. Ms. Ivey further noted that the block in question is not just for this expansion, it also includes all of the CIP needs for that year, which is why there is such as significant jump in that year because that is when BAWA would start the process for that expansion. Ms. Ivey then noted that in FYE 2027, they would project that BAWA would need to borrow about twenty-five million dollars to continue with that project and so without a rate increase, we then bring your coverage down below that 1.25 target that we have. You can also see in the graph on the right, your Operating Reserves would have dipped down to $0.5 million, so way below your target in 2026. It would come back up in 2027, but your Capital Reserve would be negative so that is the "Do Nothing" option. Ms. Ivey further stated that as she initially noted, it looks like their proposed plan would be feasible. She noted that they extended their financial plan window because in discussions with staff, they understood that this expansion is coming, so right now, it is projected to be immediately after the five-year window that they might normally look at; therefore, they wanted to extend the window a bit just so that board member could see the impacts of that, and therefore make some decisions in these first few years that may offset a large increase, a large rate spike that BAWA might need. Director McKay asked if Ms. Ivey has a scenario where it shows the three percent increase every year because that is the current operating mode and because he did not believe that the proposed rate plan was really realistic. Ms. Ivey responded that Director McKay was right, the plan is not and noted that the next option is not a three percent increase, but based on the projections, their BAWA Board Special Meeting Minutes September 30, 2020 Page 6of8 recommendation is to bump up to six percent in each year, which gets BAWA past the initial hump in 2026 and 2027 where they would start the project. She stated that the six percent increase will allow BAWA to build up some reserves and to slowly increase that revenue from rates, so that BAWA can meet its target coverage and target reserves. Ms. Ivey stated that the three percent increase in the first year shows our revenue requirement for fiscal year 2021 as compared to the projected revenue that you would bring in for fiscal year 2020, and so, you can see the three percent, and we would be getting about seven and a half percent of that from the other districts and 2.4% percent of that from the City of Baytown. She noted that with this three percent and in going through the allocation process to figure out how they would allocate that three percent, they saw a three percent overall in revenue, but they wanted to make sure that it was being recovered from the customers that are putting more demand on the system; i.e., more peaking demand on the system, and so that is why, based on the analysis, the City of Baytown has a low peaking factor, so, that is why they benefit from a lower rate. She noted that the City of Baytown currently already benefits from a lower rate, and so, based on their analysis, the city would continue to benefit from a lower rate, but that gap between the two rates would increase because the other customers have a much higher peaking factor as a group. Ms. Ivey showed the board members a chart that outlined the impact of the different rate increase plans on the costumers. President Smith asked staff to give an example of how these increases would impact MUD, city and industrial customer; i.e., a minimum bill. Assistant City Manager Nick Woolery stated that is a little more complicated, but tried to give a good example. He noted that BAWA did approve the three percent increase, which was shown in the charts for this upcoming fiscal year, but the city did not increase water and sewer rates at all, so the BAWA rate went up, but what was passed down to the customers actually did not go up on this fiscal year, so it kind of depends, because the whether it is the City of Baytown or the various MUDs, it depends on their financial situation, they may not always pass along that same rate increase to the end user, it just depends on what other improvements they are making to their own system. Director McKay stated that he understands that BAWA is going to have an expansion and it is going to need some money. He suggested that they go ahead and start slowly raising their rates to be prepared for that, but he has been here for a few years and he did not remember going through that six percent rate, in order to build a fifty -million -dollar BAWA East Plant. Director McKay asked why did we not have to do that for construction. Mr. Beaver responded that a couple of things is (1) we had a rate study when we were increasing the rates and over the last few years, the board will recall, we have not increased rates, and (2) there are also some debt services that was done in order to help with some of those costs of the project. Director McKay noted that it just seems that six percent, for four or five years in a row, if you are talking about individual people, especially people on a fixed income, that is going to be a huge burden. Mr. Woolery asked for the board members to consider the flip side, the City of Houston increases BAWA's rates every year, and BAWA has not passed that along to its customers every year, so BAWA Board Special Meeting Minutes September 30, 2020 Page 7 of 8 there are so many other factors involved in this rate study. Mr. Woolery also noted that this is the worst case scenario and it is a model, so there are things that we are going to work on from now until this next budget year that we may look at and say, "you know what; it is not the right time to start with six percent." or "we have revised the analysis and we do not think that plan is going to need to be done for two or three more years after that" all things that can change the model a little bit. Mr. Woolery clarified that this presentation is a rate study and not a rate -request approval. Mr. Simoneaux noted that today's presentation is for discussion and planning purposes right now and staff is not asking for any action. He further noted that staff is going to relocate the assumptions by the time everyone is ready to start discussing rates for FY 2022, so staff has some time to update the projections before BAWA is asked to take any action, which will be approximately about a year away. However, he did want to note that BAWA's raw water costs are going up every year at a rate of at least three percent, so BAWA has had many increases but did not raise its own rates. b. Receive an update regarding the Baytown Area Water Authority East Plant Project. Assistant Director of Engineering Andres Brinkley presented the item and showed the board members pictures of a lot of the work and progress that had been completed since the meeting last month. Mrs. Brinkley noted that the plant is all built out, but everyone has been working on some equipment and putting the plant through its phases. She noted that last month, staff saw that they were making pretty good water, in terms of clarity, and they were trying to figure out the dosage of disinfection, residual, miscellaneous things like that and noticed that some of the equipment went on the fritz, so, staff had those replaced. She noted that staff had been troubleshooting what is happening with the water levels at the plant and those issues had all been resolved. Mrs. Brinkley listed other items that were cleaner or corrected as she reviewed the pictures with the board members and noted that overall, they are near the end of construction and the current status of this contract value is just over 49 million. She stated that it had been very productive in terms of the contractor building everything and putting BAWA in the good position that it is at today, to begin commissioning, ahead of the original construction schedule. C. Receive an update regarding the Fritz Lanham Surface Water Plant Chemical Feed Improvements Project. Assistant Director of Engineering Andrea Brinkley presented the item and stated that the main BAWA plant also has some construction going on and the work is going very well. She noted that the contractor for that work is LEM and noted that despite bad weather they were able to get a lot of the major items delivered. She noted that staff is very pleased with the progress of the project. BAWA Board Special Meeting Minutes September 30, 2020 Page 8 of 8 4. MANAGER'S REPORT a. The next Baytown Area Water Authority meeting is scheduled for Wednesday, October 21, 2020, at 4:30 p.m., in the Council Chamber located at City Hall, 2401 Market Street, Baytown, Texas 77520. There was no report. 5. EXECUTIVE SESSION a. Recess into and conduct an executive session pursuant to Sections 551.071 of the Texas Government Code to seek the advice of the Authority's attorneys on legal matters related to the Baytown Area Water Authority East District Water Treatment Plant. At 5:19, President Smith recessed into an executive session pursuant to Sections 551.071 of the Texas Government Code to seek the advice of the Authority's attorneys on legal matters related to the Baytown Area Water Authority East District Water Treatment Plant. At 5:47, President Smith reconvened the Baytown Area Water Authority September 30, 2020, Special Meeting, and announced that in accordance with Section 551.102 of the Texas Government Code, no action was taken in executive session. 6. ADJOURN With there being no further business to discuss, President Bradley Smith adjourned the Wednesday, September 30, 2020, BAWA Board Special Meeting at 5:50 P.M. City of Baytown