April 12, 2011

The regular meeting of the Board of Commissioners of Public Utility District No. 1 of Whatcom County was called to order at 8:00 a.m. by Commissioner Jeff McClure. Said meeting was open to the public and notice thereof had been given as required by law. Those present included Commissioner Mike Murphy and Legal Counsel Jon Sitkin. Staff: Steve Jilk, General Manager; Brian Walters, Director of Utility Operations; Barb Shosten, Director of Finance; Annette Smith, Assistant Finance Director Fred Disch, Water Systems Supervisor; Paul Siegmund, Process and Control Engineer; Duane Holden, Project Manager; Rebecca Schlotterback, Water Resource Technician; Lew Gaskill, Accountant 1; Mike Macomber, IT/SCADA Technician; and Dennis Yabsley, Electric System Supervisor. Public attending: Rick Maricle, ConocoPhillips; and Tom Perry, Murray, Smith and Associates.
• Public Comment
No comments made.

• Approval of the Meeting Minutes and Claims
The Commissioners were presented with the minutes of the regular meeting held March 22, 2011, and the following claims of April 12, 2011.

• BPA-Residential Exchange Program Settlement Agreement
The Residential Exchange Program (REP) was established in federal law, part of the 1980 Northwest Power Act, as a mechanism to extend the financial benefits of low-cost power generated by the Federal Columbia River Power System (FCRPS) to residential and small farm customers of the Region's investor owned electric utilities (IOUs). Under the REP, the Bonneville Power Administration (BPA) provides payments to IOUs, the magnitude of which are set according to a complex analysis that takes into account the size of the IOUs' residential & small farm electric loads and the difference between the FCRPS's average power costs and the IOUs'.

The payments are included in BPA's costs used for setting its power rates paid by BPA's customers, including public utilities or consumer-owned utilities (COUs), as they are referred to in the Settlement Agreement. The amount of the payments is set in a rate hearing process prior to each of BPA's two year rate periods, and then recovered through power sales revenues over the following two years. As a requirement to receiving these payments, IOUs affected must pass the financial benefits received on to their eligible customers in the form of a credit on the customers' power bills.

The Settlement Agreement, if ratified by consumer-owned utility customers (COUs) of BPA who in aggregate represent 91% of BPA's Tier 1 electric load, will be included in BPA's current rate setting process. If approved by BPA at the conclusion of the rate hearing this summer, the Settlement Agreement will determine the amount of financial benefits to be provided to the Region's IOUs through 2028. As part of the Settlement Agreement, the Region's COUs will receive monthly credits (rebates) on their BPA power bills for the first eight years of the settlement period. These credits are compensation to COUs for overpayments made by BPA to the IOUs under the REP during prior years, as determined in a federal Ninth Circuit Court proceeding.

Based on the payment structure agreed to by the parties who negotiated the agreement, the forecast through 2028 is that the District's power rates will be slightly lower resulting in a cost reduction with a net present value over the 18 year settlement period of approximately $3.5 million.

ACTION: Commissioner Murphy motioned to approve the Residential Exchange Program Settlement Agreement (No.11PB-112322) and authorize the District's General Manager to sign the document. Commissioner McClure second the motion. Motion passed unanimously.

• 2010 Financial Report
Assistant Finance Director Smith provided an overview of the 2010 District Financial Statement. The District's financial policies conform to the Generally Accepted Accounting Principles (GAAP) and the financial statements have been developed in compliance with the Governmental Standards Board (GASB) Statement 34 - Basic Financial Statements - and Management Discussion and Analysis - for State and Local Governments.

The Financial Report consists of the following three parts:
1. Management's Discussion and Analysis (MD&A)
2. Financial Statements, including footnotes
3. Required Supplemental Schedules

The MD&A portion of the report gives an overview of the Statement of Net Assets (Balance Sheet) and Statement of Revenue, Expenses, and Change in Net Assets (Income Statement) for 2010 compared to the same statements for 2009. The purpose of this statement is to help the reader focus in on the most significant elements contained in the more comprehensive financial statements, footnotes, and supplemental schedules (section 2 and 3 above). It also includes a discussion of the major changes between the two years, changes in capital assets, long-term debt, and any other significant issues or pending changes for the District. This section of the report is prepared according to prescribed guidelines and falls short of providing an ‘apples to apples' comparison of the preceding year if circumstances have changed significantly between the two years. It also does not provide a budget to actual comparison of results. For that reason, the following, high-level statement was prepared to provide that additional information/comparison:

The lines of the statement have been numbered and are discussed in more detail below:

1) Service Revenues - Water Utilities - this line includes the service revenues for both the Raw Water (Cherry Point) utility and the Grandview Potable and Fire utilities. Since actual water consumption decreased by 11% between 2009 and 2010, the 2010 Water Revenues increased from the 2009 revenues mainly due to the increase in rates for 2010. The 2010 actual revenues were right in line with the budget.

2) Service Revenues - Electric Utility - this line includes Electric service revenues for District services only (O&M, admin, labor, etc.). The pass-through revenues for BPA power, transmission, and tax costs have been removed from this statement. The budget and 2010 and 2009 actual amounts are in line.

3) Miscellaneous & Business Service Revenue - this line includes any miscellaneous income along with revenue generated from business services. Approximately $200,000 of business services budgeted for did not occur during 2010.

4) Operations - this line includes all operating, planning and business development, and administrative costs, including power costs for the water treatment plants, but excluding power costs passed through to Conoco Phillips. The Conoco Phillips power costs are a straight pass-thru from BPA and have a zero net effect. The 2010 actual costs of $4,027,283 increased from 2009 primarily due to a decrease in BPA Look-back credits received from BPA. The difference between 2010 actual costs and the budget came mainly from an increase in Outside Services over budget, a decrease of planning and business development projects which didn't occur, and a decrease in taxes due to a credit for the Privilege Tax.

5) Depreciation Expense - this line includes depreciation expenses exclusively. The budgeted amount is actually the amount of the rate funded capital transfer referred to as funding depreciation from a budgetary stand point. This amount is lower than usual due to the anticipation of the 2010 bond issue. The 2010 actual amounts increased from 2009 by $123,634.

6) Net Non-operating Income (Expenses) - this line includes all revenues and expenses unrelated to the normal operations of the District, with the Alcoa Escrow fees, LUD assessments, interest income and interest expense being the major components. The reason for the decrease of $40,718 between 2010 than 2009 is due to assessments received from the Grandview LUD decreasing by $121,000 from last year, the Interest Income decreasing by $65,000 from last year, but the Alcoa Service Revenues were $143,000 more than last year. In other words, our non-operating expenses exceeded our non-operating income for 2010 by $122,627.

7) Income Before Extraordinary Items - this line is computed by subtracting expenses from revenue. The net income in 2010 is $1,539,982, and while it does not match the increase in cash and investments, it is correlated to it.

Commissioners Murphy and McClure acknowledged Shosten and Smith for the professional quality of the financial report.

ACTION: Commissioner Murphy motioned to accept the District's 2010 Annual Financial Report. Commissioner McClure second the motion. Motion passed unanimously.

• Manager's Report
Ferndale Annexation - The District received notification that the Whatcom County Boundary Review Board has approved the Grandview Annexation for the City of Ferndale. Jilk anticipates meeting with the City of Ferndale in the fall of 2011 to begin discussions on the relationship between the City and the District with regards to the Grandview water service.

North County Digester - The digester working group met to discuss the draft scope for the feasibility study and the consensus of the group is to issue an RFP to private sector firms because the group feels that the private sector firms will provide a better business component element to the study. Jilk stated that it is likely the group will be able to obtain commitments of the $75,000 in funds that is projected budget for the study.

Whatcom County Coordinated Water System Plan (WCCWSP) - PUD Lead - The District has been asked to take the lead on the WCCWSP. Jilk is working on a funding request application to submit to the EDI by the end of May.
Dept. of Health Consolidation Study - The State Dept. of Health will be sending the District a formal request to perform a consolidation study for the Hemmi Road Water Association and the Fazon Water Association. Jilk will keep the Commission informed of the status.

• There being no further business for the regular meeting, the Commission adjourned the regular meeting at 8:52 a.m.

President/Commissioner

Secretary/ Commissioner

Commissioner