Board Members present: Patrick Lanning, Sandra Bishop, Mel Menegat, Ron Farmer. Commissioner Dorothy Anderson was excused.

Others Present: Randy Berggren, Cathy Bloom, Garilyn Johnston, Janet McClennen, Jim Origliosso, Tom Buckhouse, Dawne Howard, Nancy Cook, Marty Douglass, Debra Smith, and Krista Hince of the EWEB staff; and Lynn Taylor, City of Eugene Minutes Recorder; and John Simpson, member of the public.

President Lanning called the Work Session of the Eugene Water & Electric Board (EWEB) to order at 5:55 p.m.

2004 FIRST QUARTER BUDGET AND FINANCIAL PERFORMANCE

Assistant Treasurer Cathy Bloom reviewed the document First Quarter Financial Statements: May 4, 2004, which was distributed to Commissioners. She said the statements represented the financial status as of March 31, 2004.

Discussing the electric utility, Ms. Bloom said that operating cash was $21.3 million. She said that funds were transferred into pension and medical reserve accounts based on the higher PERS percentage to be paid, and the self-insurance reserve account was increased based on an actuarial determination. She indicated that the net operating revenue was higher in each of the first three months than it was in the previous year. She used a bar graph to provide a three-year view of system load.

Commissioner Farmer commented that the financial statement was presented in terms of dollars, not volume, and asked if both sets of information could be included in future statements.

Ms. Bloom said that net income for the electric utility was $7.5 million for the first quarter compared to $4.7 million in the first quarter of 2003; however, the projected contribution margin was a negative $10.8 million. She explained that the figures represented an update of forecasted generation based on lower stream flows. She recalled for Commissioners that during the budget $7.5 million was built into the contribution margin to put into a power reserve to build the account to $10 million. She said that because of stream levels, the $7.5 million in additional funds would not be available and the $10.8 million negative contribution represented a shortfall that would be addressed with the power reserve account, although $200,000 would need to be covered by the line of credit.

Commissioner Farmer requested that financial statements include percentages to illustrate gross margin as a percentage of sales and similar comparisons. He said it was difficult to reconcile the snow pack with the projection of low stream flows and questioned whether the assumption was bad. Mr. Berggren replied that stream flow was 78 percent of normal and the generation assumption was based on 100 percent normal weather. He said the year was shaping up to be a significant drought. He said that Bonneville was a substantial part of EWEB's system and the Columbia River system snow pack was much different from that of the McKenzie River, which was also below normal.

Fiscal Services Supervisor Dick Varner reported that as of March, stream flow was 95 to 100 percent of normal in the McKenzie River, but a substantial amount of the snow pack melted in April and there was now no snow at low elevations in the Cascades and most sites were running at 40 to 60 percent of normal snow pack.

Continuing, Ms. Bloom said the electric utility's capital budget was performing well and she expected it to stay within budget for the remainder of the year. She stated that the operating budget at 29 percent of cost was higher than expected, primarily due to the storm during the first week of January 2004. She said that because of anticipated reimbursements from the Federal Emergency Management Agency (FEMA) and other sources the impact on the budget would be zero.

Ms. Bloom reported that the water utility, according to the balance sheet, had approximately $11 million in cash, but most of that was segregated. She said that in fact cash at the end of March was negative and the water utility had paid interest to the electric utility for the past two months because the electric utility funded some of the day-to-day costs. She said that some funds that were not restricted would be transferred from the capital improvement fund for operations. She said the net operating loss through March was $528,000, compared to last year's loss of $397,000, and she expected the trend to continue. She noted that the capital budget was at 10 percent of costs, which was consistent with the seasonal component, and the operating budget was at 23 percent of costs.

Ms. Bloom concluded her report with the steam utility and noted that the income statement was shown in two categories: operations and fuel cost. She noted that operating revenue was at 28 percent and operating expenses at 27 percent. She explained that the net fuel charge loss indicated that there was less income received than the cost of fuel and a rate increase would likely be requested in the fall.

Commissioner Farmer noted that there were benchmarks for the electric utility, but not for the water and steam utilities, and asked if benchmarks would be developed for those. Ms. Bloom replied that EWEB had not internally created any water and steam benchmarks and there was no outside source for those, as there was for the electric utility.

GENERAL MANAGER'S GOAL STATUS FOR 2004 FIRST QUARTER

General Manager Randy Berggren referred to materials distributed to the Commissioners which included the original goal document approved by the Board, an operational performance measures summary in table format, a goals and strategy update report, operating initiative action plans, and an operating initiative status update report. He commented that most of the General Manager's goals were on target as related to specific objectives and action plans. He indicated that there were three negative trends relative to operational performance measures, two of those in water. He said that a water main break at the University of Oregon had negatively impacted an indicator, but felt that would be reversed by the end of the year. He expected the chlorine residual issue on water quality would be resolved by the end of the second quarter. He said the third negative trend related to lost calls and while still below target, substantial improvement was made and the indicator was now at 94 percent.

Mr. Berggren said that currently the most significant issue from a financial perspective was the contribution margin issue. He said a fourth consecutive year of drought had impacts on both the budget and reserve building strategies. He said the contribution margin projection could require reconsideration of retiring the surcharge in October as it was unlikely that the Board's targets for reserves would be reached. He expressed the hope that weather pattern impacts on generation assumptions, building reserves, and long-range financial planning could be discussed during the Board's Strategic Planning Retreat in May 2004.

President Lanning asked if the web-based connect/disconnect application would be ready for the high-use fall season. Mr. Berggren replied that the application would be tested internally with employees before being made available externally to customers.

Treasurer Jim Origliosso explained that there were two major seasons for connect/disconnect: June and September. He stated there were also two types of applications; one for connect/disconnect and the other for bill presentment and payment. He said the intent was to field test the application with customer service representatives in June and make it available on the Internet in September. He commented that as part of the customer service transition assessment a survey of customers about the "start/stop" process would be done before and after the application was launched. He said that bill payment required a secure website for financial transactions and the program would be tested throughout the summer and also tested with employees before being made available to the public.

Vice President Bishop asked for the General Manager's perspective on the modified budget process and goals and communications with the Board. Mr. Berggren said that the new budget process was streamlined and integral to that was the Board's movement to a higher level of review and was now engaged in policy-level review in its Governance role instead of being involved in small budget details. He indicated that he felt there was a balance in his responsibilities for communications and operations, but would appreciate feedback from the Board to confirm that perspective and whether he was meeting expectations.

Commissioner Farmer asked if reduced stream flow increased the price that EWEB paid for power. Mr. Berggren replied that it diminished the amount of generation EWEB had projected to have available for wholesale sales into the market and prices were actually higher than projected. He said that EWEB had protected itself against price risk, but not volume risk resulting from drought and less generation than planned.

Mr. Varner clarified that EWEB had anticipated a large amount of free generation through secondary power from EWEB's projects and the "slice." He said that EWEB had been finding power to resell and while there was an increase in wholesale revenues, there was a large increase in purchase power that dominated the increase in wholesale revenues.

Commissioner Farmer requested that information be separated to distinguish between power purchased for resale and wholly generated. He asked if the broken water main at the University of Oregon had resulted from an aging infrastructure and if there could be similar occurrences. Water and Steam Director Tom Buckhouse said that the preliminary investigation of the break indicated that it was possibly a manufacturing problem. He said the break was not typical and he felt it was a unique situation and did not reflect infrastructure problems.

President Lanning thanked Mr. Berggren for an in-depth report and commented that it was a good way to communicate with the Board. He said the Governance changes were very positive and the Commissioners were engaged from a policy level and not simply accepting recommendations from staff.

President Lanning closed the Work Session at 7 p.m.

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Assistant Secretary President