Attachment

ATTACHMENT #1 Regular LF&A Meeting of 11/13/2006 City of Dover Financial Reporting & Information Flow November 13, 2006

Chronology „ April 2006 „ Meeting with Burns & McDonnell to start rate analysis 4/26/06; „ Provided $84 mWh for power supply/generation based on contract negotiations; including preliminary budgets and approximately $3 million each year for capital improvements. Rate stabilization reserve would be used to reduce first year rate increases. Not enough time to analyze demand charges, will do after contracts & budgets are finalized; „ May 2006 „ Power supply and plant operation contract negotiations; Contract approved by City Council 5/3/06, start date 5/4/06 „ Budget preparation for plant (since the assumption was the plant was revenue neutral, it was considered to be included in the $84 mWh) „ Budget hearings with City Council 5/10 – 5/17 „ June 2006 „ Budget hearings continued 6/6 – 6/9 „ First formal meeting with PACE to discuss Risk Management Concepts 6/6/06 „ PACE verbally provided conservative estimate for plant revenue of $1.2 million „ Financial Forecast & Rate Analysis Presentation by Burns & McDonnell 6/6/06 based on draft budgets, $84 mWh for power supply & plant, historical trends, and use of rate stabilization reserve in 2007. „ Council update of transition by Jim Utt of PACE on 6/6; Confirmed target rate of $84 mWh achievable „ Public Hearing for Electric Fund Budget 6/12/06; Plant budget still included in power supply line item „ Changes to Draft Budgets based on motions made in Budget Hearings 2

Chronology „ July 2006 „ Plant budget finalized, insurance coverage by City of Dover, additional $300,000; Total $6.1 million; Still included in power supply budget as approved by City Council; „ City budgets finalized and downloaded into financial system; „ August 2006 „ Review of July operating results indicated that revenues were not coming in at expected levels; PACE & Burns & McDonnell were contacted immediately to assist in analyzing the difference; „ Preliminary evaluation indicated seasonal differences and kWh difference for June and July months; Summer and Winter rates blended, which will cause less revenue in summer months and greater revenues in winter months; „ Meeting with Burns and McDonnell on 8/23/06 to establish time table for review and update of the rate model and to incorporate demand and plant cost; „ Revenues were still off and plant was not able to generate the revenue anticipated; „ Review of July report from PACE highlighted the $1.24 mWh for incentive which was not included in the budgeted rate of $84 mWh for power supply & operations; Explained accounting rules require it to be budgeted for as it is an expense of the current year. 3

Chronology „ September 2006 „ Met with Burns & McDonnell on 9/18 and 9/19 and analyzed complexity and rate model line by line. „ Identified corrections needed and changed the model to reflect the final budget numbers, incentive and incremental capacity. „ Revenues still not as expected; Finance Director communicated concerns to Council on 9/18 regarding cost to operate the plant, insurance cost, and an update that the rate analysis was underway including incorporating all the elements of the final contracts. „ October 2006 „ Finance Director communicated to Council on 10/5 that it appeared the power cost adjustment was not included in the base rate which approximates $7.2 million annually as well as some other changes made to the rate analysis. „ Burns and McDonnell provided the updated rate analysis to City Council highlighting the shortfall in revenues and the need for another rate increase on 1/1/07. It was explained the June 6 presentation misrepresented the overall revenue increase as 38%. „ PACE updated Council with quarterly results; Revised estimate on plant shortfall to $4.5 million; 4

Residential June 6 Rate Increase „ Blended rate = average winter and summer rates; no power cost Energy & adjustment Customer Blended Proposed „ Presented as a 24% increase to Charge Rate Rate rates on June 6 versus a 15% Increase increase to energy & customer charges on October 23 „ January 1 additional rate increase of 8% would bring total increase up Residential .0902 .1146 24% to 24% for FY07 „ Cause(s) of shortfall – a) PCA? b) Reduced growth rate and no PCA .0096 --- reduction in fixed cost; Plant all fixed cost; Departmental Budgets approximately 70% fixed cost Total Bill Increase .0998 .1146 15% 5

Sample Residential Account 6

Electric Fund Bond Covenant „ A covenant is a promise to your bond holders „ The rate model is a 5 year forecast (long-term) prepared on the basis we use for our Comprehensive Annual Financial Report to communicate to the public we are fulfilling the promise we made „ Electric Bond Covenant – The City of Dover promised it will insure it has sufficient net revenues to cover the maximum amount of its debt obligation 1.25 times „ Net Revenue is the difference between revenues we collect from our ratepayers and the payments we make to our employees, vendors, and suppliers „ Current net revenue required to meet the promise is $3.3 million, or 1.25 times $2.6 million maximum annual debt payment „ The promise does not include using savings to cover expenses „ FY08 includes a $20 million bond issue; Rating Agencies will be reviewing FY07 7

Rating Agencies & Bondholders „ Use of savings/reserves is not addressing the problem when expenses are greater than revenues; Creates alarm; „ Rating Agencies & Bond Holders expect to see a willingness to set rates to cover cost of operations plus a sufficient amount for debt „ Healthy budget balance does not equal positive net revenue „ Expect to see reserves used for intended purpose, i.e. capital replacement, rate stabilization „ Communication - KEY 8

FY07 Projected Net Revenues 9

Budget Balance „ Cash on hand „ Sufficient funds to cover daily cash flow needs and fluctuations „ Recommended practice is 45 days of budgeted expenses or 12% „ Not as critical if you have other accounts to borrow from for temporary fluctuations 10

FY07 Summary Budget with Plant Break Even October 23, 2006 11

FY 07Financial Reporting Summary 12

FY07 Presentation Comparison with Plant Break Even Comprehensive Financial Report June 6 versus October 23 In thousands (000’s) June 6 October 23 Change Rate Revenue $81,554 $78,606 $(2,948) Other 2,492 2,328 (164) Utility Tax 1,778 1,441 (337) Interest 384 634 250 Total Revenue $86,208 $83,009 $(3,199) Power Supply $67,329 $60,775 $(6,554) Operating Expenses 13,103 18,636 5,533 Transfer to General Fund 5,700 5,700 --- Total Expenses $86,132 $85,111 $(1,021) Net Revenue $76 $(2,102) $(2,178) Reserve Transfers 5,440 --- (5,440) Additional Increase --- 3,144 3,144 Adjusted Revenue $5,516 $1,042 $(4,474) Interest on Long-Term Debt (885) (859) 26 Depreciation & Amortization (4,505) (4,274) 231 13 Net Income as Reported in CAFR $126 $(4,091) $(4,217)

Summary of Presentation Changes – FY07 June 6 versus October 23 Change to Rate Revenues Change to Expenses „ Growth assumption changed from „ Reduction in final budget power 3% to 1%; Reduction $2.9 million supply $1,464,000 Change to Other Revenues „ Duke Rebate – reduction in revenue „ Pace Incentive Fee – addition to $964,000 expense $973,000 „ Street Lights – addition to revenue „ Excess capacity (6 mgw) – addition $840,000 to expense $63,000 „ Interest Earnings – added to include I & E Fund $250,000 „ Final expense budgets – reduction „ Utility Tax – reduction to revenue to expenses $256,000 $337,000 „ Utility Tax – reduction to expense „ Other final budget adjustments $337,000 $40,000 „ Net decrease in expenses „ Net $251,000 other revenue reduction $1,021,000 Reserves „ Reserves changed to transfer in and not included in revenue $5,000,000 Rate Stab. & $440,000 Bond Reserve 14

Plant Cost Recovery „ Budget $6.1 million „ Cost Recovery $1.6 million „ Deficit $4.5 million „ Equates to a 6% rate increase „ Future results will be impacted by regulation 15

Options Short term „ Additional 8% rate increase – promise kept „ Reduce expenses – promise kept „ Reduce budget balance „ Reduce or eliminate transfer to rate stabilization reserve „ Transfer from reserves $4.5 million needed to cover the plant „ Combination of above Long term „ Insure net revenue sufficient to cover promise on bonds „ Conduct revenue generating potential of the plant including capacity and regulation markets; PACE expected to complete by March 31; 16