CU board stands by mandate to operate as business

Chris Nattinger, board chairman, said that what City Council doesn't understand about City Utilities is that "we were asked to run it like a business, and that's what we're doing."

With the investor-owned Empire District Electric company juxtaposed to snatch up CU's best commercial utility customers if electric competition comes to Missouri through de-regulation, the CU board has more to worry about than a small water rate increase, at least in Nattinger's mind.

So when Councilwoman Teri Hacker asked at an Aug. 21 study session between CU and council just why the $223 million in reserves couldn't be used to fund the water utility's capital expenses needs, Nattinger said she just doesn't understand business.

The numbers

Nattinger emphasized caution. The income figures might look good for CU, but if not for the income provided by interest from its portfolio, "it would be a pretty marginal operation."

"Let's keep our liquid capital base we're definitely going to need it in the future," he said. "Let's fund things like this small water increase out of operations ... and not our interest income."

CU's bonding counsel has advised that CU "can't operate on less than $150 million of liquid reserves for a company of our size with its inherent liability for disasters and maintenance in all ... departments," Nattinger said. "There's only about a $25 million play" in the reserves now. He added that the reserves have been spent down by $50 million or more in the past few years. Extra money in reserve right now is "spent bucks."

Hacker suggested that the $223 million in reserves might be a savings account for the utility to buy Empire, whose planned merger with the international Utilicorp was recently called off after years of contract negotiations and regulatory hoop-jumping.

Amy Bass, Empire's information officer, said that CU wasn't negotiating to buy the investor-owned electric utility. Empire is selling for $20 a share with assets valued at $829 million, according to its Web site. It now has a long-term contract with Utilicorp to market the excess electricity it generates from its new power generator on the Missouri-Kansas border, Bass said.

But that excess capacity is exactly what worries the CU board. If deregulation of the electric industry occurs in Missouri, there would be nothing to stop Empire from competing directly with CU for its biggest customers businesses like General Electric, Litton and Kraft. "They could cherry pick those who are the most profitable customers," Nattinger said.

"How that would effect CU and it's revenue all those dangers," are important issues. So the fact that the board at its March retreat discussed the future of power supplies as it related to Empire which at the time was seeking a purchaser was good business planning, Nattinger said.

"The future power supply is going to be a tremendous issue for our city," he said. City officials want growth, but the responsibility of providing power needs falls squarely on the shoulders of CU, Nattinger said.

Competition

Nattinger said that CU General Manager Robert Roundtree "thinks like a businessman should think" and not like an elected official, which may be why council doesn't un-derstand his attitude.

"Bob Roundtree's attitude is looking into the future and not sticking our head in the sand. He's thinking outside the box," Nattinger said.

He's thinking about things like how easily Empire could compete with CU if given the chance.

Like Kansas City Pow-er and Light, Empire can produce electricity from coal-fired plants cheaper than CU because it pays less for coal. That's because it has more than one transportation source for the fuel, unlike Springfield which is only served by Burlington-Northern Railroad, Nattinger said. Seventy percent of the cost of producing electricity from CU's coal-fired plants is for fuel, he added.

"When we get down to this future supply thing and we'll get there we're talking about a big, big thing with big, big costs."

When the utility built the Southwest Power Plant many years ago, "it was a very tough decision ... it was very controversial and it cost millions of dollars ... and now we're growing with these peaking turbines."

The new natural gas turbines "will get us to 2007, which is right around the corner, and then we're forced to do something else. And that needs to be base-load providers ... to keep the costs low, which means coal-fired plants." Such plants could cost $250 million, "or it could be twice that" depending on the community's needs, Nattinger said.

Liquid reserves

"It's our philosophy that we've got these liquid capital reserves. They earn us money half of what we need (to pay bills.) We need to keep them until we need to use them" in the future.

He added, "if you wanted to debate liquid capital reserves, the city has much more liquid reserves that CU substantially higher." Nattinger has re-quested an accounting of the city's reserve funds.

But when the city wants more income, "they basically raise their prices a quarter cent or eighth cent. Why not pay out of their liquid reserves?"

The city is "happy to increase the sewer charges for infrastructure for maintenance and in-creased capacity. They never, ever refer to their liquid re-serves."

Nattinger said the water department hasn't had an income boost in the form of a rate increase in "what's going on 10 years." The water rate increase doesn't amount to much, Nattinger said, about $13 a year for the average customer.

"They make such a big deal out of it. It's beyond my understanding. We've all gotten worn out, and now tempers are flaring. Let's focus," Nattinger said.

Let CU borrow

Hacker also asked why the water utility couldn't borrow money to fund the capital expenses.

The water utility, like the public utility which includes electric, gas, telecommunications and transit has excellent credit and substantial untapped borrowing capacity.

Although CU has an excellent credit rating and a debt-to-equity ratio that most utilities would envy, borrowed money has to be paid back out of income from operations, Nattinger said, adding that the water department's income is marginal but for its interest income.

Voluntary payments to city

An untapped income source for the water utility could be the voluntary payments it makes to the city in lieu of taxes, Roundtree said earlier this summer.

The city charter which created the CU board and gave it powers requires that the electric, gas and transit portions of CU make payments to the city from each division's gross income.

"The water company was the only en-tity that was not involved in an off-setting cash-type payment back to city," Nattinger said. The city "saw an imbalance" between the utilities.

"(The water department) was doing services, of course ... and quite substantially in the form of fire protection."

It didn't make payments in lieu of taxes because the bond issue of 1957, which funded the purchase of the Springfield Water Company, had cov-enants that required the income be used for the payment of the bonds which would "restrict any kind of cash payment to the city," Nattinger said.

A few years ago, when the bonds were paid off and income freed up, the city requested the water utility pay 4 percent of the gross receipts "all at one time," he said.

In what he called "a good faith gesture to the city and in cooperation with them," the board agreed the water department could make the payments, but requested that they be phased in.

That payment may be as high $445,000 in 2001. But by not making those payments for three years, the water company could save itself about $2,755,000, just about what it needs for capital expenditures.

Some of the board members may regret the decision now to make the voluntary payments, but, Nattinger said, "Sometimes on our board we try to have feel-good times with council and try to foster in our minds a better cooperation with that entity. Maybe that entered into our thoughts as we tried to do that. But as you know, those situations go up and down."

There was also more money coming to the water utility back then, he said. "I think probably it was the correct thing to do, but when you get slapped in the face with some other things minor things (like the water increase) they made it a major thing ... you start thinking, Maybe we should not have done that.' But it's in the past. It's done."

Part of the problem, as Nattinger sees it, is that the city looks at CU as a "cash cow." It bleeds money from the most fragile operation CU operates the transit system which despite the fact that is loses money overall, still has to send a payment in lieu of taxes to the city. "That should be eliminated," Nattinger said.

CU subsidizes the transit system "and it's fine for CU to do that, fine for the people to have that."

But, he added, "there are certain people that come from a more liberal point of view rather than a logical business point of view that want to make ... CU more of a welfare providing entity," instead of a business.

"The operational parts of the business that make money should not be made welfare providers for people out of the goodness of our hearts. It was not the intention of the writers of the charter. When they established the guidelines, we were told to run it like a business."

He said the board has a history of having "experienced businessmen (and women) on our board who have run very large corporations, or smaller-business men like myself. We are not going to run it at a loss."