CENTRAL ARIZONA PROJECTFinance, Audit and Power Committee

August 15, 2019 ­ 10:00 AM

Central Arizona Project23636 N. 7th StreetPhoenix, ArizonaBoard Room

FINAL AGENDATimes shown are approximate. Some items may take more or less time than scheduled, or the Chair may 

grant requests to hear items in an order other than shown. 

1. Consideration of Action to Approve the Minutes of the May 16, 2019 Finance, Audit and Power Committee ­ Goddard (10:00)

2. Report on Internal Audit Activities (Project Reliability: Effectively Manage, Operate and Maintain CAP Assets^) ­ Ramirez  (10:05)

3. Report on Capital Improvement Budget, Projects, and Team (Project Reliability: Effectively Manage, Operate and Maintain CAP Assets^) ­ Francom/Johnson (10:20)

4. Update on Power Programs (Power: Generation Resources^) ­ Young  (10:40)5. Future Agenda Items (10:55)6. Public Comment 7. Adjourn 

^ Linkage to 2016 CAWCD Board of Directors Strategic Plan.

CENTRAL ARIZONA WATER CONSERVATION DISTRICT Finance, Audit, and Power Committee

May 16, 2019

   A meeting of the Central Arizona Project Finance, Audit and Power Committee ("Committee") of the Central Arizona Water Conservation District’s ("CAP" or "CAWCD") Board of Directors was called to order by Chair Goddard on 5/16/2019 at 9:02 a.m. The meeting was held at the Central Arizona Project, 23636 North Seventh Street, Phoenix, Arizona, in the Board Room. Committee Members present were: Acting Chair Mark Taylor, Pima County; Alexandra Arboleda, Maricopa County; Jennifer Brown, Maricopa County; Karen Cesare, Pima County; Pat Jacobs, Pima County; and Jennifer Martin, Maricopa County (via teleconference). Committee Members not present were: Chair Terry Goddard, Maricopa County. Staff members present were: Ted Cooke, General Manager; Jay Johnson, General Counsel; Chris Hall, Director of Finance and Administration; Bridget Schwartz-Manock, Director of Public Affairs; Doug Dunlap, Finance and Accounting Manager; Brian Young, Power Programs Manager; Ramon Ramirez, Internal Audit Manager; Megan Casey, Public Affairs Management Analyst, Jenn Miller, Board Support Specialist; and Samantha Simpson, Executive Secretary. 

 

1.  CONSIDERATION OF ACTION TO APPROVE THE MINUTES OF THE APRIL 18, 2019 FINANCE, AUDIT AND POWER COMMITTEE -TAYLOR 

   On a motion (Board Member Cesare) and a second (Board Member Jacobs), the FAP Committee approved the minutes of the April 18, 2019 meeting. Motion passed.  

Voting yes: Jennifer Brown, Karen Cesare, Pat Jacobs, Jennifer Martin, Mark Taylor

Not voting: Alexandra Arboleda

 

2.  REPORT ON INTERNAL AUDIT ACTIVITIES - RAMIREZ  

   Ramon Ramirez, Internal Audit Manager, reported on the internal audit activities and indicated that a final report was issued for the expense reimbursement audit and that work on the Fleet Management Audit is in the fieldwork phase. Mr. Ramirez stated that work on the Palo Verde Morgan Transmission Project audit has been initiated and is in the preliminary survey phase. He also reported that this year, the CAGRD staff will take the lead on the audits of selected water provider reports, but Internal Audit has provided planning assistance and will continue to consult throughout the audit as needed. Internal Audit will act as the contract administrator on IT penetration testing being done by an outside consultant and that work is in the preliminary stages. He specifically reviewed the expense reimbursement audit and covered the background, objective and scope and identified the improvement opportunities.  

 

  

Finance, Audit, and Power Committee May 16, 2019 Page 2

3.  REPORT ON RESULTS OF 2020 ENERGY AUCTION AND 2020 HEDGING TARGETS - YOUNG 

   Brian Young, Power Programs Manager, presented the current status of power purchases from energy auctions as well as provided a brief overview of CAP hedging targets. Mr. Young described the energy auction process and indicated that they are conducted by Enel X, which has most major suppliers in the West. There is no cost to CAWCD to conduct energy auctions, as suppliers pay a small fee to Enel X based on their awards. He reported that in the initial auction, CAP solicited 16 products, which varied by season, time of day, and point of delivery. Twelve different suppliers participated in the initial auction. The total energy secured for 2020 was increased to about 55% of expected load, which includes long-term resources, and the auction results are indicative of expected overall average energy costs for 2020. Mr. Young also informed the Committee of an upcoming staff recommendation to raise the variable load hedging target to 30%-70%. Staff anticipates this change will lead to increased savings saving from power purchases and more certain and stable energy rates.  

 

4.  DISCUSSION ON FINANCING OPTIONS FOR WATER ACQUISITION APPROVED BY THE BOARD BETWEEN CAWCD, GILA RIVER INDIAN COMMUNITY AND GILA RIVER WATER STORAGE LLC - DUNLAP 

   Doug Dunlap, Finance and Accounting Manager provided a quick background on the three major parts of the agreement: Long Term Storage Credit Purchase, Recovery and Exchange Agreement, and CAP NIA Priority Water Lease. He noted the latter two agreements are "pay as you go", but the Long Term Storage Credit Purchase necessitates a large up-front expenditure requiring some short-term financing. Mr. Dunlap indicated that, due to the current Infrastructure and Water Rights reserve balance and the timing of tax collection through the County Treasurer, there would not be sufficient funds available for the LTSC purchase agreement when payment came due in August 2019. Mr. Dunlap reviewed the three options available for making the final payment. The first option was to utilize terms in the purchase agreement with the associated interest as indicated in the agreement. The second option was to acquire a bond (loan) from an outside source. The third option was to borrow the funds from the CAWCD General Fund. Each option carried unique interest costs, as well as non-financial considerations. In order to meet the contractual time constraints, a method of payment would need to be determined by the June Board Meeting. Ted Cooke, CAP General Manager, added a couple of comments for additional perspective. His primary comment related to Committee members’ desires to see an “apples-to-apples” comparison between the options. He indicated that such an analysis was not possible because there were primary differences between the options being considered and the proposed options were based on advice of financial advisors. The options were discussed and each board member provided comments. Board Member Taylor hoped to see more of an "apples to apples" to do a true comparison. He agreed from a numbers standpoint, Option 3 less expensive, but based on optics and other benefits, Option 2 would also be a viable choice. Board Member Jacobs expressed support for Option 2.

Finance, Audit, and Power Committee May 16, 2019 Page 3

Board Member Brown stated that she is a proponent for establishing credit and favors Option 2. Board Member Cesare held her comments for the CAGRD Committee meeting but said she would convey the discussions. Board Member Arboleda expressed being in support of Option 2 and reiterated some of the benefits mentioned by other members. Board Member Martin, upon reflection of previous discussions when Option 3 was favored, expressed her current preference for Option 2. Several individuals submitted public testimony: Brian Draper, City of Mesa Water Resources Department, submitted an electronic blue card in opposition to option 3 to utilize CAWCD financing, noting the proposal to loan funds to CAGRD highlights the conflicts of interest with CAWCD governance of CAGRD. Kathy Rall, City of Scottsdale Water Department, submitted an electronic blue card in support of option 2 to utilize outside financing and asked the Board to consider the optics of using reserves. Alan Delaney, Water Policy Administrator for the City of Peoria, submitted an electronic blue card in support of option 2 to utilize outside financing, noting that this option would have CAGRD pay for the loan costs to cover CAGRD expenses and provides extra reserves for any potential long term storage credit acquisitions that might appear in the future. He also expressed opposition to option 3 to utilize CAWCD financing. Bret Fleck, Arizona Municipal Water Users Association, spoke in support of option 2 to utilize outside financing and encouraged the committee to support pursuing all avenues with option 2 before considering option 3.

 

5.  FUTURE AGENDA ITEMS 

   Acting Chair Taylor reported that the June FAP Meeting has been cancelled and the Board will not meet at all in July. The next FAP meeting is scheduled for August 15 at 10:00 a.m.  

 

6.  PUBLIC COMMENT 

   No additional public comment.  

7.  ADJOURN 

   There being no further business to come before the Committee, the meeting adjourned at 10:43 a.m. ___________________________ Terry Goddard Chair 

 

623-869-2333 | From Tucson 520-579-0046 | Fax 623-869-2332 | CentralArizonaProject.com

Agenda Number 2.

CONTACT: Ramon Ramirez623-869-2123rramirez@cap-az.com

MEETING DATE: Thursday, August 15, 2019

AGENDA ITEM: Report on Internal Audit Activities (Project Reliability: Effectively Manage, Operate and Maintain CAP Assets^) - Ramirez

LINKAGE TO STRATEGIC PLAN, POLICY, STATUTE OR GUIDING PRINCIPLE:2016 CAWCD Strategic Plan Project Reliability: Effectively Operate and Maintain CAP Assets.

PREVIOUS BOARD ACTION/ACTIVITY:The Finance Audit and Power Committee (FAP) receives regular reports on Internal Audit activities.

ISSUE SUMMARY/DESCRIPTION: The Final report for the Fleet Maintenance Audit has been issued. The Purchasing Card audit has been initiated and is in the fieldwork phase. As well, the Palo Verde Morgan Transmission Project audit is in the fieldwork phase. Consultation work on the CAGRD Water Provider Reports audit has been done and CAGRD staff completed the audit. CAGRD staff will have full responsibility for the Water Provider audits in the coming years. The Internal Audit Manager will act as the contract administrator on IT penetration testing that will be done by an outside consultant. That work is anticipated to begin in October.

ATTACHMENTS: 1. Internal Audit Presentation2. Internal Audit Activities Attachment

1

Report on 2019 Internal Audit Activities

Ramon Ramirez Internal Audit Manager

August 15, 2019

Status of Audit Projects

• Fleet Management – Final Report Issued

• Palo Verde Morgan Transmission Project–Fieldwork Phase

• Purchasing Card – Fieldwork Phase

• CAGRD Water Providers Audit – Consulting Completed

• IT Penetration Tests – Contract Administrator Estimated to Begin in October

2

Fleet Management Audit

Background

• Fleet Maintenance is responsible for motor vehicle and heavy equipment acquisition, maintenance and disposal decisions.

• Fleet consists of 266 motor vehicles, (the majority of which are SUV’s or a pick up variation) and 64 pieces of driver operated heavy equipment.

• Acquisitions are made to replace retired vehicles and to address newly emerged business needs.

• Vehicles are removed from service once at the end of their economically viable useful life, or they no longer effectively serve CAP’s business needs, or they are determined to be underutilized.

Fleet Management Audit

Background (Continued)

• Retired vehicles are sold via auction on the Public Surplus website.

• Fleet implements a preventative maintenance program for all motor vehicles and heavy equipment.

• Fleet is responsible for conducting corrective maintenance and repair work.

3

Fleet Management Audit

Objective & Scope:

• Assess controls over the acquisition, maintenance and disposal of CAP’s motor vehicles and driver operated heavy equipment.

• Audit work focused on activities that occurred during the period beginning January 1, 2018 through June 30, 2019.

Fleet Management Audit

Audit Results – Positive Findings

Fleet proactively identified the need to for better trackingand report data and is taking steps toward that end.

A vehicle classification system is being developed to facilitate vehicle performance, use and cost analysis.

GPS devices installed on CAP vehicles to record daily mileage/hours and to identify vehicle performance issues.

Preventative maintenance schedules are recorded and managed using the Infor asset management software.

Fleet is developing a workflow process to document rationale and approvals of new and replacement vehicle requests.

4

Fleet Management Audit

Audit Results – Positive Findings (Continued)

All vehicles pending disposal were verified to be onsiteand in CAP’s possession.

Controls are sufficiently adequate to ensure that retiredvehicles are sold via public auction and the proceedsdeposited into CAP accounts.

A verification of all Fleet assets is conducted every twoyears during the capital inventory process.

Fleet Management Audit

Improvement Opportunities

A methodical process that objectively weighs criticality of need, vehicle utilization, cost and maintenance experience will help ensure identification of cost effective solutions at fleet management decision points.

An executive level approval process for additions or reductions to the fleet will help ensure implementation of Fleet Maintenance rightsizing decisions.

Use of existing CAP staff in a sharing arrangement may help expedite new vehicle preparation.

5

Fleet Management AuditImprovement Opportunities (Continued)

Updating Fleet Vehicle guidelines would help:

Establish criteria on the most effective and efficient methods of achieving desired fleet management objectives.

Ensure business continuity in the event of staff turnover.

Provide a mechanism by which new employees can be efficiently introduced to Purchasing operations.

Assessing whether Fleet’s work order backlog is a temporary or ongoing issue may help clarify mitigating steps that should be taken.

Fleet Management AuditImprovement Opportunities (Continued)

Clarifying whether the factory warranty period can be delayed until a vehicle is put into service may help extend warranty coverage.

Streamlining the vehicle disposal process and tracking the elapsed days to dispose of vehicles should help maximize auction revenue.

Minimum mileage thresholds that trigger vehicle retention reviews should help rightsizing efforts.

Formally documenting the rationale for all acquisition and removal decisions should help ensure consistency and process integrity.

6

Questions?

Central Arizona Project Report on and Discussion of Internal Audit Activities

Page 1 of 2

Fleet Management Status: Audit Final report was issued on 8/7/19. Executive Summary: Fleet Maintenance has undertaken efforts to improve its ability to use fact based analysis to help actively

manage fleet assets. Currently, Fleet Maintenance is working to develop a vehicle classification system that will help in reviewing and interpreting vehicle performance, use, and cost data. Recently completed installation of GPS devices will help ensure that accurate daily mileage use and performance information is captured and stored. Preventative maintenance is scheduled for each vehicle to help minimize chances of unexpected failures.

However, audit work did identify opportunities to improve fleet asset management efforts by taking the following steps:

• Develop a formal methodical process for making fleet asset management decisions that objectively weighs criticality of need, vehicle utilization, cost, and maintenance experience in order to identify cost effective solutions to identified problems.

• Develop an executive approval process for decisions that add to or reduce the overall size of the fleet to help ensure implementation of fleet rightsizing determinations.

• Update Fleet Vehicle guidelines to establish criteria on the most effective and efficient methods of achieving desired fleet management objectives and to help ensure consistent application of procedures and business continuity in the event of staff turnover.

• Explore the feasibility of using appropriate existing CAP staff in a sharing arrangement to do vehicle preparation work that does not require skilled Fleet Management mechanics.

• Review the fleet work order backlog reports and determine whether they are a reliable depiction of the condition within Fleet Maintenance. If so, determine whether the backlog is a temporary event or an ongoing issue that needs to be addressed.

• Consult with manufacturer service shops to determine the possibility of not beginning factory warranty periods until the date that a vehicle is put into service. If so, diligently record the in-service date of each vehicle.

Central Arizona Project Report on and Discussion of Internal Audit Activities

Page 2 of 2

• Initiate discussions with parties involved with the vehicle disposal process to identify opportunities to streamline the process. Within the Fleet Vehicle guidelines establish a firm criteria for days within which a vehicle should be disposed of after its replacement is service ready. Track the actual days elapsed to dispose of each vehicle and follow-up to address systemic issues that result in delayed vehicle disposal.

• Definitively establish minimum mileage thresholds that trigger review of whether a vehicle should be replaced. For all vehicle replacement decisions, document and retain the rationale for the replacement decision.

Palo Verde Status: Morgan Transmission Audit work has been initiated and is in the fieldwork phase. Project Audit Purchasing Status: Card Audit Audit work has been initiated and is in the fieldwork phase. CAGRD Status: Water Providers Audit CAGRD staff has completed this audit and will assume all future Water Provider audits. The Internal Audit

Manager provided audit scoping and fieldwork consulting on this assignment. Information Status: Technology Penetration Historically, IT has contracted outside consultants to conduct penetration testing as will be done this year. The Testing difference this year is that the Internal Audit Manager will serve as the contract administrator in order to add an

independent oversight function to the process. Testing results will be presented to the Internal Audit Manager and passed through to IT management. The work is anticipated to begin in October.

1

Central Arizona ProjectFinance, Audit, and Power Committee

Capital Improvement ProgramDarrin Francom

Ryan JohnsonAugust 15, 2019

Agenda

1. Project Steering Committee – Managing Capital Projects

2. Engineering Project Managers & Projects for 2020-2021

2

2

Project Steering CommitteeManaging Capital Projects

Darrin FrancomDirector of Operations, Power and Engineering

Led By Directors

◦ Field Maintenance (Bob Moody)

◦ Centralized Maint. & Reliability (Brian Buzard)

◦ Finance and Administration (Chris Hall)

◦ Operations, Power & Engineering (Darrin Francom)

Significant Subject Matter Expert Engagement

◦ Reliability Engineering, Project Management, Design Engineers, Asset Owners, Finance, Operations

4

Project Steering Committee

3

Execute Highest Priority Projects

◦ Strategic Fit (Risk)

◦ Opportunity Cost & Organizational Impact

Select Best Solution Path

Oversight of Project Execution

Help Manage CAP Capital Budget

5

Role of the PSCCatastrophic 5

Critical 4

Severe 3

Serious 2

Negligible 1

1 2 3 4 5 6

Improbable Remote Unlikely Occasional Probable Frequent0.0001 0.001 0.01 0.1 1 10

One failure every 1,000 - 10,000

years

One failure every 100 - 1000 years

One failure every 10 - 100 years

One failure every 1-10 years

1 failure per year Mult iple failures per year

CAP Reliability and Maintenance Engineering Risk Priority Number 

First Quarter 2019 Financials

Capital Forecast: $5.844 million over

PSC Action Options◦ South Plants Fire Protection: Delay construction at

BLK/SNY until 2020◦ Elevator Systems Phase 2: Delay design of everything

except MWP until 2020◦ Backup Power Systems Replacement: Delay

construction of Group 2 package until 2020◦ Sump Pump Water Level Controls: Delay design and

construction until 2020◦ Jib Crane at RED: Delay design and construction until

2020

6

4

First Quarter 2019 Financials

Capital Forecast: $5.844 million over

PSC Action Options◦ South Plants Fire Protection: Delay construction at

BLK/SNY until 2020◦ Elevator Systems Phase 2: Delay design of everything

except MWP until 2020◦ Backup Power Systems Replacement: Delay

construction of Group 2 package until 2020◦ Sump Pump Water Level Controls: Delay design and

construction until 2020◦ Jib Crane at RED: Delay design and construction until

2020

7

$1.497 million reduction in 2019

Results / Early 2nd Quarter

Shifted $1.497 million into 2020 – 2021◦ (Reduction of $1.497 million in 2019)

Normal Project Movement and Actual Cost Realization ◦ $600 – 700k Additional Reduction

Approximately $2.1 million Total Reduction◦ Roughly $3.7 million Over Budget

Will Review Again as Q2 Forecasts Completes

8

5

9

Questions On How the PSC Manages Capital Budget or

Actions Taken in 2019?

Engineering Project Management Team and 2020-2021 Projects

Ryan JohnsonManager, Engineering Services

6

Board of Directors

Ted Cooke

(GM)

Bob Moody

(AGM)Darrin Francom (Director, OPE)

Ryan Johnson (Manager, Engineering)

Darren Couturier (Supvsr, Proj Mgmt)

Keith Wood

(Snr PM)

Jason Terrell

(PM)

Rebecca Lewis

(PM)

Tamara Miller

(PM)

Marcus Corley

(PM)

Zach Kopp

(PMIT)

Telma Bearden

(Snr CA)

John Harrison

(Snr CA)

Rick Buelow

(Snr CA) 11

• Capital Improvement Program• Scope, Schedule, Budget• Project Team Leadership• Construction Management

Project Management Team

12

• Coffer Dam: Design and Fabricate• Covered Vehicle Parking Installation• Building Accessibility at Mark Wilmer

and Twin Peaks Field Office

Keith Wood

7

13

• Mark Wilmer Unit 6 Repair• Mark Wilmer Trashrake Reconfiguration• Elevator Modernization, Phase 2,

Multiple Locations

Jason Terrell

14

• SCADA Replacement at HQ Control Center

• Electromechanical Relay Replacement

• Motor Excitation Control System Replacement at West Plants

Marcus Corley

8

15

• Backup Power Systems Replacement at Checks and Turnouts

• Sandario Pumping Plant Potable Water System

• South Plants Fire Protection

Rebecca Lewis

16

• Discharge Isolation Valves at Black Mountain/Snyder Hill

• Hassayampa Sand Filter Replacement• Mark Wilmer Cooling Water Treatment

System

Tamara Miller

9

17

• Condition Based Monitoring System, Multiple Plants

• Vehicle Lift at Tucson Field Office• Entrance Improvements at Pinal Field

Office

Zach Kopp

18

• John Harrison• Telma Bearden• Rick Buelow

• Construction Contract Administration• Board Approved Construction Contracts• Construction Contracts under $250K

• Administration in compliance with ARS Title 34• $34 million in 2020, and $21 million in 2021: Priority, Capability, Project

Type

Construction Contract Administrators

10

19

Questions

1

Power Program Update

Brian YoungAugust 15, 2019

• 2019 Energy Supply

• New Palo Verde Transmission Capacity

• Solar Phase I Project Update

• 2020 Purchases 

• Purchases for Later Years

Power Update Topics

2

2

• NGS is expected to operate into early November until 

coal stockpile is exhausted.

• Nov and Dec energy will be supplied primarily from 

market energy.

• A significant portion of Nov & Dec energy has been 

purchased at favorable prices.

• Lower than expected NGS costs and prices for market 

purchases will result in average energy costs 

significantly below projections in 2019 energy rate. 

2019 Energy Supply 

3

• Recently 80 MW of transmission capacity from Palo Verde 

to Westwing became available from El Paso Electric (a 

participant in the Palo Verde nuclear plant).

• We were able to secure this transmission capacity in a 5‐

year agreement with renewal rights.

• The cost of new transmission capacity is a fraction of other 

transmission rates in the region and is expected to save 

over $2M/year in energy and/or transmission costs.

• Combined with the existing 100 MW of capacity on PV‐

Morgan we now have the capability to make the bulk of 

our market energy purchases at Palo Verde.

New Palo Verde Transmission Capacity 

4

3

• Environmental work was completed in early July which 

allowed for construction to start.

• Construction crews on site and commenced 

construction in July.

• Energization and testing of the facility is anticipated to 

start in early November and should be complete in 

December.

• Commercial operation expected to commence on 

January 1, 2020, the earliest start date allowed under 

the PPA.

Solar Phase I Project Update

5

• Staff currently making targeted monthly purchases of 

2020 energy as forward market prices have dropped 

significantly in recent months.

• We currently have about 70% of estimated 2020 energy 

needs secured and expect to be between 75% to 80% 

by the start of 2020.

• Monthly purchases are lowering average 2020 energy 

purchase price and expect to be at least $2/MWh below 

estimated prices in energy rate. 

• Higher hedging targets recently implemented allows for 

more low cost energy purchase opportunities.

2020 Energy Purchases

6

4

• Forward prices for 2021 and beyond also have dropped 

in recent months.

• First energy auction for 2021 and 2022 held in May of 

this year provided roughly 15% of the expected 

purchases.

• Next energy auction is planned for October this year 

also for 2021 and 2022 products.

• Still early in the process, but outlook is favorable for 

2021 and 2022 energy purchase prices to average equal 

to or less than 2020 purchases.

Energy Purchases for Later Years 

7

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