Electrical System Q & A

 

 

Question 1:  Why are we voting on mortgaging the property without having specific financing numbers?

Answer:  The Club is asking its members to approve the concept of mortgaging the property to pay for this important project.  The Club has talked to several banks to determine the process for obtaining a loan.  Every bank has required that the Club first have a financing plan in place in order to loan this money, much like a homeowner providing proof of income.

 

In effect, the Club needs member approval in order to move the process forward.

 

Specific finance numbers will be determined through the bidding process.  The Club is relying on an experienced electrical designer and has obtained a reliable estimate of $1.3 million for the project.  That number may be slightly lower or slightly higher, depending on the bids.  These bids could range between $1 million and $1.5 million.  Early pre-bid inquiries, however, look favorable.  If they are less than $1,000,000, the Club benefits, but it is necessary and prudent for the Club to provide members the variables that determine the final number.

 

Interest rates are extremely low at this time, and a loan rate will be in the low 4% range.  It is a good time to finance a project like this.

 

Question 2:  What are the approximate financing terms the Club is looking at?

Answer:    Interest rates are extremely favorable to the Club, based on current market rates and the Club’s debt to equity position.  Loan rates will be in the low 4% range.  The bank is hedging its bet slightly by locking in a five year rate, with a reset after that.  Managing that reset is discussed in the following question.

 

Question 3: How would a $1.3 million loan impact our current cash flow?

Answer:  The loan payment would have minimal affect on the cash flow.  The current budget can support the additional annual debt payment, while still generating $110.000+ for capital projects, and maintaining the annual deposit in the Contingency Reserve Fund (CRF) as required by the Bylaws.  In five years, our outstanding notes and bonds used for the late 1990’s club remodel will be paid off.  These bonds and notes, based on a declining payoff schedule, have fallen from 2006 levels of around $120,000 to $83,000.  That makes a loan of this size very manageable. 

 

Additionally, looking ahead, the Club’s cash flow looks very good.  Several expensive capital projects will have been completed, including the fire vent project, the standpipe project, and the docks cap project.  The allocation of funds to these projects over the past few years will be freed up to pay for the electrical financing.  The Club’s cash flow improves so much in the next few years that it is distinctly possible this loan will be paid off within ten years, or possibly sooner through our annual contributions to the Contingency Reserve Fund (CRF). 

 

The Club is committed to building a reserve fund to make a lump-sum payment at the five year interest reset.  Currently, we are on track to make that lump-sum payment in 2019with the projected Contingency Reserve Fund (CRF) balance.  The CRF is funded each year through a Bylaw requirement.  It ensures the Club has available funds to pay for unforeseen circumstances and to fund large projects.  The clubhouse renovation is an example where the Club used CRF funds to help pay for that project.  This fund provides security and flexibility, allowing the Club to plan how much to pay down at the time of the loan interest rate reset.

 

Question 4:  Why did the Electrical Committee choose this particular design?

Answer:  The Electrical Committee chose this electrical design based on existing load problems within the present system.  Current load requirements have taken the existing system to 100% capacity. It chose a design that offers 50% more capacity than the current system, factoring in future load requirements and dock expansion, as well.  The Committee originally looked at providing 50 amp 240 volt service, but concluded it would be more costly and could require a primary service from City Light.  The Committee settled on a design that provides a backbone to allow expansion of service in the future, while keeping costs manageable in the present, with enough capacity to fulfill present and future needs.  The design also provides flexibility in the present to offer some slips with 50 amp service.  The biggest issues of the past have been a failure to plan for the future and adding onto a system that was not designed to handle greater capacities.  The Electrical Committee’s design choice solves those problems while keeping costs to a minimum to meet design needs.

 

Question 5:  Why doesn’t the Club just cap the loan at $1,000,000 to keep the project under that budget cap?

Answer:  An artificial cap on the project does not make financial or project sense. The request for approval of a mortgage without a cap gives the Club the flexibility to provide to the membership the most optimal system for the best value.  It is possible that the project bids may come under $1 million, but an excellent electrical system designer has estimated this project to be around $1.3 million.  The Electrical Committee spent two years analyzing our system needs, received input from many sources, and with the help of the system designer, developed a plan that meets our current needs and future electrical needs, including expansion of Dock 1.  The ballot measure as worded does not preclude the project from coming in under $1 million, but an arbitrary limitation could prevent the project from being completed as it was carefully designed.

 

If the project is capped and comes in at bid near the estimated cost, then the club would be forced to do the project in phases.  A phased approach would increase project costs an estimated 20% and be difficult logistically.  First, we are currently in a recession and early bid estimates are favorable to doing the entire project now.  Interest rates and the inflation rate are extremely low and near historic lows.  To underscore this, when the Club did the clubhouse remodel, it paid 7.5% interest to its members, If inflation takes off as forecasted, our cost of completing the project will go up.  A good example of what inflation does to a project is to witness the 520 bridge replacement.  Inflation and rising project costs over the years nearly doubled the cost of replacement.  The Club wants to avoid unnecessary costs. 

 

In essence, then, an arbitrary cap makes no sense and only serves to complicate the project and extend costs.

 

Question 6:  Why don't we just issue bonds or notes to our members?

Answer:  This approach was discussed at length.  Ultimately, the time involved to put bonds together, the time to offer them to the membership, the purchase period, and the issuance of the bonds, were the major issues, with cost being a secondary issue.  The Club needs to get this project going sooner rather than later due to the service and safety risks of the current electrical system.  Issuing bonds or notes is still an option, but creates timing issues.  This project needs to be started while the lake is low and there is access to the under dock area.  The lake starts rising again in mid to late February.  Trying to issue bonds could delay the project a year, and that is not feasible for safety reasons.

 

We still can still issue bonds or notes at a later date and the Club can take its time doing it with a loan in place, if issuing bonds or notes makes financial sense.  Any bank loan we get will have a provision for Club or member funds to pay down principal with no penalty.

 

Members have been under the impression that the Club has never mortgaged itself, that it has financed all its projects internally through bonds and notes.  Nothing can be further from the truth.  Historical records show the club has mortgaged itself on four different occasions, including one period where it held two mortgages at the same time.  The members took the mortgages at that time because mortgages provided the ability to leverage Club assets quickly to achieve stated goals.  When the Club had a mortgage, it historically paid it off early.  That is the plan today and is discussed below.

 

Question 7:  How does this financing impact our current bonds and notes?

Answer:  The language of the ballot measure does not mention refinancing the bonds and notes as part of the mortgage request.  Regardless, the Club does not support rolling the bonds and notes into the loan.  The Club will seek to find a bank that does not require this.  The Club is interested in doing what is best for the Club and its individual members.  The Club further seeks to minimize any disruption to the members and their finances.

 

Question 8: Why aren't the mooring members paying for these upgrades?

Answer:  Simply put, the mooring members are paying the lion’s share of the electrical upgrade.  Our annual budget for 2013-2014 is approximately $910,000.  Of that amount, the revenue generated by the mooring members is roughly $730,000, or 80.2% of the budget.  This includes their contributions through moorage fees and dues.  This does not include, however, the electrical surcharge paid by each mooring member.  The electrical surcharge increases each mooring member’s contribution to the overall revenue generated by the Club.

 

In contrast, non-mooring member dues are roughly $110,000, or 11.8% of the budget. 

 

It is important to remember, too, that maintaining our club and docks in good and modern condition benefits all members by ensuring continued demand for moorage at QCYC.  Moreover, the revenue generated by the mooring members finances a large portion of our operational costs.  These costs include the maintenance of the clubhouse, the grounds, and helps finance our outstations and social events.

 

Question 9:  Will my moorage rates go up to pay for this financing?

Answer:  The Planning and Finance Committee sees no reason for this project to cause an increase in moorage rates.  Revenue projections at this time do not foresee a need for any moorage increase.

 

Question 10:  Will we have to raise dues to pay for this?

Answer:  The Planning and Finance Committee sees no reason for this project to cause an increase in dues.  Revenue projections at this time do not foresee a need for any dues increase.

 

Question 11: Why did the electrical committee choose 600 amp 480 volts instead of 800 amp 480 volt for the service?

Answer:  The 600-amp service is the maximum that City Light will give us on a secondary service.  To get more we would have to go to a primary service at a $250,000 premium.  The 600-amp service has been validated to be more than sufficient for our needs and future growth.  600-amp service would increase our current capacity by 50%.  The system design, however, does not preclude stepping up to a primary service at a later date, if needed.

 

Question 12:  How much will it cost a member to upgrade to 50-amp 240v service?

Answer:  The kit to upgrade should not cost more than a couple hundred dollars.  It includes new breakers and an outlet receptacle.   We will need to establish a policy on who can do the installation.  If it includes an electrician, it could double the cost.  We will also need a policy of how many 50 amp outlets will be available.

 

Question 13:  When will this project begin and will it disrupt power on the docks?

Answer:  We hope to get construction under way early 2014.  There will be planned disruptions of power in the spring when the weather starts to warm up.

 

Question 14:  Since Dock 3 use could be temporarily disrupted if the 520 bridge is built, are we still going to upgrade Dock 3, as well?

Answer:  Yes, we are upgrading Dock 3.  There is no timetable on the 520 project and no money to build the section of 520 adjacent to Dock 3 at this time.  Additionally, a mitigation action will be required for people and businesses impacted by 520, meaning the Club will be compensated in some form for the costs to rebuild or repair any dock space that has been displaced.  Further, Dock 3 currently has the most problems.  For safety reasons, it would be imprudent not to replace the system at this time. Lastly, failing to upgrade Dock 3 would require maintaining two separate services, one for Dock 3 and the other for Docks 1 and 2.  That doesn’t make sense and is fiscally imprudent. 

 

Question 15:  Will the electrical surcharge go away with this financing?

Answer:  The electrical surcharge is a small, but important component to the revenue stream required to maintain the docks.  There is no plan to discontinue the electrical surcharge at this time.  In effect, the surcharge is a continuing commitment by the mooring members to produce revenue to keep our docks in good shape.

 

Question 16:  Can we get more capacity from the existing service?

Answer:  No.  The current service for the docks is at maximum capacity.  To gain more capacity we need an updated service for the property.  This requires a change to higher voltage service and transformers to step the voltage down.

 

Question 17:  Why can’t we just get the higher capacity service?

Answer:  The wiring and fusing for Dock 3 is currently at maximum capacity during winter peak use.  The wiring and fusing at two other panel locations on Docks 1 and 2 are also at or near max capacity during winter peak use.  Continual max capacity on the system creates safety issues. 

 

Question 18:  What is the proposed timeline for the project?

Answer:  We are planning to request bids in early December and the project could start as early as February 2014.  Lake levels dictate this project and it is important to get it underway while the lake is low.  Otherwise, the project will be delayed for a year.

 

Question 19:  What is the cost difference to have a system design with a combination of single 30amp and dual 30-amp capacity?

Answer:  Based on the data currently collected the cost difference is 10-15%.

 

Question 20:   Why don’t we do a phased approach over a period of time?

Answer:  A phased approach would increase project cost an estimated 20% and be difficult logistically.

 

Question 21:  Are new pedestals being installed at all slip locations including covered slips?

Answer:  Yes.  New pedestals are being installed at all locations.  Code requires the breakers to be within 30 inches of the plug/receptacles.