LCRA FY 2009 Business Plan

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Consolidated Look at Revenues and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Rate Impacts of This Business Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Key Topics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Wholesale Power Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Transmission Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Water Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Community Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Corporate Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Table of Contents

General ManagerThomas G. Mason

Assistant General Manager and Chief Administrative OfficerRick Bluntzer

Assistant General Manager and Chief Operating OfficerMarcus W. Pridgeon

Acting Chief Financial OfficerBrady Edwards

General Auditor*W. Charles Johnson, Jr., CPA, CIA

General Counsel*John Rubottom

LCRA Board of DirectorsRebecca A. Klein, ChairClayborne L. Nettleship, Vice ChairLinda C. Raun, SecretaryBrenda AdairSteve K. BalasKay CarltonIda A. CarterJohn C. Dickerson IIIWalter E. GarrettW.F. Woody McCaslandFranklin Scott Spears, Jr.Bobby SteinerTimothy TimmermanB.R. Skipper WallaceLucy Wilke

The Board of Directors is composed of 15 members appointed by the governor. Directors represent counties in the electric and water service areas. The directors meet regularly to set strategic corporate direction for the general manager and staff, to approve projects and large expenditures, and to review progress on major activities and industry issues.

* These positions report to the general manager and the Board of Directors.

This Business Plan presents a long-term vision for LCRA and affiliates and a summary of its operational plans. The Business Plan should not be used as a basis for making a financial decision with regard to LCRA or any of its securities or other obligations. For more complete information on LCRA and its obligations, please refer to LCRA’s annual financial report, the official statements relating to LCRA’s bonds, and the annual and material event disclosures filed by LCRA with the nationally recognized municipal securities information repositories and the State Information Depository pursuant to Rule 15c2-12 of the Securities and Exchange Commission. The information in this report and each of the documents referred to speaks only as of its date. Copies of the documents referred to above or elsewhere in this report may be obtained from James Travis, Controller, LCRA, 3700 Lake Austin Boulevard, Austin, Texas 78703.

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Introduction

The Lower Colorado River Authority began preparations for its fiscal year (FY) 2009 Business Plan with a new general manager, a new management structure and a new direction for the organization. Managers and staff reviewed their opera-tions with these objectives:

• LCRAwillcontinuetocarryoutitspublic service mission as spelled out in its enabling legislation.

• LCRAwillfocusonprioritiesanduseits resources wisely for the benefit of the communities and customers it serves.

• LCRAwillworkhardtoprovideitswholesale electric customers with energy at the lowest possible cost.

What’s New in This PlanLCRA’s FY 2009 Business Plan has been crafted in response to these expecta-tions. The plan contains additional information that explains more about the factors that affect the costs of the services LCRA provides.

Throughout the publication, “Sources and Uses” graphs – for LCRA total as well as each business unit – show the major sources of revenues and how they’re spent.

NewsectionsdiscusstheprojectedratesforkeyLCRAelectricandwaterservices, the major sources and uses of the Development Fund, LCRA staffing levels, and other issues that affect the costs of providing services.

The sections for LCRA’s five business units have also been expanded to include information about issues affecting each business unit, including cost-cutting measures and specific customer concerns.

The result is a Business Plan that discusses not only the things LCRA will be doing but also how it is paying for them. We hope this is information that is useful to LCRA Board members and customers in evaluating our progress in meeting their expectations that we provide meaningful public services in a cost-effective manner.

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Key Budget Reductions As part of the planning process, LCRA’s executive managers have evalu-ated the organization’s programs, services and internal operations to identify activities that have outlived their usefulness or are no longer in demand by LCRA customers.

Thus far, the evaluation has resulted in the following proposed reductions that total more than $7 million alone for FY 2009:

• ReductionsintheCommunityDevelopmentPartnershipandPartnershipsInParksgrantprograms.

• Reductionofoperationalexpensesthroughouttheorganization.

• ReductionofPublicSafetypositionsandconsolidationofservices.

• Eliminationofarchaeologyeducationprograms,focusinginsteadonarchae-ology issues associated with project construction.

In addition, LCRA plans to eliminate the employee Gain Sharing program in future years in favor of more targeted incentives. Based on last year’s pay-out, this move could save some $3.5 million annually. This savings would not reduce LCRA’s budgeted operations – funding for Gain Sharing payments were contingent on net revenues that LCRA achieved in excess of its debt-service-coverage obligations. But the change reflects LCRA’s commitment toefficientoperationsbylink-ing incentive pay to outstanding employee performance.

While the projected savings of $7 million for FY 2009 is small when compared to LCRA’s total budget, these are the first of several cost-savings measures that LCRA will continuetomakeincomingyearsas it carries out its commitment to efficient operations.

Preparing for Changes and ChallengesThe FY 2009 Business Plan also reflects how LCRA’s business units are pre-paring for changes and challenges through these proposals:

• optionsforexpandingLCRA’sportfolioofgenerationresourcestomeetthegrowing demand for electric power;

• fundingtocarryoutLCRA’sroleofhelpingmaintainandexpandthestate’selectric transmission system to ensure reliable service;

• preparationsforstate-mandatedchangesindeterminingthecostanddeliv-eryofelectricitythroughthesetupofa“nodal”market;

• moreefficientoperationofLCRA’swaterandwastewaterutilitiestoservegrowing demand; and

• plansforparksandgreaterpublicaccesstothelowerColoradoRiverandHighlandLakes.

This Business Plan may also raise additional questions, and that’s a good thing. Those conversations help LCRA carry out its responsibilities of pro-viding public service – and of being transparent in how it carries out those services.

Please address your questions and comments to LCRA’s general manager, ThomasG.Mason,byphoneat1-800-776-5272,Ext.3283,orbye-mailatThomas.Mason@lcra.org.

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The Key Drivers of LCRA’s Business PlanFAQs

F R E Q U E N T L Y A S K E D

Q U E S T I O N S• What objectives did LCRA follow in developing this Business Plan?

The objectives were: more tightly defined corporate goals; elimination of programs that were no longer needed or wanted by LCRA customers; the merging or elimination of duplicated programs; growth of programs needed by the public or changing conditions; and opportunities for centralization as cost reduction, in keeping with the spirit of LCRA’s enabling legislation.

• Did LCRA cut costs by adopting a hard dollar target?

No. Management and officers determined to what degree services should be funded. It also was important not to reduce or eliminate any program without first talking with customers about their desire and need for that program.

• What operations were included in this review?

The review spanned all business units and operations.

• What level of staffing and funding is LCRA using to run its operations?

LCRA wants to be a nuts-and-bolts organization. But LCRA will not sacrifice safety, reliability or customer service.

• How do these changes reconcile with LCRA’s public service mission?

The Texas Legislature charged LCRA with the responsibility to provide a variety of services for the benefit of the lower Colorado River basin and the people of Texas. Legislators gave LCRA to right to sell some of its services (such as its electric and water operations) to help pay for other public-service activities (such as flood control or protection of the basin’s natural resources). While that mandate will not change, the FY 2009 Business Plan reflects an increased consciousness of the costs that our customers pay for those services.

• Is LCRA cutting unnecessary programs or services?

LCRA has never considered any of its programs or services as “unnecessary,” if that word refers to services the public can do without and would not want to pay for. All LCRA operations have been rooted in LCRA’s enabling legislation and deliver a utility service, stewardship of water and land or community support. The challenge is to ensure that LCRA is providing the right services at costs that customers are willing to pay.

These key themes shaped LCRA’s development of its Business Plan:

• LCRAembracesitsongoingobligation to find ways to deliver its services at the lowest reasonable cost.

• Asapublicserviceentityfunded by user rates and fees, LCRA continues to evaluate its public and community services to make sure it is providing in the most cost-effective manner those services that customers need and want.

• LCRAreviewsandsetsitselectric and water rates to generate only those revenues that are truly needed to provide the quality and reliability of service that customers expect.

• EveryLCRAemployeehasa responsibility to help LCRA manage its costs. Cost consciousness – on matters great and small – needs to guide every action.

Revenue AnalysisIn FY 2009, Wholesale Power Services’ operating revenues of $1.08 billion are $187.0 million, or 21.0 percent, higher than last year’s budget. This increase reflects a fuel revenue increase of $163.1 million and a nonfuel revenue increase of $23.9 million.

For the FY 2010 – FY 2013 horizon, fuel revenue increases are a product of increased load and increasing fuel prices while nonfuel revenue increases primar-ily result from WPS’ projected capital spending forecast.

Cost AnalysisOperating expenses in FY 2009 of $953.6 million are $172.6 million, or 22.1 percent, higher than last year’s budget. The primary drivers of this increase are higher commodity fuel prices as comparative fuel expenses increased by $163.1 million.

In FY 2009, debt service payments of $104.3 million are $10.0 million, or 10.6 percent, greater than last year’s plan. For FY 2010 - FY 2013, increases in debt service payments reflect the addition of peaking and baseload generation units. Additionally, cover-age is included in the nonfuel revenue requirement to achieve a targeted 1.25 debt service coverage level.

Projected capital expenditures for FY 2009 are $276.1 million and $1,402 million over the 5-year Plan period. $782 million of the planned capital expenditures are for base-load generat-ing units, while $104 million is for the completion of the Winchester Power Park peaking unit. In addition, the capital plan includes $162 million for the completion of the FPP Units 1 and 2 Scrubber Project.

SummaryThroughout this Business Plan horizon,

WPS continues to provide custom-

ers with a competitive average price of

power. The forecasted capital program

increases the nonfuel cost component

of power; with the addition of the

peaking unit reduces customer expo-

sure to volatile market prices, and the

addition of baseload generation lowers

reliance on market purchases and adds

stability to prices.

The planned capacity additions help

WPS maintain a competitive posi-

tion compared to the market and offer

further diversity of fuel sources and

generating technology to the LCRA

portfolio.

Wholesale Power Services

Cost-Conscious Actions

• Limitationofnonfueloperations and maintenance in order to synchronize fiscal and pricing year.

• Additionofpeakinggenerationunit to reduce exposure to volatile market prices.

• Re-examinationofoutageschedules and budgets.

•Reviewandlimitationofprograms such as Key Accounts, Solar for Schools, and LCRAenergy.org.

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Competitiveness of ElectricRatesLCRA’s electric rates for wholesale cus-tomers are competitively priced, espe-cially compared to other utilities in the Electric Reliability Council of Texas generating region. LCRA’s competitive position is strongly influenced by its diversity of fuel sources and generat-ing technology. Currently, LCRA uses coal, natural gas, purchased power and renewables, along with several differ-ent generation technologies, to meet its customers’ growing needs for power. For a number of years, LCRA has been seeking legitimate options to rebalance the baseload portion of its portfolio and reduce its exposure to volatile market prices. As its customers’ needs grow, so must LCRA continue to invest now in the generation resources it will need in the future to provide competitive, reli-able power generation.

How Costs Become RatesAll of LCRA’s business units that sell their services base their rates on cost of service – operations and maintenance, debt costs and debt service coverage, labor and capital projects, as well as other costs that are specific to their operations. Here is a summary of how the business units use their costs to determine rates:

Wholesale Power Services LCRA’s wholesale electric service is cost-based. Its rates are designed to recover its share of LCRA’s revenue requirements, or its costs of generating

electricity. LCRA does this through two rate components:

Fuel rate: This component covers the cost of fuels (natural gas, coal, renew-ables and purchased power) used to generate electricity, as well as the cost of transporting these fuels to the power plants and fuel storage facilities, and other fuel-related items. LCRA adjusts its fuel rate periodically to reflect chang-ing fuel and fuel transportation costs.

Nonfuel Rate: The base rate covers the cost of labor, operations and mainte-nance, debt and debt-service coverage, expenses charged from Corporate Ser-vices, allocations to the Development Fund and other nonfuel costs.

Together, these rates combine to develop a time-of-use pricing structure. This pricing structure is designed to be fair and equitable to all wholesale customers: each customer pays the exact same amount for energy based on when it is used (more for peak times like summer afternoons, less for off-peak times like the middle of the night.) This pricing structure provides LCRA customers with pricing predictability and stability, and they can use it to send pricing signals to their end-use con-sumers to encourage conservation.

Transmission Services

Transmission Services is the only

LCRA business unit in which rates are

Key Topics

LCRA’s total number of employees dropped by 54 positions from FY 2006 to FY 2007, as LCRA began its review of programs and services and deferred the refilling of some positions. As of the third quarter FY 2008, LCRA’s work force actually numbered 2,224. But that number is projected to increase by the end of the year as LCRA begins some long-term projects (see graph on next page). The head count is projected to remain relatively flat during FY 2009-2013, averaging 2,377 positions.

1,500

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FY2003

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Budget

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Actual Proposed

LCRATotalNumberofEmployees,FY2003–FY2013

Revenue Analysis In FY 2009, Water Services’ operat-ing revenues of $105.4 million are $7.5 million or 8 percent higher than last year’s budget. This increase reflects projected rate increases in all areas as well as continued growth in demands for all of Water Services’ products and services.

A series of two rate increases for the firm raw water rate is included in order to carry out effectively LCRA’s statu-tory mission of flood control, water supply, water quality and other river management services. The current rate is $126 per acre-foot and is budgeted to increase by 9.5 percent on Jan. 1, 2009, and Jan. 1, 2011.

The proposed 4 percent per year increase in agricultural irrigation rates is largely to keep up with the inflation-ary effects of the substantial electric and other variable costs of the irrigation operation. Despite these planned rate increases as well as increases in acreage farmed, Irrigation Services does not attain full cost recovery.

Revenues for hydroelectric operations are cost-of-service based and continue to rise primarily as a result of existing debt and future capital improvements. The projected costs are still well below the forecasted market value, which is tied to the price of natural gas.

Board-approved rate increases for retail treated water and wastewater in West Travis County area for FY 2009 and FY 2010 are assumed in the plan. Over-all water demands in the West Travis County area remain strong, and total living-unit equivalents are expected to grow 9 percent in FY 2009. Rates for wholesale systems are forecast to rise to match cost of service.

Cost Analysis Operating expenses in FY 2009 of $50.5 million are slightly higher than last year’s budget by $500,000 or less than 1 percent. Despite grow-ing labor-related costs and increas-ing costs for materials, electricity and other commodities, Water Services attained essentially a no-growth operat-ing expense budget. This reflects the LCRA-wide review of all programs and

services. A significant number of previ-ously budgeted but unfilled positions have been eliminated as a result of this on-going review.

In FY 2009, debt service payments of $36.9 million are greater than last year’s plan by $5.9 million or 19 percent. The five-year plan does not include any further deferrals of scheduled Water and Wastewater Utility debt service. Payback of previously deferred debt is scheduled to begin in FY 2011.

Projected capital expenditures for FY 2009 are $45.3 million and $261 million over the five-year plan period. More than $188 million of the planned capital expenditures over the next five years are for water and wastewater utility infrastructure, primarily in the West Travis County and Williamson County areas. In addition, the capital plan includes almost $31 million for the rehabilitation of the floodgates at Buchanan Dam.

Summary Demands for all Water Services’ prod-ucts and services will continue

Water Services

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WPS: The volatile nature of fuel com-modity prices, particularly for natural gas, will be the most significant driver of fuel rates in the coming 12 months. Capital investment activity will become an increasingly larger piece of the nonfuel rate as work continues toward the development of new generation facilities and ongoing maintenance of the existing fleet. While LCRA has committed to holding the nonfuel rate flat through FY 2009, LCRA expects it to rise over the next five years due to increased debt-service costs for WPS’s capital program. Other nonfuel costs remain flat.

Transmission: Capital investment has been, and will continue to be, the primary factor driving the transmission cost of service set for LCRA Trans-mission Services Corporation (TSC) by the Public Utility Commission of Texas. Over the next five years, LCRA TSC projects its transmission rate to rise from $3.51 per kW 4CP at the beginning of FY 2009 to $4.50 by FY 2013, an increase of 28 percent.

Raw Water: Two increases of 9.5 percent each are projected for 2009 and 2011, to help pay for the costs of providing the water. This would raise the current rate of $126 per acre-foot to $151 by 2013, a cumulative increase of 19.8 percent.

Agricultural Water: Water Ser-vices proposes a series of increases of 4

percent a year over the next five years to help pay for the rising costs of provid-ing the water.

Water and Wastewater Utilities: Increases of 20 to 25 percent are planned for LCRA’s retail water systems during FY 2009. (The LCRA Board has already approved two such increases: 20 percent for the West Tra-vis County (WTC) Water System and 23 percent for the WTC Wastewater

System.) Wholesale customers served by WTC may see their rates increase by up to 23 percent. Other contract systems may see rate increases of 2 to 14 percent during FY 2009.

Telecommunications: No impact on fees is anticipated at this time.

Parks: No impact on fees is antici-pated at this time.

Rate Impacts of This Business Plan

The market price of natural gas, which affects of the cost of LCRA electricity, has increased by roughly 55 percent over the past five years, from $5.24 to $8.11 per million British thermal units (MMBtu). Current forecasts call for the price to peak at about $8.80 per MMBtu by 2009 before dropping slightly and holding steady through 2013 – although the price will continue to be subject to market fluctuations.

Average Wholesale Natural Gas Prices, FY 2003 – FY 2013 (Dollars per MMBtu)

Revenue Analysis Community Services funds come primarily from LCRA’s Development Fund ($18.8 million for FY 2009). Other sources of funding include revenues from these programs: Envi-ronmental Laboratory Services ($4 million), LCRA’s three natural science centers and nature parks ($1 million), marina and boat dock fees ($700,000), and parks and recreation area user fees ($400,000). McKinney Roughs Nature Park revenues doubled in FY 2008 primarily through its public/private partnership with Hyatt Regency Lost Pines Resort and Spa.

Cost Analysis The focus in FY 2008 was a target per-centage of cost-cutting. Costs slightly increased due to labor and inflation. Operating funding for FY 2009 is $1.7 million lower than FY 2008. Both revenues and expenditures are up for Environmental Laboratory Services, due to new contracts with the state. Capital plan costs are down because of the deferral of land acquisitions for parks. Grant programs are down overall by $1.5 million per year. (The FY 2008 Business Plan did not break out grants spending as a separate line item.)

Summary The five-year plan shows about 5 per-cent growth per year for Community Services’ operating funding requirement (which is the remaining amount when operating expenses are subtracted from operating revenues). Capital expendi-tures increase after FY 2009, reflecting improvements to existing LCRA parks, mainly those located along upper Lake Travis. Grant awards (Community Development Partnership Program) are held flat for five years at $500,000 per year.

Community Services