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HomeMy WebLinkAbout2012-18 Honeywell intent not metRESOLUTION NO. 2012-18 RESOLUTION OF THE CITY COUNCIL OF THE CITY OF UKIAH DETERMINING THAT HONEYWELL INTERNATIONAL, INC. HAS NOT SATISFIED THE CONDITIONS ON THE CITY COUNCIL'S INTENT TO CONTRACT FOR REPLACEMENT OF WATER METERS AND CONFERENCE CENTER EQUIPMENT AND FURNISHINGS REFURBISHMENT AND DESIGN WHEREAS: 1. On June 15, 2011, the City Council authorized the City Manager to sign a letter of intent ("LOI") addressed to Robert Falco, an Energy Services Account Executive with Honeywell International, Inc. ("Honeywell"), a true and correct copy of which is attached hereto as Attachment 1; and 2. In the LOI, the City Manager confirmed that the City intended to proceed toward finalizing a contract with Honeywell for three projects: (1) a comprehensive replacement of water meters used by the City's water department with water meters using Advanced Meter Reading technology and leak detection equipment; (2) design and installation improvements to the HVAC, lighting and life safety equipment at the City's conference center, the design and installation of a commercial kitchen at the conference center and replacement of conference center chairs; and (3) the design and installation of a biogas cogeneration system for the City's Wastewater Treatment Plant; and 3. The LOI stated that the contract with Honeywell must provide a turn-key program for design, implementation and financing of the projects, utilizing 3rd party financing; and 4. The LOI specified that for a period of 180 days, commencing on June 15, 2011, and ending on December 12, 2011, Honeywell was to undertake certain activities, including an investment grade assessment of these projects and the creation of contract documents, and the City agreed to negotiate exclusively with Honeywell; and 5. Under the LOI, the City's intent to enter a contract with Honeywell was subject to all of the following conditions: a. The City Council finds that the water meter and conference center projects and the proposed financing are acceptable to the community; b. Honeywell has provided the City in writing all of the information and data developed or considered by Honeywell in determining whether the project is feasible and meets the LOI's intent, including reasonable detail (30% design) for all components of the contract, and program cash flows and the opportunity cost of maintaining the status quo; c. The contract proposed by Honeywell meets the following criteria: (1) Proposed project savings and additional revenue projections allow the project to be paid for in not more than 13 years out of savings in energy, operational costs and new revenue generation. (2) The proposed project costs do not increase the total energy and operational expenditures for the facilities above the level spent in 2010 beyond the adjustment for CPI. (3) Honeywell financially guarantees the proposed annual energy savings under terms mutually negotiated with the City and the City can use the energy savings to pay the debt instrument. (4) Honeywell has arranged financing for the Projects on terms mutually negotiated with the City. (5) The proposed contract documents provide for capital improvements which are paid for through energy savings, operational savings and/or additional revenue generation. (6) The contract documents provide a detailed scope of work and document energy savings guarantees by Honeywell; and 6. If all of the conditions as stated above in paragraph 5 were satisfied and the City Council decided, nevertheless, not to contract with Honeywell for a final project, the City agreed to pay Honeywell a fee of $85,000 (the "break fee") to reimburse it for the expenses of performing in accordance with the LOI; and 7. Honeywell determined that the biogas cogeneration project at the Wastewater Treatment Plant would not produce sufficient revenue or energy savings to pay for the cost of the project over a 13 year period; and 8. As stated in more detail below, Honeywell reported to the City that it determined that water meter replacement project and the Conference Center project would produce sufficient increased revenue and cost savings to pay for the costs of those projects over a 13 year period; and 9. Honeywell reported a total cost for the water meter project of $2,650,000, consisting of $1,907,260 in labor and materials, $529,230 to Honeywell for project development, project management, overhead and profit, and $213,500 for bonds and contingency; and 10. For different time periods between June 30, 2013, and December 30, 2025, Honeywell projected different amounts of "positive cash flow" to the City's water and sewer departments, meaning increased annual revenue and reduced operation and maintenance costs from the use of more accurate meters minus the annual debt service on the loan to pay the project cost and the cost of Honeywell's guarantee of the accuracy of the new water meters: a. through December 30, 2015, the annual positive cash flow was projected at $6,000 ($500/month) b. for the period December 30, 2015, to December 30, 2023, the annual positive cash flow was projected at $7,176 ($600/month), and c. for the period December 30, 2023, to December 30, 2025, the annual positive cash flow was projected at $2,914 ($243/month). To achieve the positive cash flow for the period December 30, 2015, to December 30, 2023, Honeywell assumed that the Honeywell guarantee of water meter accuracy would terminate on December 30, 2015, saving the City the annual fee of $13,000. If the guarantee continued, the City would incur a negative cash flow of approximately $5,000 per year; and 11. Honeywell reported a total cost for the conference center project of $500,000, consisting of $383,125 in labor and materials, $98,240 to Honeywell for project development, project management, overhead and profit, and $24,450 for bonds and contingency; and 12. Honeywell projected annual debt service for the conference center project of $48,462 for the period December 30, 2013, to December 30, 2025, with annual revenues of $62,400, projecting a positive cash flow for the 13 year period of $11,538. Honeywell based the projections on the rate for commercial kitchens on a website called "Kitchens by the Hour," the current daily rate for the conference center ballroom and the daily rate for the conference center meeting rooms, projecting that the commercial kitchen would be rented 5 days per month ($200/day x 5 days = $1000/mo.), and that the improvements to the conference center would increase ballroom rentals by one day per month ($2600 x 1) and meeting room rentals by two days per month ($800/day x 2 days = $1600) for an annual revenue of $62,400 ($5200 month x 12); and 13. Honeywell did not account for any cost increases resulting from the operation of a commercial kitchen or the increased use of the ballroom or meeting rooms, including utilities, janitorial service, maintenance or repair; and 14. Honeywell did not investigate whether there are commercial kitchens available for rent in the Ukiah area, what the rental rates for commercial kitchens in the Ukiah area are or what demand exists for commercial kitchen rental other than receiving a statement from the conference center manager that they have received inquiries about the availability of a commercial kitchen at the conference center. Honeywell did not conduct any market research upon which to base its projections for increased rentals at the conference center; and 15. Honeywell offered no guarantee of its revenue projections resulting from the conference center project; and 16. Honeywell's Investment Grade Assessment Report, dated March 7, 2012, contains all of the information concerning the projects that Honeywell has submitted to the City. Honeywell has not represented to the City that the report contains all of the information and data developed or considered by Honeywell in determining whether the project is feasible and meets the LOI's intent; and 17. The City Council considered the LOI at meetings on April 14, 2011, May 4, 2011, June 1, 2011 and June 15, 2011. At those meetings no member of the general public spoke in favor of the Honeywell proposal and numerous members of the public spoke against or expressed skepticism about the Honeywell proposal. A number advocated public bidding, if the City was going to pursue the projects. Based largely on these concerns, the City Council negotiated for the provision in the LOI that made the City's obligation to pay the break fee conditioned on the City Council finding that the water meter and conference center projects and the proposed financing are acceptable to the community; and 18. The City Council understood at the time it approved the LOI that Honeywell proposed to guarantee its revenue projections, assuring the City that Honeywell would assume the risk that revenue increases and cost savings would pay the debt service for the projects; NOW, THEREFORE, BASED ON THE FOREGOING, THE CITY COUNCIL FINDS AND RESOLVES AS FOLLOWS: 1. Honeywell has not satisfied the conditions on the City Council's intent to contract for the water meter replacement project and the conference center project. A. The water meter and conference center projects and the proposed financing are not acceptable to the community for the following reasons: 1. The revenue projections for the water meter replacement project do not contain an adequate cushion to protect the City, particularly in light of the following: a. A positive cash flow of $6,000 to $7,000 per year for the City's water and sewer departments with combined annual revenue of over $8 Million does not provide an adequate cushion to assure the City that revenues and cost savings will, in fact, cover debt service over the 13 year term of the loan. b. Honeywell has not offered to guarantee its revenue projections; c. It only offers to guarantee the accuracy of the newly installed water meters; 4 d. It only offers to guarantee the accuracy of the meters until December 30, 2015; e. It proposes to charge an annual fee for the meter accuracy guarantee starting at approximately $12,000 and increasing to over $13,000; f. Beginning on January 1, 2016, Honeywell's revenue projections would not cover debt service, if the accuracy guarantee and its fee continued beyond December 30, 2015; g. The accuracy guarantee does not assure the City of the projected increase in revenue to the water and sewer funds, if consumption is reduced as a result of higher bills or voluntary or mandated water conservation, particularly because mandated water conversation is imposed on both residential and commercial accounts; h. If the projected revenue increases and cost reductions do not cover debt service, the City would be faced with the prospect of increasing water and sewer rates. These rates were recently increased over a five year period, imposing a hardship on many City residents. As a result substantial barriers exist to any additional water or sewer rate increases over the next few years. The City general fund is running a deficit and the City must make painful budget cuts to balance its general fund budget. There are no general fund revenues available to subsidize the City's water and sewer utilities. 2. The revenue projections for the conference center project are inadequate to incur the debt necessary to fund the project. a. The revenue projections are not based on adequate research and are highly speculative. b. Honeywell has not offered to guarantee the projections. The City will undertake the entire risk in assuming this debt. c. The only source of revenue to pay debt service, if Honeywell's revenue projections for the conference center are not realized over this 13 year debt repayment period, is the City's General Fund, where expenses already exceed revenue. The Community does not support an additional debt burden for a conference center when it is already faced with the possibility of cuts in public safety and other essential public services. 3. The Community does not support contracting with Honeywell for construction of these projects without public bidding, particularly in light of the fact that Honeywell did not submit its detailed specifications for the conference center and the Investment Grade Assessment Report within the six month term of the LOI and taking into consideration the substantial portion of the project cost going to Honeywell for project development, project management, overhead and profit. In the absence of competitive bidding, the Community is not assured that the project costs are competitive. There has been no negotiation with Honeywell over its charges. B. Honeywell has not represented to the City that it has provided the City with all of the information and data developed or considered by Honeywell in determining whether the project is feasible and meets the LOI's intent. C. Honeywell did not provide 30% design for all components of the contract. D. In identifying the above conditions in the LOI which Honeywell has not satisfied, the City Council does not intend to express or imply that Honeywell has satisfied all of the other conditions in the LOI. II. Because Honeywell did not satisfy all of the conditions in the LOI, the City Council does not intend to contract with Honeywell for these projects. PASSED AND ADOPTED at a regular meeting of the City Council held on April 4, 2012, by the following roll call vote: AYES: Councilmembers Thomas, Baldwin, Vice Mayor Crane, and Mayor Landis. NOES: None. ABSENT: Councilmember Rodin. ABSTAIN: None. ATTEST: VV J nne Currie, City Clerk ary An andis, Mayor 6