Item 10: FY22 Forecast — original pdf

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Item 10 Austin Energy Fiscal Year 2022 Forecast and Budget Planning Mark Dombroski Chief Financial Officer April 19, 2021 © 2018 Austin Energy Fiscal Year 2022 Forecast and Budget Planning Agenda Budget Schedule Forecast Inputs, Assumptions and Process Forecast Summary Budget Planning 3 Austin Energy Fiscal Year 2022 Forecast and Budget Planning Budget Schedule 4 City of Austin Fiscal Year 2022 Budget Timeline FY 2021 FY 2021 FY 2021 FY 2021 FY 2021 FY 2021 FY 2021 FY 2021 FY 2021 FY 2022 FY 2022 FY 2022 JAN FEB MAR APR MAY JUNE JULY AUG SEPT OCT NOV DEC 28th – 7th Austin Energy Budget Development City of Austin Budget Development Austin Energy FY22 Forecast Development 16th City Council Financial Forecast Report Delivered 19th EUC Forecast & Budget Process Presentation 1st Austin Energy Pass-Through Rate Change Effective 1st City of Austin Fiscal Year 2022 9th City Council City Manager Proposed Budget Presentation 12th EUC Proposed Budget Presentation 3rd City Council Council Budget Work Session & Set Max Rate 23rd & 30th City Council Public Hearings 29th City Council Set Max Tax Rate Budget & Tax Rate Hearings 11th City Council Public Hearing Tax Rate 11th – 13th City Council Budget Readings/Adoption Adopt Tax Rate Call Election, If Necessary 5 City of Austin and Austin Energy Financial and Performance Data Sources Austin Finance Online City of Austin Budget Documents https://www.austintexas.gov/financeonline/fin ance/index.cfm https://www.austintexas.gov/financeonline/afo _content.cfm?s=1 City of Austin Strategic Direction 2023 https://www.austintexas.gov/financeonline/afo _content.cfm?s=73 Performance Austin Data Austin: Austin Energy https://cityofaustin.github.io/PerformanceATX/ https://data.austintexas.gov/browse?Additiona l-Information_Department=Austin+Energy Austin Energy Corporate Reports and Data Library https://austinenergy.com/ae/about/reports- and-data-library/reports-and-data-library 6 Forecast to Budget 5-Step Process 5-Year Forecast 1. The forecast is a 5-year “top down” analysis used to establish thresholds for budget development by the business units and to gauge future financial policy compliance and rate impacts 2. Business units use the targets to allocate funds to accomplish program and project requirements Business Unit Targets 4. Prior to submitting the budget, Austin Energy updates and revises the forecast with information from the organizational budgets, latest market data and makes adjustments to ensure compliance Organizational Budgets Revised Forecast Budget Submission 3. Austin Energy uses a “bottom up” approach to develop organizational one-year budgets and 5- year CIP using eCOMBS and PowerPlan while reconciling funding needs to forecasted revenues 5. Austin Energy submits its proposed one-year budget and 5-year CIP to City of Austin Finance where it is compiled, reviewed and possibly revised prior to City Manager approval and presentation to City Council 7 Austin Energy Fiscal Year 2022 Forecast and Budget Planning Forecast Inputs, Assumptions and Process 8 Austin Energy Forecast Inputs • Preliminary Load Forecast • City of Austin Forecasting Assumptions • Power Supply Cost Forecast (ERCOT Market • Austin Energy Forecasting Assumptions Forecast) • Amended Budget (Current Year Estimate) • Approved Public Utility Commission of Texas Transmission (PUCT) Rates (what we charge) • Adopted 5-Year CIP Forecast (with revisions) • Approved PUCT Postage Stamp Rate (what we • Existing Debt Schedules (Bonds and CP) • Approved Program Changes • Historical Financial Trends • Existing Contractual Obligations • Adopted City of Austin Financial Policies • Adopted City of Austin Fees and Tariffs pay) Plan • District Cooling Customer Growth and Consumption • Joint Projects Forecast (Fayette and South Texas) • Resource, Generation and Climate Protection • Credit Rating Agency Metrics 9 Austin Energy Forecast Assumptions LOAD: REVENUE: • Includes no discrete provision for potential industrial projects. Perryman includes such projects in the overall forecast pattern • No COVID Pandemic impact starting Jan 2022 EXPENSE: • Labor Escalation Factor is at 3% per year • Inflation is at 0.75% per year on non-labor costs • Depreciation rate is 2.95% • Cost of debt: 3% for taxable and non-taxable • City transfers and payments continue to grow at 5% per year • No adjustment for the February winter event • Base rate change in FY 2024 to maintain financial policy compliance • Power Supply cost forecast uses UPLAN and revenue is set to equal expenses for each year • Cost of Nacogdoches Biomass (NAC) recovered through Power Supply Adjustment until January 2024 • Regulatory and Community Benefit Charge revenue is set equal to forecasted expense for each year • Interest income rate is 0.15% for 2022 and beyond • Customer Assistance Program (CAP) returns to a 10% discount for the five-year period CIP: • 65% cash funded 10 Austin Energy’s Forecasting Process Load Forecast Revenue Forecast Financial Forecast Forecasted Energy Sales & Customer Count by Sector Billing Determinants (KWh, KW, Bills by Customer Class F o r e c a s t s F o r e c a s t I n p u t s F o r e c a s t O u t p u t s Economics • Woods & Poole • Perryman SAE Residential & Commercial SAE Modeling DSM & Solar PV Goals Provided by Customer Energy Solutions Weather Historical and Normal HDD/CDD Historical Data •Energy Sales & Bill Count •Peak Demand •Net Energy for Load Forecasted Energy Sales & Customer Count by Sector Forecasted Long Term Hourly Load for PSA Run Historical Profile by Rate Class Green Choice Forecast Tariff Revenue by Rate Class Historical Financials CIP Spending Plan and O&M Power Supply Cost Tariff Debt Schedule Fund Summary Ratios Affordability Billing Units Revenue by Rate Calss Energy Market Operation UPLAN PSA Run Result 11 Austin Energy Fiscal Year 2022 Forecast and Budget Planning Forecast Summary 12 Austin Energy Forecast Fund Summary Millions of $ FY 2021 Budget FY 2021 CYE FY 2022 Forecast FY 2023 Forecast FY 2024 Forecast FY 2025 Forecast FY 2026 Forecast $394.2 1,416.0 $400.7 1,393.1 $310.4 1,477.8 $310.0 1, 534.5 $310.4 1,587.5 $310.7 1,601.8 $310.8 1,644.2 Beginning Balance Revenues/Transfers In Requirements: Operating Expenses Power Supply Expenses Debt Service CIP Transfer General Fund Transfer Support Transfers AE Reserve Transfers Total Requirements Excess (Deficiency) Ending Balance FTEs 685.3 359.4 158.1 39.9 114.0 59.4 5 (5.1) $389.1 1,813 679.5 359.4 158.1 107.9 114.0 64.4 0 674.6 422.6 164.3 39.1 113.0 60.7 4.0 (90.3) $310.4 1,813 (0.4) $310.0 1,823 649.9 464.4 176.8 55.2 114.0 63.8 10.0 0.5 $310.4 1,833 654.1 467.6 181.3 70.1 116.0 67.1 31.0 0.3 $310.7 1,843 676.6 470.6 183.5 68.3 121.0 70.7 11.0 0.1 $310.8 1,853 $1,421.1 $1,483.3 $1,478.3 $1,534.1 $1,587.2 $1,601.7 $1,650.4 690.4 498.6 188.5 71.4 127.0 74.5 0 (6.2) $304.6 1,863 13 Austin Energy Forecast CIP Summary Millions of $ Budget FY 2021 Forecast FY 2022 Forecast FY 2023 Forecast FY 2024 Forecast FY 2025 Forecast FY 2026 Total 2022-2026 Distribution $107.2 $92.8 $89.5 $84.1 $81.4 $83.0 $430.8 Distribution Substation Transmission Joint Projects District Cooling General Electric Service Delivery $160.7 $128.6 $123.8 $118.3 $115.3 $117.5 $603.5 Power Production $16.5 $19.0 $15.8 $13.8 16.9 36.6 11.4 48.6 119.3 10.6 25.2 10.4 25.0 20.5 9.1 25.2 11.1 3.9 23.8 9.0 25.2 10.6 2.5 20.0 9.0 24.9 $7.7 10.2 5.0 22.5 9.2 46.9 25.3 125.8 $7.8 12.2 5.1 $64.1 54.5 41.5 22.8 109.6 Total $356.5 $203.5 $178.4 $165.2 $160.7 $165.4 $873.2 14 Forecasted Key Financial Metrics Summary Minimum or Target Forecast FY 2021 Forecast FY 2022 Forecast FY 2023 Forecast FY 2024 Forecast FY 2025 Forecast FY 2026 Operating Margin 10% 12% 13% 12% Net Income (Millions of $) > $0 ($42.9) ($176.3) ($20.3) ($33.4) Quick Ratio > 1.5 2.4 2.7 2.8 Days Cash on Hand 150 Days 210 Days 204 Days 210 Days 222 Days 227 Days 223 Days Debt Service Coverage > 2.0 Debt to Capital < 50% 1.5 54% 1.9 56% 1.8 56% 16% $0.6 2.5 1.6 54% 2% 2.5 1.8 56% 15% $2.7 2.7 2.0 56% 15 Retail Revenue Summary Use of Funds 12% GFT Applied Basis for Rate When Adjusted Last Adjustment % of Residential Bill (1) Base Rates Includes Customer, Energy and Demand Charges: Recovers O&M, G&A and debt service for generation/power supply, distribution, customer services and corporate services Power Supply Adjustment Recovers net ERCOT settlements, fuel, hedging, PPA’s, GreenChoice® and VoS Recovers ERCOT transmission and related administrative charges/credits and NERC/TRE regulatory fees Regulatory Charge Community Benefit Charge: Service Area Lighting Cost of Service for Test Year Actual Expenses Rate review performed every 5-years Annually during Budget or if Recovery is ±10% Jan 2017, Decreased 6.7% Nov 2020, Decreased 2% Actual Expenses Annually during Budget Nov 2020, Increased 19% Recovers cost of street lighting, operations of traffic signals and certain Park lighting Actual Expenses Annually during Budget Community Benefit Charge: Energy Efficiency Services Funds the cost of energy efficiency rebates and related costs, weatherization, solar incentives, and the Green Building program Community Benefit Charge: Customer Assistance Program Funds projects that help qualifying low-income and other disadvantaged residential customers through bill discounts, payment assistance (Plus 1), arrearage management, and weatherization services Actual Expenses Annually during Budget Actual Expenses Annually during Budget (1) City of Austin Residential Non-CAP Customer using 860 KWh (2019 Typical Monthly Consumption) Nov 2018, Decreased 10% Nov 2020, Decreased 29% Nov 2018, Decreased 11% Yes No Yes Yes Yes Yes 53% 31% 10% 1% 3% 2% 16 Austin Energy System Average Rate History Consumer Price Index-Urban Electricity (CPI-U E), Consumer Price Index-Urban Electricity (CPI-U E), AE System Average Rate History AE System Average Rate History and 2% Growth Rate and 2% Growth Rate Indexed to 1995 Indexed to 1995 CPI-U E CPI-U E 2% Growth Rate 2% Growth Rate AE System Average Rate History AE System Average Rate History 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% -10% 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 CPI-U Electricity Average (1995-2020=2.04%) 2% System Rate Increase Change in System Rate 17 Affordability Goal: Affordability Metric Actual CYE Forecast 0.1400 0.1200 0.1000 h W K r e P $ 0.0800 0.0600 0.0400 0.0200 - FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY2025 FY2026 Base Rates Community Benefit Charge Power Supply Adjustment 2% Affordability Line Regulatory Charge 18 Affordability Goal: Competitiveness Metric System Average Annual Rates by Calendar Year h W k r e p s t n e C 13.00 12.00 11.00 10.00 9.00 8.00 7.00 6.00 5.00 4.00 Austin Energy customers have received a net benefit of $1.76 Billion compared to the Texas average Austin Energy improved to 97.5% of the Average for Texas 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 Austin Energy Texas Entities (filtered) ERCOT Texas Entities (filtered) Source: U.S. Energy Information Administration Form 861, October 2020 19 Weather Impacts Base Revenue Average ~$80 Million Variance Over the Forecast $772 $727 $689 $778 $733 $694 $42M ($37M) $765 $721 $683 $830 $780 $730 $680 $668 $630 $630 $597 $580 $677 $638 $605 FY2022 FY2023 FY2024 FY2025 FY2026 Extreme Base Rev Normal Base Rev Mild Base Rev 20 Declining Consumption per Customer Residential Sales Per Household Commercial Sales Per Customer l s e a S H W M l a u n n A 12.50 12.00 11.50 11.00 10.50 10.00 l s e a S H W M l a u n n A 160 155 150 145 140 135 130 125 120 115 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Historical (MWh) Weather Normalized (MWh) Historical (MWh) Weather Normalized (MWh) 21 Tiered Rates: Customer Bill Stability and Revenue Impacts Inclined Block Rates Austin Energy adopted a 5-tiered residential block structure in 2013 and set the rates for tiers 1 and 2 below cost of service while tiers 4 and 5 are significantly above cost. Consumption in tiers 4 and 5 have decreased 14% since 2012. Declining average consumption aggregates energy sales into the lower tiers jeopardizing Austin Energy’s ability to recover costs and customers’ bill stability especially during weather events. 60% 40% 20% 0% FY2022 Residential Tier Distribution 76% of sales 60% of revenue 12% of sales 21% of revenue 29% 31% 50% 26% 19% 12% 14% 8% Tier 1 Tier 2 Tier 3 Tier 4 kWh % Energy Charge Revenue % 7% 4% Tier 5 22 Customer Growth and Energy Sales Austin Energy has been experiencing the same trend as other electric providers in the country, stagnated growth in energy sales. However, our consistent growth in customers has masked the effects. The traditional business model of periodic rate cases with fixed costs recovered in volumetric billing determinants (KWh) must be evaluated in the context of our new reality: Distributed generation, energy efficiency and conservation, new and highly efficient housing stock, aggressive inclined block rates, and demand for energy services. All of this leads to higher fixed costs with fewer KWh being sold and inflation outpacing sales growth. 1.6% Forecasted Annual Customer Growth 0.8% Forecasted Energy Sales Growth 23 Austin Energy FY 2022 Forecast Summary Challenges and Opportunities • Financial position is stable but vulnerable • Many major decisions still in play • Flat energy sales with increasing customers • Declining average consumption threatens cost recovery (fixed costs in variable rates) • Margins are sustained only with planned asset disposals and base rate increase • Pending base rate change effective FY2024 offset by significant reduction to the PSA as NAC moves to base rates and impact of Winter Storm Uri is realized • Loss of dispatchable generation reduces wholesale market revenues • Net income is challenged but cash position continue to remain strong • Increasing debt service costs due to aggressive • Restricted cash reserves increasing CIP spending in prior years • Forecasted rates remain well-below 2% affordability metric and currently 2.5% below state-wide average system rate 24 Austin Energy Fiscal Year 2022 Forecast and Budget Planning Budget Planning 25 Austin Energy FY 2022 Budget Planning Summary • Much of Austin Energy’s $1.4B budget is comprised of costs that cannot be significantly changed in the short run Program) without trade-offs • Program costs are inputs to the budget (e.g. Resource Plan and Customer Assistance • Relatively flat base rate revenues with assumed cost escalators limit new initiatives • Power supply costs and the Power Supply Adjustment tariff structure present that greatest volatility in the budget • Capital spending focuses on meeting continued customer growth, with increased capital spending in substations, district cooling projects and warehouse space • The FY 2022 budget will look very similar to the FY 2021 budget 26 Austin Energy Financial Reports Austin Energy is required to report its financial performance in two separate and distinct formats, the Fund Summary and Financial Statements. These two reports will not necessarily match and are used for different purposes. Fund Summary (1) GAAP Financial Statements (2) • Reports the approved budget and actual • Reports the Statement of Revenues, Expenses and Fund Net revenues and expenditures • Funds are structured to reflect the operating Position, Statement of Net Position and Statement of Cash Flows (Comprehensive Annual Financial Report) activities of the utility • Used to account for services for which the utility charges its • Represents cash received and payments expected to be paid during the fiscal year • Encumbrances recognized in the year customers • Must comply with Generally Accepted Accounting Principles (GAAP) and subject to an annual audit committed • Revenue is recognized when earned and expenses recorded when • Relied upon by City of Austin stakeholders to ensure compliance with approved budget a liability is incurred (1) (2) Provided in separate handout • Includes non-cash items such as depreciation and amortization • Relied upon by City of Austin stakeholders, joint project partners, credit rating agencies, external bond holders and vendors to gauge financial health and integrity 27 FY 2021 Sources of Revenue Net Power Supply $419.0M , 30% $1.4B Base Revenue $630.5M, 45% Regulatory $140.8 M, 10% Transmission Revenue $86.2M , 6% Community Benefit $56.5M , 4% Other Revenue $73.8M , 5% * Interest Income $9.2M , 1% *Other revenue includes District Cooling (chiller) $30.2M, Congestion Revenue $20.5M, infrastructure attachments $6.6M, Misc. Fees $15.1M 28 Resources that Austin Energy Uses for its Operations in FY2021 Operating Requirements General Fund Transfer $114.0M, 8% City Services Transfers $59.4M, 4% Operations & Maintenance Commodities $15.1M, 6% Personnel $246.2M, 57% O&M $434.5M,31% Contractual Services $173.0M, 38% $1.4 B $434.5M Internal Transfers/CIP/ Reserves $44.9M, 3% Debt Service $158.0M, 11% Joint Projects $85.4M, 6% Power Supply $359.4M, 25% Transmission & ERCOT $161.3M, 11% 29 Non-Discretionary Requirements FY 2021 Austin Energy’s budget includes spending which is non-discretionary in nature. Austin Energy has little or no control over the required spending levels in the short or mid-range time horizon. Component of the Non-Discretionary Requirements Fiscal Year 2021 Amended Amount Transmission & ERCOT: Austin Energy purchases the power it needs from ERCOT to serve its customers. This represents the cost to transmit that power to the Austin Energy load zone which is equivalent to ≈ 4% of ERCOT’s total cost for transmission. Debt Service: Austin Energy has approximately $1.9 Billion in commercial paper and bonds. This represents the principal and interest payment on that debt. General Fund Transfer: By policy, Austin Energy transfers 12% of its non-power supply revenue less District Cooling revenue (3-year average is used) to the City’s General Fund. Internal Transfers/Capital Spending/Reserves: By policy, Austin Energy funds approximately 35-60% of capital projects with cash. Austin Energy also funds and maintains certain Reserves with this cash. This represents the transfer of cash to those accounts. Joint Projects: Austin Energy partners with CPS Energy and NRG Energy at South Texas Nuclear Project and the Lower Colorado River Authority at Fayette Power Plant. This represents Austin Energy’s share of the operating cost for those joint projects. City Services: Austin Energy uses the services of other City departments such as fleets, technology, legal, City Manager’s Office and City Council. This represents Austin Energy’s direct and allocated costs from the City. Economic Development Fund Transfer: Austin Energy, Austin Water and Austin Resource Recovery provide funding for the City’s Economic Development Fund. This represents Austin Energy’s allocation of costs from the City. Total Non-Discretionary Requirements $161.3M $158.0M $114.0M $39.9M $85.4M $53.0M $8.4M $620.0M 30 Power Supply Costs FY 2021 Austin Energy’s budget includes the recovery of power supply costs. This presents the net cost of the electricity needed to serve our retail customers. These cost are largely non-discretionary as they are driven by market pricing, response to customer load and the requirements of the Resource Plan. Positive wholesale revenue reduces retail customers’ costs. Properly managed, generation acts as a physical hedge for serving our load. Components of Power Supply Cost Fiscal Year 2021 Budgeted Amount Estimated revenue earned by selling power to ERCOT from our generation facilities and our renewable energy Purchase Power Agreements (wholesale market). The price is based upon competitive market pricing. Actual revenues can fluctuate significantly. Less: Estimated cost of the fuel and Purchase Power Agreements used to generate power (wholesale market). Fuel cost are based upon competitive market pricing and Purchase Power Agreements are based on contract rates. Actual cost can fluctuate significantly. Less: Estimated cost of power purchased from ERCOT to serve retail customers (retail market). The amount of power required to serve our customers is fairly predictable, but the cost is market based and can fluctuate significantly. Austin Energy hedges energy prices as a way to protect the utility from price spikes. Less: ERCOT cost associated with serving Austin Energy’s load (retail market). Austin Energy incurs certain costs associated with its need to serve retail customers. Net Power Supply Cost ($442.9M) $417.5M $364.2M $20.6M $359.4M 31 Operations & Maintenance FY 2021 Austin Energy’s budget includes expenditures for Operations & Maintenance. This spending represents Contractuals, Commodities and Personnel. Portions of this budget are controllable or discretionary, but much is necessary to support efficient and safe operations of the utility. Reductions in proper maintenance leads to increased capital costs. Operations & Maintenance Component Fiscal Year 2021 Amended Amount Personnel: Austin Energy is authorized 1,813 employees and 112 temporary employees. An assumption is made that 6% of the positions will be vacant at any one time. This represents 94% of the cost for salaries, payroll taxes, benefits and 100% of the cost of health insurance. Contractuals: Austin Energy requires support of contractors, consultants and support services to provide for safe, efficient and clean electricity. Austin Energy also requires support to meet certain policy requirements, such as energy efficiency and demand reduction. This represents expenses and payments for those contractual items. (Discussed in more detail later) Commodities: Austin Energy requires software, tools, chemicals, safety equipment, replacement materials and parts to operate and maintain the utility. This represents expenses and payments for those commodities. (Discussed in more detail later) Total Operations & Maintenance Requirements $246.2M $173.2M $15.1M $434.5M 32 Contractuals: Top Ten Items FY 2021 Austin Energy’s Contractuals budget for 2021 is $266.4 Million. It is offset with $93.2 Million of interdepartmental reimbursements and refunds. The top ten items within the Contractuals budget represent $135. Million, or 51% of the entire Contractuals budget. Total Value in Contractual Expense Category for Fiscal Year 2021 Maintenance - Computer Hardware/Software Conservation and Solar Rebates Line Clearance Services, Distribution & Transmission Maintenance – General Plant Equipment Information Technology Contract Employees Information Technology Consulting Services Temporary Contract Employees in Customer Care Bad Debt Expense Real Estate Leasing for Office Space Liability Insurance Premiums on Assets Total Value of Top Ten Items in Contractuals $266,391,999 $28,715,890 $22,486,910 $20,000,000 $12,738,856 $11,422,764 $10,923,691 $9,407,314 $8,774,666 $5,628,756 $5,182,000 $135,280,847 33 Commodities: Top Ten Items FY 2021 Austin Energy’s Commodities budget for 2021 is $15.1 Million. The top ten items within the Commodities budget represent $10.2 Million, or 67% of the entire Commodities budget. Total Value in Commodities Expense Category for Fiscal Year 2021 Inventory Purchase Small Tools/Minor Equipment Office Furnishings Safety Equipment Chemicals Software Minor Computer Hardware Clothing/Clothing Material Electrical Conductors – Hardware/Wire/Cable Educational/Promotional Materials Total Value of Top Ten Items in Commodities $15,113,130 $1,575,000 $1,289,041 $1,239,235 $1,214,708 $1,033,855 $1,021,279 $979,069 $638,517 $625,835 $565,459 $10,181,998 34 Confidential & Proprietary ©2018 Austin Energy. All rights reserved. Austin Energy and the Austin Energy logo and combinations thereof are trademarks of Austin Energy, the electric department of the City of Austin, Texas. Other names are for informational purposes only and may be trademarks of their respective owners.