Item 7_FY23 Forecast — original pdf

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Item 7 Austin Energy Fiscal Year 2023 Forecast and Budget Planning John Davis Director, Austin Energy Finance April 11, 2022 © 2022 Austin Energy Disclaimer Certain information set forth in this presentation contains forecasted financial information. Forecasts necessarily involve known and unknown risks and uncertainties, which may cause actual performance and financial results in future periods to differ materially from any projections of future performance. Although this forecasted financial information contained in this presentation are based upon what Austin Energy management believes are reasonable assumptions, there can be no assurance that forecasted financial information will prove to be accurate, as actual results and future events could differ materially from those anticipated in such forecasts. In addition, this presentation contains unaudited information and should be read in conjunction with the audited Annual Comprehensive Financial Reports for the City of Austin, which was published on March 14, 2022: https://assets.austintexas.gov/financeonline/downloads/annual_comprehensive_financial_repor t/annual_comprehensive_financial_report_2021.pdf 2 Fiscal Year 2023 Forecast and Budget Planning Agenda Budget Schedule Forecast Inputs, Assumptions and Process Forecast Summary Budget Planning 3 Austin Energy Fiscal Year 2023 Forecast and Budget Planning Budget Schedule 4 City of Austin Fiscal Year 2023 Budget Timeline FY 2022 FY 2022 FY 2022 FY 2022 FY 2022 FY 2022 FY 2022 FY 2022 FY 2022 FY 2023 FY 2023 FY 2023 JAN FEB MAR APR MAY JUNE JULY AUG SEPT OCT NOV DEC Austin Energy FY23 Forecast Development Austin Energy FY23 Budget Development 6th Austin Energy Proposed FY23 Budget & Forecast # 2 Submitted 11th EUC Meeting 8th EUC Meeting 15th City Council Financial Forecast Report Delivered by City Manager 15th City Council City Manager Proposed Budget Presentation City of Austin Proposed Budget Development 27th City Council Public Hearing 31st EUC B&C Recommendations Due 11th EUC Forecast # 1 & Process Presentation 1st Austin Energy Pass-Through Rate Change Effective 1st City of Austin FY23 Begins 9th -11th City Council Budget Work Sessions 17th–19th City Council Budget Readings & Adoption, Adopt Tax Rate 2nd City Council Set Max Tax Rate Budget & Tax Rate Hearings 5 City of Austin and Austin Energy Financial and Performance Data Sources Austin Finance Online https://financeonline.austintexas.gov/af o/finance/ City of Austin Budget Documents https://financeonline.austintexas.gov/af o/afo_content.cfm?s=1 City of Austin Strategic Direction 2023 https://financeonline.austintexas.gov/af o/afo_content.cfm?s=73&p=160 City of Austin Strategic Performance Dashboard https://data.austintexas.gov/stories/s/5 9fp-raw5 Data Austin: Austin Energy https://data.austintexas.gov/browse?Additional- Information_Department=Austin+Energy&City- of-Austin_Department-=Austin+Energy Austin Energy Corporate Reports and Data Library https://austinenergy.com/ae/about/rep orts-and-data-library/reports-and-data- library 6 Forecast to Budget 4-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 Revised Forecast 3. Prior to submitting the budget, Austin Energy updates and revises the forecast with info from the organizational budgets and latest market data, then adjusts to ensure compliance to financial policies 2. Business units use the zero-based budgeting process to develop organizational one-year budgets and 5-year CIP plans while reconciling funding needs to forecasted revenues Zero-Based Budgeting 4. Austin Energy submits its proposed 1-year budget and 5-year CIP plan to City of Austin Finance where it can be revised prior to City Manager and/or City Council approval Budget Submission 7 Austin Energy Fiscal Year 2023 Forecast and Budget Planning Forecast Inputs, Assumptions and Process 8 Austin Energy Forecast Inputs FY23 • 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) pay) • Approved Program Changes • Historical Financial Trends • Existing Contractual Obligations • District Cooling Customer Growth and Consumption • Joint Projects Forecast (Fayette and South Texas) • Resource, Generation, and Climate Protection • Adopted City of Austin Financial Policies Plan • Adopted City of Austin Fees and Tariffs • Credit Rating Agency Metrics 9 Austin Energy Forecast Assumptions FY23 REVENUE EXPENSE • Base revenue increase starting Jan 2023 to maintain financial policy compliance • Pass-through revenue (PSA, Regulatory, and Community Benefit Charge) are based on the cost with no over or under-recovery • Continue Nacogdoches debt and O&M recovery through Power Supply Adjustment Projects updates • Interest income rate is 0.85% for 2023 and beyond • Inflation is at 2.4% for 2023, 1.5% for 2024-2027 on non-labor costs • Depreciation rate is 2.95% • Cost of debt: 3% for taxable and non-taxable • Approved FY2022 5-year Capital Plan with Joint • CIP funded 60% cash (average) in a 5-year period 10 City of Austin Forecast Assumptions FY23 • Health insurance contribution increase 0% LABOR AND BENEFITS: • Wage increase 3.0% DIRECT EXPENSES: • Fuel 5% • Fleet Maintenance 7% CITY ALLOCATIONS: • Administrative Services 5% • Communications and Technology Management (CTM) 10% • Combined Transportation, Emergency & Communications Center (CTECC) & Wireless 5% • City Transfers expected to grow at 5% 11 Other Events and Assumptions GENERATION AND POWER SUPPLY ASSETS • Decker Unit 2 ceased operations in March 2022 • Fayette – Austin Energy’s share continues to run with reduced dispatch to meet carbon emission goals • 475MW solar PPA additions in 2023 • Hackberry wind PPA expires on December 31, 2023 • Power supply costs based on the latest generation resource updates and forecasted market price • $31.5M on sales of TLC to City of Austin with cash transfer payment method for the next 5 years • Decker Unit 2 retired with no gain or loss in disposals 12 Austin Energy’s Forecasting Process 13 Austin Energy Fiscal Year 2023 Forecast and Budget Planning Forecast Summary 14 Austin Energy’s Forecast Fund Summary (in millions $) FY 2022 Budget FY 2022 CYE FY 2023 Forecast FY 2024 Forecast FY 2025 Forecast FY 2026 Forecast FY 2027 Forecast $261.0 1,490.3 $303.9 $242.1 $242.2 1,505.0 1,568.0 1, 595.7 $242.3 1,604.8 $244.0 1,612.8 $245.5 1,624.8 Beginning Balance Revenues/Transfers In Requirements: Operating Expenses Power Supply Expenses Debt Service CIP (Cash Transfer) General Fund Transfer Support Transfers AE Reserve Transfers T otal Requirements Excess (Deficiency) Ending Balance FTEs 715.3 422.3 161.9 40.2 114.0 55.9 0 (19.4) $241.7 1,823 719.1 422.3 161.9 92.4 114.0 57.1 0 728.1 408.7 166.6 81.7 115.0 60.8 7.0 (61.7) $242.1 1,823 - $242.2 1,823 734.1 398.4 183.9 87.6 119.0 62.5 10.0 0.1 $242.3 1,833 755.7 391.3 184.2 55.1 126.0 65.8 25.0 1.7 $244.0 1,843 776.5 382.6 185.7 55.6 131.0 68.9 11.0 1.4 $245.5 1,853 $1,509.6 $1,566.8 $1,567.9 $1,595.5 $1,603.1 $1,611.3 $1,624.3 782.6 380.8 194.5 51.8 134.0 72.6 8.0 0.5 $246.0 1,863 15 Austin Energy Forecast CIP Summary (in millions $) Budget FY 2022 Forecast FY 2023 Forecast FY 2024 Forecast FY 2025 Forecast FY 2026 Forecast FY 2027 T otal 2023-2027 Distribution $123.6 $113.3 $96.9 $101.8 $101.0 $101.0 $514.0 Distribution Substation Transmission Joint Projects District Cooling General Electric Service Delivery $203.3 $163.6 $190.7 $149.7 $146.3 $146.3 $796.6 Power Production $24.4 $24.0 $18.3 $10.7 $10.9 $72.4 23.1 56.6 12.9 40.6 38.7 10.5 39.8 11.9 8.4 28.7 33.9 59.9 11.0 0.7 8.2 11.0 36.9 $8.5 11.8 0.3 7.5 9.0 36.3 12.8 0.2 6.7 9.0 73.4 36.3 209.2 8.8 0.2 6.7 56.3 9.8 57.8 T otal $319.9 $236.6 $228.9 $177.8 $176.7 $172.9 $992.9 16 Forecasted Key Financial Metrics Summary Minimum or Target Forecast FY 2022 Forecast FY 2023 Forecast FY 2024 Forecast FY 2025 Forecast FY 2026 Forecast FY 2027 Operating Margin 10% 12% 14% 14% 13% 13% Net Income (Millions of $) > $0 ($19.2) ($11.7) ($13.2) ($30.4) ($34.2) Quick Ratio > 1.5 2.2 2.1 2.4 2.6 2.7 Days Cash on Hand 150 Days 184 Days 178 Days 193 Days 212 Days 228 Days 240 Days Debt Service Coverage > 2.0 2.0 Debt to Capital < 50% 56% 2.3 55% 2.2 55% 2.2 55% 2.0 55% 15% $5.0 2.3 2.1 55% 17 FY22 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% (2) Nov 2021, Decreased 7% Actual Expenses Annually during Budget Nov 2021, Increased 20% 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 Nov 2018, Decreased 10% Nov 2020, Decreased 29% Nov 2018, Decreased 11% (1) City of Austin Residential Non-CAP Customer using 860 KWh (2019 Typical Monthly Consumption); does not add to 100% due to rounding. (2) System-wide decrease of 6.7%. 18 53% 29% 12% 1% 2% 2% Yes No Yes Yes Yes Yes Austin Energy System Average Rate History Consumer Price Index-Urban Electricity (CPI-U E), Austin Energy System Average Rate History and 2% Growth Rate Indexed to 1995 CPI-U E AE System Average Rate History 95% 85% 75% 65% 55% 45% 35% 25% 15% 5% -5% CPI-U Electricity Average (1995-2021=2.13%) 2% System Rate Increase Change in System Rate 19 Affordability Goal: Affordability Metric Actual CYE Forecast 0.1400 0.1200 0.1000 0.0800 0.0600 h W K r e P $ 0.0400 0.0200 - FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 Base Rates Community Benefit Charge FY 2018 FY 2019 FY 2020 Power Supply Adjustment 2% Affordability Line FY 2021 FY 2022 FY 2023 FY 2024 FY2025 FY2026 FY2027 Regulatory Charge 20 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 2004 2007 2010 2013 2016 2019 Austin Energy Texas Entities (filtered) ERCOT Texas Entities (filtered) Source: U.S. Energy Information Administration Form 861 21 Weather Impacts Base Revenue Average ~$67 Million Variance Over the Forecast $777 $729 $711 $737 $718 $794 $745 $727 $803 $754 $735 $48M ($19M) s n o i l l i M $820 $800 $780 $760 $740 $720 $700 $680 $660 $640 $620 $747 $701 $683 FY2023 FY2024 Extreme Base Rev FY2025 Normal Base Rev FY2026 FY2027 Mild Base Rev 22 Austin Energy FY 2023 Forecast Summary Challenges & Opportunities • Flat energy sales with strong customer growth • Cash position strengthens in 2024 due to • Current rate design coupled with declining revenue increase average consumption threatens cost recovery • Restricted cash reserves increasing • Austin Energy requires an increase in base revenue in 2023 to improve its financial position • Increasing debt service due to expanded CIP Plan to meet customer growth • Forecasted rates remain well below the 2% Affordability Metric; the Competitiveness Metric shows Austin Energy’s system average rate in 2020 is 2.5% below the average for Texas 23 Austin Energy Fiscal Year 2023 Forecast and Budget Planning Budget Planning 24 Austin Energy FY 2023 Budget Planning • Austin Energy’s $1.5B operating budget comprises costs that cannot be significantly changed in the short run • Program costs are inputs to the budget (e.g. Resource Plan and Customer Assistance • Relatively flat base revenues with assumed cost escalators limit new initiatives without Program) trade-offs • Power supply costs and the Power Supply Adjustment tariff structure present the greatest volatility in the budget • Capital spending focuses on meeting continued customer growth, and spending is increasing on substations, district cooling projects, and warehouse space • The FY 2023 budget will look similar to the FY 2022 budget 25 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 revenues and expenditures • Funds are structured to reflect the operating activities of the utility • Reports the Statement of Revenues, Expenses and Fund Net Position, Statement of Net Position, and Statement of Cash Flows (Annual Comprehensive Financial Report) • Used to account for services for which the utility charges its • Represents cash received and payments expected customers to be paid during the fiscal year • Must comply with Generally Accepted Accounting Principles • Encumbrances recognized in the year committed (GAAP) and subject to an annual audit • Relied upon by City of Austin stakeholders to ensure compliance with the approved budget when a liability is incurred • Revenue is recognized when earned and expenses are recorded (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 bondholders, and vendors to gauge financial health and integrity 26 FY 2022 Sources of Revenue Sources of Revenue ($millions) Interest Income $4.0 Other Revenue* $78.7 Community Benefit $58.2 Transmission Revenue $91.5 Regulatory $145.9 $1.5B Base Revenue $629.5 Net Power Supply $482.5 *Other revenue includes District Cooling (chiller) $34.3M, Congestion Revenue $21.7M, infrastructure attachments $6.7M, and miscellaneous and product revenue $16.0M 27 FY 2022 Operating Requirements Operating Requirements ($millions) O&M Breakout ($millions) Transmission & ERCOT $167.7 Power Supply $422.3 Contractuals $166.6 Debt Service $161.9 General Fund Transfer $114.0 Nuclear & Coal $87.8 $1.5B $458.8M O&M $458.8 City Service Transfers $56.9 CIP / Reserves $40.2 Personnel $276.1 Commodities $16.1 28 Non-Discretionary Requirements FY 2022 Austin Energy’s budget is mainly non-discretionary in nature; the Utility 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 2022 Budget 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. 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. Internal Transfers/Capital Spending/Reserves: By policy, Austin Energy funds approximately 35-60% of capital projects with cash, and Austin Energy also funds and maintains certain Reserves with this cash. This represents the transfer of cash to those accounts. 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 $167.7M $161.8M $114.0M $87.8M $46.5M $40.2M $ 9.4M $627.4M 29 Power Supply Cost FY 2022 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 2022 Budget 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 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 ($326.3M) $373.5M $349.8M $25.2M $422.3M 30 Operations & Maintenance FY 2022 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 can lead to increased capital costs. Components of the Operations & Maintenance Fiscal Year 2022 Budget Personnel: Austin Energy is authorized 1,897 employees and 112 temporary employees. An assumption is made that 8% of the positions will be vacant at any one time. This represents 92% of the cost of salaries, payroll taxes, benefits, and 100% of the cost of health insurance. Contractuals: Austin Energy requires support of contractors, consultants, and services to provide safe, efficient, and clean electricity and to support certain policy requirements, such as energy efficiency and demand reduction. (Discussed in more detail later) Commodities: Austin Energy requires software, tools, chemicals, safety equipment, replacement materials, and parts to operate and maintain the Utility. (Discussed in more detail later) Total Operations & Maintenance Requirements $276.1M $166.6M $16.1M $458.8M 31 Contractuals: Top-Ten Items FY 2022 Austin Energy’s Contractuals budget for 2022 is $292.1M. It is offset with $125.8M of interdepartmental reimbursements and refunds for a net total of $166.6M. The top ten items within the Contractuals budget represent $147.3M, or 50% of the entire Contractuals budget. Top Ten Expenses in the Contractuals Category Fiscal Year 2022 Budget Maintenance - Computer Hardware/Software Conservation and Solar Rebates Line Clearance Services, Distribution & Transmission Maintenance – General Plant Equipment Information Technology Consulting Services Information Technology Contract Employees Temporary Contract Employees in Customer Care Engineering Services Liability Insurance Premiums on Assets Security Services Total Value of Top Ten Items in Contractuals $33,872,765 $22,611,910 $20,000,000 $15,153,207 $12,986,053 $11,938,758 $9,402,984 $9,140,000 $6,210,000 $6,000,000 $147,315,677 32 Commodities: Top-Ten Items FY 2022 Austin Energy’s Commodities budget for 2022 is $15.3 Million. The top ten items within the Commodities budget represent $10.3 Million, or 67% of the entire Commodities budget. Top Ten Expenses in the Commodity Category Fiscal Year 2022 Budget Inventory Purchase Office Furnishings Small Tools/Minor Equipment Minor Computer Hardware Chemicals Safety Equipment Software Clothing/Clothing Material Educational/Promotional Materials Electrical Conductors – Hardware/Wire/Cable Total Value of Top Ten Items in Commodities $1,575,000 $1,479,735 $1,374,041 $1,184,869 $1,055,155 $948,484 $858,044 $840,797 $506,892 $452,862 $10,275,879 33 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.