Item 13 AE FY25 Financial Forecast — original pdf

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Item 13 Austin Energy FY 2025 Five Year Forecast Rusty Maenius Senior Vice President & Chief Financial Officer May 13, 2024 ©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 12, 2024: https://www.austintexas.gov/service/current-annual-comprehensive-financial-report 2 Fiscal Year 2025 Forecast and Budget Planning Agenda • Overview and Objectives • Forecast Inputs, Assumptions and Process • Forecast Summary 3 The Forecast is an Opportunity Three Questions What is the current situation? How did we get here? What are going to do about it? 4 What is the Current Situation? Austin Energy’s Finances 1. Structural imbalance • Current base rates won’t fund future costs • City Council has perhaps indicated a willingness to continue with additional incremental increases (gradualism) 2. Key Performance Indicators (KPIs) not at target levels 3. Lagging cash position puts utility at increased risk • 150 Days of Cash on Hand minimum • Rating agencies concerned 4. Recent rate increases are starting to drive financial rebound 5% base rate effective March 2023 plus additional 2% November 2023 5 Structural Imbalance Current Base Rates Do Not Keep Pace With Costs Millions $2,050.0 $2,000.0 $1,950.0 $1,900.0 $1,850.0 $1,800.0 $1,750.0 $1,700.0 $1,650.0 CYE 2024 Fcast 2025 Fcast 2026 Fcast 2027 Fcast 2028 Fcast 2029 Total Uses Total Sources Note: Total Uses adjusted to reach 150 Days Cash On Hand by 2027 6 Key Performance Indicators KPI Measures Target Operating Margin Operational Cashflow Net Margins (Millions of $) Profitability / Long Term Sustainability Quick Ratio Liquidity Days Cash on Hand Liquidity Debt Service Coverage Ability to Meet Debt Service Debt to Capital Leverage / Ability to Borrow 10% > $0 > 1.5 150 Days Minimum > 2.0 < 50% Audited FY2023 Budget FY2024 2% 11% <$28.8M> $34.2 1.4 2.6 94 Days 126 Days 2.3 56% 2.3 56% General Fund Transfer (Millions of $) Transfer to the City 12% or less $115 $115 7 Minimum of 150 Days of Cash on Hand (DCOH) 218 222 213 • Cash and Reserves are vital • Financial policy requires a minimum of 150 DCOH • In violation since 2022 • On Rating Agency radar December 2023 inquiry turned into consideration of possible rating action 250 s y a D f o r e b m u N 200 150 100 50 FY19 FY20 FY21 FY22 FY23 Days Cash on Hand Policy Minimum 117 117 94 $479M FY24 at March 8 Understanding Cash Cash comes in two buckets Contingency Reserve 60 days on non- power supply O&M Power Supply Reserve 90 days of net power supply costs Working Capital 60 days on non-power supply O&M plus any additional to meet 150 DCOH minimum Days Cash On Hand (DCOH): 150 minimum 210 peer median Capital Reserve 50% of previous year’s depreciation expense 9 Why is Cash Important? Cash and reserves provide flexibility and mitigate risk Bridges the gap of seasonal revenues and volatile costs Pays daily operating costs Austin Energy has an obligation to serve, cannot sit out adverse market conditions, nor wait for a more favorable economic environment Acts as an insurance policy Supports credit ratings and lowers borrowing costs Financial Policy No. 11 Austin Energy shall maintain a minimum operating cash equivalent (also known as Working Capital) of 60 days of budgeted operations and maintenance expense, less power supply costs, plus the amount of additional monies required to bring the sum of all Austin Energy's reserves to no less than 150 days of operating and maintenance expense. 10 Characteristics Seasonality of Monthly Base Rates Working Capital – “The Check Book” • Pay the daily bills • Bridges seasonality/volatility Reserves – “Rainy Day Funds” • Act as an insurance policy • “Break glass only in case of an emergency” • Bad things can happen…and they do! 14% 13% 12% 11% 10% 9% 8% 7% 6% 5% 4% 1/12th of Year FY2021 FY2022 FY2023 11 12 13 The Less Visible Aspect of Market Volatility FY2023 Monthly Power Costs Austin Energy’s ERCOT Collateral Requirement $140,000,000 $120,000,000 $100,000,000 $80,000,000 $60,000,000 $40,000,000 $20,000,000 $- Average Monthly Cost FY2023 Extreme Year Mild Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 14 Cash Actuals, Targets and Status Thousands of dollars Working Capital March 2024 $255,593 2024 Target $181,231 Over/<Under> $ 74,362 Contingency Reserve Power Supply Reserve Capital Reserve Total Reserves $110,644 $ 40,245 $ 72,343 $223,232 $134,489 $139,878 $113,754 $388,121 <$ 23,845> <$ 99,633> <$ 41,411> <$164,889> Total Cash $478,825 $569,352 <$ 90,527> Days Cash on Hand 117 150 <33> 15 How Did We Get Here? The Story… 1. Covid 2. Regulatory lag Rate setting terminology that describes the period from test year and when new rates are implemented 3. Inflation 16 In The Beginning... 5 year Revenue Review 2019 • Revenues = Costs • Costs Increasing • “AA” Credit Rating Regulatory Lag 2019 • Financially sound City Council Covid • Over 200 DCOH approves new Subsides rates • 4X debt service coverage (DSC) 2022 • Positive operating and net margins 2021 5% base rate increase March 2023 Additional 2% base rate increase 2023 2024 • Prepared revenue adequacy review per policy Inflation - Rate case proceeding - Used cash to fund deficit • “AA” credit rating - Restored former rates - Used cash to fund deficit - Test year for rate increase • Breakeven but rising costs would require rate increase 17 The Story Unfolds… 5 year Revenue Review Covid Regulatory Lag 2020 • Covid arrives Additional 2% base rate • Instead of starting a rate case, Austin Energy temporarily increase Covid Subsides reduced rates providing COVID relief to customers City Council approves new rates 5% base rate increase March 2023 2019 2020 2021 • Used cash to fund the deficit 2022 2023 2024 • Revenues = Costs • Costs Increasing • “AA” Credit Rating • Temporarily reduced rates • Used cash to fund deficit • Negative operating and net margins • Rate case • Restored proceeding former rates • Cash remains stable • Used cash to • Used cash to fund deficit fund deficit • Debt Service Coverage falls from 4X to 2.1X • Test year for rate increase Inflation 18 5 year Revenue Review Covid Covid Subsides 2019 2020 2021 • Revenue shortfalls continue 2022 2023 2024 The Story Unfolds… 2021 • Covid subsides Regulatory Lag • Winter Storm URI 5% base rate increase March 2023 • Inflation starts to set in • FY2021 becomes test year City Council approves new rates Additional 2% base rate increase • Restored former rates • Used cash to fund deficit • Test year for rate increase • Used cash to fund the deficit • Rate case • Cash remains stable due to approximately proceeding • Used cash to fund deficit • Negative operating and net margins $100M PSA over-recovery Inflation • Debt Service Coverage falls below target to 1.9X 19 • Revenues = Costs • Costs Increasing • “AA” Credit Rating • Temporarily reduced rates • Used cash to fund deficit The Story Unfolds… 5 year Revenue Review Covid Covid Subsides Base rate case proceeding 2019 2020 2021 2022 • Revenues = Costs • Costs Increasing • “AA” Credit Rating • Temporarily reduced rates • Used cash to fund deficit • Restored former rates • Used cash to fund deficit • Test year for rate increase • Used cash to fund deficit • Downgraded to “AA-” 2022 • Rate case 5% base rate increase March 2023 Additional • Revenue shortfall continues 2% base rate increase • Used cash to fund the deficit • Inflation (CPI) reaches 9% • 117 days cash on hand & below 2023 150 day minimum 2024 • $100M+ PSA under-recovered • Negative net margins Inflation • Hot summer improves Debt Service Coverage to 2.1 and operating margins breakeven (10% target) • Downgraded to “AA-” 20 The Story Unfolds… Regulatory Lag 5 year Revenue Review Covid Covid Subsides Base rate case proceeding City Council approves new rates 2019 2020 2021 2022 2023 150 day minimum 2024 • Revenues = Costs • Costs Increasing • “AA” Credit Rating • Temporarily reduced rates • Used cash to fund deficit • Restored former rates • Used cash to fund deficit • Test year for rate increase • Used cash to fund deficit • Downgraded to “AA-” 5% base rate increase March 2023 2023 • $30M/5% base rate increase approved Dec. 2022 effective March 2023 • Regulatory Lag – 17 months from Test Year end to effective date for new rates • Partial year with new rates as revenue shortfall persists • Used cash to fund the deficit • 94 days cash on hand, below Additional 2% base rate increase • Negative net margins with over $140M in combined losses from 2020 to 2023 • Operating margins improve but below target – Debt Service Coverage moves to 2.3X • Inflation and supply chain impediments drive pole, transformer, conductor costs from 2X to 3X of FY2021 cost 21 The Story Unfolds… Regulatory Lag 5 year Revenue Review Covid Covid Subsides Base rate case proceeding City Council approves new rates Additional 2% base rate increase 2019 2020 2021 2022 2023 2024 • Revenues = Costs • Costs Increasing • “AA” Credit Rating • Temporarily reduced rates • Used cash to fund deficit • Restored former rates • Used cash to fund deficit • Test year for rate increase • Used cash to fund deficit • Downgraded to “AA-” 5% base rate increase March 2023 Inflation • Additional revenues start to improve KPIs including Day Cash on Hand (DCOH) • DCOH below minimum & industry 22 Inflation’s Impact Rising Costs Pressure Cashflow 200% 180% 160% 140% 120% 100% 80% 60% 40% 20% 0% 2021 2022 2023 2024 Pad Mounted Transformer Single Phase Pole URD residential conductor Consumer Price Index (CPI) Note: CPI rate of increase for 2024 is assumed to be the same as 2023 23 What Are We Going To Do About It? 1. Revenue • Recommend annual incremental base rate increases balanced against affordability • File interim Transmission Cost of Service in FY2025 • Adjust fees and contribution in aid of construction (CIAC) to ensure cost recovery • Collect power supply under-recovery 2. Cost Control • Strict cost controls: budget to forecast targets • Manage mandates/initiatives to funding levels • Work to moderate General Fund Transfer (GFT) in short run to attain the minimum of 150 days cash on hand (DCOH) and push towards 200+ DCOH industry standard 3. Financing Structure Manage debt/equity financing to maximize cash to meet and exceed 150 DCOH 24 Austin Energy Fiscal Year 2025 Forecast and Budget Planning Forecast Inputs, Assumptions and Process 25 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 adjusts to ensure compliance Organizational Budgets Revised Forecast 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 Budget Submission 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 26 FY 2025 Forecast Source Documents • Preliminary FY2025 Load Forecast • Adopted City of Austin Fees and Tariffs • Power Supply Cost Forecast (ERCOT Market Forecast) • City of Austin Forecasting Assumptions • Amended Budget (Current Year Estimate) • Austin Energy Forecasting Assumptions • Adopted 5-Year Capital Improvement Plan (CIP) Forecast (with revisions) • Approved Public Utility Commission of Texas Transmission (PUCT) Rates (what we charge) • Existing Debt Schedules (Bonds and CP) • Approved PUCT Postage Stamp Rate (what we pay) • Approved Program Changes • Historical Financial Trends • District Cooling Customer Growth and Consumption • Joint Projects Forecast (Fayette and South Texas) • Existing Contractual Obligations • Credit Rating Agency Metrics • Adopted City of Austin Financial Policies 27 Austin Energy Forecast Assumptions REVENUE • 2% annual base revenue increase in FY 2025-2027 and FY2029 with a 7% increase in FY2028. EXPENSE • Labor Escalation Factor is 4% for FY2025 and 3.5% per year for FY2026-2029 • 2% customer growth and 1.6% increase in energy • Inflation is forecast at 2.2% for FY2025, 2.1% for sales (compound annual growth rate for the forecast period) FY2026, 2.0% for FY2027/2028 and 1.9% for FY2029 on non-labor costs (Congressional Budget Office) • PSA, Regulatory and Community Benefit Charges • O&M projects: Veg management / Altec Vehicle Lease are set to equal cost ($10M/$5M) • Interest income rate 5.5% for FY2025 • Cost of debt: 5.5% for non-taxable • Transmission matrix revenue increases $13M per year starting mid-year FY2025 • General Fund Transfer (GFT) rate is 11.6% in FY2025 and capped at 2% growth in the following years • $15M in FEMA reimbursement in FY2025 for Winter Storm Mara • Five-year Capital Plan based on approved FY2024 budget, with 10% increase applied to FY2026-FY2029 • Customer Assistance Program increases to 80,000 • Capital plan is funded with approximately 50% cash, customers by FY2025 for 5-year forecast period 28 City-Wide Forecast Assumptions Labor and Benefits • Cost of living increase – 4% • Insurance increase – 10% Direct Expenses City Allocations Fleet Maintenance – 5% • Administrative Support – 5% • Communications and Technology Management (CTM) – 5% • Combined Transportation, Emergency & Communications Center (CTECC) and Wireless – 5% • Accrued Payroll – 5% 29 Austin Energy’s Forecasting Process 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 Load Forecast Economics • Woods & Poole • Perryman SAE ITRON Model Residential & Commercial SAE Modeling DSM & Solar PV Goals Data by CES-Austin Energy Weather Historical & 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 Revenue Forecast Financial Forecast Forecasted Energy Sales & Customer Count by Sector Amended Budget Historical Profile by Rate Class Forecasting Assumptions Green Choice Forecast Tariff Billing Determinants Revenue by Rate Class Historical Financials Forecasted Revenue CIP Plan and O&M Updates Power Supply Cost Debt Schedule Fund Summary Key Metrics Affordability Energy Market Operations UPLAN PSA Run Result 30 Austin Energy Fiscal Year 2025 Forecast and Budget Planning Forecast Summary 31 Millions of $ Beginning Balance Revenues/Transfers In Requirements: Operating Expenses Power Supply Expenses Debt Service CIP (Cash Transfer) General Fund Transfer Support Transfers AE Reserve Transfers Total Requirements Excess (Deficiency) Ending Balance FTEs Austin Energy Forecast Fund Summary FY2024 Budget FY2025 Forecast FY2026 Forecast FY2027 Forecast FY2028 Forecast FY2029 Forecast $298.4 1,780.9 $298.5 1,847.7 $299.2 1,893.5 $300.3 1,952.7 $301.3 2,051.0 $303.2 2,101.4 781.9 549.7 170.8 80.3 115.0 63.8 19.4 0.1 $298.5 1,924 878.1 514.5 175.7 68.4 124.0 66.2 20.0 .7 $299.2 1,934 893.2 522.6 198.5 60.8 126.0 69.3 22.0 1.1 $300.3 1,944 903.1 533.9 199.7 60.6 129.0 72.4 53.0 1.0 $301.3 1,954 940.7 546.6 210.9 53.1 132.0 75.7 90.0 1.9 $303.2 1,964 $1,780.8 $1,847.0 $1,892.4 $1,951.7 $2,049.1 $2,099.0 973.0 546.2 204.7 73.9 135.0 79.2 87.0 2.4 $305.6 1,974 32 Austin Energy Forecast CIP Summary Millions of $ Budget FY2024 Forecast FY2025 Forecast FY2026 Forecast FY2027 Forecast FY2028 Forecast FY2029 Total 2025-2029 Distribution $106.4 $98.5 $102.7 $102.8 $102.8 $104.9 $511.7 Electric Service Delivery $178.8 $195.7 $213.6 $201.4 $169.5 $172.7 $952.9 Power Production $20.3 $17.3 Distribution Substation Transmission Joint Projects District Cooling General 15.4 57.0 9.6 18.7 35.4 15.8 81.4 12.5 17.7 64.2 18.2 92.7 $9.2 16.2 8.2 1.9 9.8 88.8 $9.8 10.7 1.7 1.3 15.8 50.9 $8.3 13.4 0.0 1.3 16.1 51.7 $8.6 13.7 0.0 1.3 Total $262.8 $307.4 $249.1 $224.9 $192.5 $196.3 $1,170.2 75.7 365.5 $53.2 66.5 27.6 70.0 33 Capital Improvement Plan Major Capital Projects Austin Energy Field Service Center Distribution System Resilience Program Timber Creek (Southeast) Substation: FY 2021 - 2026 FY 2021 - 2029 FY 2022 - 2026 Acquire a new service center, warehouse, and laydown yard that will include an approximately 28-acre tract, a 155,000 square foot building with 15,000 square feet of office space, and 8-acres of laydown yard. This program incorporates all facets of overhead distribution system maintenance, upgrade and resilience – including grid hardening against wildfire and extreme weather events – to address overall system reliability. Construct a new substation to provide capacity and to support the growing load in Southeast Austin, including the expansion of Austin-Bergstrom International Airport (AUS). Brackenridge Substation FY 2020 – 2027 This substation originally built in 1975 is nearing the end of its useful life. This much needed rebuild includes three new 70MVA unit transformers and a 138kV Gas-Insulated Switchgear (GIS) due to the limited space. 34 Forecasted Key Financial Metrics Summary Minimum or Target Projected FY2024 Forecast FY2025 Forecast FY2026 Forecast FY2027 Forecast FY2028 Forecast FY2029 Operating Margin Net Income (Millions of $) Quick Ratio 10% > $0 > 1.5 11% 13% 14% 15% $19.8 $49.0 $82.0 $94.9 2.5 2.4 2.3 2.2 Days Cash on Hand 150 Days 126 Days 132 Days 134 Days 139 Days 152 Days 165 Days Debt Service Coverage > 2.0 Debt to Capital < 50% 2.1 56% 2.3 55% 2.4 53% 2.5 52% 11% $34.2 2.6 2.3 56% 10% $8.1 2.5 2.3 55% 35 $140 $130 $120 $110 $100 $90 $80 Austin Energy Billing Impacts Typical and CAP Bill Impacts (860 kWh) $119.26 $120.45 $121.57 $122.73 $126.80 $128.05 $92.86 $93.03 $93.77 $94.54 $97.22 $98.04 FY24 FY25 FY26 FY27 FY28 FY29 Typical Residential Customer CAP Customer 36 130% 120% 110% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% -10% Austin Energy System Average Rate History Consumer Price Index-Urban Electricity (CPI-U E), Austin Energy System Average Rate History and 2% Growth Rate CPI-U E 2% Growth Rate Austin Energy System Average Rate History 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 CPI-U Electricity Average (1995-2023=2.62%) 2% System Rate Increase Change in System Rate 37 FY 2025 Forecast Summary Challenges and Opportunities • Additional base rate increases required to • Inflation drives costs inordinately higher • Increasing energy sales rely solely on Plan to meet customer growth • Increasing debt service due to expanded CIP meet costs customer growth • Approved base rate increase stabilizes Austin • Weather normalized average consumption Energy’s financial position continues to decline • Residential consumption remains relatively flat • Commercial energy consumption on a per square foot basis is declining • Improving cash position due to base rate increases and PSA administrative adjustments • Forecasted rates remain within the 2% affordability metric 38 ©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.