1 STAFF REPORT
DAT
E: April 25, 2023
TO: Justin Hess, City Manager
FROM: Dawn Roth Lindell, General Manager, Burbank Water and Power VIA: Stela Kalomian, acting Chief Financial Officer
BY: Evilia Waloejo, Financial Planning and Risk Manager SUBJECT: Approval of Burbank Water and Power’s 2023 Financial Reserves Policy
RECOMMENDATION
Approve the 2023 Burbank Water and Power Financial Reserves Policy (FRP) and approve the minimum financial reserve of 105 days cash on hand (DCOH), a recommended range between 160 and 240 DCOH for the electric fund, and the minimum financial reserve of 120 DCOH and recommended range between 200 and 300 DCOH for the water fund.
BACKGROUND
The Burbank City Council approved the initial FRP in 2003 and subsequent updates in 2008, 2012, and 2017. The 2023 FRP was developed by BWP staff and BWP’s financial advisor, Public Financial Management (PFM).
A
financial reserve policy is one important tool BWP uses to mitigate risk while promoting long- term fiscal, operational and rate stability. As risks and the environment that BWP operates in evolve, the FRP needs to be updated to address those changes. Some of the significant changes the electric fund has faced recently included revenue shortfalls during the Covid-19 Pandemic, increased renewable mandates, coal supply issues , electrification, volatility in energy prices, supply chain issues , and aging infrastructure; and some of the changes the water fund has faced include d sales volatility driven by a prolonged drought, recycled water supply interruptions, Metropolitan Water District ( MWD) rate increases , and an increased reliance on the Burbank Operable Unit for supply.
In
recent history, BWP used its financial reserves to mitigate the aforementioned risks, phase in the electric and water rate increases, make strategic water purchases, reduce interest costs by paying off debt early, and pay for unplanned critical repairs to the utility’s plants.
Th
e FRP minimum financial reserve recommendation represents what is needed in the short - term to operate the utility. Short -term should cover the time necessary for the City Council to make and implement the necessary arrangements to address risk events. Operating at the minimum financial reserve level for a sustained period would almost certainly result in a credit rating downgrade. A plan to restore reserves to the recommended range is prudent financial
WATER AND
POWER
2 management. The FRP recommended range is the target the utility should plan and forecast to maintain. It considers the risks the utility faces , utility rates, rating agency guidance, peer positioning, and market conditions.
The minimum and recommended reserve levels in the 2017 FRP were stated in fixed dollar amounts. The minimum reserve for the electric fund was $42.8 million and the recommended reserve was $73 million. The minimum reserve for the wa ter fund was $9.4 million and the recommended reserve was $17.8 million.
Days Cash on Hand (DCOH)
The metric used in the 2023 FRP is DCOH. All cash reserve recommendations are given in a number of DCOH , which is an estimate of the number of days under normal operations that BWP can cover with its existing cash. Rating agencies view DCOH as an important evaluating metric when preparing a credit rating; and DCOH is easily calculable for any publicly audited entity, including BWP’s peer utilities, from audited financial statements.
DCOH is calculated by taking the sum of unrestricted cash and investments and dividing it by the average operating expenses for one day. Average operating expenses are calculated by dividing the annual operating expenses, without depreciation, by 365.
DISCUSSION
The 2023 FRP tries to balance the need for BWP to have competitive rates, reliable and safe services, access to financing, and prudent and reasonable financial reserves. The FRP includes an executive summary and detailed sections for both the electric and water funds that outline the methodology and reasoning used to develop the financial reserve recommendations, including the types of risks BWP faces, other tools BWP has at its disposal to mitigate risks , such as budgetary responses and temporary funding, how minimum and recommended reserves impact rating agencies evaluations, and comparative DCOH data and credit ratings for peer utili ties. The proposed recommended reserve levels are projected to maintain current credit ratings and provide adequate financial reserves to mitigate risks.
Maintaining a strong credit rating is essential to ensure access to low-cost capital markets when needed.
Electric Fund
Historically, the electric fund has maintained an AA- credit rating from Standard & Poor’s Global Ratings and an Aa3 credit rating from Moody’s Investor Service with lower cash reserve levels than its neighbors and peers. This is a very strong rating from both agencies. It is primarily attributable to Burbank’s diverse power resources, competitive rates, the City Council’s historical support for rate increases, robust service area economy, its diverse fuel supply, and having an energy cost adjustment charge (ECAC) rate adjustment in place.
Water Fund
The water fund has historically maintained an AAA credit rating from Standard & Poor’s Global Ratings and an Aaa credit rating from Fitch Ratings with lower cash reserve levels than its neighbors and peers . This is the highest credit rating from both agencies . It is primarily attributable to Burbank’s robust historical financial performance, competitive rates, the City Council’s historical support for rate increases, its well-established customer base, and its local production resources.
3 ENVIRONMENTAL REVIEW
This activity has no potential for resulting in either a direct physical change in the environment, or a reasonably foreseeable indirect physical change in the environment, and as such, is not a “project” subject to t he requirements of the California Environmental Quality Act (CEQA) 14 Cal. Code Regs § 15378.
FISCAL IMPACT
There is no anticipated fiscal impact on the electric fund or the water fund as it relates to the proposed changes in BWP’s financial reserves in fiscal year (FY) 2023-24.
CONCLUSION
The updated FRP is designed to set minimum and recommended reserve levels as prudent financial management to mitigate a wide range of risks that BWP faces as an electric and water utility and to align with the City’s adopted financial policies. The minimum reserve level is intended to provide cash reserves necessary for operations. The recommended range is a level of reserve that BWP should seek to achieve and maintain to balance rates, rating agency guidance, and market expectations in addition to risk mitigation tool. Staff therefore requests that the Burbank City Council approve the Burbank Water and Power Financial Reserves Policy and approve the minimum financial reserves of 105 DCOH and a recommended range between 160 and 240 DCOH for the electric fund and the minimum financial reserves of 120 DCOH and a recommended range between 200 and 300 DCOH for the water fund.
ATTACHMENTS
Attachment 1 – Burbank Water and Power Financial Reserves Policy