EBCE Draft Budget Presentation 1
April 29, 2022
EBCE DRAFT BUDGET MEMO
FISCAL YEAR JULY 1, 2022 – JUNE 30, 2023
FY 2022/23 DRAFT BUDGET AND PREVIOUSLY APPROVED ANNUAL BUDGETS FY 2022-23 FY 2021-22 FY 2020-21 FY 2019-20
DRAFT BUDGET BUDGET BUDGET BUDGET
OPERATIONS
REVENUE & OTHER SOURCES
GASB 62 Unrecognized Revenue Balance 15,814,000 15,814,000 12,680,000 0 Operating Revenue
Electricity Sales 808,495,000 508,636,000 401,405,000 487,014,000 Uncollectables (10,350,000) (8,939,000) (9,902,000) (2,447,000) Other Operations Revenue 0 0 0 0
Total Operating Revenue 798,145,000 499,697,000 391,503,000 484,567,000
EXPENSES & OTHER USES
Energy Operating Expenses
Cost of Energy 521,668,000 442,338,000 358,078,000 386,904,000 Energy Operating Services 11,261,000 12,240,000 11,146,000 9,664,000 Total Energy Operating Expenses 532,929,000 454,578,000 369,224,000 396,568,000 Overhead Operating Expenses
Personnel 16,712,000 10,171,000 7,429,000 6,703,000
Marketing & Communications 1,476,000 1,686,000 1,544,000 2,263,000 Legal, Policy, & Regulatory Affairs 1,752,000 1,592,000 1,297,000 1,586,000 Other Professional Services 936,000 850,000 1,345,000 1,214,000 General & Administrative 3,256,000 2,961,000 2,146,000 2,290,000 Depreciation 180,000 60,000 60,000 61,000
Total Overhead Operating Expenses 24,312,000 17,320,000 13,821,000 14,117,000 Total Operating Expenses 557,241,000 471,898,000 383,045,000 410,685,000
NON-OPERATIONS
Total Non-Operating Revenue 229,000 1,692,000 1,506,000 578,000
NON-OPERATING EXPENSES
Borrowing Interest 1,440,000 898,000 804,000 1,229,000
Local Development Funding 22,000,000 8,475,000 6,340,000 6,275,000 Capital Expenditures 6,000,000 5,500,000 0 0
Total Non-Operating Expenses 29,440,000 14,873,000 7,144,000 7,504,000 NET NON-OPERATING POSITION (29,211,000) (13,181,000) (5,638,000) (6,926,000) TOTAL REVENUES 798,374,000 501,389,000 393,009,000 485,145,000 TOTAL EXPENSES 586,681,000 486,771,000 390,189,000 418,189,000 NET INCREASE(DECREASE) IN POSITION 211,693,000 14,618,000 2,820,000 66,956,000
RESERVE BALANCE
Beginning Reserve Balance TBD 90,218,000 90,218,000 40,514,000 FY Contribution TBD TBD 0 49,704,000
Reserve Balance TBD 90,218,000 90,218,000 90,218,000
Percent of Expenses 18.5% 23.1% 21.6%
# Minimum Target (25%) 146,670,000 121,693,000 97,547,000 104,547,000 # Operating Target (50%) 293,341,000 243,386,000 195,095,000 209,095,000 # Maximum Target (75%) 440,011,000 365,078,000 292,642,000 313,642,000 EBCE Draft Budget Presentation 2
April 29, 2022
EXECUTIVE SUMMARY
The base case budget for Fiscal Year July 1, 2022 to June 30, 2023 is forecasted to reflect very strong financial performance. This is primarily driven by a rising energy cost environment. In a rising cost environment, PG&E rates generally increase and PCIA decreases, creating more operating headroom for EBCE given that we index our rates to PG&E. There is an additional effect from calendar year 2021 that also compounds this effect, because actual energy prices significantly exceeded forecasted levels. The effect is that while calendar year 2021 resulted in a net loss, there is a favorable PCIA adjustment that further reduces calendar year 2022 PCIA levels, which further strengthens calendar 2022 operating headroom. Because of our mid-year fiscal cycle our annual financials are able to offset some of this year-to-year volatility.
Calendar 2022 financials will perform very strongly to offset calendar 2021 losses based on the current rates and PCIA levels that are in place. The high energy cost environment is currently forecasted to persist in calendar year 2023. Energy cost increases are driven by a combination of drought conditions, a significant increase in natural gas prices, more extreme weather patterns driving increased loads in CAISO, supply chain disruptions, and retirements of dispatchable generation. Because 2022 and 2023 hedges were executed in a softer energy price environment, this results in very strong financial performance for FY 22-23. However, the calendar 2023 rates and PCIA are subject to significant volatility as we’ve seen energy prices increase over 80% on average between 2020 and 2022. One of the risks that we will need to manage is that as we put on higher priced energy hedges in the current environment, if prices soften in 2023 and onwards, we may face tight operating headroom, similar to calendar year 2021. While we strive to lower energy costs as a whole for our customers, this is a financial risk.
With this as background, the current financial outlook is very strong for FY 22-23 which will require significant discussion on what reserve levels to target, how to adjust the customer value proposition, what level of renewables to procure, and how to invest further in local programs.
Staff is proposing allocating budget to all of these areas in a fiscally prudent manner, which would include:
1) An increase to the customer value proposition in the form of a customer rebate at the end of the fiscal year. This would allow for certainty on how our financial performance is realized in light of energy price volatility/uncertainty. 2) A significant contribution to the operating reserve of $100-150MM that would allow EBCE to approach the target level of 50% of operating expenses. 3) An increase in renewable energy procurement – but to primarily do so by reserving funds towards long-term procurement, which invests in incremental resources rather than just short-term procurement of existing resources. This would be done in conjunction with our current evaluation of an active renewables and storage RFO that is in process.
4) An increase in local development budget by ~$13MM for the fiscal year and to establish a separate local development capital investment fund that can provide debt, equity, or performance guarantees towards establishing long-term programs.
EBCE Draft Budget Presentation 3
April 29, 2022
BASE CASE ASSUMPTIONS
Revenues
• Assumes current rates and PCIA are unchanged through 2022 • Rates and PCIA for 2023 are set to non-stressed, or forecasted energy rates as of 4/1/22 • 1.5% uncollectable rate for remainder of 2022 then 1.0% in 2023 • No recognition of GASB 62 revenue ($15,814,000)
• Non-operating revenue Assumes 0.25% interest earned in cash balances in accounts Energy Costs
• Consists of all costs related to serving load including hedges, open position, CAISO management, capacity, carbon free procurement, renewable energy, long-term PPA’s, and other additional attributes
• Significant increase in costs is due primarily to rising energy rates and premiums on attributes Energy Service Costs
• Data Management fees are lower due to negotiation of new contract with provider Overhead Costs
• No significant change most overhead functional areas
• Increase in Depreciation is due to expected residence in the new building in January, 2023 • Increase in personnel due to hiring of eighteen additional positions in local programs, marketing, technology, and backfilling two existing positions, as well as COLA, retention incentives, and other increases and adjustments.
Non-Operating Costs
• Borrowing interest increased due to expected upsizing of credit facility cost with commitment fee
• $6M for capital expenditures is for necessary operating improvements on the new building • Program funding increased 42% to $12M
Reserve Funds
• In the current year, EBCE is operating with about 18.6% of projected operating expenses held in reserves
• In FY 2020-21, EBCE did not contribute to operating reserves. Staff is expecting net position will be available this year for contribution to reserves, the exact amount is TBD at this time • To reach the Board approved operating target for next year, an additional $198M is required • To reach the Board approved minimum target for next year, an additional $54M is required EBCE Draft Budget Presentation 4
April 29, 2022
RISKS DISCUSSION
EBCE is exposed to a variety of risks in this coming fiscal year. Below is a representative list of key risks, though it is not comprehensive in reflecting all risks.
Energy Market Risk:
• EBCE currently has approximately 30-35% of its energy portfolio with some exposure to the market. Short term energy prices can see volatility of 10-20% on a regular basis based on typical supply/demand dynamics that are heavily influenced by weather and electricity infrastructure.
With volatility we estimate that energy costs could increase reasonably as much as $50-65MM, though this could also result in a similar reduction in energy costs. We are in a rising cost environment with increased volatility relative to historical periods. Energy prices in 2022 and 2023 are forecasted to be approximately 80% above the historical avg over since 2010. • PCIA and rate impacts from energy market volatility are also necessary to consider. The PCIA actually serves as a form of risk mitigation based on the portfolio of resources under PG&E. An increase in energy market prices is partially offset by a decrease in PCIA the following calendar year. A decrease in prices would conversely result in an increase in PCIA which could materially reduce revenues in 2023 as EBCE experienced in the 2021 calendar year. Should prices revert to historical averages, net revenues are expected to be significantly reduced in 2023 resulting in net negative position in 2023, as show in the following table.
Q1 Q2 Q3 Q4 FY 2022-23
Jul-Sep Oct-Dec Jan-Mar Apr-Jun BUDGET
OPERATIONS
REVENUE & OTHER SOURCES
Total Operating Revenue 246,823,000 201,010,000 103,908,000 97,632,000 649,373,000
EXPENSES & OTHER USES
Total Energy Operating Expenses 139,082,000 119,457,000 113,416,000 95,498,000 467,453,000 Total Overhead Operating Expenses 6,048,000 6,048,000 6,108,000 6,108,000 24,312,000 Total Operating Expenses 145,130,000 125,505,000 119,524,000 101,606,000 491,765,000
NON-OPERATIONS
Total Non-Operating Revenue 26,000 28,000 45,000 45,000 144,000 Total Non-Operating Expenses 8,860,000 8,860,000 5,860,000 5,860,000 29,440,000 NET NON-OPERATING POSITION (8,834,000) (8,832,000) (5,815,000) (5,815,000) (29,296,000) TOTAL REVENUES 246,849,000 201,038,000 103,953,000 97,677,000 649,517,000 TOTAL EXPENSES 153,990,000 134,365,000 125,384,000 107,466,000 521,205,000 NET INCREASE(DECREASE) IN POSITION 92,859,000 66,673,000 (21,431,000) (9,789,000) 128,312,000 EBCE Draft Budget Presentation 5
April 29, 2022
Uncollectables/Write-offs:
• EBCE increased expected exposure to uncollectable accounts from 0.5% to 2.5% of revenue for the COVID crisis in the 2020-2021 fiscal year. During the current fiscal year, staff has reduced the expected exposure to 2.0% in the first half of the 2022 calendar year. Staff is expecting this risk to reduce in the coming year. However, it will not dissipate entirely. EBCE is reducing the uncollectable estimation from 2.0% to 1.5% for the first half of the fiscal year, then to 1.0% for the second half. These estimates are at the higher end of the range compared to other CCAs based on our regional income demographics. To mitigate this risk, we are pursuing an increase in CARE/FERA enrollments, Arrearage Management Plan (AMP) enrollments, other community programs efforts, such as DAC-GT and community solar, and other forms of debt relief that are currently under analysis. Staff is monitoring true uncollectable rates closely, upon which these recommendations are based.
• As of April 1, EBCE has received about 81% of eligible CAPP money. The remaining amount is expected to be delivered before the end of the fiscal year.
Opt-out risk:
• Customer opt-outs are generally an ongoing risk to EBCE. However, we do not anticipate an increased risk of opt-outs for the fiscal year for established communities under normal conditions. There is currently no active discussion of DA expansion that would take effect in 2023, beyond what has already been in process.
• Change of product decisions may increase opt-outs, but this is difficult to estimate at this time based on the discussions among cities to opt up customers to Renewable 100.
SURPLUS OPTIONS
Given the potentially large net position in this next fiscal year, and after understanding the risks, it is important to discuss the various ways in which the surplus can be put to work. Some of the key areas of focus are:
• Reserve Contribution: EBCE has recently received an A-Stable credit rating from S&P. This rating is premised upon establishing strong reserves in the near term. Contributing to reserves should be considered in conjunction with other options presented. • Increasing Renewable Content: Clean energy is part of EBCE’s mandate. EBCE can procure more renewable energy to reach targets quicker.
• Increasing the Value Proposition for Customers: EBCE tightened the value proposition when the PCIA was high and reducing revenues, and COVID was expected to incur more uncollectables.
EBCE can increase the Value Proposition and provide methods to lower consumer costs. • Increase funding to Local Development: The current draft budget already has a historically large contribution to the Local Development Fund. Increasing funding has its trade-offs which are discussed.
RENEWABLE CONTENT DISCUSSION
Providing clean energy is part of EBCE’s mandate. Currently about 21% of EBCE’s customer load is on the Renewable 100 (R100) product which is comprised of 100% renewable energy content. The remaining 79% of load is on the Bright Choice (BC) product. The renewable content for total BC is planned at 45% EBCE Draft Budget Presentation 6
April 29, 2022
for the 2022 calendar year and 49% for 2023. To increase both these values by 1% costs approximately $635,000 in renewable content purchases.
VALUE PROPOSITION DISCUSSION
Providing a value proposition to customers with rates less than PG&E is another part of EBCE’s mandate. EBCE tightened this value proposition to a 1% discount to PG&E from a 1.5% discount in fiscal year 2020-2021 to keep a positive net position for the year as PCIA rates were at all time highs. With the lowering of PCIA in 2022 and expected moderate increase in PCIA in 2023, it may be prudent to increase the value proposition. The large net position for the year provides the opportunity to give back to the community. Staff is currently working on a number of possible options revolving around a combination of increasing the value proposition now to recognize projections and bill credits later to recognize the results as they occur.
LOCAL DEVELOPMENT DISCUSSION
Local Development was established as a fund separate from the general operating fund by the Board in the 2019-2020 fiscal year. Programs are currently expected to carry a balance forward this year of approximately $13.8M. Additional funding for next fiscal year is increased from the current year by 42% to $12M. Carry-over funds from previous years are required for established programs and are ear-marked for specific purposes but have not yet had costs actualized. These costs may occur in this coming fiscal year and should not be seen as above budget spending, but as pre-approved carry-over spending. The total approved spending requested is the total beginning balance plus transfers from the operating fund.
FY 2022-23 FY 2021-22 FY 2020-21 FY 2019-2020
BEGINNING BALANCE 13,821,067 10,067,572 4,870,737 0
REVENUE & OTHER SOURCES
Transfer from Operating Fund 22,000,000 8,475,000 6,340,000 6,275,000 Grants/Credits - - 395,000 -
Total Revenues & Other Sources 22,000,000 8,475,000 6,735,000 6,275,000
EXPENSES & OTHER USES
Actual Program Expenses - 1,221,504 1,538,165 1,404,263 Expected Remaing Expenses 35,821,067 3,500,000 - -
Total Expenses & Other Uses 35,821,067 4,721,504 1,538,165 1,404,263 ENDING BALANCE - 13,821,067 10,067,572 4,870,737