Background and History of Ava’s Reserve Policy
2 June 10, 2018, the Board of Directors (BOD) approved by resolution (R-2018-26) a financial reserve policy (P-2018-10) to allow Ava to contribute surplus revenues to reserves. ▪ This policy consisted of a waterfall allocation to four separate funds • General Operating/Credit Reserve
• Rate Credit Reserve
• Collateral Reserve
• Local Development Reserve
Negotiations with Ava’s credit facility, restructuring Local Development as a separate fund, and in preparation for a credit rating review, the BOD approved by resolution (R-2021-2) to update the financial reserve policy on January 20, 2021
▪ This update consolidated the remaining reserves into a single reserve fund and discussions also led to creation of a Local Development Fund that was used to accumulate and track budget allocations to Local Development activities
• Target funding percentage was set to 50% of operating expenses for the fiscal year, with a range set to a minimum of 25% and a maximum of 75%
Survey of Comparable Best Practices
In considering the relevance of Ava’s reserve policy, staff has completed a broad survey of 23 public agencies to discover comparable best practices for reserve fund policy and management The goals of the survey were as follows:
• Test for generally accepted targets and ranges, if applicable, for reserve fund levels
• Discover best approaches on funding reserve funds
• Discover best practices for use discretion
3 Agencies Surveyed
• AC Transit
• Alameda Municipal Power
• Ava Community Energy
• Central Coast Community Energy
• City of Burbank Water & Power
• Clean Energy Alliance
• Clean Power Alliance
• Clean Power SF
• Desert Community Energy
• EBMUD
• LADWP
• MCE
• Orange County Power Authority
• Peninsula Clean Energy
• Pico Rivera IME
• Pioneer Community Energy
• Redwood Coast Energy Authority
• SMUD
• San Diego Community Power
• Silicon Valley Clean Energy
• Sonoma Clean Power
• South Placer MUD
• Valley Clean Energy
Results of Survey of Comparable Best Practices
Statistics of Respondents:
• 22 (96%) have a target reserve that averages at 48% (stdev = 17%) of annual operating expenses (OpEx) or gross revenues ▪ One (4%) respondent had no target identified, but did have min and max range tied to gross revenues ▪ Two respondents had reserve targets dependent upon gross revenues, the rest were operating expenses ▪ One respondent had a fixed dollar amount not seemingly dependent upon financial aspect ▪ Ava has a target of 50% of annual OpEx
• 12 (52%) have a minimum reserve target averaging 29% (stdev = 10%) of OpEx, one of which was tied to gross revenues. ▪ 11 (48%) had no mention of minimum reserve targets
▪ Ava has a minimum target of 25% of OpEx
• 10 (43%) have a maximum reserve target averaging 73% (stdev = 27%) of OpEx, one of which was tied to gross revenues. ▪ 13 (57%) had no mention of maximum reserve targets
▪ Ava has a maximum target of 75% of OpEx
More than half (15) funded reserves from net revenues, 2 funded from gross revenues, and the rest (6) did not specify funding mechanism. Ava funds its reserves from net revenues.
10 allow CEO discretion for use of reserves, 8 require board approval, and 5 do not specify. Ava currently requires BOD approval for use of reserves.
4 Current Reserve Fund Levels & Upcoming Needs
• Currently, Ava has $330,873,400 allocated to reserves which covers approximately 40% of current fiscal year’s operating expenses.
• Stockton and Lathrop are only active in the last quarter of this current fiscal year • Next fiscal year (FY 2025-2026) will be a full operating year with Stockton and Lathrop • San Juaquin County will only be active in the last quarter of FY 2025-2026 • The following fiscal year (FY 2026-2027) will be the first year with full participation of all new communities
• Keeping to the reserve policy, Ava will expect to require a material increase to the 50% target • Staff is intending to present a reserve funding plan with the upcoming budget development session this year
5 Contribution Year Contribution Withdraws Balance Operating Expenses* PctCoverage 2018-2019 40,513,687 - 40,513,687 410,686,000 9.9%
2019-2020 49,704,640 - 90,218,327 383,045,000 23.6%
2020-2021 - - 90,218,327 471,897,000 19.1%
2021-2022 65,655,073 - 155,873,400 562,667,000 27.7%
2022-2023 75,000,000 - 230,873,400 732,885,000 31.5%
2023-2024 100,000,000 - 330,873,400 826,473,000 40.0%
2024-2025** 65,668,500 - 396,541,900 1,076,267,000 36.8% *Operating Expenses are fiscal year ahead for coverage purposes **Proposed contribution with projected operating expenses to cover for FY 25-26 as of 1/28/2025 Reserve Policy Funding Plan
Ava min/max/target reserve levels are in line with the averages of surveyed agencies. The min/max ranges are intended to allow flexibility to build reserves over time, swing with any market volatility that would impact the annual operating expenses levels, and provide guidelines for potential future utilization.
Staff recommends maintaining the current min/max/target levels and consider adjustments in the future as Ava
approaches its target level.
With expansion to San Joaquin County current forecasted annual operating expenditures for a full year are estimated at approximately $1.2 billion, which translates to a 50% reserve target of $600 million. From the previous slide, current reserves are at $330 million and anticipates approaching $400MM af the end of FY 2025.
Staff is developing a funding plan to meet target levels in 5 to 10 years.
6 Reserve Funding Options:
• Prioritize with full net revenues until
50% target met
▪ Estimated time: 3 – 6 years
▪ Pros: Low risk to value proposition to meet
target. Clear to public.
▪ Cons: Limits surplus options.
• Five years to target
▪ Allocate ~$54 million per year
▪ Pros: Clear to public. Clear budget line
item. Retains flexibility with surplus
options.
▪ Cons: Risk to value proposition to meet
target in lean years.
• Ten years to target
▪ Allocate ~$27 million per year
▪ Pros & Cons are same as 5 years but with
reduced risk to value proposition
Purpose & Utilization of Ava’s Reserve Policy
7 Although not explicit in the policy, the operating intent of the reserve fund is to provide resources in cases of extreme need, such as local natural catastrophes (earthquakes, tsunamis, fires, etc…) or significant energy market events that lead to price volatility and financial risk to Ava. Examples include but are not limited to climate event driven extreme supply shortages or demand spikes, market manipulation (ala 2000-2001), global pandemics, geopolitical economic events, etc. In consideration of power resource ownership, such reserves will also be maintained for unplanned outages and other unplanned investments/costs.
Ava’s reserve policy was established to hold a suitable cash balance to meet targeted levels of operating expenses with the objectives of:
• Maintain long-term financial independence and rate stability • Secure favorable commercial terms with vendors and power providers • Support the maintenance of a credit rating
• Provide liquidity for unanticipated expenditures
• Meet Ava’s strategic objectives, and
• Have cash available for other operational needs as approved by the Board Rate Stabilization Fund Policy Considerations
Ava has a GASB 62 Revenue Deferral Fund in which budget surplus allocations have been made. This fund has primarily been maintained to allow matching of timing for on-bill credits, the solar & storage incentive program, and a one-time allocation towards long-term renewable energy & clean energy storage investments.
Staff is evaluating a more formalized Rate Stabilization Fund Policy in order to lay out a funding plan and intended utilization for review with the board.
The policy recommendation will include disbursements for specific programmatic purpose and in order to maintain stable rate discounts in response to cyclical and short-term market volatility, anticipated 1-2 times each decade.
8 Waterfall of Liquidity Resources
1. Working Capital
2. Rate Stabilization Fund
3. Credit Facility
4. Reserve Fund
Conclusion & Next Steps
• Ava's Reserve Policy is in line with industry norms for similar agency operations • Staff is seeking feedback from the board on funding plan duration • Staff will present an information item to the full board on March 19, 2025 • Staff will provide a formal recommendation on a Reserve Policy funding plan for board action in May 2025
• Staff will bring forward a draft Rate Stabilization Fund Policy for consideration in the coming months
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