Finance & Risk
Management
Committee
Meeting
March 16, 2023
Welcome
&
Call to
Order
Roll
Call
Items to
be Added,
Withdrawn
or
Reordered
on the
Agenda
Public
Comment
for Items
NOT
on the
Agenda
Regular
Meeting
Agenda
Welcome
Roll Call
Public Comment for items Not on the Agenda
Items to be Added, Withdrawn or Reordered on
the Agenda
REGULAR AGENDA
1. Approval of February 9, 2023 Meeting Minutes
2. Treasurer’s Report for Period Ending 1/31/23
3. Presentation of the Proposed Framework of the SDCP
Investment Policy
4. Presentation of the Proposed Framework of the SDCP Debt Policy
Committee Member Announcements
Adjournment
7 Item 1
Approval of February 9, 2023 Meeting Minutes
Recommendation: Approve February 9, 2023
Meeting Minutes
Presenter:
Kimberly Isley
Clerk of the Board
8 Item 2
Treasurer’s Report for Period Ending 01/31/23
Recommendation: Receive and File Treasurer’s
Report for Period Ending 01/31/23
Presenter:
Dr. Eric Washington,
Chief Financial Officer
9 Results for the period performed well overall
compared to the adopted budget:
• Net operating revenues 7.0 percentage
points over budget.
• Operating expenses came in 6.0
percentage points over budget
Financial results for the YTD FY23:
• $491.13M in net operating revenues
• $476.02M in total expenses (includes
energy costs of $461.97M or 94% of net
revenues)
• $15.12M change in YTD net position
Item 2: Treasurer’s Report
YTD FY23 Budget v. Actual
10 Item 2: Treasurer’s Report
Year-to-date financial results compared to
projections:
• Net operating revenues were in line with
the proforma projections
• Total expenses were 4.82% under the
proforma projections
• Change in net position was $23.02M over
the projected
YTD FY23 Proforma v. Actual
11 Reserves
28%
LOC
15%
Unmet
Reserves
57%
$74M
Total Liquidity
FY 2022-23 YTD
$24M
Outstanding
Debt
FY 2022-23 YTD
$M $20M $40M $60M
$15M
Reserve
Contribution
FY 2022-23 YTD
28%
Percent Reserve
Goal Met
FY 2022-23
Item 2: Treasurer’s Report CONTRIBUTION RESERVES GOAL DEBT Reserve contribution
for the fiscal year
Outstanding loans
FY23 YTD
City Loans
Total available liquidity
FY23 YTD
$15M - Actual
$8M - Budget
$24M
$107M - Goal
LOC
$74M
$171M Reserve
Target FY23
$M $50M $100M
$M $20M $40M $60M $80M
Unrestricted
Cash LOC
12 Item 2: Treasurer’s Report
$75.7M
$85.9M
$54.4M
$61.6M
$73.2M
$56.5M
$73.9M
$0.0M
$20.0M
$40.0M
$60.0M
$80.0M
$100.0M
$120.0M
$140.0M
$160.0M
$180.0M
7/31/20228/31/20229/30/2022
10/31/202211/30/202212/31/2022
1/31/2023
Year-to-Date Reserves FY 2023
Unrestricted Cash Lines of Credit Reserve Goal Total Reserves RESERVE GOAL: $171.3M
13 14
Item 2
Recommendation: Receive and File Treasurer’s
Report for Period Ending 1/31/23
15 Item 3
Presentation of the Proposed Framework of the
SDCP Investment Policy
Recommendation: Receive and file presentation on
the proposed framework of the SDCP Investment
Policy.
Presenter:
Dr. Eric Washington,
Chief Financial Officer
Financial Stability
Practice fiscal strategies to
promote long-term organizational
sustainability
17 GOALS
Adopt financial controls and policies to meet or
exceed best practices and manage risk.
Obtain an investment grade credit rating by Nov
2025.
Adopt plan to increase reserves to $175M by
10/2023 (90 DCOH) and $360M by 10/2025 (180
DCOH).
Develop Rate Stabilization Reserve of $70M to
mitigate power cost fluctuations and economic
downturns.
18 56.6
161.2
309.9
63.9 81.0
0 200
400
600
800
1,000
1,200
1,400
1,600
FY22 FY23 FY24 FY25 FY26
90-Day Threshold
Jun 2023
$M
Operating Budget, $M FY22 FY23 FY24 FY25 FY26
Net Revenue 383.8 929.8 1,284.0 1,067.9 1,107.0
Total Expense 327.2 768.6 974.1 1,004.0 1,026.0
Annual Reserve (Net Income) 56.6 161.2 309.9 63.9 81.0
Reserves (Cumulative Net Surplus) 42.5 203.7 513.6 577.5 658.6 90-Day Expense Target 81.8 192.2 243.5 251.0 256.5
180-Day Expense 163.6 384.3 487.1 502.0 513.0
180-Day Threshold
Oct 2023
January 2023 – Rate Setting
November 2023
Potential Start
Invest-Grade Credit Rating
Projections
$514M to $660M
Cash Reserves
19 Development of Investment Policy
Investment Policy
Peer CCAs
Member
Agencies
Reporting
Financial
Best
Practices
Investment
Objectives
Investment
Types
Prohibited
Investments
Controls
20 Investment Objectives (Safety, Liquidity, Return)
1. Safety
“Ensure the preservation of
principal.”
2. Liquidity
“Remain sufficiently liquid to
meet operating needs.”
3. Return on
Investments
“Portfolio shall be designed
to attain a market rate of
return.”
SDCP will manage investments accordance with “Prudent Investor Standard” pursuant to California Government Code 53600.3
21 Acceptable Investment Types
Deposits at Banks: Non-interest-bearing and Interest-bearing depository accounts or FDIC insured certificates of deposit with maturities not to exceed 5 years. As per Section 53652, banks must collateralize the deposits of public agencies in amount equal to no less than 110% of as currently stated in the value of the deposits. Local Agency Investment Fund (LAIF) : This program offers local agencies the opportunity to participate in a major portfolio, which invests hundreds of millions of dollars, using the investment expertise of the State Treasurer's Office investment staff at no additional cost to the taxpayer. US Treasury Obligations: Debt obligations issued by the United States Government and secured by the full faith and credit (the power to tax and borrow) of the United State. Federal Agency Securities: A low-risk debt obligation that is issued by a U.S. government-sponsored enterprise (GSE) or other federally related entity.
Bankers’ Acceptances: A short-term issuance by a bank that guarantees payment at a later time. Negotiable Certificates of Deposit: CDs with a min. face value of $100K, which can be bought or sold. Placement Service Deposits: Funds may be invested in deposits placed with a private sector entity that assists in the placement of deposits with eligible financial institutions located in the United States (Section 53601.8). Money Market Funds: A type of mutual fund that invests in high-quality, short-term debt instruments, cash, and cash equivalents.
Commercial Paper: An unsecured, short-term debt instrument issued by corporations. 22 Prohibited Investment Types
Pursuant to Section 53601.6, SDCP shall not invest Funds in any security that could result in a zero-interest accrual, or less, if held to maturity. These prohibited investments include, but are not limited to:
ₓ Inverse Floaters
ₓ Range Notes
ₓ Mortgage-derived Interest-only Strips
ₓ Foreign Currency Denominated Securities
ₓ Trading securities for the sole purpose of speculating on the future direction of interest rates.
ₓ Purchasing or selling securities on margin.
23 Internal Controls and Reporting
Control of Collusion
Clear Delegation of Authority to Subordinate Staff Members Delivery-Versus-Payment (DVP)
Safekeeping and Custody
Avoidance of Physical Delivered Bearer Securities
Written Confirmation of Telephone Wire Transfers
Audits
Custodian
Annual Policy Review
Reporting
Monthly
Annually
The Treasurer is responsible for establishing and maintaining an internal control structure designed to ensure that the assets of the entity are protected from loss, theft or misuse. Accordingly, the Treasurer shall establish and maintain internal controls that shall address the following points:
The internal control structure shall be
designed to provide reasonable
assurance that these objectives are met.
The concept of reasonable assurance
recognizes that:
1. The cost of a control should not
exceed the benefits likely to be
derived; and
2. The valuation of costs and benefits
requires estimates and judgments by
management.
24 Item 3
Recommendation: Receive and file presentation on
the proposed framework of the SDCP Investment
Policy.
25 Item 4
Presentation of the Proposed Framework of the
SDCP Debt Policy
Receive and file presentation on the proposed
framework of the SDCP Debt Policy.
Presenter:
Dr. Eric Washington,
Chief Financial Officer
26 FY25 Year-End Projected Reserves
January 2022
$373.9 million
Rate Setting
June 2022
$145.4 million
Budget Adoption
January 2022
(Rate Setting)
December 2022
$88.5 million
December Estimate
180-Day Target
$500.0 million
Strategic Goal
June 2022
(Budget Adopted)
December 2022
(Current)
Largely due to rising energy costs,
SDCP’s reserve projection has
decreased throughout calendar year
2022.
SDCP currently has a 90-day cash on hand reserve target and has a strategic goal to obtain 180-days cash on hand.
January 2023
(Rate Setting)
90-Day Target
$250.0 million
Current Reserve Target
November 2023
(Pursue credit-rating)
Nov 2023
Rating
Begin Exploring Possibility
27 Why Reserves?
180-Day Target
$500.0 million
Strategic Goal
Power
Purchase
Agreements
Rate
Stability
Debt
Issuance
Long-Term
Financial
Health
Programs
Leveraging Funds
90-Day Target
$250.0 million
Current Reserve Target
January 2023
(Rate Setting)
Nov 2023
Rating
Begin Exploring Possibility
November 2023
(Pursue credit-rating)
Mid 2024
Issue Debt
Earliest Date
Mid 2024
(Earliest debt issuance)
Energy
Portfolio Development
Provide sufficient, reasonably
priced, clean electricity to our
customers
29 GOALS
Manage portfolio to manage risk, cost, and reliability objectives through risk management tools, sufficient staffing, and staff training.
Develop secure Clean Energy Portfolio with goals of 50% RE (2022), 75% (2027), 85% (2030), and 100% (2035).
15% of our energy coming from new, distributed infill storage/solar+ storage resources in Member Agencies by 2035. 600MW of new Local Wholesale Energy and/or Battery Storage Projects (utility scale projects within San Diego and Imperial counties) by 2035
Support development of innovative energy sources to improve resiliency through pilot programs, grant programs, and
partnerships.
Create high quality local jobs in renewable energy that support healthy families and vibrant communities.
30 Development of Debt Policy
Debt Policy
Peer
CCAs
Member
Agencies
Financial Best
Practices
Scope
Tax Exempt
and Taxable
Permitted
Debt Type
Covenants
Scope and Authority
Governs issuance and management of all
bonds and other forms of indebtedness.
Compliance with California Government
Code Section 8855 and Senate Bill 1029
which require debt issuers to adopt a
local debt policy.
SDCP bond issuances shall be green
bonds, to the extent possible.
Use of Debt:
Construction, acquisition,
rehabilitation, replacement, or
expansion of physical assets.
Refunding of prior outstanding debt.
Other Board-approved needs.
31 Permited Debt Types
Debt issued to finance
capital expenditures with
the objective of
structuring repayment
within the expected life
of the financed asset.
Long-Term Debt Short-Term Debt
Primarily used to meet
interim funding pending
the issuance of long-term debt. Generally has
a maturity of less than 7
years and may take
several forms, including
notes, commercial
paper,
Variable Rate Debt
It may be appropriate to
issue long-term variable
rate debt that bears an
interest rate that is reset
periodically at
predetermined intervals.
Refunding Debt
To refinance existing
bonds to achieve debt
service savings,
restructure the type of
debt outstanding, modify
SDCP’s covenants to
bondholders, restructure
future debt service
payments, take
advantage of market
opportunities, or to
reduce exposure to
certain counterparties.
SDCP may legally issue both short-term and long-term debt, through either a direct loan or through the public market, using the debt instruments described below.
Types of Debt
Revenue Bonds
Commercial Paper or other
Interim Funding Notes
Capital Leases
Certificates of
Participation/Lease Revenue
Bonds
Installment Sale or Purchase
Agreements Revenue Bonds
Bond or Grant Anticipation
Notes
Tax and Revenue Anticipation
Notes
State and Federal Loans and
Grants
Direct Bank Loans or Lines of
Credit
Public Private Partnerships
32 Tax Exempt and Taxable Bonds
Tax-Exempt • Bonds issued on a federally tax- exempt basis • Typically issued at lower interest rates, reducing
SDCP’s cost of borrowing.
• Limited by federal tax law in the uses of tax-exempt bond • Require governmental purpose
• Must be spent on capital improvements
• Reasonable expectations for spending
proceeds at the time of issuance
• Limiting private use of financed projects
Taxable
• Not exempt from federal income tax
• Typically issued at higher interest rates
• IRS restrictions do not apply
• Used in in situations where the project or purpose
of borrowing may not meet federal tax law
requirements
• May consider taxable tax credit or direct subsidy
bonds that offer lower costs of borrowing through
the issuance of taxable debt that is supported by
federal subsidy payments on the interest expense
Bonds may be issued as taxable or federally tax-exempt. 33 Covenants
When SDCP issues debt, the Agency will have to execute certain types of covenants that may require SDCP to meet certain requirements.
SDCP Additional Bond Tests
1. Pledged revenues will be no less than one and a
half times (2.0x) the maximum annual principal
and interest and debt service for the aggregate
outstanding senior lien bonds including the debt
service for the new issuance.
2. Annual debt service on long-term debt shall not
exceed 5% of the Agency’s annual total operating
expenses.
Covenants
(DSCR, Rate Covenants, etc.)
34 Example – For illustration purposes only
SDCP Additional Bond Tests
1. Pledged revenues will be no less than one and a
half times (2.0x) the maximum annual principal
and interest and debt service for the aggregate
outstanding senior lien bonds including the debt
service for the new issuance.
2. Annual debt service on long-term debt shall not
exceed 5% of the Agency’s annual total
expenses.
Example: SDCP issues a $500
million revenue bond to construct
a solar and storage project.
Loan amount: $500,000,000
Interest Rate: 5.00%
Pledged revenues: Ratepayer revenue
Useful life: 20 years
Net Revenue
$1,284 m
Debt Service Schedule FY 2024 Projected
Total Expense
$974 m
Net Position
$310 m
SDCP Bond Tests
1. Pledged Revenues
FY24 Revenue = $1,284m
Yearly Debt Service = $40m
Calculation
2.0 x $40m = $80m
$1,284m > $80m
Bond Test Passed
2. Annual Debt Service
FY24 Expense = $974m
Yearly Debt Service = $40m
Calculation
$974m x 5% = $48.7m
$48.7m > $40m
Bond Test Passed
35 Item 4
Receive and file presentation on the proposed
framework of the SDCP Debt Policy.
Committee Member
Announcements
Adjournment
Next Regular
Finance & Risk
Management
Committee
Meeting
April 13, 2023