6/14/2023
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CASH RESERVE POLICYUPDATEBoard of Public UtilitiesJune 26, 2023Riverside Public Utilities RiversideCA.gov2
BACKGROUNDOn June 12, 2023, the Board approved a recommendation tothe City Council to conceptually approve both the Water andElectric Five-Year Rate plans.Both rate plan discussions include references to the MinimumCash Reserve Balances to demonstrate the impact of noaction and the impact of approving the rates presented.During the meeting, there were Board Member questionsregarding RPU’s fiscal reserves. 6/14/2023
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PURPOSE OF THE RESERVE POLICIESProperly designed reserve policies send a positive signal toratepayers, investors, and regulatory and credit rating agenciesthat the Board and City Council are committed to maintainingthe long-term fiscal strength of RPU.Strong and transparent financial policies, including maintainingprudent reserves for emergencies, rate stability, working capital,capital improvements and debt service, are consistent with bestpractices in the utility industry.
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PURPOSE OF THE RESERVE POLICIESThe policies are essential to the long-term financial healthof RPU to:Maintain the short-term and long-term financial health of RPU.Maintain stable rates for customers and help ensuremanageable rate increases.Fund unanticipated cost contingencies.Ensure funds exist for system improvements.Ensure cash exists for the timely payment of bills.Act as a significant positive credit factor in bond ratings. 6/14/2023
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RESERVE ACCOUNT BALANCESSchedules of Cash and Cash Equivalents – Electric UtilityAudited June 30, 2022 Unaudited March 31, 2023Unrestricted cash and cash equivalents:Undesignated reserve $ 161,231,000 $ 136,104,000 Customer deposits reserve 5,610,000 5,610,000 Capital repair and replacement reserve 2,488,000 2,488,000Electric reliability fund reserve 82,261,000 87,321,000 Mission Square improvement fund reserve 1,533,000 1,533,000 Additional decommissioning liability reserve 16 ,107,000 7,976,000 Dark Fiber Reserve 4 ,942,000 4,942,000 Total unrestricted cash and cash equivalents $ 274,172,000 $ 245,974,000Legally restricted cash and cash equivalents:Reserved for debt service $ 18,927,000 $ 20,792,000 Reserved for bond construction 0 0 Reserved for regulatory requirements 16,366,000 29,271,000 Reserved for low carbon fuel standard 3,233,000 3,916,000 Reserved for Public Benefit Programs 25,032,000 29,177,000 Total legally restricted cash and cash equivalents $ 63,558,000 $ 83,156,000 Total cash and cash equivalents $ 337,730,000 $ 329,130,000 RiversideCA.gov6
RESERVE ACCOUNT BALANCESSchedules of Cash and Cash Equivalents – Electric Utility (continued)Audited June 30, 2022 Unaudited March 31, 2023Legally restricted cash and investments at fiscal agent:Reserved for decommissioning liability $ 42,083,000 $ 48,937,000 Reserved for other cash at fiscal agent 901,000 433,000 Reserved for debt service 10,801,000 10,807,000 Total legally restricted cash and investments at fiscal agent$ 53,785,000 $ 60,177,000 Total unrestricted and restricted cash $ 391,515,000 $ 389,307,000 6/14/2023
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RESERVE ACCOUNT BALANCESSchedules of Cash and Cash Equivalents – Water UtilityAudited June 30, 2022 Unaudited March 31, 2023Unrestricted cash and cash equivalents:Undesignated reserve $ 38,918,000 $ 40,775,000 Recycled water cash reserve 1,158,000 1,158,000Property reserve 5,804,000 5,804,000 Customer deposits reserve 832,000 832,000Capital repair and replacement reserve 2,364,000 2,363,000 Total unrestricted cash and cash equivalents $ 49,076,000 $ 50,932,000 Legally restricted cash and cash equivalents:Reserved for debt service $ 7,557,000 $ 9,360,000 Reserved for bond construction4,666,000 63,650,000 Water Conservation Programs 3,330,000 3,678,000 Total legally restricted cash and cash equivalents $ 15,553,000 $ 76,688,000 Total cash and cash equivalents $ 64,629,000 $ 127,620,000 Legally Restricted cash and investments at fiscal agent:Other cash at fiscal agent $ 0 $ 52,000 Total cash and investments at fiscal agent $ 0 $ 52,000 Total unrestricted and restricted cash $ 64,629,000 $ 127,672,000 RiversideCA.gov8
POLICY HISTORY2016
• The approved policies documented and adopted financial goals for RPU utilities and established policies for long-term, as well as day-to-day operations of both utilities. • The policies cover areas including financial reporting, cash reserves, operating and capital budgeting, debt management, investments, risk management, financial planning, and others.2017 • Approved the Dark Fiber Leasing Program, established uniform lease rates for the use of the dark fiber infrastructure, physical and cyber security policies, a master fiber lease license agreement, and a new cost center within the Electric Fund for related expenses • Approved the Dark Fiber designated reserve fund for leased fiber activities2018 • City Council approved rates that include the use of a Line of Credit (LOC) as part of the 5-Year Rate proposal to keep utility rates as low as possible. • Utilizing a LOC reduced the electric and water rates by approximately 1% and 3%, respectively. • Approved the LOC into RPU’s fiscal policies 6/14/2023
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POLICY HISTORY2020
• The Board received an update on the Riverside Public Utility’s Cash Reserve Policy, funds and use of funds. • At this meeting, the Board requested a comparative analysis of RPU’s cash reserve policies and the credit ratings compared to other similarly sized utility organizations in the region as well as an analysis of potential impacts of the Covid-19 pandemic to RPUs cash reserve.2021 • Approved the updated RPU Fiscal Policies and Cash Reserve Policy including:• the increase in annual funds to the SONGS Additional Decommissioning Liability Reserve; • the removal of calculation of operating and maintenance expenses from the Undesignated Reserves for Working Capital; • the removal of capital improvement expenditures funded with restricted or designated reserves from Undesignated Reserves for System Improvement Capital; and• updated definitions to simplify reserve terminology RiversideCA.gov10
RESERVE CATEGORIES1. Restricted Reserves are established and utilized for narrowly defined purposes as specified by legal restrictions, bond covenants, and other regulations or ordinances. 2. Designated Reserves are that portion of unrestricted reserves that meet specific purposes set aside by the Board and City Council. Designated reserve funds ensure stable service delivery, meet future needs, and protect against financial instability. Designated reserves may be held for specific capital and operating purposes.3. Undesignated Reserves are the remaining unrestricted reserves that may be used for any lawful purpose and have not been designated for specific capital and operating purposes; however, maintaining a proper level of undesignated reserves is critical to ensure the utility can meet its fluctuating cashflow demands and mitigate financial volatility. 6/14/2023
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RESTRICTED RESERVESRestricted Reserve Definition Electric WaterSan Onofre Nuclear Generating Station (SONGS) DecommissioningRiverside owns 1.79% of SONGS Units 2 & 3, within Camp Pendleton, that was permanently retired on June 7, 2013. This reserve was established in June 2017, for the Riverside’s share of the decommissioning cost obligations that are held with the trustee for the decommissioning costs. XRegulatory Requirements Reserve (Cap and Trade auction proceeds)Funds set aside for regulatory requirements for greenhouse gas allowances and low carbon fuel standard proceeded as legally restricted for specific purposes.XUnspent Bond Proceeds to Fund Capital ProjectsFunds restricted by bond covenant, allowable only for qualified approved capital projectsX XBond Redemption Reserve (Debt Service)This reserve is set aside for future bond payments that are governed by bond covenants.X XElectric Public Benefits Fund Assembly Bill 1890, adopted in 1996, monthly surcharge of 2.85% of the total electric charge to be used for low-income customer assistance, energy efficiency and conservation programs, renewable resources and energy research and development.XWater Conservation Fund May 2004 City Council approved 10-year monthly surcharge of 1.5% of the total water charge to provide financing to create and encourage water conservation and efficiency programs, renewed March 2014.X RiversideCA.gov12
DESIGNATED RESERVESDesignated Reserve Definition Electric WaterCustomer DepositsMonies held on behalf of RPU’s customers as required to be utilized if a customer fails to pay their utility bill.X XAdditional Decommissioning LiabilityEstablished in June 1998, and updated March 2016 to accumulate extra funds held at the City (not with the SONGS trustee) for the uncertainty of costs associated with the SONGS Decommissioning activities. XElectric ReliabilityEstablished in December 2007 to fund the debt service and capital expenditures for construction of internal electric generation and purchase of state transmission grid capacity, annual repair and improvements to internal generation facilities, and fund internal RPU sub-transmission system upgrades for RTRP improvements. The funds are received from retail customers through the Reliability Charge on each monthly bill.XMission Square ImprovementEstablished June 2015 to accumulate funds for major improvements to the Mission Square facility; funded by an annual contribution equal to 2% of the building value up to a maximum reserve equal to 25% of the building value.XCapital Repair/ReplacementEstablished March 2016 to accumulate amounts for repairs and replacement of facilities, vehicles, and technology outside of the Capital Improvement Program.X XRecycled WaterEstablished June 2014 to set aside funds for a recycled water program. Funding was from a legal settlement from the City.XPropertyEstablished July 2005 to accumulate all proceeds from surplus property sales to be used in the future for the purchase of property needed for operations, or for other long-term capital assets/projects. Funding is from proceeds from the sale of surplus property.XDark FiberEstablished July 2017 to accumulate proceeds from fiber leasing activity and account for expenditures of the dark fiber program.X 6/14/2023
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UNDESIGNATED RESERVESUndesignated Reserve Definition Electric WaterOperating (Working Capital)Ensures sufficient resources to pay budgeted operating and maintenance expenses, including power supply costs, recognizing the timing differences between payment of expenditures and receipt of revenues.X XRate StabilizationMitigates rate shock due to temporary and transitional regulatory changes, loss of a major resource, sharp demand reduction or market volatility.X XEmergency CapitalProvides funds to ensure ability to repair system after an emergency or natural disaster such as a flood, earthquake or major windstormX XSystem Improvements CapitalProvide funds to ensure continuity of construction over fiscal years to be reimbursed by bond proceeds or other resources.X XDebt ServiceEnsures ability to make debt service payments in an extreme event that may impact RPU’s ability to provide services, thus impacting revenues at a time critical infrastructure repairs are needed to restore systems. The Debt Service Reserve is intended to prevent an event where RPU would be unable to pay its debt service obligations during such emergencies, or extreme market disruptions.X X RiversideCA.gov14
WITHDRAWAL AND REPLENISHMENT OF RESERVES 1. RPU treats the targeted reserves as practical minimums and allow reserves to increase or decrease as necessary within the minimum and maximum prescribed levels. 2. To the extent that undesignated reserves are above the target and below the maximum, the Board and City Council have the flexibility to direct staff to:a. utilize those available funds to pay for capital projects (reducing the need for future debt),b. pay down unfunded liabilities such as pension obligations, c. defease outstanding debt, or d. fund other strategic objectives. 3. No other action by RPU would be required if reserves are between the minimum and maximum level unless directed by the Board and City Council. 4. Reserve levels below the minimum targeted reserves will leave RPU exposed to significant operational risks. Should RPU draw down reserves below the minimum targeted level, RPU will implement plans to return reserves to their minimum targeted levels within three years. Such plans will be provided within 12 months. 6/14/2023
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REPORTING AND OVERSIGHT 1. Reserve levels are monitored throughout the fiscal year and reported in the monthly and quarterly financial reports. 2. Reserve target (minimum) and maximum levels are analyzed annually and an over/under reserve determination is made in conjunction with year-end financial results. 3. These results are reported to the Board and City Council as part of the year-end financial report presentation. 4. Should designated or undesignated reserve levels need adjustment due to new risk factors due to changes in the industry, these will be brought to the Board and City Council as part of the year-end report. 5. The Policy is to be reviewed annually and updated (at a minimum of every three years) if there are material changes in the risk exposures or new conditions that require changes in reserve levels.
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MINIMUM RESERVE TARGET CALCULATIONS
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MINIMUM RESERVE TARGET CALCULATIONS
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ELECTRIC UNDESIGNATED RESERVE –FIVE YEAR RATE PLAN1. The June 12, 2023 proposed five-year water utility rate plan will fund future operating and capital costs, maintain reserve levels and financial metrics that comply with approved fiscal and reserve policies, and maintain current bond ratings to keep borrowing costs for capital investments low. 2. In order to keep the rate increases in the five-year water rate plan as low as possible, the undesignated reserve balance combined with the line of credit does fall below minimum target reserve levels prior to returning to above minimum target reserve levels within the timeframe required by the reserve policy. 6/14/2023
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WATER UNDESIGNATED RESERVE –FIVE YEAR RATE PLAN1. The June 12, 2023 proposed five-year water utility rate plan will fund future operating and capital costs, maintain reserve levels and financial metrics that comply with approved fiscal and reserve policies, and maintain current bond ratings to keep borrowing costs for capital investments low. 2. In order to keep the rate increases in the five-year water rate plan as low as possible, the undesignated reserve balance combined with the line of credit does fall below minimum target reserve levels prior to returning to above minimum target reserve levels within the timeframe required by the reserve policy.
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High Performing Government:Goal 5.4. Achieve and maintain financial health by addressing gaps betweenrevenues and expenditures and aligning resources with strategic priorities toyield the greatest impact.Infrastructure, Mobility & Connectivity:Goal 6.2. Maintain, protect and improve assets and infrastructure within theCity’s built environment to ensure and enhance reliability, resiliency,sustainability, and facilitate connectivity.Cross-Cutting Threads
STRATEGIC PLAN ALIGNMENT
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That the Board of Public Utilities receive an update on Riverside Public Utilities Fiscal Policies – Cash Reserve Policy, as it relates to the Water and Electric Utility Five-Year Rate Plan Proposal introduced to the Board on June 12, 2023.RECOMMENDATIONS