Item Number: 17
City Council / Board of Directors
Written Communications
Meeting of: November 19, 2024
Submitted By:
Brenda Hampton, Director of Electric Utility Services
Subject:
Council Policy No. CP-24-03 (CP-24-03) – Victorville Municipal Utility Services Electric Financial Management Policy
Recommendation:
That the Honorable City Council review and adopt CP-24-03, the Victorville Municipal Utility Services Electric Financial Management Policy.
Fiscal Impact:
There is no fiscal impact associated with adoption of CP-24-03, the Electric Financial Management Policy (“Policy”). The Policy created by Victorville Municipal Utility Services (“VMUS”) is to provide guidelines for effectively managing the utility's finances by establishing metrics and setting reserve levels that are reasonable, mitigate risk, and promote the long-term financial health of the utility. The combination of the VMUS Electric Funds (Funds 420, 421 and 422) will be subject to this policy.
Strategic Plan Goal:
This item aligns with Goal A, Financial Sustainability, by fostering the fiscal health of the electric utility through established metrics and reserve targets that will allow the department to maintain a strong financial position, even during economic uncertainties.
Background:
VMUS is a retail electric service provider for commercial and industrial customers located within the Southern California Logistics Airport (“SCLA”) and the Foxborough Industrial Park. The Electric System is owned and operated by the City under the administration of VMUS. The Electric fund is considered an Enterprise Fund of the City and accounts for the operation, maintenance, and capital assets of the City’s electric utility, which is funded by commercial and industrial electric rates and other fees. VMUS was established as an instrument for economic development, offering lower energy costs to current customers and attracting new businesses to Victorville. VMUS delivers safe, reliable, and 3 8
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competitively priced electric service while remaining focused on providing exceptional customer support.
VMUS has prepared an CP-24-03 Electric Financial Management Policy (Attachment A) which establishes important financial metrics and reserve levels that will be used to evaluate and assess the financial performance, health, and long-term sustainability of the utility, and guide future decision-making.
Discussion:
The Electric Financial Management Policy focuses on the key performance indicators (KPI’s) commonly used in the utility industry. It establishes specific target and/or minimum levels for each of these indicators, which include debt service coverage, fixed cost coverage, unrestricted operating reserves, and unrestricted capital reserves. Maintaining KPI’s at the assigned levels will enable VMUS to cover fixed expenses, make timely debt payments, promote rate stability, manage operational and market risk, and fund unexpected or accelerated capital expenditures that are prudent to the utility’s operations.
The Policy provides a framework and guideline for prudently managing the financial profile of the utility. If reserves and coverages exceed target levels, VMUS, with the appropriate approvals of the Victorville City Council, may use those funds for capital projects, debt or rate reduction, or other strategic objectives. Should the utility fall below the minimum levels, VMUS may implement a strategic plan to return reserves to their minimum or targeted levels within three years.
VMUS staff recently conducted a thorough analysis of its financials over the past few years, with a focus on the metrics as outlined in the Electric Financial Management Policy.
To calculate each financial metric, staff uses the City’s audited Annual Comprehensive Financial Report (ACFR). This task was completed to ensure the proposed metrics are attainable and truly represent minimum and target benchmarks for debt service coverage and financial reserves. Using the average of the last three years, VMUS attained the metrics shown in the chart below and in further detail through Attachment B.
Metric Minimum Target VMUS
Avg.
Metric
Achieved?
Debt Service Coverage 1.2x 2.8x Yes
Fixed Cost Coverage 1.4x 1.74x Yes
Unrestricted Operating Reserve 120 days 150 days 409 days Yes Unrestricted Capital Reserve Higher of 25% of five
year forecasted capital
expenditures or 3% of
net depreciable capital
assets
$489,818 Yes
The Policy will be reviewed annually by VMUS staff during the annual budget process.
Should there be substantive material changes in the risk exposure or financial conditions of the Electric Funds, the Policy will be updated and brought to Council for adoption. This Policy is intended to serve as a guide and does not restrict the Victorville City Council 3 8
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from reviewing proposed rate actions, debt issuances or other actions of substance to VMUS.
Staff recommends adoption of the Electric Financial Management Policy. If adopted by Council, this Policy will become effective immediately.
Staff remains available for any questions the Council may have.
Attachments: A. CP-24-03 - Victorville Municipal Utility Services Electric Financial Management Policy
B. VMUS Current Metrics