1 CITY OF VICTORVILLE
COUNCIL POLICY
SUBJECT:
Victorville Municipal Utility Services (“VMUS”)
ELECTRIC FINANCIAL MANAGEMENT POLICY
POLICY NO.:
CP-24-03
DATE:
No vember 19, 2024
BACKGROUND
Long-term fiscal stability is an important factor for VMUS as it sends a positive signal to its ratepayers, investors , and regulatory and credit agencies. Strong and transparent financial management policies, including maintaining prudent reserves for emergencies, rate stability, working capital and capital improvements, are consistent with best practices within the utility industry and are critical to VMUS as they help to:
• Maintain the short-term and long-term financial health of the Electric Fund • Maintain stable rates for customers that are deemed fair and reasonable and promote manageable rate increases
• Fund unanticipated costs
• Ensure funds exist for system improvements
• Ensure cash exists to permit timely payments
• Act as a significant positive credit factor in bond ratings
APPLICABILITY
This policy will apply to the VMUS Electric Funds, which includes the combination of Funds 420, 421 and 422. It is important to note that the recommendations in the Policy are associated with projected financial information for fiscal year end of future years. Actual results may vary due to unforeseen financial considerations.
PURPOSE
VMUS seeks to provide safe, reliable, and competitively priced electric service to all its customers. As a community asset and in consideration of its mission, VMUS has prepared the Financial Management Policy ( “Policy”) with the intent of establishing guidelines for prudently managing the financial profile of the utility to better serve existing customers and satisfy the demands of current and future customers. The policy establishes minimum and target benchmarks for debt service coverage and financial reserves. 2 POLICY
The Policy anticipates that in practice there is a range of acceptable results and a balance between cash flow and reserve levels is warranted.
1. Debt Service Coverage (DSC)
• Purpose: Enable the utility to make debt service payments in an extreme event that may impair the utility’s ability to provide services and to meet the bond rate covenant, thus impacting the revenues that are relied upon to pay outstanding debt service.
DSC = (Net Revenues – Fixed Expenses) / Debt Service Cost • Minimum: 1.2x
2. Fixed Cost Coverage (FCC)
• Purpose: Enhance the utility ’s ability to cover its reoccurring ( fixed) expenditures based on reoccurring revenues and to protect the utility’s credit worthiness. This solvency ratio will measure the utility’s ability to generate enough cash flow to cover its fixed expenses.
FCC = ((Net Revenues – Fixed Expenses) + (Purchased Power Costs/2)) / (Debt Service Cost + (Purchased Power Costs/2))
• Target: 1.4x
3. Unrestricted Operating Reserves
• Purpose: Enhance the utility’s ability to manage potential risk and address short -term financial variability resulting from unexpected operating results.
• Minimum: 120 days’ cash
• Target: 150 days’ cash
4. Unrestricted Capital Reserves
• Purpose: Ensure the utility has sufficient funds for unplanned or accelerated capital expenditures. These expenditures include but are not limited to equipment and infrastructure replacements and improvements.
• Target: This reserve is determined annually and will typically cover 25% of the following five years’ worth of forecasted capital expenditures or be equal to a minimum 3% of net depreciable capital assets, whichever is higher. Th is reserve target will exclude anticipated capital expenditures where the utility has arranged, or plans to arrange, financing due to a project or equipment’s size and complexity.
Building and Drawing Upon Reserves - To the extent that unrestricted reserves and coverages are above the target levels, per City policy, VMUS staff may recommend utilizing those available funds to pay for capital projects (reducing the need to issue debt), paydown outstanding debt, pay for any unforeseen expenditures, reduce customer rates or to fund other strategic objectives.
3 Reserves and coverages below the minimum level may impair VMUS ’ ability to serve its customers and VMUS may be exposed to significant operational risks. Should VMUS draw down reserves to their minimum levels, VMUS may implement plans to return reserves to their targeted levels within three years.
IMPLEMENTATION AND REVIEW
The Policy will be reviewed annually and updated when there is a significant material change in the risk exposure or conditions. It is important to note that this Policy is intended to serve as a guide and does not restrict the Victorville City Council from reviewing the proposed rate actions, debt issuances or other actions of substance to the Utility.