Title
Approval of Budget Revision 2024-60 Uniper Settlement and Change to Debt Coverage Ratio
Recommended Action
I move the Board of Public Utilities recommend the Uniper Settlement Funds be invested in a combination of a laddered treasury portfolio and the New Mexico Local Government Investment Pool (LGIP) in accordance with the County Investment Policy as overseen by the County’s Chief Financial Officer.
I further move that BPU provides guidance to the Utility Manager to use the settlement funds and associated interest income to:
1) bring Electric Distribution and Electric Production reserves up to their required balances per DPU Financial Policies and the County Charter Section 509 and Section 40-63;
2) cover increased cost of power to minimize rate increases beyond those already anticipated in long term plans; and
3) upgrade electric production and distribution systems to meet expected increased electrification demands over the next three to ten years.
I further move that BPU approve Budget Revision 2024-60 as presented and forward to Council for consideration.
I further move to amend Objective 2.3 of the DPU/BPU FY2025 Strategic Focus Areas, Goals & Objectives to reduce the debt coverage ratio target from 1.6 to 1.3.
Utilities Manager's Recommendation
The Utilities Manager recommends that the Board approve the motions as presented.
Body
In March, the Department of Public Utilities received a settlement from Uniper for the cancellation of two power agreements. The first was for 25 megawatts at an average price of $62.25 per megawatt hour. The second was for 15 megawatts at a price of $39.67 per megawatt hour. The total settlement was $58 million. The replacement power contract is at a price of $76.75 per megawatt hour. The additional power costs for FY2024 are approximately $2.2 million and for FY2025 are approximately $8.7 million. Attachment A is a budget revision to recognize the $58 million settlement and the estimated interest income.
Staff recommends investing the settlement funds less funding reserves and covering the additional power costs for FY24 and FY25. Investing the settlement funds meets the requirements of the County's Investment Policy and has been reviewed and agreed to by the County's Chief Financial Officer. This investment strategy allows DPU to 1) bring Electric Distribution and Electric Production reserves up to their required balances per DPU Financial Policies and the County Charter Section 509 and Section 40-63; 2) cover increased cost of power to minimize rate increases beyond those already anticipated in long term plans; and 3) upgrade electric production and distribution systems to meet expected increased electrification demands over the next three to ten years. The estimated interest returns are based on amounts provided by the County's Investment Advisor and interest assumptions included in the FY2025 proposed budget.
The following reserves are required per the County Charter, DPU Financial Guidance and the DPU Schedule of Funds. Staff recommends fully funding these reserves for the Electric Fund as required. The total amount to fully fund the Electric reserves is $12,138,000. Interest earned on the Electric reserves are included in Attachment A - Settlement Investment Overview.
Operations Reserve (180 days of bud operations and maintenance, excluding commodities)
Debt Service Reserve (as required by loan docs)
Retirement/Reclamation Reserve (per agreements)
Capital Expenditure Reserve (annual depreciation + 2.5%)
Rate Stabilization Reserve (where pass-through rate for commodities not in place)
Contingency Reserve (single largest equipment with potential for failure DPU Asset Team)
As requested, Staff provided additional resources for required debt coverage ratios. This supports the recommended new target of 1.3.
New Mexico Finance Authority 1.3
GDS 1.2 to 1.25
Utility Financial Solutions Rate Managers Presentation 1.17 to 1.25
Water Trust Board 1.2
Alternatives
If the Board does not approve the recommended actions, the settlement proceeds will remain unbudgeted and the existing debt coverage ratio will not be achieved.
Fiscal and Staff Impact
See attached budget revision
Attachments
A - Settlement Investment Overview
B - 2024-60 Budget Revision