A Briefing on the Differences between Ratemaking Analysis and Financial Statement Reporting
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Transcript of A Briefing on the Differences between Ratemaking Analysis and Financial Statement Reporting
A Briefing on the Differences between Ratemaking Analysis and
Financial Statement Reporting
Pine Strawberry Water Improvement District
May 5 2010
IntroductionPurpose of Presentation
Discussion of how the objectives and goals of public utility accounting differs from private company accounting
Analysis of District performance – actual vs. forecast
Background on District’s current and forecast rate plan
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Accounting for Public Utilities
Publicly-owned utilities are fundamentally different from private companies
Non-profit
Do not have owners/shareholders
Not subject to income taxes
To account for these differences, there is a separate and distinct method of bookkeeping for publicly owned utilities – it is centered around Cash Flow as opposed to Net Income
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Objectives and Goals of Ratemaking
Utility ratemaking accounting is based on the American Water Works Association Cash Basis of Accounting and focuses on Cash Flow
Private company financial statement accounting is based on the use of Generally Accepted Accounting Principals (“GAAP”) Accrual Basis of Accounting and focuses on Net Income
Attempts to directly compare these different approaches often lead to invalid conclusions (i.e. double counting of capital expenses)
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AWWA Cash Basis Methodology
Cash Basis has been historically used by publicly-owned utilities throughout the USA
Fundamental goal of Cash Basis: to enable the utility to recover the cash it needs to pay its operating expenses, debt service and meet bondholders’ debt coverage requirements
Under Cash Basis methodology, cash expenses (operating, debt principal, capital outlays) are included but non-cash expenses such as depreciation are excluded
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Types of Expenses RecoveredCash Basis vs. Accrual Basis
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AWWA GAAP Cash Basis Accural Basis
Operating Operating
Debt Interest Debt Interest
Debt Principal Depreciation
Capital Outlays Amortization
AWWA Cash Basis Methodology
Summary: when examining public utility financial statements it is important to concentrate on Cash Flow
Cash flow is the standard set by bond authorities, public sector accountants, ratemaking principles and industry experts to judge the financial health of publicly-owned utilities
AWWA rules (and ACC annual report rules) direct that privately-owned utilities (like Brooke) do not use the Cash Basis, because they are subject to taxation and therefore must take the depreciation deduction
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PSWID Year To Date FinancialsActual vs. Forecast
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It is inappropriate to compare partial year actual performance to Economists.com’s forecast because rate model is based on annual, not monthly, projections
Revenues and expenses vary widely by month
District’s year to date revenues are for lower sales volume months of October through March
District has incurred many one-time start-up costs
Actual Water Volumes (Gallons)Last 12 Months of Brooke Operations
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Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec -
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000 Percent of Annual Volume Oct – Mar = 43%
PSWIDLong Term Financial Plan
To minimize impact of acquisition and capital improvement costs on ratepayers, District chose to phase in annual debt service
Debt service is interest-only for first two years; principal payments begin in 2012
District’s plan always has been to adjust rates when principal payments came due – only issue was how much and when
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Advantages ofDistrict Financial Plan
Plan ensures that District will have sufficient cash to fund all unexpected expenses (common for a “start up” business)
Allows District to defer rate increases until 2012, to minimize impact of acquisition on ratepayers’ household budgets
Enables District to base future rate adjustments on better and more reliable volume and customer data
Will provide District Board and ratepayers time to reach consensus on most appropriate rate plan -- straight percentage increases, uniform rates for all ratepayers, etc.
Only disadvantage: depreciation (non-cash expense) is not fully funded in FY 2010 and FY 2011
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District Actual YTD PerformanceOctober 2009 – March 2010
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Actual Oct 09 -- Mar 10
Revenues $709,896
Cash Basis Expenses Operating 512,011 Debt Interest 105,577 Debt Principal/Cap Outlays - Total 617,588
Net Cash Flow 92,308
Reconciliation to Net Income Add Debt Prin/Cap Outlays - Subtract Depreciation (196,802)
Net Income (104,494)
District Actual YTD FY 2010 PerformanceEconomists.com 2012 Rate Model Forecast
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Economists.com District Actual Cash Basis Accrual Basis Forecast
Oct 09 -- Mar 10 FY 2012
Revenues $709,896 $1,462,232 **
Cash Basis Expenses Operating 512,011 * 870,741
Debt Interest 105,577 288,582 Debt Principal/Cap Outlays - 174,935
Total Expenses 617,588 1,334,258
Net Cash Flow 92,308 127,974
Reconciliation to Net Income Add Debt Prin/Cap Outlays - 174,935
Subtract Depreciation (196,802) (196,802)
Net Income (104,494) 106,107
* Includes $132,378 in start up costs ** Requires rate adjustment
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PSWIDForecast Cost of Service 2010-2019
10/0
9-6/
10
2011
2012
2013
2014
2015
2016
2017
2018
2019
$-
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
Operating Debt Service
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PSWIDCurrent Rate Schedule
PINE RATEPAYERS STRAWBERRY RATEPAYERS Williamson Base 5/8" $ 20.35
Base Charge 5/8" $ 18.45 Cost/1,000 Gal - 2,000 3.50 2,001 4,000 3.50
Usage--Summer - 2,000 6.00 4,001 6,000 3.50 Cost/1,000 Gal 2,001 4,000 7.00 6,001 Above 3.50 May-September 4,001 6,000 7.00
6,001 Above 8.00 United Base 5/8" 16.00 Cost/1,000 Gal - 2,000 2.20
Usage-- Winter - 2,000 3.95 2,001 4,000 2.20 Cost/1,000 Gal 2,001 4,000 4.96 4,001 6,000 3.85 October-April 4,001 6,000 4.96 6,001 Above 3.85
6,001 Above 6.00 E&R Base 5/8" 18.45 Cost/1,000 Gal - 2,000 3.40 2,001 4,000 3.40
4,001 6,000 5.95 6,001 Above 5.95
Alternative 1 from Sep 29 2010 Rate Analysis Consolidated Long-Term Rate Plan
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Current Pine All PSWID Ratepayers
Summer Effective Effective Effective EffectiveRate Oct-11 Oct-12 Oct-13 Oct-14
Base Chg 5/8" $18.45 $18.45 $21.22 $22.28 $23.39
Usage Chg per 1,000 Gal: - 2,000 6.00 6.00 6.90 7.25 7.61
2,001 4,000 7.00 7.00 8.05 8.45 8.88
4,001 6,000 7.00 7.00 8.05 8.45 8.88
6,001 Above 8.00 8.00 9.20 9.66 10.14
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Monthly Charges UnderSep 29 2010 Rate Plan (Alternative 1)
2004-2009 Brooke Effective Effective Effective EffectiveRates Oct-11 Oct-12 Oct-13 Oct-14
3,000 Gallons
Pine Total $37.45 $37.45 $43.07 $45.22 $47.48 (summer) Increase - 5.62 2.15 2.26
Strawberry -- WilliamsonTotal 30.85 37.45 43.07 45.22 47.48 Increase 6.60 5.62 2.15 2.26
Strawberry -- UnitedTotal 22.60 37.45 43.07 45.22 47.48 Increase 14.85 5.62 2.15 2.26
Strawberry -- E&RTotal 28.65 37.45 43.07 45.22 47.48 Increase 8.80 5.62 2.15 2.26
Presentation Summary
2009 rate study and financial plan was estimated on the Cash Basis, which is used by public utilities throughout the USA
The Cash Basis assumptions for ratemaking differ fundamentally from the GAAP Accrual Basis used for financial reporting purposes. Both methods are correct for their specific applications, but should not be mixed in their use
District is generating positive cash flow; and is able to fund all operating expenses
It is not valid to try to compare partial year performance with rate model, which forecasts on an annual basis
Rate adjustments will be necessary in 2011 when debt principal becomes due
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