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Depreciation and Capital Recovery for the Utility Industry

Depreciation and Capital Recovery for the Utility Industry. As ROR “analysts”, what do we know about depreciation?. It’s an operating expense. It’s part of the Revenue Requirement . RR = OM + T + d + [R × (V-D)]. RR = OM + T + d + [R × (V-D)]. OM = Operating & Maintenance costs T = Taxes

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Depreciation and Capital Recovery for the Utility Industry

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  1. Depreciation and Capital Recovery for the Utility Industry

  2. As ROR “analysts”, what do we know about depreciation? • It’s an operating expense. • It’s part of the Revenue Requirement. RR = OM + T + d + [R×(V-D)]

  3. RR = OM + T + d + [R×(V-D)] OM = Operating & Maintenance costs T = Taxes d = Annual depreciation expense R = Rate of return V = Value of physical capital D = Accumulated depreciation R×(V-D) is called the “return portion” and V-D is called “rate base”

  4. Revenue Requirement& Rate Regulation • Enables UTES to operate as near monopolies • Ceiling on price of service • Necessities by society • Capital-intensive • Long-lived facilities

  5. Companies Reviewed, Period 2001-05 • UTES based on business lines • ~170 Cos. • Non-UTES based on S&P 1500 • Less UTE business lines ~1400 Cos.

  6. Capital Intensive Ratio: Revenue / Gross Plant • UTES: $0.71 • Non-UTES: $5.23

  7. Long Lived Ratio: Gross Plant / Depreciation Expense • UTES: 25yrs • Non-UTES: 12yrs • Telco 10yr • Elec 27yr • IPP 24yr • Gas S&T 28yr • Gas Dist 30yr • Water 52yr

  8. Dep. Expense/Revenues UTES: 11.6% Non-UTES: 5.1% EBIT/Revenues UTES: 14.8% Non-UTES: 13.0% Ratio: Who’s Really Working NI/Revenues • UTES: 5.7% • Non-UTES: 6.2%

  9. ROR & Depreciation Market Value of Firm • EBITDA Mult. • Market/Selected • Income Approach • EBITDA / Debt Free Net Cash Flow • Ratio: DA / EBITDA • UTES: 40.6% • Non-UTES 27.4%

  10. ROR & Depreciation Credit Analysis • GCF / Interest Coverage • GCF / Average Total Debt • NCF / Construction • Ratio: DA / GCF • UTES: 52.5% • Non-UTES 34.6% CASH is King!

  11. Nuts n Bolts of Depreciation • Depreciation and Capital Recovery for the Utility Industry • Donald J. Clayton, P.E., CFA, CDP

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