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A Briefing on the Differences between Ratemaking Analysis and Financial Statement Reporting

Pine Strawberry Water Improvement District. A Briefing on the Differences between Ratemaking Analysis and Financial Statement Reporting. May 5 2010. Introduction Purpose of Presentation.

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A Briefing on the Differences between Ratemaking Analysis and Financial Statement Reporting

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  1. Pine Strawberry Water Improvement District A Briefing on the Differences between Ratemaking Analysis and Financial Statement Reporting May 5 2010

  2. 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

  3. 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

  4. 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)

  5. 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

  6. Types of Expenses RecoveredCash Basis vs. Accrual Basis

  7. 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

  8. PSWID Year To Date FinancialsActual vs. Forecast • 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

  9. Actual Water Volumes (Gallons)Last 12 Months of Brooke Operations Percent of Annual Volume Oct – Mar = 43%

  10. 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

  11. 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

  12. District Actual YTD PerformanceOctober 2009 – March 2010

  13. District Actual YTD FY 2010 PerformanceEconomists.com 2012 Rate Model Forecast

  14. PSWIDForecast Cost of Service 2010-2019

  15. PSWIDCurrent Rate Schedule

  16. Alternative 1 from Sep 29 2010 Rate Analysis Consolidated Long-Term Rate Plan

  17. Monthly Charges UnderSep 29 2010 Rate Plan (Alternative 1)

  18. 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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