Tools of the Trade

1. Tools of the Trade EVALUATING YOUR FINANCIAL POSITION

2. Ratio Analysis

3. Ratio analysis is simply a quantitative way to take information from a company’s financial statements and use it to compare a company’s performance to itself over time or to other companies in an industry.

4. Ratio Analysis STRENGTHS WEAKNESSES • Allows effective comparison with other companies • Helps companies evaluate their own performance over time • Can be a quick way to assess a company’s financial position • Can be subject to misinterpretation • Must be viewed in context of the business environment and operating philosophy of the company • Only as good as the data used. GIGO principal applies

5. Ratio Categories Leverage Liquidity Operational Profitability Debt Coverage

6. Leverage RatiosEvaluates the amount of debt used to finance assets • Debt to Equity = Total Debt / Equity • Total Debt = (Long-term Debt + Short-term Debt) • Equity = (Common Stock + Preferred Stock + Retained Earnings + Additional paid in Capital) • For Valley Utilities we could use: (LTD+ STD) / (Retained Earnings + Membership Certificates)

7. Leverage Ratios • Debt Ratio = Total Debt / Total Assets • Leverage Ratio = (Net Plant - LTD) / Net Plant • 40% - 60% has been a benchmark used over the years • High ratio is not necessarily a cause for alarm

8. Operational RatiosHow effectively a company can turn assets into revenue • Days of Sales Outstanding (DSO) • DSO = Average Receivables / Net Sales per Day Average Receivables = (Receivables (BOY) + Receivables (EOY)) / 2 Net Sales per Day = (Sales Revenue - Power Cost)/ 365 Days • Gives the average number of days it takes to collect sales revenue

9. Operational Ratios • Days of Payables Outstanding (DPO) • DPO = Average Payables / Cost of Sales per Day Average Payables = (Payables (BOY) + Payables (EOY)) / 2 Cost of Sales per Day = Power Cost / 365 days • Gives the average number of days it takes to pay obligations • Reviewing these two ratios together over time could aid in identifying areas for improvements. Especially in the area of revenue collection

10. Profitability Ratios • Net Income Ratio • Net Income Ratio = Net Income / Total Operating Revenue OR • Net Income Ratio = Net Income / Sales Revenue

11. Profitability Ratios • Measures how much income is generated by sales or operating revenue after all expenses are paid. • Measure of the amount of money retained out of each dollar generated in sales revenue or total revenue

12. Debt Coverage Ratios Debt Service Coverage indicates the amount of cash available to cover the principal and interest payment on debt. • Debt Service Coverage Ratio (DSC) • DSC = Net Operating Income / (Principal + Interest) Net Operating Income = Operating Income + Other Income OR • DSC = (Total Operating Revenue – Power Cost - O&M) / (P + I) • A value less than 1 indicates an inability to generate enough cash to pay the principal and interest

13. Debt Coverage RatiosTimes Interest Ratios measures the number of times cash can cover the interest expense • Times Interest Earned Ratio (TIER) TIER = (Net Income (before extraordinary items) + Interest) / Interest)

14. Liquidity Ratios • Gives a quick view of a company’s ability to pay its short-term obligations • It is a quick way of determining if the resources on hand cover the amount you have to pay

15. Liquidity Ratios • Current Ratio (CR) • CR = Current Assets / Current Liabilities • Quick Ratio (QR) • QR = (Current Assets - Inventory) / Current Liabilities • In general a range of 1 to 1.5 is considered reasonable

16. Liquidity Ratios • Cash Ratio • Cash Ratio = (Unrestricted Cash + Temporary Cash Investments) / Power Cost + O&M Expense) • A measure of cash available for obligations and contingencies • In general an equivalence of 1 to 2 months power cost + O&M (8% - 16%) is a reasonable benchmark

19. GUIDELINE

22. Thank You

23. Q & A