APPA’s Financial Planning for Municipals Mark Beauchamp, CPA, CMA, MBA 616-393-9722 September 27,...
-
Upload
jeffery-barnett -
Category
Documents
-
view
214 -
download
0
Transcript of APPA’s Financial Planning for Municipals Mark Beauchamp, CPA, CMA, MBA 616-393-9722 September 27,...
APPA’s Financial Planning for Municipals
Mark Beauchamp, CPA, CMA, MBA616-393-9722
September 27, 2005
Business & Finance Workshop
Objectives
How to determine revenue requirements
Development of a cash reserve policy Development of long-range financial
plan and rate track Cost of service & Electric Unbundling Contribution to City
Determination of Revenue Requirements
How much should you recover from Customers in Rates?
Two Methods Exist to Determine Revenue Requirements
Cash Basis Revenue requirements defined based
on cash outflows and debt service
Utility Basis Revenue Requirements developed
using accrual accounting basis
Cash Basis Advantages
Understood by City Councils
Attempts to match cash inflows and outflows on a yearly basis
Meets bond obligations
O&M Expenses (Excluding Depreciation Expense)Capital Expenses
Debt Service (Principle and Interest)Total Revenue Requirements
Utility Basis Advantages:
Leads to more stable and consistent rate adjustments
Typically leads to a more financially stable and healthy Utility
O&M ExpensesDepreciation Expense
Rate of ReturnRevenue Requirements
Disadvantages Cash Basis
Conceals major rate problems and revenue deficiencies
Tends to result in unexpected and large rate adjustments
Not generally accepted by courts if rates are challenged
Utility Basis City Councils may
not understand Have to justify
cash reserves Explain funding
non-cash expenses - Depreciation
Explain importance of rate of return
How to Overcome Disadvantages
Do cost of service study on Utility Basis
If Large Adjustments are Needed: Define minimum rate adjustment to
meet debt service obligations Develop a plan to phase-in rates from
a cash basis to a utility basis
Education of Boards and Councils Theory of depreciation expense –
Reasonable representation of the amount of the system used on an annual basis
Cash represents a buffer that allows timely replacement of system to ensure reliability to customers
Cash balances allows the phasing in of large rate adjustments to minimize the rate impacts on customers (Long-Term Rate Track)
Develop a financial plan and explain the consequences of inaction
Rate of Return is a Necessary Component of a Rate Study Net Book Value X
Rate of Return = Target Return
Target Return is typically for operating income
Historical Investment(Accumulated Depreciation)
Net Book Value
May Subtract Contributions in Aid of Construction
Net Book Value(Outstanding Debt)
Equity in Assets
Weighted Average Cost of Capital
AmountPercent of NBV
Interest Rate
Weigted Average
NBV 20,000,000 Outstanding Debt 8,000,000 40% 5.5% 2.2%Equity in Assets 12,000,000$ 60% 7.0% 4.2%Weigted Average Cost of Capital 6.4%
Should a Public Power System Have a Rate of Return? Covers interest expense on debt Assets installed many years ago are
more expensive to replace today The rate of return attempts to recover
sufficient funds to replace the assets at some point in the future
Without an appropriate rate of return customers today may be subsidized by future customers
Cash Reserve Policies
Cash Reserve Policy
Why is a policy important? Ability to pay for normal capital
improvements Reserve fund for catastrophic events Funding of depreciation expense
Cash Reserve Policy
What is an appropriate cash reserve: Simple answer 3 – 6 months
operating expenses/revenues Does not account for storms Does not account for capital
improvement program
Cash Reserve Policy
Maintain 20% of Historical Investment Accounts for replacement of system Ensures cash exists for major catastrophes Should result in cash available for major
improvements Weaknesses
Major improvements to system may result in change in cash reserves at a time when utility does not have cash available
Comparison of Methods
Method AmountPercent to Reserve
Reserve Amount
Method Number
25% of Historical Investment in Utility 57,239,436$ 25% 14,309,859$ 1
Three Months Operating Expenses 21,335,644 25% 5,333,911 2
Six Months Operating Expenses 21,335,644 50% 10,667,822 3
AmountPercent to Reserve
Reserve Amount
Operation & Maintenance 21,335,644$ 15% 3,200,347$ Utility Deposits 115,000 100% 115,000 Principle & Interest Current Portion 1,554,111 100% 1,554,111 Insurance Deductible 1,000,000 100% 1,000,000 Historical Investment in Utility 57,239,436 1% 572,394 Current Construction Requests 2,296,391 15% 344,459 Total of Five Year Work Plan 14,852,308 15% 2,227,846 Minimum Researve 9,014,157$ 4
Financial Planning & Long-Term Rate Track
Case Study
Financial Planning Identify Rate Adjustments to Meet
Targets Minimize Impact on Customers Maintain Appropriate Cash Balances Achieve Target Operating Income Keep from getting complaints Re-Elect Officials
Tasks
Development of Long-Term Financial Plan
Define Minimum Rate Adjustment Define Target Rate Adjustment Define Minimum Cash Reserves Develop Rate Track
Financial Projection – Base Case
2005 2006 2007 2008 2009
Rate Adjustment 0.0% 0.0% 0.0% 0.0% 0.0%
Operating Revenues 21,811,953$ 22,134,770$ 22,462,365$ 22,794,808$ 23,132,171$
Operating Expenses 21,335,644 21,729,103 22,130,327 22,539,481 22,956,730
PILOT 1,156,034 1,173,143 1,190,505 1,208,125 1,226,005
Operating Income (679,724)$ (767,475)$ (858,468)$ (952,798)$ (1,050,564)$
Other Income & Expenses (245,806) (242,882) (246,951) (252,689) (252,167)
Net Income (925,529)$ (1,010,357)$ (1,105,419)$ (1,205,487)$ (1,302,731)$
Other Sources of Cash
Net Income (925,529)$ (1,010,357)$ (1,105,419)$ (1,205,487)$ (1,302,731)$
Depreciation Expense 2,043,415 2,114,370 2,247,453 2,322,729 2,400,252
Other Sources of Cash 1,117,886$ 1,104,013$ 1,142,034$ 1,117,242$ 1,097,521$
Other Uses of Cash
Capital Expenses 2,296,391 2,365,160 4,436,104 2,509,200 2,584,100
Principle on Debt 1,025,000 1,085,000 1,145,000 1,200,000 1,270,000
Other Uses of Cash 3,321,391$ 3,450,160$ 5,581,104$ 3,709,200$ 3,854,100$
Net Cash (2,203,505)$ (2,346,147)$ (4,439,069)$ (2,591,958)$ (2,756,579)$
Cash Balance 13,796,495$ 11,450,348$ 7,011,278$ 4,419,321$ 1,662,742$
Projected
Financial Projection – Base Case
2005 2006 2007 2008 2009
Debt Coverage Ratio
Sources of Cash 1,117,886$ 1,104,013$ 1,142,034$ 1,117,242$ 1,097,521$ Add: Interest Expense 525,148 469,111 409,300 345,380 277,390 Total Adjusted Cash Flows 1,643,034$ 1,573,124$ 1,551,334$ 1,462,622$ 1,374,911$ Debt Service Principle & Interest 1,550,148 1,554,111 1,554,300 1,545,380 1,547,390 Debt Coverage Ratio 1.06 1.01 1.00 0.95 0.89
Target from Bond Ordinance 1.20 1.20 1.20 1.20 1.20 Safety Factor 0.20 0.20 0.20 0.20 0.20 Target Debt Coverage 1.40 1.40 1.40 1.40 1.40
Projected
Cost of Service Rate Track
Year
Rate Adjustment Net Income Cash Flows
Cash Balances
2005 12.3% 1,615,149$ 337,173$ 16,337,173$ 2006 0.4% 1,662,082 326,292 16,663,466 2007 0.8% 1,798,444 (1,535,207) 15,128,259 2008 0.3% 1,814,954 428,483 15,556,742 2009 0.4% 1,862,297 408,450 15,965,192
Year
Debt Coverage
RatioMinimum
Cash Target
2005 2.70 9,014,157$ 2006 2.73 9,106,455 2007 2.87 9,500,932 2008 2.90 9,317,630 2009 2.93 9,416,545
Minimum Rate Track – Bond Coverage Ratio
Year
Rate Adjustment Net Income Cash Flows
Cash Balances
2005 2.6% (388,475)$ (1,666,451)$ 14,333,549$ 2006 1.0% (250,289) (1,586,079) 12,747,470 2007 0.0% (334,101) (3,667,752) 9,079,719 2008 0.0% (422,754) (1,809,224) 7,270,494 2009 0.0% (508,413) (1,962,261) 5,308,233
Year
Debt Coverage
RatioMinimum
Cash Target
2005 1.41 9,014,157$ 2006 1.50 9,106,455 2007 1.49 9,500,932 2008 1.45 9,317,630 2009 1.40 9,416,545
Projected
Minimum Rate Track – Cash Reserve Target
Year
Rate Adjustment Net Income Cash Flows
Cash Balances
2005 2.6% (388,475)$ (1,666,451)$ 14,333,549$ 2006 1.0% (250,289) (1,586,079) 12,747,470 2007 2.0% 106,762 (3,226,888) 9,520,582 2008 5.1% 1,188,292 (198,179) 9,322,403 2009 2.0% 1,613,183 159,335 9,481,738
Year
Debt Coverage
RatioMinimum
Cash Target
2005 1.41 9,014,157$ 2006 1.50 9,106,455 2007 1.78 9,500,932 2008 2.50 9,317,630 2009 2.77 9,416,545
Projected
Minimum Rate Track – Cash Flow Target
Year
Rate Adjustment Net Income Cash Flows
Cash Balances
2005 10.7% 1,284,654$ 6,679$ 16,006,679$ 2006 0.5% 1,348,559 12,769 16,019,448 2007 8.7% 3,347,325 13,674 16,033,122 2008 -7.3% 1,407,468 20,998 16,054,120 2009 0.5% 1,471,685 17,837 16,071,957
Year
Debt Coverage
RatioMinimum
Cash Target
2005 2.49 9,014,157$ 2006 2.53 9,106,455 2007 3.86 9,500,932 2008 2.64 9,317,630 2009 2.68 9,416,545
Financial Projection – Recommended and Approved
Year
Rate Adjustment Net Income Cash Flows Cash Balances
2005 3.6% (181,916)$ (1,459,892)$ 14,540,108$ 2006 3.6% 526,046 (809,744) 13,730,364 2007 3.6% 1,275,639 (2,058,011) 11,672,353 2008 3.6% 2,074,918 688,448 12,360,801 2009 0.0% 2,026,224 572,377 12,933,178
Year
Debt Coverage
RatioMinimum
Cash Target
2005 1.54 9,014,157$ 2006 2.00 9,106,455 2007 2.53 9,500,932 2008 3.07 9,317,630 2009 3.04 9,416,545
Cost of Service & Rate Designs
Cost of Service Information
Cost of Service is critical to understanding your costs, the rate design process, and justifying the costs charged to Customers
Do not use cost of service exclusively in designing rates
Other Factors to Consider Price Signals on Marginal Costs Social Concerns Economic Development Rate Impacts Legal Issues
If you move away from cost of service to increase a subsidy legal issues could arise
Cost of Service SummaryCost of Service
Projected Revenues % Change
Residential Service Rate 1 Standard Service 9,033,134 8,164,848 11%
Residential Service Rate 1 Space Heating Provision 54,393 49,519 10%
Residential Service Rate 1 Space Heating and Water Heating 67,848 59,070 15%
Residential Service Rate 1 Water Heating Only 404,848 357,077 13%
Residential Service Rate 1 - Senior Citizen Standard 641,816 459,470 40%
General Service Secondary Rate 2 3,725,583 3,407,969 9%
General Service Primary Rate 2A 178,031 150,755 18%
General Service Electric Heating Rate 113,668 105,001 8%
General Service Secondary Public Pumping Rate 13 22,019 20,209 9%
Traffic Signals 64,459 54,843 18%
Street Lighting 414,138 443,018 -7%
Security Lights 107,481 125,146 -14%
General Service Secondary Rate 3 4,907,395 4,490,400 9%
General Service Primary Rate 4 1,229,775 1,089,783 13%
General Service Primary High Load Factor Rate 15 704,317 596,982 18%
Test Customer Number One 711,938 639,532 11%
Test Customer Number Two 481,555 447,598 8%
Test Customer Number Three 317,113 282,949 12%
Test Customer Number Four 278,703 272,339 2%
Test Customer Number Five 183,499 156,024 18%
Total 23,768,046 21,476,623 10.7%
Customer Class
Unbundling Rates Unbundling has lost its influence in recent years
as customer choice legislation has slowed. Used to determine wheeling rates for customers
provided a choice of providers. Unbundling is beneficial in developing special
rates for customers or more accurately determine some existing rates.
Identify transformer costs for primary metered customers
Standby rates Net Metering Rates Economic Development Rates Electric Line Extension Policies
Unbundled Distribution Rates
Customer Class
Monthly Customer
Charge Dist. RateBilling Basis
Residential Service Rate 1 Standard Service 7.50 0.016 kWh
Residential Service Rate 1 Space Heating Provision 7.59 0.015 kWh
Residential Service Rate 1 Space Heating and Water Heating 7.81 0.016 kWh
Residential Service Rate 1 Water Heating Only 7.60 0.016 kWh
Residential Service Rate 1 - Senior Citizen Standard 7.33 0.015 kWh
General Service Secondary Rate 2 25.03 0.019 kWh
General Service Primary Rate 2A 91.67 0.017 kWh
General Service Electric Heating Rate 27.37 0.022 kWh
Residential Farm Service and Life Support Service Rate 12 - Standard 7.67 0.017 kWh
General Service Secondary Public Pumping Rate 13 24.78 0.010 kWh
General Service Secondary Rate 3 31.71 5.28 kW
General Service Primary Rate 4 112.29 3.97 kW
General Service Primary High Load Factor Rate 15 112.29 3.69 kW
Test Customer Number One 155.11 4.34 kW
Test Customer Number Two 155.11 1.36 kW
Test Customer Number Three 155.11 1.41 kW
Test Customer Number Four 155.11 1.43 kW
Test Customer Number Five 155.11 1.43 kW
Serving Outside City Customers
Cost Differences Customers may be more spread out resulting
in greater investments It may cost more to issue a bill and read
meters because of economies that exist when providing water and wastewater services to the same customers inside the city
Rate of Return issues (Not recommended to charge a greater rate of return outside the city for electric service
Typically cost differences exist only in the customer charge
Be careful it may be your biggest area of growth
Example of Cost Differences
Unbundled Charge
Residential Inside City
Residential Outside City Difference
Distribution Customer Costs 2.22 3.22 1.00 Transformer Customer Costs 0.79 1.63 0.84 Substation Customer Costs 0.18 0.26 0.08 Meter O&M 1.25 1.25 - Meter Reading 0.52 0.76 0.24 Billing 0.61 0.89 0.27 Services 0.79 0.90 0.11 Customer Service 1.14 1.14 - Subtotal 7.50$ 10.04$ 2.54$
Contributions To City
Contributions to City
Forms of Contributions Payment in Lieu of Taxes Free Electric Services Free services Over allocation of City Support
Services Under allocation from Electric to
Other Utility Services
Contribution to City
Is your contribution to city above “normal” contributions in your area. What is your direct contribution How much one time transfers Are allocations for city provided
services appropriate What is the cost of “free services” to
the city
Contribution to City
Allocation to Utilities for City Provided Services
Allocation for common utility functions Meter Reading Billing Customer Services Administration
Contribution to City
National average of cash-only contributions approximately 3.7%
National average including free service 5.8%