UTILITY FINANCE & ACCOUNTING FOR FINANCIAL PROFESSIONALS

 TOPICS   Version 1/3/11 

Financial Accounting Institute
P.O. Box 118
Tenafly, NJ 07670

www.financialaccounting.com

201-568-0249

Prerequisite  -- Completion of FAI's Seminar for Non-Financial Professionals or a position at the utility in the finance, accounting or the rates area or an educational background including at least 3 classes in accounting. 22 CPE Credits for CPA’s.

DAY ONE  8-4 (6 hours and 45 minutes Day 1 and Day 2,  6 hours Day 3)

Calculation of ROE for the Utility and Parent Company -- 15 minute

Learning Objective: Mechanics of the calculation and relation to the allowed ROE.

We begin before 8 am (for those who arrive early) with an individual assignment using the financial statements of the company.

Rate of Return Regulation --2 hours

Learning Objectives: Understanding of why we end up with different accounting methods and different accounting estimates for the four major uses of accounting.

          GAAP

          Tax

          Rates -- Rate Cases

          Managerial

We discuss the conflicting goals of the groups who make accounting rules for the four major places where we use accounting data. This leads a preliminary discussion of tax-book temporary and permanent differences as well as ASC 980 regulatory assets and liabilities. Most of the time in this session is spent on how ratemaking uses the accounting methods and estimates. We will look at the details of the last rate case revenue requirement development.

Modifications to Rate of Return Regulation  --  1 hour

Learning Objective: To see the many different regulatory mechanisms which are possible and the implications of alternative regulatory frameworks.

           Adjustment Clauses and Cost Recovery Rates

           Rate Freezes

           Decoupling

           Pre-approvals

           Formula Ratemaking

We discuss the many different ways of modifying the traditional rate of return regulatory framework along with a discussion of what each accomplishes for the utility.

Energy Adjustment Clause -- 1 hour 30 minutes

Learning Objective: To see how adjustment mechanisms work and reduce risk at the utility.

          Theory of these Ratemaking Adjustments

          Examples of Fuel, Gas and Weatherization Normalization Clauses

          Implications for Making Management Decisions   

After an introduction to this topic and a discussion of the many different types of clauses and the different ways that they work, we work on a group project to see the implications for decision making when the utility has an adjustment mechanism in place. We look at rate review proceedings concerning the adjustment clause.

GAAP For Utilities -- 2 hours

Learning Objective: Understanding the applicability of ASC 980 and why its provisions make sense. 

          Why and How GAAP Differs from non-regulated operations

          Utility Specific GAAP - ASC 980

          Regulatory Assets and When to Remove Them

          Plant Write-Offs Under GAAP -- ASC 360-10-15

We discuss three specific pieces of GAAP with examples from the financials including illustrations of the application of ASC 980-20 from the company or other utilities. We talk about the need for ASC 980-360-35 given the impairment rules under GAAP (currently ASC 360-10-15). We review the utility's note on Significant Accounting Policies to see in which area the company violates normal GAAP. We look at each of the regulatory assets and liabilities of the company as shown on the financials and answer the question--why is this a regulatory asset or regulatory liability and not a normal asset or liability.

DAY TWO 8-4

Capitalization Versus Expense  -- 1 hour

Learning Objective:  Mastering the theory of capitalization versus expense and the motivations of managers and top management with respect to the issue.

           Influences and Motivations

           Financial Reporting, Tax Accounting, Ratemaking, Managerial Accounting

           Problems in Recovery of Plant Costs

           Retirement Units of Property

We discuss the impact on the numbers in the four sets of books when costs are capitalized rather than expensed and vice versa. Using an example of plant overhaul costs we analyze the impact on rates.

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Plant Issues -- 1  hour 45 minutes

Learning Objective: Appreciation of the significance of the ratemaking estimates of the life and removal costs and how under normal conditions errors in the estimates are corrected through accumulated depreciation.

          Accounting for Plant Retirement

          Risks of a Reserve Deficiency

          Asset Retirement Obligations -- ASC 410-20

We go through the accounting for retirement of plant. This accounting differs from most nonregulated companies. The large regulatory liability which shows up due to ASC 410-20 is discussed. Also discussed is the concept of reserve deficiency.

Accounting for Income Taxes  -- 2 hours

Learning Objective: Understanding the accounting for tax-book differences and normalization versus flow through for ratemaking.

          Permanent Differences

          Temporary Differences

We will talk about two different income tax issues; most the time spent on the use of normalization or flow through for ratemaking.  We look at the utility’s deferred tax balances, where they came from and the ratemaking implications. An illustration of the ASC 740 regulatory asset is included.

A Problem of Definition – Net Income, Operating Income and Cash Flow -- 1 hour

Learning Objective: To recognize the different terminology used by the utility industry and by Wall Street.

          Statement of Cash Flows

          Different Definitions for the Same Terms

We begin with the Statement of Cash Flows. We look at how and why the utility sometimes organizes its Balance Sheet and Income Statement differently than other companies.  Then we investigate the many meanings of the terms Net Income, Operating Income and Cash Flow.

DAY THREE  8-3

Accounting Methods and their Impact on Financial Metrics -- 1 hour

Learning Objective: Gain an understanding that key financial measures and ratios can be significantly influenced by alternative accounting methods and estimates.

          EBITDA
          Cash Flow

          EPS

          Debt/Capitalization         

          Leasing Example

We will look at how key financial measures are impacted by the classification of transactions under GAAP and how the classification for ratemaking can impact rates. Examples of the Purchase Method of Accounting for Business Combinations and the choice between Operating or Capital Lease Accounting will be studied.

CWIP AND AFUDC -- 2 hours

Learning Objective:  Understanding how the utility recovers its construction financing costs from the ratepayers.

          AFUDC versus Interest Capitalization

Analysis of the two methods of rate setting --CWIP in rate base and CWIP not in rate base. Comparison of interest capitalization under ASC 835-20 and the regulated company's method. 

Credit Rating -- 2 hours

Learning Objective: See how the bond raters rate the bonds of a company in order to see what we need to do as a company to improve or maintain our rating.

          S&P Targets for Bond Rating

          Capitalization Ratios

          Funds Flow Ratios

          Adjustments to Financial Statement Figures

This is a specific example using the financial statements in financial analysis. We focus on how S&P uses ratios to determine the bond rating the company is done. We compare our answer to the actual rating.

International Financial Reporting Standards --  1 hour 30 minutes

Learning Objective: To see the major differences between current GAAP and IFRS  for the regulated utility.

           Principal Rather the Rules Based            

           IFRS creates bigger differences between Regulatory and Financial “Sets of Books”

           Regulatory Assets and Liabilities

           AFUDC versus Interest Capitalization

           Mass Property Accounting Issues

           Impairment Rules

We will look at the significant changes in GAAP under IFRS for the regulated utility and see how these changes will impact the amounts on the Balance Sheet and the volatility of Earnings.

Conclusions -- 30 minutes