UTILITY FINANCE & ACCOUNTING FOR FINANCIAL PROFESSIONALS -- DETAIL

 Course Prerequisite  -- Completion of FAI's Seminar for Non-Financial Professionals or a position in the finance, accounting or the rates area or an educational background including at least three classes in accounting. Advanced Preparation: None except preceding.

 UTILITY FINANCE & ACCOUNTING FOR FINANCIAL PROFESSIONALS : An indepth three day group-live seminar for financial professionals who already work in the area of utility finance & accounting who need to enhance their understanding of critical finance & accounting skills including GAAP for utilities, capitalization versus expense, bond ratings, IFRS & accounting for taxes.

 Program Level: Intermediate. Recommended CPE Credits: 22

 DAY ONE  8-4

 Calculation of ROE for the Utility  

 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 a real utility company. 

Rate of Return Regulation  

Learning Objectives: Understanding of why ratemaking drives the GAAP accounting and how different accounting methods and different accounting estimates are used for four major uses of accounting.        

          GAAP

          Tax

          Rates

          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 to 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 rate case revenue requirement development.

 Modifications to Rate of Return Regulation   

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

           Incentive 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 and Gas Adjustment Clauses 

 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 one of the energy adjustment reviews rate proceedings.

GAAP For Utilities  

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

          Why and How GAAP Differs from non-regulated operations

          Uniform System of Accounts (USOA)

          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 utilities. We talk about the need for ASC 980-360-35 given the impairment rules under GAAP (ASC 360-10-15). We review the utility's note on Significant Accounting Policies to see in which area the utility violates normal GAAP. We look at each of the regulatory assets and liabilities of a utility 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. We look at the Uniform System of Accounts.

COCKTAILS  4:30 -  5:30

DAY TWO  8-4 

Capitalization Versus Expense 

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

           Averch-Johnson Effect versus Competitive Concerns

           Problems in Recovery of Plant Costs

           Stranded Costs

 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 and the potential for stranded costs.

 Plant Issues

 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 debits and credits for retirement of plant with and without removal and salvage. This accounting differs from most nonregulated companies. The large regulatory liability which shows up due to ASC 980 is discussed. Also discussed is the concept of reserve deficiency and the enormous significance of such a deficiency if operations become competitive. 

Accounting for Income Taxes  

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

          Permanent Differences

          Temporary Differences

          Intraperiod Tax Allocation

          Investment Tax Credits 

We will talk about four 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 flow through regulatory asset is included.

Unique Regulated Utility Accounting Issues   

Learning Objective: To recognize the different terminology used by the utility industry and appreciate how these are caused ratemaking.

           Acquisition  Adjustment

          Contributions in Aid of Construction and Customer Advances for Construction

          Utility Format for the Financials

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

 The unique idea of the acquisition adjustment will be introduced followed by the details in

the FERC system of accounts. The CIAC and CAC will be discussed in terms of why we have these items and the different between them. We will 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

 CWIP AND AFUDC

 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 normal GAAP and the regulated company's method.

 Accounting Methods and their Impact on Financial Metrics

 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 and Business Combination Examples

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. 

International Financial Reporting Standards 

 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. We will discuss the revaluation of assets in the transition to IFRS.

Bond Rating 

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

          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. A project to determine the bond rating for a company is done as a group project. We compare our answer to the actual rating.

 Conclusions