UTILITY FINANCE



	UTILITY FINANCE & ACCOUNTING FOR NON-FINANCIAL PROFESSIONALS TOPICS Version 1/3/12 Financial Accounting Institute P.O. Box 118 Tenafly, NJ 07670 www.financialaccounting.com 201-568-0249 Prerequisite -- None DAY ONE 8-4 (6 hours and 45 minutes Day 1 and Day 2, 6 hours Day 3) Performance Measures -- 15 minutes We begin before 8 am (for those who arrive early) with an individual assignment using the financial statements of the company. How well did the company do last year for its stakeholders? What measures are contained in the annual report? Introduction -- 15 minutes Basic Accounting Concepts -- 1 hour 30 minutes Learning Objective: Understanding of where the numbers come from that we use at the utility to run the company (managerial accounting), prepare the financial statements, set rates and prepare the company's tax return. This leads to gaining the insight needed to use accounting information to create shareholder value. Balance Sheet Income Statement We use a spreadsheet approach in making accounting entries for a simple utility company which avoids the use of debits and credits. This is not a simplified version of accounting but a conceptual version perfectly suited to users of accounting information as contrasted with the debit and credit approach needed for preparers of accounting information (i.e., accountants). We develop the Income Statement and Balance Sheet and discuss the significance of these. We compare our simple example with the real financial statements of the company. While doing our transactions analysis (i.e., preparing the spreadsheet) we discuss general accounting concepts like the cost basis of accounting, accrual accounting, accounting methods and accounting estimates. Material which may be covered in more depth later such Tax Book Temporary Differences is introduced. Financial Statement Analysis -- 1 hour 15 minutes Return on Equity Total Shareholder Return Learning Objective: Mechanics of the calculations, relation to the accounting numbers used and the relation to the allowed ROE and Shareholder Value. We calculate the ratios indicated above from the financials and market price data for the sample utility while discussing the significance of each measure. We work on a group project to calculate these same metrics used in the real utility company and its parent corporation. The Utility's Four "Sets of Books" – 2 hours 45 minutes 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 Managerial Rates Rate Cases Cost of Service Regulation Rate Base, Operating Expenses, Allowed Return Above-the-line versus Below-the-line Expenses 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 discussion of tax-book temporary differences as well as 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. Role Playing Exercise -- Rate Case -- 45 minutes Learning Objective: See how different parties to the rate case are able to effectively argue their positions such that the utility can never be sure their position will prevail. Interveners -- Consumer Group, Industrial Ratepayers Rate Case Steps Above-the-Line and Below-the-Line Issues This is a role playing exercise. Groups of 4-6 people play the roles of Consumer Advocate, CEO of the Utility, Commission Staff Advisor, Large Industrial Ratepayer, CFO the Utility and the Commissioners. Each group presents arguments on why certain costs should or should not be included in rates. DAY TWO 8 AM - 4 PM Modifications to Rate of Return Regulation -- 1 hour 45 minutes 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. Present Value Analysis and Exercise -- 1 hour 15 minutes Learning Objective: Be able to calculate the present value of a series of cash flows. We begin with compound interest and risk and return. Then we turn around the compound interest solution to see how it becomes present value analysis. A present value problem follows. Shareholder Value Maximization -- 1 hour 30 minutes Learning Objective: Learn how to make decisions in order to increase the stock price. Theory Measurement Techniques Risk Measurement Relationship to Accounting Performance Measures Financing Decisions, Operating Decisions & Investing Decisions We develop the concept of shareholder value maximization as the present value of the future free cash flows. All decisions at the firm should be made by incremental analysis of the future free cash flows as impacted by the four sets of books. Illustrations of common financing, investing and operating decisions are used. Accounting for Utility Plant -- 2 hours and 15 minutes Learning Objective: Appreciation of the fact that there is ambiguity in whether costs should be capitalized or expensed and the implications of the choice. Capitalization Versus Expense Methods of Capitalizing More or Less Which is Better for the Utility Retirement Units of Property Straight Line Depreciation Accelerated Depreciation We look at straight line and accelerated depreciation for the four sets of books. We discuss the issue of when to capitalize costs in terms of units of property. Some conclusions are drawn as to what would be a better method for the company--to capitalize costs or expense them. DAY THREE 8 AM - 3 PM Accounting for Income Taxes -- 1 hour 45 minutes Learning Objective: Understanding the accounting for tax-book differences and normalization versus flow through for ratemaking. Temporary Differences We discuss 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. Cost of Capital -- 1 hour 30 minutes Learning Objective: To be able to calculate the two different weighted average cost of capital figures for the company, one which is used for ratemaking and the other for capital budgeting. Cost of Debt and Preferred Cost of Equity Comparable Companies Weighted Average Cost of Capital Two methods of determining the cost of equity will be discussed -- the DCF method and the risk premium approach. Testimony from the last rate case will be reviewed. . Capital Project Analysis Review Case -- 2 hours 30 minutes Learning Objective: Learn to do a present value analysis using incremental cash flows as impacted by the four sets of books. Identify Incremental Cash Flows as Opposed to Accrual Figures Selecting the Appropriate Discount Rate Use a Spread Sheet Approach Incorporate Into the Analysis Tax and Ratemaking Impacts on Cash Flows Shareholder Value Measurement As a group project we will prepare a spreadsheet to see whether a capital project should be done. The groups will present answers to questions which come up in the analysis. The 1 hour and 45 minute project and the one hour of presentations of answers is a comprehensive hands-on review of much of the material in the seminar. Conclusions – 15 minutes home / seminars / register / clients / contact / about / privacy policy