FAI Seminar Design



	FAI SEMINAR DESIGN -- SUGGESTED TOPICS AND DESCRIPTION Version 8/24/09 -- TWO SEMINARS SHOWN HERE UTILITY FINANCE & ACCOUNTING FOR FINANCIAL PROFESSIONALS & UTILITY FINANCE & ACCOUNTING FOR NON-FINANCIAL PROFESSIONALS Financial Accounting Institute P.O. Box 118 Tenafly, NJ 07670 www.financialaccounting.com 201-568-0249 Information to be Supplied by Client -- For each topic which is chosen for the seminar FAI is asking your organization to supply information and/or documents in order to make this topic most relevant to the students. Although much of this information may be on the web we would appreciate hard copies of the materials. If this information is not supplied, FAI will use examples from public documents from your organization or from relevant utility companies. Under each topic the Info Request section outlines the information FAI would like to have and is an indication of the degree of customization on this topic. If some information is unavailable or proprietary you can so indicate. UTILITY FINANCE & ACCOUNTING FOR FINANCIAL PROFESSIONALS 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. These topics could be eliminated to make this a two day seminar or could be replaced by other topics which are shown at the end. Or some of the optional topics could be added to create a four day class. 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. Info Request 1. Two copies of the latest Annual Report of the utility or of each utility if more than one utility subsidiary and of the parent company if the utility has a parent. 2. Latest 10-K and 10-Q of each entity if US companies and they file these documents. 3. A statistical summary of the company, parent and/or subs that are normally sent to financial analysts on Wall Street 4. An example of the calculation of the earned regulatory return on equity for one or more of regulated entities and utility services and a reconciliation to the financial ROE for that business if available. 5. Copies of the last detailed analysis by S&P and Moody's resulting in the current Credit Rating. These should be documents between 8 and 25 pages long. The Utility's Four "Sets of Books" --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, Energy Adjustment Clause 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. Info Request -- If your company has multiple utility subsidiaries or operates in multiple states you may want to select one or more regulated utility companies and states as the examples rather than provide information for all rate cases. If your organization is a Public Utility Commission or a Law Firm please choose one or two utilities that you feel would be good examples for the seminar and try to get the information for these companies. This should be done for all of the Info Requests below. 1. Two copies of the most recent litigated rate order. This should be an order which shows disallowance's and the development of the revenue requirement (not a case which was settled). 2. Two or three examples of expenses disallowed in a rate case with relevant sections from the testimony of various parties and the commission's decision. 3, One or two examples of rate base items disallowed in a rate case with relevant sections from the testimony of various parties and the commission's decision. 4. A description of any kind of adjustment to rates other than the rate case. For example, fuel or gas adjustment clauses, weather normalization. Include information on which jurisdictions, frequency, lag in changing the rate and whether this change is separately shown on the customers bill 5, An executive summary of the issues and outcome in the rate case. 6. If the last rate case was settled, the rate order from that settlement and an executive summary of that case. 7. any testimony or major issues in the last rate cases which would be important to discuss in the seminar. 8. Copies of any recent financial analyst research reports from "Wall Street" firms about the company. 9. Copies of any financial press releases in the last year. 10. DVD, CD or mp3 or (if none available) a transcript of the last annual meeting of shareholders. 11. DVD, CD or mp3 or (if neither available) a transcript of the last presentation by company management to the financial community. 12. DVD, CD or mp3 or (if none available) a web link of recent earning release conference calls. 13. What is the name of a municipal utility in the state? Is it subject to rate regulation by the state commission? 14. What is the name of a coop in the state? Is it subject to rate regulation by the state commission? 15. A chart similar to the one shown here for the each jurisdiction and utility service with reference to the last rate order Jurisdictions/Services FERC STATE 1 STATE 2 % of Parent Company Revenue Date Filed Date of Last Rate Order Allowed Return on ST Debt Allowed Return on LT Debt Allowed Return on Preferred Allowed Return on Equity Overall Allowed Return Test Year Ended Type of year used is generally used (historic, projected) Is the year used called the test year or rate year Does the commission reduce the rate base by the deferred taxes due to the normalization method or include these deferred taxes at a zero rate in the allowed return on rate base? Agreement to not have another rate case until -- Provide date Agreement to share above a certain ROE --Yes or No If Yes -- % for ratepayers If Yes -- Amount of ROE above which sharing begins Are the commissioners elected or appointed? How many commissioners are there? Do the commissioners listen to the rate case or is it an ALJ or Hearing Examiner? How is the commission regarded in terms of its “fairness” to stockholders? One source of this information would be the Regulatory Research Associates Comparison of the State Commissions. Please provide this report if available. If known, what test year will be used for the next rate case? When will the next rate case be filed? Label this as to whether it is a known date or guess. Why will the next rate case be needed? What were the major issues in the last case? What will be the major issues in the next rate case? Are there any court actions between the company and any commissions with respect to rate issues? Which industrial or business customer is the largest? Who are the parties to the last rate case in each jurisdiction? What is the name of group which intervenes behalf of residential rate payers? What activities are non-regulated as to rates? What percent of the utility's revenue are generated from such service? Is their customer choice (i.e., competition) for your electric or gas service? If so, what percent of the customers have gone to the competitors? If the company operates an electric or gas utility and there is customer choice for buying their energy describe the company’s obligation as the provider of last resort and how the company makes a profit from selling energy. Is there customer choice (i.e., competition) in metering or meter reading? If so, what percent of the customers have gone to the competitors? What potential areas for future deregulation exist? Has this jurisdiction attempted to limit the earned return on equity which the company will be allowed to keep? Please explain. 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 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. Info Request 1. Does the company have any adjustments to their rates which occur without a general or overall rate case (i.e., one which addresses all of the utility's revenue requirement). If so please include a description of how this works. 2. Does the company operate under any of the items listed above. If so please provide details. Energy and Gas Adjustment Clauses* -- 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. Info Request 1. A copy of the last order from the commission discussing recovery of an energy adjustment (if applicable). 2. A description of how each type of adjustment mechanism works (including trackers, riders, balancing accounts, etc.). Frequency of rate adjustment, when the adjustment occurs, any interest accrued, is the adjustment a 100% pass through, etc. 3. What are the clauses called? 4. A recent rate order for such an adjustment mechanism. 5. An example of a disallowance of costs related to an adjustment clause. 6. What are the additional charges or credits called on the ratepayers' bills? 7. A sample bill sent to a customer and a written description of how to read this bill (if one exists). 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. Info Request 1. Which parts of the utility if any do not follow ASC 980? 2. Which parts of the parent company do not follow ASC 980? 3. What is the largest non-regulated revenue activity of the utility and what percent of the total revenue of the utility does this represent? 4. If any utility operations went off of ASC 980 in prior years please identify why that occurred, when that occurred. Where there stranded costs at that time and what was that amount? How much of these stranded costs were allowed recovery and how was this amount determined. What was the mechanism for recovery and how much is still left for recovery at the end of last year? 5. Provide an example of a ASC 980-360-35 disallowance at the company or sister utility company. This would be a disallowance of newly completed utility plant which was on ASC 980. 6. Provide an example of a ASC 360-10-15 impairment loss. This would typically be for non-regulated plant or deregulated plant. 7. A list of the Regulatory Assets and Liabilities at the utility with amount, amortization period, whether approved for recovery and weather include in rate base or interest is accrued on the amount. 8. An example of a regulatory asset for which the commission subsequently disallowed all or a portion from recovery. 9. Was Arthur Andersen the auditor for the company or any of its subsidiaries in the past? What years? 10. What is the Credit Rating on the senior secured debt from S&P and Moody's? 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 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. . Info Request 1. A description of the capitalization policy of the utility. 2. A few pages from the units of property list. 3. Under what conditions would a PC be capitalized? 4. FERC Form 1 and/or FERC form 2 Pages 402 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 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 410-20 is discussed. Also discussed is the concept of reserve deficiency and the enormous significance of such a deficiency if operations become competitive. Info Request 1. A copy of an analysis done to determine whether the utility has a reserve deficiency. 2. A copy of the last depreciation study. 3. FERC Form 1 and/or FERC Form 2 Page 219 4. Information regarding which plant assets have removal cost included in rates. What percent of the total gross plant is of this nature. 5. What assets have a ASC 410-20 Asset Retirement Obligation. Provide an explanation of the dollar changes from the end of the year before last to the end of last year in either one of these assets or the total for the utility. 6. A few pages from the list of retirement units of property and the dollar amount above which items which are not part of retirement units nor retirement units themselves are capitalized. 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 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. Info Request 1. Does the company own or lease its office building? Why? 2. If the company acquired or merged with another company in the past – was this handled as a purchase or a pooling? 3. Does the company have any capital leases? Describe. 4. Does the company use any of the following financial metrics for internal or external reporting? EBIT, EBITDA, Cash Flow, Free Cash Flow. Please provide the definition used and a sample of a report on which this metric appears. Unique Regulated Utility Accounting Issues -- 1 hour Learning Objective: To recognize the different terminology used by the utility industry and appreciate how these are caused by 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 difference 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. Info Request 1. Please provide an example of an acquisition adjustment and describe the amount at the time of creation, when this occurred and a description of property which was purchased. Is the acquisition adjustment included in rates and, if so, over what period of time? Is it included in the rate base? 2. Describe the commissions policy with respect to CIAC and CAC. 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 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 Credit Rating. A project to determine the bond rating for the company is done as a group project. We compare our answer to the actual rating. Info Request 1. Copies of the last detailed analysis by S&P and Moody's resulting in the current Credit Rating. These should be documents between 8 and 25 pages long. DAY THREE 8-3 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 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 ASC 740 regulatory asset is included. Info Request 1. What are the largest permanent differences at the utility? 2. Are there any examples in the past where there was a timing difference larger than the depreciation timing difference. 3. FERC Form 1 and/or FERC Form 2 Page 261 4. A chart similar to the one shown here for the each jurisdiction and utility service States STATE 1 STATE 2 STATE 3 ... Is any flow trough used Examples of largest flow through items Overall tax rate Federal + State (net of Federal deduction) 5. What action if any has each jurisdiction taken with respect to the decrease in the income tax rate to 34% in 1986? 6. What action if any has each jurisdiction taken with respect to the excess deferred taxes due to the reduction in the federal tax rate in 1986? 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. Info Request 1. A copy of a Monthly Capital Project cost summery with budget versus actuals. This should be a report which the Project Manager would receive. 2. How is the AFUDC rate determined in each jurisdiction? Is the FERC methodology used? If not specify the procedure. 3 .A copy of the AFUDC rate determination. 4. Is the CWIP in the rate base for any jurisdictions? Specify amount and how and when this amount was determined. 5. A summary of the AFUDC for the last year for the utility. 6. FERC Form 1 and/or FERC Form 2 Page 216 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. We will discuss the revaluation of assets in the transition to IFRS. Info Request Any specific company study on the transition to IFRS. Conclusions -- 30 minutes ADDITIONAL TOPICS Additional topics which could be put in place of topics which have an asterisk shown in the three day outline or topics for fourth day. Using Accounting Data to Value a Company* -- 2 hours Leaning Objective: To appreciate how Wall Street values the company's stock and hence see how shareholder value is determined by the stock market. To see how the investors use the accounting figures. Comparative Pricing Analysis Adjustments to get to Recurring Earnings Using Valuation Multiples Mergers and Acquisitions Valuation Techniques including Free Cash Flow We will work on two real examples of valuation. One uses present value of future cash flows, the other the price earnings multiple as determined from comparable companies. Of particular interest will be the determination of normal, recurring earnings (pro forma earnings).These standard valuation techniques are referred to in ASC 350. Info Request 1. The proxy statement for any merger or acquisition which the company had in the past for which there was a vote by the shareholders. Leasing -- 1 hour 30 minutes Learning Objective: Appreciation of our rules based GAAP accounting and how “creative accounting” could result in off balance sheet financing. See how regulators and the IRS might treat the same lease differently. GAAP Tax Accounting Ratemaking We review the GAAP rules for categorizing leases as either financing or operating. We see the IRS rules for determining the status as a true lease and we see why regulators like the operating lease treatment regardless of GAAP determination. The Balance Sheet, Income Statement and Statement of Cash Flows differences are illustrated. The impact on metrics such as EBITDA, Free Cash Flow and Percent of Debt in the Capital Structure are analyzed. Discussion as to why the FASB is going to revisit GAAP for leasing. Info Request 1. What category of items does the company typically enter into leases? 2. Are there any examples at the utility of leases which are capital under GAAP but are operating for ratemaking? If so, what are the entries needed to make the GAAP expense equal/the rent? 3. Who are the lessors for the utility's leases? Plant Impairment and Leasing Case -- 2 hours Learning Objective: A comprehensive review case aimed at improving present value analysis skills and sharpening participants focus on the differences between normal GAAP and what is required when following ASC 980 and ASC 980-360-35. Topics which will be put into sharper focus through this group project include AFUDC, plant impairment, categorizing leases and the different “sets of books.” AFUDC versus ASC 835-20 Leasing Rules Under ASC 840 IRS True Lease ASC 980-360-35 versus ASC 410-20 We work on this comprehensive review project for 60 minutes in groups and then review the project by having presentations from each group. Business Combinations -- 2 hours Learning Objective: Understanding of how we account for business combinations and why the FASB eliminated the pooling method. Purchase Accounting Rules--ASC 805 Acquisition Adjustments Goodwill Impairment--ASC 350 Income effects Group Project -- CGA Accounting for Goodwill and the elimination of pooling were major changes by the FASB. Info Request 1. The proxy statement for any merger or acquisition which the company had in the past for which there was a vote by the shareholders. 2. Was there a step-up in the tax basis of plant in this acquisition? If not, provide an example of where there was a step-up in the tax basis for the acquisition of another company which your company acquired. 3. Summary of accounting adjustments from a "purchase" acquisition and from a "pooling" acquisition. 4. Example of any acquisition adjustment due to the purchase of plant. 5. Any analysis done for the requirement impairment test for Goodwill. 6. What are the reporting units for the Goodwill impairment test and during what month is this analysis done. 7. Has the company needed to go to step 2 of the Goodwill impairment test. When was this, which reporting unit was the test done and did it result in an impairment? Accounting for Derivatives -- 1 hour Learning Objective: Understanding of the types of derivatives and how they are accounted for differently according to why they were entered into and whether thy are included in the Energy Adjustment Clause. Hedging Energy Trading Activities Market-to-Market Accounting We look at the five different reasons that energy contracts are entered into and see the different accounting for each. Info Request 1. Provide examples at the company of each type of derivative contract. 2. Provide an example of a ineffective hedge. Cost of Capital -- 2 hours 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 Group Project -- Cost of Capital Case After introductory material we will do a group project during which each group will determine the cost of debt, preferred and equity for the utility. Two methods of determining the cost of equity will be used -- the DCF method and the risk premium approach. Testimony from the last rate case will be reviewed. Info Request 1. Analysis of the company's cost of capital (i.e., discount rate in the engineering economics' analysis). 2. What is the hurdle rate used for capital budgeting decisions? Is it the same for all projects? 3. A copy of the cost of capital testimony from a current rate case or the last rate case. This should include all the exhibits especially the DCF methodology. 4. What is the Bond Rating on the senior secured debt from S&P and Moody's? Shareholder Value Maximization -- 1 hour 45 minutes Learning Objective: Learn how to make decisions in order to increase the stock price. Theory Measurement Techniques Statement of Cash Flows Free Cash Flow Measurements 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. We discuss the GAAP Statement of Cash Flows and the importance of the Cash from Operating Activities. 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. Info Request 1. Does the company use the term Balanced Scorecard? 2. Does the company use the term Stakeholders? What is the company goal with respect to stakeholders? 3. Is EBITDA used in any internal reports? Who receives these reports? 4. Does the company use the term Free Cash Flow? How is it defined? 5. Information on the 401-K plan, including choices of investment, matching by the company and last years performance of each of the funds available. 6. An example of a business unit performance measurement report and any explanation available. If the company uses EVA, ROI and/or a Balanced Scorecard measure, information on these should be provided. California Energy Crisis -- 1 hour 30 minutes Learning Objective: To understand the failed attempt at deregulation and the lessons for the future. Reasons for Wanting Competition Why Stranded Costs Should be Recovered Mechanism for Recovery Set Up Under AB 1890 Faults in the Recovery System What Happened We start with the regulatory compact and stranded costs. We discuss the 5.4 cents per kilowatt hour charge to ratepayers for power in order recover the stranded costs and why the price of power to the utilities rose to over 30 cents during December 2000. Info Request 1. In what ways was the utility impacted by this energy crisis? Sarbanes-Oxley -- 1 hour 30 minutes Learning Objective -- Understanding of the key provisions of SOX and why they were needed. 1. Estimate of the additional costs to the utility last year due to SOX. Enron -- 1 hour 30 minutes Learning Objectives -- Understanding of how Enron used SPE's to mask their financials and what Enron did during the California Energy Crisis. Special Purpose Entities -- Now Called Variable Interest Entities Enron's use of SPE's Enron's use of Mark-to-Market Accounting Enron's Actions during the California Energy Crisis Why the Audit Committee and CPA firm did not discover the incorrect accounting Changes since Enron in GAAP, Disclosure and Audit procedures A study of Enron and the changes which have come about since then. Info Request 1. Did the company have any dealings with Enron? Describe and indicate any losses which resulted. Worldcom Example of Major Audit Failure -- 1 hour and 30 minutes Learning Objective: See how Worldcom perpetrated a major accounting fraud and why the auditor's were unable to find it for two years. Impairment of Goodwill Capitalization of Operating Expenses Life Estimates Purchase Accounting Estimates We will look at the restated financials to see the incorrect accounting which was not found by the internal or external auditors for two years. Info Request 1. Was Arthur Andersen the auditor for the company or any of its subsidiaries in the past? What years? Mock Rate Case -- 1 hour 30 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 Rate Base Issues This is a role playing exercise. Groups of from 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. Info Request 1. What kind of advertising is allowed above-the-line in rates in each jurisdiction? Why? 2. Please provide details of any advertising disallowance in a recent rate case including relevant sections from the testimony of various parties and the commission's decision. 3. Did the company have any disallowance of contract costs in recent rate cases? Please provide details including relevant sections from the testimony of various parties and the commission's decision. Capital Project Analysis Review Case -- 2 hours 45 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 1 hour of presentations of answers is a comprehensive hands-on review of much of the material in the seminar. Info Request 1. What group(s) within the company do capital budgeting analysis (investment or project analysis)? 2. Indicate what size ($) projects are usually handled (or required to be handled) by this group. 3. What terms are used at the company for the capital budgeting analysis (e.g., Present Value of Revenue Requirements, Payback)? 4. What responsibility would the participants in this seminar have with respect to capital budgeting decisions (e.g., they should understand how the analysis works; they do the analysis; they do the analysis for small projects; or they give data to others to do the analysis, etc.? 5. Does the company have a minimum rate of return (hurdle rate) for projects? If so: Indicate the rate for each type of project. How are these rates determined? If a manager needed to do a capital budgeting analysis, who at the company would he or she call to get the appropriate rate? 6. Please send a copy of any manual or description of how the company expects capital budgeting analysis to be carried out. 7. Does the company have a standard computer program or excel template for making major capital expenditure decisions? If so provide a sample analysis including a summary page or two showing the present value of the cash flows analysis. Please send a copy of any manual or documentation on how the company's computerized project analysis system works. 8. What tax rate is used at the company for making decisions. (This should be the federal and state rate net of the state income deduction on the federal return.) UTILITY FINANCE & ACCOUNTING FOR NON-FINANCIAL PROFESSIONALS Prerequisite -- None These topics could be eliminated to make this a two day seminar or could be replaced by other topics which are shown at the end. 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 Balance Sheet, Income Statement Statement of Cash Flows Regulatory Assets 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. 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 as the Statement of Cash Flows and Tax Book Temporary Differences is introduced. We also talk about unique utility issues such as regulatory assets and stranded costs. Info Request 1. Two copies of the latest Annual Report of the utility or of each utility if more than one utility subsidiary and of the parent company if the utility has a parent. 2. Latest 10-K and 10-Q of each entity if US companies and they file these documents. 3. A statistical summary of the company, parent and/or subs that are normally sent to financial analysts on Wall Street. 4. Which parts of the utility if any do not follow ASC 980? 5. Which parts of the parent company do not follow ASC 980? 6. What is the largest non-regulated revenue activity of the utility and what percent of the total revenue of the utility does this represent? 7. If any utility operations went off of ASC 980 in prior years please identify why that occurred, when that occurred. Where there stranded costs at that time and what was that amount? How much of these stranded costs were allowed recovery and how was this amount determined. What was the mechanism for recovery and how much is still left for recovery at the end of last year? 8. Provide an example of a ASC 980-360-35 disallowance at the company or sister utility company. This would be a disallowance of newly completed utility plant which was on ASC 980. 9. Provide an example of a ASC 360-10-15 impairment loss. This would typically be for non-regulated plant or deregulated plant. 10. A list of the Regulatory Assets and Liabilities at the utility with amount, amortization period, whether approved for recovery a and weather include in rate base or interest is accrued on the amount. 11. An example of a regulatory asset for which the commission subsequently disallow all or a portion from recovery. 12. Was Arthur Andersen the auditor for the company or any of its subsidiaries in the past? What years? 13. Copies of the last detailed analysis by S&P and Moody's resulting in the current bond rating. These should be documents between 8 and 25 pages long. Financial Statement Analysis -- 1 hour 15 minutes Return on Equity Return to Common Book Value Versus Market Value Shareholder Value Created 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. Info Request 1. An example of the calculation of the earned regulatory return on equity for one or more of regulated entities and utility services and a reconciliation to the financial ROE for that business if available. 2. A page from a presentation to financial analysts or others showing some or all of the financial measures for the utility or the parent company. These financial measures should include shareholder return, ROE and book values. 3. The stock price for the parent company at he end of last year and at the end of the year before last. 4. Common stock dividends per share paid last year. 5. Is the common stock price at the end of the last two years shown in the annual report? If so on what page. 6. Is the amount of dividends per share of common shown for last year shown in the annual report? If so on what page. The Utility's Four "Sets of Books" – 1 hour 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 Energy Adjustment Clause 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 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. Info Request -- If your company has multiple utility subsidiaries or operates in multiple states you may want to select one or more regulated utility companies and states as the examples rather than provide information for all rate cases. If your organization is a Public Utility Commission or a Law Firm please choose one or two utilities that you feel would be good examples for the seminar and try to get the information for these companies. This should be done for all of the Info Requests below. 1. Two copies of the most recent litigated rate order. This should be an order which shows disallowance's and the development of the revenue requirement (not a case which was settled). 2. Two or three examples of expenses disallowed in a rate case with relevant sections from the testimony of various parties and the commission's decision. 3, One or two examples of rate base items disallowed in a rate case with relevant sections from the testimony of various parties and the commission's decision. 4. A description of any kind of adjustment to rates other than the rate case. For example, fuel or gas adjustment clauses, weather normalization. Include information on which jurisdictions, frequency, lag in changing the rate and whether this change is separately shown on the customers bill 5, An executive summary of the issues and outcome in the rate case. 6. If the last rate case was settled, the rate order from that settlement and an executive summary of that case. 7. any testimony or major issues in the last rate cases which would be important to discuss in the seminar. 8. Copies of any recent financial analyst research reports from "Wall Street" firms about the company. 9. Copies of any financial press releases in the last year. 10. DVD, CD or mp3 or (if none available) a transcript of the last annual meeting of shareholders. 11. DVD, CD or mp3 or (if neither available) a transcript of the last presentation by company management to the financial community. 12. DVD, CD or mp3 or (if none available) a web link of recent earning release conference calls. 13. What is the name of a municipal utility in the state? Is it subject to rate regulation by the state commission? 14. What is the name of a coop in the state? Is it subject to rate regulation by the state commission? 15. A chart similar to the one shown here for the each jurisdiction and utility service with reference to the last rate order Jurisdictions/Services FERC STATE 1 STATE 2 % of Parent Company Revenue Date Filed Date of Last Rate Order Allowed Return on ST Debt Allowed Return on LT Debt Allowed Return on Preferred Allowed Return on Equity Overall Allowed Return Test Year Ended Type of year used is generally used (historic, projected) Is the year used called the test year or rate year Does the commission reduce the rate base by the deferred taxes due to the normalization method or include these deferred taxes at a zero rate in the allowed return on rate base? Agreement to not have another rate case until -- Provide date Agreement to share above a certain ROE --Yes or No If Yes -- % for ratepayers If Yes -- Amount of ROE above which sharing begins Are the commissioners elected or appointed? How many commissioners are there? Do the commissioners listen to the rate case or is it an ALJ or Hearing Examiner? How is the commission regarded in terms of its “fairness” to stockholders? One source of this information would be the Regulatory Research Associates Comparison of the State Commissions. Please provide this report if available. If known, what test year will be used for the next rate case? When will the next rate case be filed? Label this as to whether it is a known date or guess. Why will the next rate case be needed? What were the major issues in the last case? What will be the major issues in the next rate case? Are there any court actions between the company and any commissions with respect to rate issues? Which industrial or business customer is the largest? Who are the parties to the last rate case in each jurisdiction? What is the name of group which intervenes behalf of residential rate payers? What activities are non-regulated as to rates? What percent of the utility's revenue are generated from such service? Is their customer choice (i.e., competition) for your electric or gas service? If so, what percent of the customers have gone to the competitors? If the company operates an electric or gas utility and there is customer choice for buying their energy describe the company’s obligation as the provider of last resort and how the company makes a profit from selling energy. Is there customer choice (i.e., competition) in metering or meter reading? If so, what percent of the customers have gone to the competitors? What potential areas for future deregulation exist? Has this jurisdiction attempted to limit the earned return on equity which the company will be allowed to keep? Please explain. Role Playing Exercise -- Rate Case -- 1 hour 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 Rate Base 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. Info Request 1. What kind of advertising is allowed above-the-line in rates in each jurisdiction? Why? 2. Please provide details of any advertising disallowance in a recent rate case including relevant sections from the testimony of various parties and the commission's decision. 3. Did the company have any disallowance of contract costs in recent rate cases? Please provide details including relevant sections from the testimony of various parties and the commission's decision. 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 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. Info Request 1. Does the company have any adjustments to their rates which occur without a general or overall rate case (i.e., one which addresses all of the utility's revenue requirement). If so please include a description of how this works. 2. Does the company operate under any of the items listed above. If so please provide details. DAY TWO 8 AM - 4 PM Accounting for Utility Plant -- 2 hours 30 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 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. Info Request 1. A description of the capitalization policy of the utility. 2. A few pages from the units of property list. 3. Under what conditions would a PC be capitalized? 4. FERC Form 1 and/or FERC form 2 Pages 402 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 ASC 740 regulatory asset is included. Info Request 1. Are there any examples in the past where there was a timing difference larger than the depreciation timing difference. 2. A chart similar to the one shown here for the each jurisdiction and utility service. States STATE 1 STATE 2 STATE 3 ... Is any flow trough used Examples of largest flow through items Overall tax rate Federal + State (net of Federal deduction) Cost of Capital* -- 2 hours 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 Group Project -- Cost of Capital Case After introductory material we will do a group project during which each group will determine the cost of debt, preferred and equity for the utility. Two methods of determining the cost of equity will be used -- the DCF method and the risk premium approach. Testimony from the last rate case will be reviewed. Info Request 1. Analysis of the company's cost of capital (i.e., discount rate in the engineering economics' analysis). 2. What is the hurdle rate used for capital budgeting decisions? Is it the same for all projects? 3. A copy of the cost of capital testimony from a current rate case or the last rate case. This should include all the exhibits especially the DCF methodology. 4. What is the Bond Rating on the senior secured debt from S&P and Moody's? DAY THREE 8 AM - 3 PM 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 interestaq1 and risk and return and relate this to the company’s 401-K plan. Then we turn around the compound interest solution to see how it becomes present value analysis. A present value problem follows. Info Request 1. Information on the 401-K plan, including choices of investment, matching by the company and last years performance of each of the funds available. 2 Do all employees have the same matching provisions? If not explain. 3. Which employees covered by a defined benefit plan? Shareholder Value Maximization* -- 1 hour 45 minutes Learning Objective: Learn how to make decisions in order to increase the stock price and to understand the GAAP Statement of Cash Flows. Theory Measurement Techniques Statement of Cash Flows Free Cash Flow Measurements 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. We discuss the GAAP Statement of Cash Flows and the importance of the Cash from Operating Activities. 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. Info Request 1. Does the company use the term Balanced Scorecard? 2. Does the company use the term Stakeholders? What is the company goal with respect to stakeholders? 3. Is EBITDA used in any internal reports? Who receives these reports? 4. Does the company use the term Free Cash Flow? How is it defined? 5. An example of a business unit performance measurement report and any explanation available. If the company uses EVA, ROI and/or a Balanced Scorecard measure, information on these should be provided. Capital Project Analysis Review Case -- 2 hours 45 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 Measuring Impact on Shareholder Value 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. Info Request 1. What group(s) within the company do capital budgeting analysis (investment or project analysis)? 2. Indicate what size ($) projects are usually handled (or required to be handled) by this group. 3. What terms are used at the company for the capital budgeting analysis (e.g., Present Value of Revenue Requirements, Payback)? 4. What responsibility would the participants in this seminar have with respect to capital budgeting decisions (e.g., they should understand how the analysis works; they do the analysis; they do the analysis for small projects; or they give data to others to do the analysis, etc.? 5. Does the company have a minimum rate of return (hurdle rate) for projects? If so: Indicate the rate for each type of project. How are these rates determined? If a manager needed to do a capital budgeting analysis, who at the company would he or she call to get the appropriate rate? 6. Please send a copy of any manual or description of how the company expects capital budgeting analysis to be carried out. 7. Does the company have a standard computer program or excel template for making major capital expenditure decisions? If so provide a sample analysis including a summary page or two showing the present value of the cash flows analysis. Please send a copy of any manual or documentation on how the company's computerized project analysis system works. 8. What tax rate is used at the company for making decisions. (This should be the federal and state rate net of the state income deduction on the federal return.) Conclusions – 15 minutes ADDITIONAL TOPICS Additional topics which could be put in place of topics which have an asterisk shown in the three day outline or topics for fourth day. We could begin before 8 am on the first day (for those who arrive early) with an individual assignment using the auditor's report from the financial statements of the company. Pretest -- Auditor's Report* -- 30 minutes Learning Objective: Appreciation of the significance of the outside auditor's work and the report included with a set of financial statements. Each participant reads through the auditor's report on the financial statements of the company and attempts answers questions which reveal why the auditor's opinion is so important to the financial markets and other users of the financial statements. Info Request 1. Two copies of the latest Annual Report of the utility or of each utility if more than one utility subsidiary and of the parent company if the utility has a parent. 2. Latest 10-K and 10-Q of each entity if US companies and they file these documents. 3. If in the past 20 years the company or a predecessor company had a qualified opinion due to a material uncertainty provide a copy of that auditor's report. 4. How much did the company pay the CPA firm for last years audit? 5. How long has the company used the same accounting firm? Who was the prior auditor? How much for other work? 6. If the auditing firm is not one of the Big Four, how many people are employed by that auditing firm (as an indication of its size)? Understanding the Utility’s Financials -- 1 hour Learning Objective: Be able to “read” the Balance Sheet and Income Statement of the company. Balance Sheet -- Costs and Values Income Statement -- Operating Income and EPS Statement of Cash Flows – Why it is important Financial Statement Notes We will go through the real financial statements of the company line by line and explain what each item on the Balance Sheet and Income Statement represents and how it is measured. This analysis will be related to the example in the Basics section if that section is in the seminar. We will look at the notes to see where the regulated utility “violates” normal GAAP. Energy and Gas Adjustment Clauses -- 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 one of the energy adjustment reviews rate proceedings. Info Request 1. A copy of the last order from the commission discussing recovery of an energy adjustment (if applicable). 2. How does each adjustment mechanism work. Frequency of rate adjustment, when the adjustment occurs, any interest accrued, is the adjustment a 100% pass through, etc. 3. What are the clauses called? 4. What are the additional charges or credits called on the ratepayers' bills? 5. A sample bill sent to a customer and a written description of how to read this bill (if one exists). CWIP AND AFUDC -- 1 hour 30 minutes 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. Info Request 1. A copy of a Monthly Capital Project cost summery with budget versus actuals. This should be a report which the Project Manager would receive. 2. How is the AFUDC rate determined in each jurisdiction. FERC method or if other specify the procedure. 3 .A copy of the AFUDC rate determination. 4. Is the CWIP in the rate base for any jurisdictions. Specify amount and how and when this amount was determined. 5. Provided a summary of the AFUDC for the last year for the utility. 6. FERC Form 1 and/or FERC Form 2 Page 216 HOMEWORK PROBLEM: TRANSACTIONS ANALYSIS -- 30 minutes to review This is 20 minutes of practice with entering transactions and preparing the balance sheet and income statement. Review of Homework home / seminars / register / clients / contact / about / privacy policy