Financial Assessment for Water Utilities

Transcription

1 Financial Assessment for Water Utilities Speaker: Dawn Lund Vice President Utility Financial Solutions Traverse City, Michigan E: 1 International consulting firm providing cost of service and financial plans and services to utilities across the country, Canada, Guam and the Caribbean

2 Overview of basic indicators to determine overall financial health Overall financial health can effect capital reinvestment Concepts we talk about are what we repeatedly see working in the industry (exceptions to everything in this presentation) Methodical review the same any size of utility Review can apply to other utility types

3 Foregoing capital investment System aging Need major improvements Have to borrow for regular capital Operating at a loss Spending down cash Keeping rates artificially low Board/Council avoids rate adjustments We haven t had a rate increase in XX years We want to be the lowest cost provider.

4 Operators in the field/plant know what need to be replaced, finance knows what can be paid for In the perfect world, the field/plant operators/managers should be the driver in development of the capital budget The finance can check for reasonableness Reality?

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6 Do you have a five-year capital plan? Do you stick to the plan? Regular Investment in system? Ever cut capital to keep rates low (or finance limits reasonable investment)? Over 60% watch for aging and check capital plan

7 Comments: Utility A A $ 63,263,861 Historical Investment B $ 29,370,067 Accum Depreciation (B/A) 46% Percent Depreciated Acceptable Comments: 50% or less = Newer Over 60% should be watched for aging In general; Reinvest in Capital at least rate of depreciation Info Available on Balance Sheet

8 Pay as you go for regular capital Bonding for extra-ordinary capital Future reinvesting in the system (at least depreciation, can be age dependent)

9 Yearly Depreciation Comments: $ 1,863,509 Depreciation $1,500,000 Average Capital Acceptable Recommendation: Yearly Capital Expenditure ON AVERAGE should mirror Depreciation (Some years will be more, some less) This should be looked at in conjuncion with the "Age of System" : Older may need to reinvest more than depreciation

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11 Future management, Boards and Councils will continue to maintain adequate reserve levels Periodic reviews of cash levels and rate adjustments List methodology and show calculations in policy for ease of update in the future Identify time period to restore cash reserve if falls below minimum cash levels Cash restored through issuance of debt, rate adjustments, reduced expenses

12 Cash Balance If rates set appropriately and large capital cause cash to fall below minimum = bond issuance 12,000,000 10,000,000 Projected Cash Reserves 8,000,000 6,000,000 4,000,000 2,000,000 - Minimum Cash Reserves, 6,000,000 Cash Reserves, 2,000,

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15 Policy should identify minimum cash reserve level Cash should be allowed to be above the minimum level Cash reserves will fluctuate over time depending on age of assets and capital improvement program Falling below minimum levels trigger a rate increase or bond issuance for large improvements

16 Four Risk Factors to Consider % Risk Range to Influenced By: O&M Expenses (Less Depreciation) 12-25% Billing Cycle - timing of expenses VS Receipts Historical Investment in Assets 1-3% Age of System Annual Debt Payment % Timing of Debt Payments Total Five-Year Capital Plan 20% 1/5 of five-year plan - funds beginning of season Total of These Five Items $X,XXX,XXX MINIMUM Recommendation

17 Pay expenses Fund system improvements help ensure reliability Pay Debt Service Maintain stable rates for customers Fund unanticipated cost contingencies Phase in large rate adjustment Keep utility healthy for future Management

18 Cash On Hand Comments: Utility A A $ 33,945,391 O&M Expenses B $ 5,205,300 Cash on Hand (non-restricted) (A/B) 6.52 Factor 365/Factor 56 Days Cash on Hand of Total O&M for Electric LOW Find this information on your income statement and balance sheet Establish a Cash reserve policy for each utility Higher Bond Rating 150 Days

19 Identifies the amount of debt outstanding against the remaining Net Book Value How leveraged is the system Typical of what we see: Between %; 70% MAX

20 Outstanding Debt % Comments: Utility A A $ 33,057,749 NBV B $ 10,030,000 Principal (B/A) 30% Acceptable Comments: Typically 30-60%; Less than 70%) Find Info on your Balance Sheet

21 Identifies cash generated by operations above the debt service payment Debt coverage ratios mandated by covenants and established in bond ordinances Know your requirements and calculate with the yearly budget process

22 Technically in default even if making payment but not meeting Debt Coverage Ratio DEFAULT OF LOAN Affects ratings and ability to issue bonds in future Affects interest rate in the future = higher risk Ever pledge revenues of another utility? (combined)

23 Comments: Utility A A $ (1,071,944) Net Income B 1,936,076 Depreciation C 511,963 Interest (Sum A-C) $ 1,376,095 Cash from operations to pay Debt D $ 760,000 Yearly Debt Payment Sum (A-C)/D 1.81 Debt Coverage Ratio Acceptable Comments: Revenue Bonds 1.20 or Higher (General Obligation 1.0 minimum) Know your specific requirements! Info available on Balance Sheet, Income Statement, Cash Flow Statement

24 If operating at a loss, not funding replacement Adequate rate of return on investment to help ensure current customers are paying their fair share of the use of the infrastructure and not deferring the charge to future generations Typical range for a municipal 4-6%

25 Rate of Return Comments: Utility A A 33,057,749 Net Book Value B $ (1,071,944) Operating LOSS 2013 Loss - Critical C $ 478,000 Operating Income 2012 (C/A) 1.45% 2012 Return Percent Very Low Comments: NBV on Balance Sheet Operating Income on Income statement Divide Operating Income by NBV to get return % Cost of service study and/or financial projection to set a rate track to meet operating income Rate of Return (Typical range 4-6%)

26 Cost of Service studies should be completed every three to five years or when substantial changes in costs occur Was the study used? Key indicator can be the monthly customer charge

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28 Costs that do not vary with usage: Meter operation, maintenance and replacement costs Meter reading Billing Costs Customer Service Portion of Distribution/Collection System

29 Typical cost based residential customer charges: Typical Municipal System - $12+/Month

30 Increasing customer charges helps stabilize revenues Declining sales Weather Reduces subsidy between year-round customers and seasonal customers

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32 Small periodic increases to keep up with inflation 0-under 5% - inflationary 5-9% - a few large industrials Double digits = complaints

33 Need doesn t go away Decline in Cash Larger future increases Don t push off capital improvements (at least depreciation) Financially burdened when improvements are needed

34 Best Practices Small periodic rate adjustments less than 5% at any give time Adequate Historical increases between 5% and 10% with adjustments occurring less than three years apart Inadequate lengthy time between rate adjustments resulting in increases greater than 10% Implement increase in transition month = transparent

35 Overall financial health can greatly impact capital reinvestment Hopefully you have been given some guidance on financial areas to check Find you need help with an overall assessment, don t hesitate to call or . Very inexpensive and effective way to get an overall financial assessment excellent for Managers, Board/Council Members and City Managers

36 Dawn Lund, Vice-President Utility Financial Solutions International consulting firm providing cost of service and financial plans and services to utilities across the country, Canada, Guam and the Caribbean