Utility financial playbook: Q&A for unprecedented times
We’re operating in uncertain times that test utility financial operations. The playbook of best practices on which utility finance departments historically rely may not have all the answers. In fact, best practices are invented daily as we wade deeper into the current environment.
Below are some of the questions about utility financial best practices Baker Tilly has received and provided insight on to clients. As additional topics arise that will benefit utility companies, this article will be updated.
Expand the section(s) below to view the FAQ.
Many small and medium-sized utilities have “significant” customers (i.e., contribute more than 10 percent of utility sales). Staying close to significant customers is important, especially when government-required shutdowns and declining sales are affecting these customers’ operations
While the utility will work with the customer to maintain service if they face a cash flow squeeze, it may be prudent for the utility to consider adjusting its allowance for doubtful accounts to reflect current events. Many utilities only review this calculation annually. However with the rapidly changing and unpredictably situations around COVID-19, a monthly look may be more appropriate. It may be better to adjust this regularly rather than record any large write-downs at year-end.
We all have empathy for customers who are financially struggling. Your utility will work with customers unable to pay by using customer assistance programs or longer-term payment plans. From a utility financial perspective, it may be appropriate to conduct a monthly review on the allowance for doubtful accounts and increase it for potential defaults in customer payments.
For projects placed on indefinite hold, it seems appropriate most overhead charges should stop until the projects restart. An applicable overhead that should still be applied is the “allowance for funds used during construction” (AFUDC), as the utility has capital tied up in each project.
The question then arises, “What do we do with the overheads that are now NOT being allocated?” Here are two potential treatments:
- Allow the overheads to flow to the income statement impacting current year income; or
- Record the overheads as a regulatory asset. Once things calm down, analyze the overheads to determine if these costs will become part of the future allocation pool, written off to expense or recovered in customer rates.
The Governmental Accounting Standards Board (GASB) has discussed offering temporary relief and delays on the implementation of some accounting standards.
Many metrics can be used to manage your utility. KPIs can be leading or lagging indicators. In this fast-changing environment, leading indicators can be more helpful in managing the utility’s financial direction.
Some leading KPIs that can be useful in determining the direction of revenues or source/uses of cash include:
- Forecasted days cash on hand (based on current cash plus expected revenues-forecasted operating expenses, capital expenditures and debt service)
- Daily collections divided by customer accounts receivable
- Aging of customer accounts receivable (to determine if customers are slowing their payments)
- Rate stabilization reserves compared to forecasted revenues (to determine potential sources of cash if needed)
- Aging of vendor payments due (if cash is tight the utility may slow its vendor payments)
- Daily locational marginal pricing (LMP) power costs in your region (if your utility is a market power purchaser for a portion of its load; this is helpful in determining cash needs for power costs)
- Customer web traffic, disconnections of customer automatic payments
- Applications for customer payment assistance programs
- Large customer daily kWh/kW statistics compared to the prior year (weather adjusted)
Update these and other KPIs at least monthly. In the case of forecasted days cash on hand, a weekly update will be more useful in spotting positive or negative trends.
