Foundations of Finance March 8, 2018 International Womans Day - - PowerPoint PPT Presentation

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Foundations of Finance March 8, 2018 International Womans Day - - PowerPoint PPT Presentation

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Foundations of Finance March 8, 2018 International Womans Day National Peanut Cluster Day Jeff Hughes Environmental Finance Center UNC School of Government 919.843.4956 jhughes@unc.edu www.efc.sog.unc.edu Water and Wastewater

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March 8, 2018 International Woman’s Day National Peanut Cluster Day Jeff Hughes Environmental Finance Center UNC School of Government 919.843.4956 jhughes@unc.edu www.efc.sog.unc.edu

Foundations

  • f

Finance

Water and Wastewater Leadership Center

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Environmental Finance Center

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How you pay for it matters

Supporting the fair, effective, and financially sustainable delivery of environmental programs through:

  • Applied Research

– Fees and finance

  • Teaching and Outreach
  • Program Design and Evaluation

– Dashboard – Capital planning tools

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Water Quantity Management Challenges

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Water Infrastructure Challenges

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Water Quality Management Challenges

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Customer Confidence Challenges

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Objectives for the Day

1. Improve ability to identify finance information that is relevant (and irrelevant) to the sustainability and success of your operations. 2. Improve understanding of basic financial terminology and trends. 3. Gain confidence to help answer key finance questions. 4. Strengthen ability to communicate financial information to customers/“shareholders,” management, and elected officials.

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Agenda

  • 1. Introduction to financial leadership
  • 2. Financial health/benchmarking
  • 3. Looking beyond budgetary line item costs
  • 4. Revenue trends
  • 5. Affordability
  • 6. Capital finance trends
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Finance Questions and…

….Burning Issues

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Financial Leadership??

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Krispy Kreme Corporate Accomplishments

  • Sales of $778.6 million, a 28 % increase over last

fiscal year (52-week year).

  • Net income of $39.1 million, up 51.6 percent over

last fiscal year

  • Opening 53 factory stores and 10 commissaries.
  • Acquiring Montana Mills Bread Co., Inc.,
  • Achieving a 24.0 percent national market share
  • Successfully rolling out our new Krispy Kreme

Signature Coffees across North America.

  • Being recognized by Restaurants and

Institutions

SOURCE: Krispy Kreme Annual Report

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Orange Water and Sewer Authority Corporate Accomplishments

  • Renovation of Pump Station ($540,000)
  • Replacement of 14,000 of water ft of water line

($2.9 Million)

  • Rehabilitation of 19,000 ft of sewer line ($650,000)
  • Begun evaluation of reclaimed water project.
  • In house study of establishing more

comprehensive water conservation program.

  • Ambitious 15 year CIP identifies $251 million of

necessary system improvements.

SOURCE: Annual Report

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Net (Plant) Assets/Operating Revenue

http://www.waterrf.org/publicreportlibrary/91257.pdf

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Penn and Teller

http://www.amazon.com/gp/product/B00MQM VQTE/ref=asc_aa?ie=UTF8&redirect=true&re directToAsin=B00MQMVQTE&t=0m0s&tag=cli cker_piv-20 https://www.youtube.com/watch?v=YFKT4jvN 4OE

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Assessing Financial Condition

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Assessing and Presenting Financial Information

  • For your lender
  • For yourself
  • For your board
  • For your boss

– Engineer – Finance

  • For your neighbor
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Assessment of Your Utility Annual Report or Management Discussion

  • Overall fiscal health?
  • Biggest finance related accomplishment?
  • Biggest financial challenge?
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Rating Agency’s View of Industry

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Outlook according to Moody’s

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Ratings

Source: Moodys Municipal Bond Rating Scale, November 2002

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The ‘Nessie’ Curve

Source: Dawn of the Replacement Era, AWWA

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Water Distribution System

  • Average yearly expenditure over the last 20

years is $226,000

  • This equates to a 1,396 year replacement schedule
  • Yearly funding should average $4,000,000
  • 162 miles of unlined cast iron mains
  • Poor condition of distribution system directly

affects water quality

Source: Linda Sims, City of Durham, Department of Water Management

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Whiteboard Video: Financial Benchmarking

http://www.waterrf.org/Pages/Projects.aspx?PID=4366

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The Most Common Financial Indicator?? Compare with Caution!!

$563 $753 $298 $282 $524 $1,032 $497 $582 $414 $643 $669 $843 $0 $200 $400 $600 $800 $1,000 $1,200 2004 2005

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Operating Expenditure vs. Operation Expense

  • Financial terminology is not always

consistently applied but…

– “Expense” may includes non “monetized” items such as depreciation that tend to be “related” to what the utility is or should be seeing in their capital expenditures – Sometimes, we are more concerned about cash “expenditures” – Key take-away – know what you are comparing!

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Operating Expenditures

Graphic Source: NACWA 2014 Finance Survey and Report Executive Summary

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Major non-cash costs that are not considered operating expenditures

  • Principal payments
  • Interest payments (for governmental utilities)
  • Pay as you go outlays
  • Transfers other than reimbursements
  • Depreciation expense
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Depreciation “Simplified”

  • Method of allocating initial cost over time to

be in sync with income generation.

  • Estimate of value of asset being used up

(worn down) over time.

  • Formulaic conversion a capital expense to a

recurring expense

– Deductible against income for tax purposes (for tax paying entities) – Useful indicator of “full cost pricing” -- whether revenue (rates) are covering capital costs

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King of the Investor Indicators: Debt Service Coverage

  • Debt Service Coverage = Revenue available

to pay debt service divided by debt payments

  • Multiple variations on how this is calculated

(what gets added to revenues and what gets subtracted)

  • Simplest Version: Revenues available to pay

debt service = Operating Revenues – Operating Expenditures

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Debt/Needs Indicators

  • Net Assets = Total Assets – Total Liabilities
  • Long Term Debt/Net Assets
  • Debt per account
  • CIP costs per account
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Assessment Exercise

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“Costs”

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Single vs. Triple Bottom Line

Graphic Source, El Paso Triple Bottom Line: Desalination and Reuse Water Final Report, Prepared for El Paso, Stratus Consulting

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Source: Fayetteville Observer 2/ 6/ 04

Fixed vs. Variable

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Why does this happen?

Revenue and Expenses for Charlotte-Mecklenburg Utilities in a Given Year Source: CMU Director Doug Bean’s presentation to the Charlotte City Council

  • n December 1, 2008.
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Dividends vs. Reimbursements

  • Reimbursements for indirect services
  • Payment in Lieu of Taxes
  • Dividends

– Based on equity – Based on revenues – Based on net income

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Initial Capital Costs vs. Life Cycle

Common Applications

  • Type of pipes
  • Type of pumps
  • Treatment facilities

Initial Cost vs. PV of:

  • Repair
  • Energy usage
  • Replacement
  • Labor
  • ….
  • …
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Revenues

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Revenue case study?

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1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

Water Sales (1980-2009)

(Slide provided by Orange Water and Sewer Authority)

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Trends in Demand Growth

(Orange Water and Sewer Authority, Chapel Hill/Carrboro, NC)

Courtesy of Pat Davis, Orange Water and Sewer Authority

Raw Water Demand (MGD)

1965 1975 1985 1995 2005 2015 2025 2035 2045 2055

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Is it variable or is it gone??

20 40 60 80 100 120 140 160 180 200 220 240 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 Annual MGD

Actual Annual 5-Year Moving Average 1967 SWD Forecast 1973 RIBCO Forecast 1980 Complan Forecast Medium 1980 Complan Forecast Medium-Low 1985 Complan Forecast-Medium 1993 WSP Forecast

Source: Seattle Public Utilities

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What is happening?

100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000 1,000,000 1,100,000 1,200,000 1,300,000 1,400,000 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 20 40 60 80 100 120 140 160 180 200 220 240 260 280

Total Water Consumption Population Population

  • Prices went up
  • Homes became more efficient
  • Water users became more efficient
  • Decentralized initiatives increased

Source: Seattle Public Utilities

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Revenue and Expenses for Charlotte-Mecklenburg Utilities in a Given Year Source: CMU Director Doug Bean’s presentation to the Charlotte City Council on December 1, 2008.

Are there alternatives?

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Evolving Pricing: Water Utility 2.0?

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New business models?

  • Airlines – sur charge model
  • Phone/cable – bundled services for

predetermined fixed fees

  • Customer specific peaking charges?
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Affordability

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Finance Highlight

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Trends in User Charges

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Affordability Indicators

  • Annual User Charge/Median Household

Income

– Can be dominated/blurred by denominator or numerator – Families that don’t pay utility bills? – Statistical precision

  • Poverty rate
  • General socio demographic indicators

(unemployment..)

  • Range of emerging indicators
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Diverse Affordability Criteria

  • Credit worthiness (Rating Agencies)
  • System Financial Capability Assessment

(Regulatory Purposes)

  • Funding Agency Affordably Criteria for

awarding grants and subsidized interest (Allocating Scarce Public Subsidy)

  • Criteria for customers applying for

assistance from their utility

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EPA Financial Capability Assessment Guidance (1997)

CSO Financial Capability Assessment Guidance, 1996

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Panel Findings and Recommendations

  • “Fragmented

Governance”

  • “Varied viewpoints”
  • “Bifurcated regulatory

and organizational structures.”

  • “separately-managed

silos for drinking water, wastewater, and stormwater at all levels of government.”

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Cost of Water Service in Terms of Hours Worked

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S&P Affordability

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Local Customer Assistance Criteria

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Utility Level Customer Assistance Programs and Strategies

  • Water efficiency
  • Payment plans
  • Need based rate classifications
  • Structuring rates to minimize impact on low

volume/basic use

  • One time assistance payments
  • Recurring discounts
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Affordability Exercise

  • Is there a problem?
  • How do you measure it?
  • How should it be addressed?
  • Who should pay?
  • How should they pay?
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Capital Finance Developments

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Basic Questions Behind Debt

  • 1. What are terms (interest rate, length)
  • 2. What is security (General Obligation vs.

Revenue)

  • 3. What will be used to retire debt (Taxes vs.

utility revenues)

  • 4. Is a referendum needed
  • 5. What is the coverage requirement
  • 6. Is it taxable?
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Capital Financing Trends?

  • Impact of Tax Cut Act
  • Longer term debt

– Need asset life, investors, and legal framework

  • Green Bonds
  • Environmental Impact/Pay for Performance

Bonds

  • Public Private Partnerships

– Typically much higher cost of capital rates but risk incorporated into capital rates

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Paying for the Big Stuff

Graphic Source: NACWA 2014 Finance Survey and Report

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Cost of Capital

0.00 1.00 2.00 3.00 4.00 5.00 6.00

Revenue Bond Index

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Tax Exempt Revenue Bonds Rule

  • Backed by enterprise revenue
  • May or may not need referendum (usually

don’t)

  • Great rates for those with good ratings
  • 20 to 40 years (occasionally longer)
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Private Sources of Capital

  • Bond market 2 to 6 percent capital that does

not absorb risk

  • Public Private Partnership Equity 5 to 20%

capital that

  • Public Private Partnership Debt 4 to 8 %

percent blended with equity

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Example of Flows of Capital

  • Insert P3 diagram

88 https://efc.sog.unc.edu/project/alternative-water-project-delivery-models

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Retiring Private Capital

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Infrastructure Plan

Incentiving state and local investment tapping into private capital $200 Billion of New? Federal Investment

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Objectives for the Day

1. Improve ability to identify finance information that is relevant (and irrelevant) to the sustainability and success of your operations. 2. Improve understanding of basic financial terminology and trends. 3. Continue to strengthen techniques of communicating financial information to customers/“shareholders,” management, and elected officials