Foundations of Finance 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 Water and Wastewater Leadership Center
Environmental Finance Center 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 How you pay for it matters 2
Water Quantity Management Challenges
Water Infrastructure Challenges 4
Water Quality Management Challenges
Customer Confidence Challenges 6
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.
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
Finance Questions and… ….Burning Issues
Financial Leadership??
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
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
Net (Plant) Assets/Operating Revenue http://www.waterrf.org/publicreportlibrary/91257.pdf
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
Assessing Financial Condition 20
Assessing and Presenting Financial Information • For your lender • For yourself • For your board • For your boss – Engineer – Finance • For your neighbor
Assessment of Your Utility Annual Report or Management Discussion • Overall fiscal health? • Biggest finance related accomplishment? • Biggest financial challenge?
Rating Agency’s View of Industry 24
Outlook according to Moody’s 25
Ratings Source: Moodys Municipal Bond Rating Scale, November 2002
The ‘ Nessie ’ Curve Source: Dawn of the Replacement Era, AWWA
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
Whiteboard Video: Financial Benchmarking http://www.waterrf.org/Pages/Projects.aspx?PID=4366
The Most Common Financial Indicator?? Compare with Caution!! $1,200 2005 $1,032 $1,000 2004 $843 $753 $800 $669 $643 $582 $563 $600 $524 $497 $414 $400 $298 $282 $200 $0
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!
Operating Expenditures Graphic Source: NACWA 2014 Finance Survey and Report Executive Summary
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
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
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
Debt/Needs Indicators • Net Assets = Total Assets – Total Liabilities • Long Term Debt/Net Assets • Debt per account • CIP costs per account
Assessment Exercise 48
“Costs” 49
Single vs. Triple Bottom Line Graphic Source, El Paso Triple Bottom Line: Desalination and Reuse Water Final Report, Prepared for El Paso, Stratus Consulting
Fixed vs. Variable Source: Fayetteville Observer 2/ 6/ 04
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 on December 1, 2008.
Dividends vs. Reimbursements • Reimbursements for indirect services • Payment in Lieu of Taxes • Dividends – Based on equity – Based on revenues – Based on net income
Initial Capital Costs vs. Life Cycle Common Applications Initial Cost vs. PV of: • Type of pipes • Repair • Type of pumps • Energy usage • Treatment facilities • Replacement • Labor • …. • …
Revenues 57
Revenue case study?
Water Sales (1980-2009) (Slide provided by Orange Water and Sewer Authority) 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
Trends in Demand Growth (Orange Water and Sewer Authority, Chapel Hill/Carrboro, NC) Raw Water Demand (MGD) 1965 1975 1985 1995 2005 2015 2025 2035 2045 2055 Courtesy of Pat Davis, Orange Water and Sewer Authority
Is it variable or is it gone?? 240 220 200 180 160 Annual MGD 140 120 Actual Annual 100 5-Year Moving Average 1967 SWD Forecast 80 1973 RIBCO Forecast 60 1980 Complan Forecast Medium 1980 Complan Forecast Medium-Low 40 1985 Complan Forecast-Medium 20 1993 WSP Forecast 0 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 Source: Seattle Public Utilities
What is happening? • Prices went up • Homes became more efficient • Water users became more efficient • Decentralized initiatives increased 1,400,000 280 1,300,000 260 1,200,000 Population 240 1,100,000 220 1,000,000 200 900,000 180 800,000 160 Total Water Consumption Population 700,000 140 600,000 120 500,000 100 400,000 80 300,000 60 200,000 40 100,000 20 0 0 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 Source: Seattle Public Utilities
Are there alternatives? 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.
Evolving Pricing: Water Utility 2.0?
New business models? • Airlines – sur charge model • Phone/cable – bundled services for predetermined fixed fees • Customer specific peaking charges?
Affordability 67
Finance Highlight 68
Trends in User Charges
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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