Best Practices: Utility Financial Management in Difficult Times

Transcription

1 Best Practices: Utility Financial Management in Difficult Times A difficult economy provides the opportunity to leverage, or at least validate, financial management best practices. Paul McElroy 2010 APPA National Conference Orlando, Florida

2 Best Practices: Utility Financial Management in Difficult Times A difficult economy provides the opportunity to leverage, or at least validate, financial management best practices. Financial Infrastructure Model built to avoid or manage risk? Financial Management Best Practices Framework Do all stakeholders support the principles and policies? Are processes robust enough to capture, plan for, and manage externalities? Are processes in place to capture upstream trends? Broad responses to difficult economic times Communicate with all stakeholders Increase and sharpen focus on stress test scenarios Manage what s driving results JEA responses to the current economic environment Financial markets, specifically liquidity Operating expenses Capital program

3 Financial Management Infrastructure Is your financial management system built to avoid or manage risk? Competence and Resources Allocated High Low X Low Risk Profile High Response to difficult economic times will be determined by your relative risk profile, whether you have chosen to avoid or manage risk. If you have chosen to create value for your customers by managing risk; then does your organization have the competence and appropriate resources to be successful?

4 Financial Management Best Practices Framework Principles and Policies Planning Performance Do all stakeholders support the principles and policies? Are processes robust enough to capture, plan for, and manage externalities? Are processes in place to capture upstream trends? Pricing Philosophy Strategic Financial Balance Sheet Capital Program Scope, Goals, Objectives Key Financial Metrics Annual Pricing Plan Revenue Requirements Cost of Service, Rates Pay-go Strategy Market Capacity Operating Environmental Economic Analysis Ten Year Five Year Annual Budget Monthly Forecast Financial Analysis Liquidity Investments Asset Management Credit Availability Long-term Liabilities Discipline prioritization process Rigorous project definition Project Management Debt and Investment Policy Stress Test and Contingency Planning Revenues Expenses Scope, Goals and Objectives Key Metrics, Parameters Debt Affordability Model Risk Management Policy Enterprise-Wide Program Internal Audit Review Economic, Revenue and Expense Drivers and Trends Develop Contingency Scenarios Unit Sales Activity Number of Accounts Charge-off, Theft Consumption Trends Procurement Process o Unit prices o Bidding activity Hedging o Fuel o Interest o Other

5 Financial Management Best Practices Framework Difficult economic times call for action Communicate with all stakeholders, especially the governing board in the context of principles and policy. Increase and sharpen focus on stress testing and contingency planning. Results speak for themselves. In a volitile market, waiting for results is too late (and too difficult). Manage what s driving results!

6 Actively manage what s driving results! action $ Financial Results - lag Performance Trends - lead Time Early action, while difficult, will reduce the heavy lifting later in the business cycle.

7 Practical Example: Operating Within the Confluence of an Economic Downturn and Conservation Number of Electric Customers Number of Water & Sewer Customers 418, , , , , , , , , , , , , , , ,000 Month to Date Year to Date 2008 Actual 2007 Actual $ Variance % Variance 2008 Budget 2008 Actual 2007 Actual $ Variance % Variance 2008 Budget KWH Sold 1,283,155 1,500,022 (216,867) % 1,432,322 12,034,294 12,053,318 (19,024) -1.16% 12,814,994 Water 4,220 5,872 (1,652) -28,13% 5,699 48,589 53,126 (4,537) -8.54% 53,149 Sewer 2,943 3,779 (836) % 3,497 32,982 35,015 (2,033) -5.81% 34,153 Communicate policies and principles Sharpen the short-term planning focus Manage what s driving results Action

8 JEA s Response to the Economic Crisis Stick to principles, policies and plans, be proactive in identifying up-stream trends, then act! Held firm on planned pricing actions Base rate adjustments, including environmental and conservation charges Variable fuel rate adjustments Shored-up liquidity and capital structure Replaced $800 million Auction Rate Securities by expanding variable VRDO program Withdrew 90% of assets from safe investment fund Scoured the planet for new liquidity support Renewed, replaced or refunded existing liquidity facilities while we lost to the market on price, we held firm on terms and conditions.

9 JEA s Response to the Economic Crisis Stick to principles, policies and plans, be proactive in identifying up-stream trends, then act! Aggressively reduced operating expenses and capital programs Reduced or redeployed staff where possible Released temporary and contract workforce Froze all consulting contracts, evaluated and reduced/eliminated where possible Reduced/froze hiring, including replacements for the next twelve months Reduced/froze capital spending Cut non-mission critical expenses Deferred non-mission critical, repair and maintenance expenses Even in crisis, maintained: Safety Customer experience and reliability initiatives Investments with immediate verifiable returns Employee training and development Salary and benefit budgeted increases Employee incentive programs

10 JEA s Response to the Economic Crisis Stick to principles, policies and plans, be proactive in identifying up-stream trends, then act! Outcome, while painful and difficult, was successful Reduced full time equivilents by 9% Reduced annual O&M expenses by $30 million Reduced annual capital program by 50% Results as of year end 2009 Improved cash flow metrics Improved liquidity Lowered leverage Communicate policies and principles Sharpen the short-term planning focus Manage what s Driving results Action