Page 1 of 13 Budget Documentation & Workpaper Guidelines for O&M and Capital Expenditures (2013/2015 Budget) Revised March 2011
Table of Contents Page 2 of 13 Page - Introduction & Purpose 3 - Timeline for Completion 4 - Budget Documentation Required Sections 5 Narrative 5 Approvals 6 Supporting Schedules 7 Budget Documentation Templates 9 - Supporting Budget Workpapers 9 - Checklist of Required Items 10 - Review Criteria 11 - Supplemental Tips, Suggestions, Examples, etc. 13 Revised April 2012 2
Introduction & Purpose Page 3 of 13 This document was prepared to assist you in the preparation of the budget documentation and workpapers for your business area for the 2013/2015 budget. Budgeting is the foundation and framework for developing supportable and attainable financial plans by legal entity, utility and jurisdiction. The documents you develop as a result of these instructions are a normal part of the annual budget effort. These documents will also be used to support various rate case filings. Please pay careful attention to the calendar and the new requirements as there have been significant changes to the deliverables and the timeline for budget completion. The new requirements have been developed in conjunction with Regulatory and all deadlines will be strictly enforced. The goal is to continuously improve the level of budget documentation and to: provide a consistent basis for business planning and budget reviews, facilitate any necessary budget adjustments, provide transparency and a clear audit trail, support rate case filings, and assist external reporting and investor relations with their communication to the investment community through SEC and regulatory reporting. As you compile your budget documentation and workpapers, please prepare documentation that is well organized, formatted for printing, checked for grammar and spelling, and that the documents could be easily understood by an outside party. Revised April 2012 3
Timeline for Completion Page 4 of 13 The following timeline has been developed for the preparation and review of the 2013/2015 budget documentation and workpapers for both O&M and capital expenditures: May 11 May 31 Business areas will prepare the preliminary budget walk forward only along with GAAP and FERC O&M Trend Analysis to be reviewed with the Regulatory team prior to the O&M budget being presented to the Financial Council. Both preliminary budget walk forward and GAAP and FERC O&M Trend Analysis should be saved in the appropriate business area folder on SharePoint site no later than 2 business days before this business area meeting with O&M and Capital Reporting team and the Regulatory team. In addition, this year s meetings will also include leaders from the business areas in order to facilitate better dialog and to ensure a complete understanding of what is going on in each business. May 14 May 25 June 14 June 25 June 26 July 13 July 31 GAAP and FERC O&M trend analysis meetings will be scheduled to review preliminary budget walk forwards and GAAP and FERC O&M Trend Analysis and finalize O&M budget before Financial Council meeting. Business areas will incorporate final O&M changes into budget with Executive Approval. Business areas will prepare and submit into their appropriate business area folders on SharePoint site Preliminary Budget Documentation: Narrative only. Budget documentation review meetings will be held with business areas. August 1 Final narratives, along with signature pages are due. Final documents should be saved in the appropriate business area folder on SharePoint site by 5 pm CT (4 pm MT). August 31 Final budget workpapers are due. All budget supporting documentation (i.e. source files in excel or word, and/or PDF s of any hard copy documentation used to create budgets) should be saved in the appropriate business area folder on SharePoint site. Please note that we will not be requiring Variance Analysis as part of our standard budget documentation packages this year. We are doing this in an effort to enhance productivity. In addition, by not requiring the Variance Analysis, it frees up your time to pull together narratives and workpapers that better support our rate case filings. However, if specific jurisdictions require Variance Analysis as part of a rate case filing, we will require those to be completed. In those cases, we will let you know as soon as possible, which jurisdictions require them and for what time periods to compare. This schedule has been developed taking into consideration the timing of the completion of the O&M and capital budget, and the time necessary to develop, research, and review the budget documentation. The schedule is more aggressive than in prior years due to changing business requirements, and will require additional focus to ensure all deadlines are met as they will be strictly enforced. Revised April 2012 4
Budget Documentation - Narrative Page 5 of 13 Required Sections The narrative requirements for the 2013/2015 budget cycle are similar to prior years requirements. However, we have re-ordered some of the components and added a Customer Value section (detailed below) in an effort to better align these narratives with how rate case testimony is prepared and to provide better overall support for the costs that are in these budgets. The O&M and Capital Reporting team will provide you with an example narrative from Energy Supply NSPM 2012-2013 Budget to assist you in developing your 2013/2015 budget documentation. Please review the additional requirements immediately and ask any questions early to ensure you can meet the established deadlines. For each of the business areas, required budget documentation will include the following: GAAP and FERC O&M Trend Analysis (May 14 May 25 th only to validate budget data) Narrative Approvals (signature page on the Narrative) Supporting Schedules In addition to the budget documentation (which will be filed with rate cases), budget workpapers are also necessary and will be addressed later in this document. Narrative Introduction Short paragraph that explains what the Business Area does and its main sub-areas Section I - Customer Value The idea behind this is to focus the reader on what this organization does for the customer, and what its key priorities, strategic initiatives, and challenges are for the upcoming year. In addition to highlighting the organizations largest priorities and investments for the upcoming year, this section should also include summary explanations of the largest and most important areas of base spend. While developing this section of the narrative, think about the business from the perspective of driver-based budgeting. What are the largest cost drivers in the organization and what is happening with them? You may choose to focus on items that are in the organization s scorecard. Non-financial information, such as number of employees, miles of new mains, changes in service level, the price of steel or other commodities, etc. are also helpful to establish context. This section should also document any cost savings initiatives the business area has included in their planning and budgeting (e.g., replacing an older bulldozer will not only reduce maintenance costs, but because it runs more efficiently, less fuel will be required). This information will be the support for business area testimony developed for rate case filings. Section II Walk forward of Major Cost Drivers and Major Cost Categories This section consists of two parts. The first is the Budget Walk Forward, which is a walk forward schedule of the business drivers and amounts that comprise the majority of the increases and/or decreases in costs in the form of tables and bar graphs beginning with the April 2012 forecast to the 2013 budget, the 2013 budget to the 2014 budget and ending with the 2014 budget to the 2015 budget. These walk forwards should be done from an activity-based perspective, meaning that we want to know not only that consulting costs are up $250K from the prior period, but what the consultants were working on and why, for example. The second part is the Major Cost Categories, which shows the total O&M Budget and what it is made of using pie charts for each budget year for a given business area. Revised April 2012 5
Page 6 of 13 Section III Functional Organization Chart This section should include an organizational chart that identifies all areas that fit within the organizational entity being discussed, as well as the headcount for each of those areas. Include splits by employee category (union, non-union, etc.). Section IV Major Business Functions and Key Activities (included as an appendix) This section generally describes the overall responsibilities of the areas included in the organizational entity being discussed. This section includes: a description of what the organization does, the legal entity under which it fits. Supporting documents should be included in this section to enable the reader to understand the context of the organizational entity being discussed. A summary of the departments contained within the organizational entity being discussed should also be included. For Service Company organizations, the Service Level Agreements provide an excellent source of information for this section. Section V Cost Allocation Methodologies A description of any cost assignment or allocation method used to distribute budget dollars between legal entities and utilities must be provided. Any significant changes in allocation methods from the prior year should be explained. Separate activities into the following categories: Operating Company Direct Charges, Service Company Direct Charges, and Service Company Allocated Charges. In the Service Company Allocated Charges category, please use a table layout to identify the subledger codes used by the business area. This information will be provided to Business Areas by O&M and Capital Reporting team. Please review your documentation in this section to ensure you are using only Service Company allocation factors that are approved for your business area, and that you explain all Service Company allocation factors your organization used in developing your 2013-2015 budget. Approvals Section VI Approvals The individual preparing the documentation for a particular area, the Business Area Financial Leader, and the Business Area VP should sign the Approvals page. Revised April 2012 6
Page 7 of 13 Supporting Schedules The supporting schedules used for the 2013/2015 budget documentation are generally the same as those used in prior periods budget documentation. Queries and appropriate data will be provided to business areas by O&M and Capital Reporting team. NOTE: You do not need to save these schedules or submit them to Corporate Budgeting and Regulatory, as they will be run one final time corporately when the budget is final for our official record (these are listed here only for assisting in business area analysis). Schedule 1 Business Area Analysis of Billings The schedule developed for this section should include the business area operating and maintenance expenses broken out by: Operating Company Direct Charges, Service Company Direct Charges, and Service Company Allocated Charges. The purpose of this schedule is to provide a breakdown of the amount of budgeted operating and maintenance expenses of the business area in each of the operating utilities by: (1) amounts where the charge originated within the utility company, (2) amounts directly assigned from the Service Company, and (3) amounts allocated to the utility from the Service Company. This query is not run by individual business areas, but rather provided to the Regulatory team as part of final budget documentation package. Business Objects query name: Bud Doc O&M Analysis of Billings Schedule 2 Business Area Service Company Billings The schedule developed for this section should include the Service Company costs for the organization, and the Xcel Energy legal entity to which they were directly billed or allocated. This schedule is intended to provide the amount of budgeted billings from each business area that manages Service Company costs, how much of those costs are billed to each Xcel Energy utility legal entity, and the amount billed to other nonregulated subsidiaries of Xcel Energy. This query is not run by individual business areas, but rather provided to the Regulatory team as part of final budget documentation package. Business Objects query name: Bud Doc O&M Svc Co Billings Schedule 3 Business Area Operating & Maintenance Object Comparisons This section includes the schedules for each utility company to be used as the basis for the variance explanations by object account. These comparisons are as follows: 2011 actuals vs. april 2012 forecast april 2012 forecast vs. 2013 budget 2013 budget vs. 2014 budget 2014 budget vs. 2015 budget The purpose of these schedules is to provide a comparison of each utility s operating & maintenance expenses by object account. The 2012 forecast compared to the 2011 actual expenses (the most recent historical period), the 2012 forecast compared to the 2013 budget, 2013 budget compared to the 2014 budget and the 2014 budget compared to the 2015 budget. Revised April 2012 7
Page 8 of 13 Business Objects query names: Bud Doc O&M Act vs Bud Var Bud Doc O&M Mar FCST vs Bud Var Bud Doc O&M Bud Yr 1 vs Bud Yr 2 Var These queries are run by individual business areas to perform necessary analysis, and provided to them by O&M and Capital Reporting team. Schedule 4 Business Area Operating & Maintenance FERC Comparisons This section includes the schedules for each utility company to be used as the basis for the variance explanations by FERC account. These comparisons are as follows: 2011 actuals vs. april 2012 forecast april 2012 forecast vs. 2013 budget 2013 budget vs. 2014 budget 2014 budget vs. 2015 budget The purpose of these schedules is to provide a comparison of each utility s operating & maintenance expenses by FERC account. The 2012 forecast compared to the 2011 actual expenses (the most recent historical period), the 2012 forecast compared to the 2013 budget, 2013 budget compared to the 2014 budget and the 2014 budget compared to the 2015 budget. Business Objects query names: Bud Doc O&M Act vs Bud Var Bud Doc O&M Mar FCST vs Bud Var Bud Doc O&M Bud Yr 1 vs Bud Yr 2 Var These queries are run by individual business areas to perform necessary analysis, and provided to them by O&M and Capital Reporting team. Schedule 5 Business Area Capital Expenditures by Project This section includes a complete listing of the business area s capital projects and amounts included in each utility s budget for capital expenditures. Verify that project descriptions are meaningful and easy for readers to interpret. This query is not run by individual business areas, but rather provided to the Regulatory team as part of final budget documentation package. Business Objects query name: Bud Doc Capital Schedule 6 Business Area Business Units This section includes a complete listing of the business area s JDE business units used in the budget. This query is not run by individual business areas, but rather provided to the Regulatory team as part of final budget documentation package. Business Objects query name: Bud Doc Business Unit Listing Revised April 2012 8
Page 9 of 13 Budget Documentation Templates To facilitate the development of the required documentation, and to provide a standardized format for the documentation across business areas, Microsoft Word template (an example of a completed Narrative from previous year) has been developed for the narrative and approvals sections, along with Microsoft Excel template for the variance analysis section of the budget documentation. Samples of the blank templates can be found on SharePoint site. Supporting Budget Workpapers In addition to the required budget documentation, each business area must also compile all supporting workpapers used to develop the 2013/2015 budget. Workpapers include the detail, including supporting assumptions and calculations, used to develop the budget and help form the link between the underlying business drivers and the dollar amounts included in the budget. Workpapers are NOT the Business Objects queries mentioned previously in the Supporting Schedules section. Workpapers should contain: - How dollars were derived (by JDE object for O&M AND by project for capital) - How accounting was derived - Explanation of expenses - Cost drivers for variances explained - Clearly defined project descriptions - Clear justification for any amounts included in Other - Rationale for increases or decreases from year to year They should also include any additional information that is relevant to budget dollars. For example: - Vendor quotes, quantities - Maintenance schedules - Escalation assumptions - Business growth assumptions - Historical data, where relevant Revised April 2012 9
Checklist of Required Items Page 10 of 13 Narrative Cover Sheet Major Business Functions and Key Activities Functional Organization Chart Walk forward of Major Cost Drivers of the organizational entity Cost Allocation Methodologies Approvals Approvals sheet (signed and dated) Workpapers Complete set of workpapers Electronic copies of workpapers saved in the appropriate Business Area folder on SharePoint site Revised April 2012 10
Review Criteria Page 11 of 13 The evaluation criteria to be used to guide the review of the budget documentation and workpapers submitted by the business areas (for completeness, level of detail, etc.) are listed below. Budget documentation has been provided at the agreed upon organizational level(s) (based on discussions between the business areas and Corporate Budgeting). Do the budget documentation and workpapers support the total dollars budgeted and where those dollars are charged (by legal entity and utility)? If not, additional (more detailed) explanations may be necessary. All required elements are included for each area (see Checklist of Required Items). Descriptions of Major Business Functions and Key Activities provide the reader with a high-level understanding of the nature of the organizational entity being discussed (e.g., the business area, functional areas, types of activities performed, for which organizations, etc.). Cost Allocation Methodologies explain why costs cannot be directly assigned to particular operating companies and/or utilities, and describe rationale for selection of particular allocation methodologies utilized. Any changes from prior years are clearly noted. Allocators used in the budget and included in the Cost Allocation Methodologies section are appropriate for the organizational entity being discussed. Pie chart figures tie out to 2013-2015 budget amounts, and sections are consistent with description of Major Cost Components. Description of Major Cost Drivers adequately explains key drivers of budgeted expenses (e.g., growth, unique projects, activities, initiatives, etc.). Schedules prepared at an object level that provides sufficient detail to understand significant year-to-year changes. Listings of all projects included in 2013 and 2015 capital budgets for each organizational area have been reviewed for meaningful project descriptions. Construction start dates, in-service dates and expenditure patterns for each project have been reviewed and are consistent with current plans. Workpapers have been provided for each area. Workpapers adequately support all budgeted O&M expenses and capital expenditures. Rationale for headcount additions (including budgeted but unfilled positions) is documented (e.g., changes in anticipated scope of work and reasons why, hiring in advance of expected retirements for succession planning, etc.). Headcount variance analysis schedule ties to the headcounts in CBS. Revised April 2012 11
Review Criteria (continued) Labor split by JDE business unit and object account is documented (this determines where labor costs are assigned by operating company and utility). Any significant changes to labor distribution from prior year are also explained. Rationale for any significant non-labor expense is detailed (through CBS tool or in a separate spreadsheet). Roll-up hierarchy is provided to build the link from manager-level budget inputs to higher-level budget documentation. No formatting changes have been made to the narrative or variance analysis schedules (e.g., font size & type, spacing, headers/footers, layout, heading titles, etc.). Page 12 of 13 Revised April 2012 12
Narrative Tips, Suggestions, Examples, etc. Page 13 of 13 Business areas residing in the Service Company are recommended to include the following introduction in the Major Business Functions and Key Activities section: The business area is a part of Xcel Energy Services Inc. and provides a variety of support services to Xcel Energy Inc. and its subsidiaries. These services are provided in accordance with Service Agreements entered into with each subsidiary. The Service Agreements are administered in accordance with Federal Energy Regulatory Commission (FERC) regulations there under. All acronyms should be defined the first time the acronym is referenced, followed by the acronym in parentheses. Each time thereafter the acronym can be used alone. For example, the first time FERC is used it should be referenced Federal Energy Regulatory Commission (FERC) and thereafter should be referenced FERC. Revised April 2012 13