Utility managers wear many hats and are often pulled in several directions so when the topic of long-range financial planning or forecasting comes up it can sound like “just one more task”. In reality long-range planning is integral to a utility’s success and ability to achieve its mission—to provide reliable and affordable service to its customers.
The challenges facing utilities are widespread including new regulations, succession planning or other staffing changes, managing operational cost increases, conservation, new customers, service territory changes, new technologies, replacing aging infrastructure, and local and state oversight. While there are trends within the industry, the specific issues on which your utility is focused are likely different than those of the utility down the road. The one commonality is the potential impact of these items on your utility’s finances.
For example, developing a new industrial park requires upfront capital infrastructure and review of system capacity to serve the additional customers. In addition to financing the capital costs, a utility may have operational changes that increase ongoing expenses. Management needs to address the timing of the cash outlay as well as the proper recovery of costs to ensure the long-term financial stability of the utility and its ability to continue to provide reliable and affordable service.
This is where long-range planning comes in. The goals of long-range planning are to:
- Proactively identify the need and timing for borrowing to finance capital improvements or replacements as well as the timing and magnitude of rate adjustments
- Understand the impact of projects and operational changes on key financial benchmarks such as cash flows and reserves, debt coverage, or earnings
- Make informed decisions related to projects, borrowing, and rate adjustments and communicate those to the governing body, customers, and other stakeholders
Now that we understand the purpose, where do we begin? The first step is to gather data. Start with historical data such as expenses, revenues, customer counts and sales, and capital activity. Next collect data on known and anticipated changes for the future; this can include inflationary increases and expenses that may increase by more than inflation such as insurance, labor, chemicals, and power. Customer growth and sales projections should incorporate historical trends as well as known changes such as annexations, development, and announced changes in usage level by significant customers. Finally the planned capital activity—additions as well as replacements—needs to be considered. By putting all the pieces together we get a picture of the organization’s future finances and can start to understand the impact on key benchmarks.
The next step is to evaluate the results and make potential adjustments. Contemplate “Do we need to borrow sooner? Delay projects? Or adjust rates more frequently?” The long-range plan becomes a tool to set a utility’s direction and assist management and the governing body in making decisions and understanding the impact of those decisions.
Completing a comprehensive long-range plan will take collaboration and input from management, operations, engineering, and finance. It is important to identify a champion who will keep the team moving forward and identify individual assumptions or pieces of information that may not support each other. Once the plan is complete and approved, actual results should be compared to the plan to determine if further adjustments need to be made to continue to move the utility in the desired direction, maintain the financial stability, and achieve its mission.
For more information on this topic, or to learn how Baker Tilly energy and utility specialists can help, contact our team.