Business Cycle of a Business Cycle of a Fixed AssetFixed Asset
-William Quam
Santee CooperSantee Cooper
Moncks Corner, SC
The state's leading resource for improving the quality of life for the people of South Carolina
Santee Cooper Headquarters, One Riverwood Dr.
About UsAbout Us
Total Revenue: $1.60 Billion
Customers:
Retail 162,657
Industrial 31
Wholesale (Co-op) 4
Plant in service: $6.4 Billion
2008 Generation By Fuel Mix2008 Generation By Fuel Mix8%
1% 4%
83%
Coal NuclearHydro Natural GasOil & LF Gas Purchased Power
What is a Fixed Asset?What is a Fixed Asset?
Plant, Property, and Plant, Property, and
EquipmentEquipment
For use in operations and not For use in operations and not
for resalefor resale Long-term in nature and usually Long-term in nature and usually
subject to depreciationsubject to depreciation Possess physical substancePossess physical substance
Grainger Generating Station - Steam
Capitalization PolicyCapitalization Policy
Capitalization policy for capital assets: Guidelines to follow GAAP and Federal accounting regulations for electric utilities
provide a guide for the
future replacement
establish a basis for the amount
of insurance coverage required.
Capitalization PolicyCapitalization Policy
Suggestion #1 from Engineering
“At such time that your capital budget has been 100% spent, all future charges shall be classified as operations and maintenance expense”
Capitalization PolicyCapitalization Policy
Suggestion #2 from Engineering
“At such time that your operations and maintenance expense budget has been 100% spent, all future charges shall be classified as capital costs”
Capitalization PolicyCapitalization Policy
Engineering’s pet names for Accountants:
1) FERC Boy
2) Bean Counter
3) Horse’s Asset
4) Number Geek
5) That Simon Guy from American Idol
Capitalization PolicyCapitalization Policy
Retirement Unit: Term used to identify items of electric plant
The installation of a new addition or complete replacement of a retirement unit is always classified as a capital cost
Includes installed cost plus sales tax and overhead
Capitalization Policy (cont.)Capitalization Policy (cont.)
Minor Item: A component part of a retirement unit.
When a minor item is replaced independently with a like minor item, the cost is charged to maintenance regardless of $ value.
Different rules for addition of minor items which did not previously exist.
Capitalization Policy (cont.)Capitalization Policy (cont.)
Substantial Betterment: Addition of unlike minor items adds years of useful life and/or increased output / efficiency
Measurement: Installment cost of unlike minor items exceeds cost of like minor items by at least 35%
Retirement UnitsRetirement Units
Major
Examples:
Building – Warehouse
Conveyor System
Transformer
Minor
Examples:
Ceiling Fans
Individual Bucket
Replace & Rewind Inner Coil
Dress Pole PolicyDress Pole Policy
The first installation of a pole and components shall be charged to construction. The retirement unit will be pole and fixtures.
Any additions to pole, charge to O&M Replacement of pole, with or without components,
charge to capital Replacement of any components, charge to O&M
Software PolicySoftware Policy
Cost of software is capitalized if:
a.) Useful life is 5 years or greater
AND
b.) Includible costs of development and installation are $200,000 or greater
Software Policy (cont.)Software Policy (cont.)
Includible costs: purchase or development costs, internal or external installation costs, testing, costs to develop software used for data conversion
Non-includible Costs: Preliminary investigation costs, manual data conversion, all training after development and installation phases, maintenance contracts
Capital EquipmentCapital Equipment
Defined as a retirement unit costing $3,000 or
more (including sales tax)
and does not require labor
or travel to be operational
Ex: vehicle, copier, stuffed bear
Business Cycle of a Fixed AssetBusiness Cycle of a Fixed Asset
A. Proposal to spend capital dollars
B. Budget Process – 3 yr. / 10 yr.
C. Funding: Cash Improvement Fund or Bond Funded
D. Construction Work in Progress
E. Plant Placed in Service / Depreciation
F. Unitization
G. Retirement / Write-off
Proposal to Spend Capital DollarsProposal to Spend Capital Dollars
Originator of Construction Project
a) Develops proposal for construction project (s) including reason for capital expenditure, drawings and projected cash flows
b) When request proposal is approved by appropriate levels of management, cash flows are added to capital budget.
Budget ProcessBudget Process
3 year Budget Cycle
O&M and Capital Budget
Only spend Capital dollars
if your capital project is
approved as part of your capital budget
Board of Directors and Exec. Management approve budget
FundingFunding
A. O&M expenses paid by Revenue Fund
B. Capital replacements and improvements paid by Capital Improvement Fund. 8.5% added to every $1 of revenue
C. Large construction projects (generating stations) funded by revenue bonds
Budget VarianceBudget Variance
If Project Manager exceeds the approved capital budget item request amount
a) Director of Plant Accounting can place a hold on additionalcharges to construction projects in Oracle system
b) Executive Management approval needed to complete construction project that is over budget.
c) Board of Directors approval to increase budget is required on revenue bond funded projects
What happens to folks who don’t follow the Accounting Rules
The Budget vs. Actual Torture Room
HELP!!I can’t explain
this variance!!
HELP!!I can’t explain
this variance!!
Construction Work in ProgressConstruction Work in Progress
A. What costs should be included in Electric Plant and CWIP?
1) Code of Federal Regulations Subchapter C, Part 101 Electric Plant Instructions
Construction Work in ProgressConstruction Work in Progress
A. What costs should be included in Electric Plant and CWIP?
Overhead or Burden CostsShare of management and administrative expenses that indirectly benefit construction
Construction’s share of the cost of systems (Inventory, Purchasing) and employee benefits and leave.
Construction Work in ProgressConstruction Work in Progress
2. Overhead or Burden CostsAdded per $1 of labor
-General A&G-Leave Allocation-Fringe Benefits
Added per $1 of Inventory Stock charges-Materials overhead
Added per $1 of invoiced charges-Accounts Payable/Purchasing System
Construction Work in ProgressConstruction Work in Progress
A. What costs should be included in Electric Plant and CWIP?
– Contribution in Aid of Construction (CIAC)– Preliminary Studies – Deferred Debits
Construction Work in ProgressConstruction Work in Progress
B. Tracking Capital Costs
1.) By Budget Item Code(ex: G00048=Cross Unit 4)
2.) By Project Number(ex: 107796=Cross Unit 4 Construction)
3.) By Asset Category Code(ex: ES.3120.B130=Boiler)
4.) By Asset Location Code(ex: SC.BERK.SC401=Cross Complex Unit 4)
Plant Placed In ServicePlant Placed In Service
A. When are assets considered in-service?
1) When management declares start of commercial operations
– (ex: generating unit)
2) When energization takes place– (ex: lines & substations)
3) When purchased and delivered– (ex: capital equipment)
4) When Santee Cooper begins using item
Plant Placed In-ServicePlant Placed In-Service
B. Accounting Treatment
1) In the month that asset is placed in service:
Asset cost transferred from CWIP-1070 to Utility Plant in service-1060
Depreciation of asset begins
Plant Placed In-ServicePlant Placed In-Service
C. Internal controls
– 1. All capital projects must declare estimated in-service date before approval. Estimated date entered in Oracle System
– 2. Oracle system prompt to Plant Accounting & Project Mgr. if assets not in-service by estimated date.
DepreciationDepreciation
A. Methods Used
1) Composite MethodUsed for most of Santee Cooper’s assets
Depreciation rate applied to groups of assets that are not similar
(e.g.: steam generation, transmission substations)
Study of depreciation rates required every 5 – 7 years
No gain or loss on retirement
DepreciationDepreciation
A. Methods Used
2) Composite RatesOne depreciation rate for each production category
(ex: steam, hydro, nuclear, other power)
Individual depreciation rate for each FERC regulatory acct.
(Transmission, distribution, generation plant)
DepreciationDepreciation
A. Methods Used
3) Straight Line or AmortizationLimited use on intangible and some general plant assets
Assets are homogenous.
(ex: computer equipment)
Recognize gain or loss on retirement
UnitizationUnitization
A. Process of placing assets into proper FERC Uniform System of Accounts
B. Last chance to catch errors
Retirements / Write-offsRetirements / Write-offs
A. Accounting treatment for retirements
B. Accounting treatment for write-offs
C. GASB 42 – Impairment of Capital Assets