Managing Your Utility During a Recessionary Period

Michigan 2010 Joint ConferenceAugust 11, 2010

John Julien, CPAPartner

2

Background

3

Background

First economic contraction of any note since early 90’s Worst recession since early 80’s (‘81-’82) Greatest banking (financial) crisis since the Great

Depression Many people over age 40 have forgotten what recession

feels like (and folks under age 40 were not even adults in the early 90’s) But, like all recessions, this too will end.

4

Background (cont’d)

Utilities are insulated, (but not immune) from economic cycles Utilities cannot go bankrupt and simply cease functioning.

However, they can become insolvent whereupon a receiver could be appointed to manage the utility.

Cannot, and should not, incur long-term debt to pay operating expenses

5

Understanding theUtility Industry

6

Advantages of Utility Industry

No competition for customers (generally) Necessary product or service (demand is inelastic) Lower prices for purchasing (not subject to sales taxes on

most items) Borrowing costs are less on debt (tax-exempt in many

cases) Return on investment (“profit”) not a consideration. No

shareholders. Do not pay income or property taxes.

7

Disadvantages of Utility Industry Significant regulations Unfunded mandates Customer resistance to rates Open door laws, public records request, etc. (in some

cases) Finite customer base Often a concentration of revenues in a small number

of customers

8

Disadvantages of Utility Industry (cont’d)

Can take months to enact an increase in rates If municipal utility, the civil unit is also struggling to

balance its own budget Looking for cost-sharing arrangements

Rent on shared space Shared equipment

Payments in lieu of property taxes Other transfers

9

Utility Management – Limited Choices

Over the short term, management has a very limited menu of options: Increase revenues, or Reduce expenditures

10

Ideas for Increasing Revenues

11

Revenues

Review all hydrants and automatic sprinklers to make sure you are getting paid

Review adequacy of customer deposits to offset bad debts

Review shut-off policy (shorten)

12

Revenues

Program-in small water rate adjustments, (when possible).

Re-examine non-recurring fees (a soft increase) NSF fees Reconnect fees Tap fees, etc.

13

Ideas for Decreasing Expenditures

14

Expenses

Review Existing Supply Contracts Examples

Uniforms Mobile phones (group plan) Property, casualty and liability insurance

Bid out insurance services Consider raising deductibles

15

Expenses (cont’d)

People Costs: Defer Hiring Not replacing (attrition) Freeze salaries and wages Reduction in force Sharing employees with other nearby utilities (i.e. -

certified operators)

16

Expenses (cont’d)

People Costs: (cont’d)

Eliminate overtime Cross-train employees Go to bi-monthly or quarterly meter readings Mandatory four-day work week Rotating furloughs

17

Expenses (cont’d)

People Costs: (cont’d)

Increase health insurance co-pays Consider Health Savings Account arrangements Reduce or temporarily suspend retirement

contributions (if private pension) Eliminate post-retirement benefits Outsource functions Automate processes (operationally and

administratively)

18

Expenses (cont’d)

Group purchasing through consortium arrangements Chemicals Vehicles

State bid (?) Fuel Office supplies

Other Ideas

Defer non-essential capital projectsDefer periodic maintenance, if possibleRegionalization of treatment/supply facilitiesBuy more fuel-efficient vehicles

19

20

Opportunities and

Challenges

21

Opportunities Make the hard decisions that you have been putting off or avoiding

altogether Build goodwill with customers

Explain cost-savings measures and efforts to control costs and customer rates Look for government to fund infrastructure programs

State and federal assistance Some grant dollars

May require a local funding match, but still may be a great opportunity to finance essential projects

22

Challenges Banks unwilling to lend to even good credit Customer growth has waned Development (especially residential) has all but stopped Ripple effect within your operating chain

Possibility of vendors and suppliers going out of business Beware of the scam artists

In desperate times, people sometimes assume greater risk by making desperate decisions

23

Final Thoughts

24

Considerations/Suggestions

Have a budget. Make sure everyone understands it. Compare actual-to-budget frequently.

Keep timely, accurate records Smaller, mid-course corrections to your budget are more

acceptable than larger changes later. Talk to your largest customers frequently. Monitor

them for any “on-going” concerns

25

Considerations/Suggestions Need to have a financial plan for more than just the

current year. Review banking relationships

Maximize interest earnings Minimize fees and costs Stay within FDIC limits! $250,000 Stay aware of your bank’s financial health

26

Contact Information

John Julien, CPA - Partner julien@umbaugh.com

Umbaugh Phone Number 517-321-0110 Website – www.umbaugh.com