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MANAGEMENT’S DISCUSSION & ANALYSIS
The Management Discussion and Analysis (MD&A) serves as an introduction to the financial statements of Floresville Electric Light and Power System (FELPS). It is intended to be an objective and easily understandable analysis of significant financial and operating activities and events for the year ending December 31, 2007. It also provides an overview of FELPS general financial condition and results of operations for the year ending December 31, 2006. This MD&A is in accordance with the Governmental Accounting Standards Board (GASB) Statement No. 34, Basic Financial Statements – and Management’s Discussion and Analysis – for State and Local Governments.
The audited financial statements presented this year include the following:
The Balance Sheets present FELPS’ assets and liabilities for the current and prior year. Assets are reported as current and restricted. Restricted assets include cash, cash equivalents, and investments. These assets are classified as restricted due to State Law and Bond Ordinances. Additionally, receivables, inventories, prepayments, and net capital assets are itemized. Liabilities are segregated into current and non-current to illustrate the long-term nature of net debt. Fund net assets, or the difference between the total assets and total liabilities are reported. The fund net assets are classified as invested in capital assets (net of related debt), restricted, and unrestricted which is available for operations.
The Statements of Revenues, Expenses and Changes in Fund Net Assets include all current and prior year revenues and expenses. This statement identifies, for the current and prior year, the amount of revenue generated from existing energy sales to cover operating expenses for the years, with operating expenses shown by major cost categories. Revenue remaining is available to pay for disbursements according to the flow of funds, as stated in the Bond Ordinance. These statements provide information on the credit worthiness of the utility system as a whole.
The Statements of Cash Flows presents two years of cash activity. The statement is prepared using the direct method, in accordance with GASB 34, which reports cash receipts and payments along with a reconciliation of operating income to net cash provided by the operating activities. Categories of cash flows presented are cash flows from operating activities, non-capital financing activities, capital and related financing activities, and allowed investment processes. The changes in cash balances during the two years shown are an important indicator of FELPS’ liquidity and financial condition. The flow of funds of the System, as stated in the Bond Ordinance, requires that gross revenues of the System be applied in sequence: (1) to the payment of current Maintenance and Operation Expenses, (2) to the payment of all Parity Bonds, including the establishment and maintenance of the reserve fund portion of the Retirement Account or repayment of any Reserve Fund surety policy, (3) to the payment and security of obligations hereinafter issued which are inferior in lien to the Parity Bonds, (4) to the Repair and Replacement Account, (5) to the payment of the annual amount due to the Participating Cities, and (6) for any purpose authorized by law for the benefit of the System.
GASB 33, Accounting and Financial Reporting for Nonexchange Transaction, requires governments to recognize capital contributions to enterprise funds as revenues, not contributed capital. This revenue is shown on the Statements of Revenues, Expenses, and Changes in Fund Net Assets.
Another important aspect of the financial reporting involves the balance sheet presentation. Essentially, the utility system’s equity is categorized as fund net assets. At year-end 2007, this amounted to $27,571,230 as compared with $26,020,107 for December 31, 2006. The balance sheet presentation focuses further on asset liquidity.
Following are other analyses and explanations of the transactions, activities and events that had a major impact on either the fund net assets or the change in fund net assets for 2007. This discussion will compare results to the prior year.
Major Transactions and Events:
FELPS, during its 65-year history, has shown steady growth. When it was purchased from CPS Energy (CPS) in 1942, by the cities of Floresville, Stockdale, and Poth, the utility had 802 customers compared with 13,324 at the end of 2007.
FELPS earned a coveted A+ rating from Standard & Poor’s and an A rating from Fitch on the 2005 Bond Issue. Standard & Poor’s stated FELPS has “strong financial performance” and Fitch stated FELPS has “a diverse customer base with no concentration, strong financial performance, and strong management that emphasizes extensive planning”. In 2007, Fitch reaffirmed the A rating reflecting FELPS’ fundamental credit strengths including solid debt service coverage, limited business risk, and competitive retail rates.
CPS Energy, with an industry leading credit rating, continues to serve as FELPS’ wholesale power supplier. CPS continues construction on a 750-MW coal-fired power plant. The unit, J.K. Spruce Power Plant, and its state of the art emissions-control system will become operational in 2010. CPS owns 40 percent share of the output from the South Texas Project (STP) nuclear power plant Units 1 and 2 near Bay City, Texas. During 2007, CPS’ Board of Trustees voted unanimously to participate in continued development of new nuclear generation. CPS is continuing analysis of a proposal by NRG Energy, a co-owner of the South Texas Project (STP) nuclear plant, to build two additional generating units next to the two existing units in Matagorda County. CPS has continued to diversify their fuels sources, including 500 MW of wind energy, which keep the electric bills the lowest among the nation’s largest cities, which allows FELPS to keep electric bills low.
FELPS is allowed by the three owner cities’ agreement and based on FELPS Board authorization, to transfer up to three percent of the system’s gross electric sales revenue to the owner cities – Floresville, Stockdale, and Poth. According to the franchise agreements, FELPS transfers two percent of gross electric sales within the city limits of La Vernia and Falls City to those two cities. During 2007, these distributions were made.
FELPS maintains ongoing training and development of staff with participation in outside organizations related to FELPS’ engineering, operational, and financial functions. New Board of Trustee Members receive an orientation on pertinent System information and all Board of Trustee Members attend periodic work sessions to help them make informed decisions concerning FELPS. FELPS has implemented enhanced and regular key staff meetings to disseminate information and obtain vital feedback. FELPS continues to provide timely information to the customers through bill mailings and other forums.
FELPS is meeting all legal and environmental standards including Spill Prevention, Containment, and Control (SPCC) implementation. In November 2002, FELPS was awarded a Certificate of Distinction from the Government Treasurers’ Organization of Texas (GTOT) for their investment policy and was recertified in 2004 and again in 2007 for the next two years.
FELPS reviews all budgets on an ongoing basis and annually updates budgets with new financial analysis from actual experience. FELPS generally remains on track with its long-range forecast and plans.
The Board of Trustees and Management team continue to work well together and there is a good working relationship with the Owner and Franchise cities. FELPS is well positioned to provide quality service to meet growth requirements, as well as provide competitive service to the customers. FELPS also supports the youth in the community through donations for scholarships and stock shows.
Comparison of 12 Months Ended December 2007 and 2006
Operating revenues from electric sales for year 2007 totaled $23,921,122, a 5 percent increase from last year. While kWh sales were lower in 2007 than 2006, billed revenues were higher. This overall increase in revenue is attributed to a large increase in purchased power costs per kWh, including a 7% rate increase from CPS in 2007. These costs are passed on to FELPS’ customers as described below. Additionally, FELPS’ prior rate changes contribute to the increase as well. CPS Energy continues to remain one of the most efficient, reliable and cost-effective energy providers in the country. The purchased power costs are passed through to the customers in the form of a credit or charge as stated in the Purchased Power Adjustment Clause in FELPS’ rates. The average purchased power cost per kWh increased by 9%. During this year the number of customers increased by 213 to a year-end average of 13,324 representing a 1.6 percent increase.
The Total Purchased Power Cost was $15,728,611 or approximately 7 percent higher than the comparable amount for 2006. This increase was due to the rate increase from CPS and the fuel costs.
FELPS operating and maintenance expenses, other than Purchased Power Costs, amounted to $7,366,647, which was 6 percent higher as compared to the previous year. Total depreciation expense amounted to $1,926,950, which was $87,391 or 5% greater than 2006. This increase reflects the distribution plant additions.
FELPS makes payments to the cities of Floresville, Stockdale, and Poth based on a percentage of the prior year’s gross electric sales revenue. FELPS, once again, has met the owner cities distribution transfer at the maximum bond ordinance level of 3 percent. The amount distributed in 2007 totaled $684,893, which increased by 3 percent over last year, reflecting the higher revenue for the prior year. Of this total, Floresville received $437,971 and Stockdale and Poth each received $123,461.
Income before contributions was $1,977,136 in 2007 as compared to $2,248,881 in 2006. This decrease of $271,745 or 1% was due to the increase in the cost of fuel and operating expenses.
Total assets at December 31, 2007 amounted to $43,463,690; an increase of $849,138, this increase from the prior year is due to slightly higher revenue.
For the year ended December 31, 2007, cash paid for capital expenditures amounted to $3,902,110 compared with $2,824,220 in 2006, an increase of 38%. At December 31, 2007, FELPS had used the final bond proceeds available for eligible capital projects. Capital expenditures are funded with a mix of bond funds and cash reserves. FELPS continues to implement strategic initiatives and cost-containment efforts to provide effective, reliable, and cost-efficient electricity. Major projects included in the capital expenditures for 2007 involved upgrading the Sutherland Springs Substation transformer from a 10 MVA to a 25 MVA, as well as replacing the reclosers and controls in the substation. Reconductoring (converting 4/0 ACSR to 795 ACSR) from Texas Highway 97 north to US 181 has been completed. FELPS added distribution lines to newly developed service areas, replaced poles system wide, and finished many other small capital projects. Also completed during 2007 was a new feeder exit from the Eagle Creek Substation North on County Road 128 to serve the Saspamco and Graytown areas and rebuilding and reconductoring the Saspamco line, which eliminated a 35KV underbuild from the CPS Elmendorf Substation to the FELPS Eagle Creek Substation. Several vehicles were purchased and will be in 2008 in order to continue to upgrade the vehicle fleet. Progress continues on converting the SCADA System from Ilex to a PML Scada Master Station. This project will continue over the next couple of years. The IVR Outage System was implemented and is working well. The phone system was upgraded to a VOIP version to better integrate with the IVR Outage System. Computer hardware, software and equipment continues to be upgraded as needed. Major projects expected to be completed in 2008 include reconductoring and replacing poles from 181 bypass to County Road 320; building a circuit tie to provide the Connally Medical Center with a second feed (standby) and provide throwover switchgear; reconductoring US 181 South to Kazzt Lane in Floresville. Consideration is being given to upgrading the truck radio system. In order to achieve our capital goals, FELPS continues to optimize the level of permanent staff size with the use of unique outside professional services.
For more information about FELPS, contact David K. McMillan, General Manager at (830) 216-7000, ext 221 or Marcy Moody, Manager of Financial Services, ext 261. FELPS’ mailing address is P O Box 218, Floresville, TX 78114.
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