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, 2011. It also provides an overview of FELPS general financial condition and results of operations for the year ending December 31, 2011. 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 2011, this amounted to $32,162,571 as compared with $30,835,115 for December 31, 2010. 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 2011. This discussion will compare results to the prior year.
Major Transactions and Events:
FELPS, during its 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 13,992 at the end of 2011.
During 2011, FELPS implemented a 1.5% rate increase and issued new Revenue Bonds. Proceeds from the Bond Issue will be used for improvements to the distribution system.
FELPS earned an A+ rating from Standard & Poor’s and an AA- rating from Fitch on the 2011 Bond Issue and Outstanding Debt. Standard & Poor’s stated FELPS has sound financial performance that is sustainable and Fitch stated FELPS has solid financial metrics, which included a high proportion of residential customers, and both agencies cited a favorable purchase power contract. Other strengths include strong management that emphasizes extensive planning. The rating outlook for both Standard & Poor’s and Fitch is stable.
CPS Energy, with an industry leading credit rating, continues to serve as FELPS’ wholesale power supplier. CPS continues to diversity their fuel mix with traditional and renewable fuel sources. CPS uses the output from two units of the South Texas Project (STP) nuclear power plant near Bay City, Texas. During 2011, CPS signed a contract with SunEdison to bring 30 MW of solar generation, is beginning work at the Dos Rios Waste Water Treatment Plant and a request for proposals have been submitted for up to 400 MW of solar power. CPS has the largest wind-energy portfolio among municipally owned utilities nationwide. The company currently contracts with Peñascal and Papalote Creel Wind Farm. Together, these two projects comprise almost 200 MW. These actions solidify CPS’ position as a leader in renewable energy among municipalities. During 2010, operation began at the J.K. Spruce Power Plant, Unit 2 and in 2011, CPS finalized a contract with Summit Texas Clean Energy to provide 200 MW of clean coal power. This diverse mix of generation fuels help 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 System 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 and a half percent of gross electric sales within the city limits of La Vernia and two percent within the city limits of Falls City to those two cities. During 2011, 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. In July 2011, FELPS was awarded a Certificate of Distinction from the Government Treasurers’ Organization of Texas (GTOT) for their investment policy. FELPS continues to work with the American Public Power Association and the Texas Public Power Association to ensure the best interest of FELPS.
FELPS reviews all budgets on an ongoing basis and annually updates forecasts with new financial analysis from actual experience. FELPS extended the financial planning window through 2025 and 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, stock shows and various other youth activities.
Comparison of 12 Months Ended December 2011 and 2010
Operating revenues from electric sales for year 2011 totaled $29,895,022, a 10.4 percent increase from last year. This overall increase in revenue is attributed to the increase in rates charges and additional kWh sales. During the year the number of customers increased by 165 to a year-end average of 13,992; representing a 1.2 percent increase.
The Total Purchased Power Cost was $20,447,071 or approximately 16.1 percent increase than the comparable amount for 2010. This increase was due to the higher kWh purchases and fuel costs experienced in 2011. The fuel component of the purchased power cost is passed through to the customers in the form of a credit or charge as stated the Purchased Power Adjustment Clause in FELPS’ rates.
FELPS’ operating and maintenance expenses, other than Purchased Power Costs, amounted to $8,686,295, which was 2 percent higher as compared to the previous year. Total depreciation expense amounted to $2,421,185, which was $122,545 or 5.3% greater than 2010. 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 2011 totaled $812,361, which increased by 1.32 percent over last year, reflecting the higher revenue for the prior year. Of this total, Floresville received $519,911 and Stockdale and Poth each received $146,225.
Income before contributions was $1,585,750 in 2011 as compared to $1,744,381 in 2010. This decrease of $158,631 or 9.1% was due to the increase in expenses, including depreciation.
Total assets at December 31, 2011 amounted to $59,959,663; an increase of $10,900,057, this increase from the prior year is due to higher cash available from bond funds and an increase in capital plant additions.
For the year ended December 31, 2011 cash paid for capital expenditures amounted to $4,338,376 compared with $3,711,296 in 2010, an increase of 16.9%. At December 31, 2011, FELPS had approximately $6.68 million of bond proceeds available for eligible capital projects in 2012 and 2013. Capital expenditures are funded with a mixture 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 2011 were an upgrade and expansion of the internet service. Upgrades to several FELPS facilities were made and backup generators were installed at two locations. In order to continue to upgrade the vehicle fleet, several vehicles were purchased, including a digger derrick and 100’ bucket truck. FELPS installed distribution lines to newly developed service areas, including expansion due to the Eagle Ford Shale exploration, replaced poles system wide, and finished many other small capital projects, including reconductoring various electric lines. Computer hardware, software and equipment continue to be upgraded as needed. Major projects expected in 2012 include the improvement of security at all FELPS Substations, a radio tower at the Eagle Creek substation, additional internet upgrades, the purchase of two new pickup trucks and continued work on the GPS mapping program. 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 Jacobs, Manager of Financial Services, ext 261. FELPS’ mailing address is P O Box 218, Floresville, TX 78114.