Business Cycle of a Fixed Asset

1. Business Cycle of a Fixed Asset William Quam

2. Santee 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.

3. About Us Total Revenue: $1.60 Billion Customers: Retail 162,657 Industrial 31 Wholesale (Co-op) 4 Plant in service: $6.4 Billion

4. 2008 Generation By Fuel Mix

5. What is a Fixed Asset? • Plant, Property, and Equipment • For use in operations and not for resale • Long-term in nature and usually subject to depreciation • Possess physical substance Grainger Generating Station - Steam

6. Capitalization 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.

7. Capitalization 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”

8. Capitalization 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”

9. Capitalization Policy • Engineering’s pet names for Accountants: • FERC Boy • Bean Counter • Horse’s Asset • Number Geek • That Simon Guy from American Idol

10. 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

11. 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.)

12. 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%

13. Major Examples: Building – Warehouse Conveyor System Transformer Minor Examples: Ceiling Fans Individual Bucket Replace & Rewind Inner Coil Retirement Units

14. Dress 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

15. Software 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

16. 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

17. Capital 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

18. Business Cycle of a Fixed Asset • Proposal to spend capital dollars • Budget Process – 3 yr. / 10 yr. • Funding: Cash Improvement Fund or Bond Funded • Construction Work in Progress • Plant Placed in Service / Depreciation • Unitization • Retirement / Write-off

19. Proposal to Spend Capital Dollars • Originator of Construction Project • Develops proposal for construction project (s) including reason for capital expenditure, drawings and projected cash flows • When request proposal is approved by appropriate levels of management, cash flows are added to capital budget.

20. Budget 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

21. Funding • O&M expenses paid by Revenue Fund • Capital replacements and improvements paid by Capital Improvement Fund. 8.5% added to every $1 of revenue • Large construction projects (generating stations) funded by revenue bonds

22. Budget Variance • If Project Manager exceeds the approved capital budget item request amount • Director of Plant Accounting can place a hold on additional charges to construction projects in Oracle system • Executive Management approval needed to complete construction project that is over budget. • Board of Directors approval to increase budget is required on revenue bond funded projects

25. Construction Work in Progress A. What costs should be included in Electric Plant and CWIP? • Code of Federal Regulations Subchapter C, Part 101 Electric Plant Instructions

26. Construction Work in Progress A. What costs should be included in Electric Plant and CWIP? • Overhead or Burden Costs • Share of management and administrative expenses that indirectly benefit construction • Construction’s share of the cost of systems (Inventory, Purchasing) and employee benefits and leave.

27. Construction Work in Progress 2. Overhead or Burden Costs • Added 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

28. Construction Work in Progress A. What costs should be included in Electric Plant and CWIP? • Contribution in Aid of Construction (CIAC) • Preliminary Studies – Deferred Debits

29. Construction 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)

30. Plant 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

31. Plant 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

32. Plant 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.

33. Depreciation A. Methods Used 1) Composite Method • Used 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

34. Depreciation A. Methods Used 2) Composite Rates • One depreciation rate for each production category (ex: steam, hydro, nuclear, other power) • Individual depreciation rate for each FERC regulatory acct. (Transmission, distribution, generation plant)

35. Depreciation A. Methods Used 3) Straight Line or Amortization • Limited use on intangible and some general plant assets • Assets are homogenous. (ex: computer equipment) • Recognize gain or loss on retirement

36. Unitization • Process of placing assets into proper FERC Uniform System of Accounts • Last chance to catch errors

37. Retirements / Write-offs • Accounting treatment for retirements • Accounting treatment for write-offs • GASB 42 – Impairment of Capital Assets