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Georgetown Electric Fund • By the Numbers

by Kevin Pitts, City Council District 5

The City of Georgetown Electric Fund has been a topic of discussion in the news, social media, and among residents. The information floating around has created confusion among many. I was one of those, and was under the impression that our electric utility had lost anywhere from $6-$26 million, as reported by multiple sources.  

I am a commercial banker and review financial statements on a daily basis. Being on council since May 2018, I did not have historical knowledge of the electric utility performance. I asked city staff to provide me with the approved budget and the year-end actual fund schedules (or financial statements) from 2014-18. I wanted to review the numbers for myself, without any outside influence. My goal was to try and answer three questions: 

•  What happened? 
•  Why did it happen?
•  How can council set policy to ensure it does not happen again?

When reviewing the fund schedules one must first understand how to read them. The way I view a fund schedule is by breaking it into two sections. 

The first section is a traditional—revenues minus expenses—statement. The second section is similar to a statement of cash flow that reflects sources and uses of funds. Sources of funds are operating profits and bond proceeds. Uses are operating losses and Non-Operating Expenses (Capital Improvements, Debt Payments, and Debt Issuance Costs). Figures 1 and 2 show fund schedules that were budgeted and what was actually booked at fiscal year-end.

Figure 1

Three observations in regard to the actual fiscal year end numbers: 

  • Our fund balance started at almost $12M in 2014, and was just below $2M at year-end 2018.
  • The electric fund had an operating profit (added for my analysis) in 2014-17 and a $3.2M operating loss in 2018. The fund had not lost money outside of 2018 as was my previous impression.
  • The Purchased Power* line item increased substantially from 2016-18.

What happened?

Based on my analysis of actual numbers, the electric fund brought in $15M in operating profit from 2014-18. However, our fund balance decreased by roughly $10M.  As mentioned above, operating profit is a source of cash to our electric fund. So what happened to the fund balance?

Figure 3 tracks the fund balance to locate the use of the funds. I made another chart to determine the difference in bond proceeds, which are used for capital improvements, versus the amount of capital improvement. 

Figure 3

As stated previously, capital improvements are one of three line items that make up the Non-Operational Expenses. 

Based on data in Figure 4 the primary reason our fund schedule was reduced by roughly $10M was to cash-fund our capital improvements. 

Figure 4

I observed what appears to be a change in strategy starting in 2017, which also coincides with a change in leadership in our finance department. I wanted to understand why we chose to cash fund approximately 30% of our capital improvements, instead of funding the entire amount from bond proceeds. Figs. 5 and 6 helped me locate a reason for the cash funding.

Figure 5
Figure 6

Those final two charts show that if the approved budget would have been achieved over a five-year period, we would have produced $22.7M more in cash than we actually did. Therefore, I would assume that the decision makers at the time made the assumption that the electric fund would be replenishing its cash at a much higher rate than what actually occurred. The largest deviation was in the purchase power cost line item. Our forecasting appears to have been very poor.  So…

What happened? The city electric fund was reduced by roughly $10M from 2014-2018.

Why did it happen? It appears we cash-funded our capital improvements at too high a rate because we assumed our operations would be a source of $37.8M in cash rather than the $15.1M actually generated. The primary cause for missing the projected operating performance was poor forecasting of our purchase power costs.

How can council set policy to ensure it does not happen again? My fellow council members and I will continue working this question. However, the city currently has two requests for proposals outstanding. One seeks an outside firm to manage our electric portfolio and should help our forecasting of purchase power cost. The other is for an outside firm to assess our management within the electric utility and should help with forecasting and overall management. 

*The Purchased Power line item is a net number that represents the total cost to purchase power less the sale of the excess power not used by the City of Georgetown.

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