May 24, 2022
How Ready are You for the Future? Part 2 - Getting Your Finance House in Order
Welcome back to our Customer Newsletter Series, "How Ready are You for the Future?" In Part 1 in the series, we described the Infrastructure Investment and Jobs Act (IIJA) as Utegration sees it – a once-in-a-lifetime opportunity to accelerate utility improvements and transformation. The objective of the article was to start the conversation about your utility's readiness to meet and deliver on this opportunity.
We also introduced two concepts for consideration: “house in order” and “common threads”. Why are these important? Because, as an industry, we have several rapidly approaching windows of time to meet and deliver on these opportunities while at the same time addressing significant transformations related to our supporting technologies.
At Utegration, we believe these “house in order” improvements and actions are critical to improve readiness by building the path to necessary changes while reducing risks associated with financial, operational, customer, sustainability and organizational transformation. Couple these factors with defined timelines for technology upgrades, innovation, and replacements, and the clear conclusion is that it is time to get started!
Our next conversation focuses on getting your house in order related to financials. It’s provided by Jerry Cavalieri, managing director of regulatory reporting, who leads Utegration's energy & utility financial transformation practice. Jerry has deep expertise in this area, and has been “reading the tea leaves” in this climate of great regulatory change, in order to help our clients understand the potential risks of not getting their houses in order. Below, Jerry offers his top recommendations to ensure your utility is ready for higher capital costs, which appears to be looming.
Getting Your Finance House in Order
Managing Director, Regulatory Reporting
The year 2022 is shaping up to be one of rising interest rates following near zero rates during the pandemic. The implication for pure-play regulated utilities is increasing borrowing costs for construction of new assets to the rate base. As interest rates rise, utility income will be hurt by higher debt financing because utilities compete for capital from bond investors who are attracted to rising yields. And higher debt service costs lowers returns to shareholders, at least in the short term.
Since interest rates have been on a decline for about the last 40 years, is it time to think about a long-term trend of gradually rising interest rates?
When factoring in the need to raise rates to fight the highest inflation seen since the 1970s, now is probably a good time to refocus on operating efficiency so your utility can earn its authorized rate of return. Good financial management is the best defense to position your utility for the rough waters ahead.
Given this backdrop, how does a utility get its financial house in order? We have identified five key areas to modernize finance for greater efficiency:
- Consolidate scattered data to a single platform
- Present financial reports for O&M and Capital more often than monthly
- Link budget, actual and forecast data to your ERP in real time
- Record GAAP and FERC accounting at point of transaction entry
- Produce one version of truth for internal and external stakeholders
Why are these five areas of importance today? Simply put, with rising interest rates likely over the long term, both earnings and cash will feel the squeeze as lower costs of capital enjoyed today give way to higher debt and equity costs. It’s time to transform your financial data into highly visible, transparent, and timely delivery for performance measurement that is faster and actionable for decision makers.
Consolidate scattered data to a single platform
It used to be okay to have your transaction data for actuals in the ERP, your capital accounting processes on another platform and your budgets and forecasts in still another application. All of it would come together again during the monthly close cycle, right? But scattered data takes time to get reassembled and that is time wasted that could lead to widening variances from plan that management doesn’t even know is a problem until it is too late to course-correct.
Reimagine your financial house: where transaction data and aggregated data stay together on a single platform for O&M and capital, and where monthly financials are replaced with weekly updates of actual, budget and forecast all without moving data around. It sounds like data utopia, but such a vision can be not only be realized, but be given priority vs. simply upgrading each scattered data platform to the newest release. Financial data doesn’t have to be just monthly though. It can and should be weekly (at a minimum), with all allocations performed for complete visibility compared to plan to allow time for managers to take action and execute.
Present financial reports for O&M and Capital more often than monthly
Of course everyone wants their data faster. But exactly how do you accomplish this at your utility? Well, if data is reunited from the work to eliminate scattered data as discussed in item #1, you can use the power of the ERP to introduce the concept of continuous closing.
It’s not good enough anymore to just close the books faster at the month end. Best-in-class utilities already do that – or should be working towards it. It’s time to look at the month-to-date data to provide an income statement and balance sheet mid-month. Starting with a mid-month view, create a soft close in which all direct and indirect costs are posted just like they would be at the month end. Strive to get EBITDA fully loaded bi-weekly or even weekly.
Depreciation and amortizations that can’t be controlled can wait for the month end. But corporate and shared service costs as well as direct capital and expense should be translated (e.g., allocated and settled) during the month, at least once prior to the month end — ideally even weekly. Doing so will make actionable data available to front-line field managers where they can take action, not just explain a variance from plan after it’s too late to do anything about it.
To achieve this vision, update older costing models to make entry a direct cost. For example, fleet costs that are allocated should be charged direct just like a labor posting. Allocate what’s left using multiple iterations throughout the month. By the time the month end is closed, all the key decisions and action steps have already been determined and may already be in execution mode. Time isn’t lost or wasted “getting the numbers.”
Link budget, actual and forecast data to your ERP in real time
Think about where your budgeted dollars reside today at your utility. Are they in the ERP together with actuals? If so, great! You’re doing things right. But, what if budget is sitting on a platform that is separate and away from the daily activity of the actuals? That’s a problem. It doesn’t make a lot of sense to try and get actuals to be recorded, allocated and available more often than monthly if the planned and forecast amounts can’t be compared until month end.
The solution is to make a permanent link between the ERP and the planning tool. With today’s in-memory computing technologies, it also doesn’t make sense to replicate data from one platform to another for comparison. This is inefficient, may result in reconciliation issues , can be fraught with latency issues, and generally is expensive from a total cost of ownership perspective. An active link allows drilldown to transactional data when needed, with the confidence that the numbers are current. Furthermore, we expect managers will use their mobile devices more frequently to check the status of variances at multiple intervals during the month. If this is not the case today, get ready so your utility is prepared.
Record GAAP and FERC accounting at point of transaction entry
So, what’s all the fuss about FERC accounting anyway? Isn’t that just needed for rate cases and external filings? The business isn’t run on FERC, right? Indeed, the business is not run on FERC accounts. But, today’s Public Service Commissions (PSCs) and Public Utilities Commissions (PUCs) are better equipped with more digital versions of prior-FERC accounting now that the new XBRL reporting standard went into effect in 2021. Today, regulators can compare your utility against companies of similar size and over many years (10 to be exact, as of October 2021) using a digital version of the Uniform System of Accounts. That’s powerful for the regulator.
All this digital information made available by the new XBRL standards means that interrogatories from regulators during rate cases (and in between them) can be more probing and more frequent than ever. So, how does a utility prepare for this change? Well, the best-in-class financial models will present FERC and GAAP accounting side-by-side during document entry. Think of the process to functionalize costs for generation, transmission, distribution, customer accounts and administration happening in real time. Why not? It can be done and doing so means that the business can track spending of O&M by function, by FERC account or by GAAP account and get answers anytime during the month. This brings us to our final financial item.
Produce one version of truth for internal and external stakeholders
It’s quite surprising that getting to a single version of truth is still an issue today. But when data is scattered on multiple platforms, postings aren’t always current or captured with the same level of granularity as originally recorded in the ERP. Summarization introduces tradeoffs, and gradually, the numbers in one system don’t match the numbers in another system. This sometimes forces users to “fix” the problem by introducing yet another version of “truth” to manage the business. This old model of reentering data into another system either manually or through uploads is a trap that leads to incomplete data or downright wrong numbers. This cycle of creating multiple versions of truth, even if done unwittingly, needs to be replaced with a reliable official system of record.
Today’s concept of a universal journal (where all data from the general ledger and subledgers is on one common table in the ERP without the need to summarize and aggregate in advance of using the data) is a breakthrough that should be leveraged. Utilities that implement the four steps above are best positioned to get to a single version of truth. Realistically, since timely data is now needed more frequently during the month, there simply isn’t the time to copy the numbers from one system to another. If your financial users are still reentering data, then move to reporting to a single universal journal that is available in real time so everyone from the C-level executive to the front-line supervisor is looking and acting on the same set of numbers anytime during the month with no reentry. How refreshing is that!
A call to action
If one or more of the five action steps resonates with you, then let Utegration help your utility get its financial house in order. Our experts have extensive domain experience in the utilities and energy sector. Together with our certified accounting solution, Finance4U®, we can show you a pathway to realize a modernized financial model in your SAP ERP where all the information is reunited on a single platform.
Interest rates may put a squeeze on earnings as the cost of capital rises, but with a financial performance tool that is faster, more granular and more accurate, you can vastly improve management decision making and earn your utility’s authorized rate of return.
Thank you for your ongoing interest in our “How Ready are You for the Future?” series. In upcoming issues, we will explore the “common threads” and new opportunities:
- Work Orders, Supply Chain and Financial Assets
- Digital Workers and Operations
- 3P Analytics Journey (Practical, Productive, Possible)
- Customer Transformation: The Never-Ending Story
If you're ready to discuss your “house in order” challenges or thoughts, we invite you to reach out to us directly:
- Gary Hayes, Chief Solutions Officer at firstname.lastname@example.org
- Jerry Cavalieri, Managing Director, Regulatory Reporting at email@example.com