Business Analysis: LA Department of Water and Power

Noncurrent assets  

Utility plant had an increase of 10% to operation cost including four areas of change:  Of the four, Generation outflow increased the most ( 19.8%) between 2015 and 2016.  Transmission had a decrease in outflow of 14.5%, Distribution had an increase of 6%, General utility plant costs spiked 5.8%. However, the accumulated depreciation brought the net assets of utility plant to a 16% increase. 6% above the total outflow. Ongoing costs for construction, nuclear fuel and natural gas field increased 4%, with construction in progress yielding a staggering explosion in costs of  49.6% more in 2016.   

In LA’s 5 year plan to increase rates of water and power for residents, the city cites the replacement of aging infrastructure as a major factor which will impact rate changes, although revenue from power and water in FY2015 was 4.42 billion, a need of 720 million for power and 330 million for water is need to complete massive projects to increase water quality, improve infrastructure and maintain compliance (LADWP Benchmark Analysis). It can be assessed that the increase in ongoing construction found in line 8 of the 2015-2016 Statement of Net Position is in reference to the need for infrastructure upgrades in the utility plant. Raising customer rates in an effective method in counteracting these rising costs. Generation of power and water was the second largest increase in costs, this means that the city had to produce more water and power to customers in 2016 than in previous years. The demand must align with the costs to maintain and upgrade services. LADWP’s 2015 Benchmarking Analysis makes the case for raising costs in all line items of the utility plant operations, citing higher rates in other counties and states, as well as the need to meet regulatory benchmarks. (LADWP Benchmark Analysis) 

In contrast to the utility plant costs, costs for investments, long-term notes and receivables, regulatory assets and post-employment assets decreased by 8.6%, although in context, regulatory assets dedicated to pensions decreased 40%, a much higher percentage than all other line items in this category. This is due to the increase of long time utility workers aging into the pension program. Long term reform is a decade away at the least.  

When considering the cause of this significant decrease in outflow for pensions for city workers, we find that according to Forbes, the pension program in LA is a major driver of economic instability.  Although the city underwent extensive pension reform in 2011 and 2012, it is clear that 2015’s pension outflow was much higher than in the next year. This is most likely due to growing pressure to further cut this portion of the budget (Jamison).  

 In multiple categories, the Department of Water and Power has fewer long term investments than it did a year ago. When these other noncurrent assets are added to the plant assets mentioned above, there is just slightly more on hand (43%) now than there was in 2015. 

Current Assets 

Moving to the department’s more liquid assets, this segment generally improved during 2016. Most importantly, unrestricted cash and cash equivalents rose by 20% year over year. This allows the department more flexibility to pay costs associated with both emergencies and opportunities that may arise.  Restricted cash decreased by 7%, meaning there was a decrease in interest payments, which is a long-term benefit to the city.  This could also account for a small portion of the decrease in pension spending. Cash collateral received from securities lending increased by meaning that LADWP increased their investment in the cities lending program.  

This makes since as a five-year plan for improvements is rolling out which will require at least 500 million to fund.  

Accounts receivable and current long-term notes receivable dipped 25%, but the rise in cash is much more considerable and significant. The department has done well to increase liquidity in the most recent fiscal year. Water System has an increased balance owed to LADWP, however, the demand on the Water System has increased, justifying a doubling in their balance ( 103%) . However, it should be noted that the total owed is still under 10,000. Unsurprisingly accrued unbilled revenue and materials and fuel have also increased (15% and 32% respectively) due to a push to add more lines and piping to the water system and increase power outputs.   

In all, assets have repositioned priorities, taking a large portion from regulatory assets and assigning more to aspects such as construction.  

In terms of deferred outflows, all items have decreased. I noted previously that pension spending (15%) well as spending on derivative instruments (46%) and debt refunding( 8.3%) have all been deprioritized.  

Liabilities and Deferred Inflows

Net Position 

In order for the statement of net position to balance of course, liabilities must equal assets (since there is no shareholder equity), and such is the case here. Liabilities are up slightly in 2016 by 2.2%. Of this percentage, around $5.59 billion is in the form of the net position. This is composed partially of funds for capital assets (which is distinct from capital project liabilities), a figure that has dropped slightly by 4%. Funds allotted to debt servicing have also dropped, from 10.5%, this is aligned with a drop  in debt refunding as well. With pressure to cut spending, debt is often the first to be reduced if possible, including lending. Post-employment benefits and unrestricted new position have both increased slightly by 3%.  

Other Noncurrent Liabilities 

Liabilities associated with accruals (decreased by 48% ) , workers compensation claims ( increased by 13.6% ( decreased by 46%) , derivative instrument liabilities ( decreased by 10.4%) and pension liability decreased by 10%. This category of liabilities can be explained by a reprioritization of derivative instruments, accruals and pension costs, and an increase in accidents. 

Current Liabilities 

These liabilities include the current portion of long-term debt which decreased by 8%, accounts payable and accrued expenses decreased by 2%, accrued interest decreased less than 1%, accrued interest from employee expenses increased by 4.5%, and obligations under securities lending transactions increased by 192%. These last two line items are the only line items in the category to experience an increase.  The increase in employee expenses is directly related to an increase in projects, as the increase in securities lending is directly related to the increase in cash collateral for securities lending. 

While there were deferred outflows under assets, there are also deferred inflows under liabilities. These include a less than 1% decrease in amount on debt refunding and deferred inflow from regulated business activities. These two categories are relatively stable because they represent less than 1% of the budget in total, and relate most closely to LADWP's initiative to cut spending and reduce debt refunding and other nonessential activities in favor of infrastructure upgrades. This is most evident in the decrease in deferred pension payment, the city has done well to reduce the postponed payments to pensions figure, yet this was accomplished in some ways by cutting spending on pensions in all forms. 

Works Cited

Jamison, Peter. Paying for public retirees has never cost L.A. taxpayers more. And that's after pension reform. LA Times. NOV. 18, 2016, http://www.latimes.com/projects/la-me-pension-squeeze/. Accessed 7 Nov. 2017. 

LADWP Benchmark Analysis. March 15, 2015, http://ens.lacity.org/opa/importantdoc/opaimportantdoc324996827_06302015.pdf. Accessed 7 Nov. 2017.