Business Cycle of a
Fixed Asset
-William
Quam
Santee Cooper

Moncks Corner, SC
Santee Cooper Headquarters, One Riverwood Dr.
The state's leading resource for improving the quality of life
for the people of South Carolina
About Us
Total Revenue: $1.60 Billion
Customers:
Retail
162,657
Industrial
31
Wholesale (Co-op) 4
Plant in service: $6.4 Billion
4%
83
%
8%
1%
2008 Generation By Fuel Mix
Coal
Hydro
Oil & LF Gas
Nuclear
Natural Gas
Purchased Power
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
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.
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”
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”
Capitalization Policy
Engineering’s pet names for Accountants:
1)
2)
3)
4)
5)
FERC Boy
Bean Counter
Horse’s Asset
Number Geek
That Simon Guy from American Idol
Capitalization Policy

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 (cont.)

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.)

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%
Retirement Units
Major
Examples:
Building – Warehouse
Minor
Examples:
Ceiling Fans
Conveyor System
Individual Bucket
Transformer
Replace & Rewind
Inner Coil
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
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
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
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
Business Cycle of a Fixed Asset
A.
B.
C.
D.
E.
F.
G.
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
Proposal to Spend Capital Dollars

Originator of Construction Project
a)
b)
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.
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
Funding
A.
B.
C.
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
Budget Variance
If Project Manager exceeds the approved capital
budget item request amount
a)
b)
c)
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
What happens to folks who don’t
follow the Accounting Rules
The Budget vs. Actual Torture
Room
HELP!!
HELP!!
I Ican’t
can’texplain
explain
this
thisvariance!!
variance!!
Construction Work in Progress
A. What costs should be included in
Electric Plant and CWIP?
1)
Code of Federal Regulations Subchapter C, Part
101 Electric Plant Instructions
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.
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
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
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)
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
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
Plant Placed In-Service
C. Internal controls
–
–
1. All capital projects must declare estimated inservice 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.
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
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)
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
Unitization
A.
B.
Process of placing assets into proper
FERC Uniform System of Accounts
Last chance to catch errors
Retirements / Write-offs
A.
B.
C.
Accounting treatment for retirements
Accounting treatment for write-offs
GASB 42 – Impairment of Capital Assets