Fee Simple? Utility Board Directors Get Less Than Peers
How do fees for utility board directors match up to those at other companies? Not too shabbily, as the following data show, but...
statement further complicates matters. This approach begins with net income, which includes all operating revenues and expenses as well as investing and financing gains and/or losses. Net income is then adjusted, often with a dozen or more items, to arrive at cash flows from operating activities.
While most of these adjustments are understandable to the reader, often some very large adjustments leave the reader less than enlightened. Enron's 10-K filed with the SEC for 2000 illustrates the problems with the indirect method. Enron's net income for the year was $979 million, but it reported significantly larger cash flows from operating activities: $4,779 million. The gap between net income and cash flow has some large components that are easy to understand-depreciation, for example, was $855 million. However, two components-"changes in components of working capital" and "other operating activities"-totaled $2,882 million, or more than half the total gap between net income and operating cash flows. In the single paragraph of the filing's MD&A discussing the statement of cash flows, no explanation is provided for either component, even though the year-on-year change in these two items was $3,708 million.
Although FAS 95 encourages companies to use the direct method, wherein individual items are identified, virtually all publicly traded companies use the indirect method. Typical non-cash adjustment items include:
- depreciation and amortization;
- impairment of goodwill and long-lived assets;
- changes in deferred taxes;
- income from equity in affiliates in excess of dividends received;
- non-cash mark-to-market income from trading activities (especially recently in the energy industry);
- non-cash compensation expense;
- long-term pension and other post-retirement accruals;
- change in working capital; and
"Other" often (especially for energy companies) includes two items that mask information about sustainable cash flow: adjustments for out-of-market contracts and other types of prepayments. Sometimes, changes in networking capital also are included.
Out-of-Market Contracts: Accounting for Sales Into The Future
When a company acquires a contract to be settled in the future with terms that do not reflect those currently available in the market, GAAP requires that the out-of market component be treated as the outcome of an investing activity. It goes immediately on the balance sheet (as an asset if the out-of-market component is positive and as a liability if negative). The resulting asset or liability is then amortized in the period(s) in which the contract is settled to determine the income from the contract. These adjustments are not, however, applied to the statement of cash flows. Without a similar adjustment to the statement of cash flows, the reported cash flow from the out-of-market contract either overstates (if contract was in the money) or understates (if the contract was out of the money) the cash flow expected from contracts entered into at market prices. For most companies this discrepancy is probably insignificant, but such contracts play a particularly important role in the energy industry, which is characterized by active futures markets for both gas and electricity.
Independent power plants are often bought and sold with long-term contracts to serve a particular customer.
In addition, as some states have made the transition from regulated to competitive