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SECTION 4 - AMORTIZATION EXPENSE
Amortization expense is driven by Disco’s investment in the distribution system and retirement of related property, plant and equipment. The amortization of fixed assets is based on useful service lives. The straight-line method of amortization is used for all assets. The estimated service lives and amortization rates-remaining life were developed using the group amortization concept, which consists of grouping depreciable property into similar groups and determining an average life of the group based on the “Equal Life Group” theory. Amortization is provided for all assets sufficient to amortize the cost of such assets, less estimated salvage value, over their estimated service lives. Please refer to the Depreciation Study found in Appendix E, Evidence – Appendices, Volume 3 of 3. The cost of distribution assets retired, net of dismantlement and salvage, is charged to accumulated amortization. For all other property, plant and equipment dispositions, the cost and accumulated amortization is removed from the accounts, with the gain or loss on disposal being reflected in income. Please refer to Attachment to Section 4, entitled “Capital Expenditures” (attached) for details of Disco’s capital expenditures for the periods 2007/08, 2006/07 and 2005/06.
EVIDENCE APRIL 19, 2007 BOARD REFERENCE: 2007-004
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The components of amortization expense are detailed in Table 4A.
Table 4A
Amortization Expense
Fiscal Years Ending March 31 (in millions $) (1) 2007/08F (1) (2) (3) (4) (5) (6) (7) (8) (9) Distribution assets Substations General properties Vehicles Office equipment Tools Information systems Customer contributions Total Amortization Expense $ 29.3 3.6 0.8 2.0 0.2 0.1 7.4 (1.5) 41.9 (2) 2006/07E $ 29.4 3.6 1.0 2.1 0.4 0.1 5.1 (1.4) 40.3 (3)=(1)-(2) Variance $ (0.1) (0.2) (0.1) (0.2) 2.3 (0.1) 1.6 (4) 2005/06A $ 30.8 3.9 1.0 2.3 0.3 0.1 4.9 (1.2) 42.1
$
$
$
$
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2007/08 F = forecast 2006/07 E = 11 months of actuals + 1 month of forecast 2005/06 A = actuals
Amortization expense is forecasted to increase by $1.6 million in 2007/08 compared to 2006/07. The increase is related to the implementation of changes recommended in the Depreciation Study. The section below outlines in more detail the amortization changes made as a result of the Depreciation Study. GANNETT FLEMING STUDY The increase in amortization of $1.6 million (Table 4A, line 9) is related to changes Disco has incorporated into the 2007/08 budget as a result of the recommendations made by Gannett Fleming in the Depreciation Study. The study reviewed retirement data for all asset classes, met with members of the Disco Amortization Review Committee and operations staff, performed inspections of various facilities and compared Disco’s results to industry practice for reasonability.
EVIDENCE APRIL 19, 2007 BOARD REFERENCE: 2007-004
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The Disco Amortization Review Committee consists of members having expertise in engineering, planning and accounting, together with representatives involved in the design and operation of specific categories of fixed assets. During the undertaking of the Depreciation Study, the Amortization Review Committee reviewed and accepted the impacts of the study on service lives, remaining life rates and salvage estimates. The Depreciation Study provided estimates of service lives, remaining life rates, and salvage rates. All changes were incorporated in the 2007/08 forecast and the impact to services lives are shown in Table 4B. The 2007/08 changes include • • Changes to service lives of numerous assets (on average, asset lives were extended) Use of Equal Life Group “group amortization” procedure for all asset categories (this procedure better aligns the consumption of the service value of the assets to the amortization expense) • Adoption of the amortization of general plant concept for “general property” type assets (for the asset classes tools and equipment, computer hardware and software, office furniture and buildings), whereby for assets of high volume and individual low value, there would only be one asset capitalized annually for each asset class and that asset would be retired at the end of the amortization period The largest impact of the changes is a $2.3 million increase (Table 4A, line 7) in amortization related to information systems, resulting from a change in service life from 8 years to 6 years.
EVIDENCE APRIL 19, 2007 BOARD REFERENCE: 2007-004
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1 2 3 4 ESTIMATED SERVICE LIVES OF FIXED ASSETS/ AMORTIZATION RATES – TABLE 4B The current estimated service lives and amortization rates for Disco fixed assets are based on the recommendations in the study and are outlined in the following table.
Table 4B
Estimated Service Lives of Fixed Assets/Amortization Rates
(1) Estimated Service Lives (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) Category Distribution Assets Easements and clearing Poles and fixtures Overhead wire, underground wire, submarine cable Protective equipment Reclosers, switches, voltage regulators Capacitors and switchgear Transformers Services Dusk to dawn lights Water heaters Meters (Years) 30-38.6 31.7-32.2 33.9-38.8 30.5 20.7-38.5 24.4-33.2 27.6-28.9 30.9 20.6-31.1 16 22.4-27.9 20.2-43.1 31.3-45.5 18.2-43.7 15-25.3 15-20 15-48.8 4.6-18.6 15.9 15 6 (2) Amortization Rate 3.83-5.83% 3.18-3.23% 1.42-4.09% 2.92% 1.45-5.35% 2.59-5.89% 4.22-5.07% 4.6% 2.78-4.67% 5.27% 2.88-6.41% 1.55-5.24% 1.61-3.28% 0.86-13.84% 4.34-4.88% 0.07-0.69% 1.71-2.14% 2.40-20.82% 5.17% 3.29% 33.77%
(13) Substations (14) Sites and improvements (15) Buildings and structures (16) Electrical power systems (17) Instrumentation and control (18) Auxiliary services (19) General Properties (20) Vehicles (21) Office equipment (22) Tools (23) Information Systems (24) Software (major) and hardware
Ranges are due to different service lives for items within categories
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EVIDENCE APRIL 19, 2007 BOARD REFERENCE: 2007-004
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