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Presentation Topics

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Title: Slide 1 Author: BK10943 Last modified by: RH9006 Created Date: 5/14/2009 12:45:59 PM Document presentation format: Custom Manager: tn10628 Company – PowerPoint PPT presentation

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Title: Presentation Topics


1
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2
Presentation Topics
  • About Baker Tilly (formerly Virchow Krause)
  • Introduction
  • Focusing on critical issues
  • Operations
  • Financing, investing, and access to credit
    markets
  • Capital expenditures
  • Financial reporting
  • Budgeting and rates
  • Customer service and collections
  • Weathering the storm while planning for the
    future
  • Thank you!

3
About Baker Tilly
  • Overview
  • Firm established in 1931a 75 year history of
    focusing on client needs and providing
    outstanding service
  • 17th largest Public Accounting and Consulting
    Firm in USA (Public Accounting Reports Top 100
    2008)
  • Over 160 partners and more than 1,325
    professionals Depth of Resources
  • Seamless global services through Baker Tilly
    International (BTI)
  • Most Admired Wisconsin Company Best
    Accounting Firm (Corporate Report Wisconsin)
  • Nationwide energy practice
  • Nationwide energy practice More than 300 utility
    clients across the country our Energy and
    Utilities Group is focused just on utilities
  • Proud supporter of APPA and other Industry
    Associations

4
Energy and Utility Group Clients
We provide services to more than 300 utilities
nationwide
5
Introduction
  • The last twelve months have seen an unprecedented
    economic situation in several generations due
    to declining stock prices

6
Introduction
  • Including those of utilities

7
Introduction
  • Declining investment yields

8
Introduction
  • Declines in bond activity, lending, home prices,
    personal income, etc.
  • Decrease in demand for electricity (EIA report
    4.14.09)
  • Consumption
  • Cooling degree-days this summer are projected to
    be 5 percent lower than during the summer of 2008
  • The reduced need for air conditioning combined
    with the impact of the recession on electricity
    sales, especially in the industrial sector, are
    expected to reduce total electricity consumption
    by 1.6 percent in 2009 
  • Consumption is expected to return to a more
    normal growth rate of 1.4 percent in 2010

9
Introduction
  • What have we seen and heard in the marketplace as
    to how policymakers are dealing with the economic
    downturn? The focus is in these key areas
  • Operations
  • Financing, Investing and Access to Credit Markets
  • Capital Expenditures
  • Financial Reporting
  • Budgeting and Rates
  • Customer Service and Collections

10
Focusing on Critical Issues - Operations
  • Budget cuts
  • Travel, training, overtime, layoffs
  • Focus on future demand increase
  • Duke Energy
  • "There is a huge snapback in the demand for
    electricity at the end of a prolonged recession,"
    Duke CEO James Rogers told financial analysts
    recently. But for now, power generation and
    distribution were both down 3 in the third
    quarter from the year-ago period gas
    distribution was down 5, according to statistics
    compiled by Energy Performance Review. More
    specifically, Duke reported a nearly 6 decline
    in power sales in the Midwest from last year's
    third quarter. Duke's utilities in the Carolinas
    saw a decline of 4.3.

11
Focusing on Critical Issues - Operations
  • Opportunity
  • Prairie State Generating Company
  • Building a 5 billion coal fired generating unit
    in Southern Illinois (St. Louis area)
  • Helps local economy by hiring hundreds of welders
    laid off from area projects
  • Prairie State one year earlier had forecasted a
    severe shortage of welders needed on its project
    due to lack of supply of skilled labor
  • Opportunity
  • USA Today (3.17.09) reports on increase in power
    theft in last six months

12
Focusing on Critical Issues Financing,
Investing, and Access to Credit Markets
  • 3rd quarter, 2008 end of 1st quarter, 2009
  • Credit freeze
  • Smaller issues sold, larger issues frozen out
  • Interest rates high by historical standards
  • 2nd quarter, 2009
  • Slight thawing
  • Investors more receptive to larger issues
  • Baker Tilly Energy and Utilities Group involved
    in over 400 million in issues in last two months
  • Spread is narrowing between Treasury yields and
    tax exempts from late 2008 where all securities
    other than Treasuries were indiscriminately
    punished

13
Focusing on Critical Issues Financing,
Investing, and Access to Credit Markets
  • Negative outlook on Public Sector by Moodys
  • Public Power Daily 4.9.09
  • Citing the recession, Moody's assigns negative
    outlook to US local government sector(outlook is
    not uniformly negative)
  • "The report outlines the key challenges facing
    local governments in the current environment and
    highlights what will likely drive rating
    decisions," said Moody's Senior Vice President
    Eric Hoffmann, author of the report.
  • Market volatility, particularly the potential
    liquidity implications of failed remarketing of
    variable rate debt
  • Industries particularly at risk in the current
    economic downturn, including real estate
    development, auto manufacturing and financial
    services
  • Expenditures that are legally mandated and/or
    effectively fixed in the near term

14
Focusing on Critical Issues Financing,
Investing, and Access to Credit Markets
  • Moodys Improving your utilitys position
  • Public Power Daily 4.9.09
  • Moodys recommendations on improving your
    utilitys position
  • Above average reserve levels
  • Willingness and ability to make mid-year budget
    adjustments
  • Consistent conservative budget assumptions
  • "The governance strength of individual issuers
    and the behaviors that demonstrate their
    willingness and ability to adapt to that
    environment will determine the overall trend in
    individual ratings," the report said

15
Focusing on Critical Issues Financing,
Investing, and Access to Credit Markets
  • Greater use of commercial paper by utilities to
    fund capital projects and fund operations
  • NE utility commercial paper using Australian bank
    as issuer of security more marketable since it
    avoids concentration limits
  • Greater draws on lines of credit even when not
    needed but negotiations are tougher

16
Focusing on Critical Issues Financing,
Investing, and Access to Credit Markets
  • Advance refunding is popular once again
  • Intergovernmental loans are happening increased
    yields and safety of principal repayment

17
Focusing on Critical Issues Financing,
Investing, and Access to Credit Markets
  • Investing options
  • Many public power entities are bound by
    investment policies of states, cities or other
    oversight bodies
  • Many have invested in state investment pools
  • Some of these state pools have lost their
    insurance coverage
  • Others now hesitant to invest in highly rated
    commercial paper (AAA/AA)
  • Now investing in targeted local commercial paper
    and advertising support and financing for local
    business
  • Concern is liquidity

18
Focusing on Critical Issues Capital
Expenditures
  • Reductions in Capex is general throughout the
    industry
  • Utilipoint article 2.25.09 Mark Burlingame
  • Half of the top ten IOU utilities are cutting
    spending by 3 billion for 2009
  • Utilities that are independent of large
    multi-state holding companies are increasing
    spending slightly
  • Distribution spending has been reduced for the
    majority of IOUs, seemingly due to low or no
    customer growth/load growth
  • Probably the most important pattern for all IOUs
    is maintaining liquidity in an era of tight
    credit. Those patterns appear to be the only
    patterns found

19
Focusing on Critical Issues Capital
Expenditures
  • Decline in capex spending is common for IOUs and
    public power
  • Dominion Resources capex down 350 million
  • PGE capex down 300 million
  • Exelon - 150 million reduction (15 of annual
    capex)
  • Progress Energy - 250 million cut in capex
  • Public Power Utilities across the board cuts in
    capex
  • Freeze in credit markets leading to postponement
    of capital projects
  • Pent up demand
  • Studies have shown that borrowings by utilities
    generally do not depend on market timing

20
Focusing on Critical Issues Capital
Expenditures
  • Drive for self-sufficiency in power supply
  • Public Power Daily 3.12.09
  • Public power is positioned well to handle the
    changes in the electric utility industry,
    American Municipal Power-Ohio CEO Marc Gerken
    told the EnergyBiz Leadership Forum in Washington
    on Tuesday. Public power has a long-term business
    model that is conservative, but public power
    utilities are innovative in other ways, he said.
    And public power is customer-focused.
  • AMP-Ohio developed an optimized supply resource
    plan for 20 years that concluded self-building
    was the best option and doing nothing was the
    worst, Gerken said.
  • But the biggest thing AMP-Ohio is doing is
    pursuing energy efficiency, with a goal of 1
    annual savings.

21
Focusing on Critical Issues Capital
Expenditures
  • Not all projects are postponed
  • Prairie State
  • 5 billion project two 500 mW units and coal
    mine in Southern Illinois
  • Co-owned by six joint action agencies
  • Waupun, WI
  • Completed construction of 8 million reverse
    osmosis water treatment plant
  • Renewables
  • Stimulus funds
  • CREBs
  • Public Private partnerships again growing (after
    dearth of issues in late 2008/early 2009)

22
Focusing on Critical Issues Capital
Expenditures
  • Emerging Energies of Wisconsin
  • Recent increased market interest for the sale of
    the development rights of a 20 MW wind farm as a
    result of the recent passage of the Stimulus
    Bill, which contained incentives that allowed new
    players to enter the bidding (previously tax
    equity investors were essentially the only
    reasonable option)

23
Focusing on Critical Issues Financial Reporting
  • Use of financial accounting tools to defer
    non-cash mark-to-market investment and derivative
    losses
  • Commonly used tools to reflect that public power
    and utilities are generally not in the business
    of trading investments and derivatives
  • These interim losses are not passed backed to
    ratepayers so should not be reflected in current
    financial operations
  • Investment gains/losses are recognized on
    culmination of the transactions

24
Focusing on Critical Issues Financial Reporting
  • Utilities are paying particular attention to
    other financial areas
  • Allowances for uncollectible accounts
  • Impaired assets
  • Stranded costs due to closure of large industrial
    customers

25
Focusing on Critical Issues Budgeting and Rates
  • Reductions in customer revenues are impacting
    rates
  • Industrial plant closings
  • Flat and declining residential consumption
  • Rates include high fixed costs
  • Your utility sees this also if you provide water
    and wastewater services
  • Political unwillingness to raise rates in current
    environment
  • How to maintain transfer payments to city general
    fund without an increase in rates?
  • Trickle down effect to some cities

26
Focusing on Critical Issues Budgeting and Rates
  • Budget cuts address
  • Travel and non-essentials
  • Across the board mandates (i.e. cut the budget
    8)
  • Position layoffs
  • Internal construction crews
  • Non-replacement of positions
  • Outsourcing key functions
  • Internal audit
  • Maintenance
  • Trend was already going in that direction

27
Focusing on Critical Issues Customer Service
and Collections
  • More intense focus on delinquent customers
  • Using ordinances/state statues to aid in
    collection process
  • First in line for taxpayer refunds
  • Vendor bills offsets
  • Aggressive disconnect policies
  • Customer deposits
  • Working earlier on payment plans with delinquent
    customers

28
Weathering the Storm While Planning for the Future
  • Dont be lost in the negativity, but also dont
    be naïve aboutthe situation
  • Keep long-term strategic plans current
  • Dont allow customer balances to age
  • Empathize yet be fair to all ratepayers
  • Be realistic about revenue requirements and their
    impacts on OM and Capex spend
  • Be open to changes in budgeting practices

29
Weathering the Storm While Planning for the Future
  • Recognize that the situation will improve
  • Pent up demand will drive your utility future
    plans
  • Be open to new investing and financing sources
  • Be knowledgeable about stimulus funds available

30
Thank You!
  • Thank you for allowing us to present to you
    today!
  • Work with your peer public power utilities to
    navigate through this mess and to capitalize on
    opportunities
  • Dont hesitate to contact us with any questions
    regarding this presentation!
  • Send me an email if youd like a copy of this
    presentation!
  • Russ Hissom, CPA, Partner
  • 608 240 2361
  • russ.hissom_at_bakertilly.com
  • Bakertilly.com
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