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How policymakers are responding to the current economic downturnPresented by Russ Hissom, CPA, Partner
June 16, 2009
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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!
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About Baker Tilly
Overview
› Firm established in 1931—a 75 year history of focusing on client needs and providing outstanding service
› 17th largest Public Accounting and Consulting Firm in USA (Public Accounting Report’s “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
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Energy and Utility Group Clients
TX• Entergy• CPS Energy• Lower Colorado
River Authority• New Braunfels
Utilities• Bryan Texas
Utilities
TX• Entergy• CPS Energy• Lower Colorado
River Authority• New Braunfels
Utilities• Bryan Texas
Utilities
CA• California Public
Utilities Commission
• PG&E• SCE• SDG&E• Burbank Water
and Power• Sacramento
Municipal Utility• Modesto• WECC
CA• California Public
Utilities Commission
• PG&E• SCE• SDG&E• Burbank Water
and Power• Sacramento
Municipal Utility• Modesto• WECC
• Guam Power Authority
• Guam Power Authority
FL• Orlando Utilities
Commission• Florida Municipal
Power Agency• Gainesville
Regional Utilities
FL• Orlando Utilities
Commission• Florida Municipal
Power Agency• Gainesville
Regional Utilities
WA• Seattle City Light
WA• Seattle City Light
CO• Colorado
Springs Utilities
CO• Colorado
Springs Utilities
MI• Michigan Public
Power Agency
MI• Michigan Public
Power Agency
NY• Long Island
Power Authority
NY• Long Island
Power Authority
WI• WI Dept of Energy• Wisconsin Public
Power
WI• WI Dept of Energy• Wisconsin Public
Power
NE• Lincoln
Electric System
NE• Lincoln
Electric System
OH• AMP-Ohio• Reliability First Corp
OH• AMP-Ohio• Reliability First Corp
IL• Illinois
Municipal Electric Agency
IL• Illinois
Municipal Electric Agency
MA• MMWEC
MA• MMWEC
IN• Indiana
Municipal Power Agency
IN• Indiana
Municipal Power Agency
MN• Otter Tail Power• Utilities Plus
MN• Otter Tail Power• Utilities Plus
AZ• Arizona
Corporation Commission
AZ• Arizona
Corporation Commission
NM• New Mexico
Public Utilities Commission
NM• New Mexico
Public Utilities Commission
Midwest Region• Midwest
Reliability Organization
Midwest Region• Midwest
Reliability Organization
We provide services to more than 300 utilities nationwide
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Introduction
The last twelve months have seen an unprecedented economic situation in several generations – due to declining stock prices
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Introduction
Including those of utilities
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Introduction
Declining investment yields
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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
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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
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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%.
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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
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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
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Focusing on Critical Issues – Financing, Investing, and Access to Credit Markets
Negative outlook on Public Sector by Moody’s
› 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
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Focusing on Critical Issues – Financing, Investing, and Access to Credit Markets
Moody’s – Improving your utility’s position
› Public Power Daily – 4.9.09
› Moody’s recommendations on improving your utility’s 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
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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
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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
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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
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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”
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Focusing on Critical Issues – Capital Expenditures
› Decline in capex spending is common for IOU’s and public power
– Dominion Resources – capex down $350 million
– PG&E – 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
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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.”
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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)
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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)
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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
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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
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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
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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
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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
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Weathering the Storm While Planning for the Future
› Don’t be lost in the negativity, but also don’t be naïve aboutthe situation
› Keep long-term strategic plans current
› Don’t allow customer balances to age
– Empathize yet be fair to all ratepayers
› Be realistic about revenue requirements and their impacts on O&M and Capex spend
› Be open to changes in budgeting practices
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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
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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
› Don’t hesitate to contact us with any questions regarding this presentation!
› Send me an email if you’d like a copy of this presentation!
Russ Hissom, CPA, Partner
608 240 2361
Bakertilly.com