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How policymakers are responding to the current economic downturn Presented by Russ Hissom, CPA, Partner June 16, 2009

How policymakers are responding to the current economic downturn Presented by Russ Hissom, CPA, Partner June 16, 2009

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Page 1: How policymakers are responding to the current economic downturn Presented by Russ Hissom, CPA, Partner June 16, 2009

How policymakers are responding to the current economic downturnPresented by Russ Hissom, CPA, Partner

June 16, 2009

Page 2: How policymakers are responding to the current economic downturn Presented by Russ Hissom, CPA, Partner June 16, 2009

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!

Page 3: How policymakers are responding to the current economic downturn Presented by Russ Hissom, CPA, Partner June 16, 2009

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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

Page 4: How policymakers are responding to the current economic downturn Presented by Russ Hissom, CPA, Partner June 16, 2009

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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

Page 5: How policymakers are responding to the current economic downturn Presented by Russ Hissom, CPA, Partner June 16, 2009

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Introduction

The last twelve months have seen an unprecedented economic situation in several generations – due to declining stock prices

Page 6: How policymakers are responding to the current economic downturn Presented by Russ Hissom, CPA, Partner June 16, 2009

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Introduction

Including those of utilities

Page 7: How policymakers are responding to the current economic downturn Presented by Russ Hissom, CPA, Partner June 16, 2009

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Introduction

Declining investment yields

Page 8: How policymakers are responding to the current economic downturn Presented by Russ Hissom, CPA, Partner June 16, 2009

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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

Page 9: How policymakers are responding to the current economic downturn Presented by Russ Hissom, CPA, Partner June 16, 2009

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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%.

Page 11: How policymakers are responding to the current economic downturn Presented by Russ Hissom, CPA, Partner June 16, 2009

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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

Page 12: How policymakers are responding to the current economic downturn Presented by Russ Hissom, CPA, Partner June 16, 2009

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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

Page 13: How policymakers are responding to the current economic downturn Presented by Russ Hissom, CPA, Partner June 16, 2009

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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

Page 14: How policymakers are responding to the current economic downturn Presented by Russ Hissom, CPA, Partner June 16, 2009

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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

Page 15: How policymakers are responding to the current economic downturn Presented by Russ Hissom, CPA, Partner June 16, 2009

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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”

Page 19: How policymakers are responding to the current economic downturn Presented by Russ Hissom, CPA, Partner June 16, 2009

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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)

Page 22: How policymakers are responding to the current economic downturn Presented by Russ Hissom, CPA, Partner June 16, 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

Page 30: How policymakers are responding to the current economic downturn Presented by Russ Hissom, CPA, Partner June 16, 2009

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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

[email protected]

Bakertilly.com