CFC’s Financial Webinar Serieseoplugin.commpartners.com/NRECA/120314/Equity Management Ma… · CFC VP, Program and Planning Analysis Financial Webinar Series Loaded with examples

CFC’s Financial Webinar SeriesConsidering Equity Management

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CFC’s Financial Webinar SeriesConsidering Equity Management



John Grant

CFC

Steve Kettler

CFC


What percent of those who started a

New Year’s resolution actually were

successful?

• 12%

• 20%

• 25%

• 30%

• 50%


Today’s takeaway:

Have a plan with smaller, bite-sized goals…

and you’re much more likely to achieve your

overall objective!


John Grant

CFCVP, Program and Planning Analysis


Loaded

with

examples

and

resources!


Steve Kettler

CFCVP, Portfolio Management


A Taste of

CFC’s

New

Guide


The Guide’s Chapters

• Introduction - Basics

• Developing an Effective Equity Management

Plan

• The Changing Business Environment

• The Impact of G&T Issues on Distribution System

Equity Management

• Ongoing Responsibilities

• Appendices


History of Equity Policy in the Electric

Cooperative Industry

• Earliest Days: REA (RUS) Policy and Mortgage

Provisions

• 1976: Capital Credits Study Committee

• 2005: Capital Credits Task Force

• 2012: CFC’s “Considering Equity

Management” Guide Released


Introduction - Basics

• Electric Cooperatives Need Cash

• Where Does the Cash for Capital Investment

Come From?

– Equity capital

– Debt capital

• Equity Level Risks

– Too low?

– Too high?


The Equity Continuum

0% 100%Equity

Risk

Lower

Higher Creates high interest cost and margin requirements

Creates the need for high margins to cover 100% of plant investment

Optimal equity results inlowest cost to the member


Measuring Equity

• Key Ratio Trend Analysis (KRTA)– Ratio #16 – Equity level as % of total assets

– Ratio #18 – Equity level as % of total capitalization

– Ratio #17 – Distribution equity (excludes G&T equity)

• Comparing Ratios Can be Instructive


Equity Development Plan

• Responsibilities– Board of Directors

– Management

• Setting an Equity Target– Typically a range

– A balancing act


“Optimal Equity Level”


Answering Key Questions – a Few Examples

• Outlook for Future Member Growth?

• What are Our Cash Flow Requirements?

• Are We Well Positioned to Respond to Storms, Etc.?

• Are We a Potential Takeover Target?

• Is There a Potential Merger in the Future?

• Is There a Potential Acquisition in the Future?

• Do We Have Concentration of Customers?

• What is the Condition of Our System?


Three Equity Numbers To Know

• Current Equity Level

– The starting point

• Optimal Equity Level

– Use four key decision points to calculate optimum

range

• Strategic Equity Range

– Optimum range adjusted for strategic issues



How Do You Get There?

• Modeling - Long Range Financial Forecast &

Others

• Benchmarking – KRTA

• CFC Regional Vice-President

• Equity Management Policy Template –

Appendix 5

• Manage to Achieve Goals


Today’s Approach

• Introduction

• Developing an Effective Equity Management Plan

• Changing Business Environment

• Impact of G&T Issues on Distribution System Equity Management


• Appendices


Changing Business Environment

• Environmental Scan

• Increasing Power Costs

• Changing Patterns of Load Growth

• Competition, Growth, Economy, Etc.

• KRTA Connections


Today’s Approach

• Introduction



• Impact of G&T Issues on Distribution System

Equity Management


• Appendices


G&Ts and Equity Management

• Purchased Power Major Component of

Distribution Cost

• G&Ts Must Generate Margins

• Financing and the Capital Markets

• Coordination Between G&Ts and Member Systems Desirable

• Allocation Versus Retirement


Today’s Approach

• Introduction





• Appendices


Ongoing Responsibilities

• Review and Update Annually

• Communicate, Communicate, Communicate


Today’s Approach

• Introduction





• Appendices


Appendices

1. A Step-by-Step Guide to Developing an Equity

Management Plan

2. How to Calculate a Target for Margins

3. How to Calculate the Hypothetical Lowest-Cost

Equity Target

4. The Goodwin and the Boatman Theorem

5. Equity Management Policy Template

6. Glossary


Now…let’s turn it over to our audience!


How to Submit Your Question

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Step 1: Type in your question here.


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This program—Considering Equity

Management—is a copyrighted presentation of CFC. No portion of this

program may be reproduced, used or distributed without CFC’s written consent.


Documents

CFC’s Financial Webinar Serieseoplugin.commpartners.com/NRECA/120314/Equity Management Ma… · CFC VP, Program and Planning Analysis Financial Webinar Series Loaded with examples