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Finance at NorthWestern April 3, 2018 Customer Stakeholder Group Meeting
Hauser Dam
ELECTRIC UTILITY SYSTEM
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WHAT IS FINANCE
• Finance = MONEY• NorthWestern is a Billion Dollar Company
2017 = $1,305,652,208 and $2,582,000,000
NWE Finance Structure• CFO• Controller• Treasury and Cash• Investor Relations• Financial Planning and Analysis• Tax• Internal Audit
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ELECTRIC SERVICE TERRITORY AND PEERS
369,000 MT Customers63,000 SD Customers
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GAS SERVICE TERRITORY AND PEERS
197,000 MT Customers89,000 SD/NE Customers
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MT ELECTRIC CUSTOMERS BY DIVISION
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MT GAS CUSTOMERS BY DIVISION
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LET’S DO SOME MATH
• What does it cost to run a 100 Watt lightbulb?–Let’s say you run the lightbulb 6 hours everyday–Your bill is measured in Kilowatt Hours (1000 watts = 1 kilowatt)
Turn off your lights - or keep them on
STEPS:1. 100 Watts* 6 hours/day = 600 watt hours/day2. * 365 Days in Year = 219,000 watt hours/year3. / 1000 = 219 kilowatt hours/year4. Bill = $0.10/kilowatt hour5. = 219 kilowatt hours/year * $0.10 = $21.90/year6. Divide by 12 for cost per month = $1.83/month
Charging an I-Phone = 5 Watts, 8 hours/day = $0.12/month42 Inch Plasma TV = 300 Watts, 7 hours/day = $6.39/month
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BALANCE STAKEHOLDER INTERESTS
MISSIONWorking together to deliver safe, reliable and innovative energy solutions that create
value for customers, communities, employees
and investors
All have different expectations and
wants!
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OUR BUSINESSES
MTElectric
Distribution
Transmission
DGGS
CU4
Supply
Spion Kop Wind
Hydro Generation
MTGas
Distribution
Transmission
Storage
Supply
Propane
Battle Creek, Bear Paw, SBP, HPL
SDElectric
RetailBundled
Wholesale Generation
SD Peaking Generation
Beethoven Wind
SDGas
RetailBundled
Transport and Ethanol
NE Gas
RetailBundled
Transport and Ethanol
Infrastructure DSIP and TSIP
Trans NERC compliance, CIP
Gas Production
Generation Plant Upgrades
Butte G.O.
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FINANCE BASICS - CASH
A
BC
D
E
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FINANCE BASICS – NET INCOME
• If Cash is King, then NET INCOME is his Queen– Known as Profits, Earnings, Bottom Line - Expectations in Place!
• Company Earnings belong to Shareholders - Expectations
Quiz: What can you do to increase net income?What is the Goal of All Companies?
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FINANCE AND EXPECTATIONS
• Publically Traded Company – Investor Owned• Regulated by MPSC, SD/NE PUC, and FERC• A lot of expectations and responsibilities
Shareholders• The Owners• Board of Directors• 50M shares of
stock• Sell-Side analysts
provide earnings expectations
Debt Holders• $2.1B worth of
debt on our books• Issued first
mortgage bonds, etc.
• Need to meet earnings and cash expectations
• Investment Grade• Rating Agencies
Regulators• Provide
authorization to earn return
• Rate Cases and hearings
• Customer bill impacts
• Need to be prudent with costs
• Prioritize
Customers• Expect reliable
service at lowest possible cost
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FINANCE BASICS – OWNERS EXPECTATIONS
You can take the Expected Earnings
per Share * # Shares to get Expected Net Income for our
Company
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OUR BALANCE SHEET
$1.8 Billion of Equity
$2.1 Billion of Debt$5.4 Billionof Assets
$1.5 Billion of Other Liabilities
12/31/17
Moody’s: A2Fitch: A
S&P: A-
Moody’s downgraded our senior secured and unsecured credit rating onMarch 10, 2017 and has us on a Negative Outlook and on February 5, 2018, Fitch placed us on Negative Outlook. However, even after the ratings downgrade, Moody’s rating is in line with Fitch and above S&P
on a secured basis (and between them on an unsecured basis).
NWE – CREDIT RATINGS
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Electric and natural gas utilities average S&P rating
Electric and natural gas utilities average Moody’s rating
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FINANCE BASICS – CAPITAL VS EXPENSE
Capital: A long-lived tangible asset. These items go on the company’s balance sheet and are depreciated over time on the income statement.
Expense: The costs to operate and maintain the existing system, and the administrative costs needed to run the company.
Capital:a. Replace/Install new polesb. Install new Substationsc. Purchase new meters and
transformersd. Connect new customerse. Replace UG cablef. New Buildingsg. New Vehiclesh. New Toolsi. Engineering of new subs,
lines, and permitting j. Retire Existing and
Replacek. New Computer Systemsl. New Mobile Radiosm. New Generation Plants,…n. Labor, materials, contractor
and other costs to install the new assets and/or remove the existing assets
Operating and Maintenance:a. Tree Trimmingb. Outage Repairc. Locatesd. Cross-Arm repaire. Stubbingf. Meter Readingg. Patrolling and Inspectionsh. Connects and Disconnectsi. Benefits, Flex Time, Meetingsj. Fleet maintenance, fuel, utilities, rentsk. Write-offs and Customer Care costsl. Facilities, warehouse, procurement,
safetyAdmin and General:a. BT Costsb. Finance and Accountingc. Legal, Risk, Insuranced. Regulatory and Governmente. Donations, BOD costs, HR Programsf. Communicationsg. Travel and Training
Quiz:If a pole
falls down and I put it back up is
this Capital or Expense?
Why do we care?
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CAPITAL VS EXPENSE – REGULATED WORLD
Capital: Plant Additions add to Rate Base• Utilities Earn a Return on Rate Base
Expense: Operating and Admin costs• Prudent costs passed through to customers
What if we want to Invest $50M more capital and $10M more expense for customer programs?
Total Revenue Requirement = (Rate Base * Rate of Return) + Expense
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WHAT ISSUES DOES THIS RAISE?
From a Finance Perspective:• Regulatory Lag is a Big Issue when we make new
investments.– Our Shareholders expect us to provide earnings each year (guidance)– If we invest the $50M in capital and $10M in operating expense, the
costs need to be incurred and a rate case developed and file for an opportunity to recover those outlays. The overall rate case process could take 1 year or more before we recover the revenue requirement.
– In the meantime – what happens to our earnings or net income in that current year?
Revenue $0 Op Expense $10,000,000
Pre-Tax Income ($10,000,000)Income Tax ($3,850,000)Net Income ($6,150,000)
EPS ($0.17)
Shareholders not happy!
It’s the first year of expense increase for new programs that is the big issue. MPSC allowed first 2-years of DSIP expense to be amortized over 5-years.
VOLUMETRIC GROWTH
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Customers growing 1.5% per yearLoads grew 0.5% on average per year 2006-17
Use Per Customer Declining• LED’s, Appliances, Conservation• Weather
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ALWAYS FOCUS ON COST CONTROL
BUDGET
• Annual Budget driven by Company and Shareholder Expectations. Approved by BOD• Revenue, Cost of Sales, Op and Admin Costs, Capital Plans, Depreciation, Interest,
Earnings, Balance Sheet, Cash Flows…
MonthlyTracking
• Monthly Reporting for each area that tracks how we perform v budget and prior year• Develop monthly forecasts to anticipate upcoming changes to budget and provide
year-end estimates of performance
Contingency
• January 2018 – 5% Warmer than Normal• Lower Revenue and Cash• Property taxes increasing and MPSC disallowance of tracker recovery • Implement contingency plans by each area to help offset so that we can continue to
meet expectations. Cost Control!
OA&G EXPENSE
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OA&G EXPENSE
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CAPITAL
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Historic Staffing Summary
Total Staffing Levels increased 124 (68 from hydro) between 2012 and 2017 (8.6% increase).
The drop in 2016 and 2017 actual headcount of 1,552 & 1,557 is primarily due to higher than normal open positions at the end of 2016 and a lower seasonal employee headcount than normal. We had 59 open positions at the end of 2016 (normal is approximately 25).
2017 Year-end employees totaled 1,557, which is 70 less than the budgeted headcount for 2017 of 1,627.
Our Net PPE and Net Income per employees have grown significantly since 2012.
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2016 Better Than Peers
Our Administrative and General (A&G) expense and Operations & Maintenance (O&M) expense metrics have been below our peer average. Source: SNL Financial 10K data. O&M expense includes OA&G expense from 10K’s less A&G expense from FERC Form 1 reports.26
INDUSTRY TRENDS: U.S. ELECTRICITY CONSUMPTION
Flat Loads over past 10-years
INDUSTRY TRENDS: Electric Demand Declining
28Relying on organic load growth will not achieve the industry’s expected 4% to 6% EPS growth rates
INDUSTRY TRENDS: PV (SOLAR) INSTALLATIONS
U.S. adding more PV than any other type of generation
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FOCUS ON THE CUSTOMER
QUIZ (Need to Pass to Continue as a Stakeholder):1. What is the number one cause of power outages in the U.S.?2. What is a brown out?3. The four main segments of the Power Grid are…4. Who launched Pearl Street Station, the first commercial power plant,
in lower Manhattan in 1882?5. NorthWestern Energy serves approximately how many electric
customers?