IMA Presentation - Natural Gas 101 2012 03 20

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  • 1. Gas Industry 101Cascade Natural Gas Corporation Joe Silveira, CMA
  • 2. Natural Gas Facts• Natural Gas (national) serves: - 65 million homes - 5 million businesses - 207,000 factories - 1,800 electric generating units• Natural Gas accounts for one- fourth of all energy used in the United States Gas Industry 101
  • 3. Natural Gas Facts• Considered the cleanest fossil fuel• On an energy equivalent basis emits 45% less CO2 than coal; 27% less than oil • Efficient: 90% of natural gas produced is delivered to customers in usable energy (cycle) Gas Industry 101
  • 4. Natural Gas Facts•In 2010, 88% of natural gas consumed in the U.S. was produced in U.S.•Natural gas resource base is more than 2 trillion cubic feet, considered to be a 100- year supply•Roughly 40 percent of consumption in the U.S. occurs between December and March Gas Industry 101
  • 5. Natural Gas Facts • There are nearly 2.4 million miles of pipeline that transport natural gas in the U.S. • According to NTSB, pipelines are the safest form of energy transportation. • Natural gas companies spend about $7 billion a year on safety programs. Gas Industry 101
  • 6. Cascade Natural Gas Gas Industry 101
  • 7. Natural Gas Facts Gas Industry 101
  • 8. Cascade Natural Gas• Company started in 1953 • Acquired by MDU Resources Group in 2007 • Moved headquarters from Seattle to Kennewick in 2010• Investor Owned Utility (IOU) • vs.. Public Utility District (PUD) • Both have the same ‘public’ service responsibility • PUD Independent of city/county gov’t • IOU have Income/Property/Corporate/Franchise taxes; PUD have payments in lieu of taxes• Gas Purchases • Long term pipeline capacity contracts. • Purchase core demand covering a 3 year period. (90/60/30) • We set contract terms and send out for bid • Cover additional demand needs with spot or first of the month purchases. Gas Industry 101
  • 9. Cascade Natural Gas 100% 90% 80% 70% 60% 50% Non-Core 40% Industrial 30% Commercial 20% Residential 10% 0% Gas Industry 101
  • 10. General Factors• Safety and Reliability Service Standards• No formal industry specific accounting education (OJT)• Obligation to serve – All willing customers (i.e. willing to follow tariff) – Special provisions apply to low income customers• Complex long range planning – IRP (Integrated Resource Plan) 20 YR Horizon • Estimate demand and plant construction plans • Factor weather, economy, demographics, etc. • Provide service on demand and contract for capacity and gas so estimates must be reliable Gas Industry 101
  • 11. General Factors• Capital Intensive – Roughly: $2 capital investment $1 revenue • Compared to typical manufacturing of $.10- $.15 investment $1 revenue• High Proportion of fixed costs – Depreciation, property taxes, interest on debt• Regulatory Lag – Deferred items (i.e. gas cost recovery) are collected in the following PGA year – Difficult to adjust quickly to changing conditions (Rate Case)• 4 sets of Books! – FERC, GAAP, Tax, Managerial Gas Industry 101
  • 12. Accounting & Regulation• Federal Energy Regulatory Commission (FERC) – Uniform System of Accounts – AFUDC debt and equity – Above and Below the line• Rate regulation – State Commissions (WUTC, OPUC) • Serve as a substitute for competition • Guided by the concepts of fairness and equity (ratepayer and utility) • Each may have different drivers for rate design (i.e. conservation) • Determine the earnings level of the utility in their respective jurisdiction – Rate regulation requires accounting data (tool for regulators) • Regulatory commissions require uniformity of accounting (FERC accounts) Gas Industry 101
  • 13. Accounting & Regulation• Rate design considerations – Once the revenue requirement is set, rates need to be designed to allocate the revenue across the customer classes. • Cost of service study (rate spread) • Fixed/Variable combination has a service charge component as well as volumetric (usage) charges (rate design) • Equitable and Fair (avoid ‘rate shock’) • Earnings stability • Consultants!!! – Incentives • Earnings sharing • Decoupling Gas Industry 101
  • 14. Accounting & Regulation• Cannot make money on fuel – Natural gas cost a straight pass through - Purchased Gas Adjustment (PGA)• Revenue – Regulated: Operating Expenses + (Rate Base*Allowed Return) – Non-regulated projects (i.e. pipeline work)• Rate base – Consists primarily of Plant in Service (PIS) and a portion of working capital. – Utilities are regulated on how much they can earn on rate base each year, generally 9-12% • This is what they are allowed to earn, NOT guaranteed! Gas Industry 101
  • 15. Questions and Discussion joe.silveira@cngc.com Gas Industry 101 Cascade Natural Gas Corporation Joe Silveira, CMA