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Five Strategic Priorities: Generation and Transmission Cooperatives

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Generation and Transmission cooperatives face a rapidly changing business outlook with complex and high-stakes challenges on many fronts. We believe these organizations must address five key strategic …

Generation and Transmission cooperatives face a rapidly changing business outlook with complex and high-stakes challenges on many fronts. We believe these organizations must address five key strategic priorities to confront the future with confidence including: managing generation assets, ensuring grid security and reliability, gaining access to capital markets, improving the effectiveness of stakeholder management, and fostering economic development.

This insight provides a summary for a five-part series that ScottMadden published. The full series can be found here: http://www.scottmadden.com/insight/516/five-strategic-priorities-for-generation-and-transmission-cooperatives.html.

To learn more, please visit www.scottmadden.com.

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  • 1. Copyright © 2012 by ScottMadden. All rights reserved. Five Strategic Priorities for Generation and Transmission Cooperatives Winter 2012 Contact: Brad Kitchens (sbkitchens@scottmadden.com) Marc Miller (mdmiller@scottmadden.com)
  • 2. Copyright © 2012 by ScottMadden. All rights reserved. Introduction Generation and Transmission cooperatives face a rapidly changing business outlook with complex and high-stakes challenges on many fronts. We believe these organizations must address five strategic priorities to confront the future with confidence. This insight provides a summary for a five-part series that ScottMadden will publish. 1 Managing Generation Assets Ensuring Grid Security and Reliability Gaining Access to Capital Markets Improving the Effectiveness of Stakeholder Management Fostering Economic Development
  • 3. Copyright © 2012 by ScottMadden. All rights reserved. 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 (MW) Top Cooperatives CurrentGeneration Capacity by Fuel Type Hydro Renewable Natural Gas Coal Managing Generation Assets 2 The management of generation assets, never easy, is even more challenging in today’s environment of volatile commodity prices, aging infrastructure, environmental mandates, and regulatory and capital market uncertainty. Almost half of the total MW capacity of top cooperatives* is coal. Establishing a formal approach to portfolio lifecycle optimization is becoming critical. Physical Assets Life Cycle Costs Resource Optimization Risk Asset Value Ensuring assets operate at design parameters with minimal off-normal operations Optimizing initial and ongoing investment to maximize an asset’s value over its life cycle Maximizing the contribution from those who manage the asset through review of performance Managing engineering, operational, and financial risk Developing additional value from physical assets and management/operational competencies DescriptionComponent Gas  Impact of the “rush to gas” on future demand (and prices)  Environmental pressures on shale gas extraction Coal  Regulatory uncertainty  Environmental pressure  Feasibility of retiring older units Nuclear  Long development time and higher project schedule risk  Uneasiness about future capital costs and current economics (low gas price)  Environmental scrutiny (e.g., on spent fuel) Wind  Extent and timing of renewable energy standards  Low capacity factor and intermittency  Geographic constraints and transmission availability Each resource type has key issues that complicate resource planning: The lifecycle value of a portfolio can be optimized through a comprehensive asset management strategy. *Defined here as those with assets more than $1 billion or annual revenue more than $500 million
  • 4. Copyright © 2012 by ScottMadden. All rights reserved. $47.4 $57.2 $49.0 $43.0 $41.1 $48.4 $59.9 $74.1 $82.8 $77.6 $74.2 $- $10 $20 $30 $40 $50 $60 $70 $80 $90 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 $Billions AnnualCapitalExpenditures Gaining Access to Capital Markets 3 0% 20% 40% 60% 80% 100% 120% Debt(%) Topcooperatives Debt/ Capitalization - 0.50 1.00 1.50 2.00 2.50 Ratio(X) Topcooperatives DebtService CoverageRatio  A median DSC ratio of 1.31x is within the range of a Fitch study in which ratios of public power firms rated AA or A ranged from 1.25x to 1.7x from 2005 to 2009*  Relatively high debt levels (a median of 86% of total capitalization) reflect the large balance sheets and low risk profile of most cooperatives *Sources: SNL Financial and EEI Finance Department, U.S. Public Power Peer Study June 16, 2010 **Defined here as those with assets more than $1 billion or annual revenue more than $500 million  Total property, plant and equipment jumped nearly 20% in the past six years, from $816B in 2005 to $998B in 2010*  Annual capital expenditures at investor- owned utilities have grown from $47B in 2000 to $74B in 2010 Regulatory & Legislative Environment  Strong rate-making ability or positive regulatory relationships  Consistent engagement with key stakeholders Business & Economic Environment  A diverse and growing service area  Community support for conservation and investments in efficiency Management & Operations  Experienced and effective leadership  Competitive operational performance  A diverse and low cost resource mix Financial Performance  Strong historical financials, including balance sheet stability, appropriate debt- service ratios, and sufficient liquidity Dimensions of Business Strength How Do Capital Markets Judge Cooperatives? With potentially costly environmental upgrades on the horizon and the need to increase capacity over the long term, capital needs continue to rise. What is driving Cooperatives to Access Capital Markets?  At the same time, RUS financing is declining and becoming more restrictive — RUS financing was $7.5B in 2008, and estimated to be only $6.1B in 2012, a $1.4B decrease The 21 top cooperatives** demonstrated the following financial characteristics in 2010:
  • 5. Copyright © 2012 by ScottMadden. All rights reserved. Ensuring Grid Security and Reliability 4 In 2008, FERC gave NERC the power to establish mandatory bulk power system requirements for security and reliability and to audit compliance and levy fines. Since then, NERC standards and requirements have grown and are growing. NERC Compliance Maturity Model Ongoing Compliance  Continuous cycle (as standards evolve, procedures are updated and personnel are trained)  Demonstrated culture of compliance  Active regulatory relationships Integration and Automation  Requirements coordinated by all business units  Documents managed electronically  Workflow and metrics automated Accountability  Dedicated compliance organization established  Individual standard owners assigned Defined Processes  Compliance requirements defined  Mitigation activities established HighLow Maturity Level Top 10 Violations (March 2010 – March 2011)  Top companies are working to ensure that their organizations can evolve to meet changing NERC and FERC priorities  In 2012 and beyond, NERC will use a risk-based approach to reliability, including a heavy focus on Critical Infrastructure Protection (CIP) standards — 8 of the top 10 standards violated, and 80% of total violations, are CIP  In addition to managing key reliability metrics, companies should also build a mature and effective compliance program  Compliance programs are most effective when they impact multiple dimensions of an organization, including: — Organizational Structure — Standards Development — Employee Training — Program management — Risk management — Systems and Processes — Technology Management Rulemaking and Enforcement is Evolving
  • 6. Copyright © 2012 by ScottMadden. All rights reserved. Fostering Economic Development 5 Cooperatives can be powerful drivers of economic development for their communities. In spite of competing demands on financial resources, economic development is a perennial top priority at best-in-class companies, with the most successful sharing a few common characteristics  Visible and Accountable Leadership: Support for initiatives is maintained throughout the organization, leadership is accountable, and progress is reviewed and communicated regularly  Consistent and Significant Resources: Every year, substantial technical, financial, and human resources are dedicated to fostering economic development  Focused and Measurable Objectives: Customized initiatives, with clear goals, are designed based on a broad set of proven approaches Required Commitment Data and Analytical Resources  Site Selection/Certification: Providing access to geographic information systems (GIS)  Economic Data: Providing access to analysis of industry sectors, demographic data, economic trends, and electric usage estimates  Publications: Publishing documents or periodicals addressing local or regional economic concerns Planning and Development Management  Engineering and Project Management: Providing engineering services for site evaluation and planning, or project managers to navigate the site development process  Strategic and Community Plan Assistance: Enabling communities to direct change through assistance with evaluating resources and objectives Community and Industry Collaboration  Funds: Creating funds for economic development, job creation, or the enhancement of infrastructure  Grants: Awarding development grants to deserving entities  Incentives: Providing businesses with incentives to conserve or improve energy efficiency  Educational Programs: Working with local colleges to create educational sessions or comprehensive grant programs Impact How Do Top Performing Companies Approach Economic Development?
  • 7. Copyright © 2012 by ScottMadden. All rights reserved. Improving the Effectiveness of Stakeholder Management Cooperatives face unique governance challenges: while working to meet the expectations of investors, voters, citizens, and government entities, they must also work to preserve transparency and member control. 6 Cooperatives Face A Balancing Act  Promotes transparency and collaboration among stakeholders and the utility  Incorporates stakeholder input into strategic planning decisions  Fosters stakeholder understanding of planning constraints and viewpoints  Establishes stakeholder “buy-in” and support of the planning process  Increases support from policy and rate-making authorities An Effective Stakeholder Management Plan  Conflicting stakeholder expectations and financial and strategic constraints combine to form a challenging landscape Clean Energy Advocates Environmental Advocates Retail Customers Wholesale Customers Academia Generation Partners Governments at All Levels Financial Analysts Stakeholder Engagement Chambers of Commerce Misc. Business Interests Expectations Constraints Higher material and labor costs Decreases in demand Aging infrastructure and regulatory uncertainty Volatile commodity prices Investment in renewable energy Environmental improvements Sustained earnings growth Low rates and reliable power
  • 8. Copyright © 2012 by ScottMadden. All rights reserved. Contact Us ScottMadden has undertaken numerous consulting projects for cooperatives across the country. If you are interested in learning more about strategic priorities for Generation and Transmission Cooperatives, please contact us. Brad Kitchens President and CEO ScottMadden, Inc. 3495 Piedmont Rd, Bldg 10 Suite 805 Atlanta, GA 30305 Phone: 404-814-0020 sbkitchens@scottmadden.com Marc Miller Director ScottMadden, Inc. 3495 Piedmont Rd, Bldg 10 Suite 805 Atlanta, GA 30305 Phone: 404-814-0020 mdmiller@scottmadden.com

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