More Related Content Similar to Five Strategic Priorities: Generation and Transmission Cooperatives (20) More from ScottMadden, Inc. (20) Five Strategic Priorities: Generation and Transmission Cooperatives1. 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