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Natural Gas Benchmarking

The document provides an overview of natural gas benchmarking, highlighting the importance of this process for energy companies facing challenges such as aging infrastructure and declining return on equity. It outlines a benchmarking approach that assesses performance gaps and improvement opportunities through peer comparisons, providing insights into operational and financial data. The report also emphasizes the role of benchmarking in driving discussions about performance measures and identifying best practices within the industry.

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Natural Gas Benchmarking Overview and Example Report December 2013 Copyright © 2013 by ScottMadden, Inc. All rights reserved.
Contents  Why Engage in Benchmarking  Example Report  ScottMadden – Who We Are 1 Copyright © 2013 by ScottMadden, Inc. All rights reserved.
Why Engage in Benchmarking
Why Engage in Benchmarking? Energy companies face increasing challenges  Aging infrastructure  Growth potential  Declining ROE and increasing regulatory scrutiny  Environmental compliance demands  Ongoing cost control pressure  Aging labor force  Industry uncertainty  External impacts on business operations Assessing business performance through benchmarking can help identify performance gaps and improvement opportunities. Benchmarking is a key part of the business management process. Benefits  Provides insight on performance and helps identify improvement opportunities  Enables companies to set stretch goals and learn from best performers through external, objective reviews  Serves as an integral part of managing the business 3 Copyright © 2013 by ScottMadden, Inc. All rights reserved.
Example Industry Challenge: Aging Infrastructure Onshore Gas Distribution Pipeline Construction by Decade and Region (miles) Western Southeast Northeast Midwest Gulf 250,000 Miles of Pipeline 150,000 100,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 50,000 Source: PHMSA   The growth rate in CapEx for this group was 22% higher in 2012 than in 2011 Forecasts indicate this trend continuing in 2013 ~55% Annual Capital Expenditures – 15 Publicly-Traded Gas Utilities $3,000 MEDIAN $ Millions $2,500 $2,000 $1,500 $1,000 $500 $2005 2006 2007 2008 2009 2010 2011 2012 Source: SNL 4 Copyright © 2013 by ScottMadden, Inc. All rights reserved. Unknown 2010present 20002009 19901999 19801989 19701979 19601969 Source: PHMSA ~31%  Much of U.S. pipeline infrastructure is aging; over a third is 40 years or older  Pipeline safety, a top priority for the gas industry, is driving investments to improve system integrity  Recent high-profile incidents have highlighted the need for such improvements  As a result, capital expenditures among gas utilities have increased significantly 19501959 Pre-1940 Unknown 2010present 20002009 19901999 19801989 19701979 19601969 19501959 0 19401949 0 19401949 10,000 Pre-1940 Miles of Pipeline 200,000 Onshore Gas Transmission Pipeline Construction by Decade and Region (miles)
Example Industry Challenge: Declining ROE Rate cases have increased consistently since 2000, but authorized ROEs continue to decline  In 2012, rate case filings were at the second highest point in 14 years  Gas allowed ROEs are at the lowest point in 14 years. 2012 median authorized ROEs are 150 basis points below those reported in1998  Contributing factors for this trend include:  Increased levels of planned capital expenditures for renewal of aging infrastructure  Declining natural gas consumption  Increasing energy efficiency in homes Earning authorized returns is challenging  Two-thirds of gas utilities’ earned ROEs are below what is authorized  The median of earned ROE as a percentage of allowed ROE is 91% Sources: ScottMadden analysis; Regulatory Research Associates; SNL Financial 5 Copyright © 2013 by ScottMadden, Inc. All rights reserved.
Our Benchmarking Approach Our benchmarking analysis is based on publicly available data with metrics and peer groups developed based on ScottMadden insight and client input Data Gathering and Analysis Objectives and Planning Insight Development Presentation of Results  Confirm objectives of  Assemble benchmarking  Develop findings  Review results study  Define plan and schedule  Select metrics based on objectives  Develop benchmarking panel and vet with client data  Develop analyses and conduct additional research as needed  Highlight leading and  Validate opportunities for lagging areas of performance improvement  Identify areas for more detailed assessment The analysis can take three to six weeks to complete depending on the level of client involvement and input needed. We tailor the schedule to our clients’ requirements. An illustrative timeline is below. Phase Objectives and Planning Data Gathering and Analysis Insight Development Presentation of Results 6 Copyright © 2013 by ScottMadden, Inc. All rights reserved. Week 1 Week 2 Week 3 Week 4 Typical fees for this effort are approximately $25,000
Example Report 7
Report Contents  Introduction  Summary of Initial Observations  Overview of Panel Companies  Financial Performance  Operational Performance  Potential Improvement Opportunities An example report with illustrative data follows 8 Copyright © 2013 by ScottMadden, Inc. All rights reserved.
Introduction Overview Approach  The objective of this review is to provide high-level financial and operating comparisons that will help the Company* management identify potential opportunities for improvement  A panel of 12 natural gas companies, including the Company, was selected as the benchmarking peer group for comparison purposes  While benchmarking can point to good practices and best-of-class results, it is not “the answer.” Instead, the benchmarking process itself provides a platform for dialogue about key management questions:  What are the appropriate measures of performance?  Where do we stand relative to those measures, and who are the “best”?   Financial metrics were obtained from FERC Form 2 reports or annual reports submitted to state commissions  Operational data (e.g., miles of main, number of services, leaks repaired) were obtained from Department of Transportation (DOT) annual operator reports  Potential focus areas for improvement can be derived from the benchmarking results  How will we institute those improvement initiatives, and how will we measure success? * The “Company” is the subject of the benchmarking effort 9 Copyright © 2013 by ScottMadden, Inc. All rights reserved. Company size, location, and system characteristics are the primary considerations for peer companies  This report is focused on key measures that provide a snapshot of financial and operational performance compared to peers What are others doing, and what should we be doing to improve?   Where applicable, key industry trends, compiled from ScottMadden observations and research, provide context to the benchmarking comparison
Benchmarking Results Summary of Initial Observations*  Revenue (net of production) per customer is slightly below comparable peers. While customer growth is relatively flat, the Company is keeping pace with the peer companies  The Company is near the median in terms of level of investment in its system  Results for Operation and Maintenance (O&M) expenses are mixed  Non-production O&M expense is relatively high on a per customer basis but relatively low on a per mile and per employee basis  Administrative and General (A&G) expense per customer is relatively high while Distribution expenses are low when compared to the peer panel  The Company’s distribution system is ranked high in the peer panel, with its relatively high percentage of protected steel and plastic mains and services * The initial observations throughout this report can be refined after discussion with management to better understand the context (i.e., the “why’s” and the “so what’s”) 10 Copyright © 2013 by ScottMadden, Inc. All rights reserved.
Overview of Panel Companies  A group of comparable peer utilities was selected based on similarities in scale, region, organization structure, and other system operational and design characteristics (e.g., multiple opcos under one holding company, whether or not the service territories were contiguous, whether or not they own upstream assets, pipe constructed of one predominant material, etc.) to the degree possible to ensure a like-in-kind basis of comparison for the benchmarking analysis. Company Customers Throughput (Mcf 000s) Operating Revenue ($000s) Utility A 694,391 68,938 644,474 Utility B 1,198,791 70,562 241,798 Utility C 918,283 80,535 1,178,102 Utility D 1,471,249 191,566 1,550,240 Utility E 544,205 48,138 380,935 Utility F 1,048,626 101,729 808,334 Utility G 431,181 12,656 369,353 Utility H 427,483 38,319 480,854 Utility I 1,881,576 210,244 1,064,301 Utility J 426,078 46,644 446,201 Utility K 656,743 79,349 909,192 The Company 686,256 85,644 424,256 NOTE: Customers, Throughput, and Operating Revenue reflect year-end 2012 data 11 Copyright © 2013 by ScottMadden, Inc. All rights reserved.
Benchmarking Results – Revenue and Growth Gas Revenue per Customer and Growth Revenue Net of Production Production Expense  Revenue net of production reflects what is received for the delivery of gas; commodity costs have been removed from this number  Note: quartiles and median based on revenue net of production  The Company was below most of the peer companies on a revenue net of production per customer basis Better  Overall, growth rates for the panel companies are fairly flat, and reflect the challenging economy  The customer growth rate for the Company is at the median of the panel (about 0.2%) 12 Copyright © 2013 by ScottMadden, Inc. All rights reserved. Top Quartile Median Bottom Quartile
Benchmarking Results – Revenue and Growth Net Utility Plant  Net utility plant reflects end-of-year total plant less accumulated depreciation expense  The Company was slightly above comparable peers in net plant per mile of main and per customer  The Company is just below the median for 5 Year CAGR, which indicates that the company has been investing less in its infrastructure than the peer panel Top Quartile Median Bottom Quartile 13 Copyright © 2013 by ScottMadden, Inc. All rights reserved.
Benchmarking Results – Cost Total Non-Production O&M Better Note: Main data not available for Utility E  The Company was above most comparable peers based on total non-production O&M expense per customer. A&G cost appears to be a driver for this metric  However, the Company was below most comparable peers on a per mile of main basis  The Company was one of the lowest to comparable peers based on total non-production O&M expense per employee Transmission Distribution Customer Accounts Customer Service & Info 14 Copyright © 2013 by ScottMadden, Inc. All rights reserved. Sales Expense Admin & General Storage
Benchmarking Results – Cost Administrative and General O&M Better Note: Administrative Expenses Transferred and Duplicate Charges are recorded as credits  We provide more detailed analyses of Administrative and General (A&G) expenses, as this is one of the largest components of total non-production O&M. These charts break down total A&G expense by FERC line item  The relatively high A&G expense per customer for the Company is driven primarily by Employee Pensions and Benefits, Outside Services, and Salaries  Administrative and General O&M expense per employee for the Company was considerably below the median and comparable peers Top Quartile Median Bottom Quartile 15 Copyright © 2013 by ScottMadden, Inc. All rights reserved.
Benchmarking Results – Cost Distribution O&M Note: Main data was not available for Company E Better Note: Main data not available for Utility E  Distribution is another major component of non-production O&M expense  The Company’s distribution O&M expense per mile of main and per customer are lower than the majority of the panel, likely because of the Company’s high percentage of newer pipe (see following page) Top Quartile Median Bottom Quartile 16 Copyright © 2013 by ScottMadden, Inc. All rights reserved.
Benchmarking Results – Operational Composition of Gas Distribution System  The Company has a high percentage of plastic and protected steel. The Company has no cast iron and very little unprotected steel, indicating that its system is relatively new  The composition of distribution mains can drive system performance and maintenance expenses (leaks, etc.)  The Company also ranks high in the peer panel for services. Virtually all of its services are made up of plastic and protected steel  Like mains, the composition of services is a determinant of system performance and maintenance expenses 17 Copyright © 2013 by ScottMadden, Inc. All rights reserved.
Benchmarking Results – Operational Leaks Repaired and Scheduled for Repair Better Better Better  The Company is close to the median in each measure related to leaks  The Company’s position in the peer panel is relatively high, given that its distribution system has one of the highest percentages of plastic and protected steel Top Quartile Median Bottom Quartile 18 Copyright © 2013 by ScottMadden, Inc. All rights reserved.
Benchmarking Results – Operational Pipeline Incidents by Cause Better NOTE: Significant incidents meet one or more of the following criteria • Fatality or injury requiring in-patient hospitalization • $50,000 or more in total costs • Highly volatile liquid releases of five barrels or more or other liquid releases of 50 barrels or more • Liquid releases resulting in an unintentional fire or explosion Source: PHMSA  The Company experienced three significant incidents in 2012 while Utility H and Utility G did not experience any 19 Copyright © 2013 by ScottMadden, Inc. All rights reserved.
Benchmarking Results – Customer J.D. Power Customer Satisfaction Better Top Quartile Median Bottom Quartile  The Company’s customer satisfaction rating is just above the median among the peer panel companies Note: JD Power data not available for Utility I 20 Copyright © 2013 by ScottMadden, Inc. All rights reserved.
Next Steps  Review results with management and key stakeholders  Validate opportunities for improvement (e.g., identify gaps with leading practices)  Identify areas for more detailed assessment 21 Copyright © 2013 by ScottMadden, Inc. All rights reserved.
ScottMadden – Who We Are 22
Who We Are WE DO WHAT IT TAKES TO GET IT DONE RIGHT 23 Copyright © 2013 by ScottMadden, Inc. All rights reserved. ENERGY  More than 300 clients including 20 of the top 20 energy utilities  Every business unit, every function C O R P O R AT E & SHARED SERVICES We deliver a broad array of consulting services—from strategic planning through implementation—across many industries, business units, and functions.  More than 2,400 projects  More than 1,100 projects CLEAN TECH & S U S TA I N A B I L I T Y ScottMadden is a management consulting firm with more than 30 years of deep, hands-on experience.  Unique perspective built on 30 years of energy experience  Clients range from entertainment to energy to high tech  Unmatched experience with more clients and more solutions  Solutions for clean and renewable sources of energy, smart energy management, and sustainability
ScottMadden: SMART. FOCUSED. DONE RIGHT. “They were able to offer more customization vs. a cookiecutter consulting project plan or proposal. Exactly what we’re looking for.” 24 Copyright © 2013 by ScottMadden, Inc. All rights reserved. We believe that client success is the best measure of our own success. We listen carefully to our clients’ challenges, concerns, and goals so we can personalize our work and focus on the things most important to their success. We don’t solve problems with canned methodologies—we help our clients solve the right problem in the right way. We do what we say we are going to do with genuine passion, tenacity, and integrity throughout the entire process.
ScottMadden Knows Energy EXPERIENCE Our energy utility expertise was built over more than 30 years. It is experience based, not theoretical. Our capabilities are broad and deep. Chances are we have seen and solved a similar problem. SCOPE We perform projects across every energy utility industry business unit and in every function. Since 1983, we have served more than 300 clients and completed more than 2,400 projects. SERVICES We have helped our clients develop strategies, improve operations, reorganize companies, and implement initiatives. 20 OF THE TOP 20 ENERGY UTILITIES HAVE ENGAGED SCOTTMADDEN. 25 Copyright © 2013 by ScottMadden, Inc. All rights reserved.
Representative Capabilities  Strategic planning  Business planning  Operational excellence and best practices  Playbook and management model  Process improvement  Organization design and staffing  Smart Grid  Renewables  Environmental  Regulatory  M&A  Benchmarking  Corporate and shared services  Clean tech and sustainability “I’ve used many consulting services during my career, and no other firm ever delivered on the promises they made better than ScottMadden.” G E N E R AT I O N C O M PA N Y PRESIDENT 26 Copyright © 2013 by ScottMadden, Inc. All rights reserved.
Areas of Focus GENERATION VERTICALLY INTEGRATED UTILITIES/PUBLIC POWER, MUNICIPALS, AND COOPERATIVES Our practical expertise in nuclear, fossil, and renewables helps clients implement leading practices for fleets and individual plants to improve and sustain results. We have performed numerous projects for leading players in every area of the business. TRANSMISSION REGULATION AND RATES We provide broad, deep energy expertise coupled with practical business acumen to help companies navigate transmission challenges with solid business advice. We offer extensive experience in addressing the strategic and operational challenges posed by energy regulation to help our clients succeed in today’s turbulent times. DISTRIBUTION/SMART GRID GAS We help our clients manage their distribution businesses in this changing environment with a continued focus on managing cost and ensuring reliability. We help companies adapt to rapid change in the natural gas industry by providing strategic and operational improvements that deliver value to clients. 27 Copyright © 2013 by ScottMadden, Inc. All rights reserved.
Consulting Approach CONTENT DEEP We know energy and have worked across every energy utility business unit and every function for more than 30 years. PERSONALIZED We begin by listening to our clients’ situation, challenges, and goals; then we personalize our work to help them succeed. CONTEXTUAL C O L L A B O R AT I V E R E A L R E S U LT S 28 Copyright © 2013 by ScottMadden, Inc. All rights reserved. We don’t solve problems with canned methodologies—we help our clients solve the right problem in the right way. We engage with our clients like no other firm does, working side by side to produce results. Our work is practical and can be put into play immediately. We excel at helping internal stakeholders take ownership to continue producing results after our work is done.
Representative Clients Generation Transmission Delivery Utilities Regulation Note: Representative sample; not all-inclusive of clients served. Excludes numerous well-known clients due to confidentiality agreements 29 Copyright © 2013 by ScottMadden, Inc. All rights reserved. Gas
Why ScottMadden? More than 30 years later, our very first client is still with us today. DEEP EXPERTISE  More than 30 years in the energy industry gives us unmatched experience  More than 2,400 projects means most likely we’ve seen a similar issue or solved a similar problem PERSONALIZED APPROACH   We engage with our clients like no other firm does, working side by side to create practical, real results  “Outstanding job of selecting really good people that have the experience, knowledge, and insights.” Before we begin any project, we sit down and listen to our clients’ needs and challenges We don’t employ canned methodologies or cookie-cutter solutions. We work to solve the right problem in the right way PHILOSOPHY 30 We are personally invested in every project and measure our success by our clients’ success  We listen to our clients’ needs and put their best interests ahead of our own  We work with integrity, tenacity, and a genuine passion for what we do  Copyright © 2013 by ScottMadden, Inc. All rights reserved.  We do what it takes to get it done right
Representative Qualifications Gas Diversified Utility Gas Industry Briefing and Benchmarking Analysis ScottMadden worked with a diversified utility after a recent acquisition of three LDCs to develop an executive primer on the natural gas industry and the business model for a typical LDC. This engagement also involved a detailed benchmarking analysis that compared the acquired LDCs to regional and national peer panels. Multiple Gas LDCs Business Process Improvement ScottMadden managed large multi-team projects to assess LDCs’ current state processes, functions, and organizations and led teams through developing future state designs and business cases to support implementation. ScottMadden provided the methodology, supported project management, facilitated and performed analysis, offered best practices, supported communications and change management, and helped to develop deliverables. Projects improved business results, service levels, and operating efficiencies, increased employee engagement, and helped develop a new culture of continuous improvement. The project was cited in the client’s subsequent Wall Street analyst presentations and annual reports. GAS 31 Copyright © 2013 by ScottMadden, Inc. All rights reserved. Gas LDC Organization Analysis ScottMadden conducted an organizational structure analysis for a large gas LDC by comparing current state practices to best practice benchmarks, including spans of control, layers, and cost to manage. The analysis resulted in identification of potential areas of improvement. These opportunities would result in a structure aligned with corporate strategy, efficient decision making, clear accountabilities, increased morale, and the potential for significant savings.

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Natural Gas Benchmarking

  • 1.
    Natural Gas Benchmarking Overviewand Example Report December 2013 Copyright © 2013 by ScottMadden, Inc. All rights reserved.
  • 2.
    Contents  Why Engagein Benchmarking  Example Report  ScottMadden – Who We Are 1 Copyright © 2013 by ScottMadden, Inc. All rights reserved.
  • 3.
    Why Engage inBenchmarking
  • 4.
    Why Engage inBenchmarking? Energy companies face increasing challenges  Aging infrastructure  Growth potential  Declining ROE and increasing regulatory scrutiny  Environmental compliance demands  Ongoing cost control pressure  Aging labor force  Industry uncertainty  External impacts on business operations Assessing business performance through benchmarking can help identify performance gaps and improvement opportunities. Benchmarking is a key part of the business management process. Benefits  Provides insight on performance and helps identify improvement opportunities  Enables companies to set stretch goals and learn from best performers through external, objective reviews  Serves as an integral part of managing the business 3 Copyright © 2013 by ScottMadden, Inc. All rights reserved.
  • 5.
    Example Industry Challenge:Aging Infrastructure Onshore Gas Distribution Pipeline Construction by Decade and Region (miles) Western Southeast Northeast Midwest Gulf 250,000 Miles of Pipeline 150,000 100,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 50,000 Source: PHMSA   The growth rate in CapEx for this group was 22% higher in 2012 than in 2011 Forecasts indicate this trend continuing in 2013 ~55% Annual Capital Expenditures – 15 Publicly-Traded Gas Utilities $3,000 MEDIAN $ Millions $2,500 $2,000 $1,500 $1,000 $500 $2005 2006 2007 2008 2009 2010 2011 2012 Source: SNL 4 Copyright © 2013 by ScottMadden, Inc. All rights reserved. Unknown 2010present 20002009 19901999 19801989 19701979 19601969 Source: PHMSA ~31%  Much of U.S. pipeline infrastructure is aging; over a third is 40 years or older  Pipeline safety, a top priority for the gas industry, is driving investments to improve system integrity  Recent high-profile incidents have highlighted the need for such improvements  As a result, capital expenditures among gas utilities have increased significantly 19501959 Pre-1940 Unknown 2010present 20002009 19901999 19801989 19701979 19601969 19501959 0 19401949 0 19401949 10,000 Pre-1940 Miles of Pipeline 200,000 Onshore Gas Transmission Pipeline Construction by Decade and Region (miles)
  • 6.
    Example Industry Challenge:Declining ROE Rate cases have increased consistently since 2000, but authorized ROEs continue to decline  In 2012, rate case filings were at the second highest point in 14 years  Gas allowed ROEs are at the lowest point in 14 years. 2012 median authorized ROEs are 150 basis points below those reported in1998  Contributing factors for this trend include:  Increased levels of planned capital expenditures for renewal of aging infrastructure  Declining natural gas consumption  Increasing energy efficiency in homes Earning authorized returns is challenging  Two-thirds of gas utilities’ earned ROEs are below what is authorized  The median of earned ROE as a percentage of allowed ROE is 91% Sources: ScottMadden analysis; Regulatory Research Associates; SNL Financial 5 Copyright © 2013 by ScottMadden, Inc. All rights reserved.
  • 7.
    Our Benchmarking Approach Ourbenchmarking analysis is based on publicly available data with metrics and peer groups developed based on ScottMadden insight and client input Data Gathering and Analysis Objectives and Planning Insight Development Presentation of Results  Confirm objectives of  Assemble benchmarking  Develop findings  Review results study  Define plan and schedule  Select metrics based on objectives  Develop benchmarking panel and vet with client data  Develop analyses and conduct additional research as needed  Highlight leading and  Validate opportunities for lagging areas of performance improvement  Identify areas for more detailed assessment The analysis can take three to six weeks to complete depending on the level of client involvement and input needed. We tailor the schedule to our clients’ requirements. An illustrative timeline is below. Phase Objectives and Planning Data Gathering and Analysis Insight Development Presentation of Results 6 Copyright © 2013 by ScottMadden, Inc. All rights reserved. Week 1 Week 2 Week 3 Week 4 Typical fees for this effort are approximately $25,000
  • 8.
  • 9.
    Report Contents  Introduction Summary of Initial Observations  Overview of Panel Companies  Financial Performance  Operational Performance  Potential Improvement Opportunities An example report with illustrative data follows 8 Copyright © 2013 by ScottMadden, Inc. All rights reserved.
  • 10.
    Introduction Overview Approach  The objectiveof this review is to provide high-level financial and operating comparisons that will help the Company* management identify potential opportunities for improvement  A panel of 12 natural gas companies, including the Company, was selected as the benchmarking peer group for comparison purposes  While benchmarking can point to good practices and best-of-class results, it is not “the answer.” Instead, the benchmarking process itself provides a platform for dialogue about key management questions:  What are the appropriate measures of performance?  Where do we stand relative to those measures, and who are the “best”?   Financial metrics were obtained from FERC Form 2 reports or annual reports submitted to state commissions  Operational data (e.g., miles of main, number of services, leaks repaired) were obtained from Department of Transportation (DOT) annual operator reports  Potential focus areas for improvement can be derived from the benchmarking results  How will we institute those improvement initiatives, and how will we measure success? * The “Company” is the subject of the benchmarking effort 9 Copyright © 2013 by ScottMadden, Inc. All rights reserved. Company size, location, and system characteristics are the primary considerations for peer companies  This report is focused on key measures that provide a snapshot of financial and operational performance compared to peers What are others doing, and what should we be doing to improve?   Where applicable, key industry trends, compiled from ScottMadden observations and research, provide context to the benchmarking comparison
  • 11.
    Benchmarking Results Summary ofInitial Observations*  Revenue (net of production) per customer is slightly below comparable peers. While customer growth is relatively flat, the Company is keeping pace with the peer companies  The Company is near the median in terms of level of investment in its system  Results for Operation and Maintenance (O&M) expenses are mixed  Non-production O&M expense is relatively high on a per customer basis but relatively low on a per mile and per employee basis  Administrative and General (A&G) expense per customer is relatively high while Distribution expenses are low when compared to the peer panel  The Company’s distribution system is ranked high in the peer panel, with its relatively high percentage of protected steel and plastic mains and services * The initial observations throughout this report can be refined after discussion with management to better understand the context (i.e., the “why’s” and the “so what’s”) 10 Copyright © 2013 by ScottMadden, Inc. All rights reserved.
  • 12.
    Overview of PanelCompanies  A group of comparable peer utilities was selected based on similarities in scale, region, organization structure, and other system operational and design characteristics (e.g., multiple opcos under one holding company, whether or not the service territories were contiguous, whether or not they own upstream assets, pipe constructed of one predominant material, etc.) to the degree possible to ensure a like-in-kind basis of comparison for the benchmarking analysis. Company Customers Throughput (Mcf 000s) Operating Revenue ($000s) Utility A 694,391 68,938 644,474 Utility B 1,198,791 70,562 241,798 Utility C 918,283 80,535 1,178,102 Utility D 1,471,249 191,566 1,550,240 Utility E 544,205 48,138 380,935 Utility F 1,048,626 101,729 808,334 Utility G 431,181 12,656 369,353 Utility H 427,483 38,319 480,854 Utility I 1,881,576 210,244 1,064,301 Utility J 426,078 46,644 446,201 Utility K 656,743 79,349 909,192 The Company 686,256 85,644 424,256 NOTE: Customers, Throughput, and Operating Revenue reflect year-end 2012 data 11 Copyright © 2013 by ScottMadden, Inc. All rights reserved.
  • 13.
    Benchmarking Results –Revenue and Growth Gas Revenue per Customer and Growth Revenue Net of Production Production Expense  Revenue net of production reflects what is received for the delivery of gas; commodity costs have been removed from this number  Note: quartiles and median based on revenue net of production  The Company was below most of the peer companies on a revenue net of production per customer basis Better  Overall, growth rates for the panel companies are fairly flat, and reflect the challenging economy  The customer growth rate for the Company is at the median of the panel (about 0.2%) 12 Copyright © 2013 by ScottMadden, Inc. All rights reserved. Top Quartile Median Bottom Quartile
  • 14.
    Benchmarking Results –Revenue and Growth Net Utility Plant  Net utility plant reflects end-of-year total plant less accumulated depreciation expense  The Company was slightly above comparable peers in net plant per mile of main and per customer  The Company is just below the median for 5 Year CAGR, which indicates that the company has been investing less in its infrastructure than the peer panel Top Quartile Median Bottom Quartile 13 Copyright © 2013 by ScottMadden, Inc. All rights reserved.
  • 15.
    Benchmarking Results –Cost Total Non-Production O&M Better Note: Main data not available for Utility E  The Company was above most comparable peers based on total non-production O&M expense per customer. A&G cost appears to be a driver for this metric  However, the Company was below most comparable peers on a per mile of main basis  The Company was one of the lowest to comparable peers based on total non-production O&M expense per employee Transmission Distribution Customer Accounts Customer Service & Info 14 Copyright © 2013 by ScottMadden, Inc. All rights reserved. Sales Expense Admin & General Storage
  • 16.
    Benchmarking Results –Cost Administrative and General O&M Better Note: Administrative Expenses Transferred and Duplicate Charges are recorded as credits  We provide more detailed analyses of Administrative and General (A&G) expenses, as this is one of the largest components of total non-production O&M. These charts break down total A&G expense by FERC line item  The relatively high A&G expense per customer for the Company is driven primarily by Employee Pensions and Benefits, Outside Services, and Salaries  Administrative and General O&M expense per employee for the Company was considerably below the median and comparable peers Top Quartile Median Bottom Quartile 15 Copyright © 2013 by ScottMadden, Inc. All rights reserved.
  • 17.
    Benchmarking Results –Cost Distribution O&M Note: Main data was not available for Company E Better Note: Main data not available for Utility E  Distribution is another major component of non-production O&M expense  The Company’s distribution O&M expense per mile of main and per customer are lower than the majority of the panel, likely because of the Company’s high percentage of newer pipe (see following page) Top Quartile Median Bottom Quartile 16 Copyright © 2013 by ScottMadden, Inc. All rights reserved.
  • 18.
    Benchmarking Results –Operational Composition of Gas Distribution System  The Company has a high percentage of plastic and protected steel. The Company has no cast iron and very little unprotected steel, indicating that its system is relatively new  The composition of distribution mains can drive system performance and maintenance expenses (leaks, etc.)  The Company also ranks high in the peer panel for services. Virtually all of its services are made up of plastic and protected steel  Like mains, the composition of services is a determinant of system performance and maintenance expenses 17 Copyright © 2013 by ScottMadden, Inc. All rights reserved.
  • 19.
    Benchmarking Results –Operational Leaks Repaired and Scheduled for Repair Better Better Better  The Company is close to the median in each measure related to leaks  The Company’s position in the peer panel is relatively high, given that its distribution system has one of the highest percentages of plastic and protected steel Top Quartile Median Bottom Quartile 18 Copyright © 2013 by ScottMadden, Inc. All rights reserved.
  • 20.
    Benchmarking Results –Operational Pipeline Incidents by Cause Better NOTE: Significant incidents meet one or more of the following criteria • Fatality or injury requiring in-patient hospitalization • $50,000 or more in total costs • Highly volatile liquid releases of five barrels or more or other liquid releases of 50 barrels or more • Liquid releases resulting in an unintentional fire or explosion Source: PHMSA  The Company experienced three significant incidents in 2012 while Utility H and Utility G did not experience any 19 Copyright © 2013 by ScottMadden, Inc. All rights reserved.
  • 21.
    Benchmarking Results –Customer J.D. Power Customer Satisfaction Better Top Quartile Median Bottom Quartile  The Company’s customer satisfaction rating is just above the median among the peer panel companies Note: JD Power data not available for Utility I 20 Copyright © 2013 by ScottMadden, Inc. All rights reserved.
  • 22.
    Next Steps  Reviewresults with management and key stakeholders  Validate opportunities for improvement (e.g., identify gaps with leading practices)  Identify areas for more detailed assessment 21 Copyright © 2013 by ScottMadden, Inc. All rights reserved.
  • 23.
  • 24.
    Who We Are WEDO WHAT IT TAKES TO GET IT DONE RIGHT 23 Copyright © 2013 by ScottMadden, Inc. All rights reserved. ENERGY  More than 300 clients including 20 of the top 20 energy utilities  Every business unit, every function C O R P O R AT E & SHARED SERVICES We deliver a broad array of consulting services—from strategic planning through implementation—across many industries, business units, and functions.  More than 2,400 projects  More than 1,100 projects CLEAN TECH & S U S TA I N A B I L I T Y ScottMadden is a management consulting firm with more than 30 years of deep, hands-on experience.  Unique perspective built on 30 years of energy experience  Clients range from entertainment to energy to high tech  Unmatched experience with more clients and more solutions  Solutions for clean and renewable sources of energy, smart energy management, and sustainability
  • 25.
    ScottMadden: SMART. FOCUSED. DONE RIGHT. “They wereable to offer more customization vs. a cookiecutter consulting project plan or proposal. Exactly what we’re looking for.” 24 Copyright © 2013 by ScottMadden, Inc. All rights reserved. We believe that client success is the best measure of our own success. We listen carefully to our clients’ challenges, concerns, and goals so we can personalize our work and focus on the things most important to their success. We don’t solve problems with canned methodologies—we help our clients solve the right problem in the right way. We do what we say we are going to do with genuine passion, tenacity, and integrity throughout the entire process.
  • 26.
    ScottMadden Knows Energy EXPERIENCE Ourenergy utility expertise was built over more than 30 years. It is experience based, not theoretical. Our capabilities are broad and deep. Chances are we have seen and solved a similar problem. SCOPE We perform projects across every energy utility industry business unit and in every function. Since 1983, we have served more than 300 clients and completed more than 2,400 projects. SERVICES We have helped our clients develop strategies, improve operations, reorganize companies, and implement initiatives. 20 OF THE TOP 20 ENERGY UTILITIES HAVE ENGAGED SCOTTMADDEN. 25 Copyright © 2013 by ScottMadden, Inc. All rights reserved.
  • 27.
    Representative Capabilities  Strategic planning  Businessplanning  Operational excellence and best practices  Playbook and management model  Process improvement  Organization design and staffing  Smart Grid  Renewables  Environmental  Regulatory  M&A  Benchmarking  Corporate and shared services  Clean tech and sustainability “I’ve used many consulting services during my career, and no other firm ever delivered on the promises they made better than ScottMadden.” G E N E R AT I O N C O M PA N Y PRESIDENT 26 Copyright © 2013 by ScottMadden, Inc. All rights reserved.
  • 28.
    Areas of Focus GENERATION VERTICALLYINTEGRATED UTILITIES/PUBLIC POWER, MUNICIPALS, AND COOPERATIVES Our practical expertise in nuclear, fossil, and renewables helps clients implement leading practices for fleets and individual plants to improve and sustain results. We have performed numerous projects for leading players in every area of the business. TRANSMISSION REGULATION AND RATES We provide broad, deep energy expertise coupled with practical business acumen to help companies navigate transmission challenges with solid business advice. We offer extensive experience in addressing the strategic and operational challenges posed by energy regulation to help our clients succeed in today’s turbulent times. DISTRIBUTION/SMART GRID GAS We help our clients manage their distribution businesses in this changing environment with a continued focus on managing cost and ensuring reliability. We help companies adapt to rapid change in the natural gas industry by providing strategic and operational improvements that deliver value to clients. 27 Copyright © 2013 by ScottMadden, Inc. All rights reserved.
  • 29.
    Consulting Approach CONTENT DEEP Weknow energy and have worked across every energy utility business unit and every function for more than 30 years. PERSONALIZED We begin by listening to our clients’ situation, challenges, and goals; then we personalize our work to help them succeed. CONTEXTUAL C O L L A B O R AT I V E R E A L R E S U LT S 28 Copyright © 2013 by ScottMadden, Inc. All rights reserved. We don’t solve problems with canned methodologies—we help our clients solve the right problem in the right way. We engage with our clients like no other firm does, working side by side to produce results. Our work is practical and can be put into play immediately. We excel at helping internal stakeholders take ownership to continue producing results after our work is done.
  • 30.
    Representative Clients Generation Transmission Delivery Utilities Regulation Note: Representativesample; not all-inclusive of clients served. Excludes numerous well-known clients due to confidentiality agreements 29 Copyright © 2013 by ScottMadden, Inc. All rights reserved. Gas
  • 31.
    Why ScottMadden? More than30 years later, our very first client is still with us today. DEEP EXPERTISE  More than 30 years in the energy industry gives us unmatched experience  More than 2,400 projects means most likely we’ve seen a similar issue or solved a similar problem PERSONALIZED APPROACH   We engage with our clients like no other firm does, working side by side to create practical, real results  “Outstanding job of selecting really good people that have the experience, knowledge, and insights.” Before we begin any project, we sit down and listen to our clients’ needs and challenges We don’t employ canned methodologies or cookie-cutter solutions. We work to solve the right problem in the right way PHILOSOPHY 30 We are personally invested in every project and measure our success by our clients’ success  We listen to our clients’ needs and put their best interests ahead of our own  We work with integrity, tenacity, and a genuine passion for what we do  Copyright © 2013 by ScottMadden, Inc. All rights reserved.  We do what it takes to get it done right
  • 32.
    Representative Qualifications Gas Diversified Utility GasIndustry Briefing and Benchmarking Analysis ScottMadden worked with a diversified utility after a recent acquisition of three LDCs to develop an executive primer on the natural gas industry and the business model for a typical LDC. This engagement also involved a detailed benchmarking analysis that compared the acquired LDCs to regional and national peer panels. Multiple Gas LDCs Business Process Improvement ScottMadden managed large multi-team projects to assess LDCs’ current state processes, functions, and organizations and led teams through developing future state designs and business cases to support implementation. ScottMadden provided the methodology, supported project management, facilitated and performed analysis, offered best practices, supported communications and change management, and helped to develop deliverables. Projects improved business results, service levels, and operating efficiencies, increased employee engagement, and helped develop a new culture of continuous improvement. The project was cited in the client’s subsequent Wall Street analyst presentations and annual reports. GAS 31 Copyright © 2013 by ScottMadden, Inc. All rights reserved. Gas LDC Organization Analysis ScottMadden conducted an organizational structure analysis for a large gas LDC by comparing current state practices to best practice benchmarks, including spans of control, layers, and cost to manage. The analysis resulted in identification of potential areas of improvement. These opportunities would result in a structure aligned with corporate strategy, efficient decision making, clear accountabilities, increased morale, and the potential for significant savings.