IMA Presentation - Natural Gas 101 2012 03 20

Joe Silveira, CMA

Gas Industry 101Gas Industry 101

Cascade Natural Gas Corporation

Natural Gas Facts

• Natural Gas (national) serves:

- 65 million homes- 5 million

businesses- 207,000 factories- 1,800 electric - 1,800 electric

generating units

• Natural Gas accounts for one-fourth of all energy used in the United States


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


produced is delivered to customers in usable energy (cycle)

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 •Roughly 40 percent of consumption in the U.S. occurs between December and March


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 form of energy transportation.

•Natural gas companies spend about $7 billion a year on safety programs.


Cascade Natural Gas


Natural Gas Facts


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 • 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.


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Non-Core

Industrial

Commercial

Residential

Cascade Natural Gas


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


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• 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


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)


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’)• Equitable and Fair (avoid ‘rate shock’)

• Earnings stability

• Consultants!!!

– Incentives

• Earnings sharing

• Decoupling


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!


Questions and [email protected]

Joe Silveira, CMACascade Natural Gas Corporation


Documents

IMA Presentation - Natural Gas 101 2012 03 20