bv law firms brownbag luncheon
TRANSCRIPT
April 3, 2013
BLACK & VEATCH MANAGEMENT CONSULTING
Issues For An Expanding Energy Market Market and Regulatory Advisory Services to theNatural Gas and Power Industries
AGENDA
• About Black & VeatchIssues For An Expanding Energy Market
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ABOUT B
LACK &
VEATCH
BLACK & VEATCH CORPORATION – SOLVING THE WORLD’S COMPLEX INFRASTRUCTURE CHALLENGES
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• Founded in 1915• Global workforce of over 9,200 • More than 100 offices worldwide• Projects in more than 100 countries on 6 continents
• $2.7 billion in annual revenues in 2011• Employee‐owned corporation
BLACK & VEATCH CORPORATION IS A LEADING GLOBAL ENGINEERING, CONSULTING AND CONSTRUCTION COMPANY
ABOUT B
LACK &
VEATCH
WE INTEGRATE MARKET REALITIES WITH REGULATORY STRATEGIES
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STRA
TEGY, M
ARKETS & FINAN
CE •Market Analysis
• Integrated Resource Planning
•Power Fuel Planning & Procurement
•M&A Support• Lender’s Engineer
REGULATO
RY, SECURITY & COMPLIANCE • Cost of
Service & Rates
• Expert Testimony
• Turnkey Regulatory Services
• Pipeline Integrity
• Cybersecurity CUSTOMER
ENGAG
EMEN
T • Retail Market Systems
• Contact Customer Performance
• CIS
INTELLIGEN
T INFRAS
TRUCT
URE • Advanced
Metering Infrastructure
• GIS• Energy Efficiency & Demand Response
• Integrated Operations Control
• Distribution Planning
CUSTOMIZED, INTEGRATED & STRATEGIC SOLUTIONS
Black & Veatch Management Consulting
AGENDA
• About Black & VeatchIssues For An Expanding Energy Market
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ISSUES ENCOMPASS THE MAJOR CHALLENGES FACING THE NATURAL GAS AND POWER MARKETS TODAY
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– BRIGHT OUTLOOK OR TORTURED OPTIMISM?
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Optimistic92%
Neutral 5% Pessimistic 3%
OUTLOOK ON INDUSTRY GROWTH IN NORTH AMERICA BETWEEN NOW AND 2020Source: Black & Veatch Natural Gas SurveyQ. What is your general outlook on the future growth of the North American natural gas industry?
Low Gas Prices+Lagging Demand Growth+Potential Export Limits+Increasing Regulation
?
=
– WHILE THE INDUSTRY IS OPTIMISTIC, CHALLENGES EXIST
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4.57
4.22
4.21
4.21
4.13
4.08
4.01
3.94
3.80
3.74
Safety
Economic growth
Gas supply reliability
Rate and regulatory certainty
Capital access and cost
Aging infrastructure
Gas price stability
Electric‐gas interdependency
Environmental activism
Aging work force
On a scale of 1 to 5, rate the most important long‐term issues to the gas industry.
No Impact
SignificantImpact
Capital, Capacity
Convergence, Capital, Capacity
Convergence, Capital, Capacity
Convergence, Capital, Capacity
Convergence, Capital, Capacity
Convergence, Capital, Capacity
Convergence, Capital, Capacity
Convergence, Capital, Capacity
Convergence, Capital, Capacity
Capital
Source: 2012 Black & Veatch Strategic Directions in the US Natural Gas Industry
Thesemarketissuesrequireregulatorystrategies
CAPIT
AL
– WHO WILL BUILD THE INFRASTRUCTURE IF NO ONE WANTS TO PAY?
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Convergence
Cap
acity
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3.44
3.43
3.23
3.22
3.10
3.10
Ability to recover operating costs and provide satisfactory earnings
Costs associated with maintaining satisfactory regulatory compliance
Level of investment made by your company in the natural gas industry
Predictability of natural gas prices
Level of natural gas prices to consumers
Stability of service pricing
– CAPITAL: HOW WILL UNCERTAINTY AFFECT EXPANSION AND MAINTENANCE INVESTMENTS
B&V Survey Question: To what extent do you believe regulatory uncertainty (at either the federal or state level) has an impact on the following issues?
No Impact
SignificantImpact
CAPIT
AL
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CAPIT
AL
– CAPITAL: COULD REGULATORY UNCERTAINTY DIFFER MIDSTREAM INVESTMENTS?
US Midstream Investment Impact Summary for the 2012‐2035 Period (Cumulative Impacts in Billions of 2011 Dollars, Employment is Average Annual
Jobs Supported)MIDSTREAM INVESTMENTS MIDSTREAM O&M EXPENDITURES COMBINED IMPACT
US Investment $200.2 Total O&M Expenditures $28.9 Expenditures $229.1
Results Results Results
Avg. Annual Employment
104,579 Avg. Annual Employment
20,760 Avg. Annual Employment 125,339
Income $141.3 Income $29.7 Income $171.0
Value Added $217.6 Value Added $43.1 Value Added $260.7
Output $424.5 Output $87.0 Output $511.5
State and Local Taxes $16.8 State and Local Taxes $3.3 State and Local Taxes $20.1
Federal Taxes $30.9 Federal Taxes $6.0 Federal Taxes $36.9
Source: Jobs & Economic Benefits of Midstream Infrastructure Development, INGAA Foundation, Inc., February 2012
– ENCOURAGING INVESTMENT IN PIPELINES THROUGH STABLE CASH FLOWS…
• Promote Stable Pipeline Service Revenues• Stabilize Cash Flow and redefine depreciable life as the ability to cover operating costs rather than life of producible reserves (High Island Offshore System Docket No.RP09‐487);
• Set rates on revenue targets not throughput targets (Stingray Pipeline TQAM in Docket No. RP11‐1957);
• Develop services that promote use of max rate firm service (Kinetica Energy Express Rate Schedule LFT‐1 in Docket No.CP12‐490
• Protect operating margins from large one time expenses• “Event trackers”• Safety and Cyber‐security prefunding mechanisms
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CAPIT
AL
SeeManagingtheRegulatoryRiskofInfrastructureInvestment inOil&GasFinancialJournal,February15,2013.
• Promote “Market Risked” Treatment For Equity Investors• Re‐evaluate the CAPM used for gas pipelines
• Consider thicker equity layers (HighPoint in Docket No. CP12‐9)
• Exercise more flexibility in use of proxy group median for ROE
• Utilize “risk premiums”
• Incremental v Rolled in Pricing• Flexibility in recovery of large irregular costs (Columbia Gas Transmission CCRM in Docket No.RP12‐1021)
– … ASSISTED BY EVOLVING REGULATORY TREATMENT OF CAPITAL IN GAS PIPELINES
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CAPIT
AL
‐ CONVERGENCE DRIVES SUPPLY, DEMAND AND REGULATORY ISSUES
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Cap
acity
Capital
CONVERGENCE
GAS FIRED GENERATION DRIVES GAS AND POWER MARKET CONVERGENCE
15Source: Black & Veatch EMP
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CONVERGENCE
‐ ANOTHER CONVERGENCE DRIVER: EMISSIONS COMPLIANCE DEADLINES
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CONVERGENCE
– TECHNOLOGY ECONOMICS DICTATE CONTINUED CONVERGENCE
Assumptions: Capital costs are national average values and will vary widely by region and site.Coal assumes an average delivered price of $1.50/MMBtu.
Source: Black & Veatch Energy Market Perspective Analysis17
CONVERGENCE
Moreoptionssupportsgas/electricconvergence.
• Requirement 2 of Order 1000 creates opportunities for gas pipelines
• Implementation plans are not complete;
• RTOs should ask “What is the appropriate placement and relationship of new electric and gas facilities that will promote the most cost efficient delivery of energy to consumers and industry?”
– CONVERGENCE: INCREASED CHOICES FOR OPTIMIZING REGIONAL ENERGY GRIDS
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Major PipelinesElectric TransmissionNortheast U.S.
CONVERGENCE
– EVALUATING THE EFFICIENT ENERGY BUILD
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Cascade Mountains
CONVERGENCE
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– WHO SHOULD PAY FOR NEW GAS INFRASTRUCTURE?
CONVERGENCE
– COMMUNICATION AND SCHEDULING COORDINATION IS VALUABLE, HOWEVER…
Source:ISONewEnglandNUCPUCSymposium
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CONVERGENCE
Beginwithanother'stoendwithyourown.‐BaltasarGracián
• Guidelines for new service design:• Use existing FERC designs as a point of departure;• Recognize the operational characteristics of the pipeline;• Understand the cost implications for the pipeline;• Don’t try to be all things to all shippers, group services according to their needs;
• Test the design when possible and let it evolve.
• An Evolving Flexible Rate Design• Gulfstream – Docket No.CP00‐6;• ANR Pipeline – Docket No.RP00‐332;• Kinetica Energy Express – Docket No.CP12‐49
– …SO IS GAS PIPELINE FLEXIBILITY.
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CONVERGENCE
CAPACIT
Y– CAPACITY REALIGNMENTS STRAINS
OPERATIONS AND OPERATING MARGINS
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Convergence
Cap
ital
2012‐2022 Flows Increase2012‐2022 Flows Decrease2012‐2022 Flows StableNatural Gas Pipelines
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– SHIFTING SUPPLY BASINS REDEFINE ALL MARKETS
Source: Black & Veatch Energy Market Perspective Analysis
CAPACIT
Y
– DRAMATIC CAPACITY REALIGNMENTS CALL FOR RETHINKING MARKETS AND SERVICES
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CAPACIT
Y
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– SOURCES OF CAPITAL FOR UNCONVENTIONAL AREAS: COMMONWEALTH PIPELINE
CAPACIT
Y
– WILL GULF COAST LNG EXPORTS REVIVE GULF COAST PIPELINE CAPACITY?
Source: B&V Analysis, FERC, DOE
Jordan Cove
Freeport LNGLake Charles
•Cameron LNG
• MultipleFERC/DOE/NEBapplicationsforexportfrompreviousimportterminalsaswellasnewsites
• Ifapprovedandsupportedbymarket;thiswouldcreateanewdemandsourcefornaturalgasandamoreglobalizednaturalgasmarket
Gulf of Mexico Excelerate Energy
Elba Island, GA (Southern LNG)
Gulf Coast LNG
Freeport Cheniere
Gulf LNG Liquefaction
Oregon LNG
CE FLNG
•Golden Pass LNG
Cove Point
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CAPACIT
Y
– TRANSITIONAL REGULATORY OPTIONS
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POTENTIAL SOLUTION PR
OMOTES RA
TE
CERT
AINTY
MINIM
IZES U
NIT
COST IM
PACT
MINIM
IZES
INCR
EMEN
TAL COST
IMPA
CT
PROMOTES SERV
ICE
CERT
AINTY
AVOIDS D
EATH
SPIRAL
COMMENTSTransition Mechanisms
Surcharges
A temporary solution that can fill temporary revenue gaps but not suitable as a long term solution
Throughput Driven Revenue True‐Ups
Links revenue deficiency to throughput decline but may accelerate death spiral
Rate Increases
Provides certainty only for term of rate increase; risk of significant cost reallocation; does not address underlying issue
Segment Specific Rate Treatment
Segmented rates recognize greater risk associated with underutilized segment
Acceleration of Depreciation
Increased cash flow improves revenue stability; accelerates future need for alternative mechanisms such as management fee
Temporary Abandonment
Practical only when segments can be isolated or compression can be idled without impacting contractual obligations
CAPACIT
Y
– PERMANENT REGULATORY OPTIONS
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POTENTIAL SOLUTION PROMOTES RA
TE
CERT
AINTY
MINIM
IZES U
NIT
COST IM
PACT
MINIM
IZES
INCR
EMEN
TAL COST
IMPA
CT
PROMOTES SERV
ICE
CERT
AINTY
AVOIDS D
EATH
SPIRAL
COMMENTSPermanent Solutions
Market Based Rates
Pipelines unable to collect max rates due to market pressures will not increase revenues; does not address underlying issue
Capacity Securitization
Most effective when associated with isolated pipeline capacity; sufficient throughput must remain to provide adequate amortization of costs
Refunctionalization Does not address underlying issue or promote revenue stability
Asset Consolidation
Consolidation of capacity restores the balance between demand for capacity and supply of capacity
Partial Abandonment
Effective on individual pipelines to right size capacity to match future obligations but does not deal with the total market for capacity
Full Abandonment / Sale
Abandonment of inefficient assets promote right sizing of market capacity; sales have uncertain outcomes that could result in increases and rates and changes in service rights
CAPACIT
Y
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