RISK MITIGATION LARGE LOADS

Transcription

1 RISK MITIGATION LARGE LOADS Powder River Energy Corporation/Pioneer Electric Cooperative, Inc. NSAC/NRECA 2018 Tax, Finance, & Accounting Conference Joanne Kolb/Lindsay Campbell August 6, 2018

2 Agenda Background on PRECorp Review of Risk Strategies Line Extension Policy Accelerated Depreciation Direct Assigned Plant in C.O.S.S. Plant Retirement Fund/Surcharge Credit Policy Background on Pioneer Electric Cooperative, Inc Southern Pioneer Electric Company Review of Risk Strategies Learning Objectives Review

3 Powder River Energy Corp Serve 5 Counties in Wyoming and 2 in Montana Load: 350 MW Peak 2.3 B kwh Annually Serve 9 of 10 largest coal mines in US Wyoming (Gillette) known as Energy Capital of US Oil and Gas - Coal Bed Methane (CBM) boom in early 2000 s Significant commercial and industrial load (90% of total kwh sold) 45% Coal 17% CBM 28% other commercial/industrial

4 PRECorp Statistics Employees: 127 Miles of Line: 11,342 Total Utility Plant: $382.5 Meters: 26,739 Members: 12,135 Largest Customer AR Balance: $2.2 M Members per Mile: 2.3

5 Line Extension Policy 2 line extension policies Special policy for the CBM Member Class Different Contribution Aid to Construction for different classes Different member contracted minimum service lengths Intended to mitigate risk Available on our website:

6 Accelerated Depreciation CBM boom significant risk Estimated production of 7-10 years Plant investment $136M Accelerated distribution plant and substations specific to CBM

7 Direct Plant Assignment Significant investment in transmission and substations Industry or member class requesting system investment Significant investments direct assigned Based upon requested load as % of total for that investment Investment only half the equation

8 Plant Retirement Fund /Surcharge Potential for short lived investment Plan for future retirement costs Approved surcharge on all usage in that class Used for cost of retirement for that specific plant

9 Credit Policy Prior to 2015, only collect deposits on new members not existing Unless disconnected Based upon Wyoming Public Service Commission approved rules and regulations Experienced multiple bankruptcies and members closing up: coal, oil, gas $1.5M + write off in 2016 Rule change in 2015 allowed objective credit screen for all members within specific criteria, in addition to payment history Rule changed in 2017 allowed objective credit screen for all applicants and non-residential members includes payment history

10 Credit Policy 2016 Started with Top 50 members/80% of revenue Minimum threshold for credit rating: Public rating (S&P, Moody s, Fitch) Implied rating hired third party agency to review financial statements Request 3 years of audited financial statements with notes Financial analysis completed to mimic agency ratings Based upon historical failure rates within those ratings If fail to meet minimum threshold, a deposit is required. Re-evaluation annually All other members deposit required for late pay or disconnect Agreement for Assurance of Performance Contract for special payment terms and deposit

11 Credit Policy 2017 Continued with Top 50 members/80% of revenue Started work on more robust credit policy for all non-residential members Hired Third party consultant to draft policy Started with Board Risk Tolerance Review of Member AR Balances & Historical Default Rates Developed Credit limit matrix based upon credit rating Credit assessment process Corporate Guarantee and Letter of Credit option

12 Credit Limit Matrix

13 Credit Assessment Process 2 mo. average highest A/R => $50k No ( < $50k) No No ( < $50k >$2k) 2 mo. Average A/R =< $2k Yes Run Intelliscore Online Utility Report Pas s No score Fail 2 mo. Average A/R =< $5k and 24 months of timely payment to PRECorp No Full Deposit required Yes ( => $50k) No deposit required Yes Non Residential Member Is the member rated by the rating Agencies? Yes Use lowest of senior unsecured or company ratings from S&P, Moody s and/or Fitch > B/B2 Trace credit limit to table Partial deposit may be required Obtain at least 3 Yrs of audited F/S w/ footnotes for member company Privately held Public F/S data available Evaluate public F/S data < B+/B1 Full deposit required Will member provide private F/S? Yes Evaluate private F/S data Filter for trigger items/issues: Qualified/going concern audit opinion Non-compliance w/ BMO loan covenants Bankruptcy filing is pending Insolvency or Negative TNW Yes No deposit required No Full deposit required < B+/B1 No Some deposit required Trace to credit limit table > B/B2 Produce implied rating Objective credit review

14 Pioneer Electric Cooperative, Inc. Provides Retail and Wholesale Service in 10 Southwest Kansas Counties. Member-Owner of Sunflower Electric Power Corporation (G&T). Approximately 5,000 Members and 16,700 Meters. 160,000 kw System Peak 900,000,000 kwh Annual Sales. Load Profile: o 71% C&I o 14% Irrigation o 9% Residential o 6% Wholesale Over 4,000 miles distribution and transmission lines Largest Load: 27 MW, 99% Load Factor Midstream Gas Processing Facility Self-Regulated Under Kansas Law for Retail Rates.

15 Southern Pioneer Electric Company Wholly-Owned Not-For-Profit Subsidiary Company of Pioneer Electric. Member-Owner of Mid-Kansas Electric Company, Inc. (G&T). Provides Retail and Wholesale Service in 10 Southwest and Southcentral Kansas Counties. Approximately 17,000 meters 133,000 kw System Peak 750,000,000 kwh Annual Sales. Load Profile: o 72% C&I o 1 % Irrigation o 24% Residential o 3% Other Largest Load: 48 MW, 99% Load Factor Midstream Gas Processing Facility Fully Regulated by the Kansas Corporation Commission under Kansas Law.

16 Pioneer and Southern Pioneer Service Territories

17 Old Security Deposit Practices Pioneer and Southern Pioneer: o Rules and Regulations Both Provided Security Deposits for Guarantee of Payment of Electric Bills Could be Assessed for New Customers and only for Existing Customers If the Existing Customer: - Failed to Pay Bill On Time for 3 Consecutive Billing Periods, One of Which was at Least 60 Days in Arrears, or - The Customer Interfered With Service in an Unauthorized Manner. Security Deposit Equaled the Customer s Projected Two (2) Months Billing and Remained in Place Until Termination of Service.

18 2016 Bankruptcies and Risk Mitigation Pioneer Bankruptcies of Two Large High Load Factor Customer Loads in o 27 MW Midstream Gas Processing Plant and 10 MW of Field Compression and Well-Head Assets. o 6 MW Biomass Facility

19 2016 Bankruptcies and Risk Mitigation cont. Board of Trustees Immediate Modification of Security Deposit Requirements in Rules and Regulations Upon Notice of the Potential Bankruptcy of One of the Large Customers in February Modified Rules and Regs Provide Pioneer Can Assess a Security Deposit for Existing Customer If: o Customer Fails to Pay Undisputed Bill Before Delinquency Date at Least Three (3) Billing Periods During the Previous 12 Months; o Customer is Taking Service Under Large Industrial Tariff ( 3 MW); or o Pioneer Establishes in Its Sole Discretion that Customer is a Financial Risk to the Coop Due to Inadequate Assurance of Future Payment of Bills or Has an Unsatisfactory Credit Rating.

20 2016 Bankruptcies and Risk Mitigation cont. Notice of Security Deposit Assessment Immediately Sent to Customer for the Full Two Months Amount. Cash Security Deposit Received From Customer in April Customer Subsequently Filed Chapter 11 Bankruptcy in Southern District of Texas in May 2016.

21 Chapter 11 Pre-Petition Claims o 2016 Bankruptcies and Risk Mitigation cont. Court Approval Required to Offset Pre-Petition Security Deposit and Capital Credits Against Pre- Petition Debt. Chapter 11 Post-Petition Adequate Assurance Payment (11 U.S.C. 366) o o Unless Utility Files Objection to Adequate Assurance Procedures and/or the Defined Adequate Assurance of Payment, Utility Will Be Deemed to Have Received Adequate Assurance of Payment Satisfactory to Utility in Compliance with Bankruptcy Code and May Not Discontinue, Alter or Refuse Service for Prepetition Charges or Adequate Assurance Payment. Adequate Assurance Payment Generally Based Upon 2 Weeks Average Utility Bill.

22 Chapter 11 Contracts 2016 Bankruptcies and Risk Mitigation cont. o Most Contracts Treated as Executory Contracts Under Bankruptcy Code. o Debtor Given Option to Assume or Reject (i.e. Terminate) Contract. o All Defaults (Pre- and Post-Petition) Must Be Cured Before Contract Can be Assumed by Debtor. o Utility Obligated to Perform Under Contract Until Contract is Either Assumed or Rejected by Debtor. o Pioneer Successful in Getting Customers to Assume Service Contracts. **Satisfaction of Prepetition Claims, Adequate Assurance Payments and Assumption of Service Contracts All Memorialized with Customers By Way of Settlement Agreements Filed With and Approved by the Bankruptcy Courts.

23 Continued Risk Mitigation Activities Review and Identification of High Risk Loads. Assessment of Security Deposit as Part of Rate Contract Negotiations. o Security for Termination Damages and Other Liquidated Damages Tighter Contract Language. Southern Pioneer Seeking Kansas Corporation Commission Approval of Updated Rules and Regulations Internal Controls to Monitor Security Deposits. Personal Guarantees for Smaller LLCs and Corporations.

24 Other Risk Mitigation Activities G&T Extraordinary Transmission Line Extension Policy Distribution Facilities and Line Extension Contracts

25 Learning Objectives Variety of Risk Mitigation Strategies Line Extension Policies Depreciation and Rate Development Credit/Collection Policies Contracting

26 Contact Information Joanne Kolb Chief Financial and Administration Officer Powder River Energy Corp Lindsay Campbell Executive Vice President - General Counsel Pioneer Electric Cooperative/Southern Pioneer Electric Power lcampbell@pioneerelectric.coop