Issues in Power Supply Pro Forma Statements Pro Forma Statements - PowerPoint PPT Presentation

Issues in Power Supply Pro Forma Statements – – Pro Forma Statements the What, the Why, the How the What, the Why, the How Washington EMC Board Briefing January 26, 2012 Mark Hackett, Energy Perception, LLC 404-291-0204 cell, mark.hackett@gmail.com

Why is this relevant? • Several of Georgia’s EMCs facing critical power supply decisions – Expiring power supply contracts – Plans for large new generating facilities – Inconsistent demand growth 2 2

Mark Hackett ‐ Introduction • 25 year Power Industry Career – Strategic Planning Analyst, Florida Power & Light – Head of Generation Planning and Power Trading, Oglethorpe Power – Chief Technology Officer & Partner, New Energy Associates, LLC • Power System Planning Consulting • Utility Planning & Operations Software • Expert Witness Testimony – Federal Energy Regulatory Commission But most of all – concerned Cobb EMC Member! 3 3

Pro Formas – the What? • Definition depends on subject area – Legal: court rulings to move things along – Accounting: earnings adjusted for extraordinary events • In Business… 4 4

Pro Forma – Business Definition “A financial statement prepared on the basis of some assumed events and transactions that have not yet occurred." * * Ralph Estes's Dictionary of Accounting (MIT, Cambridge, 1981, p. 105) 5 5

Key Elements • Pro forma statements are a forecast ‐ by definition they will be wrong • Require forecasts of underlying non ‐ financial data • Present forecasts of variables of greatest concern – Revenues, rates, earnings/losses, cash position, debt forecast, etc. • Are frequently presented on a multi ‐ year basis 6 6

Common Examples – Budget* * From fictitious company – numbers all made up 7 7

Common Examples – Rating Agency Forecast* * From November 28, 2011 Investor Briefing 8 8

Common Examples – Load Forecast* 9 * From 2010 Year End Investor Briefing 9

Pro Formas – the Why? • Georgia EMCs are facing significant power supply decisions • Owners typically “on the hook” for closely held affiliates • Pro formas are standard tools to evaluate risk and alternatives • No pro forma performed on Plant Washington “Sam Kelly, an EMC vice president, also admitted that Cobb EMC has not done a pro forma cost estimate regarding Plant Washington, though supporters say it would cost $2 billion to build.” Kim Isaza, Marietta Daily Journal, January 12, 2012 Read more: The Marietta Daily Journal - Cobb EMC’s pursuit cools on coal fired power plant 10 10

Pro Formas ‐ Key Uses • Pro forma statements are a forecast ‐ by definition they will be wrong – but… • They are used to provide insights regarding likely or possible outcomes • Allow for examination of risk and alternatives 11 11

Pro Formas – the How? • Demand forecast • Inventory of existing supply resources – Evaluation of current need • Enumeration of potential alternatives • Cost simulation of alternatives against expected demand (including transmission implications) • Development of key financial statement and customer rate impact forecasts Cost simulation should occur prior to committing funds for contracts or project development! 12 12

Multiple Scenarios are Important • Forecasts are always wrong • Multiple pro formas should be developed on multiple assumption scenarios – Optimistic/pessimistic capital costs – Optimistic/pessimistic interest rates – Optimistic/pessimistic demand growth 13 13

Pro Formas – the How? • Optimistic/pessimistic pro formas should be created for the Power4Georgians development • Resulting forecast for cost of power to Washington EMC should be examined • Pro forma should then be performed for Washington EMC to assess rate impact 14 14

Two Perspectives on Demand vs. Resources 15 15

Load Shape is Important Megawatt Demand Months in Year Not all your resources run all the time - but you make the mortgage payment all year - gas mileage may vary 16 16

Two Coal Plants Don’t Stack Up Megawatt Demand Months in Year Even one coal plant equals the entire base load requirement of all 5 participants! 17 17

Alternatives available to Washington EMC • Washington EMC has a host of options outside of self build – Oglethorpe Power – RFP’s in power supply market – Demand side management • Assuming build is the right choice – What to build: gas, coal, renewable? – Who will operate? – Management of fuel procurement? 18 18

Wrap ‐ up • Pro formas are standard forecast tools used to evaluate critical decisions • Pro formas have not been performed with respect to Plant Washington • Optimistic/pessimistic pro formas should be developed to evaluate risk and rate impacts • Washington EMC has numerous supply alternatives – pro formas can help 19 19