Winter Forum September 19, 2019 San Antonio, Texas
Laura Demman Vice President Customer Service and Business Development
Customer Commitment Vision Statement • To be the preferred provider of natural gas transportation and storage services based on our integrity, operational excellence, financial strength and environmental responsibility Mission Statement • We are in business to serve our customers. Fairly. Efficiently. Reliably. These statements mean that • You will get what we promise on time. • We will share the purpose behind our actions. • We will commit to making it easy to do business with us. • We will negotiate and perform in good faith. • We will continue to invest in the pipeline in order to provide you highly reliable service and to meet your future growth needs. -Permanent Partners- • Mutually beneficial relationships based on our core principles, not quarter over quarter profits • Perform necessary due diligence, but maintain an attitude of partnership • No surprises either way • Frank, candid discussions • Seek balanced outcomes Why Six Core Principles and the focus on Permanent Partnerships? Sustainability 2
Regulatory Update • Background – While managing through significant commercial issues and deploying enormous amounts of capital, Northern has not raised rates since 2004. – This is quite a significant accomplishment over a 15-year period, when the overall rate base increased by 120% ($1.7 billion). • Tax Reform – Since 2015, Northern has been communicating with its customers regarding the need to modernize its infrastructure, which would ultimately require a rate increase. – Northern’s customers have benefitted from tax reform through deferral of a rate case as a reduction in tax costs partially offsets the cost of modernization. • FERC 501-G process – FERC required pipelines to file a 501-G statement to reflect how tax reform would impact income and return on investment for 2017. – Northern’s position is that the tax reform benefits of 2018 forward will help pay for its modernization efforts and deferred Northern’s requirement to seek an increase in rates. – Northern fully cooperated with the process; not all pipelines did. – Kern River was the first pipeline to agree to a voluntary rate credit. 3
Regulatory Update (continued) • Section 5 status – FERC issued an order in January 2019 requiring a section 5 rate review as a result of Northern’s Form 501-G docket. – FERC based this review on an erroneous estimated return on equity calculation of 17.3% while Northern’s return on equity for 2018 was actually 13.5%, which, ironically, falls within the range of the ROEs used in FERC’s and intervenors’ section 5 testimony. – Northern filed a Motion to Terminate describing the flaws in FERC’s analysis, but FERC refused to acknowledge its mistake or correct its support for the section 5 action. • As a result, Northern filed a section 4 rate increase on July 1 as a response to the section 5. – Northern did not desire to take this action. – Northern knew a year ago that we could support a rate increase in 2019, but made a management decision to leave rates stable for another year. – The fact Northern was forced to file a section 4 rate increase was solely attributed to the fundamentally flawed and ill-conceived section 5 action that was brought against Northern by FERC. • FERC trial staff testimony would have you believe that Northern somehow sold $20 million worth of gas for $121 million. • Using the data in FERC trial staff’s case filed and adjusting for this single item, trial staff’s testimony would support a Market Area transportation rate increase of 15% or higher. 4
Regulatory Update (continued) • Northern’s commitment during the section 4 rate process: – We will meet or discuss facts and positions with any party at virtually any time. – At the end of this proceeding, we expect a balanced outcome for Northern and its customers. – Northern always competes on price and does what is necessary to retain competitive markets. • Next Steps • Technical Conference – September 24, 2019 • Anticipated “Top Sheets” – Early November 2019 • Settlement Conference – November 6, 2019 5
Section 4 Details Costs and Rates • Filed cost of service of approximately $1.0 billion represents an under-recovery of approximately $300 million versus test period revenue • The $300 million requested increase can be attributed to two areas – Cost of service on incremental non-revenue generating capital investment above depreciation since Northern’s last rate case (over $160 million or 53% of the increase) – Increased depreciation rates, much more in-line with our capital spending than our current low depreciation rates, coupled with negative salvage (over $130 million or 43% of the increase) – All other elements of Northern’s business have a negligible rate impact to customers • Impact on Traditional Rates: Traditional Rate Design Market Area reservation (TF12, TF5, TFX) 91% Field Area reservation (TFX) 36% Storage – FDD reservation and capacity 118% SMS reservation 50% GS-T 90% • Impact on Prospective System-wide Rates System-wide Rate Design TFX reservation 108% 6
Section 4 Details Service Provision Changes Base Case provisions to be implemented January 1, 2020 • Simplification and standardization – Deferred delivery points will be posted on Northern’s website rather than listing individual points in its tariff for ease of administration in adding new points and deleting abandoned points. – Open season posting results will reflect the awarding of capacity to only successful bidders to provide the necessary information to the marketplace of the highest bid for the capacity received vs. the posting of all bids received. – Imbalances caused by a prior period adjustment may be resolved using the imbalance-to-storage option on a mutually agreeable basis vs. requiring an imbalance to be cashed-out. – OBA requirements will be modified to reflect, on a default basis, that an OBA required by Commission’s regulations between interconnecting pipelines will include a volumetric in-kind imbalance resolution methodology, unless the pipelines agree otherwise. – Alternative structures will be provided for purchasing system balancing agreements and providing flexibility as to the quantity of balancing services purchased. • System management and control – Clarification that transportation allocations may limit storage account balance transfers when such transfers would move storage inventories downstream of transportation constraint locations • Carlton supply obligation and rate updates – Carlton commodity surcharge will be changed to $0.00/Dth to reflect the reality that supply costs at Great Lakes/Carlton are no longer priced at a premium to other supply points in the Market Area. – Carlton scheduling penalty will reflect an index-price component in response to volatility in gas prices that can result in the current fixed-price penalty of $25.00/Dth being ineffective. 7
Section 4 Details Service Provision Changes (continued) Prospective provisions to be implemented after FERC approval and necessary IT system modifications • Simplification and standardization – TF12 Base and Variable components will be combined into one TF12 rate as a simplification to the rate structure. The redetermination of the TF12 Base and Variable rates is not achieving its intended purpose and simplification should occur to combine these into one rate structure. – The transition of services to standard tariff provisions is proposed for the closed group identified as the Small Customers. This will impact items such as the daily 650 Dth daily scheduling tolerance, the GS-T rate schedule, monthly imbalance tiering and Small Customer creditworthiness provisions. • System management and control – SMS and daily delivery variance charge application changes are proposed to simplify the structure, standardize SMS capabilities during SOL, Critical and SUL days, and to more closely align the applicability of charges on the variance between scheduled and actual volumes. The proposals are targeted to balance additional flexibilities, such as the possibility of using SMS above firm entitlement on Critical Days, and eliminating the punitive variance charges on positive imbalances during standard days, with increased control on the system, such as eliminating the reference to MDQ for SMS applicability on SOL days and modified tolerance bands for SOL, Critical and SUL days. 8
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