2. Natural Gas Facts
• Natural Gas
(national) serves:
- 65 million homes
- 5 million
businesses
- 207,000 factories
- 1,800 electric
generating units
• Natural Gas
accounts for one-
fourth of all energy
used in the United
States
Gas Industry 101
3. 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
delivered to
customers in
usable
energy
(cycle)
Gas Industry 101
4. 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
U.S. occurs between December and March
Gas Industry 101
5. 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
transportation.
• Natural gas companies
spend about $7 billion a
year on safety programs.
Gas Industry 101
8. 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
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.
Gas Industry 101
9. Cascade Natural Gas
100%
90%
80%
70%
60%
50% Non-Core
40%
Industrial
30%
Commercial
20%
Residential
10%
0%
Gas Industry 101
10. 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
Gas Industry 101
11. 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
– 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
Gas Industry 101
12. 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)
Gas Industry 101
13. 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’)
• Earnings stability
• Consultants!!!
– Incentives
• Earnings sharing
• Decoupling
Gas Industry 101
14. 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!
Gas Industry 101
15. Questions and Discussion
joe.silveira@cngc.com
Gas Industry 101
Cascade Natural Gas Corporation
Joe Silveira, CMA