Benchmarking for Natural Gas LDCs

Given the myriad challenges faced by the industry today, natural gas local distribution companies can benefit from assessing business performance through benchmarking to help identify performance gaps and improvement opportunities. ScottMadden has a low-cost approach to providing this information to its clients, as described in our Natural Gas Benchmarking document. The objective of this review is to provide high-level financial and operating comparisons that will help company management identify potential opportunities for improvement.

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Natural Gas Benchmarking

  • Overview and Example Report
  • July 2015

Why Engage in Benchmarking Example Report ScottMadden Who We Are

Why Engage in Benchmarking

Energy companies face increasing challenges Aging infrastructure Declining ROE and increasing regulatory scrutiny Ongoing cost control pressure Industry uncertainty Benefits Provides insight on performance and helps identify improvement opportunities Enables companies to set stretch goals and learn from best performers through external, objective reviews Serves as an integral part of managing the business

  • Why Engage in Benchmarking?
  • Assessing business performance through benchmarking can help identify performance gaps and improvement opportunities. Benchmarking is a key part of the business management process.
  • Growth potential Environmental compliance demands Aging labor force External impacts on business operations

Our benchmarking analysis is based on publicly available data with metrics and peer groups developed based on ScottMadden insight and client input The analysis can take three to six weeks to complete depending on the level of client involvement and input needed. We tailor the schedule to our clients requirements. An illustrative timeline is below.

  • Our Benchmarking Approach
  • Typical fees for this effort are approximately $25,000

Example Report

Introduction Summary of Initial Observations Overview of Panel Companies Financial Performance Operational Performance Potential Improvement Opportunities

  • Report Contents
  • An example report with illustrative data follows

Overview The objective of this review is to provide high-level financial and operating comparisons that will help the Company* management identify potential opportunities for improvement While benchmarking can point to good practices and best-of-class results, it is not the answer. Instead, the benchmarking process itself provides a platform for dialogue about key management questions: What are the appropriate measures of performance? Where do we stand relative to those measures, and who are the best? What are others doing, and what should we be doing to improve? How will we institute those improvement initiatives, and how will we measure success?

  • Introduction
  • Approach A panel of 12 natural gas companies, including the Company, was selected as the benchmarking peer group for comparison purposes Company size, location, and system characteristics are the primary considerations for peer companies This report is focused on key measures that provide a snapshot of financial and operational performance compared to peers Financial metrics were obtained from FERC Form 2 reports or annual reports submitted to state commissions Operational data (e.g., miles of main, number of services, leaks repaired) were obtained from Department of Transportation (DOT) annual operator reports Potential focus areas for improvement can be derived from the benchmarking results Where applicable, key industry trends, compiled from ScottMadden observations and research, provide context to the benchmarking comparison
  • * The Company is the subject of the benchmarking effort

Revenue (net of production) per customer is slightly below comparable peers. While customer growth is relatively flat, the Company is keeping pace with the peer companies The Company is near the median in terms of level of investment in its system Results for Operation and Maintenance (O&M) expenses are mixed Non production O&M expense is relatively high on a per customer basis but relatively low on a per mile and per employee basis Administrative and General (A&G) expense per customer is relatively high while Distribution expenses are low when compared to the peer panel The Companys distribution system is ranked high in the peer panel, with its relatively high percentage of protected steel and plastic mains and services

  • Summary of Initial Observations*
  • Benchmarking Results
  • * The initial observations throughout this report are typically refined after discussion with management to better understand the context

A group of comparable peer utilities was selected based on similarities in scale, region, organization structure, and other system operational and design characteristics (e.g., multiple operating companies under one holding company, whether or not the service territories were contiguous, whether or not they own upstream assets, pipe constructed of one predominant material, etc.) to the degree possible to ensure a like-in-kind basis of comparison for the benchmarking analysis

  • Overview of Panel Companies
  • NOTE: Customers, Throughput, and Operating Revenue reflect year-end 2014 data

Overall, growth rates for the panel companies are fairly flat, and reflect the challenging economy The customer growth rate for the Company is at the median of the panel (about 0.2%)

  • Revenue net of production reflects what is received for the delivery of gas; commodity costs have been removed from this number Note: quartiles and median based on revenue net of production The Company was below most of the peer companies on a revenue net of production per customer basis
  • Gas Revenue per Customer and Growth
  • Benchmarking Results Revenue and Growth

Net utility plant reflects end-of-year total plant less accumulated depreciation expense The Company was slightly above comparable peers in net plant per mile of main and per customer The Company is just below the median for 5 Year CAGR, which indicates that the company has been investing less in its infrastructure than the peer panel

  • Net Utility Plant
  • Benchmarking Results Revenue and Growth

The Company was above most comparable peers based on total non-production O&M expense per customer. A&G cost appears to be a driver for this metric However, the Company was below most comparable peers on a per mile of main basis The Company was one of the lowest to comparable peers based on total non-production O&M expense per employee

  • Total Non-Production O&M
  • Benchmarking Results Cost

We provide more detailed analyses of Administrative and General (A&G) expenses, as this is one of the largest components of total non production O&M. These charts break down total A&G expense by FERC line item The relatively high A&G expense per customer for the Company is driven primarily by Employee Pensions and Benefits, Outside Services, and Salaries Administrative and General O&M expense per employee for the Company was considerably below the median and comparable peers

  • Administrative and General O&M
  • Benchmarking Results Cost
  • Note: Administrative Expenses Transferred and Duplicate Charges are recorded as credits

Distribution is another major component of non-production O&M expense The Companys distribution O&M expense per mile of main and per customer are lower than the majority of the panel, likely because of the companys high percentage of newer pipe (see following page)

  • Distribution O&M
  • Benchmarking Results Cost
  • Note: Main data was not available for Company E

The Company also ranks high in the peer panel for services. Virtually all of its services are made up of plastic and protected steel Like mains, the composition of services is a determinant of system performance and maintenance expenses

  • The Company has a high percentage of plastic and protected steel. The Company has no cast iron and very little unprotected steel, indicating that its system is relatively new The composition of distribution mains can drive system performance and maintenance expenses (leaks, etc.)
  • Composition of Gas Distribution System
  • Benchmarking Results Operational

The Company is close to the median in each measure related to leaks The Companys position in the peer panel is relatively high, given that its distribution system has one of the highest percentages of plastic and protected steel

  • Leaks Repaired and Scheduled for Repair
  • Benchmarking Results Operational

The Company experienced three significant incidents during this period while Utility H and Utility G did not experience any

  • Pipeline Incidents by Cause
  • Benchmarking Results Operational
  • NOTE: Significant incidents meet one or more of the following criteria Fatality or injury requiring in-patient hospitalization $50,000 or more in total costs Highly volatile liquid releases of five barrels or more or other liquid releases of 50 barrels or more Liquid releases resulting in an unintentional fire or explosion
  • Source: PHMSA

The Companys customer satisfaction rating is just above the median among the peer panel companies

  • J.D. Power Customer Satisfaction
  • Benchmarking Results Customer

Review results with management and key stakeholders Validate opportunities for improvement (e.g., identify gaps with leading practices) Identify areas for more detailed assessment

  • Next Steps

ScottMadden Who We Are

  • Who We Are
  • ScottMadden is a management consulting firm with more than 30 years of deep, hands-on experience. We deliver a broad array of consulting servicesfrom strategic planning through implementationacross many industries, business units, and functions.

  • Representative Capabilities
  • Strategic planning Business planning Operational excellence and best practices Playbook and management model Process improvement Organization design and staffing Smart Grid Renewables Environmental Regulatory M&A Benchmarking Corporate and shared services Clean tech and sustainability
  • Ive used many consulting services during my career, and no other firm ever delivered on the promises they made better than ScottMadden. GENERATION COMPANY PRESIDENT

  • Areas of Focus
  • GENERATION Our practical expertise in nuclear, fossil, and renewables helps clients implement leading practices for fleets and individual plants to improve and sustain results.
  • DISTRIBUTION/SMART GRID We help our clients manage their distribution businesses in this changing environment with a continued focus on managing cost and ensuring reliability.
  • TRANSMISSION We provide broad, deep energy expertise coupled with practical business acumen to help companies navigate transmission challenges with solid business advice.
  • VERTICALLY INTEGRATED UTILITIES/PUBLIC POWER, MUNICIPALS, AND COOPERATIVES We have performed numerous projects for leading players in every area of the business.
  • REGULATION AND RATES We offer extensive experience in addressing the strategic and operational challenges posed by energy regulation to help our clients succeed in todays turbulent times.
  • GAS We help companies adapt to rapid change in the natural gas industry by providing strategic and operational improvements that deliver value to clients.

Diversified Utility Gas Industry Briefing and Benchmarking Analysis ScottMadden worked with a diversified utility after a recent acquisition of three LDCs to develop an executive primer on the natural gas industry and the business model for a typical LDC. This engagement also involved a detailed benchmarking analysis that compared the acquired LDCs to regional and national peer panels. Multiple Gas LDCs Business Process Improvement ScottMadden managed large multi-team projects to assess LDCs current state processes, functions, and organizations and led teams through developing future state designs and business cases to support implementation. ScottMadden provided the methodology, supported project management, facilitated and performed analysis, offered best practices, supported communications and change management, and helped to develop deliverables. Projects improved business results, service levels, and operating efficiencies, increased employee engagement, and helped develop a new culture of continuous improvement. The project was cited in the clients subsequent Wall Street analyst presentations and annual reports. Gas LDC Organization Analysis ScottMadden conducted an organizational structure analysis for a large gas LDC by comparing current state practices to best practice benchmarks, including spans of control, layers, and cost to manage. The analysis resulted in identification of potential areas of improvement. These opportunities would result in a structure aligned with corporate strategy, efficient decision making, clear accountabilities, increased morale, and the potential for significant savings.

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Contributing Authors

Jason Davis Director

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