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CFC’s Financial Webinar SeriesConsidering Equity Management
Financial Webinar Series
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Financial Webinar Series
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Financial Webinar Series
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CFC’s Financial Webinar SeriesConsidering Equity Management
Financial Webinar Series
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Financial Webinar Series
John Grant
CFC
Steve Kettler
CFC
Financial Webinar Series
What percent of those who started a
New Year’s resolution actually were
successful?
• 12%
• 20%
• 25%
• 30%
• 50%
Financial Webinar Series
Today’s takeaway:
Have a plan with smaller, bite-sized goals…
and you’re much more likely to achieve your
overall objective!
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Financial Webinar Series
John Grant
CFCVP, Program and Planning Analysis
Financial Webinar Series
Loaded
with
examples
and
resources!
Financial Webinar Series
Steve Kettler
CFCVP, Portfolio Management
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Financial Webinar Series
A Taste of
CFC’s
New
Guide
Financial Webinar Series
The Guide’s Chapters
• Introduction - Basics
• Developing an Effective Equity Management
Plan
• The Changing Business Environment
• The Impact of G&T Issues on Distribution System
Equity Management
• Ongoing Responsibilities
• Appendices
Financial Webinar Series
History of Equity Policy in the Electric
Cooperative Industry
• Earliest Days: REA (RUS) Policy and Mortgage
Provisions
• 1976: Capital Credits Study Committee
• 2005: Capital Credits Task Force
• 2012: CFC’s “Considering Equity
Management” Guide Released
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Financial Webinar Series
Introduction - Basics
• Electric Cooperatives Need Cash
• Where Does the Cash for Capital Investment
Come From?
– Equity capital
– Debt capital
• Equity Level Risks
– Too low?
– Too high?
Financial Webinar Series
The Equity Continuum
0% 100%Equity
Risk
Lower
Higher Creates high interest cost and margin requirements
Creates the need for high margins to cover 100% of plant investment
Optimal equity results inlowest cost to the member
Financial Webinar Series
Measuring Equity
• Key Ratio Trend Analysis (KRTA)– Ratio #16 – Equity level as % of total assets
– Ratio #18 – Equity level as % of total capitalization
– Ratio #17 – Distribution equity (excludes G&T equity)
• Comparing Ratios Can be Instructive
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Financial Webinar Series
Equity Development Plan
• Responsibilities– Board of Directors
– Management
• Setting an Equity Target– Typically a range
– A balancing act
Financial Webinar Series
“Optimal Equity Level”
Financial Webinar Series
Answering Key Questions – a Few Examples
• Outlook for Future Member Growth?
• What are Our Cash Flow Requirements?
• Are We Well Positioned to Respond to Storms, Etc.?
• Are We a Potential Takeover Target?
• Is There a Potential Merger in the Future?
• Is There a Potential Acquisition in the Future?
• Do We Have Concentration of Customers?
• What is the Condition of Our System?
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Financial Webinar Series
Three Equity Numbers To Know
• Current Equity Level
– The starting point
• Optimal Equity Level
– Use four key decision points to calculate optimum
range
• Strategic Equity Range
– Optimum range adjusted for strategic issues
Financial Webinar Series
Financial Webinar Series
How Do You Get There?
• Modeling - Long Range Financial Forecast &
Others
• Benchmarking – KRTA
• CFC Regional Vice-President
• Equity Management Policy Template –
Appendix 5
• Manage to Achieve Goals
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Financial Webinar Series
Today’s Approach
• Introduction
• Developing an Effective Equity Management Plan
• Changing Business Environment
• Impact of G&T Issues on Distribution System Equity Management
• Ongoing Responsibilities
• Appendices
Financial Webinar Series
Changing Business Environment
• Environmental Scan
• Increasing Power Costs
• Changing Patterns of Load Growth
• Competition, Growth, Economy, Etc.
• KRTA Connections
Financial Webinar Series
Today’s Approach
• Introduction
• Developing an Effective Equity Management Plan
• Changing Business Environment
• Impact of G&T Issues on Distribution System
Equity Management
• Ongoing Responsibilities
• Appendices
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Financial Webinar Series
G&Ts and Equity Management
• Purchased Power Major Component of
Distribution Cost
• G&Ts Must Generate Margins
• Financing and the Capital Markets
• Coordination Between G&Ts and Member Systems Desirable
• Allocation Versus Retirement
Financial Webinar Series
Today’s Approach
• Introduction
• Developing an Effective Equity Management Plan
• Changing Business Environment
• Impact of G&T Issues on Distribution System Equity Management
• Ongoing Responsibilities
• Appendices
Financial Webinar Series
Ongoing Responsibilities
• Review and Update Annually
• Communicate, Communicate, Communicate
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Financial Webinar Series
Today’s Approach
• Introduction
• Developing an Effective Equity Management Plan
• Changing Business Environment
• Impact of G&T Issues on Distribution System Equity Management
• Ongoing Responsibilities
• Appendices
Financial Webinar Series
Appendices
1. A Step-by-Step Guide to Developing an Equity
Management Plan
2. How to Calculate a Target for Margins
3. How to Calculate the Hypothetical Lowest-Cost
Equity Target
4. The Goodwin and the Boatman Theorem
5. Equity Management Policy Template
6. Glossary
Financial Webinar Series
Now…let’s turn it over to our audience!
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Financial Webinar Series
How to Submit Your Question
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Financial Webinar Series
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Financial Webinar Series
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Financial Webinar Series
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Training Tab
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Financial Webinar Series
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Financial Webinar Series
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Financial Webinar Series