"Pricing Solutions and Enhancing Profitability..."
Situation-
Our client is a combination utility in the mid-Atlantic region. The client’s aggregate annual utility revenues exceed $70 million across its electric, natural gas, water and sewer operations.
The client faced strategic challenges. The utility was dependent on a single large customer for a significant portion of it revenue and profitability. Further, the utility faced increasing competition from alternative fuels and its long-range vision was inadequate.
Actions-
As a first stage, organization and development of administrative documents was necessary. Then, KHA was asked to develop load forecasting models, perform an in-depth rate analysis, and recommend a pricing strategy.
KHA designed and built a long-range forecast to enhance corporate vision. We developed a short-range nomination models to increase accuracy for gas purchases as well as provided support in the creation of a hedging policy and program. These solutions provided foundations for a comprehensive rate study and a multi-year plan to reduce the utility’s reliance on the large customer for profitability. Next, KHA performed a short-run marginal cost study to support an aggressive pricing strategy to meet competitive threats.
Results-
We provided new rates, tariffs, and terms and conditions that improved the client administrative accuracy and organization. We supported and participated in the client’s contact negotiations with its large customer. KHA presented its findings and recommendations to the utility’s city council and commission for successful implementation.
"A Shortened Supply-Chain…"
Situation-
Our client is a municipal agency and energy provider with more than 80,000 customers making it one of the larger such agencies in the U.S. The client’s objective to shorten its supply-chain faced regulatory and economic challenges. The main construction project was a 40-plus mile pipeline. This initiative was comprised of four critical undertakings in the context of working with all agency members:
· Demonstrating the economic feasibility of the pipeline · Strategic acquisition of another municipal system in order to access supply points · Overcoming opposition and litigation from local landowners · Obtaining cost-effective financing
Actions-
To find solutions to these challenges, KHA first developed a 50-year economic analysis of the proposed pipeline that included capital investment, operating expenses and opportunity costs. We provided M&A services to our client were we used several valuation methods that included Comparable Transactions and Discounted Cash Flow. This assisted the client in establishing an offer price to acquire an essential municipal system and its strategic supply point. When landowners brought legal action to stop the proposed pipeline, we provide expert testimony on the project’s economic merit. When the project advanced to the financing stage, KHA provided financial feasibility reports for inclusion in the official statement for both of the client’s municipal bond issues.
Results-
KHA’s opportunity cost valuation demonstrated before the courts a net present value of savings over the life of the project that is expected to exceed $200 million. Based upon KHA’s M&A valuation analysis, the client successfully acquired its municipal system target. Following the client’s legal victory, the way was cleared for construction of the pipeline. The client raised the necessary capital to fund the project and completed construction in an efficient manner after the legal delay.
"Achieving Greater Efficiencies…"
Situation-
Our clients consist of two small cities in the Southeastern U.S. that operate two separate and independent electric and water utility systems as well as a jointly-owned municipal gas distribution system. Viewed in combination, the utility systems provide service to over 20,000 accounts.
Facing substantial and rising operating costs, our clients asked KHA to examine the potential efficiencies to be gained from merged administrative functions. To overcome these challenges, a major organizational transformation was needed.
Actions-
KHA reviewed the utility systems’ current operations, policies, practices, and procedures in areas of meter reading, payment collection, bill payment, customer service and customer billing. We calculated required cost of capital rates, provided economic forecasts, developed benchmarks, acquired bids, estimated capital expenditures in technology, integrated marketing and customer information pamphlets, compiled historic as well as estimated on-going operating expenses and developed cost allocation methods.
KHA designed and recommended new organizational structures to take advantage of synergies and that would support and facilitate the clients’ strategic business ambitions of merging the utilities’ administrative functions. We recommended cost-effective solutions as well as significant technology investments to reengineer and achieve greater efficiencies in the utility operations.
Results-
The clients successfully implemented several KHA recommendations. The analysis demonstrated staff reduction that would exceed 70% in some functions. The payback period of recommended multi-million dollar capital investments were as little as six years. In smaller investments, the payback was less than one year. In other instances, a mere change in process and procedures produced tens of thousands of dollars of savings with no investment.
