Building Business Acumen

1. Building Business Acumen

2. Objectives • Know and understand what measures are important to the Executive Team. • Understand the five business drivers all successful businesses must focus on. • Have a better understanding of the company’s financial statements. • Become a better communicator of company strategy and performance. • Create an action plan detailing how you will positively impact company results.

3. Business Acumen? • Quickness of perception • Keen insight • Mental acuteness ~Wayne Gretzky~ “The Great One” When asked by a reporter, “What makes you so great?” Wayne responded by saying; “I don’t skate to where the puck is.” “I skate to where the puck… is going to be.” 3

4. Pop Quiz - Answers reflect Integrys data FY2010 • How much Cash was on hand? ______ ($) • What was the Cash Flow from Operations? ______ ($) • What was the Dividend Yield? ______ (%) • What was the Total Revenue? ______ ($) • What was the Net Income? ______ ($) • What was the Earnings per Share (EPS)? ______ ($) • What was the total O&M costs? ______ ($) • What was the Authorized Return on Equity (ROE)? ______ (%) • What was the % change in Revenue year over year? ______ (%) • What was the % change in Net Income year over year? ______ (%) • What was the % change in EPS year over year? ______ (%) • What was the number of Notices of Violations? ______ (#) 35

5. Business Acumen “When it comes to running a business successfully, the street vendor and the CEOs of some of the world’s largest and most successful companies talk and think very much alike.”Ram Charan • 5-Step Approach per Driver: • Case Study • 1. Define the driver. • 2. Know how we measure it. • 3. Know why it is important. • 4. Discover our numbers(& comp). • 5. Create an Action Plan. 4

6. CASH The Cash Driver is defined as what is needed to grow and maintain the business. Measures Cashis the bills and coins in the register, and cash in the bank. It also includes cash equivalents, like Certificates of Deposits (CDs) and other highly liquid investments (i.e. easily converted into cash within 90 days). Why do you think Peter Drucker would say… “Cash Flow is more important than profit.” Cash Flowis the cash generation from “core operating activities” that flows into the business and the cash that flows out of the business in a given time period, such as a quarter or a year. Dividend Yieldis how much cash a company pays out each year compared to the stock price. The Dividend Yield represents the Return on Investment for the stock. 8

7. Cash vs. Cash Flow Pay off loans Buy furniture Put it in savings

8. Benchmark Cash How do we compare? • Major uses of Cash in 2010: • $189 million paid in dividends • $259 million in CapEx • $202 million in Pension Contributions 9

9. Impacting the CASH Driver CASH: • Pay slower • Collect faster… with the same sales revenues and costs. CASH or CASH FLOW: • Increase revenues/sales • Reduce/costs • Reduce Waste • Reduce re-work • Manage/Reduce OT • Increase sales/revenues • Maintain schedule/deliverable dates • Increase operational efficiencies • Compress A/R – Extend A/P • Better training / faster ramp up • Decrease or better manage inventory • Vendor Owned/Managed Inventory • Control expenses • Don’t hoard (tools, parts, people) • Reduce/conserve utilities • Reduce conflicts (systems, people, processes, IT technologies) 9

10. PROFIT The PROFIT Driver is defined as the money made after expenses are subtracted from your revenues. It can be expressed in dollars ($) or as a percent (%). You can improve profit in three fundamental ways: • Increase Sales Price • Reduce Expenses • Sell more units • The types of expenses you deduct determine which income you are calculating. Common income calculations include: • Gross Income: deducts Cost of Goods Sold (COGS) • Operating Income: deducts COGS, SG&A (Sales General & Admin) • Net Income: deducts all expenses 10

11. Revenue – Expense = Income (Also called:“NetProfit”and “NetEarnings”)

12. High Margin vs. Low Margin HighMargins Low Margins 7.9% 33.6% 3.9% 30.0% 21.5% 1.4% WHY? They sell commodities. “If you’re not unique, you better be cheap!” WHY? They offer something Unique! To drive Profit($) you need either: High Margin(%) or High Velocity(Volume)

13. Benchmark Profit How do we compare? Impact to Margin: Reduce costs and drive operational excellence - 2009 $290 million after-tax increase in noncash goodwill impairment - 2010 2% lower natural gas throughput volumes = lower revenues 9% decrease in average heating degree days = lower revenues $25 million less amortization of regulatory assets = higher costs 11

14. Growing Profits • Sell more • Improve Quality  Strengthen Pricing • Understand Product Mix (sell more of the higher margin products) • Improve execution and up-selling • Make prudent investments in growth • Negotiate materials costs • Reduce inventories • Decrease employee turnover • Scrutinize spend on R&D • Reduce/conserve Operating costs • Improve Project Planning 11

15. Impacting the PROFIT Driver PROFIT: • Product Margin: Increase Price and/or Decrease Costs (or both) • Company Margin: Increase Sales and/or Decrease Expenses (or both) • Expressed in Dollars or Percent(Margin) • Decrease Re-Work • Decrease/Eliminate waste • Decrease utilities • Reduce shortages • Reduce “emergency” charges • Timely and accurate data (visibility) • Create accurate schedules • Improve operational efficiencies • Better education on costs • Change requests go through proper channels • Increase Revenue - Collect on work that’s been done • Increase Revenue – Get quality right • Faster on-boarding • Reduce employee turnover • Improve accountability • Improve communication • Effective training 11

16. ASSETS Assets are economic resources owned by a business. Anything tangible or intangible that one possesses, usually considered as applicable to the payment of one's debts, is considered an asset. Simplistically stated, assets are things of value that can be readily converted into cash. When evaluating a company’s assets, both strength and utilizationshould be considered. • Return on Assets (ROA)The percent value of sales (revenues) to Total Assets. • Authorized Return on Equity (ROE)The Regulatory Net Income (GAAP Adjusted Net Income) compared to Regulatory Equity (GAAP Adjusted Equity). Equity adjustments include items such as Goodwill. 12

17. Strength vs. Utilization Asset Strength: Refers to a company’s ability to stay viable during the ups and downs in the market place. Asset Utilization: Refers to a company’s ability to efficiently and effectively use its assets to generate profits. Organizations must balance Asset Strength & Utilization • Asset Strength Metrics: • Current Ratio • Debt to Equity Ratio • Asset Utilization Metrics: • Return on Assets (ROA) • Return on Inventory (ROI) • Inventory Turnover • Return on Equity (ROE) 13

18. Assets in Action The modern charcoal briquette was invented by automaker Henry Ford. Ford operated a sawmill in the forests around Iron Mountain, Michigan, in the years prior to 1920 to make wooden parts for his Model T. As the piles of wood scraps began to grow, so did Ford's eagerness to find an efficient way of using them. He learned of a process developed and patented by Orin F. Stafford. The process involved chipping wood into small pieces, converting it into charcoal, grinding the charcoal into powder, adding a binder and compressing the mix into the now-familiar, pillow-shaped briquette. By 1921, a charcoal-making plant was in full operation.

19. Benchmark Assets How do we compare? Impact to Assets: - Rate Cases - Regulated vs. Nonregulated - Purchase or Sell Assets 13

20. Impacting the ASSET Driver • Improve understanding of priority • Communicate performance • Increase efficiencies (employee/company) • Increase employee productivity • Increase performance • Increase process efficiencies • Consistent QA/QC • Share best-practices • Forecast more accurately • Execute plans with more discipline • Better communication with other groups • Decrease redundancies • Use resources better within the company • Share tools where appropriate • Schedule more efficiently • Encourage web meetings • Don’t over build • Cross train employees • Alternative work arrangements • Improve work flow / planning ASSETS: Asset Execution = efficiencies, productivity, speed Remember…Return on _______ 13

21. Growth Growth is defined as an increase over a period of time such as year/year, quarter/quarter, or month /month. Growth is most commonly measured by: There are two types of Growth: Organic Growth:Comes from a company’s existing business Inorganic Growth:Comes from a merger or an acquisition Sales Income EPS Top-Line Bottom-Line Investor In today’s business world, no growth means lagging behind in a world that grows every day… 14

22. Decline vs. Growth Business in Growth Mode Business in Rapid Decline • Attracts/Retains the best & brightest! • Productivity goes up = more profit = more cash = more ability to grow! • Morale is typically higher. • You have the ability to grow in your career! • Best & brightest leave first • Productivity goes down • Morale goes down • Costs are cut, which limits ability to grow, and the company becomes less profitable.

23. Benchmark Growth How do we compare? Inorganic Growth - 2007 purchase of North Shore Gas Company and The Peoples Gas Light and Coke Company Organic Growth - Pipe Infrastructure replacement in Chicago (Part of 5-year plan) expected to take nearly 20 years to complete. 15

24. Impacting the GROWTH Driver GROWTH: • Growth = quarter over quarter or year over year increases in… • Top-Line (Sales) and/or… • Bottom-Line (Profits) and/or… • Earnings Per Share (EPS) for public companies. • Remember…Organic growth comes from a company’s existing business Inorganic growth comes from mergers and acquisitions • Play a part in culture shaping and acquisition integration • Hire talent that is strong and adaptable • Develop great leaders • Anticipate employee needs that will support a growth strategy • Promote products to everyone! • Create quality and value • Create customer loyalty • Provide exceptional service (Int’l & Ext’l) • Invest in employees • Share industry memory/knowledge • Save cash to put into new programs • Help transition programs to Production 15

25. People People are the external customers, internal customers, as well as in-direct influences such as affiliates, vendors, and suppliers. Without People…then what happens? 16

26. Internal People A’s hire A+’s and B’s hire C’s What is the #1 reason a person will leave a company?

27. External People “If I would have asked my customers what they wanted, they would have told me a faster horse!” Henry Ford

28. Anticipating External People • What companies have failed to anticipate customer expectations? What were the results? • What limits companies from anticipating their • customers’ wants and needs?

29. Benchmark PEOPLE How do we compare? 17

30. Impacting the PEOPLE Driver PEOPLE: • People= Customers & Employees Hopefully you serve your customers well. How well do you serve your co-workers? • Anticipation The best way to meet and exceed people’s needs is to try and anticipate them. • Exceed deadlines • Be positive • Always follow through • Increase vision • Anticipate needs and expectations • Increase quality staffing • Increase employee education • Retain employees • HR: Hire the best! • Listen with empathy to resolve unhappy customers • Better educate customers • Possess good product knowledge • Increase customer negotiations • Increase customer awareness • Accurately set customer expectations 17

31. 5 Business Drivers Mid-Term Exam Can you ignore any of these over time and still be successful? 18

32. 5 Business Driver Ranking Rank the 5 Business Drivers in order based on the driver you have the greatest impact / influence or (based on your role) is the most important to the success of Integrys Energy. 1.) Most important 2.) 3.) 4.) 5.) Least important Be prepared to share your list with the class. 38

33. Demystifying the Annual Report What is the Purpose of the Annual Report? • General Communication • Shareholders, existing/potential investors (others?) • Important, numbers, decision and strategy • Where we have been and where we are going • Marketing • The what, who and how • Name, Image & Branding • Colors • Compliance • GAAP • SEC 21

34. Integrys Strategic Message • Financial Hi-lights • Letter to Shareholders • Management’s Discussion & Analysis • Financial Statements • Notes to the Financial Section Income Statement Balance Sheet Statement of Cash Flows 22

35. A Letter to Shareholders 5

36. Demystifying the Annual Report Financial Statements: Identify the equation. Recognize the purpose of the statement. Locate the key numbers/measures. How do I impact each statement? CAN YOU READ THIS? 21

37. Income Statement Statement Formula: Revenues – Expenses = Income Statement Purpose: Identify Profitability -3.6% -54.2% -12.2% -56.2% -4.8% Revenue Growth This Yr / Last Yr – 1 * 100 $5,203.2/$7,499.8 = .69378 - 1 = -0.30622 *100 = -30.6% Top-line • Gross Profit • Revenues $ 5,203.2 • Utility Costs $ 1,685.5 • Nonregulated Costs $ 1,619.8 • = Gross Profit $ 1,897.9 Net Income Growth This Yr / Last Yr – 1 * 100 $220.9 / -$69.6 = -3.1739 - 1 = -4.1739 *100 = 417.4% Gross Profit Margin = Gross Profit / Sales (Revenues) =$1,897.9/$5,203.2 = 36.5% Bottom-line 24

38. + $100 $100 $83.6 $16.4 $5.68 $10.72 - $100 $100 $100 $34.62 $65.38

39. Balance Sheet Statement Formula: Assets = Liabilities + Equity Statement Purpose: Identify Financial Strength Return on Assets Net Income /Total Assets = Return on Assets $220.9/ $9,816.8 = 2.25% Current Ratio Current Assets / Current Liabilities = Current Ratio $2,050.4 / $1,657.8 = 1.24 Equity Ratio Total Equity / Total Assets = Equity Ratio $2,957/ $9,816.8 = .3012 x 100 = 30% Equity Ratio Authorized ROE Net Income /(Total Equity – Goodwill) = Authorized ROE $223.5/ $2,263.3 = 9.87% 6,859.8 8,944.4 26

40. Statement Formula: Cash In – Cash Out = Net Cash Statement of Cash Flow Statement Purpose: Identify Cash Management Earn It Sell/Invest It Borrow It 28

41. Navigating the Financials 179 725 2.72 48.83 5.57 5,203 221 2.83 1,045 223.5 9.9 ($2,905.8 - $642.5) -30.6 % 5,203 7,499 221 -67 417 % 2.83 -0.91 411 %

42. External Factors • Competition • Suppliers Business • Investors • Stock Market • Stock Price • Dividend • Investor dependency • Regulations • State • Federal • Political Environment • Inflation • Unemployment • Interest Rates 40

43. Stock Market Influence Dividend Yield 2006 – 4.22% 2007 – 4.96% 2008 – 6.24% 2009 – 6.48% 2010 – 5.57% 5 yr. avg. – 5.83% Market Averages S&P 500 – 2.67%/2.08% Overall #308 of 4640 Sector #11 of 123 Industry #7 of 31 “after talking with our investors, I realized how much they depend on the company for their retirement”Charlie Schrock

44. Individual Action Plan • Review: • What new insights did you gain, • as a result of attending? (Page 52) •  Action Plan: • List the things you can commit to do: • Cash: (refer to page 9) • Profit: (refer to page 11) • Assets: (refer to page 13) • Growth: (refer to page 15) • People: (refer to page 17) (Page 53) 52/53

45. Content Retention Time Retention of Content • Review • Apply • Teach 15% 52

46. Business Acumen Resources • Books: • What the CEO Wants You to Know • Good to Great • Built to Last • Magazines and Newspapers: • Wall Street Journal • Fortune • Web Sites: • www.reuters.com • www.nasdaq.com • www.yahoo.com • How to Read a Financial Report • Keys to Reading an Annual Report • BusinessWeek • Harvard Business Review • www.finance.google.com • www.hoovers.com • www.smartmoney.com 55

47. Objectives – How did we do? • Know and understand what measures are important to the Executive Team. • Understand the five business drivers all successful businesses must focus on. • Have a better understanding of the company’s financial statements. • Become a better communicator of company strategy and performance. • Create an action plan detailing how you will positively impact company results.

48. Post Course Business Acumen • 7 days: Teach one of the principals learned in class today, to someone in your department. • 7 days: Discuss your action items with your manager in the next 7 days. • 30 days: Read the first 90 pages of: “What The CEO Wants You to Know“ 4. 30 days: Get with your class partner and give an account of your progress on your action item(s). Start now: • Build and practice your new business acumen skills. • When making decisions, determine how the outcome will impact Cash, Profit, Assets, Growth, People… 56

49. One Final Thought… “People will work hard for a paycheck, harder for a person, and hardest for a reason.”