— by Alex Conrad —
With regard to [OPALCO’s] need to meet certain debt covenants, we hear a lot about ‘revenue shortfall’ [see orcasissues.com/new-opalco-surcharge-to-correct-shortfall ] Let’s pause for a moment and look at publicly available data, some of which may surprise you.
At the end of 2014, OPALCO’s TIER (times interest earned ratio) fell to 1.13. A ratio of 1.25 or greater is required to be in compliance with debt covenants. Specifically, this is required by OPALCO’s RUS lender…essentially the federal government via the USDA.
OPALCO’s April 2015 board minutes indicated that a CAP (corrective action plan) was being prepared to address the out of compliance 1.13 TIER. Little detail was publicly provided beyond saying the CAP would address the reasons for the 1.13 TIER result and present a plan to correct the ratio. One can reasonably presume that recent rate surcharge discussions are one result of the CAP.
What is TIER anyway? Specifically, it is a company’s EBIT (earnings before interest and taxes) divided by interest expense. This is a simple math exercise, but what does it mean? TIER is a measurement of an entity’s ability to service the debt it has taken on. As such, the minimum RUS ratio reflects a reasonable endeavor by OPALCO’s lender (the federal government) to ensure that future debt payments will be made and a potential default avoided. (n.b. defaulting on a minimum ratio requirement and defaulting on the debt itself are NOT the same thing)
So OPALCO’s 1.13 TIER is telling us, and telling OPALCO’s lender, that the future ability to service debt is in jeopardy. For reference, OPALCO’s 2010 through 2013 year ending TIER numbers were: 3.21, 5.27, 2.07 and 2.24.
Again, TIER is a measurement derived from earnings (revenue minus expenses, excluding taxes and interest) and interest expense, i.e. how much the debt service is costing the entity. OPALCO is repeatedly telling us that revenue shortfalls are driving the current crisis…let’s pause to look at actual data.
While it is true that 2014 revenue failed to meet the 2014 budget, 2014 revenue INCREASED from 2013. (In fact, revenues increased year-over-year for all three sub-groups: residential, commercial and other) The actual numbers: 2014 $22,029,025 vs 2013 $21,431,278. So the first takeaway here is to realize that when OPALCO talks about revenue shortfalls vis-à-vis the need to submit a CAP, they are talking about shortfalls against their budget, NOT against actual results. 2014 revenues saw an actual 2.2% increase year-over-year. Calling a 2.2% increase a shortfall is sophistry worthy of the ‘other’ Washington. Perhaps there are K Street jobs waiting for some people here, but I digress…
So 2014 saw a 2.2% increase in revenue. What about expenses? 2014 operating expenses increased significantly: 2014 $20,901,493 vs 2013 $19,906,881. That’s an increase of $994,612, or 4.9%.
In fairness, the biggest ‘miss’ on the expense side on 2014 appears to be cost of power, largely out of OPALCO’s direct control…and this brings us to an important point. It is TRUE that OPALCO and other utilities face unprecedented challenges going forward. Centralized power-gen and grid maintenance costs are poised to increase over time while the capital costs of renewables and energy efficiency will trend downward…very soon, the traditional maths of utilities will no longer work, yet the need for centralized power-gen is not going away any time soon. It’s a complicated and expensive problem for any utility to navigate through to the future. Add in the unique costs we have here directly related to our Salish Sea island infrastructure, and the path forward becomes even more difficult.
More than a few utilities around the US will wind up as wards of the state as a result of these challenges. There’s no reason yet to believe that will happen here. But while it’s reasonable for OPALCO to expect open minds to these challenges from members, it’s also reasonable to expect more sophisticated transparency from OPALCO beyond the ubiquitous cry of climate-driven revenue shortfalls. The current idea on deck, a revenue true-up where budgeted revenue = actual revenue is preposterous for a number of reasons, but that is for another forum and another discussion.
OK, back to TIER. We’ve looked at revenue and expenses for the EBIT side of the equation. What of interest expense, the other major value? Interest expense also rose dramatically in 2014: 2014 $908,934 vs 2013 $786,193. That’s an increase of $122,741, or 15.6%. Also consider that interest on long-term debt from 2010 to 2013 came in respectively at: $684,822, $733,675, $759,686 and (2013) $786,193.
It’s not hard to find the culprit here. OPALCO’s year ending 2014 long-term debt liability was $24,987,266 compared to $17,558,365 for 2013. That’s a WHOPPING $7,428,901 increase from 2013, or 42.3%.(!) Consider long-term debt liabilities from 2010 to 2013: $12,096,608, $14,318,323, $15,462,363 and (2013) $17,558,365. This increase appears to be unprecedented, at least in recent history. Note that more debt is certainly ahead as sub-marine cable replacement capital projects commence. Continued misses on things like TIER floors will undoubtedly raise OPALCO’s cost of capital for these already expensive future projects – plainly spoken, this could mean significant and unexpected additional costs for the members.
What could be driving such a non-trivial increase in debt? Could it be the warming weather? Could it be a shortfall? No, it’s almost certainly related to a capital project. So, could it be broadband? This seems like a leading candidate as an expensive capital project that is both new and in range of a $7 million loan. It’s difficult to discern for certain with publicly available information.
As an illustrative exercise though, let’s assume for the moment that the dramatic increase in debt is indeed related to broadband; broadband which OPALCO regularly tells us is paying its own way. (but while not delivering, even minimally, to their own forecasts…but that is yet another topic for another forum/time) With this assumption in play, let’s further assume that 2014 interest expense did not increase by 40%+, but instead by 4.7%, basis recent historical data. First we need 2014 EBIT…we know interest expense and TIER, so math tells us EBIT is $1,027,095. So let’s calculate TIER again with EBIT (conservatively, keeping it constant) and an interest expense of 2013 + 4.7%. We have 1,027,095 / 823,144 = 1.25. It’s close, but there is now NO TIER covenant default in this scenario, even with disappointing revenue and operating expense results. Does this mean that broadband related debt is pushing TIER below minimum requirements? And if so, is by extension driving the need for the upcoming surcharge? Maybe, only OPALCO has the granular data to know for sure.
A few suggestions for good faith transparency:
– Publish the CAP report submitted as a result of TIER falling below its minimum threshold.
– Solicit the opinion of an independent auditor to weigh in on the impact of broadband on utility finances, specifically with regard to rates and future cost of capital for expensive projects like sub-marine cable replacement.
– Expand the discussion on rates to examine the utility’s structure. Is a non-regulated utility the best structure going forward? Broaden the stakeholder groups currently involved in this dialogue.
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Seems like a very insightful analysis to me…I echo the call for increased transparency and forthrightness (if that’s a word)…given that we’re a member-owned cooperative, I would have loved to have heard all this information from Foster or the Board, unless this information is tainted or inaccurate. At the recent meeting, the Board laid the entire revenue shortfall at the feet of a warm winter…I would have appreciated more circumspection.
Great information and a very thoughtful analysis. Thanks so much.
It is very interesting to realize that OPALCO has added a surcharge to everyone’s bill less than one month since the Annual Meeting. As Fred Klein points out, it would have been nice for management and the Board to have been more forthright about the financial condition of the Co-Op.
I am very disappointed that the Board members are not speaking out, to us, the members, on these continuing issues. It is becoming apparent that this situation is going to continue for some time and that it seems to be a more fundamental problem then just a question of degree days.
Interestingly, I just reviewed the Annual Meeting report and several pages speak to the issue of conservation. If we all conserve and cut usage, does not revenue continue to decline such that rates need to increase again and again to offset the shortfall?
The bottom line is that I don’t believe that OPALCO management and the Board are being candid with the membership.
I agree with the comments above. We Can remove the Board.
Spirit Eagle
I think the best suggestion is to “solicit the opinion of an independent auditor” as Alex Conrad has stated.
Would it be too much of an imposition if a member were to inquire as to how much of the shortfall can be attributed to warm weather and how much is attributed to expenses incurred in the development of the broadband?
Theresa Haynie here for Opalco.
@Pat Kuhele, we are independently audited every year. The latest report for the 2014 fiscal year from auditors Moss Adams was delivered for all members to see at the March 2015 Board Meeting. You can find the 2014 Audit online at http://www.opalco.com in the Financial Reports for 2014.
To Charlie Binford-
The revenue shortfall does not come from expenses of any kind. Opalco Revenue comes from energy usage and facility charges. And Opalco rates are over-weighted toward usage, which means that revenues fall when usage drops. Conversely, revenues jump in a very cold winter. This 2-year warming revenue hit is not unique to Opalco, as most Northwest energy companies are experiencing similar shortfalls. Ironically, had the Board raised the usage charge,as some have urged, rather than the facility charge, the losses would have been even greater. Actions by the Board reduced the revenue shortfall, although not enough as the warming trend continued this calendar year.
The Opalco Revenue budget is set based on expected member usage patterns, patterns that changed quickly when the 2014-2015 cold winter months never developed. Historically, winter usage produces the revenue peak for Opalco that carries us through the lower-use summer.
As for the expense side and the costs attributable to broadband, the answer is more complex. If you count as “development” when Opalco started laying fiber optic cables in 2001, that development has enabled but did not drive Internet services for the community. Now fourteen years into fiber deployment, Opalco accelerated broadband expansion led by two things: our own Opalco communications needs first and foremost, and then following the 2013 CenTel outage, a more comprehensive solution for island-wide high speed broadband driven by pleas of the membership and business. There is no revenue shortfall attributable to those Internet expenses, but there is a budget impact that has been widely communicated. You can see very detailed information on the Opalco website, available in the documents posted in the Find Document section. Members are always welcome to ask questions of us.
Brilliant analysis. I’m sure that there’s lots of info from OPALCO that might clarify and answer some of this, but that only highlights the question of why isn’t OPALCO being totally forthcoming and transparent with that info from the start? Not sure who is organizing their outreach effort with the public, but it comes across as a bit arrogant and I’m often left with the impression that I’m being patted on the head and told not to worry. What OPALCO doesn’t seem to realize is that the illusion of dishonesty is a serious issue. OPALCO leadership may be making all the right decisions and completely authentic in their motivations, but the fact remains that there’s a growing sense of distrust in the community, and the approach taken by their leadership only amplifies that. If I were the OPALCO board, I would be looking quite seriously and a change in direction of leadership and philosophy and not rest comfortably that things will just be able to be hammered through.
The idea of an independent audit and report is a great one. I mean, for something so important, why not?
We all know that OPALCO will be reading these comments closely. Let’s take this opportunity to offer up thoughtful, respectful, and well presented alternative views to their hegemony.
Theresa,
Your reply is non-responsive and as an official voice of OPALCO, troubling in its lack of awareness and comprehension of the matters disturbing many members.
For example, pointing anyone to the 2014 audit misses the point completely. Certainly no one is seriously suggesting that OPALCO has skipped required and customary audits, or that these audits are missing deliberate malfeasance. As well, Moss Adams is certainly a fine and competent firm. The suggestion at hand is materially different: specifically, to solicit the opinion of an independent auditor to test management’s claims that broadband (and I should add, broadband’s non-performance to date) is not unduly contributing to utility rate woes or straining the utility in other ways financially. Anyone who has actually read the Moss Adams report will know that this question is not addressed directly or peripherally in the auditor’s report.
I will respond more fully soon when time permits…
For OPALCO to respond to the thrust of this email thread with the claim that, “The revenue shortfall does not come from expenses of any kind” is the kind of disingenuous language which is disturbing for me to hear as it may be for others members. “Revenue shortfall” is the term OPALCO is using to justify the requirement for the $2M surcharge in order to cover expenses already accrued, while not being forthright about the nature of the significant and atypical rise in those expenses already detailed in Alex’s Guest Column.
I read this claim as a mincing of words distortion of meaning rather than a responsive reply to what I hope is of community-wide concern, irrespective of the merits of OPALCO’s broad band initiative.
The question for those of us on Orcas on this comment thread, and indeed all islanders, is how do we regain active control of what was once a utility that belonged to the residents of San Juan County? The recent election was a little bit of a start, but it’s clear that there’s still a huge information gap out there, and many islanders are unaware of the depth of the lack of understanding of local concerns by OPALCO itself (see response above for confirmation).
Maybe it’s time for an active organization that meets regularly to organize and offer up a coordinated and thoughtful response to the standard OPALCO party line?
My concern is primarily that the attitude of OPALCO doesn’t seem to want to embrace an open and transparent culture, which is what democracy thrives on. Does anyone know if WA State Public Records Act (https://apps.leg.wa.gov/rcw/default.aspx?cite=42.56) applies to OPALCO? I’d think it would. If so, maybe someone wants to submit a request (sample request here: https://www.nfoic.org/washington-sample-foia-request) for all email messages between OPALCO staff and board members having to do with the current discussion around rate increases and broad band expenses? Would love to see the discussions that have transpired.
OPALCO is not subject to the State Public Records act, or the Open Public Meetings act, like the School, Fire Department, Sewer, County and other tax districts.
So, a FOIA request is not possible with them.
In response to Fred and to SteveJ,
Opalco itself is staffed by islanders, and Board members must be islanders, too. When decisions are made about the annual rate structure, or in our current case, the revenue shortfall, those are made by islanders with islanders in mind. This isn’t some group in Olympia dictating revenue goals to Opalco, but a dedicated group of men and women who care deeply about the Co-op and its work of delivering reliable and safe energy to the twenty islands we serve.
And Fred, the revenue shortfall is exactly that. We don’t need to spin a thing about it, and you as well as the others in this thread recognize why this is such a critical point. Opalco is a not-for-profit, member-owned cooperative operating at the cost of service. When the budgeted revenue doesn’t materialize, we can’t simply dial back the past year’s expense column or drop our level of service. Opalco took several belt-tightening measures during 2014 to try to lessen the gap. And as far back as 2008 during the recession, the Board held off on rate increases to help the islands’ economy.
We welcome inquiries about the budget, the budget process and financial statements, up to and including the certified independent audit of those financials – all of the information that our Board has access to in making decisions. Our walking the talk of an open and transparent culture is demonstrated in posted Board materials, financial reports and Board meetings that are open to all members. When the audit was delivered at the March 2015 Board meeting, open as always to the membership, no members chose to attend. The members calling for an accurate accounting for and other acts of transparency and openness about broadband and grid control expenses were noticeably absent.
Lastly, the public discussions that have transpired about broadband are many, starting with a series of public meetings in 2013 and continuing with a hundred or more meetings with homeowner associations, community and civic groups.
Opalco has several goals as part of our mission, but underlying them all is the foundation of improving the quality of life in the San Juan Islands. Yes, whether we like it or not, the cost to provide power in the islands is going up. As a member myself, I can be dismayed along with the rest of you about this cost-of-island-living trend, but nothing about the rate increase changes our mission. And, this is not the first time in our 78-year history (nor will it be the last) that we’ve had to take on debt, seen our equity temporarily drop or made additional surcharge payments in our bills to accomplish something good for the whole of the cooperative. The sky is not falling.
Theresa Haynie, Opalco
Oh my…”The members calling for an accurate accounting for and other acts of transparency and openness about broadband and grid control expenses were noticeably absent.” Now that we’ve had our passive aggressive scolding, perhaps we can re-direct our attention to a look at actual OPALCO performance and a level of objectivity noticeably absent from recent OPALCO communications.
The assertion that recent revenue shortfalls have nothing to do with expense is true only in the most technical sense. As a practical matter, revenue declines related to falling energy use are very much tied to the cost of that energy. For example, one of the greatest challenges facing OPALCO is that kWh usage (for convenience, I’ll define usage here as kWh purchased from BPA) is often falling faster than cost of kWh; in some instances, the cost of kWh is even increasing as usage declines. Put another way, declining revenues related to falling usage are driving margin shortfalls.
Let’s take a look at some data from 2013 and 2014 to understand this more clearly. Usage in 2014 fell compared to 2013 from 217,913,854 kWh (2013) to 212,349,941 kWh (2014), a modest decline of -2.55%. Now let’s look at the costs against this purchased energy. The story is quite different as the 2014 bill (BPA billing to OPALCO) of $7,144,116 grew from the 2013 bill of $6,642,759. This represents an increased bill of 7.55% against a decline in usage of -2.55%. In turn, this translates to a non-trivial margin influence with a decidedly negative impact on OPALCO’s bottom line. This is why you’ll recall from the original analysis that 2014’s modest 2.2% revenue increase was negated by pressure on the expense side…largely from cost of power. Here, we can plainly see why.
If we look at the last four quarters of public data available, Q2 2014 through Q1 2015 (April 2014 – March 2015) the trend continues. Compared to the same quarters the year prior, we see that for this 12 month period (Apr 14 – Mar 1) usage declined by -8.29% while billings only declined by -1.07%. This may be an imperfect analysis, but a more granular look is not really possible with the current data available…it’s certainly enough evidence to demonstrate that negative margin pressure continued.
Whether or not you agreed with OPALCO’s recent February rate changes, this data of BPA usage vs billings clearly indicates that the usage-centric member billing scheme previously in place was trending towards unsustainable…something had to change or the negative margin pressure was bound to inflict real financial harm over time. I won’t revisit the debate on the choice of rate plan from February…instead, let’s focus on the future. Why after a scant few months is there an urgent call to include surcharges and new rate plans? What did the new rate plan miss?
It’s hard to analyze what happened in Q1 2015 in any detail, as this quarterly report is yet to be published. We do have one interesting data point though…while Q1 2015 usage declined substantially from 2014 69,919,757 to 2015 59,781,065 (a decrease of 14.50%) BPA billings fell at a slightly greater rate, from 2014 $2,323,879 to 2015 $1,972,829…a decrease of 15.11%. The question at hand is…if variable costs fell more or less in line with variable usage (an assumption made without the benefit of a Q1 financial report), why then the emergency need for surcharges and a proposed new rate design…particularly when the new rate design was constructed to capture more of the facility cost?
The answer can be found in the last paragraph of OPALCO’s press release about the surcharge: “This corrective action is required to remain compliant with our federal funder, USDA/Rural Utilities Service (RUS)….OPALCO is compliant at this time.” Yes, back to our old friend, TIER. Please remember, revenue is but one component of the TIER calculation. My guess is that Q1 2015 TIER failed to improve, or perhaps even deteriorated…we are likely not consuming enough to generate a sufficiently high enough margin against long term debt; which remember is now running at historic highs (about $22 million) with a 42% increase from 2013 to 2014 alone. This is just a guess…we will see what the Q1 financials tell us when they are released. – Open thought for a moment…ponder what happens over the coming 24 or so months when an additional $15 million in debt may be needed for the sub-marine cable project…
Finally, a few words about broadband…as a matter of context, I am a proponent of broadband for the community. Here in Doe Bay, we have proven that reliable high-speed service can be delivered in a timely manner at a good value. While I support OPALCO’s broadband goals in principle, I am skeptical that the right strategy is in place.
OPALCO’s broadband efforts have already started in earnest of course…let’s see what objective measurements can be made about progress. After all, we are repeatedly told that broadband will contribute positively to the utility side in the future. The best metric we have today to predict broadband’s future viability is progress against milestones.
We have a bit of data from the 2014 year end financials. The broadband division exceeded revenues by a nice margin, coming in at $519,819 vs a forecast of $397,106. Unfortunately expenses came in at the antipode of revenue shortfall, with expense running some 89% over budget. Here’s a quick snapshot from the data:
Employee Expense
2014 forecast: $0
2014 actual: $87,565
Executive Expense
2014 forecast: $102,711
2014 actual: $154,610
Planning Expense:
2014 forecast: $0
2014 actual: $89,500
Engineering Consultant:
2014 forecast: $78,588
2014 actual: $179,025
Total, these line items:
2014 forecast: $181,299
2014 actual: $510,700
Overall 2014 Broadband Operating Expense
Forecast $392,354
Actual: $739,907
The board approved a broadband business plan in October 2014. This plan called for major launches beginning the next month, in November. Here is a summary of the launch schedule approved in October 2014.
Cattle Point 70 members, 2 LTE sites, November 2014 launch
Doe Bay/Eagle Lake, 50 members, 1 LTE site, November 2014 launch
Deer Harbor, 75 members, 2LTE sites, January 2015 launch
South Lopez, 50 members, 1 LTE site, January 2015 launch
SJ West, 30 members, 2 LTE sites, February 2015 launch
To the best of my knowledge, only Doe Bay/Eagle Lake has launched from this list…and that launch took place last week, about six months late. Candidly I am perplexed that a plan could be approved in October for launches over the coming 90 days, only to have none of them occur. But this is what happened.
The 2015 budget calls for 1,000 broadband subscribers by the end of the year, with the first 300 in place by the end of this month. It is very difficult to extract much valuable analysis from existing data without the Q1 financial report. But suffice to say, I am skeptical of claims similar to, “There is no revenue shortfall attributable to those Internet expenses.” This seems highly unlikely given the known facts above, but it is only speculation until the Q1 report is out…
No, the sky is not falling…but we should all remember the lesson of Chicken Little…if you don’t want to be eaten by the fox, don’t believe everything you are told…
Thank you Alexander! This is the sort of clear and cogent analysis we’re all in such desperate need of. I’m sure Theresa and OPALCO are genuinely interested in doing the right thing and helping the community, but the fact that they seem to be so thoroughly tone deaf to why their “outreach” and patronizing responses don’t really resonate with islanders who are asking good questions is a sure sign of the need for a change in their approach.
In regards to Theresa’s official OPALCO response that “The revenue shortfall does not come from expenses of any kind.”
My notes from the September 2014 board meeting show management informed the board that our cooperative was on target for a $500,000 to $800,000 shortfall. At the start of 2014 the board had budgeted expenditures at $1.55 million for underground distribution cable replacement, but then went on to spend spent $3.2 million!
This can be found in the 2014 year end financials “Capital Projects Budget” page 11, here https://www.opalco.com/wp-content/uploads/2015/03/March-2015-2014-Year-end-financials.pdf
There is a note that some of this over budget expenditure was driven at least in part by “Henry Island Submarine/Bored Cable – Extensive environmental”.
It is important to realize that RUS does not approve loans for such work until a construction work plan has been provided or amended as requested. All permits must required be lined up before work begins. RUS pays out loans as the work is completed. Our engineer must sign off on the work plan before it is submitted or amended and again when phases of the work are completed so that the loan can be drawn upon. So it would seem that at the point when it was realized that “extensive environmental” work needed to be done the board would have had to approve going ahead with the expenditure and the timing of it.
More to the point, it seems to me the board could have decided to either adjust their tariff’s that were set the following February or could have postponed the work to when it would fit the budget.
It appears that the board had set a budget then chose to overspend by $1.55 million in 2014.
Doesn’t that seem pretty close to the 1.4 million claimed as a revenue shortfall?
Furthermore, I believe I read that when setting demand forecasts weather is taken into consideration and a 5% margin of error provided by engineering for purposes of planning.
To me this sounds more like a shortfall due to overspending and not one driven so much from warmer than expected weather.
Thank you Alexander and Gray for shedding light on the expense issues.
I was at the last board meeting (special meeting on May 28), the main purpose of which was to discuss a new surcharge to recover revenue shortfalls. At the meeting, it was remarkable to me that the subject of expenses (budget vs actual) was not presented or discussed, and was deftly brushed aside when I and other members raised the question.
From that meeting, I have serious concerns/questions:
1. If the board did not discuss expenses during the board meetings, how and when does the board exercise its fiduciary duty to set the budget and monitor the expenses? Before the OPALCO board and management decide on how to collect more $$ from us, can we members-owners have some evidence-based assurances that the board has done its deliberation on cost monitoring?
2. If the board has done such deliberation, why was the process not open to the public and info not presented and shared before or during the meeting?
3. If the board has not done such deliberation, when does it plan to do so? Note however that the board already planned to collect $600,000 of additional revenues starting July 1. The May and June meetings focused/will focus primarily how to allocate the $600k cost among members.
Given the comments in this and previous threads about OPALCO costs, I sincerely hope we members-owners will get some answers to the above questions from the board/management.
I was however intrigued by Theresa Haynie’s statement above that “The revenue shortfall does not come from expenses of any kind.” I assume that her statement represents OPALCO’s official position on the issue. To remove doubts about higher-than-budgeted costs causing the need to raise the rates again, I propose the following:
1. the calculation of “revenue shortfall” should be based on the original revenue target as per the approved 2015 budget, adjusted for kWh shortfalls only.
According to the May 28 board packet, the kWh shortfall was 4,443,958 kWh. Using OPALCO’s “total revenue per kWh sales” estimate of average 11 cents/kWh (from the presentation shown at the same board meeting), the revenue shortfall from warming temperatures should be $489,000, not $600,000. This is 18.5% below OPALCO’s calculated figure of “revenue shortfall”. So what explains the 18.5% extra cost/revenue shortfall?
If Theresa’s claim that “the revenue shortfall does not come from expenses of any kind” is true, calculating the revenue shortfall based on the kWh shortfall alone should be sufficient to meet the revenue target and TIER ratio.
2. If Theresa’s statement above is incorrect and there is indeed a need to raise rates because of higher expenses than planned, it is inaccurate and misleading to use the phrase “revenue shortfall”. For this portion of costs to be recovered, I believe we need at least two board meetings to go over the numbers before approving and passing through such costs onto members-owners. To quietly insert such costs into the “revenue shortfall” surcharge formula is equivalent to the board giving up its fiduciary power to monitor the cost and budget. This is not the board’s intention, is it?
I understand OPALCO is in a difficult financial situation right now. But please do not give up transparency, honesty and trust in its haste to solve the financial trouble. OPALCO is on a long road to rate increases, it is important to not mis-step and build trust and understanding with its members-owners. Thank you.
To Chom-
There are several layers of budget-to-actual review that happen routinely at Opalco, and managed by our General Manager. The most intense scrutiny of the budget is done during the cycle (October-December) when the budget is set for the next fiscal year. Opalco staff works on five-year projections that make line-by-line assumptions on expenses and are adjusted for inflation. Those budget projections provide the basis for the actual FY budget based on service levels, known projects, anticipated events (for example, in winter, there will be outages and therefore overtime for linemen), standard maintenance, and general and administrative expenses in addition to the BPA expense. Only after the cost side is done do we set the revenue projections (because our co-op structure is cost-of-service) and ensure that a healthy margin remains.
During the budget year, an internal quarterly review is conducted to compare revenue and expense Budget to Actuals. Accounting staff prepare a comprehensive review after the close of each quarter. Then, each manager reviews quarterly reports for their areas of responsibility and must explain any notable variances. The group meets to discuss and annotate the Quarterly Report that is then sent to the Board and included in the Board packet for review and discussion. The Board does not make day-to-day or month-to-month cost-cutting recommendations. Their role is to set the direction and policy of the Co-op.
When we saw the trend of declining revenues (still expecting cold weather late in the year), we delayed some projects, left unfilled staff and lineman positions, and took other cost-cutting steps. In November, at the point that it became clear that colder temperatures were not going to balance our revenue requirement, it was too late to make further expense adjustments.
The Opalco Board relies on the recommendations of the General Manager, based on methodical and professional financial management by staff. The General Manager’s role is to oversee that process and propose changes when circumstances change. There is no question that we have entered a period of climate change, revenue volatility, and pressure to cut costs while still moving forward with huge and essential capital projects like the submarine cable replacements. Every line item is and will continue to be reviewed as the Opalco staff works to navigate a course through this rapidly changing landscape.
Theresa Haynie for Opalco
The fundamental flaw with this review of OPALCO’s internal budget process is that it does not reflect what actually happened. Most specifically, “When we saw the trend of declining revenues (still expecting cold weather late in the year), we delayed…” is emphatically a material misstatement of fact.
(pardon the poor formatting when content is pasted here – but should be relatively easy to follow nonetheless)
Let’s look at Q1 14 vs Q1 13
Q1 13 Q1 14 yoy % change
Revenue $6,406,425 $6,841,371 6.79%
Operating Expense $5,689,389 $5,868,028 3.14%
Op Margins $717,036 $973,343 35.75%
Before fixed charges
Net Margin $546,594 $806,904 47.62%
TIER 3.99 4.77 19.55%
The first quarter of 2014 started the year off strong vs 2013. Not only was revenue up, but costs advanced at a lower rate resulting in healthy margin growth. Net margins also remained strong, and we see the related health of TIER.
Now, to the second quarter…
Q2 13 Q2 14 yoy % change
Revenue $10,962,260 $11,477,127 4.7%
Operating Expense $10,251,889 $10,973,502 7.04%
Op Margins $710,371 503,625 -29.1%
Before fixed charges
Net Margin $364,680 $108,878 -70.14%
TIER 2.23 1.35 -39.46%
During the second quarter, revenue growth continued…however, operating expenses climbed at a faster rate. This drove the negative change in operating margins before fixed costs, falling by nearly a third. Net margins also suffered considerably more, resulting in a lower TIER result. We’ll look at why that might be in a moment while looking at Q3 results.
Finally, onto the 3rd quarter…
Q3 13 Q3 14 yoy % change
Revenue $15,115,984 $15,911,784 5.26%
Operating Expense $14,357,384 $15,478,925 7.81%
Op Margins $758,660 $432.859 -42.94
Before fixed charges
Net Margin $225,527 -$174,692 -177.46%
TIER 1.65 0.74 -55.15%
In the third quarter, revenue continues to increase from the previous year (despite the claim: “we saw the trend of declining revenues…”) Operating expenses also rose, again at a higher rate driving lower margins. But what accounts for the dramatic deterioration of net margins that we started to see in Q2? It’s the debt…specifically here demonstrated via interest payments. During Q3 2014, both revenue AND operating expenses came in under budget…however, interest expense came in higher than forecast. ($675,474 vs $657,463).
Of the three components of TIER, the ranked culprits to the troubling calculations are interest expense/debt, expenses and finally revenue…however, OPALCO talks nearly exclusively of revenue. I think this is because they plan to fix the problem with revenue. Candidly, there aren’t a lot of good or easy options…but avoiding a future date with a bankruptcy judge is in everyone’s interest…so everyone should weigh in with their opinions on this matter.
Simply some quick comments with a 30 minute window…there’s much to discuss…it shall be very interesting to see what the Q1 2015 report tells us. The Q1 report was published on 10 and 12 June respectively for the past two years…so we should know soon.