Vital signs strength in challenging times: electric cooperatives in 2009.

Across the country, across industries, in virtually every sector of business, 2009 saw the economy continue its slow but steady recovery from the longest recession since World War II. Our nation's electric cooperatives took the lead, with annual data for 2009 showing that rural electric cooperatives not only maintained their financial health but even performed better than the industry average in terms of sales and consumer growth.

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While costs and rates continued to trend upward, the major benchmarks of co-op financial performance stayed strong or even improved. In a year of falling electricity sales, rural electric cooperatives experienced a smaller sales decline than the industry as a whole, while consumer growth slowed but continued. (1)

Sales and Customer Growth

The combination of a poor economy and mild weather produced a low sales growth year for most electric utilities in 2009. Despite this, the decline in retail sales for rural electric cooperatives was not as severe as for the industry as a whole as seen in Figure 1. Preliminary data from the Energy Information Administration ("EIA") through October indicates a strong rebound in sales in 2010.

Distribution co-ops sold 390 billion kWh in 2009, down 1.7% or 6.8 billion kWh from 2008. This was actually the first time co-op sales did not experience positive growth. The total utility industry was hit much harder. Sales for all utilities declined 4.2% nationally. In fact, 2008-2009 was the first time in 60 years where total electric utility industry sales declined for two consecutive years.

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The level of kWh sales is primarily dependent on three factors: the number of new customers added, weather conditions and economic activity. All three factors, especially the latter, played a part in driving down sales across the industry in 2009. The first of these factors, number of new customers, increased only modestly for co-ops in 2009, less than one percent. This was a significant departure from historical norms, where co-ops had been accustomed to high customer growth rates. From 1974 through 2007, the annual average rate was 2.8%. Yet in 2009, electric cooperatives grew only 0.6%, as shown on Figure 2.

The second major factor affecting energy sales is weather. Weather conditions affect heating and cooling, the main component of residential sales. A mild winter and cooler-than-normal summer in certain parts of the country in 2009 contributed to lower sales for many co-ops. However, residential sales were only off 0.6% overall during the year and nearly forty percent of all cooperatives had positive sales growth in 2009. These co-ops are shown in two shades on Figure 3. The darker shade represents co-ops that had the highest total sales growth, over 2.5%. The lighter shade shows the co-ops that had from 0% to 2.5% total sales growth.

Record wet conditions in Minnesota and North Dakota led to increased grain-drying activity, which is quite energy intensive. As a result, sales increased in that region. Drought in the southwest increased irrigation sales. On a statewide basis, Texas had the largest absolute increase in kWh sales, selling 580 million kWh more than the prior year.

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The third major influence on sales is the economy. This was certainly true for 2009, with the recession causing significant declines in commercial and industrial (C&I) sales. C&I sales were down 3.3% for cooperatives, but down a much more significant six percent for the total industry.

Although C&I sales are not normally a significant driver of cooperative sales growth, it appears that many of the fastest growing co-ops were those with high C&I sales growth.

Co-ops in the mid-section of the country seemed to experience the highest C&I sales growth as highlighted on Figure 4. Despite the recession, many of these co-ops have diverse agriculture, natural resource loads or, in some cases, new ethanol plants or energy sector Loads that continued to prosper into 2009. At the statewide level, Colorado, Iowa, North and South Dakota had the largest increases in C&I sales.

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There was also positive growth in total number of customers served. In a year when new housing starts were at all-time lows and customer growth was flat across the country, three-quarters of all co-ops still had a net increase in new customers. Figure 5 below shows these co-ops. The darker shade indicates co-ops with a customer growth rate of over 0.8%. The lighter shades are co-ops that grew from 0% to 0.8%. Overall, there was a net increase of 116,962 customers, bringing the total to over 18 million nationwide. Most of the fastest growing co-ops were in the midsection of the country, with Texas co-ops in particular experiencing rapid growth. In fact, at the state level, Texas added by far the most new customers at 36,363 bringing the total there to 1.9 million. North and South Carolina were second and third in customer growth. Together, the Carolina co-ops added over 14,000 new customers, particularly in coastal areas.

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Cost Structure of Electric Cooperatives

The core business of a rural electric cooperative is the distribution of electric power to customers, largely residential. Fifty-eight percent of co-op retail sales were residential in 2009.

Power Costs

As shown in Figure 6 above, over two-thirds of cooperatives' total costs is for purchased power. While these purchases represent the majority of costs, these costs are also the hardest for an individual co-op to control. Looking at composite Form 7 data, spending for purchased power was $25 billion in 2009, close to last year's level. On a per kWh basis, power costs were 6.55 cents per kWh, up from 6.50 cents per kWh in 2008. This increase was much less than in prior years when fuel and commodity costs were rising rapidly. Figure 7 shows the rise in power costs on a per kWh basis. Over 5 years, they have gone up an average of 6.3% per year. To help cooperatives cope with rising costs and rates, this year NRECA and CFC released "Rate Strategies for 21st Century Challenges, A Guide to Rate Innovation for Cooperatives." (2)

Distribution Costs 

Distribution costs have also climbed steadily in the past few years, although not as fast as power costs. Distribution costs include everything from maintaining overhead power lines to meter reading. These costs tend to be higher for rural electric cooperatives because co-ops serve, for the most part, sparsely populated areas and/or difficult terrain. Overall, co-ops had about $12 billion of non-power costs. These costs were up 3.5% in 2009. The three major categories of distribution costs are Capital Costs, O&M (Operations & Maintenance) and A&G (Administrative & General costs, sometimes called overhead).

Capital Costs

The largest of the three categories of distribution costs (and the largest expense after cost of power) are capital costs. Capital costs consist of depreciation, amortization, interest on debt and taxes. Total capital costs for all distribution co-ops in 2009 was $4.7 billion or $259 per customer served. Capital costs have risen at an average rate of 4.9% per year over the last 5 years. The reason for this increase was the strong consumer growth from prior years and the growth in plant needed to serve them. The consumer growth can be seen on Figure 2 for the years 2005 to 2007.

Investment in Total Utility Plant (TUP) increased to meet that demand growth. The investment in TUP has begun to slow down as shown in Figure 8, but the costs of those growth years are still being felt.

Distribution O&M Expenses

The next largest distribution expense category is O&M (operations and maintenance). This category comprises the total cost of operating and maintaining the electric distribution infrastructure to deliver power. O&M expenses (and all subsequent distribution expenses described below) include labor costs. In this category, that includes the engineering staff. It also includes the cost of operating and maintaining substations, overhead and underground lines, poles, meters, transformers, customer installations, tree-trimming and brush clearance. Total O&M costs for distribution co-ops totaled $3.4 billion in 2009. O&M, like all distribution costs, are necessary expenses to serve consumers. They are often expressed on a per customer basis as in Figure 9. O&M has been rising an average of 3.6% per year and is currently $184 per customer served.

A&G Expenses

A&G (Administrative and General) costs are about 5% of total operating revenue. They were $1.8 billion in 2009 or $100 per customer. The A&G category includes many of the fixed, 'overhead' costs associated with any business operation: management, auditors, property & casualty insurance, office supplies, regulatory & franchise fees, outside consulting and professional services. In addition, they include fast-growing costs such as retiree pensions, health care and disability. A&G costs per customer were up nearly 3.7% in both 2008 and 2009 and an average of 2.9% over the last 5 years as shown on Figure 10.

Customer Accounts, Sales and Service Expenses

Finally, there are several costs directly related to servicing customers. These customer-related expenses include accounting and bill collecting, promotional and advertising materials, newsletters and direct mailings. They also include functions unique to electric utilities such as meter reading and consumer education for energy efficiency or conservation, technical and engineering advice to C&I customers and key accounts. They also include an allowance for uncollectible consumer accounts.

Importantly, these uncollectable consumer accounts were up only slightly during 2009 despite the recession. This speaks well of the ability of electric cooperatives across the nation to effectively manage uncollectibles in the face of significant stress. These total customer accounts, sales and service expenses amount to about $1.4 billion per year or $78 per customer as seen on Figure 11, and have increased 2.7% annually.

Financial Measures

Despite an unrelenting growth in power and distribution costs, measures such as TIER (Times Interest Earned Ratio) and Equity as a Percent of Assets show that electric cooperatives continue to strengthen financially. Distribution co-ops had Total Operating Revenue of $38 billion in 2009, enough to cover higher costs and maintain healthy margins. TIER, a key financial ratio used in the rural electric program to compare margins and interest expense, has improved for two straight years according to CFC's Key Ratio Trends Analysis (KRTAs). TIER is widely used by co-ops in their financial planning and is closely monitored by the financial community. Regulators use TIER as the primary basis for co-op rate setting. TIER is calculated as interest expense plus margins divided by interest expense. The typical co-op TIER, shown on Figure 12, has been, and remains, well above the minimum 1.25 required by the Rural Utilities Service (RUS).

Cooperative equity increased to healthy levels during the 1980s. Over the 39-year period shown in Figure 13, equity as a percent of assets peaked at 43% in 1994 and is now at 40%. Assessments of distribution cooperative equity have concluded that an equity level between 30% and 50% of assets is desirable for most co-ops. Only 14% of co-ops have an equity ratio below 30%, and these are generally the very fast-growing co-ops.

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Customers-per-employee is a measure of productivity. Figure 14 shows that, for the last 5 years, co-ops have made steady improvement of 1.1% per year in the number of customers served by each distribution system employee. The total number of full-time employees now working at distribution co-ops is 55,542. That number is down slightly from 2008, showing that co-ops are working hard to keep staffs lean and costs low.

Capital Credits

Capital credits are the primary source of equity for most cooperatives. Retiring capital credits is a practice unique to cooperatives whereby a co-op's equity is gradually returned to members. In 2009, electric distribution co-ops returned $540 million in capital credits to their member-owners. The lower segment of the bar on both Figure 15 and Figure 16 represents "general" retirements to members. The upper segment represents "special" retirements (generally to estates). Retirements have increased an average of 2.8% per year over the period shown on Figure 15. Cumulatively (Figure 15), rural electric co-ops have returned $9 billion of equity to their members.

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Conclusion

Due to an unusual combination of economic and weather-related circumstances, 2009 was a challenging year for electric utilities across the country. Despite that environment, rural electric cooperatives managed to outperform the industry as a whole in terms of sales and consumer growth. They successfully negotiated consecutive years of rising costs and rates while delivering affordable and dependable power to 18 million households and businesses. All of the major indicators of their financial strength remain positive. This allowed co-ops to return more than half a billion dollars of equity in the form of capital credits, to their customers.

Vital Signs, first produced in 1985, is an annual analysis of data reported by rural electric co-ops, from the end of the previous calendar year. This year's report is based upon 2009 data from 817 distribution systems. All data is treated confidentially and no individual system data is released or published.

NRECA Strategic Analysis, 11/16/2010

Footnotes

(1) The data for these conclusions came from 2009 Annual Form 7s collected by CFC and shared in aggregate with NRECA. The majority of co-ops, over 800, are included in the composite numbers. For comparisons to the Total Electric Utility Industry, historic and preliminary 2010 sales data came from the EIA (the Energy Information Administration).

(2) Available for download at: https://www.cooperative.com/InterestAreas/ energyinnovation/RateDesign/Pages/default.aspx

Dave Olivier is Manager of Strategic Analysis Information at NRECA. He conducts data analysis and outside research for NRECA's legislative and regulatory staff and membership and manages databases and information vital to NRECA members.

Louise Williams is a Map Development Specialist for NRECA. She is responsible for developing and maintaining the official map of NRECA member systems.

Mike Ganley is NRECA's Principal for Economic and Policy Analysis. Mike joined NRECA in 1987 after more than ten years of service with the Rural Electrification Administration. He is manager of NRECA's Strategic Analysis Unit, which conducts studies and research on a variety of financial and operations policy issues affecting cooperatives.

Figure 2: Customer Growth Rate Has Slowed

2005   2.5%
2006   2.7%
2007   2.8%
2008   1.9%
2009   0.6%

Note: Table made from bar graph.

Figure 6: Co-op Cost Structure

Cost of Power        68%
A&G *                 9%
C&M                   9%
Capital Costs        13%
Distribution Costs   32%
Margins

* A&G expense category includes customers sales
and information expenses.

Note: Table made from pie graph.

Figure 7: Power Costs Up Substantially in Recent Years

Average annual growth rate 6.3%

2005   5.37[cents]
2006   5.76[cents]
2007   5.93[cents]
2008   6.50[cents]
2009   6.55[cents]

Note: Table made from bar graph.

Figure 8: Investment in Total Utility Plant

2005   6.0%
2006   7.1%
2007   7.2%
2008   6.5%
2009   4.9%

Note: Table made from bar graph.

Figure 9: Distribution Operations & Maintenance Expenses

2005   $157
2006   $163
2007   $170
2008   $181
2009   $184

Note: Table made from bar graph.

Figure 10: Administrative & General Expenses

Average annual growth rate 2.9%

2005    $88
2006    $90
2007    $93
2008    $97
2009   $100

Note: Table made from bar graph.

Figure 11: Customer Accounts, Sales and Service Expenses

Average annual growth rate 2.7%

2005    $69
2006    $72
2007    $74
2008    $76
2009    $78

Note: Table made from bar graph.

Figure 12: Times Interest Earned Ratio (TIER)

2005   2.20
2006   2.29
2007   2.24
2008   2.27
2009   2.30

Note: Table made from bar graph.

Figure 14: Customers per Employee Shows Improvement

Average annual growth rate 1.1%

2005   275
2006   276
2007   282
2008   286
2009   287

Note: Table made from bar graph.

Figure 15: Annual Capital Credit Retirements

Average annual growth rate 2.8%

2005   $483
2006   $499
2007   $545
2008   $530
2009   $540

Note: Table made from bar graph.