By Vernon Robison
Moapa Valley Progress
Staff members at the Overton Power District (OPD) presented an annual draft budget for 2013 at the OPD board meeting on Thursday last week. While officials admitted that the projected numbers still posed some financial challenges for the district, they expressed optimism that the district would meet its obligations and its key debt measures for the coming year.
In her report, OPD Finance Administration Manager Terry Romero said that the district had seen only a 1.5 percent increase in energy sales between 2011 and 2012. She said that for the 2013 draft budget, she had projected that same low rate of growth.
“We wanted to be very conservative in our revenue estimation,” Romero said. “We feel that 2013 will be the same or maybe even better than 2012. But to be conservative, we are again estimating at only 1.5 percent growth in sales.”
According to this projection, the district is budgeted to sell over 355 million kilowatt hours in 2013, at a rate of about 10 cents per kilowatt hour. This is expected to generate over $35 million in revenues from energy sales, Romero said.
Other electric revenues including connect fees, substation fees, penalties and other miscellaneous fees were being projected at an increase of only 1 percent, Romero said.
OPD General Manager Delmar Leatham pointed out that the OPD had connected 80 new meters in the community during January alone.
“Those new meter connections represent almost a 1 percent growth in our residential customers in a single month,” Leatham said. “So these are very conservative numbers.”
On the expense side, Romero explained that, because of line loss, the district must purchase a little more power than it sells. Based on the projected sales, the district must purchase about 384 million kilowatt hours at a rate of around 6.5 cents per kilowatt hour. Thus, the total cost of purchase power was projected at $24.9 million, Romero said.
Romero stated that the cost of purchased power was, for the most part a fixed cost based largely on energy contracts which had been entered by OPD. These contracts go out as far as five years to 2018, she said.
Other costs including transmission costs, distribution, consumer accounts and administrative general costs were projected at a conservative 4 percent increase in the budget, Romero said.
With all of this, Romero had calculated a 2013 margin for the district of $1.1 million. This results in a projected debt service coverage ratio of 1.25.
This key measure is the ratio of cash reserves available to pay the district’s debt payments. The OPD is obligated to its debtors to maintain a certain threshold on this ratio. Romero explained that the threshold for OPD on this debt service ratio is 1.35. So these current projections for 2013, if realized, would find the district below its debt service requirement, she said.
But Leatham said that the district would most likely exceed the conservative estimates projected in this draft budget.
“If growth continues throughout the year, we should reach our ratio quite easily,” Leatham said. “And, I don’t want to curse us, but if we have a hot summer, weather plays a huge part in our sales for the year.”
Romero said that she had done some additional calculations that seemed to bear this out.
“If we have an additional one percent growth, which we mentioned we already saw in January, (the debt service ratio) will be at 1.32,” Romero said. “That is a more realistic number and will more likely happen. But I like to use more conservative numbers in the draft budget document.”
Mesquite Trustee James Pugh, who was newly appointed to the board last month, asked about a recent downgrade in the OPD’s credit rating by Moody’s, a bond rating agency. This downgrade took the district from an A2 rating down to a lower Baa rating. This action by Moody’s followed a previous downgrade of OPD credit by Fitch, another bond rating agency, which took place last year.
“What was the reasoning behind the downgrade of our bond if we are that close to meeting the ratio,” Pugh asked.
Leatham explained that the rating agencies look at various elements in their credit ratings including potential for growth, debt service ratio and cash reserves.
“Our cash levels had dropped,” added Romero. “But they didn’t know about our repayment actions that had caused that.”
Leatham said that while credit ratings are important, they are less critical to the OPD in its current situation.
“Where (credit ratings) become material is if we were going out to issue another set of bonds,” Leatham said. “Then bond investors would look at our ratings and want to require a little higher interest rates there and it would be more expensive for us. But we are not looking to borrow any funds in the near future. We will have time to recover that rating before we need to start looking for that. By 2018, we are likely to be in good shape by then.”
At any rate, when the time came that additional funds are needed, Leatham said that the OPD might be better off to go with a laddered loan program from the National Rural Utilities Cooperative Finance Corporation, of which OPD is a member. This might provide a better financial picture than floating another bond, Leatham said.
Leatham said that when growth had slowed in recent years, the board could see the debt service ratio starting to tighten as sales decreased. But rather than moving swiftly to increase rates and preserve those key measures, the board had opted to delay rate increases as long as possible, Leatham said.
“There was a decision by the board saying ‘Let’s see if we can see some growth before we raise the rates’,” Leatham said. “When that growth didn’t occur, we fell below those thresholds. But the idea was that we didn’t want to add another financial burden on the recovery by raising rates if we didn’t need to.”
The board was eventually forced to raise rates, though, to meet the district’s obligations, Leatham said.
“The obligation is to have rates in place that can reasonably be expected to generate those coverages,” Leatham said. “We believe those rates are now in place. The budget we are looking at; we want it to be a kind of worse case scenario. We want these numbers to be on the very conservative end.”
Romero presented a chart showing the breakdown of OPD expenses by classification. Based on the draft 2013 budget’s projected total revenue of about $37 million, $24.9 million or 67% is used to pay the cost of power. Another 9% was in debt service payments and 5% was in depreciation costs. All of these expenses are fixed expenses, Romero said.
The district is expected to spend 11% of its projected revenues on wages and another 5% on employee benefit plans.
Leatham spoke about the strategy the district had taken in reducing its workforce in recent years.
“There has been a lot of discussion about laying people off,” Leatham said. ‘We have reduced our workforce in the past few years. But because we had people nearing the end of their careers, it was decided that planned retirement would be a part of our cost reduction.”
Leatham explained that there were two people who are definitely planning retirement this year. Two others may retire this year, but are still uncertain, he said. Then there are two more for certain who would retire the following year. Thus by next year, the district could have a reduction in workforce of as many of six people, Leatham said.
“That is more than a 10% reduction,” Leatham said. “Now you could have taken the harsher approach and simply laid those individuals off before they were ready to retire. That was not a decision this board wanted to make; and it functionally accomplishes the same thing by allowing retirements to take place; or encouraging them to take place.”
Board chairman Larry Moses added that with this strategy, the impact to the district had been lessened because a sudden layoff would have impacted more people from the lower salaried segment of employees.
Leatham estimated that the savings to the district for the upcoming retirements would be between $300,000 and $400,000 in labor costs.
The only other category of expenses was the 3% in other miscellaneous costs to the district.
“That little piece is basically what we have control over and out of that is our margins,” Romero said. “So there is not a lot of wiggle room here.”
