Alliance Co-Managers' Report - 2011

Measurable progress being made at your cooperative

by Donald A. Franklund and Clayton O. Hoffman, Alliance Co-Managers

At last year’s annual meeting, we spent a lot of time discussing the ice storms and their impact. While we are still working on some of the aftermath, we have determined that the overall cost of the January and April storms totaled more than $45,500,000.

We spent most of last year working with the federal and state people in getting the proper documentation completed. After everything was added up, Mor-Gran-Sou received $35,000,000 in assistance.

The difference of $10,500,000 was funded by Mor-Gran-Sou in two fundamental methods. Approximately $5,000,000 was funded through general funds and pre-existing Rural Utilities Service (RUS) loans. The remaining $5,500,000 was funded through an emergency line of credit with Cooperative Finance Corporation.

Based on feedback from the members, we are moving forward with paying the $5.5 million note over a five-year period through a “storm surcharge,” which was implemented beginning in January. We have made very good progress so far. Currently the balance is $4,500,000. We hope to be able to get an additional $2 million in reimbursements from the Federal Emergency Management Agency (FEMA).

In addition to the revenue from the surcharge, everyone at Mor-Gran-Sou has worked hard to hold down expenses. We have implemented a hiring freeze, so as folks quit or retire, we are not replacing them. We have limited our participation in a number programs and events we have traditionally supported. We have deferred equipment replacements for one year.

It is very important to point out that all of this will show up next year as higher margins at the cooperative. When we increase rates or sales, this shows up as greater revenue. When we reduce our cost, this shows up as lower expenses. Margins are simply the difference between the two. So for us to raise cash to pay off the note, we need to have greater margins.

So, where are we today? Based on the past winter storms and winds, it appears that the poles and wires did well. That was a concern last year as we were going into the winter.

It appears that we are making good progress on repaying the $5.5 million. We should be able to achieve repayment in the 60-month life of the program.

Future Rates:
The next three years will see a rising cost in power we purchase from Basin Electric Power Cooperative. The members of Basin have grown, which means they need additional power supply to meet the increased demand. To meet that need, Basin has begun building new wind, coal and gas generation. They have also refitted existing plant by adding environmental control equipment.

Over the past three years, Basin has implemented rate increases annually to cover the cost to bring new electrical generation online and to improve existing power plants. These increases have been passed through in the rates at Mor-Gran-Sou.

As they look forward, it appears they will continue to increase their rate in each of the next three years and then level off. While we are not sure of the exact increase, they will be increasing their rates in 2012.

Future Concerns:
The next few years are going to be a challenge for our cooperative and our membership. These challenges include:

The need for a federal energy policy
We need to know the direction that the federal government supports, as a choice for future generations of electric power. Is coal going to be regulated out of the generation market? That answer is especially critical for the electric industry in the Midwest.
The cost of doing business
How are we, as a country, going to get these costs under control? Healthcare costs, fuel costs, environmental costs, system material costs.
The lack of cooperative support
As the rural countryside continues to be in a steady decline of farmers and ranchers, the support of our cooperatives also diminishes. This is especially true in state and federal agencies, as well as in our state Legislature and Congress.