Co-operative

Article Dean Dorton

Here are the key risks and opportunities for 2018:

Cybersecurity and Big Data

Co-operatives can be proactive by implementing effective controls to prevent and detect cyber-crime. A successful cybersecurity campaign includes educating employees of potential phishing schemes. Potential effects of a co-op network infiltration can include shut down of an energy grid, re-direction of energy to a particular location, or theft of customer payment information. Management can use simple software applications to create data analytics which help in identifying trends in business and ultimately help make informed decisions.

Power Supply Costs

Even though a proposal exists to repeal the EPA Clean Power Plan, continue to investigate alternative sources of energy, such as wind, solar, and biomass, to further diversify power sources as well as work with communities to deploy energy storage and efficiency technologies. Explore wholesale power markets as a way to obtain reliable electricity at an effective cost.

Safety, Including Overtime Management

Safety is a major concern for co-operatives as their employees routinely work in dangerous conditions (i.e. downed power line in a thunderstorm) that, if not taken seriously, can expose the co-operative. Monitor overtime hours to help protect the safety of employees; this important oversight role is a vital way to control costs.

Community and Environmental Responsibility

As an electric co-operative, you have to balance providing affordable electricity to your community, while protecting it from environmental degradation. You can launch conservation programs in your community by providing information and resources to members about how they can individually reduce their energy costs. This not only saves the members money but also keeps you from wasting energy resources and protects the environment. The enhanced use of social media and technology will facilitate great success in this area.

Succession Planning

As co-operative executives continue to grow older and retire in larger numbers than in the past, there must be a greater emphasis on succession planning and staff development. This risk flows all the way down to recruitment of top talent as urbanization continues to increase in the U.S. and competition from other industry sectors for talent intensifies. Whether you decide to use an internal or external hire to replace key top management, take the necessary steps to ensure a smooth transition.

Adoption of the New Revenue Standard

Co-operatives will need to adopt ASU 2014-09 (Revenue from Contracts with Customers) in 2019 or 2020, depending on fiscal year end. This standard focuses on a five-step process to assess revenue recognition for products and services. The concept of transfer of control is used to dictate when revenue is recognized. Identify your significant revenue streams and apply the new revenue criteria to each stream. In addition to potential changes in revenue recognition, expanded disclosures will be required. Management should use 2018 to assess this standard appropriately.

Adoption of the New Lease Standard

Co-operatives will need to adopt ASU 2016-02 (Leases) in 2020 or 2021, depending on fiscal year end. This standard focuses on placing almost all leases on the balance sheet through a right of use asset and liability. The concept of transfer of control is used to define a lease. The most important step for management in 2018 is to start building an inventory of leases. After the inventory is built, determine the need for investing in lease software to properly track the new accounting requirements.Sources: America’s Electric Cooperatives, Ernst & Young, Coop News, Cooperative Energy, Vanderbilt UniversityElectric Co-operative Key Performance IndicatorsNote: Group consists of various Kentucky-based electric co-operatives.

Measurement Trend 2016 2015 2014 2013
Debt to equity Positive 1.18 1.29 1.40 1.49
Equity to total assets Positive 43% 41% 38% 37%
Current ratio Stable 1.00 0.99 1.05 0.97
AP turnover Stable 15.48 17.72 16.58 15.59
AR turnover Stable 13.10 16.13 14.60 16.19
Operating margin %* Decline 4.2% 6.0% 6.2% 5.6%
Cost of purchase %* Stable 70% 70% 71% 72%
Capital expenditures %* Stable 9.7% 8.3% 7.3% 7.6%

* Percent of revenue

Overall, the results are positive and show the stability that exists in the electric co-operative industry in Kentucky. Operating margin slipped in 2016 due to a decline in revenue, attributed to weather patterns and increased energy efficiency programs.

Article Dean Dorton

As you close out 2015, take a look at the following key electric co-op performance indicators in Kentucky. Dean Dorton analyzed 11 of the larger electric co-op financial statements as provided to the Public Service Commission.

The industry looks stable with equity as a percentage of total assets climbing from 37% to 43% and an increase in current ratio from 1.18 to 1.25. Accounts receivable and accounts payable continue to turnover about every 12th day. Operating margin dipped from 6% to 5% and the group continues to reinvest in itself at the rate of 8% of revenue.

The industry is highly leveraged to fund its capital with debt exceeding its equity. The purchase of energy sits at 74% of revenue and represents one of the main risks going forward as highlighted in Dean Dorton’s top 10 electric co-op list for 2016.

2014

2013

Debt to equity

1.39

1.46

Equity to total assets

43%

37%

Current ratio

1.25

1.18

Accounts payable turnover

12.65

11.82

Accounts receivable turnover

12.59

12.82

Operating margin

5%

6%

Cost of purchase %

74%

74%

Plant additions %

8%

8%

 

For more information, contact Bill Kohm at bkohm@deandorton.com or 859-425-7625.


View Bill Kohm’s Bio

Article Dean Dorton

Electric co-operatives are unique entities that are part government agency, part agricultural co-operative, and part not-for-profit company that provide electricity to rural areas of the United States. Most co-operatives are solely distributors of energy and do not actually generate the electricity themselves. Due to the fact that co-operatives are utilities in a largely unregulated sub-section of the energy industry which provide service in primarily rural locations, there are specific risks that need to be addressed. Here are the key risks for 2016:

  1. Cybersecurity
  2. Power Supply Costs
  3. Safety Including Overtime Management
  4. Billing Adjustments (Fraud Risk)
  5. Cash Handling (Fraud Risk)
  1. Third Party Contract Compliance
  2. Employee Benefits
  3. Weather
  4. Succession Planning
  5. Pensions
  1. Cybersecurity
    Co-operatives need to implement a proactive cybersecurity strategy that includes effective controls to prevent and detect cyber-crimes. Employee training regarding potential phishing schemes can be one cost effective preventative control. Potential effects of a cybersecurity breach include shutdown of an energy grid, re-direction of energy to a particular location, or theft of customer data.
  2. Power Supply Costs
    The EPA Clean Power Plan which proposes carbon dioxide limit regulations may result in increased costs of compliance for co-operatives that will either reduce profit margins or be passed on to the end consumer in the form of higher electricity rates. Management needs to investigate alternative sources of energy to further diversify power sources.
  3.  Safety Including Overtime Management
    Safety is a major concern for co-operatives as their employees routinely work in dangerous conditions (i.e. downed power line in a thunderstorm) that, if not taken seriously, can expose the co-operative to unnecessary costs. Monitoring of overtime hours to help ensure employee safety represents an important oversight role and a vital way to control costs.
  4. Billing Adjustments (Fraud Risk)
    Proper segregation of duties needs to be in place to prevent those who initiate billing adjustments from those approving the adjustment. Otherwise, an employee could raise a customer’s rate, remit the proper agreed upon amount, and then pocket the extra amount. Additionally, adjustments involving employee accounts should require a higher level of review.
  5. Cash Handling (Fraud Risk)
    Proper controls should be implemented to protect against fraud regarding the handling of cash. This includes proper segregation of duties around cash collection, accounting module access, reconciliation of the cash balance, and recording the collection in the accounting system.
  6. Third Party Contract Compliance
    Co-operatives engage in numerous agreements with third parties that require oversight. Agreements should be logged and reviewed periodically for compliance. Additionally, management should do an annual review of its third parties to ensure that they qualify as contractors and not employees.
  7. Employee Benefits
    Focus should be placed on compliance with affordable care act provisions. Additionally, a federal overtime proposal exists that salaried individuals who earn less than approximately $50,000 per year be eligible for overtime which will impact labor costs. This overtime change could be in place by 2017, so 2016 is a great time to determine which employees may be impacted by this change and evaluate potential options. Finally, co-operatives should use some creativity in offering benefit programs that appeal to younger generations and emphasize the importance of work-life balance.
  8. Weather
    Distribution co-operatives deliver electricity from the national gridlines to rural counties. In cases of severe weather, utility poles may be damaged and not functioning properly. It may be more difficult to restore functionality in a timely fashion due to the poles’ location in very rural areas. Contingency plans and proper training should be in place to deal with severe weather issues.
  9. Succession Planning
    As co-operative executives continue to grow older and retire in larger numbers than in the past, there must be a greater emphasis on succession planning and staff development. Whether a co-operative decides to use an internal or external hire to replace key top management, steps need to be taken to ensure a smooth transition.
  10. Pensions
    Unfunded pension benefit obligations pose a serious threat to the sustainability of current businesses as they may not have the required cash flow to pay benefits as they become due. Additionally, co-operatives that participate in multi-employer funded pensions may be paying funds that do not ultimately benefit their employees if other participating employers do not contribute the appropriate amount of funding. Management should update its pension obligations at least every other year through a credible actuary and actively discuss key assumptions with the actuary.

For more information, contact Bill Kohm at bkohm@deandorton.com or (859) 425-7625.


View Bill Kohm’s Bio