Socorro Electric misses margins
Socorro Electric Cooperative failed to meet its margins for the second straight year and is now technically in default on $52 million worth of federal loans from the USDA Rural Utilities Service and the Federal Financing Bank.
How that will affect the co-op is unclear. Right now the situation is being monitored by RUS.
“We’re still waiting to hear from RUS,” said Richard Lopez, the co-op’s interim general manager, when he broke the news to the board of trustees at its regular meeting on Wednesday.
Lopez said final numbers indicated that the co-op lost $212,500 in 2010. As a result, it failed to meet the margins, or profit levels, tied to the mortgage payments on the federal loans.
Failing to do so two out of three years puts the loans into technical default. The co-op operated at a $417,000 loss in 2009.
Lopez told a group of member-owners of the public, non-profit corporation at an informational meeting addressing proposed rate increases last week that he was “hopeful” the co-op would make its margins when the final numbers for 2010 came in.
But as it turned out, it wasn’t as close as he thought. An accounting error blurred the financial picture.
Lopez said when the mistake was discovered last week he called in Jack Moss of the co-op’s accounting firm, Bolinger, Segars, Gilbert and Moss, of Lubbock, to verify the figures. And Moss was on hand at Wednesday’s meeting to explain what happened.
“The debt cost adjustment forecast was being done on a quarterly basis, but the adjustment on the billing should have been done monthly,” he said. “So in December there was $174,000 of debt cost that needed to be booked.”
Moss called the mistake a “worksheet error” that caused $225,000 of revenue adjustment to be overlooked until December when calculations were made to record on RUS Form 7.
Now that the accounting has been straightened out, “The situation will correct itself,” Moss said. “By adjusting monthly it shouldn’t happen again.”
Raising Rates
This is the second time in the last four months an accounting error dealing with rates has been detected. In September, it was discovered a mistake made five years ago caused the co-op to overcharge its customers, who are also member-owners of the electric utility, by $1.78 million. That money is in the process of being returned to members in the form of capital credits.
“The power cost adjustment was rolled forward correctly; it’s the debt cost adjustment that had the problem,” Moss said, adding that he didn’t want to blame anyone for the error. “Several people should have noticed when new rates went into effect that the debt cost should have been adjusted.”
Though the more recent mistake didn’t cost the co-op members any money, the news comes just as the co-op is about to submit its proposal for rate increases to the New Mexico Public Regulation Commission.
Socorro Electric is due to turn its proposal in to the PRC on Feb. 3. The proposal calls for an average 6.95 percent rate increase, but residential customers will experience a 12 percent increase — estimated at $8.31 per month for a customer using 500 KWh. That figure includes the $6 increase in the system charge.
Customers have a 20-day period to file a protest and must show just cause for why they are disputing the increase. If 25 protests are deemed to be legitimate, the matter goes before a PRC hearing officer.
Member-owners of Kit Carson Electric Co-op in Taos recently earned a hearing on a proposed rate increase that would result in residential customers paying an additional $14 per month on average.
Should a protest be granted to Socorro Electric’s members, Catt Cobb, a rate analyst for SGS Engineering, a consultant for the co-op, said the co-op would have to apply for emergency rate relief with the PRC.
Other Options
Lopez said in an interview on Thursday that the co-op could be saved from federal relief on the loans and not go into default. The situation could correct itself with cost-saving measures that have been implemented in recent months.
“Things are already coming into place,” he said. “The other thing they see us doing is refinancing the loans we have and cutting back on non-critical maintenance. We’ve also put off projects and cut back on donations.”
Lopez noted that some of the cutbacks were brought on by member-owners, who passed bylaws at last April’s annual meeting to reduce the size of the board and place a limit on the expenses incurred by trustees. Expenses for 11 trustees totaled $492,000 in 2009. Now with 10 trustees under a spending cap, their expenses cannot exceed $105,000 in 2011.
That difference is more than enough to cover the needed margins, based on the 2010 figures.
And should the rate increase go through, the co-op would experience an estimated $1.5 million increase in revenue per year.
“We have to show that we’re making an effort,” Lopez said. “The biggest thing we’ve got to show is that we can make our payments to RUS.”
Another option, Lopez said, would be to apply for a cushion of credit with RUS. That would require the co-op to dip into its $5.2 million in investments to come up with the money to pay off 12 months of the loan in advance.
Lopez said about $1.7 million of those investments are earmarked for repaying the overcharges and that taking a cushion of credit would cut into investments by more than half. He said the co-op’s monthly RUS payment is $109,000, so an advanced payment of about $1.3 million would be needed.
Being Monitored
Lopez said he had been in contact with Larry McGraw, field representative for RUS, and notified him Socorro Electric came up short of the margins. The two discussed the rate proposal and what cost-savings measures had already been implemented.
“We’re probably doing what (RUS) wanted us to do in the first place,” Lopez said.
He added that McGraw was to contact the USDA’s Rural Development office in Washington, D.C., and the co-op was awaiting word on what would happen next.
In a phone interview on Friday, McGraw said Socorro Electric is in default only with regard to not meeting the financial ratios. He said RUS’s plan for now is to monitor the situation.
“We have remedies,” he said. “There have been reinvestments in the mortgages on the loan contracts. Most of it can be accomplished through corrective action and they have taken appropriate action. The rate increase combined with the cost cutting should correct the situation.”
In May of last year, the co-op’s board of trustees accepted a $24 million, 35-year loan from RUS. At that time McGraw described the loans as fairly “routine,” offered every four years or so. The money is to be used for construction projects to expand and maintain the system.
Contact T.S. Last