VEA Board, CEO Address Issues Surrounding Rate Increase

Trucks

(The following was written by the Valley Electric Association Board of Directors and CEO Angela Evans.)

By now many of Valley Electric Association’s members have read the February edition of Ruralite, as well as our press release on the rate increase and job reductions. In each of these communications we felt it important to talk to our members about the thorough and complete review of the co-op’s operations following the interim appointment of CEO Angela Evans. We have taken specific efforts to let members know that this exhaustive review consisted of re-evaluation of priorities, strategies, finances, budget, staffing, the scope of work performed by external consultants, and operational expense levels.

We have talked with members who have asked us to explain “why is it that VEA is going to raise rates after the sale of the 230kV transmission line?”  Some members have assumed that there must be missing funds from the transmission sale. The purpose of this letter is to answer these very relevant questions in a clear and transparent manner.

Immediately upon appointing Ms. Evans as interim CEO, the Board of Directors engaged the accounting firm of Hinton Burdick to conduct a transitional audit of financial activities (internal controls, cash activity and expenditures) for the period of January 1, 2016 to July 31, 2018. From the Board’s perspective, a forensic review of VEA’s financial activities was critical in order to have an absolutely clear financial picture of VEA. Hinton Burdick found no wrongdoing or mismanagement of funds – including the funds resulting from the transmission sale. Specifically, as to the worry that there must be missing funds, Hinton Burdick found “No significant transactions lacking supporting documentation, or of an unidentifiable nature, were noted.”  We are committed to immediately correcting the minor concerns and opportunities for improvement raised by Hinton Burdick, and welcome any suggestions from any members on this front.

A copy of the letter regarding the forensic audit can be found by CLICKING HERE.

Now let’s talk about how VEA has managed the funds from the transmission sale.

In September 2016, the Board of Directors approved the sale of the 230 kV transmission line. The proceeds from the sale totaled $200.6 million. The chart below accounts for every dollar of the proceeds and is based on the information that was audited by the third-party independent auditor:

230-kV (Cash at Close)  $      200,600,000
Less:
Debt on Transmission Assets  $       (80,992,416)
Transaction Closing Costs  $         (2,665,236)
Net Cash to VEA  $      116,942,348
Less:
Donation to VEA Foundation  $         (5,000,000)
Immediate Rate Stability  $       (30,000,000)
Cash to Members  $       (18,157,969)
Remaining Cash to VEA  $        63,784,379
Purchase Power Agreement  $       (59,947,489)
NET PROCEEDS   $      3,836,890
  • Cash at Close. VEA received $200.6 million for the sale of the transmission sale to GridLiance West.
  • Transmission System Debt. Nearly $81 million was used to pay the outstanding debt on the transmission system.
  • Transaction Costs. Approximately $2.7 million in closing costs was paid to brokers, bankers, and lawyers who helped close the sale. (No proceeds were paid to any current or former employee of VEA as part of the closing costs.)
  • Net Cash to VEA. Nearly $117 million.
  • VEA Foundation. $5 million was set aside for a future community center. It was never the Board’s intent for VEA to lead the development of the community center even if the previous management wanted to provide such leadership. While there is support for a center, many are opposed to the idea, including VEA members living outside of Pahrump. The development of the center should involve the community. As such, it is still being driven by a group of community leaders who are in the process of assessing community needs, establishing a trust, and developing funding and operational strategies for the community venue. VEA will continue to support the committee’s work. Meantime, VEA pledged to contribute funds and property to the effort, when the project becomes a reality and when members are in agreement.
  • Rate Stability. $30 million was set aside to offset future rate increases.
  • Cash to members. $18.1 million. Most members received $579 following the sale, plus an additional check for patronage capital related to the sale.
  • Remaining Cash (as of Dec. 31, 2017). Nearly $64 million. Used to fund 2018 operations, repayment of additional debt, and the buyout of our base load purchase power agreement.
  • Purchase Power Agreement. Approximately $60 million. With approval from the Board, VEA used the $30 million rate stability fund in addition to approximately $29 million of the remaining cash to buy down long-term power contracts that were not favorable to VEA. VEA kept energy rates stable during the recession of 2008 and the decade-long recovery by managing the Co-op’s power purchase contracts. In order to keep rates from rising to member-consumers during the recession, the cost of expensive power supply contracts was pushed into the future. This strategy used by the previous CEO, known as “blend and extend,” involves maintaining power at lower rates for a period of time with a requirement to pay much higher power prices in the future. Examination of energy prices showed that pricing using the blend and extend mechanism was no longer a good deal. Unless we exited this contract in 2018, we would experience energy price increases from $50/MWh to $69/MWh in 2019. It cost nearly $60 million to exit contracts, but the savings range from $359,100 to $371,070 per month currently, and into the foreseeable future, depending on kilo-watt hour consumption. The new power deal started delivering of power in June 2018 and cost us $35.75 MWh, or slightly more than half the cost of the power that was scheduled to be delivered to VEA this year.

But, we were promised rate stability until 2024. What happened?

We understand this sentiment. The answer to this goes along with the answer to the previous question. The Board set aside $30 million from the transmission sale to offset power cost increases from 2017-28. If these funds had not been used to buy down the previous power contracts, a much higher rate increase would have been needed to pay for VEA’s power supply. In addition, the former CEO was also counting on new revenue to subsidize VEA’s rates and keep them stable when that promise was made. Those additional revenues have either not come on line or have not produced the level of revenue that was expected. In addition, during the period of 2008 to 2018, the cost of providing electricity to our members has continued to increase, just as the cost for fuel, material, steel and groceries. Therefore, we had to make difficult decisions.

We directed CEO Angela Evans to implement cost reductions across the cooperative, including a significant reduction to outside contractor expenses, reductions to the number of management and executive positions the co-op would maintain, freezing hiring (except for critical positions), freezing wages in 2018, offering a Voluntary Separation Incentive program and then involuntary reductions in employees. These reductions in cost were implemented since Ms. Evans was appointed as interim CEO with the goal of minimizing rate impacts to our members. We refused to present our members with a rate increase if we had not first looked exhaustively at our organization.

This Board takes its responsibility seriously, and is ultimately responsible for the financial health of the Cooperative, and the choices that have been made in the past, and that are being made now. Even with all the expense reductions, a rate increase is unavoidable. We also acknowledge the lack of transparency prior to Ms. Evan’s appointment as CEO that has contributed to the questions members may have today.

So where do we go from here?

At Valley Electric Association we have refocused our Mission to demonstrate that we are committed to improving the quality of life of our communities and pledge to empower our communities to achieve their potential. We pledge to continue to reliably serve our communities in the spirit of the Seven Cooperative Principles.

 Ken Derschan is President of the VEA Board of Directors.

 Angela Evans is CEO.

David Hall – Director Amargosa Valley

Richard Johnson – Director Beatty

John Maurer – Director Fish Lake

David Dawson – Director Pahrump Valley North

Pete Gazsy – Director Pahrump Valley South