Credit check is in the mail

Capital retirement brings up future issues at MEA

By RINDI WHITE-Frontiersman reporter

PALMER -- The Matanuska Electric Association Board of Directors agreed to retire nearly $1.5 million in capital credits Monday, and members will begin receiving checks from their investments prior to Thanksgiving.

The capital credit retirement is a standing part of MEA's Equity Management Plan, which requires that capital credits be retired on a 20-year cycle. There's a second caveat: that the capital credit retirement be between 1 and 4 percent of MEA's assigned equity. Don Zoerb, MEA's director of administration, said the company maintains about $75 million in equity, although that number fluctuates considerably throughout the year.

For the past several years, MEA has retired capital credits totaling about 2 percent of its equity. In this cycle, MEA will retire more than $860,000 in capital credits still on the books from 1983. To reach the 2-percent equity level, about $390,000 will be retired from existing equity as well. Retiring from the two areas means, not only will longtime customers receive cash returns on their investment in the company, customers who have been with the company less than 20 years will also see benefits. Amounts of capital credit checks, Zoerb said, are difficult to estimate because they vary according to customer class, use of service and length of membership.

The current equity plan has worked well so far, but Zoerb, in report about the credit retirement, said the board may have to change current policies in the coming years. The cooperative's margins from years past will exceed the 2-percent figure, Zoerb said, and it won't be long before the current 4-percent margin is exceeded as well.

"The mid-1980s marked the beginning of a period of rapid equity growth for MEA," Zoerb wrote. "Margins were approximately $1.6 million in 1984, $2.9 million in 1985, and ranged from $4.1 to $5.5 million during each of the next seven years."

The larger numbers speak to a change in philosophy and management at MEA 20 years ago, Zoerb said, and, in his memo, he said it may be time for MEA's board members to take another look at the Equity Management Plan. The plan outlines the cooperative's financial goals and was last revised in 1995.

"MEA, 25 years ago, from a financial point of view, was a completely different organization," Zoerb said. "It was not nearly as healthy as it is today."

In the late 1970s and early 1980s, Zoerb said, the board recognized its somewhat precarious financial position and made a decision to get on more solid ground.

"They were following a plan back then and they were doing it very well," Zoerb said. Part of that plan was to develop equity and take care of debt. One of the primary sources of debt, he explained, was through federal lending programs. But Congress, in the early 1980s, decided as a public policy matter to lessen the dependence of rural electric cooperatives on federal lending programs. One way they went about achieving that reduced dependence was to offer discounts for paying off federally owed debt.

"We received, I believe, a $10 million discount when we paid off all of our loans," Zoerb said. The loans were paid off in 1994, he said.

While MEA went through that period, the co-op's emphasis was on building equity and gaining financial ground. As a result, the margins were considerably larger than those of earlier years. In a few years, that will mean retiring capital credits for those flush years would take more than the 2 percent of MEA's equity.

"At today's equity levels it would take a retirement in the 6-percent range to retire a $4+ million year," Zoerb wrote. "By contrast, only 1.5 percent of this year's retirement is needed to cover estate payments and maintain the 20-year cycle."

Although MEA's goals shifted again when Wayne Carmony became the general manager in 1994 and it's currently on a maintenance-type of budget plan, there are several high-equity years coming up on the 20-year cycle that have to be planned for.

Aside from suggesting the plan be looked at again, Zoerb said, there aren't any recommendations on the table as to how, specifically, the plan should be changed -- if it's changed. But the board has several options.

"How does the capital credit retirement percentage relate to what the equity goal is?" Zoerb said is one of the potential questions the board could address as they begin to consider changes to the equity management plan. Another thing to consider he said -- a point that was reiterated at MEA's Monday meeting -- is that, at MEA's 2002 annual meeting, members were asked to advise the board whether they, in the future, would like to see more emphasis placed on the retirement of capital credits, on reducing rates, or keep the emphasis as it is; split between the two. By a significant majority, MEA members said they'd rather see the emphasis placed on reducing rates.

"That's also one of the variables that has to be factored into the mix," Zoerb said.

But, he pointed out, MEA has some time to consider the matter. The current policy of retiring 2 percent of its equity through capital credits will be feasible for at least another year and a half, and Zoerb said otherwise the co-op's equity plan is ticking right along.

"We're right on track with where we expected to be right now," Zoerb said.

Decisions are on the horizon, however, that could have an effect on MEA's financial picture, and Zoerb said MEA staff are trying to plan ahead -- and some of that planning may be done through revisions to the equity management plan.

"There are some major uncertainties facing us in the future," Zoerb said, "the most significant of which is the expiration of our power-supply contract in 2014."

While that may seem a long time away, MEA spokesman Mike Pauley said things like buildings to house generation facilities, if that were to be how MEA obtained its power, would require a long permitting process.

"We're in a serious planning mode right now," Zoerb said.