Audit critical of East Kentucky Power Co-operative

By BRUCE SCHREINER
Thu April 22, 2010

Frankfort, KY – East Kentucky Power Cooperative Inc. was blistered Thursday in an independent audit that raised concerns about the management and finances of the debt-ridden cooperative that produces power for a broad swath of central and eastern Kentucky.

The review said the Winchester-based cooperative is hurt by rate policies that have weakened its financial condition. In a slap at East Kentucky Power's board, the audit said needed changes will likely have spring up from the cooperative's member-customers.

The audit by The Liberty Consulting Group was ordered by the Kentucky Public Service Commission after East Kentucky Power's financial condition declined in recent years.

"What we are hopeful is that East Kentucky's management ... will recognize this as an opportunity to improve the corporation, to get a better handle on their financial condition," said PSC deputy executive director David S. Samford.

Samford said the utility's reaction to the initial findings last November ranged "somewhere between dismissive and disinterested." More recently, he said, there have been signs the board is taking the audit more seriously.

East Kentucky Power board chairman Wayne Stratton told reporters Thursday that the board at the outset was "shocked" by the audit.

"It may have taken them a while for the true depth of the comments to register," he said. "But once they were registered within that board, we're dedicated and committed to do whatever it takes to be a better board, to work with the PSC and to make East Kentucky a better unit."

Anthony "Tony" Campbell, the cooperative's president and CEO, said the utility has hired an internal auditor and adopted a whistleblower policy among other changes.

East Kentucky Power is a not-for-profit, member-owned generation and transmission cooperative. It generates and transmits electricity to 16 member-owned cooperatives, which serve more than 500,000 homes, farms and businesses in eastern and central Kentucky.

Samford pegged East Kentucky Power's current long-term debt at $2.6 billion, but said that debt load is on track to reach $4 billion to $4.6 billion.

The audit said the utility is threatened by a "real, continuing and hazardous conflict" created by its priority to keep rates low at the expense of its financial condition.

That has led to low equity ratios and under-spending of capital funds for needed improvements, yet those rates are higher than those of neighboring utilities, it said.

Samford said that given the utility's debt load, it raises the question, "can 500,000 customers pay off a $4 billion debt?" He said the worst-case scenario is that East Kentucky's rates continue to rise along with its debt.

"At some point the concern is the rates could get so high that customers would not really be able to afford that," he said.

Stratton said the utility's financial condition is improving, expressing confidence it's "on the right track." He noted that the cooperative has logged four consecutive years of positive margins, totaling more than $110 million.

Campbell said East Kentucky will file two requests with the PSC in coming days aimed at further bolstering its financial situation.

First, the utility will seek approval to establish a three-year revolving credit line not to exceed $500 million, Campbell said. That would replace its existing $650 million revolving credit line, which expires later this year and has been paid down significantly, he said.

Also, East Kentucky will file a notice for a rate increase that would generate an additional $50 million in annual revenue, he said. The increase would amount, on average, to about $4 per month for the typical household. The co-op will ask that it take effect on Jan. 1.

Campbell said the rate increase wasn't driven by the audit, but said the decision was made earlier, following a review of projected costs.

The audit also cited inadequate planning by the utility's board, a lack of oversight and ineffectiveness in setting a course for the co-op beyond keeping rates as low as possible. It said the board should pursue rate strategies that favor the utility's financial health.

With the audit's release, the next step is for Liberty and East Kentucky to develop action plans expected to be completed in early June.

East Kentucky paid for the approximately $200,000 audit.