REPORT FINDS DEBT ON TRACK TO REACH OVER $4B
EKPC board 'shocked' by audits findings

By MARLA TONCRAY, News Editor | Posted: Thursday, April 22, 2010

WINCHESTER -- In its first management audit since 2001, East Kentucky Power Cooperative officials have been advised to "make substantial improvements in its governance and financial condition" to remain viable.

The recommendation has come from the Kentucky Public Service Commission, following an independent audit conducted by The Liberty Consulting Group.

"This report raises serious questions which the PSC intends to explore," said PSC Chairman David Armstrong. "We look forward to working with EKPC and its member cooperatives as they work to address the audit's findings and recommendations."

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 to spring up from the cooperative's member-customers.

In a press release from the PSC Thursday, officials said the audit was ordered after EKPC's financial condition had declined for several years "as demonstrated by deteriorating financial ratios and a prior default on credit agreements."

"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. EKPC owns and operates the Spurlock Power Plant in Mason County.

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 EKPC will file with the PSC next week for another rate increase to be effective January 2011. The request for $50 million, if approved, is driven by repayment of new construction projects, a softening in the load growth at the cooperative, which has leveled off after a 4 percent growth rate per year over the last decade, and for operation and maintenance of its power plants, Campbell said.

The increase would amount on average to about $4 per month for residential customers.

The cooperative was granted a $19 million rate increase in December 2007 and a $59.5 million rate increase in March 2009.

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.

Already, EKPC is taking steps to address many of the issues raised in the report, Stratton said. The Board has engaged a consultant to comprehensively assess and enhance governance policies, guidelines and practices, with emphasis on industry best practices. The Board and management also are launching a fresh strategic planning initiative to establish the course for the organization.

"This audit report details opportunities to improve," Campbell said. "Working hand in hand with the Commission, we will seize those opportunities and we will become a better organization."

The Associated Press contributed to the story.

Contact Marla Toncray at marla.toncray@lee.net or call 606-564-9091, ext. 275.