Episode Transcript
[00:00:00] Speaker A: Foreign.
[00:00:07] Speaker B: Welcome to the Buzz, a podcast by Boon Electra Cooperative. The Buzz is a monthly message to our community celebrating what it means to be a member owner of your local electric cooperative, Boone Electric Cooperative, your co op, our community.
[00:00:28] Speaker C: Welcome back to the Buzz. I'm Zach Smith, communications specialist here at Boone Electric Cooperative, and joining me today are Boone Electric Cooperative CEO Todd Cully.
[00:00:37] Speaker D: Good morning, Todd.
[00:00:38] Speaker C: Welcome to the program. Welcome back to the program. I should say.
[00:00:41] Speaker D: Yeah, good to be here.
[00:00:42] Speaker C: And Boone Electric Cooperative CFO Ryan Ulis. Ryan, welcome to the show.
[00:00:47] Speaker A: Morning, Zach.
[00:00:47] Speaker C: It's the season of giving, as some members are probably finding out right now. They're receiving a little either check in the mail or a little credit to their account in the form of capital credits. But some members might be wondering, what the heck are these capital credits and why do I get them? And that's why we're here today to discuss capital credits and all the other names that they may go by, depending on where you're from and how you've heard them described.
[00:01:12] Speaker D: That's exactly right. And it's great coming into the end of the year when Ryan and I can visit with the board of directors and show them our financial condition and everything that we know that's going on internally and externally and say, hey, here's where we're coming in on margins at the end of the year, even though we're a not for profit, we do try to generate a little bit of a modest margin.
And then from there, Ryan takes it from there, runs all kinds of analysis, and then makes a presentation to the board. And in general, if we're in good financial condition, Ryan then says.
[00:01:52] Speaker D: Give us some money.
Yeah, that's exactly right.
[00:01:56] Speaker C: It's that simple.
[00:01:57] Speaker A: And it is. I think the, the way, the simplest way to look at capital credits is it's, it's an example of it. It shows you have an ownership interest.
I don't know what happens to everybody else, but I don't generally get a lot of checks in the mail. I don't get a lot of discounts on my bills. But the ones that you do and when you do that, it's typically means that you have an absolute an interest in that or some type of ownership in that. And that's why you're receiving that money.
[00:02:22] Speaker C: Yeah, that's the way that I typically describe it to people. As not a member of Boone Electric Cooperative, my electric utility, which will go unnamed for the purposes of the podcast, I not only don't have a say in who sits on the board or how it's run, but they certainly don't send me a check of any kind at the end of the year.
[00:02:41] Speaker D: Yeah, exactly. And you know, for us, and I can speak on behalf of the employees and the organization as we come into this part of the year. We know that the discussion on patronage capital, you know, the members financial interests in the organization is going to come up as a, as a hot topic and an important topic.
And so what we do is we become, I think, even more conscious of how we spend the members money. What are we using it on, what kind of value do we receive on a project if we invest in it, do we really need to solve that issue with their money or is there another option? And we know that in the cases where we can preserve the members capital that, that will enhance the probability of those dollars going back into their pocket. So it provides us a natural inclination to have good cost control without missing on an opportunity to truly invest. So there's a balancing act there. And then Ryan has to look at the dollars and then also the years in which they were allocated and he can dive into that a little bit about how the board makes decisions on what years that, that patronage is retired from. Because there's a difference between an allocation from a previous year or current year and a retirement which is the actual cash and the closing of that amount. So there's a lot of philosophy, a lot of thinking that in analysis that, that Ryan and his employees have to do as part of that process.
[00:04:15] Speaker A: It's really an ongoing process. It's something that we think about each and every month, each and every year, whether we're doing a budget, whether we're doing a long range forecast.
It isn't as simple as, you know, we get our monthly bank statements and oh, we have some extra cash in the bank, let's give some back to the members. It's, it's not that simple. It's, it's a lot bigger picture. It really is based on, you know, what the board sets as financial policies and a foundation of how we want to run the cooperative financially. So you know, the, the members are owners and we're using their investment that they give us through paying their electric bills and making sure that the utility is running correctly, that we're getting good quality service, you know, not too many outages and doing the things that are necessary to make this place run the way it needs to make. So us giving that money back is a sign that we're doing our jobs efficiently and effectively. And when we do have a little bit extra and we look at the financials, we make that determination that we can return that money to the members.
[00:05:18] Speaker C: At that time you just mentioned, there's a little bit more to it than just, okay, we made some extra money this month, let's just give some of it back. How exactly does the board make that decision? On, okay, we've covered our bases, financially speaking, we're in a position where we can retire credits because I think some people hear not for profit and they just assume, okay, well then whatever profit we made, that's just going to go back to the membership. But that doesn't necessarily take into account the business or utility aspect of being a not for profit electric utility.
[00:05:50] Speaker A: Yeah, there's many ways that you can consider a look at your financials and I think not for profit is sometimes misunderstood because one, not for profit might mean that every single penny they get, they're going to spend.
And in the case of a charity, that might be a great thing.
In our sense, not for profit means is that we're not here to make money.
Every penny above and beyond what it costs to run the cooperative, it belongs to somebody else. And in this case it's a member.
Now where we base that on is we still have other obligations.
Primarily our primary obligation is financially at least speaking, is to our creditors or people that we have borrowed money from because the cooperative is not entirely financed by the members rates we do have go out and borrow money from cfc, our primary, our majority lender. So they have financial ratios that they put in the covenants of their loan agreement saying, hey, you have to meet these metrics and that shows that you're financially stable and you're paying your debt to us. And those are some of the big things that we consider before we look at, you know, the equity that we have and what portions of that should be returned to the membership.
[00:07:01] Speaker C: And then that amount that's ultimately set aside that, okay, we're going to retire this amount. How is that divided? I guess on a member to member basis. How, how does that determination get made?
[00:07:11] Speaker A: We look at it overall first and what we look at is we try to do a, basically a 20 year rotation. And what that means is, is that your equity investment, we are using that to make an investment in the capital of the cooperative. So the first thing we look at is what's the oldest equity or margins that was allocated to the membership that's out there and, and how we could return that. And we try to do that in a 20 year rotation. The other thing that we do is we also return some money for the most recent year. And that does a couple things. One is it shows that it teaches those new members that they're a member owner of the cooperative. But it also gives me a buffer. If I'm trying to budget a bottom line and I'm budgeting very thin and I don't have any margin for error if we have a, a major storm or if there's some type of black swan event that occurs. And as everybody knows, we've had a couple of those in the last few years that could drastically impact our costs. If I don't have a buffer, that can be a little bit dangerous. So having that money to give back and budget a little bit more margins than say, instead of giving that money back at the end of the year, this gives me a little bit of buffer to move around in that sense.
[00:08:25] Speaker C: Okay.
[00:08:25] Speaker D: You know, being organized, I think it was April of 1936 when the CO op first started very basic operations. And for the first few years, I, I haven't seen those financials, but I can't imagine that they came close to covering all their costs to get started. And they had low interest loans, never grants, but low interest loans from the government to get started.
And so it was probably 15 to 20 years in to operating somewhere in the mid-50s to late-50s before they said, oh my goodness, we've covered our cost and we have a little bit extra. And they're like. And so they're like, okay, that came from the members and we ought to see about returning that to them.
But they would have been like, but we can't really afford to return this modest amount to them at this point because we have these heavy capital needs building out the system. We're building things that we need to really finance over 30 or 35 years, if not more. And so it really becomes year 39 or 40 in operation when we can afford to go back and pay off those previous year's margins with current year margins, which hopefully are a little bit larger as the system continues to grow.
Part of the dollars that Ryan's talking about that are retired or returned to the members today are coming from that era of 20 years ago or so somewhere right in that ballpark. Some are more current because with this membership we heard yesterday in the board meeting, we have around 36,000 meters on the system.
We have around 28,000 members.
13,000 of those members are new members.
So almost half had been on us for about five years.
So this cooperative has what we call pretty high churn rate and One way that the board can help those members know, especially those newer members know that they're a member of the cooperative is to provide some return of their patronage from one of these very current years. And so it builds cooperative awareness. And they soon realize that they're a part of something much larger than just themselves.
And. And then of course, we promote all the things that we do in the community and all that, that were much more than just a business.
[00:10:49] Speaker A: Yeah, I think 50 years ago, 75 years ago, it was easy for a member to see that the money they were given, the cooperative, even just to pay their electric bill, was going directly towards expanding the lines to serve their neighbors and their friends and people that they saw at church or at school or whatever. Today, I think as the. The quadratic's been established for almost 100 years, I think it's hard for members to make that connection. But that. And it's not a common model, but it's an effective model. It's always been a very effective model. And it is still true to this day that every dollar that you're paying us is going towards the maintenance and the operation and the construction and the expansion of this utility to bring other people onto the system.
[00:11:31] Speaker C: Like you said, Ryan, it's something that is maybe not as obvious as it was 90 something years ago when everything was being built out, but it's still at work today. That policy that we have where we're paying some money back to new members, paying some money back to longer term members, that's not necessarily the same at every co op. Right. That's kind of a singular thing to Boone.
[00:11:54] Speaker A: Yeah. There's so many different things that impact that. Whether it just be the philosophy of the cooperative, what the board makes decisions, but it all gets as deep as what are your state laws. From state to state, the laws that impact how a cooperative is set to operate, it can be very different. There are many cooperatives out there that are under agreements where they can't return specific types of patronage. Capital that are allocated in the Southeast. TVA or Tennessee Valley Authority is probably one of the largest GNTs in the country. And the money that they have and they allocate to their member cooperatives by bylaws cannot be returned. So these Coopers are building a ton of equity that just sits on the books. We don't have that situation in Missouri and we definitely don't have that here in Columbia. We basically look at every dollar that's returned to us. We have dollars returned to us from our G and T who we're buying power from. We also do business with a lot of companies or partner relationships as well. And they're a cooperative based business. So the transformers that we're buying, those are constructed and built by Arkansas Electric Cooperative. And, and they are a cooperative as well. So any profit that they make is coming back to us based on the dollars that we spend to them. Our lender, cfc, they're the same situation is that we're getting an allocation of Patriots capital back to us and all of that money is always returned to the cooperative. I think in the budget that we just approved a couple of days ago at our, at our November meeting, we have over $700,000 from businesses other than our primary power provider.
So overall we probably receive about $3 million a year in money returned to us through business relationships. And all that money becomes allocated and at some point returned to our membership.
[00:13:43] Speaker C: Just as the same. As a member of Boone Electric Cooperative is a member of our cooperative, we are a member of other cooperatives that return.
[00:13:51] Speaker A: Absolutely. And you're doing business with those types of companies. But that puts a lot of, it takes a lot of pressure off of rates because I'm not sitting here looking at the money that I need to generate to operate the cooperative, just coming from a single source or our members. I'm able to use these other dollars to meet my financial obligations as well.
[00:14:11] Speaker C: This is a question that I hear a lot this time of year specifically because people know this is when we retire the capital credits. Can I just bank on receiving that every year? I mean, is that something that is a guarantee year to year?
[00:14:24] Speaker D: So certainly the expectation is there for the employees to have cost control always forefront on their mind. And certainly the expectation is there for the board understanding, you know, the importance of letting our members know that they're true patrons of the, of the business. And I think our members also have come to expect it because we have a strong history of being able to, to provide it. But the short answer is there are certainly no guarantees. Mother nature can intervene and we can have some significant short term expenses where it's more affordable to take that patronage and address the issue than it is to maybe approach a lender or use a line of credit or something along those lines.
So my answer would be that it's not guaranteed, but I would be surprised if we weren't in a position to be able to provide that back to our members because of the way that our CFO here budgets and the assumptions that are built into that. Now asking the same question to Ryan he may have a different take on it and give you a completely different answer.
[00:15:34] Speaker A: Well, I mean, I think it is important to say that it is absolutely not guaranteed. But there is a long standing history, 50 plus years of cooperative doing this.
And we keep talking about, you know, adverse conditions or things that might happen. It's not that we're not planning for those because we are planning for those as well. So it's not like if you just have one single event. If we have a big snowstorm in a week and we got 20,000 people out of power for a week, that's not going to determine whether or not we have allocations or return money to the membership next year.
[00:16:09] Speaker A: We plan a little bit better than that. But I think we have a board that looks at the financial status of the cooperative. They listen to Todd and myself when we have these conversations, but they also see the pressure of saying, hey, we have a long history of this and it's important for us to remember who we are and what we're here for and who owns a co op. And this is a big deal to us. So your individual check, you may look at it one year and say, hey, this isn't that big of a deal, but if you. In total it is and it means a lot to us. So guarantee. No, but it's definitely one of our primary financial goals at the cooperative. On an annual basis.
[00:16:50] Speaker D: We still have those members that have been on our lines for 20 plus years while they still have that investment. We made an allocation 20 years ago. They have the true ownership of it even though it resides here. But those dollars are still sitting here. And so even this year, some of the money that comes back through our process to our members is going to be that 20 year money coming back.
And you know, they deserve to have legal access to that and have their investment back in, you know, the due course of business. And you know, we've talked a little bit about how many members are newer members of the cooperative.
[00:17:28] Speaker A: Right.
[00:17:28] Speaker D: But we haven't forgotten where we've come from, you know, who started to co op and, and, and all that years ago. That's still very much in our, in our DNA. And so we're always going to have that 20 year money on the books and retiring it going forward as part of this calculation. And that's a, that's a critical part of this that goes into the board's decision making also.
[00:17:50] Speaker C: Yeah, it all goes back to that balancing act that you've both talked about, I think.
[00:17:54] Speaker A: Yeah. One of the big questions that I always get when I'm around town is, you know, unfortunately power costs and other expenses keep continuing to rise and we, we have to adjust rates and increase rates occasionally and people will ask, well, how come you're giving me money back and then you're turning right around and raise my rates? Well, it's not the same money. You know, the, the money that we're giving back is money that was loaned to us through paying your, your, your bill years ago. Most of it is going to be, you know, as much as like Todd mentioned earlier, 20 years old. There is some current money and that's that buffer that year. But raising rates is for future expenses. So that's how that's going into my planning for what I need for that next year or the following years and things like that. So every dollar is not the same dollar. So it's more of a, you know, I've got to give this dollar back to this person. But there does take a need for a larger investment going forward from other members.
[00:18:50] Speaker D: So, and some of those expenses going forward, if we look at rate pressure going forward are for us to repay 30 year loans for new substation transformers that are multimillions of dollars. So we were putting some of those in now, but we're not asking our members to pay all of that right now. That's going to be paid by the members that utilize that asset over the next 30 plus years. So it's going to be financed with the debt that we get from cfc. And that's what Ryan's talking about. If, if we're seeing a, you know, increased debt pressure to cover that asset to maintain reliability, that the members expect that future member is going to have their fair share of that cost allocated to them through, through the whole process here.
[00:19:38] Speaker A: Yeah, we try to balance where we get the money because if we took all the money from the members through rates, our rates would be, be significantly higher than what they are. If we use complete debt from, from lending institutions, we'd have the same scenario. We'd be paying a lot more interest expense which would impact our rates and I'd have to raise those as well. So there's a really, there's a balance so of where we're getting our money from and we call that equity level. So we look at, you know, how much money do we want from our membership, we look at the debt portfolio, we try to manage that and get a nice blend to have the most positive impact on the financials and the money that we need to invest in the cooperative going forward.
[00:20:17] Speaker C: I like that you made that delineation between the capital credits being for the investment that was already made.
The rate increases when they occur, are forecasting for future expenses and ideally 20 or however many years down the road that money that's going into something like a rate increase would be part of what you're getting back as capital credits in the future.
[00:20:40] Speaker A: Yeah, absolutely.
[00:20:42] Speaker D: I'd say overall, looking at the, looking at the process.
[00:20:48] Speaker D: It'S wonderful to be part of an organization that truly has the members best interests at heart. And there are times where we have to make decisions, even long range decisions that seem kind of difficult to digest in the moment. But over time they provide the greatest opportunity to maintain the most affordable, reliable system possible.
And it's, I'm, I'm glad to be a part of that, Proud to be a part of it and look forward to us continuing to serve the members. Our employees know that we work for the member and these are their assets. These chairs in this room are owned by our members.
And like everything else around here, we're going to continue to take care of it.
[00:21:34] Speaker A: I think it's, it's amazing to think that the cooperative structure that was thought of, you know, 80 to 100 years ago and sure you can go back further than that. Examples of cooperatives, how it truly is the best way to do our business.
This really isn't a business that should be ran by profit seeking. And I know that maybe kind of sounds a little weird for me being a financial guy, but it really is the need to serve and the desire to serve and to meet those obligations. So the cooperative structure allows us to really focus on that and what we're really truly here for, we do all take that very serious here, always have.
[00:22:10] Speaker C: Well, I'm just curious, from your standpoint, don't you think that that maybe makes it a little bit easier just in terms of, you know, you're not sitting there every quarter, every year trying to make sure that we're profiting for stakeholders necessarily.
[00:22:22] Speaker A: It's, it actually makes it harder.
[00:22:24] Speaker C: Okay.
[00:22:25] Speaker A: It actually makes, I think it puts, I don't want to use the term burden, but it puts a, it puts a higher degree of responsibility on you because I think if you sit back and you know, it's one thing if I'm sitting at a, at a slot machine and I'm, I'm going to throw another 20 bucks in and it's my money, I just know it's not going to impact me. But if I'm sitting there, I'm throwing somebody else's money into the machine. Maybe I'm thinking a little bit harder about that. So I think because the fact that we're not using our own money or that I'm not returning that money to just some nameless person somewhere else and it's just increasing their stock portfolio, I think it means more to us because it's our neighbors, it's our friends, the people we live with, and every single employee here, we have our friends and neighbors talking to us about the cooperative on a regular basis. And I get that quite a bit.
So it's definitely not easier. It's definitely more responsibility knowing that.
[00:23:20] Speaker D: Yeah. Each month we both step into the board meeting and we were answerable to the members that are present. So all the membership elects the nine that are sitting there and they ask questions. And we have to be open and transparent and we have strict auditing standards that we have to adhere to.
And both Ryan and I are signing our names each month on those financial statements that they're truly the most accurate numbers that we have and know and that there's no malfeasance of any sort involved in it. Or we go to the big house and so he will do. We're answerable to the members money and that can be onerous and we take it seriously. But at the same time, it's an honor and it feels great knowing that we do our best month in and month out.
[00:24:11] Speaker C: All goes back to that line. Your co, op, our community. It's like as you just said, Ryan, it's not nameless person somewhere that you're never going to see. It's the friends, neighbors, family members that you're going to see every week, if not every day.
[00:24:24] Speaker A: Absolutely.
[00:24:25] Speaker C: Well, thank you guys for both coming in and talking about that. I know it's different subject for us here on the podcast, but it's something that we usually get questions about this time of year and not always obvious to people who don't deal with it every day. What exactly Capital credits are, where they come from. So thank you all for coming in and discussing that. It's been a pleasure.
[00:24:44] Speaker D: Thank you.
[00:24:45] Speaker A: Thank you, Zach.
[00:24:45] Speaker D: Appreciate it.
[00:24:46] Speaker C: Thank you all for joining us. Be sure to come back next month and until then, we'll see you somewhere down the line.
[00:24:54] Speaker B: Thank you for tuning in to the Buzz, a podcast by Boone Electric Cooperative. To subscribe or for more information, you can find us on Facebook, Instagram X and LinkedIn. And of course, you can always visit us 247 at Boonelectric Co op. Boone Electric Cooperative, your co op our community.
