Impacts of financial decisions
Cooperative Goals Involve Managing Priorities
An electric cooperative general manager once discussed his performance review with me. He said that his board wanted to:
- Promote growth and reliability in the electric distribution system
- Maintain a strong capital credit retirement program
- Limit future long-term borrowing
- Raise equity levels
- Keep electric rates at their current levels
This may sound like a great idea, but both of us knew achieving all of these goals simultaneously was not possible.
Define objectives and weigh priorities
While individually the concepts are beneficial, they are also interwoven in such a way that each objective must be weighed, prioritized, and examined in relation to the other goals. Increases in electric rates are never popular. However, both capital credit retirement programs and capital projects require cash flow that could come from increased rates. Most cooperatives utilize long-term borrowing to fund their capital projects, but if this funding source is unavailable, other strategies may need to be employed. For example, a capital credit retirement program could be limited to free up cash flow for projects that might require borrowing. Alternatively, capital projects could be postponed until excess funds are available.
Identify a peer group and benchmark
Equity management begins with an honest assessment of the cooperative’s current status and future goals. Electric cooperative directors should compare their organizations to other cooperatives with similar profiles. Sometimes, comparable cooperatives may be in different states, borrow from different lenders, or purchase power from different sources. Size, load profile, debt, equity levels, and electric rate structure can all be important factors in considering comparable cooperatives.
Once the directors understand how the cooperative compares to others, you can prioritize future goals together. However, this goal-setting process should always consider that each of the objectives has an impact on the others. When priorities have been set, a strategic plan can be developed. With a well-developed plan, management can be held accountable for achieving the goals and objectives identified in the plan.
How we can help
CLA can offer your organization insights into benchmarking, capital projects, equity issues, or long-term borrowing. We can facilitate strategic discussions with the board of directors and management on the unique issues cooperatives are facing.