July 13, 2009
Ken Silverstein
EnergyBiz Insider
Editor-in-Chief
Despite a credit crunch, the nation's rural cooperatives are exemplifying relative financial strength. Such entities are showing that they are able to secure lines of credit to conduct their operations and to build generation and transmission.
Those utilities have played a vital role in transforming their communities from desolate areas to ones flush with modern services. But the job is not finished and nearly all must continue to invest in their infrastructure. Now that the economy is on the verge of rebounding, they face a choice between contracting for wholesale power and constructing their own power plants.
Altogether, $7.2 billion in loans are pending to finance 16 projects comprising 3,650 megawatts over 10 years. That's according to the National Rural Electric Cooperative Association, which also says that the primary source of such funding -- the Rural Electric Loan Program -- allocated $6.6 billion to lending last year. It expects the demand for such loans to escalate, reporting that its survey indicates that $57 billion will be needed over the next 10 years for deals totaling 18,106 megawatts.
Two-thirds of the projects on the drawing board are expected to be fueled by natural gas and 22 percent by coal. Interestingly, not long ago coal had comprised about 40 percent of future plans. But with the national emphasis now on reducing greenhouse gas emissions, the rural cooperatives are looking at greener sources and four of them in the Southeast have tentative plans to build nuclear facilities.
In fact, those utilities pride themselves not only on their financial prudence that has allowed them to endure these hard times but also on leading the way to a sustainable future. As of June 2009, the cooperative association says that its members either owned or purchased 2,286 megawatts of green energy. Of that, 1,789 megawatts has been purchased and 497 megawatts is owned. Wind, by far the largest segment, doubled in size between 2006 and 2009.
"Even if we don't own, we are purchasing renewable energy on long-term contracts," says Michael Leitman, a financial analyst with the cooperatives association. "The owned share should grow in the next few years."
Electric cooperatives are private, non-profit companies that provide power and delivery services to their customers, who are actually members and owners of the co-op. The business model evolved in the 1930s with the need to electrify rural America when it was unprofitable for investor-owned companies to serve such a dispersed population. The cooperatives consist of generation and transmission entities that buy or own their power and which deliver that electricity to their distribution cooperative members at cost-based rates. Local distribution cooperatives then deliver it to retail customers.
Permanent Place
According to Standard & Poor's, cooperatives serve about 12 percent of the U.S. population and own about 7 percent of operational plant capacity here. Generation and transmission cooperatives as well as distribution company cooperatives have routinely maintained their investment grade ratings, as evaluated by S&P. There are 65 of the former and 865 of the latter, all in the United States.
Electric cooperatives have traditionally relied on low-cost debt provided by the federal government, set in place so that rural areas will be served. But such sources require a lengthy application process, which has forced many to look for alternative and private sources of capital. RUS, the Rural Utilities Service that is part of the Department of Agriculture and which lends monies appropriated by Congress, is the provider of choice for many cooperatives' long-term needs.
Meantime, the National Utilities Cooperative Finance Corp., which provides short-term and intermediate financing and which is privately owned, says that it has just attained a $1 billion revolving line of credit. Typically, cooperatives will come to "National Rural" after they have submitted an application to the RUS and use that money as a bridge loan.
"In spite of the extreme credit contraction in the capital markets, National Rural was able to arrange this revolving credit facility," says Andrew Don, the vice president of capital market relations. "At a time when many other companies are having difficulty securing the credit they need, closing this revolver is a testament to the financial strength of National Rural and electric cooperatives."
Critics of rural electric cooperatives say that they are inherently inefficient, largely because they obtain federally subsidized loans. Investor-owned utilities, by comparison, have greater economies of scale that positions them to participate in debt and equity markets to gain the much needed capital for future expansion. The biggest cooperatives, they add, are on the periphery of major cities where private utilities could do a better job of serving customers and modernizing their infrastructure.
But rural electric cooperatives and investor-owned utilities have different purposes. Proponents of rural electric companies say that while they are concerned about internal rates of returns, they are unconcerned about delivering value to shareholders and that they therefore make decisions that are exclusively in the best interest of their members.
"They know why they exist -- to serve, not to profit," says Ned Leonard, a vice president for the Center for Energy and Economic Development. "Their accumulated assets in power plants, pollution control, dams and reservoirs, coal mines, limestone quarries, rail equipment, gasification facilities, and transmission and distribution systems are impressive and more often than not, state-of-the-art."
Rural cooperatives have dug a permanent place in the American landscape. They have not only served sparse regions but they have also remained on sound footing. Their endurance and financial wherewithal will therefore continue to enable them to invest in their communities.
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