© Anya Hondel
© Don Pitcher
Your Member-Owned Cooperative
2017 Annual Report
MESSAGE from the Board & Management One of HEA Board of Directors’ biggest surprises of late; our members’ vote in late 2016 to reject independence from the Regulatory Commission of Alaska (RCA). In other words, “Local Control.” Among other things on the Board, we have learned to, “always remember to test our assumptions.” Before engaging in the Local Control vote, we had not shopped around our thoughts to share our considerations and get feedback. Your Board continues to learn and you will see the value of learning, embodied in each of three long-term initiatives identified at a valuable strategic planning session in October 2017. The electric utility industry around the world, in the U.S., and in Alaska faces a myriad of social and technological drivers for change that have potential to upend our economic environment at intervals of three to 15 years. For example, in 2010 the RCA decided to decouple the price of Cook Inlet natural gas from lower-48 Henry Hub indexed prices. Over the next five years, the new rate design predictably led to higher costs for natural gas, roughly doubling what we paid in previous years and the ability for utilities to secure financially attractive long-term supply contracts diminished greatly. With the days of securing multiple decades-long natural gas contracts (with commensurate price stability and predictability) behind us, short-term natural gas contracts have added uncertainty and risk in our efforts to Brad Janorschke deliver members reliable electricity General Manager at stable prices. As a result of the increased risk, HEA’s efforts moving forward and reflected in our previously mentioned strategic plan include continuing the efforts to increase the efficiency of existing assets and secure additional resources to generate electricity that are not dependent on fossil fuel. Turning to the future, your Board sees several short-term and long-term strategic initiatives. Our first strategic initiative is
Mission
to reduce our dependence on natural gas and diversify our primary energy source portfolio. This means increasing efficiency measures and adopting renewables when and to the extent we can do so, wisely. The second strategic initiative is to engage effectively in ongoing discussions about re-structuring management of Alaska’s inter-connected Railbelt electrical grid. This has involved a largescale collaborative effort among the utilities to analyze potential benefits that might accrue by reorganizing the methods we use to deliver wholesale power on the Railbelt. Railbelt-scale conversaDan Chay HEA Board President tions about re-organization are both arcane and complex — and not entirely without political aspects. In addition, most Railbeltlevel engagements occur in Anchorage, this already involves increased travel costs for management, staff, and your Board. The third strategic initiative we identified pertains to your Board’s desire to improve communications with you, our members. Better yet, improve on a two-way communication so that we can provide better service and make better decisions. We would like to share information that you might find helpful and engages you, to help us in an informed way in our decision-making challenges. When the HEA staff and Board can work with you effectively, we can be MORE POWERFUL TOGETHER. In closing, we would like to acknowledge HEA’s hardworking staff and Board for an outstanding year as we have accomplished another successful year and we look forward to numerous opportunities in the future. Dan Chay, HEA Board President Brad Janorschke, General Manager
To safely provide reliable electricity to our Vision For our members and community to benefit from members and our community through superior customer service reliable electricity and superior customer service through Homer and innovative energy solutions at fair and reasonable prices. Electric’s leadership in the application of innovative energy solutions at fair and reasonable prices.
2018–2020 STRATEGIC PLAN INITIATIVES The following strategic initiatives were developed by the Homer Electric Association, Inc. (HEA) board and management team and were based on an in-depth review of internal capabilities and external business drivers. These three initiatives represent the key areas of focus for our team, for the next three years. 1. Reduce HEA’s overall dependence on natural gas through: a) Adoption of increased efficiency measures; b) Use of alternative energy sources, including specifically renewables; and c) Adoption of strategies to control HEA’s future price exposure.
2. Engage with the other Railbelt utilities, regulators and other key third parties to best position HEA in the evolution of Railbelt operations. HEA Board of Directors will identify and develop a plan to engage in peer-to-peer events to further discussion and cooperation in Railbelt development. 3. Develop and implement a plan to increase engagement with HEA members, of all ages through education, learning, and communication about cooperative operations, strategic initiatives, and the energy industry, utilizing innovative technology platforms.
MORE POWERFUL TOGETHER Homer Electric Association, Inc. (HEA) is more than just a utility provider. Homer Electric employees are committed to building even stronger connections with our members and the communities we serve. We are a lifeline. We are cooperative power. We are more powerful together.
Expert
Innovative
Local
Homer Electric is more than an energy company. We offer solutions and find alternatives. Your cooperative listens to our members’ ideas and goals. Homer Electric is more than power poles and wires. We are building a launch pad for future economic growth. We are each part of the local lifeline to support and strengthen our communities. We are cooperative power. We are more powerful together.
Your electric cooperative is your resource for power, information on the energy industry and creates learning opportunities for our members of all ages throughout the year. We are cooperative power. We are more powerful together. Homer Electric members are more than just customers. We are local. We are neighbors, businesses, schools, organizations – we are partners with one another. We offer community outreach programs and support local non-profits. Homer Electric is the Kenai Peninsula’s advocate within Railbelt utility issues. We are cooperative power. We are more powerful together.
2017 YEAR IN REVIEW One of Homer Electric’s strategic goals is to reduce our overall dependence on natural gas and continually make improvements
Finding Innovative Solutions to maximize efficient use of our existing infrastructure. Here are some highlights from our 2017 projects toward that goal.
Battle Creek Project In an effort to increase the annual output of the stateowned Bradley Lake Hydroelectric Plant, the upcoming Battle Creek Project will divert runoff from the Battle Creek Glacier into Bradley Lake. The project will enable the facility, which currently produces the lowest cost power between Homer and Fairbanks, to increase its annual output by about 10% (enough to serve almost 5,500 homes) for the next 80 years. The roughly $48 million project would include a new 2.9 mile road along with a 9,100 foot Steel Reinforced Poly Ethylene (SRPE) underground pipe to convey the runoff to Bradley Lake. Railbelt utilities, including Homer Electric, have secured Federal subsidies to offset some of the financing costs. The project is expected to take two to three years to complete.
The Seldovia Plant Repower Project was completed in 2017 to improve the backup plant reliability and resolve a number of operational and maintenance issues. The plant was redesigned to replace one of the existing generation units and replace the very old switchgear building. The facility provides back up power to Seldovia, Port Graham, and Nanwalek when power is lost from the Homer Electric system.
Advocating For Our Members: Big Year at the RCA for Gas Pipeline Tariffs
Grant Lake Hydroelectric Project Update The Federal Energy Regulatory Commission (FERC) continued its assessment of the Grant Lake Hydroelectric License Application. FERC issued two sets of Additional Information Requests (AIRs) and requested a field study to assess visual impacts to a section of the commemorative Iditarod National Historic Trail (INHT) near the proposed project. Homer Electric filed responses to the AIRs in April and September of 2017. After completing the required fieldwork and renderings, Homer
Seldovia Plant Repower Project
Electric submitted the Final Study Report on the INHT Visual Resources Evaluation and expects a licensing decision from FERC in late 2018 or early 2019. Additionally, Homer Electric continues collaboration and consultation efforts with interested stakeholders, working with National Marine Fisheries Service and the U.S. Fish & Wildlife Service to develop and file a technical memo outlining the details of the Tailrace fish exclusion barrier.
Representing and protecting Homer Electric’s interest at the Regulatory Commission of Alaska (RCA) is important to controlling the fuel component costs of a member’s power bill. Homer Electric intervened in the Kenai Beluga Pipeline (KBPL) rate case filed by Hilcorp at the RCA in 2016 and settled in early 2017. The settled rate to transport gas on this pipeline is estimated to save HEA over $1 million per year over the rate proposed in the filing. With the annual cost of fuel and fuel transportation costing our members about $33 million, the settlement reflects a three percent savings on the Cost of Power Adjustment (COPA) portion of members’ bills. Also, as part of the negotiated settlement, HEA received a refund of $537,657 in over collected 2016 interim rates and interest. HEA also participated in the ENSTAR rate case that culminated in a three-week hearing before the Commission in June of 2017. The settled rate case resulted in HEA ratepayers paying $60,000 less per year than what they were currently paying and over $75,000 per year less than ENSTAR’s proposed rates to transport gas to HEA’s Soldotna Power Plant.
Keeping The Lights On: System Upgrades & Maintenance While our commitment to innovation is steadfast, our commitment to safely providing reliable electricity to our members and community is our main daily priority. In 2017, HEA accomplished the following projects with that priority in mind. • Kobuk Street Overhead Line Replacement – the conductor size was increased which enables more load to be carried on this line when the Billy Thompson Substation and Soldotna Substation are interconnected. • New overhead fault indicators were installed, improving outage troubleshooting and reducing outage times. All overhead fault indictors on HEA’s system will be replaced over the next few years. • New polymer bypass switches replaced the older style porcelain ones which have the potential of causing outages and safety hazards. • Installed Bear Wrap on approximately 70 power poles in the South Kachemak Bay area. The protective wrap serves to mitigate damage caused by bears clawing and chewing on the poles. • Approximately 175 miles of distribution lines were recleared in 2017. • Hatfield Substation Upgrade Project – The project consisted of installation of two 69 kV breakers, rebuilding the control house, replacement of the 69 kV to 12 kV station transformer and other various maintenance projects within the substation. • Performed a successful borescope inspection of the turbines at the Nikiski Combined Cycle Plant in May 2017. • Soldotna Combined Turbine Plant staff completed a series of tests to identify improvements for the plant’s exhaust heat exchanger in an effort to mitigate noise and vibration. Modifications will be completed in 2018. • In coordination with Hilcorp and NORSTAR (an ENSTAR affiliate), HEA completed pipeline integrity inspections on the Swanson River gas pipeline. HEA owns approximately one mile of this nearly 20-mile Department of Transportation regulated pipeline. Hilcorp owns the remaining portion. • Information Services performed comprehensive cyber security audits throughout the year to ensure the privacy and security of members’ information.
Your Energy Resource & Experts
TREASURER’S 2017 ANNUAL REPORT Organized as a rural electric Cooperative, Homer Electric Association Inc. operates as a not-for-profit entity under section 501(c)12 of the Internal Revenue Code. Established by the members to provide service at the lowest possible cost, any excess revenue (or margin) is used to improve service before it is eventually returned to members in the form of capital credit retirements. In April 2017, approximately 10,000 current and former members received $1.5 million in capital credit checks. In 2017, Homer Electric’s financial position remained strong as we continued to work towards our mission of providing safe, reliable electricity at fair and
Homer Electric is committed to building even stronger connections with our members and our local communities. One of the ways we are delivering this goal is by providing you with information, resources and services that are as reliable and useful as the electricity we supply. Homer Electric is your trusted energy partner and your first stop whenever you have a question about energy efficiency, renewables or other information about your co-op. Here are some of the ways we have connected with members and shared information on your cooperative, electrical safety, energy efficiency and new technologies: Community meetings in Seldovia, Port Graham, Ninilchik, Kasilof, Funny River, Sterling, and Nikiski.
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Power Pledge Challenge - Homer Electric partnered with Renewable Energy Alaska Project, Chugach Electric Association, Municipal Light & Power, Matanuska Electric Association, Alaska Electric Light & Power, Alaska Housing Finance Corporation, and ENSTAR Natural Gas Company to educate over 2,000 Alaskan middle school students on energy efficiency and conservation. Locally, Homer Electric presented the Power Pledge Challenge to 506 middle school students in 21 Kenai Peninsula classes, which involved hands-on activities to calculate electricity use of common household appliances.
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New Technology Workshops – Homer Electric hosted its first New Technology Workshop in November at the Kenai Peninsula College in Soldotna. The wellattended workshop provided an opportunity for members to learn more about solar energy, home energy efficiencies, heat pumps and electric vehicles.
Where Your Dollar Went
Energy Sales
479 Million kWh
457 Million kWh
472 Million kWh
Fuel & Purchased Power 37¢
Expenses
Production & Distribution Transmission 28¢ 21¢
Local Cooperative Spirit Homer Electric is committed to providing several community outreach programs to promote higher education through our scholarships; cooperative principles through our Youth Rally; energy efficiency through our Power Pledge Program; safety through our Electric City school and fair demonstrations; and emerging technologies through our New Technology Workshops. Congratulations to the following employees who have served our membership over many years in the office, in the field, and behind the scenes.
Retirements: Harvey Ambrose 8 years Gregory Fast 4 years Darlene Jonas 39½ years Marti McCleery 16 years Roxanne Northcutt 10 years Maynard Smith 14 years
Anniversaries: Cindy Frazier 20 years Julia Clymer 10 years Jesse Cress 10 years Kathy Heindl 10 years Barry Jackman 10 years Travis Kincaid 10 years Sarah Lambe 10 years Diane Massengill 10 years Roxanne Northcutt 10 years Ed Pontious 10 years Nikki Rich 10 years Glenn (Sandy) West 10 years
Consumer Accounts Expense 4¢
Industrial
Large General Service
General Service
Residential
Homer Electric sold 479 million kilowatt-hours of electricity in 2017, which is an increase of five percent compared to the year 2016. Kilowatt-hours (kWh) sold for all classes of members experienced an increase, with the largest increase of thirteen percent coming from industrial sales.
Assets $457 Liabilities $358
In 2017, total expenses were $95 million, an increase of almost $4 million or about four percent compared to 2016. Fuel and purchased power costs increased by $1 million and comprised 37 percent of total expenses. Operating costs increased almost $3 million or five percent from 2016. Assets $462 Liabilitiies $367
Assets $472 Liabilities $384
Revenue generated from energy sales totaled $99 million, an increase of almost four percent from the previous year. Other operating revenue of $1 million, primarily rentals and fees, plus $1 million from non-operating interest income and capital credit allocations from other organizations, all contribute to net margins.
Total assets were $457 million in 2017. This is a one percent decrease from $462 million in 2016. Total liabilities were $358 million in 2017, a two and a half percent decrease from $367 million the previous year.
Rate Changes
Key Ratios
As of January 5, 2017, new RCA-approved rates went into effect increasing the customer charge to $20 and decreasing the base energy rate to 14.87 cents/kWh for residential members. These charges on your bill recover the fixed cost of providing service to your location. It consists of administrative and customer service costs, as well as the distribution, generation, and transmission systems in place to provide reliable electricity.
The equity-to-total-assets ratio measures the percentage of total assets owned by members and is one of the indicators used to monitor the Cooperative’s financial health. Homer Electric’s equity ratio was 41 percent at year-end. This ratio at the end of 2016 was 40 percent. The same ratio for Alaska Electric & Energy Cooperative (AEEC), Homer Electric’s subsidiary, which owns our generation and transmission assets, was 15 percent in 2017 and 14 percent in 2016.
Revenues
Cost of Power Adjustment (COPA) The variable cost of fuel and other sources of power used to generate your electricity are reflected on your bill as the COPA charge. This rate is adjusted quarterly primarily based on the cost and source of fuel used. The average COPA rate in 2017 was 7.1 cents/kWh.
Average Residential Member Monthly Bill (based on 550 kWh as of December 31, 2015-2017) 2017
Homer Electric employees are more than just workers in a local business. Homer Electric employees are threads of the community who contribute, participate, and volunteer in our communities. Thank you for making an impact on a daily basis – making us more powerful together.
Administrative & General 10¢
Total Assets and Total Liabilities
Ed Oberts Treasurer
2016
MILLIONS
•
reasonable prices to you, our members. Through diligent monitoring and expense management, we continue to meet financial obligations required by our lenders. Homer Electric concluded the year 2017 with total consolidated operating revenues of $100 million. That total less consolidated costs of electric service of $95 million and non-operating margins of $1 million, resulted in a positive margin of $6 million. The following is a financial summary for the year.
2017
2016
2015
Capital Credits Capital credits represent Homer Electric members’ share of equity in the Cooperative and are one of the benefits of being a member of an electric Cooperative. Capital credits are based on margins, which are the difference between total expenses and total revenues of the Cooperative. Each year, Homer Electric allocates margins to its members in proportion to the amount they paid for electric service during the year. Annually, the Board of Directors considers the general retirement of capital credits. Healthy equity levels continue to allow HEA to retire capital credits. In addition to the 2017 capital credit retirement of $1.5 million, in April of 2018, approximately 9,000 current and former members received $1.72 million in capital credit disbursements. In 2017, the Board of Directors also approved $261,000 for the retirement of capital credits to estates of deceased members.
Financial Goals 2015 $- $20 $40 $60 $80 $100 $120 $140
Customer Charge
Base Energy
COPA
In conclusion, Homer Electric met its financial goals with positive margins and met required loan agreement ratios in 2017. Homer Electric’s financial management and resulting financial performance allows the Cooperative to continue to meet the energy needs of our members through innovative energy solutions, while ensuring fair and reasonable rates.
Homer Electric Association, Inc. and Subsidiary Consolidated Balance Sheets December 31,
Homer Electric Association, Inc. and Subsidiary Consolidated Balance Sheets, continued
Consolidated Balance Sheets
Assets December 31, Utility Assets Plant at Cost Electric plant in service Electric plant Utility Plant at held Costfor future use Construction in progress Electric plantwork in service
$ $
2017
2016
December 31,
2017
2016
Equities and December 31,Liabilities
590,535,539 1,166,067 7,866,936 590,535,539
$ $
579,216,752 1,166,067 10,943,553 579,216,752
Consolidated Balance Sheets, continued
Equities Equities and Liabilities Memberships Patronage capital Equities Other equities - donated capital Memberships
$ $
2016
2017
2016
48,820 95,664,080 3,251,715 48,820
$ $
50,805 91,592,274 2,791,565 50,805
95,664,080 98,964,615 3,251,715
91,592,274 94,434,644 2,791,565
Liabilities Total Equities Long-term Debt - mortgage notes payable
98,964,615 331,568,039
94,434,644 340,701,253
Liabilities Current Liabilities Long-term Debt - mortgage notes payable Current portion of long-term debt Accounts payable Current Liabilities Consumer deposits Current portion of long-term debt Accrued and benefits Accountspayroll payable Accrued taxes and Consumer deposits other current liabilities
331,568,039 16,118,989 4,915,072 1,223,154 16,118,989 2,483,930 4,915,072 1,348,181 1,223,154
340,701,253 16,907,602 3,733,947 1,215,453 16,907,602 2,603,186 3,733,947 1,329,892 1,215,453
24,932,754 447,691
Accrued payroll and benefits Total Current Accrued taxesLiabilities and other current liabilities
2,483,930 26,089,326 1,348,181
2,603,186 25,790,080 1,329,892
22,705,379 4,063,658
24,932,754 4,045,468
Deferred Credits Total Current Liabilities
707,993 26,089,326
877,000 25,790,080
7,752,458 4,063,658 6,112,933 6,548,092 7,752,458 267,138 6,112,933 3,019,896 6,548,092
7,688,365 4,045,468 6,275,502 6,472,060 7,688,365 296,107 6,275,502 330,895 6,472,060
Notes receivable, current portion Total OtherCurrent currentAssets and accrued assets
267,138 27,764,175 3,019,896
296,107 25,108,397 330,895
Deferred Charges Total Current Assets
3,743,407 27,764,175
5,402,853 25,108,397
Electric plant held for future use Total utility plant atincost Construction work progress Less accumulated depreciation and amortization
1,166,067 599,568,542 7,866,936 (196,451,530)
1,166,067 591,326,372 10,943,553 (184,967,399)
Total utility plant at cost Net Utility Plant depreciation and amortization Less accumulated
599,568,542 403,117,012 (196,451,530)
591,326,372 406,358,973 (184,967,399)
403,117,012 22,187,694 321,904
406,358,973 24,082,128 402,935
22,187,694 195,781 321,904
24,082,128 447,691 402,935
22,705,379 195,781
Current Assets Total Other Assets and Investments Cash and cash equivalents Accounts receivable, less allowance for doubtful accounts of Current Assets $107,295 ($150,820 in 2016) Cash and cash equivalents Unbilled Accountsrevenue receivable, less allowance for doubtful accounts of Materials, and supplies inventory $107,295 fuel ($150,820 in 2016) Notes receivable, Unbilled revenue current portion Other current and accrued assets Materials, fuel and supplies inventory
Other Assets and Investments Net Utility Plant Investments in associated organizations NotesAssets receivable, net of current portion Other and Investments Non-utility net oforganizations accumulated depreciation of Investmentsproperty, in associated $549,331 ($513,635 Notes receivable, net in of2016) current portion Non-utility property, net of accumulated depreciation of Total Other ($513,635 Assets andinInvestments $549,331 2016)
$
Total Assets Deferred Charges Total Assets
457,329,973 3,743,407
$
Patronage capital Total OtherEquities equities - donated capital
2017
$ 457,329,973 707,993
Total Equities and Liabilities Deferred Credits
461,802,977 5,402,853
See accompanying notes to consolidated financial statements.
Consolidated Statements of Operations and Patronage Capital
5
Consolidated Statements of Operations and Patronage Capital 2017
Years Ended December 31,
4
2016 5
Operating Revenues Years Ended December 31,
$
99,650,323 2017
$
96,784,876 2016
Operating Expenses Revenues Fuel costs Production operations and maintenance Operating Expenses Purchased Fuel costs power costs Transmission operations and maintenance Production operations and maintenance Distribution operations Purchased power costs and maintenance Consumer accounts, service sales Transmission operations andand maintenance Administrative, general and and maintenance other Distribution operations Depreciation and amortization Consumer accounts, service and sales
$
99,650,323 31,698,007 6,930,276 3,022,687 31,698,007 1,236,977 6,930,276 7,221,640 3,022,687 3,688,744 1,236,977 9,808,904 7,221,640 17,771,472 3,688,744
$
96,784,876 30,514,757 6,820,313 3,219,705 30,514,757 966,038 6,820,313 6,022,279 3,219,705 3,732,936 966,038 8,664,179 6,022,279 17,274,406 3,732,936
Administrative, general and other Total Operatingand Expenses Depreciation amortization
9,808,904 81,378,707 17,771,472
8,664,179 77,214,613 17,274,406
Interest ExpenseExpenses Total Operating Long-term debt and other Allowance for funds used during construction Interest Expense
81,378,707 13,520,569 (232,339)
77,214,613 13,936,297 (153,627)
Long-term debt and other Net Interest for Expense Allowance funds used during construction
13,520,569 13,288,230 (232,339)
13,936,297 13,782,670 (153,627)
Net margins Net operating Interest Expense
4,983,386 13,288,230
5,787,593 13,782,670
Nonoperating Margins Net operating margins Interest income Gain (loss) onMargins sale of assets Nonoperating Other income (expense) Interest income Capital credits, patronage Gain (loss) on sale of assetsdividends and other
4,983,386 183,623 (33,583) (970) 183,623 693,407 (33,583)
5,787,593 155,838 (8,278) 155,838 849,695-
Other income (expense) Total Nonoperating Margins dividends and other Capital credits, patronage
(970) 842,477 693,407
(8,278) 997,255 849,695
Net margins Total Nonoperating Margins Patronage capital, beginning of year Net margins Less retirement of patronage capital credits Patronage capital, beginning of year Patronage Capital, end of year Less retirement of patronage capital credits Patronage Capital, end of year
461,802,977 877,000
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial $ 457,329,973 $ statements. 461,802,977
4
$
See accompanying notes to consolidated financial $ 457,329,973 $ statements. 461,802,977
Total Equities and Liabilities
$
5,825,863 842,477
6,784,848 997,255
91,592,274 5,825,863 (1,754,057)
85,100,128 6,784,848 (292,702)
91,592,274 95,664,080 (1,754,057) $
85,100,128 91,592,274 (292,702)
See accompanying notes to consolidated financial $ 95,664,080 $ statements. 91,592,274 See accompanying notes to consolidated financial statements.
