Remarks by Austin J. Slater, Jr., SMECO President and CEO

8/29/2018 4:29:00 PM - by SMECO

(The following remarks were delivered at SMECO’s Annual Members’ Meeting on August 29.)

Good evening and thank you for joining us for our 2018 annual meeting. This is our 80th meeting of members since our founding in 1937, and it also represents the second year of a significant change in how we conduct this important governance responsibility, but more on that later.

As I shared with you last year, for some time now the SMECO board and I have been examining how we conduct our annual meeting. This examination was prompted by a steady decline in meeting attendance and voting. During the last year of the traditional meeting we experienced a new low in member participation with only 740 attending the meeting and 880 voting, when adding in the 140 absentee ballots cast.

The combination of changing interests, double income families, kid’s soccer, and competing interests has reduced the once popular cooperative annual meeting to a very low priority for today’s families. To put it differently, SMECO now has 135,000 members. With only 740 members attending the 2016 meeting at the Blue Crabs stadium, that’s an engagement level of only ½ of 1 percent. It was definitely time for something different.

Across the country our sister co-ops, also squaring-up to the same realities, have adopted mail-in and online voting procedures to elect their board members. Such measures allow greater democratic participation and recognize the changing lifestyles of our members and the scope of SMECO’s size. The only other electric cooperative in Maryland, Choptank Electric on Maryland’s Eastern Shore, has been using mail-in and online balloting successfully for about 10 years.

Additionally, we found that the mail-in approach will save our members more than $87,000 per meeting, as we no longer have to rent the stadium, staff up for registration, pay for food, entertainment, and prizes, all for a very small fraction of our membership. But it is critical that we offer our members this forum tonight to exercise their governance rights, voice their concerns and opinions regarding their cooperative, and conduct our annual business session; and that’s exactly why we are gathered here tonight.

I also want to note that we proposed bylaw changes this year, one of which would allow our board to consider the option of allowing members to cast their vote using the internet. This move is a reflection of our commitment to help our members participate in this fundamental role of co-op governance in the 21st century.

As I mentioned earlier we are saving about $90,000 by the approach we have taken and vastly expanded member participation through our new meeting approach. This year we received over 6,000 ballots, which is a seven-fold increase over what we were realizing at the stadium. Would we have liked to have more participation? Yes, of course. But we are pleased with the substantive increase and firmly believe we are moving in the right direction.

A quick note on venue: last year we rented Middleton Hall not knowing how many people would join us in this new format. We hosted about 70 people so by utilizing our own facility tonight we eliminated that cost too as this room has a capacity of 177. It is a bit ironic that we are back to our headquarters office for our annual meeting where it was held for so many years. So, as I have been noting, cost savings continues to be a key theme for us in a lot of various areas, because every dollar we can save will directly benefit you through lower rates.

Cost savings comes in two forms for you, the cost of the electricity itself, flowing over the lines, or what we call commodity; and the cost of delivering that electricity to you, representing poles, transformers, trucks, employees and many other key ingredients. We have been working hard to reduce delivery costs. Last year we were able to reduce those costs, or rates, by 6 percent representing a $10.1 million annual reduction in what we charge you.

This reduction was achieved through a combination of cost reduction and a regulatory action that enabled us to spread our high-voltage transmission investment to other customers in the region, specifically the Pepco service area. In specific terms, the typical residential customer saw a $50 per year reduction in their bill. We were very proud to cut these costs without reducing our level of service and thereby put money back in our customers’ pockets.

This is not a “one-off” effort for us, as we continue to focus heavily on cost reduction and performance improvement. We are examining more formal methodologies to help us get there, such as Six Sigma and Lean. But we have racked up some significant cost reductions since we began this concerted effort in 2017. Tallying up, our savings total $4.2 million.

A sizeable chunk comes from employee positions that we are not filling when employees retire or separate; we have eliminated 30 such positions, without any layoffs. A lot of the savings have come from leveraging technology. Additional savings come from contract reductions, material and supply reductions or renegotiations, and elimination of unnecessary expenditures. We are going to stick with this effort as we fine-tune our operation and continue to squeeze out unnecessary costs while focusing on process and performance.

Reducing costs is important not only as it affects your bill, but also how you participate economically in the ownership of our cooperative. Each year, SMECO’s margins—revenue less expenses—are allocated to members’ Capital Credit accounts. SMECO uses margins as working capital for new construction and system improvements. Then, whenever our Board of Directors determines that the financial condition of the co-op warrants, members receive a refund.

We closed our books in 2017 with net margins of $23.4 million. It was a very favorable financial year for the cooperative. That is one of our obligations as your stewards. All of the $23.4 million was allocated back to you, our members, as Capital Credits in our accounting records. Our Board is committed, when financially feasible, to refund Capital Credits to you in the future.

Allow me to shift to power costs. I’m pleased to report that we have achieved substantial cost savings on the largest cost on your monthly bill, the electric commodity that we purchase and sell back to you at no profit and no markup. This is the cost of the actual electrons that flow over our lines; we reduced that charge by 10 percent and began billing you at 6.6 cents per kilowatt-hour last August, which represents the lowest our commodity rate has been in 12½ years. This is important, because this is the largest part of your bill, about 60 percent of the total. And going forward, the news remains good.

Our forecast is that over the next four years, 2019 through 2022, our total cost of power will continue to moderate. This is great news for our members and you will see this influence in your bills going forward. Our decision to manage our own power portfolio has paid dividends to our customers, as we continue to capture good deals in the market and eliminate any mark-ups or profit from what you pay. As a result we enjoy some of the lowest rates in the state.

Now power cost is very important, as you have a choice of who supplies you commodity. We currently have seven retail electric suppliers providing commodity to our members. About 5,000 members, out of a total of 165,000, have elected to take service from these alternative suppliers, so they leave SMECO and their commodity is provided by another party.

We believe offering you choice is a good thing; if you can find a better price than we can offer, then it’s a win-win. It also inspires us to work like the devil to provide you the lowest price to keep you with us. We also pay particular attention to ensuring we have credit worthy counter-parties with the highest in ethical market practices. And we will always be ready to supply all our customers should they want to return to SMECO. I want to caution you that the experience with retail electric providers has not been all that rosy. We have noticed the large majority of our members who have selected alternative suppliers have wound up in the long run paying higher costs than if they had remained on SMECO’s commodity.

For example, in 2017 those 5,000 members collectively paid $2,151,600 in excess of what they would have paid SMECO; thus far in 2018, through July, they have paid $1,426,500 in excess of the rate we offer for our commodity. Why would someone pay more, you might ask? Some members are willing to pay more to ensure their power is 100 percent renewable. However, the majority are not in that camp. We have witnessed high-pressure sales tactics, free prepaid debit cards to incent members to switch, intense door-to-door sales with dubious promises, and downright deception.

My advice is that shopping for a better deal may be in your interest, but be very cautious, do your homework, and examine the contract presented to you with great care. Check out your supplier to ensure they are reputable and have a good track record on performance and customer service. To give our choice customers some added guidance, we are now adding a line on their monthly electric bill to show those customers how much more they are being charged over SMECO’s rates, or in lesser cases, how much they are saving, so they’re going to get feedback every month. We believe transparency and reliable information will help guide good market place decisions.

I am pleased to report that this year we are returning $5.6 million in Capital Credit refunds to our membership, which includes a $3.7 million general refund that was distributed last month and an additional $1.9 million special refund. So those are funds that are going back to you, our members. Capital Credits are just one more advantage our members enjoy by being part of a cooperative. When SMECO issues a refund to members, we’re making good on a cooperative promise. Passing savings on to members demonstrates electric cooperative values and shows we’re different from other utilities. Since our inception in 1937, SMECO has returned $101,226,582 in capital credit refunds to our members. This is not a benefit that customers of investor owned utilities, like Pepco or BGE, enjoy.

Electric utilities build significant amounts of long-lived infrastructure, some of which can last up to 50 years. Recovering the costs for this infrastructure investment is slow, and as a consequence, we must borrow substantive amounts of money to supplement the retained capital that I just mentioned. For financing, SMECO has largely relied on traditional cooperative banks, but as we have grown and our cash needs have increased, we found it critical to seek new capital resources.

Last year, we leveraged our favorable financial performance to access new credit markets. We began by seeking a credit rating on Wall Street. We were successful in achieving a favorable “investment grade” rating from Fitch Ratings. With that rating, we then worked with an investment banker who assisted us in tapping into what is called the “private placement” debt market. This niche in the capital markets allows large cash-rich insurance companies to lend directly to companies such as SMECO without onerous and costly government requirements.

In March we issued a request for proposal to several insurance firms for $135 million in long-term debt. We were overwhelmed with the enthusiastic reception we received. The 15 competing lenders oversubscribed our request by a factor of six times. In other words, we requested $135 million and the investors offered us $840 million. This reflects very favorably on how SMECO is viewed by the financial markets. Indeed, our $135 million transaction was financed at a 4 percent interest rate over many years. We settled in April with 15 insurance firms who each took a piece of the total. This included such highly regarded firms as New York Life, MetLife, John Hancock, and Mutual of Omaha, to name just a few.

As important as this individual transaction was to us, it is even more important to note that we have now established a new and efficient source of debt funds going forward that we expect to serve our needs for many years to come.

Many customers have embraced solar energy, at home or at work, to supplement the service we provide. We are excited about this green and clean resource and are ready to help our members consider and implement this option. Our SMECO website includes a great app called WattPlan.

WattPlan allows you to model a solar array on your very own roof and ascertain the costs of owning, leasing, or financing solar panels. It’s fun, free, and is a great and powerful tool that I encourage you to use should you be considering a rooftop solar installation.

We are receiving about 12 solar applications per week and we have staff devoted to facilitating these projects. In addition to that dedicated manpower, we have provided our developers, customers and staff with a new technology called PowerClerk which is an online seamless rooftop solar application that moves documentation through our engineering and technical reviews and ensures its timely completion.

On the larger issue of renewable energy, we continue to meet state-mandated renewable energy requirements through investments in wind, solar and other renewable resources. A permit is pending at the Public Service Commission for a 27-MW solar facility in western Charles County that would be the largest renewable energy facility in Southern Maryland upon completion. We make these renewable energy investments in the most fiscally responsible manner to balance our requirements set forth in state law with the impact on your bills.

Finally, I am proud to report that we have fully deployed our Automated Metering Infrastructure program. These AMI or “smart meters” represent a significant investment and highlight our commitment to providing better customer service, reducing outage response time, increasing efficiency across all of our business units, and saving you money. Aside from being “smart,” these meters are safe and secure. No longer do we have to dispatch a truck to check to see if service has been restored to an account or to reconnect an account. These meters communicate electricity usage remotely, saving us the time and manpower it takes to manually read meters.

With this technology, we are able to detect voltage irregularities and know instantaneously when your service is interrupted. These meters represent the “new normal” in our industry. Please allow me to stress once again that these meters are safe, secure, and serve as an example of our continued investment in improving our service to you. We project that this technology will save upwards of $5 million per year in operational costs, representing about a seven-year payback period.

Friends, as an employee, I want you to know SMECO is a great place to work. Our employees are the backbone of this cooperative. I, along with our great Board and devoted senior management team, remain committed to articulating a vision going forward that reflects the ever-changing dynamics of our industry while never losing sight that our members expect and deserve excellent service. As I mentioned earlier, we have been thankful to serve Southern Maryland for 80 years. We are looking forward to beginning the Cooperative’s next 80 years of service to the good people of Southern Maryland. It is indeed an honor and a privilege to serve you.

As a cooperative, SMECO will always put its members first and be responsive, reliable, and resourceful—the power you can count on. Thank you for entrusting your cooperative to our stewardship, and thank you for attending our 80th annual meeting this evening.

SMECO Energy Rates

Helpful Tips

SMECO Spotlights