The Good, The Bad & The Ugly

The Good, The Bad & The Ugly

ALEC 2010 Annual MeetingBob Patton, Sr. Principal for Educationrobert.patton@nreca.coopJuly 26, 2010

OverviewOverview

Good News*–Touchstone Energy Co-ops providing

superior service.–Building the value of membership yields

dividends.–Co-ops get strong marks for reliability.–Co-ops are a name you can trust.

*Touchstone Energy 2008 National Survey on “The Cooperative Difference”

Top RatingsTop Ratings Easy to understand bills 9.2 Provides reliable service* 9.0 Treats members fairly 8.9 A name that can be trusted* 8.8 Outage restoration 8.7 Delivers on promises* 8.7 Handles problems promptly 8.6 Provides information on safety 8.5

* Key attributes for member loyalty

Good RatingsGood Ratings

Good Value for the money* 8.4 Looks out for you 8.3 Communicates about costs 8.2 Gives money back* 8.2 Helps manage energy 8.0

* Key attributes for member loyalty

ACSI Satisfaction & Retention Scores

(Independent Report by ACSI--3rd Quarter 2008

ACSI Satisfaction & Retention Scores

(Independent Report by ACSI--3rd Quarter 2008

2008 Co-op Difference Group

Touchstone Energy Natl Sample

Top Investor Owned Electric Utility

Electric Utility Industry Average

66687072747678808284

RetentionOverall Satisfaction

Members Respond to Values of Co-op Model

Members Respond to Values of Co-op Model

Locally-owned and operatedBecause consumers own, co-ops are

more responsive Co-ops are working to manage costsProvide reliable service

The Membership AdvantageThe Membership Advantage

Those with some member identity are more satisfied AND Loyal than those who self-identify as “customers only”.– “Those who limit their relationship to

“customer” rate their satisfaction with the cooperative 6% lower than members who acknowledge some level of member or owner identity.”• Touchstone Energy 2008 National Survey

Keeping Co-ops as Co-opsKeeping Co-ops as Co-ops

Since inception 93 co-ops presented formal offers to “sell out”.

Seventy-two (73) offers have been rejected by the membership

OverviewOverview

Bad News–20 co-ops have voted to be purchased–Few know much about electric co-ops–View non-profit status as “inefficient”–Don’t want to “own” the thing–Little loyalty to co-op model

The BAD News Co-opsThe BAD News Co-ops

Jordan ID 1945 Donnelly ID 1946 Phelan CA1947 Bossier LA 1947 Vale OR 1949 Beaver OR 1952 Sandy OR 1956 Freehold NJ 1958 Cotton AZ 1959 Palms CA 1965

Camp CA 1970 Clinton MS 1973 Cody WY 1986 Auke AK 1988 Fairfield ID 1992 Bossier C LA 1993 Jeanerette LA1995 Aurora ME1995 Cap Rock TX 1998* Valley , LA2010*

The Equity Issue “Sells”The Equity Issue “Sells”

1998—Cap Rock, TX (Member Equity Conversion to stock)*– Member Options:

• “Earn more with your money” or credit on your bill.

– Director Options: • Incentive Plan provides for granting options to purchase common

stock & certain related rights to eligible officers and directors.

– Employee Options: • Employee stock purchase plan to purchase common stock

through payroll deductions.

Dissolve Rather Than “Sell” Dissolve Rather Than “Sell”

2010—Valley EC, LA (7,351 members out of 33,000 vote to “dissolve” the co-op and allow Board to accept sale offer-avoiding majority of all members voting required by law)*–Members Offered:

• More than 20 percent lower rates & their equity interests

–Board Offered:• Advisory role

–Employees Offered:• Employees keep jobs

The Equity “Sells” DifferenceThe Equity “Sells” Difference

1995—Teche EC, LA Takes CLECO’s Second-time Offer–Members get $1,000 checks–20% lower rates–Hire board as consultants–Million dollar scholarship fund–Keep and promote employees

OverviewOverview

Ugly News– Current litigation against some co-op’s cause.

members to question trust in co-op model.– Some co-ops are being targeted for “takeover”

and purchase inquiries offered.– Buyers will make lots of promises.– In “takeovers” Boards come under attack.– Buyouts occur where members are “in the

dark” about the business they are selling.

The UGLY News!The UGLY News!

The Buyers Test & Attack–Poll co-op members–Talk to community & political leaders–Recruit “concerned” members–Open fire in the media–Demand a meeting with Board–Send in the poor

More UGLY NewsMore UGLY News

The Buyer Promises– Checks to members– Lower rates

• “Because equity is high, you’re paying too much”

– Employees will get jobs • “We’ll share equity in form of employee raises”

– Service from “the pros”• “Because we’re bigger our service is better. Co-op

employees have more opportunities to advance”

– Keep “advisory board”

New Players Making InquiresNew Players Making Inquires

Third party entities soliciting some

co-ops’ interest in selling to “interested buyers.”–Quentin Capital –ABP International, Inc.

Handwriting on the Wall?Handwriting on the Wall?

AEP’s stated vision:“To maintain our leadership as the largest generation and transmission company in the United States.

“To maintain our leadership as the largest electric distribution business throughout the regions we serve.”

2008 AEP Annual Report

Even UGLIER NewsEven UGLIER News

Buyers Attack Boards That Refuse Offers– Accuse Board of blocking rate cuts– Protecting their “free vacations”– Private investigator reports on Board

members– Top IOU execs join the co-op– Spend over $1-million to elect sympathizers to

board of directors– Promote amending laws and force sale vote

Common Traits in Successful ‘Takeovers’/Sellouts

Common Traits in Successful ‘Takeovers’/Sellouts

Bad perception of co-op (poor/unresponsive service)

Little value for what they pay (rates too high compared to others)

Capital Credits issues (members get all their money back)

Little trust in co-op model (board not fulfilling fiduciary duty)

Show me the money!Show me the money!

Other Common Traits in Successful ‘Takeovers’/Sellouts

Other Common Traits in Successful ‘Takeovers’/Sellouts

Bad perception of co-op (poor/unresponsive service)

Little value for what they pay (rates too high compared to others)

Capital Credits issues (members get all their money back)

Little trust in co-op model (board not fulfilling fiduciary duty)

Vulnerability Check-up ExerciseVulnerability Check-up Exercise

Aggressor Analysis Worksheet (AAW)Risk Analysis Worksheet (RAW)

Evaluating Your Co-op ScoreEvaluating Your Co-op Score

Score of 30+ = CAUTIONScore of 40+ = WARNINGScore of 50+ = DANGER

Anti-Takeover “To Do List”Anti-Takeover “To Do List”> Develop a strategic plan! Assess competitive threats.

! Coordinate with your power supplier/statewide/others.

! Communicate value (what members get from their rates)

> Review capital credit policies & practices

> Update member phone & e-mail list

> Survey your membership

> Communicate Opportunities & Solutions Identify co-op supporters.

(Re)sell co-op members on co-op values and advantages.

Anti-Takeover “To Do List”Anti-Takeover “To Do List”> Adopt Law, Bylaw and Policy changes! “No Sale” Resolution .

! Takeover policy.

! Right of First Refusal Agreement.

> Build relationships with community leaders

> Educate your employees & use them!> Board and management decisions and reasons.

> Don’t let buyers & others divide them.

Anti-Takeover “To Do List”Anti-Takeover “To Do List”> Be prepared to respond to any offer! Rehearse how you’ll respond & who will respond

! Know what you’re really worth

> Organize! Media relations training for managers/others.

! National & Statewide support funds.

> Conduct a “simulation” exercise

The Bottom LineThe Bottom Line

Know your co-op’s vulnerabilitiesKnow what your co-op is worthCommunicate the co-op valuesPractice what you preachBe Prepared

“You can’t go home again”

Thomas Wolfe