OMU’s Revenue Down $4 Million: Audit Shows Slimmer Operating Margin

By Owen Covington, Messenger-Inquirer, Owensboro, Ky.

Oct. 21–Despite increased power sales, Owensboro Municipal Utilities saw its revenues decline by more than $4 million in the last fiscal year, which was offset only partially by a drop in operating expenses, according to an audit approved Thursday by the utility’s board.

OMU’s operating income dropped for a second straight year as it faces rising fuel prices in the future and an ongoing legal dispute over a contract with Kentucky Utilities for the sale of excess power generated at OMU’s Elmer Smith Station.

OMU officials said it is part of the utility’s natural cycle to see the operating margin grow slimmer as certain operating costs grow but rates and revenues stay fairly flat.

OMU Acting General Manager Stan Conn said the spiking costs of steel and copper that are used in power distribution along with the growing contribution the utility pays for its employees’ pensions have played the largest role in reducing operating income.

“The rates are fixed and as the cost goes up, the margin shrinks over time,” Conn said.

Between July 1, 2006, and June 30, 2007, OMU’s electric and telecommunication systems generated $88.3 million in revenue, compared to $92.4 million the previous year.

Those revenues went to cover $72.5 million of expenses, leaving an operating margin of $15.8 million, which was down $2.8 million from the previous year.

Throughout the year, the utility and its Elmer Smith Generating Station on U.S. 60 East sold just over 2.2 million megawatt hours of energy, which was a slight increase over the previous year.

Conn and OMU Finance Director Jim Grise said the shrinking operating income margin is the natural progression after a rate increase. OMU had its last base rate increase in 1991, Grise said.

Following a rate increase, revenues far outpace expenses, but over time as the rates stay level but operating expenses grow with inflation and other cost increases, that margin seeks until it reaches a point where a new base rate increase is needed, Grise said.

OMU has not projected when a new rate increase might be needed.

The bulk of that power was sold to Kentucky Utilities and produced $42.3 million of the electric system’s revenue for the year.

OMU also bought $2.6 million in power from Kentucky Utilities and other sources, which was far lower than the $4.2 million in power the utility bought to cover local needs the year before.

The sale and purchase of power with Kentucky Utilities is at the heart of a lawsuit now in federal court in which OMU is seeking to end a contract with Kentucky Utilities for that utility to purchase excess power generated at the Elmer Smith plant.

OMU has alleges that it has been overcharged by KU for emergency backup power the Owensboro utility has purchased. OMU’s board voted in May 2006 to end the contract with KU 10 years earlier than the scheduled end date of 2020.

That lawsuit is ongoing, and now includes a counterclaim by Kentucky Utilities that OMU has not been properly operating and maintaining the Elmer Smith plant and is seeking several million dollars in damages.

Looking ahead, auditors with Riney, Hancock & Co. predict that the utility’s revenues will grow next year in part due to an extended heat wave in the late summer and fall that has increased consumption.

However, a scheduled maintenance outage to service one of the two generating units at the Elmer Smith plant will also drive up maintenance costs next year, the auditors projected.

Several of the utility’s fuel contracts for coal will end in the current fiscal year, and the new contracts OMU will enter into will likely not carry the low coal prices the utility currently enjoys, OMU officials have said.

Those increased fuel costs, unlike costs for maintenance to the electrical grid or personnel costs, can be passed along to consumers through an energy cost adjustment, such as the one approved by the OMU board in May.

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Copyright (c) 2007, Messenger-Inquirer, Owensboro, Ky.

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