Northern Neck Electric Cooperative is no stranger to extreme weather events. Virginia’s Chesapeake region, which the co-op serves, is frequently hit by everything from seasonal thunderstorms to nor’easters to tropical storms and occasionally full-blown hurricanes.

“We’re right in that North-South boundary in the mid-Atlantic, where a lot of weather systems tend to mix,” says Bradley Hicks, president and CEO of the co-op headquartered in Warsaw, Virginia.

In March 2018, a powerful nor’easter pummeled Northern Neck’s service area, knocking out power for 58% of the co-op’s 19,000 members. For a week, Northern Neck Electric lineworkers and another 25 mutual aid crews from four co-ops labored 16-hour shifts, repairing lines and poles and restoring outages. In all, the storm cost the co-op $330,000.

Because the damage was local to Virginia and didn’t receive a state or federal disaster declaration, it didn’t qualify for assistance from the Federal Emergency Management Agency (FEMA). The co-op had no choice but to use reserves and operating funds to pay overtime and other costs related to the restoration.

“We have reserves, but the expense comes off your bottom line because a lot of the work is maintenance and repairs,” Hicks says. “We have access to funding and have some cash on hand, but having a plan of action is the most desirable approach.”

After the nor’easter, Northern Neck’s leadership decided they needed a new plan. In late 2018, they approached Homestead Funds to create a special reserve account for storm damage.

“We chose Homestead Funds because it has a long history of working with co-ops,” Hicks says.

At least one other co-op, Mecklenburg Electric Cooperative in Chase City, Virginia, has followed suit.

“I tell co-ops to look at it this way,” says Brian Allen, a representative with Homestead Funds, a Securities and Exchange Commission-registered investment company founded by NRECA. “You know how a person has a rainy-day savings account? This is what can be done for a co-op. It’s a co-op’s rainy-day savings account. There is something you can do to prepare.”

FEMA not always a given

FEMA has been a valuable source of aid for co-ops that meet the agency’s eligibility requirements, but there are limits, as Northern Neck Electric and other co-ops have discovered.

Governor-imposed states of emergency and federal disaster declarations depend on whether damage estimates meet a specific per-capita formula.

“If the White House declares a federal emergency, that’s when FEMA springs into action,” says Martha Duggan, NRECA’s senior director of regulatory affairs. “But if the per-capita level of damages is not high enough to declare a federal emergency, then no FEMA dollars flow.”

In recent years, the severity and frequency of natural disasters have strained the 40-year-old agency. According to the National Oceanic and Atmospheric Administration, 2019 marked the fifth consecutive year in which the nation experienced 10 or more individual billion-dollar disasters, many of which occurred in co-op country.

Because of the increase in violent weather, Congress is taking a harder look at how the federal disaster relief fund through which FEMA provides reimbursement for eligible expenses is being used.

“Recently, FEMA has issued several policies and procedures to require more documentation, to make really sure that procurement, for example, is done in a way that complies with federal regulations,” Duggan says.

It can now take years in some cases for FEMA reimbursements that typically cover up to 75% of costs.

“Part of it is the bureaucracy, but another part of it, frankly, is that FEMA is fulfilling its mission to be a good steward of federal taxpayer dollars,” Duggan says.

Co-ops have few options to cover costs. Sometimes the only choice is to raise rates, “which no one likes to do,” she says.

‘The proper thing to do’

In 2018, Northern Neck Electric’s then-CEO Greg White and Finance Vice President Martin Mothershead worked with Homestead Funds to set up the reserve account, which the co-op adds to each year based on the average cost of storm repairs over a 17-year period.

“We felt it was the proper thing to do, to find a solution where we could offset costs associated with major events,” says Hicks, who took over the co-op’s top job June 19 before White retired in August.

The co-op needed State Corporation Commission and Rural Utilities Service approval for the fund, which it received in December 2018. Duggan notes that co-ops with such reserves are still eligible for FEMA reimbursements.

“They’re two separate programs,” Hicks says. “In my mind, FEMA is looking at it from a disaster standpoint and for federal and state funding. This is a decision by the organization to proactively prepare for an event that either doesn’t qualify or is waiting for federal funding.”

Northern Neck Electric has yet to tap into its reserve account. But if it does, under criteria set by co-op directors, it can only be when 10% of members lose power for 24 hours or when damages exceed $100,000.

Each co-op that sets up a reserve account decides how to invest the assets across the nine Homestead Funds and how and when the money can be used. Homestead representatives provide guidance in establishing the mix of funds in the portfolio, based on the co-op’s tolerance for risk.

“That’s the beauty of it. … The co-op has discretion to determine when and how that money is spent,” says Allen, who meets with Northern Neck leadership a few times a year on the portfolio’s performance.

“And for the time they don’t need the money, it is invested where it has the potential to grow.”

But in the chaotic aftermath of a storm, if a co-op needs money quickly, will it be tied up in a mutual fund? That’s a common misconception, Allen says.

“You can make a redemption from your fund account on any day the New York Stock Exchange is open for regular trading, and there are multiple ways of receiving that money. We can mail a check, but many investors prefer the speed and convenience of an ACH transfer. If we have your bank information on file, the money can be directly deposited in your account.”

Hicks says he sees the reserve account as more than a means to provide service reliability.

“Ultimately, our role is to ensure we are good stewards of our members’ money and investments,” he says. “By having this account in place, we’re taking a proactive approach to mitigate potential costs and to manage those costs associated with storms and major outage events.”

Investing in mutual funds involves risk, including the possible loss of principal.

Past performance does not guarantee future results.

Investors should carefully consider fund objectives, risks, charges, and expenses before investing. The prospectus contains this and other information about the funds and should be read carefully before investing. To obtain a prospectus, call 800-258-3030 or visit homesteadfunds.com.

Homestead Funds’ investment advisor and/or administrator, RE Advisers Corporation, and distributor, RE Investment Corporation, are indirect, wholly owned subsidiaries of NRECA 10/20.