Transitions Rayburn Country Electric Cooperative, Inc. 2011 Annual Report
Electricity is really just organized lightning GEORGE CARLIN 2
Rayburn Country Electric Cooperative was formed in 1979 by seven electric distribution cooperatives in Northeast Texas. The Member cooperatives united to gain bargaining power in critical wholesale purchased power negotiations. For the first few years, Ray Raymond, General Manager of Kaufman County Electric Cooperative, served as Chairman of the Rayburn Board and managed all administrative and operational functions of Rayburn Country. In 1986, I became the first employee of Rayburn, along with Administrative Director Annette Kirkland. Immediately Rayburn began seeking additional hydropower and concentrated its efforts on obtaining more economical and reliable power to serve the membership. In 1992, Rayburn began construction on its first Rayburn-owned transmission facilities -- 100 miles of loop 138 kv transmission line stretching from Grand Saline to Overton. These facilities are located in the Southwest Power Pool (SPP). A message from John Kirkland PRESIDENT In 1997, Eddy Reece was employed as Vice President of Transmission to coordinate our transmission system with other power suppliers and to build a SCADA system. One year later Jack Hodges, Communications Director, was employed to manage Rayburn s communication system. The cooperative manages over 300 miles of microwave and 900 miles of radio communications and has 20 towers located in the 16 counties where its Members provide electric service for their urban and rural consumers. In 2009, The Board of Directors implemented a strategic plan to diversify Rayburn s power resources through purchase power agreements and owned assets, thus providing more control of our energy future. One year later, on December 8, 2010, Rayburn became the owner of a 25% interest in the Freestone Energy Center owned by Calpine. With the extreme heat experience during August, 2011, the Freestone Energy Center purchase resulted in lower rates for Rayburn s Members. In early 2012, Rayburn extended its power supply contract with Constellation, insuring a dependable source of energy through 2018. Ever cognizant of its need to secure sustainable and low cost power for its Members, Rayburn continues to evaluate potential generation acquisitions to complement is power supply mix. Rayburn continues to transition into a highly respected and financially sound cooperative by adding key staff employees. In 2010, Rayburn employed Lynn Midgette as Chief Financial Officer and, the following year, Rayburn employed David Naylor, Executive Vice President, and David Braun, Controller, to round out the Rayburn management team along with the current staff who continue to serve our Member cooperatives in a professional and timely manner. I am very proud of the well trained and dedicated employees that work efficiently and safely to meet current and future demands for Rayburn s Members. 3
BOARD OF DIRECTORS Rayburn s Board of Directors is comprised of 5 Board Members and 5 Alternates from the Member systems. Left to Right: Jerry Williams, Rayburn Board Member - General Manager and CEO of Lamar County Electric Cooperative Association; Ray Houston, Alternate Board Member of Grayson-Collin Electric Cooperative, Inc.; Howard Tillison, Alternate Board Chairman, Trinity Valley Electric Cooperative, Inc.; David McGinnis, Chairman of the Board General Manager and CEO of Grayson-Collin Electric Cooperative, Inc.; Jerry Boze, Secretary-Treasurer General Manager and CEO of Trinity Valley Electric Cooperative, Inc.; Mark Stubbs,Vice Chairman General Manager of Farmers Electric Cooperative, Inc.; Tony Vinson, Alternate Assistant Manager of Fannin County Electric Cooperative, Inc.; Ronald G. Odom, Board Member Manager of Fannin County Electric Cooperative, Inc.; Martin Allain, Alternate Board Member of Farmers Electric Cooperative, Inc.; Allen Branch, Alternate Board Chairman of Lamar County Electric Cooperative Association. 4
MEMBER COOPERATIVES Service Territories The five distribution Members of Rayburn Electric serve about 170,000 electric meters in a service area that stretches from the Red River at the Oklahoma border approximately 150 miles to the Piney Woods area of east Texas. Rayburn Members serve the Dallas suburban areas east and northeast of the Dallas/Fort Worth Metroplex. 5
Growth While the recent economic downturn caused growth to slow for our Members, they continue adding meters and load at a more modest rate. MEMBERS % OF MWH SALES GROWTH OF ADDITIONAL METERS AND LOAD METERS ENERGY PEAK FANNIN 4% TVEC 36% 10 Year Average Growth Rate 3.1% 4.3% 4.8% Growth is being driven by the influx of residential and small commercial customers to suburban Dallas. The customer mix of Rayburn s Members is 92% residential. For several years, the suburban cooperatives have maintained growth rates in the upper 5% of cooperatives nationwide, and that trend is forecasted to continue or even accelerate in future years. Rayburn s Members are also seeing significant growth in large power loads, primarily oil and gas related. These loads are locating throughout the service territory. FARMERS 28% GCEC 26% LAMAR 6% The combined Member assets, revenues and sales numbers are illustrated in the chart below: COMBINED MEMBER ASSETS, REVENUES AND SALES REVENUE ASSETS SALES PEAK Combined Member Profile $377.3 million $807.3 million 3,381.2 MWH 1020.4 MW In spite of strong and sustained growth, the cooperatives have managed to achieve economic goals and maintain strong financial ratios. FINANCIAL RATIOS EQUITY TO TOTAL ASSETS TOTAL DEBT TO EBITDA DSC Composite Member Ratios 37.0% 5.1X 2.1X 6
$/MWh NEW TERRITORY 2011 reflected a year of new experiences for Rayburn first year of owning a generation asset, record demands due to extreme cold in February and extreme heat during the summer, drought, and falling natural gas prices. While the challenges were significant, 2011 ended well for Rayburn and its Members. Freestone Energy Center The minority interest acquisition of the Freestone Energy Center in December 2010 was Rayburn s first foray into generation asset ownership. Freestone is a combined cycle unit operated by Calpine. After a year of ownership experience, Rayburn has a new appreciation for the complexities of operating an asset as well as the intricacies of the ERCOT market. At the same time, the benefits of the shaft diversity afforded by Freestone s two power blocks were exemplified as Rayburn was able to continue receiving power while the other power block was undergoing maintenance. Partnering with Calpine, Rayburn sought for an alignment of interests in plant operations. This alignment was successfully achieved during 2011 as Rayburn utilized Calpine s market and operations expertise to participate in the ERCOT market. On average, the ERCOT market price was approximately $45/MWh for 2011. Rayburn utilized a portion of the Freestone energy to serve its load while selling the excess into the ERCOT market. For 2011, Rayburn was able to pass through a net credit of $29.5 million to its Members through Rayburn s Power Cost Recovery Factor. 2011 AVERAGE MARKET PRICE 180.00 160.00 140.00 120.00 100.00 80.00 60.00 40.00 20.00 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 7
$/MWh Impact of Natural Gas Prices Natural gas prices continued their downward trend during 2011. Future gas prices for 2011 delivery were trading at an average of $8.58/MMBtu at the beginning of 2008. By the end of 2011, the Henry Hub pricing point was settling at $3.18/MMBtu. The additional influx of shale gas along with a mild winter pushed prices lower than were expected even at the beginning of 2011. These lower gas prices exerted additional pressure on our Members to compete with neighboring retail electricity providers, but Rayburn was able to mitigate some of this pressure through the Freestone credits. AVERAGE MEMBER RATE 100.00 90.00 80.00 70.00 60.00 50.00 40.00 30.00 20.00 10.00 2007 2008 2009 2010 2011 Rayburn mitigates some of the natural gas price exposure through its multiple power suppliers and within the respective power supply agreements. Rayburn s fuel mix includes a slice of the SWEPCo resources, hydroelectric power from Southwestern Power Administration, and natural gas from the Constellation contract and Freestone resource. 100% SOURCES OF ENERGY FOR STANDARD SERVICE 90% 80% 70% 60% 50% 40% Constellation Freestone SWEP Co Southwestern Power Admin AEP 30% 20% 10% 0% 2007 2008 2009 2010 2011 8
Summer of 2011 Weather The summer of 2011 brought record heat along with drought conditions significantly higher average temperatures for June through August and significantly lower average rainfall during those same months. The high heat led to increased energy sales for Rayburn and its Members. However, the lack of rain had a significant impact on the generation from Denison Dam. Generation from Denison Dam in 2011 was significantly below the 30-year average. Generation from Denison is scheduled by Constellation subject to Corps of Engineer guidelines and directives. Despite the reduced generation, Denison Dam was utilized during the Rayburn peak load hours. 9
Looking Forward During 2011, Rayburn solicited bids to follow its full requirements power supply contract with Constellation. As a result of the competitive evaluation, the Rayburn Board decided to extend the existing agreement with Constellation through May 2018. The expectation of natural gas prices dominated the discussion. After consulting with various experts in the field, and reflecting the belief that natural gas prices are more likely to increase in the next few years, Rayburn hedged a significant portion of its gas needs under this agreement. The agreement was finalized in February 2012. At the end of 2011, the Rayburn Board expressed a desire for Rayburn to centralize and coordinate a NERC Compliance Program on behalf of Rayburn and its Members. In the first quarter of 2012, Rayburn hired a NERC Compliance Officer and an IT Manager to facilitate this program and establish a culture of compliance. The Members formalized this program through a Reliability Services Agreement between Rayburn and each Member. Rayburn is currently in the process of establishing its Internal Compliance Program and assisting its Members with the necessary training, documentation, and administrative support necessary. 2011 provided several challenges for Rayburn and its Members. In each case, Rayburn and its Members worked together to overcome and position the collective group for a bright future proving the cooperative philosophy true. 10
FINANCIAL REPORT At its inception, Rayburn was basically a power aggregator for its Member cooperatives. In the 1990 s Rayburn built its first transmission lines, and in the 2000 s the Board decided to move the corporation toward owned-generation to fill a portion of its power requirements. With the purchase of a 25% interest in the Freestone combined-cycle generating station in December 2010, Rayburn and its Members moved into a new era in meeting their wholesale power needs. The purchase and its requisite debt caused Rayburn s equity position to plunge from 23% to 6%. Rayburn s Members met the challenge by adopting new rates in November 2010, and retaining minimum coverage ratios of 1.7 TIER and 1.5 DSC. 350,000,000 300,000,000 EQUITY AND ASSETS 350,000,000 300,000,000 OPERATING REVENUES 250,000,000 200,000,000 150,000,000 100,000,000 Total Equity Total Assets 250,000,000 200,000,000 150,000,000 100,000,000 Operating Revenues 50,000,000 0 2007 2008 2009 2010 2011 50,000,000 0 2007 2008 2009 2010 2011 SOURCES OF KEY ENERGY FINANCIAL FOR STANDARD RATIOS SERVICE 2.50 2.00 1.50 TIER 1.00 0.50 DSC 0 2007 2008 2009 2010 2011 During 2011, Freestone outperformed expectations. Sales from the unit totaled $66.7 million, which offset the operating and fixed costs of the unit. Rayburn also mitigated its exposure to higher gas locks and provided some rate relief to its Members by buying out some of its higher-priced gas contracts. Rayburn s key financial metrics are strong, with equity climbing from 6% to 11% in 2011. The trend indicates that Rayburn will achieve at least 20% equity by mid 2013. Over the past five years, Rayburn has matured into its role as a full-service Generating and Transmission cooperative. Its financial future looks bright, as Board and staff maintain strong partnerships with its power suppliers. Rayburn s leaderships continue to look for opportunities to own assets and control more of its energy future. 11
RAYBURN COUNTRY ELECTRIC COOPERATIVE, INC. Rockwall, Texas Financial Statements and Independent Auditors Report December 31, 2011 and 2010 12
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980 Sids Road Rockwall, Texas 75087 (469) 402-2100 www.rayburnelectric.com