Annual Report to the Members From the Board President and Manager
2006 Summary
FINANCIAL PERFORMANCE
William C. Bauer Board President
Empire's financial performance for the year can be described as healthy. In response to a 4 percent wholesale rate increase from Tri-State Generation and Transmission Association (Tri-State), Empire raised its average electric rates 2.3 percent on January 1, 2006. Empire added an additional 4.8 percent as a consequence of increasing costs over the previous 3 1/2 years for a total rate increase of 7.1 percent. Empire met all minimum mortgage requirements of our lenders. The Net Times Interest Earned Ratio (TIER) for 2006 was 4.1 compared to the 2005 TIER of 2.52. Empire's equity position as a percentage of assets for 2006 increased to 48.99 percent compared to the 2005 value of 46.5 percent.
Empire ended the year with revenues of $37.0 million compared to $34.0 million the previous year. After expenses, Empire's operating margin was $2.0 million compared to $873,677 in 2005. The increase is a consequence of increasing load and the rate increase.
Including Tri-State's capital credit allocations and other miscellaneous income/losses, Empire's net margin in 2006 was $4.8 million compared to $2.3 million in 2005. The increase is a consequence of increasing load, the rate increase, and the telecommunication impairment reflected in 2005's business.
Empire's rate of return at year-end 2006 was 10.2 percent compared to 7.0 percent in 2005.
$1,294,571 was returned to Empire's members in 2006 compared to the 2005 capital credit retirement of $1,052,006. A new method of paying capital credits was established in 2006. Instead of first-in first-out (FIFO), the board decided to try to get refunds into more members hands by using a 1/2 FIFO/ 1/2 PERCENTAGE method. The result was that 24,213 members received refunds in 2006 versus 9,862 members in 2005. This is a clear way to demonstrate the board's commitment to this important cooperative principle!
ELECTRIC SYSTEM
Empire's electric system continues to perform well. The foremost indication of electric system performance is the outage rate. In 2006, Empire's average customer was without power for about 1.09 hours. In 2005, Empire's average customer was without power about 0.923 hours. Considering there are 8760 hours in a year, Empire's average customer had power available for 8,758.91 hours or about 99.988 percent of the time. Storms caused about 33 percent of the outage time, 1 percent was planned, and equipment failure caused 41 percent with the balance (25 percent) being caused by animals, traffic accidents, overloaded customer services, etc. It is important to note that Empire's wholesale power supplier, Tri-State, did not record a single outage in 2006 or in 2005. Empire highly commends Tri-State for this incredible achievement. For comparison, the Colorado outage rate median, according to the Rural Utilities Service, is 2.4 hours and for cooperatives across the U.S., 3.5 hours. Empire's five-year average outage rate is 0.9 hours (54 minutes) off per customer. These reliability factors indicate that prudent engineering, operations, maintenance, and outage response practices are being performed on Empire's system and that Empire is indeed providing reliable electric service to the member-owners of the cooperative. The following graph illustrates Empire's success in its efforts to keep the power on:
TRI-STATE GENERATION AND TRANSMISSION
Helping Empire to achieve a high reliability factor is Empire's wholesale power and energy provider Tri-State based in Westminster, Colorado. Their ability to generate and transmit power from their generation resources to Empire's distribution system is directly related to Empire's excellent reliability factor. This measure of reliability reflects well on Tri-State's commitment to invest in power plants, transmission lines, and substations to insure a reliable source of power to all of Empire's member-owners.
Planning and construction of new generation and transmission facilities for growing member loads while Tri-State deals with dramatic increases in their own purchased power costs have been the major focus of Tri-State's activities during the past five years. The simple fact is that Tri-State's 44 member cooperatives grew by 44 percent over the last 10 years and project a 45 percent growth rate over the next 10 years. The following graph shows Tri-State's forecast through 2026.
Empire contributes to Tri-State's growth. The following graph illustrates this fact:
As Empire's members are painfully aware, this growth does not come without a price. Tri-State raised electric rates to Empire about 10 percent effective March 1, 2002, 7 percent effective January 1, 2003, 14 percent effective January 1, 2005, 4 percent effective January 1, 2006, and 11.8 percent effective January 1, 2007. Tri-State has projected a preliminary 11 percent rate increase in 2008 but predicts rate increases should slow down after that at rates close to inflation.
Neal Stephens General Manager
TELECOMMUNICATIONS
FastTrack Communications, Inc. (FastTrack) is a subsidiary of Durango, Colorado based La Plata Electric Association (71 1/4 percent owned by La Plata, 23 3/4 percent by Empire Electric, and 5 percent by a private stockholder). FastTrack is a facilities based telecommunications services provider which operates a fiber optic network between Albuquerque, New Mexico and Grand Junction, Colorado, a distance of about 420 miles, with connections into Farmington, Aztec, Durango, Ignacio, Cortez, and Montrose and to Denver. FastTrack is certified as a Competitive Local Exchange Carrier in both Colorado and New Mexico and is co-located in Qwest Central Offices in Albuquerque, Farmington, Durango and Grand Junction. The principal services are data transport, integrated voice/data and access to the Internet. Empire has one director that serves on the FastTrack Board of Directors. FastTrack continues to increase its market share in its service territory. FastTrack received an unqualified audit from an independent auditing firm for their 2006 operations.
Empire owns a 6 1/4 percent interest in a 144 fiber-count telecommunications project from Albuquerque, New Mexico to Grand Junction, Colorado. This project was originally called the Pathnet Project but Pathnet declared bankruptcy in 2001. As a consequence, Empire's partners in the project are currently as follows: LPEA (6 1/4 percent), Delta Montrose Electric Association (6 1/4 percent), San Miguel Power (6 1/4 percent), and Tri-State (75 percent). Tri-State is the operating partner for the project and is actively engaged in marketing the dark fiber in this system. Construction of this project has resulted in broadband telecommunications services being available in Empire's territory. Broadband telecommunication is available in the Four-Corner's region because of this project.
ENVIRONMENTAL
Three members have installed solar photo-voltaic systems and are taking advantage of Empire's net-metering tariff at year-end. When the sun is shining, the meter either slows down or spins backward resulting in the member receiving full-retail value for each kWh that offsets their kWh load. At the end of the year the meter is read and if the member pushes more kWh onto Empire's grid, they receive a payment for their net kWh generation. The amount is based on the average wholesale rate Empire would otherwise have paid Tri-State.
At year end, 29 members were participating in Empire's voluntary Renewable Energy (Green Power) tariff purchasing 140,000 kWh/month. Customers can volunteer to purchase renewable energy in blocks of 100 kWh. Each 100 kWh block of green power can be purchased for an additional $1.25 per block over and above the customer's current rate. The rate Empire is charging is a pure pass through of the rate Tri-State charges Empire for procuring these resources. Visit Tri-State's website at www.tristategt.org/greenpower for information about these renewable resources.
Empire commenced a refrigerator/freezer recycling program in 2006 to rid the system of as many energy-hogging refrigerator/freezers as possible. Members were paid $50 for each unit they hauled to the Cortez or Monticello landfills. Empire also paid for the disposal of the units. The program was very successful with 230 energy-hogging units ultimately being destroyed. Each member also received $50 toward the purchase of an Energy Star rated replacement unit.
Empire started a compact fluorescent light bulb (CFL) give away program in 2006. Over 3,000 23-watt CFL bulbs have been distributed to Empire members. A 23 watt CFL produces about as much light as a 100 watt incandescent and lasts 10 times as long. If each 23 watt bulb replaced a 100 watt incandescent, 231 kW of demand was conserved per month on a system-wide basis. For perspective, a typical all-electric home will require a peak demand of up to 15 kW. This is a good start for Empire's members.
THANKS AGAIN
It is important to remember that Empire's member-owners are the foundation of this utility. This is your electric utility and we hope you are proud of it. The board, staff, and employees again want to extend our deep appreciation to the membership for your support of your rural electric cooperative.
