William C. Bauer Board President

Empire's financial performance for the year ending December 31, 2008, was healthy. In response to an 11.4 percent wholesale rate increase from Tri-State Generation and Transmission Association, Empire raised its average electric rates 8.9 percent on January 1, 2008. This covered the increase in wholesale rates from Tri-State plus a 1.9 percent increase to cover increasing internal expenses. Empire met all minimum mortgage requirements of our lenders. Empire ended the year with revenues of $46.9 million compared to $39.7 million the previous year. After expenses, Empire's 2008 operating margin was $1.3 million compared to $1.4 million in 2007. Including Tri-State's capital credit allocations and other miscellaneous income/losses, Empire's net margin in 2008 was $5.8 million compared to $6.8 million in 2007. The decrease is a consequence of reduced capital credit allocations from Tri-State and other vendors. Empire's rate of return on rate-base at yearend 2008 was 6.8 percent compared to 7.8 percent in 2007.

In our continuing effort to keep our costs down, the staff and board identified several areas where costs could be controlled and/or reduced including but not limited to the following examples:

• One retiring lineman was not replaced
• One retiring custodian was not replaced
• Board and employee travel was reduced
• One bucket truck scheduled for regular replacement was postponed for a year
• Two office vehicles scheduled for replacement will be sold and not replaced
• Several meetings were conducted by webinar
• Consulting service expense was reduced
• More efficient mail processes were used
• A continuing effort to keep costs down and/or eliminate them is underway

Big storms in 2008 resulted in an increase in Empire's outage rate for the year. The average outage rate (hours off per customer) in 2008 was 2.177 which was dramatically higher than the 2007 rate of 0.628. Considering there are 8,760 hours in a year, Empire's average customer in 2008 had power available for 8,757.82 hours or about 99.98 percent of time instead of 99.99 percent of the time the previous year. Where storms in 2007 caused 37 percent of the outage time, storms in 2008 caused 74 percent of the outage time. Three percent of the outages was planned; equipment failure caused 6 percent; and the balance (17 percent) was caused by animals, traffic accidents, overloaded customer services, etc. For comparison, the latest available Colorado cooperative outage rate median is 2.97 hours and for all cooperatives in the U.S, 3.37 hours. Empire's five-year average outage rate is 1.2 hours (72 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.

Empire conducted a member survey in 2008 to measure attitudes regarding energy efficiency, conservation, renewable energy, and the environment, along with expectations and satisfaction with key coop functions, and member demographics. These results reflect the survey responses from 300 randomly-selected member households.

• Members indicate mixed feelings about renewable energy. Most support the concept, but are less interested in paying more for it.
• Respondents say core co-op functions like reliability, customer service and reasonable rates are slightly more important than renewable energy programs. They also reported that efficiency is also more important than renewables.
• Just under half are aware that Empire offers efficiency and Green Power programs. Considerably fewer actually participate in them.
• Only 1 in 4 is interested in paying $2-$3 more per month for renewable energy. Most who aren't interested say it's too expensive.
• About 4 of 5 would not pay more for EEA to invest in local renewable projects, or to expand the co-op's energy efficiency programs.
• Only 3 in 10 are aware of Colorado's mandated renewable portfolio standard. A slight majority say Empire should go beyond the state requirement, but fewer would support a rate increase to pay for it.
• A slight majority support Tri-State's potential use of nuclear power to generate electricity.
• More than half have taken steps to reduce home electric use in the past two years, mostly using no-cost or low-cost measures.
• Just under half have electric heating and water heaters, and about onethird of them are interested in load management.
• Nearly 9 of 10 are satisfied with EEA's existing renewable energy and efficiency programs.
• Lower satisfaction and a large "satisfaction gap" for charging reasonable rates, yet two-thirds still say their bills are reasonable.
• There was consistently high overall member satisfaction with the co-op.
• Respondents are mainly middle-aged and older (median age is 59) and the median length of service is 9 years.
• Respondents are primarily retirees and blue collar occupations.
• Considerable education exists in that over half have college or post-high school education.

Nine members are now using grid-connected solar photo-voltaic systems and are taking advantage of Empire's net-metering tariff. Two of the nine net-metered members were able to generate more energy than they used in 2008. One member received a check for $189.01 (2825 kWh) and the other $15.86 (237 kWh).

Neal Stephens General Manager

At the end of the year, 147 members were participating in Empire's voluntary Renewable Energy (Green Power) tariff purchasing 85,000-kWh/month. This is a 27 percent increase over the 116 members who participated at the same time one year ago. This is a reasonable and inexpensive way for members to purchase bulk renewable energy rather than build their own expensive facilities. Each kWh currently costs an additional $0.004 per kilowatt hour over and above regular purchases. The rate Empire charges is a pass through of the rate Tri-State charges Empire for procuring these resources. Visit Tri-State's website at www.tristategt. org/greenpower for more information about the renewable resources members can purchase.

Empire chose to put the refrigerator recycling program on hold in 2008 because the number of participants in 2007 was quite a bit lower than the previous year and partly on request of the landfills to allow them to properly process the units they have on site.

A more focused campaign was followed for Empire's compact fluorescent light (CFL) program. Empire partnered with the local Pinon Project to help members who lack the resources to upgrade their home to more energy efficient lighting. Through a coupon system the Pinon Project staffers helped distribute well over 1,000 (300 4-packs) CFL bulbs to members in need. Approximately 3,000 additional bulbs were distributed at energy seminars and the local fairs and other events in which Empire participated.

Empire began promoting the latest lighting technology by selling light emitting diode (LED) Christmas lights. A one dollar-per-string rebate was given if the consumer brought in old Christmas light strings for proper disposal. This was part of a local service club campaign entitled "Light up This Whole Town".

The year 2008 was big for education seminars. Member Services began the year hosting several seminars focused on the connection of renewable resources to Empire's grid. As part of these seminars, whole-house energy auditing was presented. More than 100 members from Colorado and Utah attended these seminars in 2008. In addition Empire, along with La Plata Electric in Durango and Tri-State hosted the first annual regional Energy Expo. It was held on the Fort Lewis College Campus, with the intention of moving it around the Four Corners in subsequent years. The two-day event was deemed a success with utilities and individual consumers all gaining information from the Expo. The format included a Friday exclusively for area utilities and municipalities to gather and share information while the next day was open to the public. It was estimated that 200 people stopped by during the Saturday affair.

Energy audits also became a larger factor in 2008 with approximately six audits being performed on local residences. Empire's Energy Efficiency Credits initiative was expanded in 2008 with Tri-State contributing to the refrigerator rebate resulting in a total rebate for an energy star refrigerator or freezer at $90. Over 130 rebates were processed for new refrigerators or freezers.

Empire does not generate electricity. Instead, Empire has contracted with Tri- State Generation and Transmission Association to generate and transmit electricity for Empire's members through the year 2050. In addition to Empire, Tri- State generates and transmits power for 43 other member cooperatives. 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 and uncertainty in future environmental costs have been the major focus of Tri-State's planning activities. Tri-State's latest projections indicate that Tri-State can anticipate up to 400 megawatts of new loads being added system-wide by 2011. It is likely that Tri-State will meet member's near-term needs with natural gas fired generation providing Tri-State with enough time to plan and develop firm long-term resources. Tri-State continues to project rate increases to cover its future expenses.

It goes without saying 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.