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2014 Annual Report

Executive Summary

Arkansas Electric Cooperatives Cooperation

A Message from the Chief Financial Officer

Michael W. Henderson
Executive Vice President and Chief Financial Officer

Commitment. Focus. Perform.

These three words are paramount in helping Arkansas Electric Cooperative Corporation (AECC) and its member cooperatives to provide reliable, affordable and responsible electricity for rural Arkansans during 2014. Developing strategy for an electric cooperative requires careful thought and foresight to achieve the correct balance of strong financial metrics to satisfy lenders and counterparties while keeping rates low to serve members. These two opposite goals are extremely difficult to balance. AECC’s board of directors and the management team has cooperated to establish a strategy that has resulted in a highly rated credit rating and managed its financial position in a manner that reduces revenue requirements such that AECC offers rates to its members that are among the lowest in the generation and transmission cooperative sector.

During 2014 AECC identified strategic goals to strengthen its ability to serve members for many years. AECC serves members in the Southwest Power Pool and the Midcontinent Independent System Operator, Inc. regional transmission organizations (RTO). These organizations operate a Day-2 power market as well as a financial transmission rights market. AECC staff excelled by installing a market data system, training market traders and creating settlement processes to allow AECC to participate in these markets. When the traditional ratemaking process was found to be insufficient to keep up with changing transmission costs, AECC staff developed a RTO/Transmission Rider to allow a monthly pass through of these costs to prevent undue stress on AECC’s net margin. This plan was approved by both the AECC board of directors and the Arkansas Public Service Commission. AECC staff was successful in completing a useful life study of some of its base load generation assets to ensure depreciation rates accurately reflect those useful lives. This resulted in helping to keep rates low to members.

As a result of remaining focused on strong credit metrics and providing low rates, AECC achieved a net margin of $15.5 million, a Margin for Interest (MFI) ratio of 1.46 and a Debt Service Coverage ratio of 1.50. Both ratios are well above the minimum desired for the “AA” category.

Achieving balance among parties with opposite desires requires a great deal of cooperation. There were significant issues in 2014 and 2013 that could have created great discontent and discord among the various interests; however, by working together strategies were developed to obtain a much stronger cooperative system than before the challenges arose.

As you review the 2014 AECC Annual Report you will find that AECC’s board of directors, member systems and management team working together has resulted in positioning AECC to provide its members with clean, low-cost, reliable electricity for rural Arkansans in a responsible manner today and in the future.