A Message from the President and Chief Executive Officer

Arkansas Electric Cooperative Corporation (AECC) achieved new milestones in 2016. Our successes range from achievement in financial metrics and upgraded credit ratings to achievement in employee satisfaction and statewide “Best Places to Work” recognition. AECC increased the level of diversity in the cooperative’s generation portfolio, thereby providing stronger optionality between cooperative-owned generation and the regional transmission organizations (RTOs) markets and enhanced our position as transmission owners in two RTOs. Our ability to hedge one strength (diverse generation ownership) against another (participation in two RTO markets) produces net benefits for AECC’s member-owners.

Our board’s reward for the prudent financial management of AECC, the generation and transmission cooperative for Arkansas’ 17 distribution cooperatives, was the receipt of a credit rating upgrade from Moody’s Investors Service. During the first quarter of 2016, Moody’s moved AECC from an “A” rating up to a “AA-” credit rating, one of the highest investment designations awarded to a public utility. This distinction marks AECC as one of the strongest G&T cooperatives and provides ready access to less expensive capital to invest in generation and transmission infrastructure. If capital is needed, AECC’s 17 distribution cooperative members will pay less for their electric service than they otherwise would.

On the human capital side, AECC received the highest compliment that any company can receive ─ a vote from its employees as one of the Best Places to Work. This award demonstrates that our employees are committed to AECC’s mission to provide reliable, affordable electricity to rural families and businesses across Arkansas.

The year 2016 also provided an opportunity to reaffirm the wisdom of having a diverse, well-managed portfolio of generation resources, as well as active participation in two RTOs – the Southwest Power Pool (SPP) and the Midcontinent Independent System Operator (MISO). During the past 50 years, the AECC board of directors has consistently chosen to invest in a fuel-diverse fleet of generation resources, including coal, natural gas, hydropower, wind, biomass and solar energy. This fuel diversity within a self-owned generation portfolio has proven to be a key factor in AECC’s ability to provide our members with reliable, affordable electricity.

The resources that were dispatched last year to serve our member cooperatives’ energy needs were analyzed and we learned that AECC’s self-owned natural gas plants provided 27 percent of our members’ energy needs in 2016 compared to 13 percent in 2015. AECC’s low-cost, stable coal resources served 45 percent of our load in both years, and our hydro and wind resources dispatched in the 14 to15 percent range each year. The result of our economic dispatch process was that AECC’s utilization of the SPP and MISO market energy fell by 50 percent between 2015 and 2016, due to the lower generation cost of cooperative-owned plants. This example highlights the great economic flexibility of maintaining a self-owned portfolio of diverse, reliable and affordable generation, while also having access to two RTO energy markets. Each wholesale energy supply source serves as a price hedge against the other, resulting in the lowest overall cost of electricity for our members.

Last, but not least, the United States Supreme Court “Stay” of the Environmental Protection Agency’s Clean Power Plan was a welcome event in 2016, and the nation may soon learn whether or not this rule survives legal challenge. While coal is still a major component of this nation’s and Arkansas’ energy supply, we believe that any impacts of reduced coal use will be offset by the continued abundance of low-cost natural gas, continued improvements in renewable energy technology and continued strides in energy efficiency. All indicators point to an energy future that continues to be reliable, affordable and responsible.