three
Cooperative Overview
five
SECO’s Performance
seven
Getting Involved
Created for our member
nine
Cooperative Advantages eleven
Member Survey
thirteen
Auditors’ Report
one
Relevant Financial Data 2003 Operating Revenue
2002
$177,804,512
$154,495,598
Net Margins
$7,466,325
$7,520,325
Total Assets
$317,416,621
$289,006,892
$1,128,636
$448,084
2,099,971,831
1,940,003,978
Miles of Energized Line
8,946
8,711
New Services
8,170
6,456
Number of Members
126,833
118,908
Full-time Employees
311
294
Patronage Capital Retired
Kilowatt-Hours Sold
A name you can trust As we move into 2004, we pledge to keep the emphasis on what is best for our members. After all, in the final analysis, that’s what a co-op is all about.
Membership Growth
Jerry D. Hatfield President & Trustee – District 9
(10 year period)
James P. Duncan
120,000
CEO & General Manager 100,000
The values local cooperatives bring to the energy business keep us focused on
40,000
1993
20,000 1995
That important consumer advocacy role is possible because we are a member owned utility. SECO’s customers elect the people who serve on the Co-op’s Board of Trustees and they get to vote on any proposed changes to the bylaws under which the Cooperative operates. It’s a very democratic organization and we are committed to keeping it that way.
60,000
1997
Changes in the energy industry have certainly given others the opportunity to try and take advantage of consumers. SECO, and the rest of the nation’s cooperatives, are fighting every step of the way to insure the interests of every customer we serve are protected.
80,000
1999
There’s no question about it, electric cooperatives are unique. Unlike other types of utilities, electric cooperatives are not-for-profit entities. That means keeping customer service at the highest possible level and keeping the cost of electricity to members as low as possible are twin priorities. There is no profit motive.
serving our members’ needs and their needs alone. Our “consumer first” approach insures we continually look for ways to enhance our ability to meet and exceed member expectations and strengthen the quality of life in the communities we serve.
2001
We are pleased to report that 2003 was a momentous year where the performance of your Cooperative is concerned. Our growth was tremendous, our service reliability continued to be excellent, our fiscal picture remained bright, and our advocacy activities, on behalf of our members, were unprecedented. That’s why the vast majority of SECO’s member/customers are so pleased with their Cooperative and you’ll read more about that in this report.
2003
Cooperative Overview
0 Number of Members in thousands
three
Growth presents
W.L. “Bud” Hodges Trustee – District 3
Rudolph A. Wyatt Vice President & Trustee – District 4
Dillard B. Boyatt Trustee – District 2
Total Utility Plant Forrest R. Jones, Sr. Trustee – District 1
(10 year period) 400 million
350 million
150 million
50 million
During 2003, SECO customers called for an astonishing 2.1 billion kilowatt-hours of electricity to power their varied lifestyles.The Co-op delivered.
0
1993
As one might imagine, the unprecedented growth your Co-op experienced last year also resulted in a new record where demand for electricity was concerned.
1995
100 million
1997
SECO’s service territory takes in nearly 2,000 square miles in parts of seven counties and in 2003 one measurement of growth was the 235 miles of new electric lines built and added to the system. As the year came to a close, there were nearly 9,000 miles of energized electric lines to maintain in SECO country.
200 million
1999
That kind of growth also meant that constructing new services and maintaining and improving existing services required a major investment from the Cooperative. Indeed,throughout the year,SECO was putting a record average of $2.3 million back into the electric system every single month. That’s about $108,000 in improvements each and every working day in 2003.
250 million
2001
The numbers at the close of 2003 showed that SECO ended the year with a total of 126,833 active accounts.8,170 of those accounts were added in 2003,eclipsing the previous record set in 2002 of 6,456 new accounts.
300 million
2003
The Co-op’s annual reports have, for the last decade, reflected incredible growth. 2003 was the most notable year yet for Sumter Electric.
Total utility plant includes all SECO’s electrical system, land, buildings, vehicles, furniture etc.
opportunity Robert G. Gentry Secretary-Treasurer & Trustee – District 7
Wilson G. Sheppard Trustee – District 8
Earl Muffett Ray F. Vick
Trustee – District 6
Jerry D. Hatfield President & Trustee – District 9
Trustee – District 5
SECO’s Performance The total kilowatt-hours utilized by SECO customers in 2003 represented a 8.2 percent increase over the old 2002 record. With such a rapid expansion of the customer base, the resulting investment in the electric system, and the record amount of electricity purchased by the Co-op on behalf of its customers, it might be assumed that member equity might well have suffered. Not so. Member equity actually grew .5 percent over 2002. At the end of 2003, SECO member/customers owned 31.7 percent equity in their Co-op.
2.5 billion
Kilowatt-Hours Sold (10 year period) 2 billion
1.5 billion
Improving equity, while growing at such a staggering pace, is very challenging and is a testament to the sage guidance of the SECO Board of Trustees, competent and conservative management and hard working, dedicated employees.
1993
1995
1997
1999
Membership growth at Sumter Electric Cooperative has been phenomenal over the past decade experiencing a record high in electricity sales.
500 million
2001
SECO’s trustees, management and employees are more than ready to accept those challenges and anxious to continue the ongoing pursuit of the Co-op’s mission – to exceed customer expectations.
1 billion
2003
SECO members can be very proud of their Co-op’s overall performance in 2003. And, 2004 is shaping up to be every bit as challenging, with no let up in the growth pattern in sight.
0
five
“We want to be sure that the voice of electric co-ops is heard by those who make the laws and act on regulation of our industry.” – Jim Duncan
Getting Involved Do SECO members want their Cooperative to be involved in the community? You bet they do and the Co-op and its employees again answered the call in 2003. SECO employees and staff were everywhere in 2003. They volunteered to work on a myriad of community enhancement projects, donated a record amount of their hardearned salaries to United Way and a wide variety of other charitable causes, pledged their time and talents to our young people’s futures through church and sports activities, as well as taking on leadership roles on numerous community related committees and boards. And, that’s just part of the story. In 2003, SECO’s Youth Scholarship Program was enhanced so that deserving high school graduates could get additional help to pursue their dreams of a higher education. In many cases, these students might have difficulty pursuing their aspirations without some type of assistance. The Co-op’s participation in the youth livestock sales at the county fairs in its service territory was also augmented. Youngsters raise their livestock themselves and the sales at the fairs help fund their educations or their future careers in farming or ranching. SECO acted as a consumer advocate on behalf of its member/customers in a number of areas.
What makes us different from other utilities? The federal government’s push to enact a national energy bill that was not co-op friendly, and would have adversely affected the lifestyles of those in the community-at-large by raising prices and lowering electric reliability, was effectively challenged by SECO and other co-ops throughout the country. Of special note in 2003, was the creation of Co-op Owners for Political Action. In March, SECO was the first electric cooperative in the nation to launch this new program aimed at giving the member/customers of electric cooperatives a unified voice in the legislative and regulatory process. Hundreds of SECO members have joined the new organization and SECO’s initiative on behalf of its customers is now being used as a model for other cooperatives around the country. The Co-op also took issue with irrational and unwarranted runaway increases in the price of natural gas and gasoline. In addition, SECO championed the
cause of those in our community who are developmentally disabled when the agencies providing services to this vulnerable segment of our society were faced with devastating funding cuts. Sumter Electric continued its commitment to using the SECO Angel Fund to help improve the human condition throughout its service territory. Thousands of people in our community who have experienced severe hardship, through no fault of their own, have been helped by the Fund. SECO, in partnership with its customers, provided over $56,000 in vitally needed assistance through the Angel Fund in 2003. At SECO, commitment to community is demonstrated daily in many ways.
seven seven
The power of Co-op Advantages Each year many people relocate to Sumter Electric Cooperative’s service territory. Often they come from a region served by an investor-owned or municipally owned utility and aren’t aware of the unique benefits of being a part of an electric cooperative. There are some distinct advantages to membership in an electric cooperative like SECO. For instance, cooperatives are owned by their member/customers and focus on their members’ needs and local priorities. They are an integral part of the communities they serve. The cooperative business model guarantees every customer a voice in business decisions. Members know they can trust their cooperative, because it was created not to make profits, but simply to deliver electricity. Co-ops offer stability, reliability and better value. While many large utility companies have merged and/or closed local offices, electric cooperatives are located in the communities they serve, making them easily accessible and responsive to members’ needs. They work hard to achieve a better quality of life for consumer-owners.
Active, involved and meticulously responsive to member and community needs – that’s the cooperative difference.
human connections Sumter Electric Cooperative is a member of Touchstone Energy Cooperatives® which is a national network of more than 600 electric co-ops that helps cooperatives take advantage of combined resources to realize economies of scale and enhance their unique relationships with their local member-owners. As a group, the Touchstone Energy Cooperatives deliver energy and energy solutions to millions of customers. Innovative programming made available through the Touchstone network is making a difference in our communities. A prime example is the Get Charged! program SECO has provided to all the public middle schools in its service area. By belonging to the Touchstone Energy Cooperatives network, SECO was able to purchase the very creative Get Charged! kits at a nominal charge and provide them to our schools at no cost to the school districts.
how to use it safely. The program has drawn rave reviews from educators and its availability would not have been possible without the resources provided through SECO’s relationship with Touchstone Energy Cooperatives. Our relationship with Touchstone Energy Cooperatives reflects SECO’s own strong values.The four core values of the Touchstone Energy Cooperatives are innovation, accountability, integrity, and commitment to community. It is a perfect fit where SECO is concerned. After all, it’s really about people. It’s about the power of human connections and the Co-op’s pledge to make sure the customers always come first.That’s the difference between electric cooperatives and other types of electric utilities. It’s a difference that we at SECO are proud of and that our customers appreciate.
Each Get Charged! kit provides interactive CD-ROMs, videotapes, teacher guides, student workbooks, and other collateral materials to assist students in gaining a real world understanding of electricity, what electric power is, how it works and, most importantly,
nine
Barry Bowman Director of Public Affairs
Ben Brickhouse
John Chapman
Director of Engineering & Information Technology
Director of Accounting & Finance
Jack Canterbury Director of Corporate Division
Every two years SECO conducts a comprehensive customer satisfaction survey of its members. We do this because we believe it’s important to understand what our customers are thinking and get their impressions of how their Cooperative is performing. In late 2003, the latest survey was conducted on SECO’s behalf by NRECA Market Research Services. The survey results certainly indicate that the vast majority of members think the Co-op is performing at a very high level.
When asked to compare SECO to what they thought would be the ideal utility, 42 percent of members again gave their Co-op a rating of 10 and an additional 22 percent gave the Co-op a rating of 9.0 on the 10 point scale.
According to the survey, overall member satisfaction with SECO is excellent. Our members gave us a 9.06 rating on a 10 point scale. SECO’s score far exceeds the goal of 8.5 which is the target for achievement in many service industries.The Co-op’s score also exceeds the 8.8 average for electric co-ops conducting member surveys nationwide.
The overall results of the survey were some of the highest ever seen by NRECA researchers. We think it comes about because your Cooperative remains firmly focused on the three major objectives of our strategic plan. Those objectives are improving customer satisfaction, improving financial performance and strengthening organizational effectiveness.
(Mean Ratings Graphed) 4.64 4.77
Clear bills Friendly employees
4.67 4.72
Professionalism
4.63 4.70
Supporting the local community
4.53 4.63
Being good stewards of the environment
4.51 4.63
Providing convenient payment options
4.52 4.57
Overall customer service
4.54 4.56
Providing personal attention
4.39 4.52
Reliability of electric service
4.39 4.52
Having consumers' best interests at heart
4.33 4.50
Communicating and keeping you informed
4.41 4.49
Resolving issues or problems
4.45 4.46 4.27 4.44
Good value for the money
3.93 4.26
Charging reasonable rates 0
1
2
Co-ops Nationwide
3 SECO 2003
4
5
Director of Eastern Division The members also gave the Co-op high marks when it came to questions about whether the Co-op was meeting their expectations. Indeed, 42 percent of the members polled said the Co-op was exceeding their expectations and gave SECO a perfect rating of 10 on a 10 point scale. Another 21 percent of members gave the Co-op a 9.0 rating on the 10 point scale. These were very strong scores and another solid indicator of member satisfaction.
Member Survey
Performance Quality Ratings
Mickey Gauldin
Chris Green
Jerry Sorensen
Alex Markley
Senior Executive Assistant
John LaSelva Director of Reliability & Operations
Director of Human Resources, Safety & Training
Harry Schindehette
Director of Operational Support Services
Director of Northern Division
Understanding our customer’s needs While each of these objectives has a number of more detailed components, the three main objectives really say it all. Those are the reasons we exist. We’re here to provide you with the highest possible level of satisfaction while building a financially strong cooperative with an organization that is structured to respond quickly to your needs. Your Co-op is a not-for-profit entity owned by the very people it serves. As such, our only focus is on what’s best for our member/customers. That attention to detail and commitment to our customers is certainly reflected in this latest survey. One aspect of the survey merits special mention. For the first time, SECO’s survey information was used to compare the Co-op to
other major utilities. If you take the overall customer satisfaction rating, the expectation rating and the ideal utility rating, NRECA researchers can determine how SECO did on the American Customer Satisfaction Index (ACSI). ACSI scores are calculated on a scale of 0 to 100. SECO’s score was 87. This was the top score for all types of major utilities rated by the Index. Southern Company was second with a score of 81. The Touchstone Energy Cooperatives, of which we are a part, were third with a score of 80.Other ACSI scores included Allegheny Energy at 77, Sempra Energy at 76, Duke Energy at 74, and PacifiCorp at 74. SECO’s score of 87 was also significantly higher than the investor owned utilities serving Florida. The industry average score on the ACSI scale is 73. So, your Co-op did extremely well by comparison.
Our members can be assured that SECO and its employees will continue striving to provide them with the very best service possible.
The survey also clearly demonstrated that one of the things members appreciate and want most is communication. They like the fact that the Co-op works hard at staying in touch with the membership and keeps them abreast of developments.We’ll continue to make communication a priority because the Co-op wants members to know what is going on with their Cooperative and we want to keep the avenues for two way dialogue wide open. We appreciate the good report card the members have given the Co-op. The great scores aside, we have no intention of resting on our laurels. Improvements can always be made and our members can be assured that SECO and its employees will continue striving to provide them with the very best service possible.
eleven
INDEPENDENT AUDITORS’ REPORT
Board of Directors Sumter Electric Cooperative, Inc. Sumterville, Florida
We have audited the accompanying balance sheets of Sumter Electric Cooperative, Inc. as of December 31, 2003 and 2002, and the related statements of revenue and patronage capital, comprehensive income, and cash flows for the years then ended.These financial statements are the responsibility of Sumter Electric Cooperative, Inc.’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Sumter Electric Cooperative, Inc. as of December 31, 2003 and 2002, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States. In accordance with Government Auditing Standards, we have also issued our report dated January 30, 2004, on our consideration of Sumter Electric Cooperative, Inc.’s internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts and grants. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be read in conjunction with this report in considering the results of our audits.
Purvis, Gray and Company January 30, 2004 Gainesville, Florida
BALANCE SHEETS for the years ended December 31, 2003 and 2002
ASSETS 2003 Electric Plant Distribution and Transmission Plant Construction Work in Progress Total Electric Plant (Accumulated Provision for Depreciation and Amortization) Total Electric Plant - Cost Less Depreciation and Amortization Investments Investments in Associated Organizations Current Assets Cash and Cash Equivalents Accounts Receivable - Consumers (Less Provision for Doubtful Accounts 2003 - $425,562; 2002 - $328,990) Other Receivables Unbilled Electric Revenues Inventories Prepayments and Other Current Assets Total Current Assets Deferred Charges Total Assets
$
331,658,755 18,479,468 350,138,223 (71,029,859) 279,108,364
2002 $
311,036,499 11,092,460 322,128,959 (64,404,520) 257,724,439
14,911,561
14,536,094
890,513
912,070
7,493,582 610,282 1,563,588 5,468,350 190,960 16,217,275 7,179,421 317,416,621
6,554,506 678,342 1,642,326 5,148,928 1,646,903 16,583,075 163,284 289,006,892
EQUITIES AND LIABILITIES Equities Memberships Patronage Capital Other Equities Total Equities Noncurrent Liabilities Long-term Debt Accrued Pension Liability Total Noncurrent Liabilities Current Liabilities Long-term Debt - Portion Due Within One Year Line of Credit Accounts Payable Consumer Deposits Other Current or Accrued Liabilities Total Current Liabilities Deferred Credits Total Equities and Liabilities
$ See accompanying notes.
602,728 97,315,394 2,632,095 100,550,217
569,954 90,977,705 (1,450,400) 90,097,259
175,852,942 0 175,852,942
162,780,541 4,081,800 166,862,341
5,986,328 5,689,000 16,988,589 4,287,515 7,257,497 40,208,929 804,533 317,416,621
4,659,361 0 13,913,203 3,565,513 9,204,445 31,342,522 704,770 289,006,892
$
thirteen
STATEMENTS OF REVENUES AND PATRONAGE CAPITAL for the years ended December 31, 2003 and 2002
2003 Operating Revenues Operating Expenses Cost of Power Transmission Expense Distribution Expense - Operations Distribution Expense - Maintenance Consumer Accounts Expense Customer Service and Informational Expense Administrative, General and Other Expense Depreciation Expense Taxes - Expense Other Expense (Total Operating Expenses) Operating Margins Before Fixed Charges Fixed Charges Interest on Long-term Debt Operating Margins After Fixed Charges Other Margins G&T Cooperative Capital Credits Other Capital Credits and Margins Total Other Margins Net Operating Margins Nonoperating Margins Interest Income Other Nonoperating Income (Expense) Total Nonoperating Margins Net Margins Patronage Capital - Beginning of Year (Retirement of Capital Credits) Patronage Capital - End of Year
$
$
177,804,512
2002 $
154,495,598
117,681,232 105,873 9,588,444 10,832,022 7,354,269 879,470 7,056,679 10,784,700 56,691 377,660 (164,717,040) 13,087,472
100,082,457 103,489 8,952,334 8,904,094 5,729,413 727,986 6,028,724 9,918,433 41,277 171,598 (140,659,805) 13,835,793
(6,447,651) 6,639,821
(6,947,285) 6,888,508
348,891 209,189 558,080 7,197,901
351,984 173,804 525,788 7,414,296
120,478 147,946 268,424 7,466,325 90,977,705 (1,128,636) 97,315,394
118,858 (12,829) 106,029 7,520,325 83,905,464 (448,084) $90,977,705
STATEMENTS OF COMPREHENSIVE INCOME for the years ended December 31, 2003 and 2002
2003 Net Margins
$
7,466,325
2002 $
7,520,325
Other Comprehensive Net Margins Accrued Pension Liability Adjustment Comprehensive Net Margins
4,081,800 $ See accompanying notes.
11,548,125
(3,323,600) $
4,196,725
STATEMENTS OF CASH FLOWS for the years ended December 31, 2003 and 2002
2003 Cash Flows from Operating Activities Net Margins Adjustments to Reconcile Net Margins to Net Cash Provided by (Used in) Operations: Capital Credits and Patronage Dividend Certificates Assigned Depreciation Provision for Uncollectible Accounts Changes in Assets - Decrease (Increase) and Liabilities - Increase (Decrease): Accounts Receivable Prepayments and Other Current Assets Deferred Charges Accounts Payable Consumer Deposits Other Current Liabilities Deferred Credits Total Adjustments Net Cash Provided by (Used in) Operating Activities
$
7,466,325
2002
$
7,520,325
(558,080) 11,564,904 323,100
(525,788) 10,685,879 344,543
(1,115,378) 1,455,943 (7,016,137) 3,075,386 722,002 (1,946,948) 99,763 6,604,555 14,070,880
(647,464) (1,387,260) 762,527 2,268,087 734,984 2,569,464 24,304 14,829,276 22,349,601
Cash Flows from Investing Activities Change in Inventory Contributions in Aid of Construction Received Proceeds from Disposition of Property Proceeds from Redemption of Patronage Capital Certificate Proceeds from Redemption of Other Investments Purchase of Other Investments Extension and Replacement of Plant Plant Removal Cost Net Cash Provided by (Used in) Investing Activities
319,422 4,415,383 71,240
(28,192) 2,251,449 133,880
280,947 38,654 (136,968) (37,165,765) (908,552) (33,085,639)
270,873 36,008 0 (28,377,556) (941,223) (26,654,761)
Cash Flows from Financing Activities Line of Credit (Net) Proceeds of Long-term Debt Payments on Long-term Debt Membership Fees Retirement of Capital Credits Increase in Other Equities Net Cash Provided by (Used in) Financing Activities
(11,427,038) 52,493,562 (20,978,156) 32,774 (1,128,636) 696 18,993,202
(4,563,962) 12,875,000 (4,408,360) 24,067 (448,084) 10,945 3,489,606
Net Increase (Decrease) in Cash and Cash Equivalents
(21,557)
(815,554)
Cash and Cash Equivalents, Beginning of Year
912,070
1,727,624
Cash and Cash Equivalents, End of Year
$ See accompanying notes.
890,513
$
912,070
fifteen
STATEMENTS OF REVENUES AND PATRONAGE CAPITAL (Concluded) for the years ended December 31, 2003 and 2002
2003
2002
Supplemental Disclosures of Cash Flow Information Cash Paid During the Year for: Interest
$
6,477,955
$
6,969,482
Income Taxes
$
0
$
0
$
5,030,393 908,552 (931,624) 5,007,321
$
5,832,398 941,224 (962,044) 5,811,578
Supplemental Schedule of Noncash Investing and Financing Activities The Cooperative Retired Certain Assets from its Plant Records as Follows: Cost of Assets Retired Plant Removal Costs Material Salvaged Net Reduction in Accumulated Depreciation
$
See accompanying notes.
$
NOTES TO FINANCIAL STATEMENTS for the years ended December 31, 2003 and 2002
Note 1 - Summary of Significant Accounting Policies Sumter Electric Cooperative, Inc. (the Cooperative) is a nonprofit rural electric distribution cooperative organized under the Statutes of the State of Florida. The primary purpose of the Cooperative is to provide electricity to its members located in central Florida through wholesale purchase and subsequent distribution. The accounting policies of the Cooperative conform to generally accepted accounting principles as applied to utility cooperatives and are in accordance with the accounting requirements of the Rural Utilities Service (RUS). Receivables Receivables are shown at anticipated realizable value. Bad debts are recognized by use of the allowance method. Receivables consist primarily of uncollateralized amounts due from the sale of energy to commercial and residential members of the Cooperative and other related items. Receivables may be considered delinquent after thirty days and are written off after approximately one hundred twenty days past due. Revenue Recognition and Cost of Power Electric revenues are recognized when billed and are adjusted for unbilled usage through year end. Power costs are metered and recognized during the period of use. The Cooperative’s retail rates provide for recovery of all power costs incurred. Utility Plant Electric plant is recorded at original cost with maintenance and repairs charged to expense as incurred. Additions to plant include costs of materials, labor and certain overhead expenses. Depreciable plant replaced or retired is removed from the appropriate asset at average cost; cost being determined by a moving average for identifiable units of property. Such costs plus removal costs less any salvage values are charged to accumulated depreciation when normal retirements are made. Depreciation Provision for depreciation of utility plant in service is based on straight-line composite rates. Depreciation rates are applied by primary account within the plant account. Depreciation on general plant assets is based on straight-line rates for specific assets as outlined by RUS ranging from three to twelve years. No provision for depreciation is made for construction work in progress until the construction has been completed and the plant is placed into service. Materials and Supplies Materials and supplies inventories are stated at weighted average cost. Cash and Cash Equivalents For purposes of the statements of cash flows, the Cooperative considers all cash and highly liquid investments as cash and cash equivalents. Such investments generally have maturities of three months or less. The Cooperative maintains accounts with several banks in central Florida and accounts at each bank are insured up to $100,000 by FDIC. As of December 31, 2003 and 2002, the amount on deposit in one account was in excess of the insured limits. Investments Investments in capital term certificates are carried at cost, with cost determined by specific identification. Investments in associated cooperatives are accounted for at original cost plus patronage capital assigned less capital credits received. Patronage Capital Accumulated net margins are credited to patronage capital. The net margins are assigned to individual cooperative members’ capital credit accounts based upon their contribution to total patronage capital for the year. Such amounts are assignable to members at year end; the assignment of capital accounts takes place in subsequent years. Capital credits are returned to members in accordance with the Cooperative’s policies and by-laws. Comprehensive Income Reporting The Cooperative accounts for comprehensive income in accordance with Statement of Financial Accounting Standards (SFAS) Statement No. 130, Reporting Comprehensive Income. Comprehensive income includes net income plus other comprehensive income (i.e., certain revenues, expenses, gains and losses reported as separate components of equity rather than in net income). “The only other comprehensive income” item of the Cooperative is the minimum pension liability adjustment, recognized in accordance with SFAS Statement No. 87, Employers’ Accounting for Pensions. Effective July 1, 2003, the group pension plan was merged into the Retirement and Security Program of the National Rural Electric Cooperative Association (NRECA), which eliminated the pension related accrued liability. See note 9 for additional pension disclosures.
seventeen
NOTES TO FINANCIAL STATEMENTS (Continued) for the years ended December 31, 2003 and 2002
Note 1 - Summary of Significant Accounting Policies (Concluded) Income Taxes The Cooperative is a nonprofit organization exempt from income taxes under the provisions of Internal Revenue Code Section 501(c)(12). Accordingly, there is no provision for income taxes in the financial statements. Compensated Absences Earned but unpaid vacation and vested sick pay are accrued as incurred. Accounting Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Collective Bargaining Approximately 54% of the Cooperative’s work force is covered by a collective bargaining agreement that expires in September 2006. Note 2 - Electric Plant and Depreciation Rates The following is a summary of the major classes of electric plant and depreciation rates as of December 31, 2003 and 2002: 2003 Transmission Plant
$
$
Depreciation Rates
6,981,697
2.75%
289,963,181
270,532,017
3.20%
315,850
317,350
N/A
Structures and Improvements
12,472,595
12,291,991
2.0%
Office Furniture and Fixtures
4,521,690
4,590,660
10.0%-20.0%
Transportation Equipment
8,484,837
7,896,328
10.0%-20.0%
Shop Equipment
997,727
938,810
7.7%
Laboratory Equipment
862,384
783,751
9.3%
2,711,493
2,705,483
4.5%
391,708
391,708
5.7%
1,917,714
1,651,501
10.0%
601,659
557,696
10.6%
1,428,703
1,397,507
19.76%
331,658,755
311,036,499
18,479,469
11,092,460
Distribution Plant
6,989,214
2002
General Plant: Land and Land Rights
Communications Equipment Stores Equipment Surge Protection Equipment Miscellaneous Equipment Software Total Electric Plant in Service Construction Work in Progress Total Electric Plant - at Cost
$
350,138,224
$
322,128,959
Depreciation expense of $10,784,700 (2003) and $9,918,433 (2002) is net of $793,160 (2003) and $767,446 (2002) charged to clearing accounts, some of which is capitalized.
NOTES TO FINANCIAL STATEMENTS (Continued) for the years ended December 31, 2003 and 2002
Note 3 - Investments in Associated Organizations Investments in associated organizations consist of the following: 2003 Seminole Electric Cooperative, Inc. Patronage Capital Assigned National Rural Utilities Cooperative Finance Corporation (CFC): Patronage Capital Certificates Capital Term Certificates Investments in Other Associated Organizations Total Investments in Associated Organizations
$
9,610,072
$
1,204,842 3,859,404 237,243 14,911,561
2002 $
9,325,912
$
1,259,180 3,761,090 189,912 14,536,094
CFC Capital Term Certificates are purchased as a condition of the mortgage agreements with CFC. At December 31, 2003 and 2002, they consist of the following: 2003 Certificates, 5% (Maturing 2070 to 2080) Certificates, 3% (Maturing 2020 to 2030) Certificates, 0% (Maturing at Variable Dates) Total
$
$
1,902,010 556,400 1,400,994 3,859,404
2002 $
$
1,902,010 556,400 1,302,680 3,761,090
Note 4 - Accounts Receivable All of the Cooperative’s consumer accounts receivable are due from consumers in the central Florida area. Each new consumer pays a membership fee and makes a deposit when becoming a consumer. The membership fees and deposits can be retained by the Cooperative in the event of nonpayment of a billing for services. Once a residential consumer establishes a satisfactory credit history, the Cooperative returns the member’s deposit. Other receivables at December 31, 2003 and 2002, include approximately $476,016 and $477,855, respectively, relating to pole rentals due from other utility companies. Note 5 - Return of Capital Under provisions of the long-term debt agreements, unlimited patronage capital distributions to members are allowed provided equities and margins equal or exceed 30% of total assets after distribution. Effective with the 1991 year, the Cooperative suspended for five years the general capital credit retirements. During 1995, the suspension was lifted and the Cooperative began making general retirements of patronage capital. The equities and margins of the Cooperative represent 31.68% and 31.17% of the total assets at December 31, 2003 and 2002, respectively. Capital credit retirements in the amount of $1,128,636 and $448,084 were paid in 2003 and 2002, respectively. Note 6 - Detail of Patronage Capital 2003 Assignable Assigned (Retired in Current Year) (Cumulative Amount Retired in Previous Years) Total Patronage Capital
$
$
7,466,325 109,955,284 117,421,609 (1,128,636) (18,977,579) 97,315,394
2002 $
$
7,520,325 102,434,959 109,955,284 (448,084) (18,529,495) 90,977,705
nineteen
NOTES TO FINANCIAL STATEMENTS (Continued) for the years ended December 31, 2003 and 2002
Note 7 - Detail of Other Equities 2003 Operating Margins (Prior to 1957) Nonoperating Margins (Prior to 1964) Capital Gains and Losses (Prior to 1964) Donated Capital Discount on Retired Capital Credits Accumulated Other Comprehensive Income: Minimum Pension Liability Adjustment Total Other Equities
$
$
32,092 19,371 10,533 626 2,569,474 0 2,632,096
2002 $
$
32,092 19,371 10,533 626 2,568,778 (4,081,800) (1,450,400)
Note 8 - Noncurrent Liabilities The Cooperative has the following unsecured line of credit: 2003 SunTrust, N.A.; Credit Line of $35,000,000, Variable Interest Based Upon Bank’s Announced Rate, Payable on Demand
$
5,689,000
2002
$
17,116,038
Because the Cooperative had sufficient approved, but undrawn long-term loan funds available, the 2002 line of credit was classified as long-term debt in accordance with Statement of Financial Accounting Standards (SFAS) Statement No. 6. For 2003, there was no long-term loan commitment from RUS as of December 31, 2003; therefore, the 2003 line of credit has been classified as a current liability at December 31, 2003. The following is a summary of the Cooperative’s long-term debt payable to RUS and CFC: 2003 RUS Mortgage Notes 2.000% Notes 1.375% Notes 1.875% Notes 2.125% Notes 2.250% Notes 2.500% Notes 2.625% Notes 2.750% Notes 3.000% Notes 3.875% Notes 3.750% Notes 3.500% Notes 3.625% Notes 3.125% Notes 4.625% Notes 5.000% Notes 5.500% Notes Total RUS Mortgage Notes (Current Portion) Long-term Portion
$
$
567,702 2,877,328 0 6,268,956 6,263,954 2,036,850 4,854,711 7,711,498 9,265,159 3,643,011 8,038,120 1,603,120 1,149,115 7,606,960 0 40,851,768 5,613,505 108,351,757 (2,887,624) 105,464,133
2002 $
$
805,870 0 2,900,000 2,062,344 2,850,000 0 4,914,648 0 1,871,131 3,707,812 8,147,606 1,636,290 6,486,949 1,927,222 4,147,309 58,637,174 5,705,969 105,800,324 (3,296,133) 102,504,191
NOTES TO FINANCIAL STATEMENTS (Continued) for the years ended December 31, 2003 and 2002
Note 8 - Noncurrent Liabilities (Continued) 2003 CFC Mortgage Notes 5.875% Notes 3.550% Notes 3.400% Notes (Variable) 2.550% Notes (Variable) 4.250% Notes 4.550% Notes 4.950% Notes 5.150% Notes 5.250% Notes 5.300% Notes 6.000% Notes 7.000% Notes Total CFC Mortgage Notes (Current Portion) Long-term Portion
$
$
0 1,240,597 0 50,229,504 983,497 1,169,080 1,965,086 3,367,865 2,001,937 10,752,144 965,724 812,079 73,487,513 (3,098,704) 70,388,809
2002 $
$
1,036,549 0 42,515,647 0 0 0 0 0 0 0 0 971,344 44,523,540 (1,363,228) 43,160,312
RUS mortgage notes are payable to the United States of America for thirty-five year periods each. Principal and interest are due in monthly or quarterly installments. Certain notes have provisions for interest rate changes at future dates. Unadvanced RUS loan funds of $0 and $21,425,000 were available to the Cooperative as of December 31, 2003 and 2002, respectively. CFC mortgage notes are payable to the National Rural Utilities Cooperative Finance Corporation for thirty-five year periods each. Principal and interest are due in quarterly installments. Certain notes have provisions for interest rate changes at future dates. Unadvanced CFC loan funds of $0 and $14,700,000 were available to the Cooperative as of December 31, 2003 and 2002, respectively. On June 30, 2003, the Cooperative refinanced RUS mortgage notes with an interest rate of 5% totaling $16,368,561 representing $16,225,948 of principal and $142,613 of interest with CFC mortgage notes with various stated interest rates ranging from 3.55% to 5.30%. CFC provides a volume and performance discount totaling .25% and an estimated .38% patronage capital reduction. The effective rates of these loans then ranges from 2.92% to 4.62%. Interest on long-term debt, all of which was charged to expense, follows: 2003 Lines of Credit RUS Mortgage Notes CFC Mortgage Notes Totals
$
$
342,174 4,199,576 1,905,901 6,447,651
2002 $
$
409,315 4,676,536 1,861,434 6,947,285
Long-term debt maturing within each of the five years subsequent to December 31, 2003, is as follows: Mortgage Notes December 31 RUS CFC Total 2004 2005 2006 2007 2008 Thereafter Total
$
$
2,887,624 2,942,869 3,032,616 3,035,181 3,141,300 93,312,167 108,351,757
$
$
3,098,704 3,232,036 3,371,937 3,467,060 3,403,638 56,914,138 73,487,513
$
$
Substantially all assets and revenues of the Cooperative are pledged as collateral for these notes.
5,986,328 6,174,905 6,404,553 6,502,241 6,544,938 150,226,305 181,839,270
twenty-one
NOTES TO FINANCIAL STATEMENTS (Continued) for the years ended December 31, 2003 and 2002
Note 8 - Noncurrent Liabilities (Concluded) Accrued Pension Liability Pursuant to SFAS Statement No. 87, Employers’ Accounting for Pensions, the Cooperative has recorded a liability for 2002 equal to the amount that the fair value of plan assets is less than the accumulated benefit obligation.The accumulated benefit obligation represents the present value of benefits expected to be provided to present plan participants at their current compensation levels. There was no accrued pension liability at December 31, 2003. See note 9 for additional pension disclosures. Note 9 - Employee Benefit Plan On, May 19, 2003, the Board of Trustees voted to merge the group pension plan for employees into the Retirement and Security Program of the National Rural Electric Cooperative Association (NRECA) effective July 1, 2003.The Retirement and Security Program administered by the NRECA is a defined benefit, multi-employer plan qualified under Section 401 of the Internal Revenue Code and exempt from federal income tax under Section 501(a) of the Internal Revenue Code. The transferred net assets have been recognized in the accounts of the NRECA Plan as of July 1, 2003. The Cooperative incurred past service costs in the amount of $9,191,107 due to the transfer to the NRECA Plan. The total cost is to be amortized for a period not to exceed thirty years. The Cooperative incurred pension expense totaling $543,407 related to the NRECA Plan at December 31, 2003. During 2002 and through June 30, 2003, the Cooperative had a pension plan covering substantially all of its employees. The plan qualified for exemption from federal income taxes. Benefits were based on the employees’ years of service (not to exceed thirty years), and the highest consecutive five-year average earnings. The Cooperative’s normal policy is to fund the minimum contribution required under ERISA. Details of the funded status of the Cooperative pension plan (transferred to NRECA plan effective July 1, 2003) and major assumptions used to determine these amounts as of December 31, 2003 and 2002, are as follows: 2003
2002
Projected Benefit Obligations Plan Net Assets at Fair Value Projected Benefit Obligations (in Excess of ) or Less Than Plan Assets
$
0 0
$
(18,430,900) 11,944,800
$
0
$
(6,486,100)
Employer Contributions
$
0
$
1,758,500
Benefits Paid
$
0
$
(407,300)
Pension Expense
$
0
$
677,100
Net Amounts Recognized
$
0
$
1,128,500
Additional Minimum Liability
$
0
$
(3,323,600)
$
0 0 0 0 0 0
$
14,653,600 492,000 1,083,700 2,608,900 (407,300) 18,430,900
Change in Projected Benefit Obligations: Benefit Obligation at Beginning of Year Service Cost Interest Cost Actuarial Loss (Gain) Benefits Paid Benefit Obligation at End of Year
$
$
Major assumptions at end of year:
Discount Rate Increase in Future Compensation Levels Expected Long-term Rate of Return on Plan Assets
2003
2002
0% 0% 0%
6.75% 3.50% 8.50%
NOTES TO FINANCIAL STATEMENTS (Continued) for the years ended December 31, 2003 and 2002
Note 9 - Employee Benefit Plan (Concluded) All employees of the Cooperative meeting age and service requirements can elect to participate in a 401(k) savings plan of the National Rural Electric Cooperative Association. Employees may make contributions to the plan up to the maximum percentage outlined in the plan and the Cooperative will match the employee contributions up to 3.50% of the employee’s salary.Both employee and employer contributions to the plan are funded biweekly.The Cooperative’s contributions to the plan were $398,057 and $362,961 in 2003 and 2002, respectively. Self-insured Medical Benefits The Cooperative provides a self-insured medical benefits plan for active and retired employees, trustees and their dependents. Participants that select dependent or additional coverages are required to pay part of the cost of the plan. In connection with the plan, the Cooperative maintains $875,000 specific excess insurance for claims that exceed $125,000 for any covered individual and $1,000,000 aggregate excess insurance for claims that exceed $3,980,826 in the plan year. The Cooperative is currently in the process of having an updated actuarial review to help determine its net cost (if any) for benefits provided to retired employees. Note 10 -
Related Parties Transactions
Seminole Electric Cooperative, Inc. The Cooperative is a member of Seminole Electric Cooperative, Inc. (Seminole), which is a generating and transmission cooperative. The Cooperative has entered into an agreement with Seminole to supply substantially all of the Cooperative’s future power needs. The following is a summary of all significant transactions between the Cooperative and Seminole: 2003 Purchased Power Cost Accounts Payable - Power Cost, December 31 Patronage Capital Assigned Patronage Capital, December 31 Note 11 -
$ $ $ $
117,681,232 11,909,081 348,891 9,610,072
2002 $ $ $ $
100,082,457 10,369,870 351,984 9,325,912
Deferred Charges and Credits
A schedule of deferred charges and credits are as follows: 2003 Deferred Charges Unamortized: Pension Cost Dues Deposits on Sales and Use Tax Other Total Deferred Charges Deferred Credits Debt Costs Environmental Cleanup Costs Unclaimed Capital Credits Special Equipment Installation Costs Unpaid Billings for Contribution in Aid of Construction Other Deferred Amounts Customer Benevolent Fund Total Deferred Credits
$
$ $
$
7,037,922 50,167 74,724 16,608 7,179,421 180,000 0 220,305 225,290 55,980 22,218 100,740 804,533
Amortization Amortization of deferred charges range from one to thirty years depending upon the individual item.
2002
$
$ $
$
0 49,445 77,993 35,846 163,284 0 170,000 172,793 238,920 4,624 25,515 92,918 704,770
twenty-three
NOTES TO FINANCIAL STATEMENTS (Concluded) for the years ended December 31, 2003 and 2002
Note 12 -
Financial Instruments
In accordance with SFAS Statement No. 107 of the Financial Accounting Standards Board, the following is a summary of the book and current values of the Cooperative’s financial instruments: Book Value
Financial Instruments RUS Long-term Debt CFC Long-term Debt CFC Subscription Capital Term Certificates and Interest-bearing Loan Capital Term Certificates CFC Loan Capital Term Certificates Lines of Credit Total
$
$
108,351,757 73,487,513
2,458,410 1,264,026 5,689,000 191,250,706
Current Value $
$
119,073,789 77,852,030
1,735,955 657,435 5,689,000 205,008,209
Discount Rates RUS Loans: ■ 2% loans discounted at the RUS insured loan rates for the corresponding maturity dates. The rates range from 1.125% to 1.845%. ■ 5% loans discounted at the RUS insured loan rates for the corresponding maturity dates. The rate for all maturities is 4.625%. ■ The RUS variable rate loans are discounted at the RUS insured loan rates as of January 1, 2004, for the corresponding maturity date. The rates are as follows: Existing Rate Discount Rate Term 3.750% 2.125% 2.250% 3.750% 2.625% 3.125% 3.000% 3.875% 3.500% 2.250% 3.625% 2.500% 2.125% 2.750% 3.750% 3.875% 1.375% 2.750% 3.000% 3.125% 5.500%
1.250% 1.125% 1.125% 1.125% 1.125% 1.625% 1.500% 1.500% 1.875% 1.875% 2.125% 2.125% 2.125% 2.500% 2.500% 2.750% 3.000% 3.000% 3.250% 3.500% 4.625%
CFC Loans: ■ Fixed rate loans discounted at January 1, 2004, CFC variable rate – 2.60%. ■ Variable rate loans discounted at January 1, 2004, CFC variable rate – 2.60%. CFC Capital Term Certificates (CTC’s): ■ Subscription CTC’s discounted at 6.75%. ■ Loan CTC’s discounted at 6.75%.
1 Year 1 Year 1 Year 2 Years 2 Years 3 Years 3 Years 3 Years 4 Years 4 Years 5 Years 5 Years 5 Years 6 Years 6 Years 7 Years 8 Years 8 Years 9 Years 10 Years Life
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