2013 SECO Energy Annual Report by SECO Energy

UNDERSTANDING YOUR

C O O P E R AT I V E

annual report

Cooperative Highlights — for 2013 —

Operating Revenue $340,468,612 Net Margins $14,760,869 Total Assets $653,670,992 Patronage Capital Distributed $ 2,887,288 Kilowatt-Hours Sold 2,836,669,610 Miles of Energized Line 11,826 New Services 5,180 Active Accounts 184,243 Full-Time Employees 403

A large electric cooperative like SECO is a complex organization. This year’s annual report looks at who we are, with whom we are affiliated and the important initiatives, statistics, and accomplishments from 2013. Members can be proud of their co-op, just as we are proud of the strong support from our members.

Illuminating facts about

Executive Staff Barry Bowman Director of Corporate Communications & Energy Services

John LaSelva Director of Reliability & Operations

i ng

er EMPLOYEES

Reliability & Operations: Working around the clock to keep the power on is the primary goal of this workforce. R & O takes pride in the hard work they do in all kinds of weather. The various groups that make up the department function as a cohesive team. They include: System Control, System Reliability, Technical Services, and Vegetation Management. They all recognize that electricity is essential to modern life and are totally committed to providing SECO members with the most reliable power possible. Critical to the operation is R&O’s Transmission and Distribution line groups; who are on call 24/7. They are ready to respond rapidly from six strategically located work centers whenever there is a system problem in any of the seven counties we serve.

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ty &

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Ted Purser Director Financial & Administrative Services

Relia

Alex Markley Director of Human Resources & Corporate Services

Engineering: Mapping, design and planning, land rights and permitting, material research and analysis, troubleshooting, system inspections with infrared technology, and planning for the future growth of the co-op are just some of the requirements for running an efficient and effective electric distribution cooperative. These serious chores fall to Engineering. Engineering’s work groups consist of GIS Services, Substation & Transmission Design, and Engineering Services. This department’s functions are the foundation for system improvements and new construction.

ine

Nora Brown Sr. Executive Assistant

Board of Trustees: Elected by the members, the Board establishes, reviews and revises corporate policies ensuring service is exceptional for the SECO membership. The Chief Executive Officer reports to and advises the Board of Trustees.

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Ben Brickhouse Director of Engineering

DELIVERING ELECTRICITY

EMPLOYEES

2013 SECO workforce fast facts: • J.D. Power names SECO as one of the top 50 “Customer Champions” in the nation. • Members gave SECO a world class score of 90 on the American Customer Satisfaction Index and an overall satisfaction rating of 9.21 on a 10-point scale during the annual telephone survey. • SECO delivered power to 184,243 members including 7,443 key accounts.

• SECO membership grew 2.9% adding 5,180 new accounts to the electric distribution system. • A new job information hotline (855) 483-2673 was established for employment opportunities at SECO. • There were 403 full-time SECO employees at year’s end. Members are also represented by nine individuals on the Board of Trustees. • There were 29 new employees hired in 2013 and 11 were call center

| 2 | 2013 SUMTER ELECTRIC COOPERATIVE

personnel needed to better assist members with telephone inquiries. Hum • Call center personnel handled 288,724 an R telephone calls throughout the year. • 72,886 service orders were processed by both the front counter and call center personnel. • Safety conscious SECO employees have worked 1,086,649 hours without a single lost time injury. • The fleet department processed 4,734 work orders on the 377 registered road vehicles.

A team of innovative professionals committed to exceeding our customers’ expectations. TO COOPERATIVE MEMBERS SINCE 1938

B oa rd o f T r u st e es

TRUSTEES

Financial & Administrative Services: Members expect that their co-op’s finances will be handled in an honest and ethical manner. Financial stability is important to the success of any business. This is particularly true when the business is a not-for-profit, member-owned co-op like SECO. Members trust the financial viability of their Fin co-op and they enjoy it when the department administers the return of any an excess margins in the form of capital credits each year during November. c All of SECO’s departments wear multiple hats. It is no different in this department. Work groups include Accounting, Billing, Payroll, Information Technology, Telecommunications, Meter Reading, Revenue Recovery, Purchasing, and Warehousing.

Se r v i

es c i v r Resou rces & Corporate Se

Human Resources & Corporate Services: An important asset to the workforce, this department’s purpose is to recruit and define, EMPLOYEES educate and develop, and retain the talent within SECO Energy. Managing productivity and developing a high work ethic helps to define HR. In addition, this department has the lead in administering a very effective safety program, working with customers on the telephone and at front counters, keeping the fleet rolling and our various facilities in good repair. Specific work groups here include Human Resources, Safety & Risk Management, Facility Services, Fleet Services, Call Center, and Customer Service Centers.

Co m mu nic ati ons &

[2 EMPLOYEES]

Ener gy Ser vices

ce s

Chief Executive Officer and General Manager leads SECO employees in Sumter Electric Cooperative’s day-to-day operations.

EMPLOYEES

t i ve

James Duncan

Corporate Communications & Energy Services: In many ways, this department is the face of the co-op. When it comes to in-person interactions with our members, it is these professionals who assist members with in-home energy audits, help educate members through community presentations, work with our businesses to help them control their bottom line, take an active part in various EDC’s, Chambers and other community organizations, and much more. Other types of communication also emanate from this department including the SECO News member newsletter, member publications, telephone advisories, the co-op’s website, social media offerings, etc.

tra

2013

nis

EMPLOYEES

Together, five departments, the CEO and Board of Trustees run a customer-focused business.

e at r o rp o C • SECO trimmed 1,707 total circuit miles

• 18,864 distribution and transmission poles were inspected and 3,416 replaced as needed. • 4,910 underground facilities were inspected and repaired or replaced as needed. • SECO employees maintained 51,378 outdoor area lights system-wide.

of encroaching vegetation. • SECO was honored by the Arbor Day Foundation as a Tree Line USA utility for the seventh year in a row. • The size of Delaware, SECO’s service territory is 2,000 square miles, 11,826 miles of power lines, and 47 substations. • System Average Interruption Frequency Index (SAIFI) was 1.5, in other words,

the average member experienced 1.5 outages. • Customer Average Interruption Duration Index (CAIDI) was 53 minutes, for the members who did experience an outage the average duration was 53 minutes. • Energy Services worked on 10,448 service orders, all completed within 10 days of request. • 496 mail-in energy audits were processed and returned to the members.

SECO FAST FACTS | 3 |

Fast facts about

James D. Holtz

Secretary-Treasurer District 4

Ray F. Vick President District 5

Jerry D. Hatfield Vice President District 9

Dillard B. Boyatt District 2

More SECO Stats • $67,540 in donations were awarded to civic organizations, educational events, humanitarian fundraisers, youth sports teams, youth livestock sales and other worthy causes. • Last May, twelve senior high school scholars, residing in homes serviced by SECO Energy, received a total of $36,000 in scholarships. • The Angel Fund distributed $64,903 to the less fortunate people in SECO territory. • The MyWay Prepay program was initiated allowing members to pay for power as they go and avoid a deposit.

• 248 community presentations were produced on energy savings, power generation, photovoltaic installations, fraudulent schemes and scams, surge protection, electrical safety, weather related energy consumption and more. • The SECO surge protection department managed 28,601 active accounts system wide. • A new Filter Change program was launched on www.secoenergy.com helping members buy a/c filters at a great savings. • Convenient SECO payment kiosks began to make their appearance in the service territory.

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[

One of the fastest growing electric distribution cooperatives, SECO comes in at the seventh largest in the nation.

Serving over 184,000 members in parts of seven counties in Central Florida.

]

Scott D. Boyatt

Earl Muffett

District 1

District 6

Rob Henion District 7

SECO 2013 Scholars

A true form of democracy, SECO’s Board of Trustees is elected by the general membership of the Co-op.

Bill James District 8

Richard J. Belles District 3

• SECO employees pledged over $10,000 to the Action Committee for Rural Electrification (ACRE) to help the National Rural Electric Cooperative Association work towards a rational U. S. energy policy. • Nearly a thousand SECO members have joined ACRE’s sister organization, Co-op Owners for Political Action (COPA), and contributed $20,500 in 2013 to help ACRE bring some sanity to the energy policy debate. • SECO’s free Co-op Connections discount card for savings on all kinds of products and services

nationally and locally had a strong year. Local merchants offering member discounts through the program grew by 25.5%. • SECO partnered with Lowe’s to provide an energy expert at their store locations in Inverness, Lady Lake, Ocala and Clermont to educate customers on best practices for energy savings. • SECO’s Facebook page was aggressively used to alert members to the latest scams, weather advisories and more.

SECO FAST FACTS | 5 |

SECO Community Beginning with our members and their families, Sumter Electric Cooperative is dedicated to the many communities it serves.

Community Involvement SECO Partners

777 fans

Member Outreach

157 followers 16,656 views Social Media

Website

441,408 Two-way visits to communication secoenergy.com with our in 2013. members

E-Mails

Phone Calls

News Releases

Letters

Newsletters

Employees

Employees sent 325,471 emails.

Call Center received 288,724 telephone calls.

20 news releases made available to local and national media.

78,307 letters to members on system upgrades, etc.

2,179,598 SECO News sent electronically or printed.

403 interacted daily with members and community.

468 followers

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2013 Data

Community involvement is something that SECO views as essential to being a good corporate citizen. It’s what makes good neighbors, strengthens the local economy and helps improve the human condition throughout the service territory.

●●● Seminole Power Generation:

Seminole Electric Cooperative, a generation and transmission cooperative, is the nonprofit provider of wholesale electricity to ten of Florida’s distribution cooperatives, including SECO Energy. Seminole provides electricity to approximately 1.7 million homes and businesses in Florida. Power is produced by two 650 MW coal-fired power plants located in Lake Palatka accounting for 49% of the power produced. A 500 MW combined cycle natural gas power plant located in Hardee County accounts for 45% of Seminole’s fuel mix. In addition, three renewable energy facilities account for 143 MW of electricity from biomass which is 6% of the fuel mix. State-of-the-art environmental control equipment makes Seminole’s coal-fired power plants among the cleanest in the world.

●●● National Rural Electric Cooperative Association [NRECA]:

NRECA is the national trade association representing electric cooperatives across the country. Co-ops are an integral part of the $370 billion U.S. electric utility industry. They play a critical role in our nation’s economy and in local communities. NRECA and its member co-ops advocate for a federal energy policy that makes power reliable and affordable while protecting health and the environment. The association also provides education and training programs for cooperative directors, managers, and employees. The wide range of services provided to co-ops also includes assistance with emerging technology, employee benefits, and financial services.

●●● Touchstone Energy:

Touchstone Energy is a federation composed of more than 753 local, consumer-owned electric cooperatives in 46 of the 50 United States. Collectively they serve more than 30 million members. Touchstone cooperatives are dedicated to providing reliable, affordable electricity and are committed to working for the benefit of the communities they serve. Integrity, accountability, innovation, and commitment to the community define the core values of all Touchstone Energy cooperatives including SECO Energy.

●●● Action Committee for Rural Electrification [ACRE]:

ACRE is NRECA’s political action committee. Its purpose is to support candidates for Congress who understand the issues of importance to electric co-ops and their consumer-owners. If there is an issue which would clearly affect co-op members in a negative way, ACRE will be in the halls of Congress advocating on behalf of co-ops and their members. ACRE is supported by voluntary contributions from eligible SECO employees and co-op members. It does not matter what political party candidates belong to as long as they support co-op values and co-op members.

Electric Co-ops . . . • • • • • • • •

are located in 80% of the nation’s counties. make up the largest electric utility network in the nation. total 905 local systems in the U.S. have a total of 42 million member-owners in 47 states. distribute power over 2.5 million miles of line. serve 75% of the U.S. land mass. own $130 billion in generation, transmission, and distribution assets. offer renewable energy options to 40 million Americans (94 percent of the nation’s co-ops).

Co-ops, by their very nature, are an integral part of the fabric that holds the communities they serve together. That is a co-op tradition. SECO and its employees are no different. The co-op has established a long history of service to the community and, in particular, to those less fortunate amongst us. That service manifests itself in many ways. The SECO Angel Fund, SECO’s corporate humanitarian initiative has helped thousands of members who have fallen on hard times through no fault of their own. Contributions from the fund have given hope and comfort to members throughout the seven counties the co-op serve. SECO views young people as a most precious resource. Their success and development is very important to the community-at-large. SECO’s scholarship program for graduating seniors and support of youth livestock sales at county fairs have helped young people gain the means to pursue higher education and a brighter future. Corporate support of external humanitarian efforts is also considerable. SECO is heavily involved with the United Way, the American Cancer Society, the Red Cross, Junior Achievement, Camp Boggy Creek and many other worthwhile organizations. Individually, co-op employees are just as concerned about the community-at-large and its well-being. If you look closely, you’ll see SECO employees taking part in walkathons for charity, coaching ball teams of all kinds, serving in civic organizations, volunteering their time and talent to important community improvement projects, serving their churches and much more. SECO employees also serve on a variety of boards and committees for area chambers of commerce, economic development councils and charitable organizations. They do all this because they firmly believe that family and community are integral to their own lives as residents of central Florida. As one SECO employee observed some years ago, “A sense of community – without it we are like islands in the stream, with no meaningful connection to one another. Isolated and introspective we don’t see the needs of those around us and our own spirit suffers as a consequence.” At SECO we believe that, if you do happen to live on an island, you need to build a bridge to the rest of humankind.

SECO FAST FACTS | 7 |

Independent Auditors’ Report Board of Directors Sumter Electric Cooperative, Inc. Sumterville, Florida

Report on the Financial Statements We have audited the accompanying financial statements of Sumter Electric Cooperative, Inc. (the Cooperative), which comprise the balance sheets as of December 31, 2013 and 2012, and the related statements of revenues and patronage capital, and cash flows for the years then ended, and the related notes to the financial statements. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility 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 audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Cooperative, as of December 31, 2013 and 2012, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated February 14, 2014, on our consideration of the Cooperative’s internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Cooperative’s internal control over financial reporting and compliance. Other Reporting Required by 7 CFR Part 1773 In accordance with 7 CFR Part 1773, Policy on Audits of Rural Utilities Service Borrowers, §1773.33 and clarified in the RUS policy memorandum dated February 7, 2014 (the regulatory requirements for electric borrowers), we have also issued our report dated February 14, 2014, on our consideration of the Cooperative’s compliance with the terms, covenants, provisions, or conditions of their loan, grant, and security instruments as set forth in the regulatory requirements for electric borrowers, insofar as they relate to accounting matters enumerated therein. The purpose of that report is to describe the scope of our testing of the Cooperative’s compliance with the regulatory requirements for electric borrowers and the results of that testing, and not to provide an opinion on the Cooperative’s compliance with the regulatory requirements for electric borrowers. That report is an integral part of an audit in considering the Cooperative’s internal control over financial reporting and compliance.

PURVIS, GRAY AND COMPANY, LLP February 14, 2014 Ocala, Florida

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Balance Sheets

December 31, 2013 & 2012 ASSETS 2013

2012

Electric Plant Distribution and Transmission Plant

Construction Work in Progress

678,825,865 $

646,827,200

24,295,830

18,960,157

703,121,695

665,787,357

(153,465,556)

(141,120,857)

549,656,139

524,666,500

56,714,152

52,560,705

2,251,843

2,902,853

10,390,124

11,202,684

Other Receivables

1,189,150

809,587

Unbilled Electric Revenues and Under Collection of Power Costs

9,929,584

8,542,102

12,543,035

12,775,117

402,234

456,276

Total Current Assets

36,705,970

36,688,619

Deferred Charges

10,594,731

194,167

653,670,992

614,109,991

809,379

777,954

203,547,670

191,674,089

2,632,933

206,989,982

195,084,976

371,036,133

353,221,567

650,490

515,006

371,686,623

353,736,573

13,107,997

11,791,021

29,684,223

25,429,940

Consumer Deposits

14,131,472

13,531,347

Other Current or Accrued Liabilities

8,750,628

7,724,282

65,674,320

58,476,590

9,320,067

6,811,852

Total Electric Plant (Accumulated Provision for Depreciation and Amortization) Total Electric Plant - Cost Less Depreciation and Amortization Investments Investments in Associated Organizations and Other Special Funds Current Assets Cash and Cash Equivalents Accounts Receivable - Consumers (Less Provision for Doubtful Accounts 2013 - $1,104,944

2012 - $1,090,118)

Inventories Prepayments and Other Current Assets

Total Assets EQUITIES AND LIABILITIES Equities Memberships Patronage Capital Other Equities Total Equities Noncurrent Liabilities Long-term Debt Deferred Compensation Liability Total Noncurrent Liabilities Current Liabilities Long-term Debt — Portion Due Within One Year Accounts Payable

Total Current Liabilities Deferred Credits Total Equities and Liabilities

653,670,992 $

614,109,991

See accompanying notes.

SECO FINANCIAL STATEMENTS | 9 |

Statements of Revenues and Patronage Capital for the years ended December 31, 2013 & 2012 2013 Operating Revenues

2012

340,468,612

330,987,476

Operating Expenses Cost of Power

232,724,103

228,823,441

209,510

206,204

Distribution Expense - Operations

15,370,820

15,082,074

Distribution Expense - Maintenance

21,215,453

20,377,766

Consumer Accounts Expense

9,760,178

9,429,595

Customer Service and Informational Expense

1,390,721

1,525,739

Administrative, General, and Other Expense

12,201,182

11,861,624

Depreciation Expense

21,884,622

20,317,197

64,205

58,102

2,220,972

383,803

352,156

(317,425,569)

(308,033,898)

23,043,043

22,953,578

(13,170,997)

(13,392,785)

9,872,046

9,560,793

G&T Cooperative Capital Credits

3,598,561

2,052,289

Other Capital Credits and Margins

1,051,676

1,230,717

Total Other Margins

4,650,237

3,283,006

14,522,283

12,843,799

Interest Income

116,667

130,439

Other Nonoperating Income

121,919

127,628

Total Nonoperating Margins

238,586

258,067

14,760,869

13,101,866

191,674,089

180,743,216

(2,887,288)

(2,170,993)

Transmission Expense

Taxes - Expense Impairment Loss Other Expense (Total Operating Expenses) Operating Margins Before Fixed Charges Fixed Charges Interest on Long-term Debt Operating Margins After Fixed Charges Other Margins

Net Operating Margins Nonoperating Margins

Net Margins Patronage Capital, Beginning of Year (Retirement of Capital Credits) Patronage Capital, End of Year

203,547,670

191,674,089

See accompanying notes.

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Statements of Cash Flows

for the years ended December 31, 2013 & 2012 2013

2012

Cash Flows from Operating Activities Net Margins

14,760,869

13,101,866

Adjustments to Reconcile Net Margins to Net Cash Provided by (Used in) Operations: Capital Credits and Patronage Dividend Certificates Assigned

(4,650,237)

(3,283,006)

Depreciation

23,852,536

22,182,827

238,510

366,400

1,114,829

(1,192,995)

(1,261,058)

54,042

829,310

Deferred Charges

(11,515,393)

131,149

Accounts Payable

4,254,283

2,012,037

600,125

1,318,561

1,026,346

(145,851)

135,484

140,828

2,508,215

1,022,313

Total Adjustments

16,425,745

23,313,510

Net Cash Provided by (Used in) Operating Activities

31,186,614

36,415,376

232,082

(814,022)

9,972,371

6,406,679

Proceeds from Disposition of Property

137,962

220,198

Proceeds from Redemption of Patronage Capital Certificate

582,345

464,238

49,929

45,955

(135,484)

(140,828)

(61,031,826)

(55,328,267)

2,079,318

(3,125,351)

(48,113,303)

(52,271,398)

1,682,835

24,669,817

Proceeds on Long-term Debt

30,000,000

Payments on Long-term Debt

(12,551,293)

(11,513,179)

Cushion of Credit

1,280,097

Membership Fees

31,425

16,320

Retirement of Capital Credits

(2,887,288)

(2,170,993)

Net Cash Provided by (Used in) Financing Activities

16,275,679

12,282,062

(651,010)

(3,573,960)

2,902,853

6,476,813

Provision for Uncollectible Accounts Amortization of Prepaid Pension Changes in Assets - Decrease (Incr) and Liabilities - Increase (Decr): Accounts Receivable Prepayments and Other Current Assets

Consumer Deposits Other Current Liabilities Deferred Compensation Liability Deferred Credits

Cash Flows from Investing Activities Change in Inventory - Net of Salvage Contributions in Aid of Construction Received

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 Cash Flows from Financing Activities Line of Credit (Net)

Net Increase (Decrease) in Cash and Cash Equivalents Cash and Cash Equivalents, Beginning of Year Cash and Cash Equivalents, End of Year

2,251,843

2,902,853

See accompanying notes. SECO FINANCIAL STATEMENTS | 11 |

Statements of Cash Flows (concluded)

for the years ended December 31, 2013 & 2012 2013

2012

Supplemental Disclosures of Cash Flow Information Cash Paid During the Year for: Interest

13,316,767

13,324,087

10,303,454

14,862,061

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

2,079,318

3,162,394

Material Salvaged

1,129,017

(3,274,163)

Net Reduction in Accumulated Depreciation

13,511,789

14,750,292

6,049,168

The Cooperative Refinanced Certain Debt with CoBank: Amounts Not Included in Proceeds on Long-term Debt Amounts Not Included in Payments on Long-term Debt Net Change in Long-term Debt

0 $

(6,049,168) $

See accompanying notes.

| 12 | 2013 SUMTER ELECTRIC COOPERATIVE

Notes to Financial Statements

December 31, 2013

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 accounts. Depreciation on general plant assets is based on straight-line rates for specific assets as outlined by RUS ranging from three to fifteen 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. As of December 31, 2013 and 2012, accounts at each bank are fully insured by the FDIC up to $250,000. 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 yearend; 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. 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. The Cooperative has adopted Accounting Standards Codification (ASC) 740, Accounting for Uncertainty in Income Taxes. The implementation of this standard had no impact on the Cooperative’s financial statements. The Cooperative does not believe it has taken any uncertain tax positions that would have a material effect on the financial statements. The Cooperative’s Form 990’s for the past three years are open to examination by the Internal Revenue Service. For the years ended December 31, 2013 and 2012, the Cooperative filed Form 990T for unrelated rental income on communication towers. The amount paid or accrued was $2,089 and $3,207, respectively. Compensated Absences Vacation is accrued monthly as it is earned and sick pay is expensed as it is taken. 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.

SECO FINANCIAL STATEMENTS | 13 |

Notes to Financial Statements

December 31, 2013

Note 1 - Summary of Significant Accounting Policies (Concluded) Collective Bargaining Approximately 40% of the Cooperative’s work force is covered by a collective bargaining agreement that expires in September 2015. Subsequent Events Management has evaluated subsequent events through February 14, 2014, the date the financial statements were available to be issued. 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, 2013 and 2012: 2013 Transmission Plant

2012 10,438,784

2.75%

577,684,427

557,265,686

3.20%

347,023

84,428,281

78,775,707

Total Electric Plant in Service

678,825,865

646,827,200

Construction Work in Progress

24,295,830

18,960,157

Distribution Plant Intangible Plant General Plant

Total Electric Plant - at Cost

16,366,134 $

Depreciation Rates

703,121,695 $

N/A 2%-33.33%

665,787,357

Depreciation expense of $21,884,622 (2013) and $20,317,197 (2012) is net of $1,967,914 (2013) and $1,865,630 (2012) charged to clearing accounts, some of which is capitalized. Impairment Loss During the year the Cooperative recorded a $2.2 million dollar capital asset impairment loss associated with meter equipment that is not fully functional. Management determined that the fair value using a cash-flow approach was not reasonably estimable. Management estimated the fair value of the capital assets by determining the key system components, the importance of those components to the system as a whole, and the statistical success rates of those components, and then applied the combined percentage to the net book value. NOTE 3 - INVESTMENTS IN ASSOCIATED ORGANIZATIONS AND OTHER SPECIAL FUNDS Investments in associated organizations and other special funds consist of the following: 2013

2012

Seminole Electric Cooperative, Inc. Patronage Capital Assigned

43,298,250 $

39,699,689

National Rural Utilities Cooperative Finance Corporation (CFC): Patronage Capital Certificates

1,935,339

1,854,995

Capital Term Certificates

3,489,416

3,539,346

GRESCO Utility Supply, Inc.

6,065,942

5,847,090

Investments in Other Associated Organizations

1,274,715

1,104,579

650,490

515,006

Special Funds Total Investments in Associated Organizations and Other Special Funds

56,714,152 $

52,560,705

CFC Capital Term Certificates are purchased as a condition of the mortgage agreements with CFC. At December 31, 2013 and 2012, they consist of the following: 2013 Certificates, 5% (Maturing 2070 to 2080)

Certificates, 3% (Maturing 2020 to 2030) Certificates, 0% (Maturing at Variable Dates) Total

| 14 | 2013 SUMTER ELECTRIC COOPERATIVE

2012 1,902,011 $

1,902,011

471,400

1,116,005

1,165,935

3,489,416 $

3,539,346

Notes to Financial Statements

December 31, 2013

The patronage capital assigned by Seminole Electric Cooperative, Inc. and the patronage capital certificates with CFC are excluded from ASC 320, Investments—Debt and Equity Securities, as an investment accounted for under the equity method of accounting. Capital term certificates are held to maturity under ASC 320 and are excluded from ASC 820, Fair Value Measurements and Disclosures. Investments in Other Associated Organizations includes memberships with related and trade organizations, and are accounted for under the equity method of accounting. ASC 820, among other things, requires the Cooperative to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value, and specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the company’s market assumptions. ASC 820 defines the following fair value hierarchy based on these three types of inputs: ■ Level 1—Quoted prices for identical instruments in active markets. ■ Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model derived valuations in which all significant inputs and significant value drivers are observable in active markets. ■ Level 3—Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. There were no assets recorded at fair value on a recurring basis at December 31, 2013, or December 31, 2012. NOTE 4 - ACCOUNT RECEIVABLES All of the Cooperative’s consumer account receivables are due from consumers in the central Florida area. Each new consumer pays a membership fee and may make 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 may return the member’s deposit. Other receivables at December 31, 2013 and 2012, include approximately $301,120 and $314,998, 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 31.67% and 31.77% of the total assets at December 31, 2013 and 2012, respectively. Capital credit retirements in the amount of $2,887,288 and $2,170,993 were paid in 2013 and 2012, respectively. NOTE 6 - DETAIL OF PATRONAGE CAPITAL 2013 Assignable

Assigned (Retired/Adjusted in Current Year) (Cumulative Amount Retired in Previous Years) Total Patronage Capital

2012

14,760,869

13,101,866

226,458,810

213,357,084

241,219,679

226,458,950

(2,887,288)

(2,170,993)

(34,784,721)

(32,613,868)

203,547,670

191,674,089

NOTE 7 - DETAIL OF OTHER EQUITIES 2013 Operating Margins (Prior to 1957)

2012 32,092

32,092

Nonoperating Margins (Prior to 1964)

19,371

Capital Gains and Losses (Prior to 1964)

10,533

626

2,570,311

Donated Capital Discount on Retired Capital Credits Total Other Equities

2,632,933

SECO FINANCIAL STATEMENTS | 15 |

Notes to Financial Statements

December 31, 2013

NOTE 8 - NONCURRENT LIABILITIES The Cooperative has the following unsecured lines of credit: 2013

2012

CoBank, ACB, Credit Line of $50,000,000 Variable Interest, 2.92% and 2.96% at December 31, 2013 and 2012, Respectively

25,289,375

24,669,817

Bank of America, Credit Line of $3,000,000 Variable Interest, 1.91%, and 1.96% at December 31, 2013 and 2012, Respectively, Payable on Demand Total

1,063,276 $

26,352,651

0 $

24,669,817

The Cooperative also has an available line of credit with CFC of $12,000,000 in 2013 and 2012. The Cooperative drew down $30,000,000 in long-term loan funds during 2013 and another $30,000,000 in January 2014 in approved long-term loan funds. In accordance with ASC 470, Debt, the line of credit was classified as long-term debt in an amount not exceeding the previously approved, but undrawn loan funds. The following is a summary of the Cooperative’s long-term debt payable to RUS, FFB, CFC, and CoBank: RUS Mortgage Notes 0.875% Notes

2013 $

2012 0

1,606,283

1.000% Notes

1,540,172

1.625% Notes

7,810,272

8,078,362

1.750% Notes

6,483,379

6,696,313

1.875% Notes

3,140,083

2.000% Notes

6,688,948

5,604,835

2.125% Notes

836,345

873,920

2.250% Notes

6,960,263

2,540,696

2.375% Notes

1,518,595

1,573,736

2.550% Notes

23,554,788

24,113,360

2.625% Notes

5,947,733

9,391,107

2.750% Notes

3,817,672

3,943,276

3.125% Notes

4,674,475

3.500% Notes

10,369,863

11,948,225

3.625% Notes

8,587,204

8,792,712

3.750% Notes

17,044,878

17,506,098

4.000% Notes

3,008,199

3,107,909

4.125% Notes

28,746,674

29,361,762

5.070% Notes

41,329,693

41,967,847

177,384,761

181,780,916

Total RUS Mortgage Notes (Current Portion) Long-term Portion

(4,475,435) $

FFB Mortgage Notes - RUS Guaranteed 2.480% Notes 2.766% Notes

172,909,326

(4,322,907) $

2013 $

177,458,009 2012

6,818,182 29,312,977

7,045,455 0

3.337% Notes

6,818,182

7,045,455

3.813% Notes

6,818,182

7,045,455

3.909% Notes

35,538,461

36,723,073

| 16 | 2013 SUMTER ELECTRIC COOPERATIVE

Notes to Financial Statements

December 31, 2013

The following is a summary of the Cooperative’s long-term debt payable to RUS, FFB, CFC, and CoBank: (Concluded) 4.019% Notes Total FFB Mortgage Notes - RUS Guaranteed (Current Portion) Long-term Portion

7,045,456

92,124,166

64,904,894

(3,009,737) $

CFC Mortgage Notes 2.930% Notes

6,818,182

89,114,429

(2,093,706) $

2013 $

62,811,188 2012

19,321,905

3.050% Notes

1,590,893

2,034,669

3.250% Notes

5,632,148

5,967,109

3.350% Notes

3,672,619

4,091,073

3.600% Notes

681,664

735,725

4.050% Notes

2,860,840

3,024,945

4.500% Notes

3,780,225

3,934,948

4.550% Notes

3,431,650

3,552,339

4.800% Notes

4,507,716

4,629,564

4.950% Notes

186,404

5.150% Notes

636,840

975,941

5.250% Notes

725,685

884,656

5.300% Notes

5,636,590

6,276,001

6.028% Notes

19,624,042

Total CFC Mortgage Notes

52,478,775

55,917,416

(Current Portion)

(3,610,576)

(3,438,640)

Long-term Portion

CoBank Mortgage Notes 1.530% Notes

48,868,199 $ 2013

52,478,776 2012

24,881,124

25,597,798

3.260% Notes

10,922,653

12,141,747

Total CoBank Mortgage Notes

35,803,777

37,739,545

(Current Portion)

(2,012,249)

(1,935,768)

Long-term Portion

33,791,528 $

35,803,777

Total Current Portion

13,107,997 $

11,791,021

Total Long-term Portion from Above

344,683,482 $

328,551,750

Total Long-term Letters of Credit

26,352,651

24,669,817

Total Long-term Portion

371,036,133

353,221,567

Total Current and Long-term Portion

384,144,130

365,012,588

RUS mortgage notes are payable to the United States of America for thirty-five year periods each. Principal and interest are due in monthly installments. Certain notes have provisions for interest rate changes at future dates. FFB mortgage notes are guaranteed by RUS and are payable quarterly to the United States of America with a maximum of up thirty-five year periods each. Certain notes have provisions for interest rate changes at future dates. 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. Certain notes included above are serviced by CFC but have been sold to Farmer MAC. The Farmer MAC loans are payable semiannually. At December 31, 2013 and 2012, the balance of these notes was $19,321,905 and $19,624,042, respectively. There were no unadvanced CFC loan funds available to the Cooperative as of December 31, 2013 and 2012, respectively. One CoBank mortgage note is fixed at a 3.26% interest rate for the remaining life of the loan and is paid monthly. The remaining CoBank mortgage notes are payable quarterly for thirty-five year periods each. Interest is calculated based on variable rates that change weekly.

SECO FINANCIAL STATEMENTS | 17 |

Notes to Financial Statements

December 31, 2013

Note 8 - Noncurrent Liabilities (Concluded) Interest on long-term debt, all of which was charged to expense, follows: 2013 Lines of Credit

2012 553,225 $

248,504

RUS Mortgage Notes

6,356,957

6,825,371

FFB Mortgage Notes - RUS Guaranteed

3,043,044

2,425,345

CFC Mortgage Notes

2,439,997

3,004,571

CoBank Mortgage Notes

777,774

Totals

13,170,997 $

888,994 13,392,785

Long-term debt maturing within each of the five years subsequent to December 31, 2013, is as follows: Mortgage Notes December 31 2014

RUS $

2015

CFC

CoBank

FFB

Total

4,475,435 $

3,610,576 $

2,012,249 $

3,009,737 $

13,107,997

4,624,629

3,616,835

2,091,887

3,009,737

13,343,088

2016

4,775,419

3,328,733

2,174,819

3,009,737

13,288,708

2017

4,954,394

3,463,995

2,261,187

3,009,737

13,689,313

2018

5,137,086

2,944,145

2,351,138

3,009,737

13,442,106

153,417,798

35,514,491

24,912,497

77,075,481

290,920,267

177,384,761 $

52,478,775 $

35,803,777 $

92,124,166 $

357,791,479

Thereafter Total

Substantially all assets and revenues of the Cooperative are pledged as collateral for these notes. RUS debt covenants require the Cooperative to maintain certain ratios including a Times Interest Earned Ratio (TIER) of 1.25, a Debt Service Coverage (DSC) Ratio of 1.25 in two out of the last three years, and Equity to Total Assets Ratio of not less than .225 to 1.0. As of December 31, 2013 and 2012, the Cooperative achieved a TIER of 2.17 and 2.00, respectively, a Debt Service Coverage Ratio of 1.96 and 1.89, respectively, and an Equity to Total Assets Ratio of .317 and .318, respectively. NOTE 9 - EMPLOYEE BENEFIT PLANS The group pension plan for employees was merged into the Retirement and Security Program of the National Rural Electric Cooperative Association (NRECA) effective July 1, 2003. The Retirement and Security Plan (RS Plan), administered by the NRECA, is a defined benefit, multi-employer pension plan qualified under Section 401 and exempt from federal income tax under Section 501(a) of the Internal Revenue Code. The plan sponsor’s Employer Identification Number is 53-0116145 and the Plan Number is 333. A unique characteristic of a multiemployer plan compared to a single employer plan is that all plan assets are available to pay benefits of any plan participant. Separate asset accounts are not maintained for participating employers. This means that assets contributed by one employer may be used to provide benefits to employees of other participating employers. The Cooperative’s contributions to the RS Plan in 2013 and 2012 represented less than 5% of the total contributions made to the plan by all participating employers. The Cooperative made contributions to the RS Plan totaling $4,672,994 and $4,269,062 in 2013 and 2012, respectively. On February 28, 2013, the Cooperative made a prepayment of $11,480,292 to the NRECA RS Plan, which was recorded as a Deferred Charge. The Cooperative is amortizing this Deferred Charge over 10 years. The unamortized balance of this Deferred Charge is as noted in Note 11. In the RS Plan, a “zone status” determination is not required, and therefore not determined, under the Pension Protection Act (PPA) of 2006. In addition, the accumulated benefit obligations and plan assets are not determined or allocated separately by individual employer. In total, the RS Plan was 80% funded at January 1, 2013, and between 65% and 80% funded at January 1, 2012, based on the PPA funding target and PPA actuarial value of assets on those dates. Because the provisions of the PPA do not apply to the NRECA Plan, funding improvement plans and surcharges are not applicable. Future contribution requirements are determined each year as part of the actuarial valuation of the plan and may change as a result of plan experience. All employees of the Cooperative meeting age and service requirements can elect to participate in a 401(k) savings plan (the 401(k) Plan) of the National Rural Electric Cooperative Association. Employees may make contributions to the 401(k) Plan up to the maximum percentage outlined in the 401(k) Plan and the Cooperative will match the employee contributions up to 4.0% of the employee’s salary. Both employee and employer contributions to the 401(k) Plan are funded biweekly. The Cooperative’s contributions to the 401(k) Plan were $1,116,828 and $1,035,837 in 2013 and 2012, respectively.

| 18 | 2013 SUMTER ELECTRIC COOPERATIVE

Notes to Financial Statements

December 31, 2013

Effective January 2006, the Cooperative adopted an executive compensation plan that allows eligible participants to defer compensation under Internal Revenue Code Section 457. There is no matching employer contribution. This plan is administered by the Cooperative and plan assets are subject to the Cooperative’s creditors in the event of bankruptcy or insolvency. Plan assets totaled $650,490 and $515,006 at December 31, 2013 and 2012, respectively. Self-insured Medical Benefits The Cooperative provides a self-insured medical benefits plan for active employees and their dependents. Active employees that select dependent or additional coverage are required to pay a premium to cover part of the cost of the coverage they select. In connection with the plan, the Cooperative maintains specific excess insurance for claims that exceed $175,000 for any covered individual and $1,000,000 aggregate excess insurance for claims that exceed $4,766,365 in the plan year. The Cooperative’s IBNR liability for active employees and part of the employees’ coverage for their dependents as of December 31, 2013 and 2012, is as follows: 2013 Beginning Balance

2012 390,345

521,734

Claims Incurred

3,606,929

3,283,711

Claims Paid

(3,727,375)

(3,415,100)

Ending Balance

269,899

390,345

NOTE 10 - RELATED PARTY TRANSACTIONS The Cooperative is one of ten members of Seminole Electric Cooperative, Inc., an electric generating and transmission cooperative. Seminole Electric Cooperative, Inc. is the sole supplier of electricity to the Cooperative and has entered into an agreement to supply power to the Cooperative through 2045. Seminole Electric Cooperative, Inc. has pledged the power supply agreement of its members to secure certain of its notes and mortgages. The following is a summary of all significant transactions between the Cooperative and Seminole Electric Cooperative, Inc.: 2013

2012

Purchased Power Cost

232,724,103

228,823,441

Accounts Payable - Power Cost, December 31

19,728,762

19,594,682

Patronage Capital Assigned

3,598,561

2,052,289

Patronage Capital, December 31

43,298,250

39,699,689

NOTE 11 - DEFERRED CHARGES AND CREDITS A schedule of deferred charges and credits are as follows: 2013

2012

Deferred Charges Unamortized: Prepayment of Pension

Deposits on Sales and Use Tax Dues Other Total Deferred Charges

10,332,264

169,261

171,193

79,027

14,179

22,974

10,594,731

194,167

2,579,629

2,083,362

Deferred Credits Unclaimed Capital Credits Customer Advances for Construction Other Deferred Amounts Customer Benevolent Fund Total Deferred Credits

6,216,990

4,313,981

405,730

291,704

117,718 $

9,320,067

122,805 $

6,811,852

SECO FINANCIAL STATEMENTS | 19 |

Notes to Financial Statements

December 31, 2013

Note 11 - Deferred Charges and Credits (Concluded) Amortization Deferred charges are amortized over periods of one or more years. Prepayment of Pension As more fully described in Note 9, the Prepayment of Pension Deferred Charged is being amortized over 10 years. NOTE 12 - FINANCIAL INSTRUMENTS In accordance with ASC 825, Financial Instruments, the following is a summary of the book and current values of the Cooperative’s financial instruments: Financial Instruments RUS Long-term Debt FFB Long-term Debt

Book Value $

177,384,761 $

Current Value 189,314,085

92,124,166

114,387,736

CFC Long-term Debt

52,478,775

45,851,004

CoBank Long-term Debt

35,803,777

24,789,964

2,373,411

1,823,820

CFC Subscription Capital Term Certificates and Interest-bearing Loan Capital Term Certificates CFC Loan Capital Term Certificates

816,015

500,937

CFC Member Capital Security

100,000

164,260

26,352,651

Lines of Credit Discount Rates RUS Loans:

■ The RUS variable rate loans are discounted at the RUS insured loan rates as of January 1, 2014, for the corresponding maturity date. The maturity dates range from 1 to 28 years and the rates range from 0.25% to 4.38%. FFB Loans: ■ The FFB loans are discounted at the Treasury rates as of January 1, 2014, for the corresponding maturity dates. The maturity dates range from 4 to 33 years and the rates range from 1.24% to 3.92%. CFC Loans: ■ The CFC loans are fixed rate loans discounted at January 1, 2014, CFC fixed rate using corresponding maturity dates for each loan. The maturity dates range from 2 to 26 years and the rates range from 2.55% to 6.50%. CoBank Loans: ■ The CoBank loans include a variable rate loan and a fixed rate loan. The variable rate loan was discounted at the variable rate of 2.92% as of December 31, 2013. The fixed rate loan was discounted at 3.26% as of December 31, 2013. The maturity dates range from 7 to 25 years. CFC Capital Term Certificates (CTC’s): ■ The Loan CTC’s are discounted based on the corresponding maturity dates of the CFC long-term fixed rates. The rates range from 4.10% to 6.40%. ■ The subscription CTC’s were discounted using the corresponding interest rates for the years remaining on the CTC ranging from 4.85% to 6.55%. CFC Member Capital Security: ■

The CFC member capital security is discounted at the 30 year Treasury bond rate of 3.92%.

NOTE 13 - CONTINGENCY The Cooperative has been identified as a potentially responsible party in a transformer superfund site. While it is not possible to predict the outcome of this matter, its resolution is not expected to have a material effect on the accompanying financial statements.

| 20 | 2013 SUMTER ELECTRIC COOPERATIVE

Ocala

Service Area Map

Ocala Service Center 75

Lake Weir 19

Umatilla

301

Inverness Service Center

Wildwood

Lake Griffin

441

Lake Panasoffkee

Leesburg

Lake Eustis

Eustis Service Center

Lake Harris

Sumterville Service Center & Headquarters Lake Apopka 35

Tallahassee

Groveland Service Center

Jacksonville

Clermont

471

Ocala

Orlando Tampa

Miami

ď&#x201A;Ť Sumterville Headquarters 330 South US Highway 301 (352) 793-3801 Sumterville Service Center 293 South US Highway 301 (352) 793-3801

Eustis Service Center 50 West Ardice Avenue (352) 357-5600

Inverness Service Center 610 South US Highway 41 (352) 726-3944

Groveland Service Center 850 North Howey Road (352) 429-2195

Ocala Service Center 4872 SW 60th Avenue (352) 237-4107