2012-05-CHEC-AR

Cape Hatteras Electric Cooperative 2011 Annual Report

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n 2011, Cape Hatteras Electric Cooperative (CHEC) continued to operate as an effective and efficient electric utility, providing reliable service to its members. This Annual Report gives a brief insight from management into activities and results of the Cooperative during the year 2011.

SAFETY The Cooperative continues its commitment to the safety of its employees, members and visitors. In 2011 CHEC was recognized by Federated Rural Electric Insurance Exchange (the co-op’s property, liability and worker’s compensation insurance carrier) for five years and 283,832 hours without a lost-time accident. At the beginning of 2011, CHEC created a committee of employees to perform a self-assessment of the Cooperative’s safety program and to develop a safety improvement plan for 2012. The areas that will be focused on are safety communications, expectations and accountability.

THE ELECTRIC SYSTEM In 2011, the number of electric services on Hatteras Island grew by 0.4 percent more than in 2010, and energy use decreased by 6.5 percent. The reduction in kWh sales was due mainly to the significantly reduced number of visitors to the Island after Hurricane Irene severed Hwy. 12 at the Pea Island National Wildlife Refuge in late August. The peak demand, normally experienced in July, increased slightly to 43.9 megawatts in 2011 as compared to 42.5 megawatts in 2010.

Cooperative crews were in the process of constructing a new 115/12.5 kV distribution substation in Buxton when Hurricane Irene brought the project to a halt. Cooperative crews will recommence and complete this project in 2012.

The Cape Hatteras Electric Cooperative electric system is unusual among electric cooperatives in having a considerable portion of its total dollar investment in transmission facilities. Nearly 32 percent, or $15 million of the total physical plant investment of $46.7 million, is in transmission facilities. This investment results in slightly higher operating costs, but also provides a stronger electric system to withstand the local extreme climatic conditions. The total plant investment of

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Reciprocating Internal Combustion Engines (RICE NESHAP). The diesel plants located in Buxton and Ocracoke are covered by the regulation and compliance is required by May 2013.

Throughout 2010-2011, NCEMC staff analyzed various options including: retiring the plants, selling the plants, emergency operation only, equivalence by permit and full compliance. In November 2011, NCEMC staff completed preliminary emissions testing of Buxton unit 4 with an oxidation catalyst installed. RICE NESHAP standards require that total CO emissions be reduced to 23 ppm, or that total CO emissions are reduced 70 percent from baseline. The data collected before and after the catalyst installation demonstrated that both tests had been met by reducing total CO emissions to less than 10 ppm for a total reduction of 86 percent.

At its Board of Directors meeting in November 2011, NCEMC staff recommended and the Board approved the implementation of full compliance for RICE NESHAP with emission reduction technology by May 2013 at a budgeted 52% Nuclear 26% Coal cost of $1 million. The NCEMC staff also recommended and the Board approved the installation of the engine control system upgrade at a cost of $700,000

by February 2013. This was strictly a good business decision for most of the 13% Gas/Oil 7% Purchases NCEMC staff and directors. However, to 1% Hydro CHEC staff and members, this decision 1% Renewables should be celebrated as the diesel plants proved to be an invaluable life line, runELECTRIC GENERATION ning for eight consecutive days to provide Cape Hatteras Electric Cooperative does electric service to parts of Hatteras and not own any electric power generation Ocracoke Islands, in the aftermath of directly. We are part-owners, along with Hurricane Irene. many other NC electric cooperatives through the North Carolina Electric RENEWABLE ENERGY Membership Corporation (NCEMC), in AND ENERGY EFFICIENCY the Catawba Nuclear plant in South In August 2007, the North Carolina legisCarolina, two gas turbine plants in lature enacted SB3, the renewable energy Anson and Richmond counties in North and energy efficiency portfolio standard Carolina and the Buxton and Ocracoke (REPS). The REPS law mandates that all diesel generating plants. The pie graph NC utilities either purchase renewable shows the Cooperative’s wholesale power energy credits produced by renewable supplier’s current fuel mix. projects or reduce energy consumption As a part of NCEMC’s budgeting through energy efficiency programs process for 2010, NCEMC staff recomapproved by the North Carolina Utilities mended and the Board of Directors Commission (NCUC). Through participation approved a $700,000 upgrade to the con- in GreenCo, a cooperative formed by most trol systems for the Buxton and Ocracoke of North Carolina’s electric cooperatives diesel plants that had been in operation to design energy efficiency projects and since 1991. In March 2010, these plans to procure renewable energy credits from were put on hold when the EPA promulgeneration projects, CHEC continues to progress in compliance with the gated the National Emission Standards REPS law. for Hazardous Air Pollutants for Existing $46.7 million represents an increase of $2.4 million over the previous year.

The Cooperative developed its new four-year construction work plan (CWP) for the years 2012–2015 totaling nearly $11.2 million. The CWP is a planning tool used for engineering and accounting purposes. Using forecasted load growth and reliability trends, engineering models are used to identify projects that will increase reliability and efficiency of the electric system. A few examples of projects included are the annual systematic replacement of aging transmission poles and the installation of automated metering infrastructure (AMI). New regulations require that all environmental studies be complete prior to including a project in the work plan and subsequent loan request. As a result, the Bonner Bridge transmission cable replacement could not be included in this work plan or loan request. When the necessary environmental studies are complete, CHEC will create a work plan amendment and separate loan request for this project.

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In 2011, GreenCo began purchasing the renewable energy credits from a 5-megawatt solar farm developed in Eastern North Carolina.

A significant part of the REPS law requirement can be met through energy efficiency programs that help our members reduce their monthly electric bill.

These energy efficiency programs were designed by GreenCo, approved by the NCUC and are to be carried out at the local Cooperative level.

In addition to continuing to sell high energy-efficient Marathon water heaters in 2011, CHEC initiated three new programs to promote energy efficiency and to help its members save money. CHEC began issuing $100 rebates to members that turn-in a second refrigerator or freezer, $25 rebates on the purchase of energy star appliances and low-interest financing up to $6,000 for the purchase of select energy star appliances. In addition, CHEC staff became certified and began providing home energy assessments to Cooperative members as a free service to aid our members in making their residences more energy efficient.

SEVERE WEATHER AND OUTAGES Category 1 Hurricane Irene wreaked havoc on the Outer Banks of North Carolina beginning the evening of Friday, August 26, through the early morning hours of Sunday, August 28. At 8:00 am on Saturday August 27, the Oregon Inlet breaker operated, creating a transmission outage for all of Hatteras and Ocracoke Islands. Our relay equipment indicated the fault occurred in Buxton. Patrolling crews found a broken guy wire and were able to safely make repairs from the ground. It was not until a flyover could be arranged on Sunday that staff was made aware of the extensive damage at the Pea Island breach.

Knowing that it would take some time to make even temporary repairs to the transmission line, CHEC and NCEMC personnel began working to provide emergency generation for Hatteras Island.

By Wednesday, August 31, the Buxton diesels and rented Caterpillar (CAT) generators powered all the villages. On September 5, Labor Day, CHEC energized the temporary transmission line restoring mainland service to Hatteras and Ocracoke Islands.

CHEC continued to face challenges as additional storms passed by offshore, causing further erosion to the inlet which

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CHEC’s temporarily restored transmission line spanned 440 feet. Working with NC DOT, focus was immediately turned to a more permanent solution for the inlet, consisting of 95-foot steel poles mounted on concrete caissons jetted 24 feet into the ground necessary to support the 700foot span required to benefit from the protection that NC DOT would install at each end of the new bridge. During the interim, additional measures had to be taken on several occasions to protect CHEC’s structure on the inlet’s south side. When the more permanent restoration was near completion, the close proximity of the high-voltage transmission lines required that the temporary lines be de-energized.

Once again, the Buxton diesels and the rented CAT generators powered the Islands. On Friday, November 11, CHEC energized the restored transmission line, again connecting Hatteras and Ocracoke Islands to mainland power.

CHEC would like to express our gratitude to the Brunswick Electric Cooperative crews and the various contract and engineering crews that came to our assistance, as well as our statewide organization, NCEMC, Dare County Emergency Management staff, the Hatteras Island Fire Departments, Rescue Agencies and local businesses that supported CHEC restoration efforts. CHEC would also like to thank NC DOT, US Fish and Wildlife Service, the Corps of Engineers and the Coastal Area Management Agency for enabling us to restore our transmission lines without delay.

Finally, CHEC would like to thank its members, the residents and property owners of Hatteras Island, for your patience and encouragement throughout the process. According to a survey conducted by the Island Free Press of over 2,000 residents and non-resident property owners, 93 percent of respondents said that CHEC did a good or excellent job in its response to Hurricane Irene.

Midgett Realty staff dedicated its annual Christmas float to thanking CHEC and NC DOT for providing electric service and transportation to the Island so quickly after the storm.

Aside from planned outages to reconnect the temporary and permanent restoration of the transmission line at Pea Island, the only outages that affected all of Hatteras Island in 2011 were due to Hurricane Irene. The total outage time from all causes resulted in 5,034 minutes of average outage time per

consumer in 2011; 5,010 minutes of that total were due to Hurricane Irene.

Severe weather is a fact of life in the Cape Hatteras Electric Cooperative service area.

The electric system has been developed over the last 17 years to provide more reliable service.

WARD TRANSFORMER COMPANY EPA SUPERFUND SITE In 2008, Cape Hatteras Electric Cooperative received notice that a cleanup was being conducted at another transformer repair facility near the RDU airport in Raleigh, Ward Transformer Company. The notice also stated that the Cooperative may be a PRP at this site because it had sent a few transformers there for repairs in the 1980s and 1990s. Four private companies are conducting an initial cleanup at the Ward Site pursuant to an agreement with EPA. According to records obtained from the Ward site, four small substation transformers were repaired in 1984-1985, and one transformer was sent to Ward 1994. It is the Cooperative’s belief that, due to the nature of the repairs of the Cape Hatteras transformers, it is not likely that they contributed to the pollution at the site or elsewhere.

The four parties performing the cleanup filed suit in 2010 against the Cooperative and approximately 160 other companies, local governments, and government agencies, who had sent electrical equipment to the Ward Site. This case is still pending. The Cooperative is pursuing several defenses to liability in this litigation.

SALES AND FRANCHISE TAX CASE In 1999, the NC Department of Revenue (DOR) arbitrarily decided to begin requiring Cape Hatteras Electric Cooperative to collect and remit sales tax on electricity used by its consumers as well as requiring the Cooperative to pay a franchise tax, which some other utilities are required to pay. This was in defiance to longstanding state legislation, which exempts CHEC from taxes. Cape Hatteras Electric Cooperative paid the taxes under protest

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and filed suit against the Department of Revenue to reverse their decision.

On March 1, 2011, the North Carolina Court of Appeals issued a unanimous decision affirming the 2009 ruling of the Superior Court in favor of Cape Hatteras Electric Cooperative. On May 12, 2011, CHEC received two refund checks from the DOR, both of which included interest at the rate of 8 percent through May 15, 2011. The refund for sales tax payments totaled $5,287,875.37 and the franchise tax refund totaled $5,250,082.27. During the first week of June 2011, CHEC mailed nearly 11,000 refund checks for sales tax paid by members on their electric accounts from 2000-2009, plus 8 percent interest.

Sales tax is often referred to as a pass-through tax as it does not have any impact on CHEC’s margins. It is collected from the customer and sent on to the DOR, which is why refunds were processed immediately to members that paid those taxes from 2000-2009. The franchise tax, which was paid by the Cooperative, directly affects CHEC’s operating statement and reduced margins for the years in which they were paid. The franchise tax was recognized as extraordinary income for accounting purposes in 2011 and was allocated, including the 8 percent interest, to CHEC members who had electric accounts during the years 2001-2009. In March 2012, the CHEC Board of Directors authorized a special capital credit retirement to return 30 percent of the franchise tax that was refunded to the cooperative

by DOR. Checks or bill credits totaling $1,575,042 were issued to CHEC members with service during 2001-2009 in late April.

FOCUS FOR THE FUTURE Plans continue to keep the Cooperative financially strong, the electric system safe and reliable and the rates as low as possible. We plan for known challenges

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and strive to retain our excellent employee workforce, work safely and provide efficient and courteous service.

The Cooperative considers the safety and convenience of our members paramount in its operations.

Given the diversity of our membership, Cape Hatteras Electric Cooperative continually strives to improve member communications. In January 2011, the Cooperative joined online networking sites Facebook and Twitter. These communication tools proved invaluable during and after Hurricane Irene.

During that time CHEC saw the number of people following our site jump from approximately 20 to over 600. On the Cooperative’s website, www.chec.coop, members that currently do not subscribe, can view current and back issues of the Carolina Country magazine, along with the Cooperative’s monthly newsletter.

Members are encouraged to visit the website often to stay up-to-date on happenings concerning the Cooperative.

The email outage notification for outages and other urgent information is functioning well. For those members that have provided their e-mail addresses, CHEC is now offering the convenience of e-billing to members who request it.

E-billing makes receiving your electric bill faster and easier and eliminates unnecessary paper use.

CHEC has recently introduced a new online customer portal for its members.

The portal acts as a virtual customer service representative, providing a single point of access to account services such as: application for new service, change your password, online bill payment, sign up for bank draft, credit card draft and budget billing, update account profile, view billing and payment history, request to receive bill by e-mail and set up message alerts via e-mail or text message to inform members of an approaching due date or that their account has been paid.

Electric cooperatives have led utilities in embracing grid modernization.

Automated metering infrastructure, which has been approved as a part of CHEC’s new four-year construction work plan, can reduce operating costs, improve customer service and outage response as immediate benefits. Potential future applications include prepaid metering, direct load control and in-home customer information systems empowering members to take control of their usage.

COOPERATIVE STRUCTURE An electric cooperative’s corporate structure is one of member ownership. As a result, our loyalty is to our members. We are not distracted by conflicting objectives of satisfying stockholders because there are none. The members own the corporation. Any net earnings continue to be the property of the members that provided them. A portion of excess earnings are refunded the following year, the remainder is retained to reduce borrowing requirements of the cooperative and are retired and refunded in future years.

FINANCIAL STRENGTH Your cooperative continues to remain financially strong. Operating margins for 2011 were $1,342,013, which is down from $2,140,547 the previous year. The lower than budgeted margins was due in large part to significant decrease in kWh sales after Hurricane Irene. The lower margins are also due in part to the increased operating cost of providing emergency generation service to the Island both after the storm and during the final period of construction on the transmission line at the Pea Island inlet. These costs are currently being reviewed by FEMA to determine what amounts, if any, are reimbursable to the cooperative. Member equity (ownership) of the Cooperative at year-end was 62.5 percent, up from 54.6 percent the previous year because of the franchise tax refund recognized as extraordinary income in 2011. The Cooperative sold 131 million kilowatt-hours in 2011, down significantly from 140 million the prior year again because of Hurricane Irene.

In 2011 capital credits were retired and refunded to current and former members in the amount of $1,255,404, the Cooperative’s largest general retirement to date.

MEMBER PARTICIPATION Cape Hatteras Electric Cooperative encourages member participation. The mail ballot election of directors continues.

This gives all member-owners the opportunity to vote in the election of directors and has demonstrated a good response rate of around 30 percent. The 2012 annual meeting of members will be held on Monday, May 14, at the Cape Hatteras Secondary School located on Hwy. 12 in Buxton. Dinner will be served at 6 pm, followed by a short business meeting at 7 pm. Members are encouraged to send questions concerning the operations of

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their cooperative to the General Manager in advance of the Annual Meeting. This may be done by mailing any questions to the CHEC General Manager at PO Box 9, Buxton 27920 or e-mailing to susanf@chec.coop.

GOVERNANCE Your Cooperative is governed by a member-elected Board of Directors. These directors are members who are actively involved in the communities of Hatteras Island. Directors are elected to rotating three-year terms. Directors presently serving are well trained in the job to which they were elected. The functions of the Board of Directors are to provide oversight of the general operations of the Cooperative, set governing policy, approve budgets and select a CEO to carry out the day-to-day operations of the Cooperative.

The board meets eight times a year, or more often as necessary, to carry out their responsibilities.

MAJOR CONCERNS Concern continues that the Bonner Bridge “Parallel Bridge” replacement project stays on track.

On July 1, 2011, the Defenders of Wildlife and Southern Environmental Law filed a lawsuit intended to halt the construction on the Bonner Bridge replacement project. On October 31, 2011, CHEC filed a motion, which was granted in January 2012, to intervene on behalf of the State and Federal defendants.

CHEC has an obligation to represent the interests of its members, the residents and property owners of Hatteras Island, when it comes to the issue of providing affordable and reliable electric service. CHEC owns and maintains 115 kV transmission lines, which are attached to the existing Bonner Bridge and runs the entire length of the Pea Island National Wildlife Refuge along Hwy. 12. CHEC has executed a utility agreement with NC DOT to attach new cables to the replacement bridge at an estimated cost of $9.3 million. If the plaintiffs prevail, the defendants will likely be forced to select the long bridge or ferry alternatives preferred by the plaintiffs. The estimated cost to install 17.5 miles of transmission line for CHEC and its members is $38.9 million, nearly doubling the total plant value of the Cooperative. Continued accessibility through the refuge is also at stake and is paramount to the Cooperative’s mission of providing affordable and reliable service.

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We are greatly concerned that regulations being issued by the Environmental Protection Agency (EPA) could have a serious impact on electric rates nationwide.

Kirk Johnson, NRECA vice president of energy and environmental policy, said: “EPA is considering or promulgating regulations affecting air pollutants, coal ash, greenhouse gases and other substances.” Every new rule or regulation creates additional cost for electric generators and businesses nationwide that are ultimately passed on to the consumer.

In 2010, new EPA regulations hit close to home when they issued rules that impact the Buxton and Ocracoke diesel generating plants. Fortunately for CHEC’s members, NCEMC has agreed to make the investment required in order for the plants to continue operating and achieve compliance of the new rules by the May 2013 deadline.

If you are concerned about the impact of EPA regulations on electric rates, we encourage you to visit www.ourenergy.coop.

The Our Energy, Our Future website was created to enable cooperative members to have a voice with Congress and ensure that energy policies are fair and affordable for all Americans.

Electric Utilities are facing unprecedented challenges. We find ourselves in a rising cost environment as we work to comply with new regulations meant to address environmental, financial and reliability concerns. Utilities also face the high costs of replacing aging infrastructure and modernizing the grid. At the same time, both growth in new customers and usage remains flat.

Access to funding is critical, the Rural Utilities Service (RUS) electric loan program, has played a significant part in providing low-cost financing to electric cooperatives all over the country. Funding should not be restricted to certain renewable and environmental projects. Like most government agencies, the RUS has come under attack by those wanting to reform Washington. However, unlike most other government agencies, the RUS electric loan program is projected to raise $300 million in interest payments for the US Treasury in FY13 budget, helping to reduce the federal deficit.

To bring this closer to home, in conjunction with our construction work plan and RUS loan application, CHEC prepared a 10-year financial forecast in 2011.

Based on forecasts prepared by our

wholesale power supplier, NCEMC, CHEC will have to raise retail electric rates by at least 29 percent by 2020 in order to keep up with the expected increases of wholesale power cost and to meet our minimum ratios and loan covenants. If we want public officials who understand what makes cooperatives different, we must engage in the political process. To register to vote, go to www.ourenergy.coop.

IN CONCLUSION The year 2012 has been declared the International Year of Cooperatives. It is a chance for us to celebrate our legacy of innovation and to remind us of what is most important in business, putting people first. As a cooperative, our members are the whole reason for our existence. The directors, employees and management thank you for the opportunity to provide the services we do. In addition to providing safe and reliable electric service, cooperative directors and employees pride themselves in being a part of the Hatteras Island community.

Throughout the year, you will find teams of CHEC directors and employees participating in local events that benefit not-for-profit organizations like the Hatteras Island Cancer Foundation’s Fun Run, the Kiwanis Club’s Bike the Light and Locomotion’s Seal Swim.

You will even find some shaving their heads for the St. Baldrick’s Foundation.

CHEC employees volunteer with the Hatteras Island Kiwanis Club, the Family Enrichment Partnership of Hatteras Island, the Hatteras and Ocracoke Island Council and the Graveyard of the Atlantic Museum. Our concern for community also extends through our Operation Round-up Foundation, scholarship program, Bright Ideas Grant program and Co-op Connections Card program.

We believe that a locally owned, managed and governed cooperative is the best means to be responsive to the needs of our membership and community.

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Board of Directors Your Cooperative is governed by a member-elected board of directors. These directors are members who are actively involved in the communities of Hatteras Island. Directors are elected to rotating three-year terms. Directors presently serving are well trained in the job to which they were elected.

The functions of the board of directors are to set governing policy, approve budgets and select a manager to carry out the day-to-day operations of the Cooperative. The board of directors meets 8 times a year, or more if necessary, to carry out their responsibilities.

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President

Vice President

Secretary/Treasurer

Richard A. Midgett

John R. Hooper

K. Norman Campbell

Director

Director

Elvin L. Hooper

Clifton A. Duke

Director

Director

Dan G. Oden Jr.

Tami Thompson

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2011 Financial Statements Operating Revenue

$17,447,476.00

Patronage Capital & Operating Margins Patronage Capital & Operating Margins Extraordinary Item–Franchise Tax Refund Interest Income and Other Non Operating Margins Capital Credits from Associated Organizations

Patronage Capital or Margins

$1,342,013.00 5,391,169.00 102,663.00 249,504.00

$7,085,349.00

Assets Net Utility Plant Investment in Associated Organizations Temporary Investments Notes and Accounts Receivable Materials and Supplies Other Current and Accrued Assets Prepayments Deferred Debits

Total Assets

$38,943,536.00 1,590,426.00 5,164,543.00 350,571.00 1,578,858.00 95,303.00 18,396.00 339,051.00

$48,080,684.00

Liabilities and Other Credits Patronage Capital Long-term Debt Notes and Accounts Payable Consumer Deposits Other Current and Accrued Liabilities Deferred Credits

Total Liabilities and Other Credits

$30,061,138.00 16,531,893.00 819,592.00 124,075.00 235,619.00 308,367.00

$48,080,684.00

2011 Expenses

65% Purchased Power

9% A & G Expense 8% Depreciation 4% Customer Acct Expense 5% Interest Exp 9% O & M Expense Annual Report 2011

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CAPE HATTERAS ELECTRIC CO-OP

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P.O. Box 9 47109 Light Plant Road Buxton, NC 27920 Phone: (252) 995-5616 Toll Free: (800) 454-5616 Fax: (252) 995-4088 Web site: www.chec.coop Office Hours: 8 a.m.-5 p.m.

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