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I remember the day the lights came on… They (the lights) finally came on. We had a 40- or 50-watt bulb. After dinner, I failed to go to the field again. She (wife) said, “Why are you not going to the field again?” I said, “I’m celebrating today. I’m gonna sit here ‘til dark comes and see how supper eats with a good light!”

— Lindsey Powers, the first Walton EMC member to receive power, recalling the day the lights came on in his home in July 1937

Left Photo: In 1980, 90-year-old Lindsey Powers still clearly recalled watching linemen dragging wire behind an old gray mule to string the first electric lines alongside Snows Mill Road in Walton County. Cover photo courtesy Basin Electric Power Corporation

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2011

Message to Members

A Legacy of Light

2011 Highlights

Board of Directors

Financials

Annual Report

CONTENTS Message to Members Read the Message

A Legacy of Light – A Walton EMC History Walton County farmers‘ perseverance during the Depression was demonstrated in many ways. The most enduring of these was the founding of a consumer-owned electric utility, Walton EMC. Learn More

2011 Highlights Review your cooperative’s accomplishments in 2011. View Highlights

Board of Directors See Photo

Financials View Financial Report

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2011

Message to Members

A Legacy of Light

2011 Highlights

Board of Directors

Financials

Message to Members

ard

O

Bo l a n i rig

From very humble beginnings in 1936, seven men invested one dollar each to set in motion the dream of bringing electricity to Walton County and the surrounding area. The result is a cooperative that has 75 years of growth and progress, 75 years of improvements in technology, 75 years of improving quality of life and 75 years of serving customer-owners. Looking back over these years, what has Walton EMC been able to accomplish? What if those seven men had not taken the leap of faith to start Walton EMC? What would life be like if Walton EMC had never existed? If there had never been a Walton EMC, what would the people in the Walton EMC service area be paying for electricity today? The Public Service Commission rate comparisons show that the closest municipal provider is slightly more expensive in the winter. In comparison, Georgia Power ranges from being $40 to $60 higher per month in the winter and $50 to $75 higher per month in the summer for 1,500 to 2,000 kilowatt hours. Walton EMC has not had an increase in retail rates since 1992, so our members are truly benefiting from the existence of Walton EMC.

If there had never been a Walton EMC, how would Georgia’s natural gas market look today? Walton made a bold venture to meet consumer demand with a business model that draws heavily on our cooperative roots. Today, we provide 65,000 Georgians substantial savings on their gas bills each month. By bringing true competition, Walton EMC Natural Gas forces the other marketers to keep rates lower for the entire gas market. Our superior customer service prompted J.D. Power & Associates to rank us best among all gas marketers in Georgia. Without Walton, Georgians would be getting less service and paying more for natural gas.

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2011

Message to Members

A Legacy of Light

2011 Highlights

Board of Directors

Financials

Message to Members If there had never been a Walton EMC, what would customers experience in power reliability? Walton’s record of restoration is one of the best in the state. Our outage time per consumer per year ranks lower than most of the other state co-ops. Being local, having hardworking employees and having service arrangements with other EMCs helps us to react and to restore power qickly. If there had never been a Walton EMC, who would care about customers’ energy efficiency needs? Who would have performed the energy audits and answered consumers’ billing inquiries? Literally thousands of people would have been without the expertise of trained energy professionals resulting in energy waste and higher bills. Hundreds of people would have experienced power quality problems that may never have been resolved except for the hard work and determination of dedicated Walton EMC employees going the extra mile for cooperative members.

If there had never been a Walton EMC, members would not be able to pool their money through Operation Round Up. Our Round Up program has collected and dispersed more than $2.6 million since its inception in 1998. During the harsh economic conditions of the past three years, many individuals and organizations would not have received assistance had it not been for the money donated by Walton EMC customer-owners and dispersed by the volunteer board of Operation Round Up. If Walton EMC had never existed, perhaps the most important difference in the lives of those in the Walton EMC service territory would be the loss of the impact of the charitable spirit of the Walton EMC employees. Because Walton EMC provides stable jobs and the employees love what they do, there is a true desire to give back to the communities we serve. Outside of Operation Round Up, employees have adopted many charitable causes including the Boys & Girls Club of Walton County, March of Dimes, Relay for Life, Atlanta 2-Day Breast Cancer Walk, Red Cross, Continued Contents  

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Message to Members

A Legacy of Light

2011 Highlights

Board of Directors

Financials

Message to Members Secret Santa, Adopt a Family and Project Sandbox. Employees donated or helped to raise more than $50,000 in 2011 alone. For their philanthropic efforts Walton EMC employees were rewarded with the first annual Community Service and Volunteerism Award and being named EMC of the Year at Georgia EMC’s annual meeting. Trying to imagine the last 75 years without Walton EMC leaves a dark and dreary picture in the mind, a dismal landscape untouched by the spirit of a cooperative — a cooperative that has employed hundreds of people whose goal has been to make their community a better place to live; a cooperative that provides reliable, affordable electric service so that its

customer-owners may enjoy a better quality of life; and a cooperative that truly believes in the spirit of benevolence and giving back to the community. Let’s take a minute and thank those seven men who had the vision and courage to start our cooperative, Walton EMC!

Ronnie Lee General Manager

Warren Few Board Chairman

Walton EMC completed a system-wide installation of smart meters in 2011.

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2011

Message to Members

A Legacy of Light

2011 Highlights

Board of Directors

Financials

A Legacy of Light Walton EMC’s history is a story about how seven men, $7 and seven principles brought power to the people.

MEMBER MEMORIES “We had candles and oil lamps. . .we had to study by those. Then we got electricity, and we couldn’t believe it — a light bulb in every room!” Dot Malcom, Good Hope

The effects of the Great Depression were still stubbornly clinging to Northeast Georgia in 1936. Hard times were nothing new in the onceprosperous region. Farmers had been fighting a losing battle with the boll weevil and soil erosion for almost a decade before the rest of the nation hit bottom. Walton County farmers’ perseverance during these difficult days was demonstrated in many ways, but the most enduring was the founding of a consumer-owned electric utility, Walton EMC. In 2011, the cooperative celebrated 75 years of providing economic electricity, a legacy of light born of necessity that continues to thrive by meeting the increasing and ever-changing demands of its customer-owners.

The dark ages Power arrived in the Walton County seat, Monroe, in 1906. With it came the electrical conveniences of city living — and the better standard of life they afforded. But it would be another 30 years before the farm families populating most of Walton and neighboring

In the early 1930s, Georgia farm families lived a primitive lifestyle without the aid of electricity to aid in farm and household chores. Photo courtesy of University of Georgia Libraries

counties would have the opportunity to turn on the lights in their homes and barns. These Northeast Georgia families were not alone in the dark. Fewer than 3 percent of the nation’s farms had access to affordable electricity in 1935. Rural families were forced to live a more primitive lifestyle because investor-owned power companies did not find it profitable to extend their lines into the sparsely populated countryside.

Georgia inspiration In 1932 things changed when, like the majority of the nation, Walton County voters enthusiastically Continued Contents  

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2011

Message to Members

A Legacy of Light

2011 Highlights

Board of Directors

Financials

A Legacy of Light sent Franklin D. Roosevelt to the White House. The new president had Georgia on his mind.

MEMBER MEMORIES “. . .they came through the fields stringing wire and putting up poles… my father was a little upset because they were tearing up some of his crop, but my mother said don’t worry about that because we’re getting power and that’s much more important.” — Margie McBryar, Loganville

The wealthy New Yorker had been living part time in Warm Springs, Ga., since 1923. He enjoyed being near therapeutic spring waters that strengthened his polio-crippled body. Roosevelt discovered that getting power for his rural Georgia residence cost four times more than what he spent for his New York mansion. The price seemed to him unfair and unjustified — and certainly unaffordable for the local farmers who were his neighbors. The experience inspired Roosevelt to aggressively work to lift the dark vale cloaking the countryside. He believed turning on the lights was the key to improving the standard of living in rural America. Soon after becoming president, he created the Rural Electrification Administration (REA) to fund building rural power lines in places like Walton County.

Seven plus one “Quick as Roosevelt signed the (REA) bill, I began to investigate it (the process for getting electricity)… and found out we could get it by having an organization,” Walton County Agent Henry Shores recalled for Walton EMC’s 50th anniversary celebration. Shores quickly recruited members of a local agriculture association to spearhead the drive to bring power to the county. “We called meetings and got enough folks interested in it. Some of them grabbed hold and went with it,” he said. “It” was the establishment of Walton Electrical Association (later named Walton Electric Membership Corporation). The “folks” were T.R. Breedlove, W.I. Barrett, I.M. Thompson, W.W. Treadwell, R.P. Burson, M.T. Robison and J.C. Adams. These seven prominent Walton County Continued

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2011

Message to Members

A Legacy of Light

2011 Highlights

Board of Directors

Financials

A Legacy of Light farmers gave $1 each toward the charter of a member-owned electric company—a cooperative.

MEMBER MEMORIES “I was just starting school when we got lights. We only had drop bulbs from the ceiling. . .we had three (bulbs) and no appliances.” — Ruby Herring, Bishop

With Breedlove as its first president and Barrett the secretary-treasurer, the newly minted cooperative began taking steps to borrow money from the REA to build local distribution lines. Shores and his wife spent the summer of 1936 conducting the necessary surveying for electricitydistribution lines in rural Walton County. In October, the Walton County Electrical Association was incorporated as the 15th rural

Power to the people The W.A. Mathis Contracting Company of Athens began building the co-op’s first substation and lines early in 1937. The substation was a single transformer on a pole at the corner of Church and Poplar streets in Monroe. On a good day, crews could set about 30 poles, with each hole being dug by hand and requiring two hours of labor each. Mules were used to string line on the new poles that began dotting the landscape eastward from Monroe down Good Hope Road toward Tillman Town. Lindsey Powers of the Turkey Mountain community became the first of 190 customerowners to receive power when the original 40 miles of line were energized in July. It was an experience the farmer never forgot. “They (the lights) finally came on. We had a little 40- or 50-watt bulb,” he recalled in an interview 25 years ago.

electric cooperative in Georgia. The new cooperative soon received a $90,000 REA loan to construct its first 90 miles of line.

On the day his farm was electrified, Powers failed to return to plowing after lunch. This prompted his wife to ask why he wasn’t working. His reply: “I am celebrating today. I’m gonna sit here ‘til dark comes and see how supper eats with a good light!” Continued Contents  

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2011

Message to Members

A Legacy of Light

2011 Highlights

Board of Directors

Financials

A Legacy of Light Sign of the times

MEMBER MEMORIES “I was about 7 when it (electricity) first came on. It was close to Christmas because I remember my father bought colored lights for the Christmas tree.” — Anne Palmer Moore, Loganville

When the co-op’s first electric bills were mailed on Sept. 1, 1937, Walton EMC had 346 members. The average kilowatt-hour consumption was 27. Before construction was completed on the initial distribution system, the cooperative’s leaders had already applied for another $375,000 in REA funds to string an additional 300 miles of lines. The expansion would extend service to homes in adjoining counties, including Newton, Gwinnett, Rockdale, Barrow, Oconee and DeKalb. Walton EMC’s first manager, J.L. Snow, guided operations from a small space formerly used as a stock room for a service station on East Spring Street in Monroe. When the cooperative quickly

outgrew its tiny office, the headquarters moved to a larger space on North Broad Street. As Walton EMC members experienced the luxury of electricity for the first time, they rushed headlong into the 20th century. They bought irons, radios, refrigerators, stoves, lights and more.

This substation and 90 miles of line brought the first electricity to farms in Walton and Morgan counties in 1937.

Red light, green light

Some 35 percent of U.S. farm families were enjoying the conveniences of electricity by the close of 1941. But the push to bring power to rural America came to a near halt following the bombing of Pearl Harbor on Dec. 7 that year. As the nation’s focus — along with manpower and materials needed to build electricity distribution systems — shifted to the war effort, those on the J.L. Snow, the cooperative’s first manager, shows off the cooperative’s service truck.

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Message to Members

A Legacy of Light

2011 Highlights

Board of Directors

Financials

A Legacy of Light

MEMBER MEMORIES “…I’d say, ‘Momma, you want it dark or you want it light?’ and I’d pull the chain to turn the light on and off.” — Tommie Dial, Loganville

waiting list for a Walton EMC "hookup” were forced to wait. A renewed push to build the Walton EMC system began in earnest in 1945 when war-weary soldiers came home. With a new world view and appreciation for the advantages of electricity, they wanted power for their farms — and they wanted it immediately. Post-war demand boosted Walton EMC membership to about 800 accounts in 1949. This local growth mirrored what was happening on a national scale. By 1950, 75 percent of America’s farms had power.

Walton EMC’s pattern of steady membership increases continued for nearly six decades thanks to the emerging Atlanta suburbs and growth around Athens. The service area expanded to 10 counties, adding Clarke, Morgan and Greene. Membership topped 10,000 in 1966. By 1975 there were 23,500 members, necessitating the construction of the current headquarters on Highway 78 east of Monroe. The number of Walton EMC customer-owners increased tenfold in the next quarter century. Membership reached the 100,000 mark in 2003. Today, the co-op serves more than 118,000 Continued

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2011

Message to Members

A Legacy of Light

2011 Highlights

Board of Directors

Financials

A Legacy of Light

MEMBER MEMORIES

customer-owners. These modern members each use an average 2,000 kilowatt hours of energy per month, almost 100 times more than the consumption levels of members in 1937.

“The first thing I did (when we got

The principle difference

electricity) was go get us a refrigerator

Technology has changed much about the way Walton EMC delivers electricity these days. Fundamentally, however, the utility is the same as when seven men pooled their resources to charter it.

and a freezer — both for $500.” — George Hillsman, Watkinsville

Just as in 1936, Walton EMC continues to operate according to the seven cooperative principles, a universal set of values that ensure the co-op’s leaders never lose sight of what is most important. These principles define the difference between Walton EMC and other power companies:

• Voluntary and open membership • Democratic member control • Members’ economic participation • Autonomy and independence • Dedication to education and information • Cooperation among cooperatives • Concern for community At its core, this co-op is, and has always been, about people. It was founded because neighbors pulled together to bring lights to the countryside. It remains vital and relevant because it continues to be a customer-controlled and -governed business that is fully focused on putting members’ best interests first.

In the 1950s and 1960s, the cooperative promoted the conveniences of electricity and educated members about the use of electric appliances.

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A Legacy of Light

2011 Highlights

Board of Directors

Financials

Highlights Walton is EMC of the Year For unprecedented generosity, Georgia EMC presented the EMC of the Year and 2011 Community Service and Volunteerism Award to Walton EMC. The co-op was honored for a range of employee-led fundraising events and other projects that demonstrate the seventh cooperative principle: concern for community.

Co-op celebrates 75th anniversary October 2011 marked 75 years since Walton County farmers formed a cooperative to bring electricity to local rural homes and farms.

Power deal keeps rates low Walton EMC signed a long-term power contract that assures adequate electricity supply and some of the state’s lowest electric rates through 2025.

Rates among lowest in state Walton EMC customer-owners continued to pay less for their electricity than most other Georgians, according to a Georgia Public Service Commission. At the 2,000 kilowatt-hour level — the average monthly usage for a Walton EMC residential account — only one utility out of the 95 surveyed had lower rates.

Gas company receives J.D. Power Award Walton EMC Natural Gas ranked highest in customer satisfaction among Georgia’s retail natural gas providers to receive the prestigious J.D. Power Award. Consumers named the company best in price, billing and payment, communications and customer service. Continued Contents   13


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Message to Members

A Legacy of Light

2011 Highlights

Board of Directors

Financials

Highlights Customer-owners share $3 million Customer-owners who purchased electric service from the cooperative during 1986 and/or 2010 received a share of $3 million in capital credit refunds. The co-op has returned $43 million in the last 24 years.

Underground crew is Georgia’s best For excellence, care and attention to detail, a Walton EMC underground crew was named Georgia’s best for the second time. They receive the regional award for the fifth time in six years.

Line technicians win awards Walton EMC overhead line technicians studied, trained and climbed their way into top spots at both the Georgia Linemen’s Rodeo and the International Lineman’s Rodeo.

Crews help co-op recover In the wake of Hurricane Irene, 12 Walton EMC employees spent four days restoring power for Carteret-Craven Electric Cooperative in New Port, N.C.

Automated meter project complete

Round Up funds help communities Worthy organizations and needy families are given $270,474 through the customer-owner funded Operation Round Up. In 14 years, participating customer-owners have donated $2.6 million to improve the quality of life in their communities.

A four-year, system-wide installation of automated meters is completed. The meters save the electric system money, improve billing accuracy, protect against theft and speed outage repairs.

Co-op sends delegates to Youth Tour Four high school students spent eight days in Atlanta and Washington, D.C., as representatives of Walton EMC for the annual Washington Youth Tour. Continued Contents   14


2011

Message to Members

A Legacy of Light

2011 Highlights

Board of Directors

Financials

Highlights Shoot raises $7,000 Nearly 80 shooters raised more than $7,000 at the first Walton EMC Charity Sporting Clays Shoot planned and executed by employees. The participants, from all across Georgia, competed on teams of five to raise money for the Atlanta 2-Day Walk for Breast Cancer.

respectively, in the national Cooperative Communicators Association contest.

Ride benefits cancer fight More than 150 motorcyclists put the rubber to the road September. 10 for Walton EMC’s ninth annual charity ride, raising $4,010 to fight breast cancer.

Students receive $75,000 in scholarships In May, 33 outstanding students from across Walton EMC’s 10-county service area shared $75,000 in Operation Round Up college scholarships. Since the scholarship program began, 141 scholarships worth $275,000 have been given.

Communicators win national awards Walton EMC’s Greg Brooks and Savannah Chandler were honored for outstanding work in employee and customer-owner communications, receiving second- and third-place awards,

Employees receive awards Line Technician Jared Smith and Journeyman Line Technician Jason Blankenship each received a Life Saving Award presented by Georgia EMC for their efforts to save the lives of two men in separate incidents.

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A Legacy of Light

2011 Highlights

Board of Directors

Financials

Board of Directors

Bobby Williams District 7

Johnny Allgood

District 11 Secretary/ Treasurer

Warren Few

Chairman

Tommy Adcock

District 6 Vice Chairman

Mary Ann Hartman District 9

Sam Simonton District 8

KEY Left to Right: Standing - Seated

Bud Wiley

District 3

Jim Whitley District 4

Dan Chelko

District 10

Ronnie Lee

President/CEO

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Message to Members

A Legacy of Light

2011 Highlights

Board of Directors

Financials

Financials

CONSOLIDATED BALANCE SHEETS - JUNE 30 - MEMBERS’ EQUITY AND LIABILITIES 2011

2010

Membership Fees

$ 1,115,660

$ 1,131,778

Patronage Capital

155,094,514

153,053,750

344,421

115,280

Other

19,816,725

16,377,688

Accumulated Other Comprehensive Loss

(17,653,969)

(20,150,763)

Members’ Equity

Donated Capital

158,717,351

150,527,733

184,985,431

185,443,531

8,941,110

13,073,221

28,249,842

25,045,568

37,190,952

38,118,789

16,222,000

13,026,000

9,280,000

10,000,000

24,978,323

24,804,700

8,360,634

7,850,877

781,000

732,309

Accrued and Withheld Taxes

4,000,335

2,982,564

Accrued Interest

1,655,067

1,830,491

Other

3,612,163

3,578,522

68,889,522

64,805,463

4,841,836

4,155,208

$454,625,092

$443,050,724

Long-Term Debt Accumulated Provision for Postretirement Benefits Pension Plan Healthcare Benefits Current Liabilities Current Maturities of Mortgage Notes Line-of-Credit Accounts Payable Consumer Deposits Current Portion of Healthcare Benefits

Deferred Credits Total Members’ Equity and Liabilities

See accompanying notes which are an integral part of these consolidated financial statements. Contents   17


2011

Message to Members

A Legacy of Light

2011 Highlights

Board of Directors

Financials

Financials

CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30 2011

2010

$315,998,963

$316,284,579

254,047,480

245,460,727

61,951,483

70,823,852

10,884,522

7,707,682

Distribution Maintenance

8,862,088

10,012,568

Consumer Accounts

7,679,240

8,121,669

Consumer Service and Information

5,898,057

5,580,680

52,150

123,394

6,728,827

8,274,141

12,398,550

11,740,544

Operating Revenues and Patronage Capital Cost of Revenues Gross Margins Operating Expenses Distribution Operations

Sales Administrative and General Depreciation and Amortization Franchise Requirements

-

Other

567,282

42,225

30,381

52,545,659

52,158,341

Operating Margins Before Interest Expense

9,405,824

18,665,511

Interest Expense

7,366,489

7,984,923

Operating Margins After Interest Expense

2,039,335

10,680,588

Nonoperating Margins

3,109,406

2,677,402

Generation and Transmission Cooperative Capital Credits

3,557,377

2,959,609

Other Capital Credits and Patronage Capital Allocations

1,403,629

1,330,050

904,048

1,105,648

9,205,699

$ 16,542,001

Income Tax Expense Net Margins

$

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2011

Message to Members

A Legacy of Light

2011 Highlights

Board of Directors

Financials

Financials

CONSOLIDATED STATEMENTS OF MEMBERS’ EQUITY AND COMPREHENSIVE INCOME FOR THE YEARS ENDED JUNE 30, 2011 AND 2010

Membership Fees Balance, June 30, 2009

$1,147,365

Patronage Capital $143,896,782

Net Margins

13,435,755

Patronage Capital Retirements

(3,684,687)

Membership Fees

Donated Capital $-

Other Equities $12,677,342 3,106,246

Net Margins

153,053,750

(3,725,898)

115,280

16,377,688

(6,114,749)

(20,150,763)

150,527,733

$10,427,252

9,205,699

$ 9,205,699

2,530,957 229,141

(16,118) (908,080)

$1,115,660

(6,114,749)

(3,496,757) 908,080

Postretirement Benefits Balance, June 30, 2011

$16,542,001

(6,114,749)

(16,118)

Other

$143,685,475

(3,569,407) 594,100

6,674,742

Patronage Capital Retirements

Total

(15,587) (594,100)

1,131,778

Comprehensive Income

16,542,001

115,280

Postretirement Benefits

Membership Fees

$(14,036,014)

(15,587)

Other

Balance, June 30, 2010

Accumulated Other Comprehensive Loss

$155,094,514

$344,421

$19,816,725

2,496,794

2,496,794

2,496,794

$(17,653,969)

$158,717,351

$11,702,493

See accompanying notes which are an integral part of these consolidated financial statements.

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2011

Message to Members

A Legacy of Light

2011 Highlights

Board of Directors

Financials

Financials

CONSOLIDATED STATEMENTS OF CASH FLOWS - FOR THE YEARS ENDED JUNE 30 2011

2010

Cash Flows from Operating Activities Net Margins

$ 9,205,699

$ 16,542,001

Depreciation and Amortization

13,044,861

12,437,173

Patronage Capital from Associated Organizations

(4,963,675)

(4,299,719)

2,288,254

2,329,086

(2,996,155)

(4,416,136)

(2,781,022)

(1,712,923)

(14,699,106)

(4,884,203)

Adjustments to Reconcile Net Margins to Net Cash Provided by Operating Activities

Healthcare Benefits Pension Plan Change In Accounts Receivable (Net) Other Current Assets Accounts Payable

173,623

945,888

Accrued and Withheld Taxes

1,017,771

442,118

Other Current and Accrued Liabilities

(141,783)

55,707

148,467

17,438,992

(14,138,539)

(21,092,977)

Return of Equity from Associated Organizations

872,054

664,923

Deferred Credits

686,628

427,122

84,650

(376,736)

Other Assets

(192,403)

542,381

Materials and Supplies

(117,789)

(35,429)

(5,019)

3,694

Cash Flows from Investing Activities Extension and Replacement of Plant

ERC and Other Loans

Nonutility Property Member Capital Securities Other Investments

-

(3,000,000)

(669,613)

(1,999,315)

(13,480,031)

(24,866,337) Contents ď ´ ď ľ 20


2011

Message to Members

A Legacy of Light

2011 Highlights

Board of Directors

Financials

Financials Cash Flows from Financing Activities Advances from CFC

17,000,000

6,000,000

(720,000)

1,800,000

(16,118)

(15,587)

(14,262,100)

(12,710,664)

(3,496,757)

(3,569,407)

2,325,549

3,426,437

509,757

236,001

8,938,865

8,419,564

10,279,196

3,586,344

Net Decrease in Cash and Cash Equivalents

(3,052,368)

(3,841,001)

Cash and Cash Equivalents-Beginning

11,179,220

15,020,221

$ 8,126,852

$ 11,179,220

Line-of-Credit Membership Fees Principal Payments on Long-Term Debt Retirement of Patronage Capital Funding of Postretirement Benefit Plans and Benefits Paid Customer Deposits Payments Received on Capital Lease

Cash and Cash Equivalents-Ending

See accompanying notes which are an integral part of these consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1) Summary of Significant Accounting Policies

Accounting policies of the Corporation reflect practices appropriate to the electric utility industry. The records of the Corporation are maintained in accordance with the Uniform System of Accounts prescribed by the Federal Energy Regulatory Commission. The following describes the more significant of those policies.

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A Legacy of Light

2011 Highlights

Board of Directors

Financials

Financials Consolidation The consolidated financial statements include the accounts and results of operations of the Corporation and its wholly-owned and majority-owned subsidiaries. Intercompany transactions have been eliminated in consolidation.

Nature of Operations The Walton Electric Membership Corporation is a member-owned, not-for-profit corporation whose purpose is to provide electric service to its members. The Corporation operates as a cooperative whereby all monies in excess of cost of providing electric service are capital, at the moment of receipt, and are credited to each member’s capital account. Doyle I, LLC, a wholly-owned subsidiary of The Walton Electric Membership Corporation, is a generation facility whose purpose is to provide Oglethorpe Power Corporation with all of the facility output, pursuant to a power purchase and sale agreement (See Note 4). Walton Energy, Inc. d/b/a Walton EMC Natural Gas, a wholly-owned subsidiary of The Walton Electric Membership Corporation, is a natural gas affiliate whose purpose is to provide natural gas service to its customers.

Use of Estimates The preparation of the consolidated financial statements in conformity with generally accepted accounting principles and standards generally accepted in the United States (U.S. GAAP) 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

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2011

Message to Members

A Legacy of Light

2011 Highlights

Board of Directors

Financials

Financials Long-Lived Assets The Corporation evaluates long-lived assets for impairment when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. The determination of whether an impairment has occurred is based on either a specific regulatory disallowance or an estimate of undiscounted future cash flows attributable to the assets, as compared with the carrying value of the assets. If an impairment has occurred, the amount of the impairment recognized is determined by estimating the fair value of the assets and recording a provision for loss if the carrying value is greater than the fair value. For the assets identified as held for sale, the carrying value is compared to the estimated fair value less the cost to sell in order to determine if an impairment provision is required. Until the assets are disposed of, their estimated fair value is reevaluated when circumstances or events change. U.S. GAAP requires the present value of the ultimate cost for an asset’s future retirement be recorded in the period in which the liability is incurred. The cost should be capitalized as part of the related long-lived asset and depreciated over the asset’s useful life. The Corporation has no legal retirement obligations related to its distribution facilities; therefore, a liability for the removal of these assets will not be recorded. Management believes the actual cost of removal, even though not a legal obligation, will be recovered through rates over the lives of the distribution assets.

Utility Plant Utility plant is capitalized at cost less related contributions in aid of construction. In general, utility plant is capitalized at the time it becomes part of an operating unit and has been energized. However, certain items of plant referred to as special equipment items (meters, transformers, oil circuit reclosers, etc.) are capitalized at the time of purchase along with related estimated cost of installation.

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Financials

Financials Depreciation and Maintenance Depreciation of the capitalized cost is provided using composite straight-line rates. When property subject to depreciation is retired or otherwise disposed of in the normal course of business, its capitalized cost and its cost of removal less salvage are charged to the accumulated provision for depreciation. Provision has been made for depreciation of distribution plant at a straight-line composite rate of 3.2 percent per annum. Depreciation of general plant is provided on a straight-line basis over the estimated useful lives of the various assets. The rates range from 2.0 to 20.0 percent per annum. The costs of maintenance, repairs and replacements of minor items of property are charged to maintenance expense accounts.

Accounts Receivable An allowance is made for doubtful accounts based on experience and other circumstances which may affect the ability of consumers to meet their obligations. Accounts considered uncollectible are charged against the allowance. Receivables are reported on the consolidated balance sheets net of such accumulated allowance.

Materials and Supplies Materials and supplies are stated at lower of cost or market. Cost is determined by the moving average method of inventory valuation.

Advertising The Corporation expenses advertising cost as it is incurred.

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Financials

Financials Equities and Margins The Corporation is organized and operates under the cooperative form of organization. As such, patronage capital or margins are allocated to patrons on the basis of patronage. Under provisions of the long-term debt agreements, until the total equities and margins equal or exceed 20 percent of the total assets of the Corporation, the return to patrons of capital contributed by them is limited.

Operating Revenues and Patronage Capital Electric revenues which include patronage capital are billed monthly to consumers on a cycle basis. Electric rates for the Corporation include provisions to permit the board of directors to adjust billings for fluctuations in fuel costs, purchased power costs and certain other factors. Electricity which had been used by the members of the Corporation but had not been billed to the members was not recorded. The components of this unbilled revenue can fluctuate based on factors including rate structure, weather, period of use, cost of purchased power and other factors. As a result, the overall estimate of unbilled revenues could be significantly affected, which could have a material impact on the Corporation’s results of operations if recorded in the consolidated financial statements. This unbilled electric revenue totaled approximately $11,217,000 and $11,720,000 for the years ended June 30, 2011 and 2010, respectively. Gas revenues related to the marketing of natural gas are also billed monthly on a cycle basis. Revenues consist of charges for natural gas, transportation, AGLC base charges and the Corporation’s consumer service charge. AGLC is responsible for providing meter readings to the Corporation in order for them to correctly bill their customers. Natural gas revenues are recorded for estimated deliveries of natural gas, not yet billed to these customers, from the meter reading date to the end of the accounting period. Unbilled receivables of $1,772,744 and $1,002,979 are included in accounts receivable for the years ended June 30, 2011 and 2010, respectively.

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Message to Members

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2011 Highlights

Board of Directors

Financials

Financials Cost of Revenues Cost of revenues for electricity and natural gas is expensed as consumed. Cost of natural gas included charges to purchase, transport, store and meter gas. The Corporation’s contractual relationship with a third-party gas asset manager requires earnings by the unrelated party in excess of $5,000,000 to be shared equally with the Corporation. Payments in the amount of $1,772,744 and $2,505,238 have been included as a component of cost of revenues for the years ended June 30, 2011 and 2010, respectively.

Generation and Transmission Cooperative Capital Credits Generation and transmission cooperative capital credits represent the annual capital furnished generation and transmission cooperatives through payment of power bills. The capital is recorded in the year provided, even though notification of the capital allocation is not received until later.

Cash Equivalents Cash equivalents include time deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less.

Fair Value of Financial Instruments Authoritative guidance regarding Fair Value Measurements for financial and nonfinancial assets and liabilities defines fair value, establishes a framework for measuring fair value in accordance with U.S. GAAP, and expands disclosures about fair value measurements. The guidance establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:

Level 1. Quoted prices from active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information Contents ď ´ ď ľ 26


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Financials

Financials on an ongoing basis. Quoted prices in active markets provide the most reliable evidence of fair value and shall be used to measure fair value whenever available. Level 1 primarily consists of financial instruments that are exchange-traded.

Level 2. Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Level 2 primarily consists of financial instruments that are nonexchange-traded but have significant observable inputs.

Level 3. Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may include internally developed methodologies that result in management’s best estimate of fair value. Level 3 financial instruments are those whose fair value is based on significant unobservable inputs.

As required by the guidance, assets and liabilities measured at fair value are based on one or more of the following three valuation techniques:

(1) M  arket approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business) and deriving fair value based on these inputs.

(2) I ncome approach. The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted). The measurement is based on the value indicated by current market expectations about those future amounts.

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2011 Highlights

Board of Directors

Financials

Financials

(3) C  ost approach. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (often referred to as current replacement cost). This approach assumes that the fair value would not exceed what it would cost a market participant to acquire or construct a substitute asset or comparable utility, adjusted for obsolescence. The table below details assets and liabilities measured at fair value on a recurring basis.

Carrying Value as of June 30, 2011

Fair Value as of June 30, 2011

Quoted Market Prices in Active Markets for Identical Assets/Liabilities (Level 1)

Significant Other Observable Inputs (Level 2)

Significant Unobservable Inputs (Level 3)

Valuation Technique

$-

(2)

ASSETS Other Investments Investment in Cooperative Choice, LLC

$ 947,360

$ 947,360

Other

1,390,279

1,390,279

$ 2,337,639

$ 2,337,639

$-

$ 2,337,639

$-

$ 201,207,431

$ 213,253,751

$-

$ 213,253,751

$-

$-

$ 947,360 1,390,279

(2)

LIABILITIES Long-Term Debt (Note 7)

(2)

Investments in associated organizations represent nontransferable interest in associated organizations. The right to receive cash is an inherent component of a financial instrument. The Corporation holds no right to receive cash since any payments are

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Financials

Financials at the discretion of the governing body for the associated organizations. As such, patronage capital from associated organizations is not considered a financial instrument. Furthermore, the Corporation considers National Rural Utilities Cooperative Finance Corporation (NRUCFC) certificates and member capital securities to be directly related to borrowing and the fair value of the investments not determinable. Investments in associated organizations are carried at cost (See Note 3).

Comprehensive Income The objective of comprehensive income is to report a measure of all changes in equity of the entity that result from transactions and events of the period other than transactions with owners. Comprehensive income consists of net income and costs not yet recognized as a component of income related to retirement plans.

Income Taxes The Corporation operates under the Internal Revenue Code Section 501(c)(12) as a tax-exempt cooperative. Accordingly, no provision for income taxes has been made in the consolidated financial statements. The Corporation’s federal information returns are subject to examination by the Internal Revenue Service (IRS) generally for three years after they are filed. Walton Energy, Inc. operates under the Georgia Corporation Code as a for-profit corporation. The Corporation had taxable income of $2,247,848 and $2,759,744 for the years ended June 30, 2011 and 2010, respectively. A federal and state provision was recorded in the statement of operations in the amount of $904,048 and $1,105,648 computed at an effective rate of 37.96 percent for the years ended June 30, 2011 and 2010, respectively. The Corporation has no significant deferred tax assets or liabilities. Walton Energy, Inc.’s income tax returns are subject to examination by the IRS and the State of Georgia generally for three years after they are filed.

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Financials

Financials Subsequent Events In preparing these consolidated financial statements, the Corporation has evaluated events and transaction for potential recognition or disclosure through October 26, 2011, the date the consolidated financial statements were available to be issued.

2) Utility Plant Listed below are the major classes of the electric utility plant as of June 30: 2011 Distribution Plant General Plant Electric Plant in Service Construction Work in Progress

2010

$ 344,778,189

$ 333,993,789

32,755,249

32,165,700

377,533,438

366,159,489

1,172,706

2,406,551

$ 378,706,144

$ 368,566,040

3) Investments in Associated Organizations 2011

2010

National Rural Utilities Cooperative Finance Corporation Membership Fee

$ 1,000

$ 1,000

Capital Term Certificates

9,837,898

9,096,006

Capital Credits

4,832,431

4,217,980

Member Capital Securities

3,000,000

3,000,000

100

100

46,105,420

43,386,216

Capital Stock Oglethorpe Power Corporation Capital Credits

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Financials

Financials Georgia Transmission Corporation Contributed Capital

3,743,638

3,743,638

Capital Credits

8,490,283

7,652,873

15,261

14,498

538,304

530,300

371,245

328,736

120,959

124,496

60,000

60,000

Contributed Capital

423,079

630,622

Capital Credits

785,509

732,223

205,808

186,761

1,000

1,000

10,569

2,542

25

25

21,874

21,874

1,000

1,000

10

10

$ 78,565,413

$ 73,731,900

Georgia Systems Operations Corporation Capital Credits GRESCO Utility Supply, Inc. Capital Credits Southeastern Data Cooperative, Inc. Capital Credits Georgia Electric Membership Corporation Workers’ Compensation Fund Capital Credits Data ComLink, Inc. Contributed Capital Smarr EMC

Federated Rural Electric Insurance Exchange Capital Credits National Rural Telecommunications Cooperative Membership Fee Capital Credits Green Power EMC Membership Fee Capital Credits Georgia Right-of-Way Company, Inc. Membership Fee Other

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Financials

4) Note Receivable-Capital Lease

In 2000, Doyle I, LLC entered into a power purchase and sale agreement with Oglethorpe Power Corporation. Oglethorpe Power Corporation committed to purchase all of the output of the generation facility for a period covering 15 years. At the end of the 15-year term, Oglethorpe Power Corporation has the option to purchase Doyle I, LLC for $10,000,000, which is considered to be the bargain purchase price. Therefore, the power purchase and sale agreement is shown as a note receivable-capital lease on the consolidated financial statements. Future minimum lease payments to be received as of June 30, 2011 are as follows: Total Future Minimum Lease Payments

$ 61,861,600

Amount Representing Interest

(8,282,429)

Present Value of Minimum Lease Payments

53,579,171

Current Portion of Note Receivable-Capital Lease

(9,490,195)

Long-Term Note Receivable-Capital Lease

$ 44,088,976

Future minimum lease payments to be received for the ensuing five years and thereafter are as follows: Year

Amount

2012

$ 9,490,195

2013

10,075,528

2014

10,696,966

2015

11,356,731

2016

11,959,751 $53,579,171

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Financials

5) Prepayments 2011 Prepaid Power Costs Prepaid Natural Gas Other

$ 10,000,000

2010 $-

12,500,000

8,000,000

166,995

262,240

$ 22,666,995

$ 8,262,240

During the year ended June 30, 2011, the Corporation elected to participate in a prepayment of power bills program initiated by one of its wholesale power providers. Under the terms of the program, the Corporation prepaid its wholesale power costs and earned a prepayment discount on its power bills during the year ended June 30, 2011. Prepaid Natural Gas consists of prepayments for customers from the Corporation to Texican Industrial Energy Marketing and Texican Natural Gas. The Corporation will be paid accrued interest along with principal. 6) Patronage Capital 2011 Assignable Assigned

Cumulative Retirements

2010

$ (9,821,395)

$ (3,017,458)

218,977,955

206,407,356

209,156,560

203,389,898

(54,062,046)

(50,336,148)

$155,094,514

$153,053,750

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Financials

7) Long-Term Debt

Long-term debt consists of mortgage notes payable to NRUCFC . The notes are secured by a mortgage agreement between the Corporation and NRUCFC. Substantially all the assets of the Corporation are pledged as security for long-term debt of the Corporation. The notes have maturity periods varying from October 10, 2011 to July 16, 2049 and are payable on an installment basis. The notes contain certain affirmative and negative covenants, including maintenance of certain financial ratios as defined in the agreement. At June 30, 2011 and 2010, the Corporation was in compliance with the covenants. On December 29, 1999, a loan agreement was established between The Walton Electric Membership Corporation and Doyle I, LLC. The terms of this agreement state that a generating facility is to be designed, constructed, operated, maintained and owned by Doyle I, LLC. Doyle I, LLC is required to make quarterly principal and interest payments for a term of 15 years from the last day of construction. The interest payable shall bear a stated interest rate equal to the current rate payable under the Corporation’s loans from NRUCFC. Interest Rate at Holder of Note

June 30, 2011

2011

2010

NRUCFC

3.00% to 7.05%

$149,185,970

$137,443,557

NRUCFC (Related to Doyle I, LLC)

5.50% to 6.25%

52,021,461

61,025,974

201,207,431

198,469,531

Maturities Due Within One Year

(16,222,000) $ 184,985,431

(13,026,000) $ 185,443,531

The estimated principal maturities of long-term debt are approximately $16,222,000 for each of the ensuing five years. In addition, the Corporation has a $24,000,000 line-of-credit at 4.25 Contents   34


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Financials

Financials percent with NRUCFC which had outstanding balances of $9,000,000 and $10,000,000 as of June 30, 2011 and 2010, respectively. Walton Energy, Inc. has a $15,000,000 line-of-credit at 4.25 percent with the National Cooperative Service Corporation which had outstanding balances of $280,000 and $ -0- as of June 30, 2011 and 2010, respectively. Total interest cost was $10,157,111 and $11,123,927, of which $3,245,617 and $3,719,615, the amounts related to Doyle I, LLC, are reflected as a reduction in interest expense for 2011 and 2010, respectively. Interest income which is a component of nonoperating margins is reduced by a like amount. Interest payments totaled $10,334,539 and $11,239,747 for 2011 and 2010, respectively.

8) Retiree Benefits

Defined Contribution Plan The Corporation provides employee benefits to substantially all employees through a sponsored defined contribution Savings Plan (401-k). In this defined contribution plan, the Corporation’s contributory portion of the costs totaled $825,955 and $825,227 for the years ended June 30, 2011 and 2010, respectively.

Pension Plan (Defined Benefit) Pension benefits for substantially all employees of the Corporation are provided through participation in a retirement and security program, a defined benefit plan qualified under Section 401 and tax-exempt under 501(a) of the Internal Revenue Code.

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Financials

Financials The status of the Corporation’s pension plan as of June 30 is detailed as follows: 2011

2010

Projected Benefit Obligation

$ 37,281,692

Fair Value of Assets

(28,340,582)

$ 36,568,638 (23,495,417)

Funded Status

$ 8,941,110

$ 13,073,221

Employer Contributions

$ 6,100,000

$ 5,915,000

$-

Plan Participant Contributions

$ 3,774,451

Benefits Paid

$$ 2,488,563

Changes in benefit obligations recognized in patronage capital are as follows: Service Cost

$ 1,903,201

$ 1,661,205

Interest Cost

1,863,363

1,835,046

Amortization of Unrecognized Amounts

1,682,446

1,336,349

(2,519,616)

Return on Plan Assets

$ 2,929,394

(1,767,299) $ 3,065,301

Amounts recognized as a reduction in equity consisted of:

Transition Obligation Prior Service Cost Actuarial Loss

2011

2010

$ 8,026,672

$ 8,690,582

(2,324,870)

(2,505,093)

769,613

3,747,431

$ 6,471,415

$ 9,932,920

Amount Recognized as a Component of Equity Not Yet Recognized as Periodic Benefit Cost

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Financials

Financials June 30 Description

2011

2010

2009

Discount Rate

4.50%

5.25%

6.20%

Expected Long-Term Rate of Return on Plan Assets

7.50%

7.50%

7.50%

Rate of Compensation Increase

3.00%

3.00%

3.00%

56.00%

40.00%

31.00%

Plan Asset Allocation Equity Fixed

14.00

23.00

18.00

Cash and Cash Equivalents

10.00

23.00

28.00

0.00

0.00

2.00

20.00

14.00

21.00

100.00%

100.00%

Real Estate Other Total Plan Asset Allocation

100.00%

The Corporation employs a total-return investment approach whereby a mix of equities and fixed income investments is used to maximize the long-term return of plan assets for a prudent level of risk. The current asset allocation adheres to the Corporation’s overall investment strategy for plan assets. Plan assets are measured at fair value. The fair value measurement is considered a Level 1 measurement based on quoted market prices in active markets for identical assets for equity and cash and cash equivalent plan assets. Fixed and other plan assets are considered a Level 2 measurement. The Corporation does not anticipate a contribution to the pension plan for the year ending June 30, 2012.

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Financials Postretirement Healthcare Benefits The status of the Corporation’s postretirement healthcare plan as of June 30 is detailed as follows: 2011

Total Accumulated Postretirement Benefit Obligation

$29,030,842

$25,777,877

-

-

$29,030,842

$25,777,877

$ 549,360

$ 531,628

$ 60,486

$ 64,368

$ 609,846

$ 595,996

Fair Value of Assets Funded Status Employer Contributions Plan Participant Contributions Benefits Paid

2010

Amounts recognized in the consolidated balance sheets consisted of:

Noncurrent Liabilities Current Liabilities

2011

2010

$28,249,842

$25,045,568

781,000

732,309

$29,030,842

$25,777,877

Other changes in benefit obligations recognized in patronage capital are as follows: Service Cost Interest Cost Amortization of Actuarial Loss Total Recognized in Net Periodic Cost and Patronage Capital

$ 531,402

$ 451,022

1,545,786

1,336,607

795,709

1,122,934

$ 2,872,897

$ 2,910,563

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2011 Highlights

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Financials

Financials June 30 Description

2011

2010

2009

Discount Rate

5.67%

5.45%

6.25%

Expected Long-Term Rate of Return on Plan Assets

0.00%

0.00%

0.00%

Initial

9.00%

8.50%

9.00%

Ultimate

5.50%

5.50%

5.50%

2017

2016

2016

Medical Trend Rate

Fiscal Year Reached

Postretirement Healthcare Benefits The Corporation expects to contribute $781,000 to this postretirement healthcare plan for the fiscal year ending June 30, 2011. The following benefits are expected to be paid: Year

Amount

2012

$ 781,000

2013

851,000

2014

924,000

2015

1,006,000

2016

1,077,000

2017-2021

6,801,000

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Financials

9) Other Assets Other assets are comprised of the following as of June 30: 2011

2010

Notes Receivable-Other

$ 4,599

$ 1,313

Miscellaneous Deferred Debits

206,362

17,245

$ 210,961

$ 18,558

10) Deferred Credits Deferred credits are comprised of the following as of June 30: 2011 Unclaimed Property Other

2010

$ 4,141,258

$ 4,003,833

700,578

151,375

$4,841,836

$4,155,208

11) Nonoperating Margins 2011 Nonoperating Margins from Subsidiaries Interest Income Other

2010

$1,499,928

$1,442,717

1,652,688

1,218,370

(43,210)

16,315

$3,109,406

$2,677,402

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Financials

12) Commitments

The Corporation has entered into various long-term contracts to meet the power supply demands of its consumers. The Corporation has a commitment to pay for its assignment of fixed cost through the term of these contracts, as well as any variable cost incurred above the allocated fixed cost amounts. The most significant of these contracts and related fixed costs for 2011 are as follows: Corporation/Facility

Contract Expiration

Percentage of Fixed or Designated Cost

Fixed Cost

Oglethorpe Power Corporation Doyle Energy Facility

08-25-2015

21.6301%

Smarr EMC

12-31-2014

9.2241

$ 4,085,514 687,486

All Other OPC Resources

12-31-2050

8.6783

50,254,920

The Corporation has an amended and restated wholesale power contract dated August 1, 1996 with Oglethorpe Power Corporation (OPC) through December 31, 2050. The Corporation has a liability for a pro rata share of all resources covered under this agreement. OPC has substantially similar Wholesale Power Contracts with each of its 38 members. The Wholesale Power Contracts provide that each OPC member, including the Corporation, is jointly and severally responsible for all costs and expenses of all existing OPC generation and purchased resources. Effective January 24, 2001, the Corporation entered into a power supply and energy call agreement. The agreement commenced on June 1, 2001 and will continue through December 31, 2015. Under the terms of the agreement, the Corporation is required to maintain a modified debt service coverage ratio equal to or greater than 1.35 and a debt to equity ratio less than 2.5:1. In the event these conditions are not met, the Corporation will be required to provide the supplier with acceptable credit support in an amount equal to $40 million. Once conditions are again met by the Corporation, the remaining amount of credit support will be returned. Contents ď ´ ď ľ 41


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Financials Also under the terms of the agreement, the supplier will supply 100 percent of regulation, spinning reserves, supplemental reserves and planning reserve capacity. The Corporation is in compliance as of June 30, 2011. Under current law, the Corporation has the ability to recover these costs from its members; however, any change to existing laws could adversely affect the ability to recover these costs. In addition, Walton Energy, Inc. is subject to a natural gas supply management agreement, as amended, with an outside third party. The third party acts as the gas asset manager and is responsible for “management services” which include, but are not limited to, performing all administrative and operational tasks associated with providing the Corporation with transportation services, storage services, consulting services and nominating services. Walton Energy, Inc. services both fixed- and variable-rate customers. The third party bills the Corporation monthly for the volume of gas used by each customer type. When fixed-rate customers lock their rate in with Walton EMC Natural Gas, the third party is required by the agreement to sell that volume at a negotiated fixed price to the Corporation. Therefore, the transaction is not considered a hedging activity, and no exposure to the Corporation exists as of the balance sheet date unless the third party fails to perform. Walton Energy, Inc. has an obligation to deliver a volume of natural gas required by AGLC. If a natural gas marketer does not deliver the required amount of natural gas, penalties may apply in accordance with the AGLC Tariff. Since the amounts required by AGLC are based on estimates, an imbalance, either positive or negative, occurs with some natural gas marketers delivering more natural gas than their consumers actually consume and other natural gas marketers delivering less natural gas than their consumers actually consume. An imbalance in deliveries of natural gas results in some marketers owing other marketers for excess natural gas (short marketer) and some marketers being owed by other marketers for deficient deliveries of natural gas (long marketer). An imbalance from the short marketers is settled with the long marketers, pursuant to the AGLC Tariff.

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Financials

Financials On December 12, 2008, GPSC approved an order which changed the methodology to determine the amount of natural gas each marketer is required to deliver, established an escrow fund to receive imbalance amounts from short marketers, required letters-of-credit to secure payment obligations and shortened the time period associated with the settlement process. GPSC conducts an audit to determine Walton Energy, Inc.’s letter-of-credit requirement. As a result of the audit, Walton Energy, Inc.’s letterof-credit requirement totaled $106,042 and was obtained from NCSC for the year ended June 30, 2011. The letter-of-credit requirement is determined on a quarterly basis, and has been guaranteed by Walton EMC. Walton Energy, Inc. is also required by AGLC’s Tariff to provide liquidity support to secure payment of their obligations to AGLC. The liquidity support required is adjusted semiannually based upon a calculation defined in the AGLC Tariff. The liquidity support requirement can be satisfied by cash deposits, a letter-of-credit or a combination of each. Walton Energy, Inc. has elected to secure a letter-of-credit in the amount of $4,534,600 from NCSC to meet requirements for the year ended June 30, 2011. The Corporation is also involved in litigation arising in the ordinary course of business. After consultation with legal counsel, management estimates that these matters will be resolved without a material adverse effect on the Corporation’s future financial position or results from operations.

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Financials

13) Concentration of Credit Risk

Financial instruments that potentially subject the Corporation to concentrations of credit risk consist principally of cash and cash equivalents and consumer accounts receivable. The Corporation maintains its cash balances in interest-bearing accounts of financial institutions; these cash balances throughout the year periodically exceed federally insured deposit limits of $250,000. The Corporation serves customers in the state of Georgia. The geographic concentration of the Corporation’s customers results in a concentration of credit risk with respect to the collection of accounts receivable. Credit evaluations are performed on most potential customers before accepting them for service. Depending upon the results of the credit evaluation, a deposit may be required. If a customer does not pay its bill based on the terms of its service agreement, the Corporation may require a consumer deposit as a condition for continued service.

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P.O. Box 260 Monroe, Georgia 30655 770-267-2505 waltonemc.com


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