2017 Annual Report

200,000 80 YEARS IN THE MAKING 2017 ANNUAL REPORT

TABLE OF CONTENTS

8 1 6 4 9 5 7 10 Letter to Members

40

200

trus

Ocala

Purpose & Core Values

Board of Trustees District Map

75

44

Lake Panasoffkee

48

Statements of Revenues and Patronage Capital

Lake Weir

19

Marion

Umatilla

301

41

Balance Sheets

Wildwood

Lake Griffin

Leesburg

441

Lake Harris

Corporate Headquarters Sumterville

Lake Eustis

Auditors’ Report 44

Statements of Cash Flows

2017 ANNUAL REPORT

Dear SECO Energy Members,

01

LETTER TO THE MEMBERSHIP

SECO Energy’s beginning was humble. Prior to President Franklin D. Roosevelt’s 1935 Rural Electric Act, also known as the REA, a home powered by electricity in rural Central Florida was only a dream. With low-interest loans from the REA, local farmers and ranchers formed Sumter Electric Cooperative, Inc. in 1938. A small group of original SECO employees started the utility from scratch, installing poles and stringing miles of electric line. On November 12, 1938, SECO turned on the lights to 400 rural homesteads in our service area. Before the close of 1938, additional homes in nearby areas were electrified. For these rural Floridians, quality of life changed dramatically.

Over the last 80 years, SECO has grown alongside the communities it serves. We’ve morphed from a small, rural utility to one of the fastestgrowing cooperatives in the nation. SECO achieved a significant milestone in late 2017 when the cooperative energized its 200,000th meter. Today, SECO Energy is “200,000 Strong – 80 Years in the Making.”

Not only have we grown significantly over the years, we’ve also vastly improved the quality of service we provide to our members. In 2017, we celebrated earning our third consecutive J.D. Power award for highest customer satisfaction in the nation in our segment. The cooperative’s ACSI (American Customer Satisfaction Index) score of 88 is a truly excellent score in the utility industry. Comparatively, the score puts SECO well above investor-owned and municipal utilities.

Our reliable electric system and member satisfaction were put to the test last year with Hurricane Irma’s devastating effects. On September 10, Irma ravaged our service area with hurricane-force winds, buckets of rain and a confirmed tornado in Umatilla. Irma’s destruction of SECO’s system was more significant than we experienced during

Charley, Francis or Jeanne in 2004. After Irma’s exit, almost 140,000 members were left without power. SECO crews joined forces with hundreds of out-ofarea service crews and tree trimming contractors who worked around-theclock to restore service. This workforce battled flood waters, fuel shortages, downed trees, heat, exhaustion and unsafe conditions. The cooperative spirit prevailed. SECO Energy safely and successfully restored power to our members in less than a week.

On behalf of the entire Board of Trustees, we are proud to report strong fiscal results for 2017. SECO is committed to meeting the demands of our growing communities through solid investments in designing, constructing and maintaining facilities with support from a vigorous vegetation management program. Our 2,000 square-mile service territory is home to 48 substations and 12,000 miles of line which represent an investment in electric facilities in excess of $839 million. The investment in SECO’s well-built, meticulously maintained system delivers power that is safe, reliable and affordable.

Members, we are thankful for you and your loyal patronage.

Jim Duncan, CEO

Ray Vick, President

ABOUT US SECO ENERGY is a not-for-profit electric cooperative serving 200,000

families and businesses across seven counties in Central Florida, making SECO the third largest electric co-op in Florida and the sixth largest in the nation. One of the most important distinctions between other types of utilities and SECO is that we are member owned.

Members have a voice in the co-op through representation. They elect a ninemember Board of Trustees who meet monthly to monitor the financial status of the Cooperative and make policy and governance decisions in the best interest of the membership.

In both 2017 and 2016, SECO Energy was ranked “Highest in Customer Satisfaction among Cooperatives” in the J.D. Power Electric Utility Residential Customer Satisfaction Study. In 2015, SECO Energy was ranked “Highest in Customer Satisfaction among Midsize Utilities in the South” by J.D. Power.

In 2017, your Board of Trustees approved a record $5.4 million return to members.

Since inception, SECO Energy has returned (retired) $57.8 million to current and former members. SECO works to control costs, maintain healthy equity and returns excess margins like a true co-op should.

SECO’s wholesale power provider is Seminole Electric Cooperative, Inc., one of the largest generation and transmission cooperatives in the nation, serving 1.6 million consumers in Florida. Seminole is owned by nine electric distribution cooperatives, and SECO is one of those nine member owners.

SECO Energy is an equal opportunity provider and employer.

2017 ANNUAL REPORT

$114.90

$114.90

Jan 2018

$112.60

Oct 2016

July 2017

$113.50

$115.60

Dec 2015

June 2016

$116.20

Oct 2015

$117.20

Nov 2014

Jan 2014

0

Aug 2015

Responding to market indicators, SECO decreased the PCA credit slightly and as of July 1, members paid $114.90 per 1,000 kilowatt hours used. “Hot Bucks” may have cooled, but SECO rates remain stable. Since 1938, SECO has been a fiscally responsible, not-for-profit electric cooperative that is your energy partner for the future.

$118.20

20

72 Municipal Utilities

40

75 Investor-owned Utilities

60

78 Cooperative Utilities

80

88 SECO Energy

100

costs to offer members affordable energy that is safe and reliable. In January 2014, SECO members paid $127.75 for 1,000 kilowatt hours of energy used. Power costs began to steadily decline and SECO responded by increasing the Power Cost Adjustment (PCA) credit or “Hot Bucks.” Members continued to benefit from decreasing costs through June 2017 when the futures market indicated a rise in natural gas prices.

June 2015

Customer Satisfaction Rating

SECO’S MEMBER-FOCUSED APPROACH includes controlling

$120.70

It’s clear there is a difference when serving members in a not-for-profit environment – and it’s the SECO Energy cooperative difference.

RATE STABILITY

$127.75

CUSTOMER SATISFACTION

03

04

2017 ANNUAL REPORT

BOARD OF TRUSTEES

Scott D. Boyatt District 1

Dillard B. Boyatt District 2

Richard J. Belles District 3

Richard Dennison District 4

Earl Muffett District 6

Rob Henion District 7 Secretary-Treasurer

Bill James District 8

Jerry D. Hatfield District 9 Vice President

Ray F. Vick District 5 President

2017 ANNUAL REPORT 27

Levy

DISTRICT MAP

41

40

Ocala

200

75

Lake Weir 19

Marion Citrus

Umatilla

301

44

Lake Griffin 441

Leesburg

Lake Panasoffkee

41

District 1 S. Boyatt District 2 D. Boyatt District 3 Belles District 4 Dennison District 5 Vick District 6 Muffett District 7 Henion District 8 James District 9 Hatfield

Wildwood

44

Lake Eustis

Lake Harris Corporate Headquarters Sumterville

48

Lake Apopka 301

50

Hernando

Clermont

N

471

Pasco

Sumter

33

27

Lake

05

06

2017 ANNUAL REPORT

OUR PURPOSE

To provide exceptional service to our members, co-workers and communities.

Jim Duncan Chief Executive Officer

EXECUTIVE LEADERSHIP

OUR VALUES

• Commitment to the Cooperative Purpose • Honesty & Integrity • Safety • Strong Work Ethic • Teamwork • Open Communication

Ben Brickhouse VP of Engineering

Nora Brown Sr. Executive Assistant

Kathryn Gloria VP of Corporate Communications & Energy Services

Gene Kanikovsky Chief Financial Officer

John LaSelva VP of Operations

Gregg Morrell VP of Corporate Services & Human Resources

INDEPENDENT AUDITORS’ REPORT

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

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, 2017 and 2016, 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.

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, 2017 and 2016, 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 9, 2018, 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 Rural Utilities Service policy memorandum dated February 7, 2014 (the regulatory requirements for electric borrowers), we have also issued our report dated February 9, 2018, 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.

February 9, 2018 Ocala, Florida

BALANCE SHEETS | DECEMBER 31, 2017 AND 2016 ASSETS

2017

2016

Electric Plant $799,144,449

$775,318,760

Construction Work in Progress

40,021,942

23,109,232

839,166,391

798,427,992

Total Electric Plant

(187,386,750)

(173,316,057)

651,779,641

625,111,935

Total Electric Plant - Cost Less Depreciation and Amortization Investments Investments in Associated Organizations and Other Special Funds

3,332,115

3,295,403

10,960,847

9,482,401

Other Receivables

18,712,956

2,878,539

248,116,609

240,133,131

Accumulated Other Comprehensive Income

(644,699)

0

Other Equities

4,568,024

3,677,479

252,927,119

244,680,445

419,171,264

412,687,235

Capital Lease Obligation

2,580,846

1,618,985

Deferred Compensation Liability

1,658,555

818,320

423,410,665

415,124,540

17,081,698

18,370,167

745,278

431,287

Line of Credit

26,926,599

0

Accounts Payable

32,173,934

23,187,940

Consumer Deposits

16,467,174

15,617,677

Other Current or Accrued Liabilities

14,992,199

15,622,356

108,386,882

73,229,427

12,699,092

10,062,150

$797,423,758

$743,096,562

Patronage Capital

Total Equities Noncurrent Liabilities Long-term Debt

5,422,376

3,076,251

15,753,466

14,254,802

137,941

204,525

54,319,701

33,191,921

7,353,728

7,890,716

$797,423,758

$743,096,562

Long-term Debt - Portion Due Within One Year Capital Lease Obligation - Portion Due Within One Year

Unbilled Electric Revenues Inventories Prepayments and Other Current Assets

08 | 2017 ANNUAL REPORT

$869,835

76,901,990

Accounts Receivable - Consumers (Less Provision for Doubtful Accounts 2017 - $1,160,527, and 2016 - $1,011,038)

Total Assets

$887,185

Memberships

Current Liabilities

Cash and Cash Equivalents

Deferred Charges

2016

Total Noncurrent Liabilities 83,970,688

Current Assets

Total Current Assets

2017

Equities

Distribution, Transmission, and General Plant

(Accumulated Provision for Depreciation and Amortization)

EQUITIES AND LIABILITIES

Total Current Liabilities Deferred Credits Total Equities and Liabilities

STATEMENTS OF REVENUES AND PATRONAGE CAPITAL | DECEMBER 31, 2017 AND 2016

Operating Revenues

2017

2016

$369,375,353

$362,719,481

2017

2016

$5,715,809

$4,800,000

1,798,429

1,320,964

7,514,238

6,120,964

12,748,446

10,529,331

645,508

819,088

28,940

(31,853)

674,448

787,235

13,422,894

11,316,566

Patronage Capital, Beginning of Year 240,133,131

233,902,330

Other Margins G&T Cooperative Capital Credits

Operating Expenses Cost of Power

Other Capital Credits and Margins 251,742,596

246,703,836

220,320

396,369

Distribution Expense - Operations

16,648,210

16,237,784

Distribution Expense - Maintenance

28,441,431

28,029,177

Consumer Accounts Expense

11,287,112

11,164,827

2,075,846

1,876,032

Administrative, General, and Other Expense

14,911,513

15,679,518

Depreciation Expense

24,668,434

23,845,708

68,064

66,965

364,507

458,527

(350,428,033)

(344,458,743)

Transmission Expense

Customer Service and Informational Expense

Taxes - Expense Other Expense

(Total Operating Expenses) Operating Margins Before Fixed Charges

Total Other Margins Net Operating Margins Nonoperating Margins Interest Income Other Nonoperating (Expense) Income

Total Nonoperating Margins Net Margins

(Retirement of Capital Credits) 18,947,320

18,260,738

(13,713,112)

(13,852,371)

5,234,208

4,408,367

Patronage Capital, End of Year

(5,439,416)

(5,085,765)

$248,116,609 $240,133,131

Fixed Charges Interest on Long-term Debt

Operating Margins After Fixed Charges

2017 ANNUAL REPORT | 09

STATEMENTS OF COMPREHENSIVE INCOME DECEMBER 31, 2017 AND 2016 2017 Net Margins

STATEMENTS OF CASH FLOWS DECEMBER 31, 2017 AND 2016 2016

$13,422,894 $11,316,566

Other Comprehensive Net Margins Amortization of Unrecognized Prior Service Costs and Unrecognized Actuarial (Loss) Gain Comprehensive Net Margins

2017 Cash Flows from Operating Activities

Net Margins

(81,254)

0

$13,341,640 $11,316,566

STATEMENTS OF CHANGES IN COMPREHENSIVE INCOME DECEMBER 31, 2017 AND 2016 2017

Initial Unrecognized Prior Service Costs Amortization of Unrecognized Prior Service Costs and Unrecognized Actuarial (Loss) Gain Accumulated Other Comprehensive Income (Loss)–End of the Year

$13,422,894 $11,316,566

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

(7,514,238)

(6,120,964)

Depreciation

26,010,147

25,416,233

277,200

(259,880)

1,148,029

1,148,029

Provision for Uncollectible Accounts Amortization of Prepaid Pension

Accumulated Other Comprehensive Income (Loss)–Beginning of the Year

2016

2016

$0

$0

(563,445)

0

Changes in Assets - Decrease (Increase) and Liabilities - Increase (Decrease): Accounts Receivable

(4,101,771)

3,389,360

(15,834,417)

141,736

66,585

(37,630)

Deferred Charges

(611,041)

(334,994)

Accounts Payable

8,985,994

(9,622,204)

849,497

715,724

(630,157)

7,136,167

840,235

156,435

2,636,942

251,416

12,123,005

21,979,428

25,545,899

33,295,994

342,956

1,188,051

9,543,785

8,855,308

253,615

306,562

Other Receivables Prepayments and Other Current Assets

Consumer Deposits Other Current Liabilities Deferred Compensation Liability

(81,254)

0

$(644,699)

$0

Deferred Credits

Total Adjustments Net Cash Provided by (Used in) Operating Activities Cash Flows from Investing Activities Change in Inventory - Net of Salvage Contributions in Aid of Construction Received

10 | 2017 ANNUAL REPORT

Proceeds from Disposition of Property

STATEMENTS OF CASH FLOWS | DECEMBER 31, 2017 AND 2016 2017

2016

Proceeds from Redemption of Patronage Capital Certificate

$426,675

$372,003

Proceeds from Redemption of Other Investments

62,849

60,431

(43,984)

(16,006)

(58,520,730)

(45,733,812)

(3,954,522)

(4,435,924)

(51,889,356)

(39,403,387)

Purchase of Other Investments Extension and Replacement of Plant Plant Removal Cost

Net Cash Provided by (Used in) Investing Activities

Line of Credit (Net)

26,926,599

0

Proceeds on Long-term Debt

20,000,000

131,886,392

Payments on Long-term Debt

(16,999,227)

(115,828,276)

Payment to Cushion of Credit

(2,194,787)

(4,091,857)

(565,768)

(379,099)

183,850

665,803

17,350

17,600

Retirement of Capital Credits

(5,377,422)

(5,085,765)

Net Cash Provided by (Used in) Financing Activities

26,380,169

7,184,798

Other Equities Membership Fees

Net Increase (Decrease) in Cash and Cash Equivalents

36,712

1,077,405

Cash and Cash Equivalents, Beginning of Year

3,295,403

2,217,998

Cash and Cash Equivalents, End of Year

$3,332,115 $3,295,403

2016

Supplemental Disclosures of Cash Flow Information

Cash Paid During the Year for: Interest

$13,672,315 $12,111,345

Supplemental Schedule of Noncash Investing and Financing Activities The Cooperative Retired Certain Assets from its Plant Records as Follows: Cost of Assets Retired

Cash Flows from Financing Activities

Payments on Capital Lease Obligation

2017

10,559,432

17,553,657

Plant Removal Costs

3,954,522

4,435,924

Material Salvaged

1,168,946

1,532,710

$15,682,900

$23,522,291

Net Reduction in Accumulated Depreciation

The Cooperative Financed Certain Equipment Using a Capital Lease: Amounts not Included in Proceeds from Capital Lease Obligation

1,841,620

1,247,916

Amounts not Included in Extension and Replacement of Plant

1,841,620

1,247,916

2017 ANNUAL REPORT | 11

12

2017 ANNUAL REPORT

HURRICANE

HURRICANE IRMA was the biggest, baddest, meanest named storm SECO Energy members had seen in a long time. Irma wreaked havoc as she traveled directly through SECO’s service territory as a 400-mile wide Category 2 to 3 hurricane. The damage our system sustained was even more significant than the 2004 hurricane season. Power outages began Sunday night September 10, and members continued to lose power into Monday. From Irma’s onset until winds subsided Monday afternoon, approximately 139,000 members reported outages.

Restoration began at noon when winds died down on Monday, September 11. We placed an emphasis on communicating with members that restoration stops when winds are over 35 mph. By Monday's end, crews restored just over 27,000 members – or about 19% of the total outages. On Tuesday and Wednesday, more than 300 out-ofstate line and tree crews arrived to assist. Crews participated in a safety briefing and then got to work. Crews made excellent progress on Tuesday and Wednesday. In less than three days, crews restored almost 75,000 members—or about 54%.

At the end of the day Friday, 87% of members were restored after Hurricane Irma.

Sunday evening, 99.9% of outages were restored —a six-and-a-half-day recovery. This was a shorter restoration than any other Central Florida major utility, and is a tribute to our hardworking SECO employees.

Member outreach during restoration touched the hearts and bellies of our employees and contractors. Letters of gratitude, food deliveries, thank you signs and other gifts arrived in droves.

2017 ANNUAL REPORT

RE A DY

13

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Highest in Customer Satisfaction among Cooperatives (2017 & 2016) and among South Midsize Utilities (2015) To learn more about SECO Energy visit us at secoenergy.com.

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For J.D. Power award information, visit jdpower.com.