William C. Bauer Board President

Empire's financial performance was stable at year end 2010. Empire did not raise electric rates in 2010 and continued to meet all minimum mortgage requirements of its Federal lender, the Rural Utilities Service. Empire ended the year with revenues of $51.5 million compared to $50.5 million the previous year. After expenses, Empire's 2010 operating margin was $1.1 million compared to the 2009 operating margin of $1.5 million. Including Tri-State Generation and Transmission Association's capital credit allocations and other miscellaneous income/ losses, Empire's net margin in 2010 was $4.4 million compared to $6.2 million in 2009.

Empire refunded about $1.0 million in capital credits to its members in 2010 compared to a little more than $750,000 in 2009 again demonstrating that Empire abides by the cooperative business model as a not-for-profit rural electric utility.

Neal Stephens General Manager

The board of directors continues to support an effective safety program. Empire's 2010 safety program was recognized by the Colorado Rural Electric Association as the best in the state (Excellence in Safety). Empire achieved its second consecutive year of "no loss time accidents" in 2010. Empire also earned its 10th "Certificate of Safety Accreditation" from the National Rural Electric Cooperative Association. The Safety Accreditation is earned every three years with the first certificate being earned in 1979.

Empire's average outage rate (hours off per customer) in 2010 was 1.16 hours per consumer, which is slightly lower than the 2009 rate of 1.19. Considering there are 8,760 hours in a year, Empire's average customer in 2010 had power available for 99.99 percent of the time. By all utility measures, 1.16 hours off per customer is an excellent outage rate and reflects that Empire is serious about its mission to provide reliable electricity for its members. Extreme storms caused 10 percent of the outage time. Empire's wholesale power supplier (Tri-State) caused 7 percent, pre-arranged outages caused 5.9 percent, and other causes (equipment failure, animals, traffic accidents, and overloaded customer services) accounts for 77.1 percent of the total. By comparison, the latest available Colorado cooperative outage rate median is 1.8 hours off and for all cooperatives in the U.S., 3.3 hours.

A reliable source of electricity is critical to your board of directors and staff. These reliability rates indicate that prudent planning, engineering, operations, maintenance, and outage response practices are being performed on Empire's system and that Empire is indeed providing reliable electric service to the member-owners of the cooperative. If any member drove around Empire's territory in 2010, you would be hard pressed to miss observing Empire's crews working on several replacement/upgrade projects. A significant amount of time and money is spent every year simply replacing/upgrading old copper lines that have been in service for 65 or more years.

At the end of 2010, 26 customers were taking advantage of Empire's net-metering tariff, predominately using grid-connected (no batteries) solar photovoltaic systems. Out of the 26 customers, six produced slightly more kilowatt-hours (kWh) than they consumed over the whole year. Several large commercial accounts connected their photovoltaic arrays to Empire's grid in 2010. The largest one of these was a 258-kilowatt (kW) array for a local construction company. Their array covered approximately 2.5 acres of land on the company's property and is one of the largest PV arrays in the Four Corners region.

A Renewable Energy Credits (RECs or Green Tags) Purchase Program (Tri-State policy 117) is available for all net-metered customers and all but five net-metered customers have signed a purchase power agreement with Empire for the RECs. In 2010 a total of $19,947.29 was shared between the participating net-metered customers for their RECs..

In April 2010, the city of Cortez connected a 250-kW hydroelectric generator to Empire Electric's distribution system. This is part of the intake facilities of their water treatment plant and takes advantage of their long high pressure raw water pipeline from McPhee reservoir that serves the treatment plant. At the end of 2010, they had generated 588,280 kWhs and received $39,038.26 for the sale of their RECs. They also received an average monthly check of $2,500 for the actual electricity they generated into Empire's grid.

At the end of the year, 213 member/accounts were participating in Empire's voluntary Renewable Energy (Green Power) tariff purchasing 201,811 kWh/month. For comparison, at year end 2009, 147 member/ accounts participated purchasing 85,000 kWh per month. This is a reasonable and inexpensive way for members to purchase bulk renewable energy rather than build their own expensive facilities. Each kWh currently costs an additional $0.0009/kWh over and above regular purchases. The rate Empire charges is a pass through of the rate Tri-State charges Empire for procuring these resources. Visit Tri-State's website at www.tristategt.org/greenpower for more information about the renewable resources members can purchase.

A total of 298 refrigerator or freezer units were recycled as a part of Empire's "Don't Plug it in — Turn it in" recycling program. Tri-State is a key partner in this very successful program. In 2010, Tri-State paid $11,920 of the total $14,900 rebated to member-customers. This is a great program to get these energy hogs off of Empire's electric system.

At year end, about $97,815 was refunded to Empire's member-owners participating in the Energy Efficiency Rebate program. These rebates were for upgrading certain appliances, water heaters and HVAC systems to more energy efficient units. The largest rebate of just over $33,000 was paid to Montezuma County for its extensive upgrade of its HVAC system to a Geo-exchange system at their main courthouse complex. Other commercial member-customers also participated in rebates for installing premium efficient motors and HVAC systems. New to the menu of available energy efficiency rebates is Tri-State's Commercial Lighting Retrofit program. In 2010, four commercial member-customers received a collective total of $5,200 for upgrading their lighting to more efficient technologies. From recent inquires about this new program, 2011 is looking to be a banner year for commercial lighting retrofits.

Through a collaborative effort between Empire and Four Corners Office of Resource Efficiency (4CORE), several education seminars were offered in 2010 focusing on renewable resources, energy efficiency and conservation concepts. Well over 150 members from Colorado and Utah attended these seminars in 2010.

Empire provides a rebate for professional energy audits and six members contracted with local experts to perform energy audits in 2010. Although down from 2009, whole house audits were also available from 4CORE through the Low Income Weatherization program. This program is funded by a grant from the Governor's Energy Office, and as such did not need extra funding through Empire's program. Empire provides financial support to fund the 4CORE collaborative effort and helps promote and extend the reach of these grant funds into Empire's service territory. For those customers who desire to perform their own energy assessment, Empire hosts a web-based audit program on www.eea.coop called the Home Energy Suite. About 14,000 hits were recorded for this interactive tool in 2010.

Empire continues to partner with five area libraries to provide devices that can record how many kWhs a particular appliance or electronic device uses over a period of time. They are called Kill-A-Watt meters and the libraries loan them out. More than 200 check-outs of the devices were made in 2010 through the combined efforts of the participating libraries.

It is important for the membership to be reminded that Empire does not generate electricity. Empire distributes electricity purchased from a generation and transmission cooperative, Tri-State. Empire's contract with Tri-State insures that Empire will have a reliable source of electricity for its member-owners through the year 2050. Tri-State also generates and transmits power for 43 other member cooperatives scattered across the states of Colorado, Nebraska, New Mexico, and Wyoming.

Even in a down economy, Tri-State had to produce 2.3 percent more kWhs for Empire's total load requirements in 2010. Empire's 2010 residential class used 2.7 percent more kWhs than in the year 2008. The small commercial class was down 2.9 percent and large power class down 1.4 percent. However, because Empire's carbon dioxide rate class used 3.5 percent more kWhs, total kWh sales were 2.3 percent more than in 2009.

As a group, the 44 member cooperative loads continue to grow and it is Tri-State's contractual responsibility to plan what types of generation and transmission resources are necessary to meet the member co-op future load requirements. Tri-State reported that its 2010 growth in kWh member sales was 5.6 percent (801,000,000 kWh) and its member growth in kW was 5 percent (121,000 kW). For comparison, Empire purchased a little more than 620,000,000 kWh in 2010 with a peak demand of 88,082 kW.

The key issue for Tri-State is assessing risk and uncertainty in an ever-changing environmental and political (regulatory) arena as well as in an economic downturn. Tri-State has adequate resources to meet the member's growth for a few years, but experience indicates that it takes a decade or more to site and construct generation resources and site new transmission lines. Tri-State's staff assures the members that it can get the job done to fulfill its contractual obligations to the 44 member systems, and is doing its best to keep electricity affordable, but uncertainty in regulatory pressures will push the price of producing electricity higher.

Of interest, are a couple of renewable resources Tri-State acquired in 2010. Tri-State entered into a long- term contract with a private company to purchase the output of 500,000 solar photovoltaic panels that will produce up to 30 megawatts when the sun is at its peak during the daytime. This project is located in the northeast corner of New Mexico. Tri-State also contracted with another company to purchase the output of 34 wind turbines in eastern Colorado which could produce up to 51 megawatts when the wind is blowing at capacity. This project is located in Kit Carson County.

Expect an increase in electric rates in 2012. In every Tri-State projection Empire will pay more for the electricity purchased in future years. For every $1 Empire collects from its rate payers, Empire pays Tri-State about $0.75 for generating and transmitting the electricity to Empire. That is why an increase in Tri-State's rates puts pressure on Empire to raise its rates to its members, and that is why Empire's customers should expect to see increases in their electric bills in 2012 and in subsequent years.

It goes without saying that Empire's member-owners are the foundation of this utility. This is your electric utility and we hope you are proud of it. The board, staff, and employees again want to extend our deep appreciation to the membership for your support of your rural electric cooperative.