Southern Power District 2007 Annual Report

Chairman's Report:

In January of 2007, I was elected to serve as Southern’s Board Chairman for a two-year period. During the first meeting in this capacity, we addressed our immediate concerns for restoring power to our customers following the December 30th ice storm. It was very difficult to know not only how to assess and prioritize the restoration efforts, but also how to find enough manpower to complete the overwhelming workload. In essence, the District opened the “checkbook” in order to meet the staggering demands. Every one of Southern’s directors were personally impacted by the storm, some more than others. I felt very fortunate to be without power in my home for only five days. The experience certainly gave us all a crash course in the District’s operation.

The 21 days it took to restore service to residential customers was only the beginning. The process of receiving funds from the Federal Emergency Management Agency (FEMA) has been slow, and although a lot of effort has been made to move the process along, complete reimbursement has yet to be seen. The net cost to the District will be approximately $12- million, and we will likely issue bonds in late 2008. When I attended my first board meeting nine years ago, the District had no debt—so it is difficult to look at the District’s finances with debt of about $55 million. However, much of this debt was incurred due to our need for capital, resulting from growth in large power customers – particularly ethanol plants. Irrigation customers have also contributed to the District’s growth--rising fuel cost, reliability and convenience have made electricity the preferred choice for many irrigators. I can see this trend on our own farm—we once had no electric wells, but have upgraded to 13 electric wells during the last nine years.

I continue to be impressed with my fellow Directors’ dedication to the District. That dedication makes our system of committees work well. Each of the committees work hard to study issues in depth, and their strong knowledge base results in overall support of their recommendations. Each of the committees at Southern are important and guide our actions in everything ranging from financial issues to customer relations. I believe that the Board’s level of awareness and involvement in district issues has really blossomed this year. I sense a realization that there may have been times in the past that we did not raise rates when we should have. I feel that although it was not long ago that we developed a financial strategy, that it does need to be reviewed and revised to meet changes in our industry, and participation in this process has indicated the Board’s commitment to staying on course. I know that most, or perhaps even all of the Directors are uncomfortable with our debt position, but we are ready to move forward with a workable financial plan. The board has struggled some in the past with cash levels that seemed high, but I believe it is now clearly understood that having a strong cash position is in the District’s best interest.

I would not want to wrap up my comments without mentioning some of the positive aspects of the District this past year. We are maintaining good relationships with our labor force. We have great employees and good people working in management. The procurement center has also proven its worth this year and has saved us about 15-20 percent of its cost in 2007 alone. We have also begun to take steps into upgrading our system to serve at 69kV. Also, the addition of a full-time mechanic has allowed us to efficiently repair and service our vehicles and equipment, making for less time wasted with vehicles “in the shop”. The District also spent some additional money to improve some of the line reconstruction following the ice storm, and I feel the improvements made will improve the integrity of our facilities and thus will be money well spent. We are also fortunate to have many prospects and opportunities to add new large power customers to our system.

Finally, I’d like to share with you my “wish list” for future years. I would like to see continued positive labor negotiations, the addition of more tenants at the District’s Energy Park, a favorable bond issue in 2008, an energy supplier that will respond to our needs and to our input, and a margin that exceeds our annual projections.

Other information inside the 2007 Annual Report