South Texas Electric Cooperative is a cutting-edge Generation & Transmission Cooperative and a leader in providing a diverse portfolio of affordable energy, a reliable power delivery system, and services customized to the needs of the members.

Since 2009, South Texas Electric Cooperative (STEC) has experienced significant growth. Over that period of time, annual system peak demand has increased by 80% and annual kWh sales have increased by 88%. Over that same timeframe, the total miles of system transmission line increased by 15.3% and the number of employees increased by 29%. For 2018 alone, system peak demand increased by 15% and kWh sales increased by 6.4% over 2017 levels, clearly indicating that historic growth has not slowed.

“Vision without action is a daydream. Action without vision is a nightmare.”

– Japanese proverb

During this period of unprecedented growth, the STEC Staff and Board of Directors have consistently focused on actions in support of our strategic plan.

The activities of 2018 represent a continuation of both of those elements – vision and action.

A facilitated strategic planning effort, involving face-to-face interviews with Board Members and Staff, culminated in a workshop where six strategic priorities were identified and described, along with strategic considerations and Board oversight criteria for each priority. Staff-assigned key initiatives and action items were also developed with corresponding schedules. As a result of the strategic planning effort, a practical strategic direction has been established for STEC and its Members for the next 3-5 years, and positive results were experienced almost immediately: • An Emergency Response Service Tariff Schedule and a Small Industrial Pass-Through Service Tariff Schedule were developed and approved by the Board. The new tariff schedules were designed to facilitate Member efforts to secure and retain attractive loads. • An ERCOT Market Risk Update and Rate Review Analysis were developed and presented to the Board Members and Member cooperative staff. • Construction of two solar power generation facilities – at the Red Gate and Pearsall Power Plant sites - was initiated in late 2018. The project was undertaken in response to Member interest, and commercial operation of the facilities is expected to occur in April 2019. • A Contracting Process and Life-Cycle Analysis was developed and presented to the Board. • A Member Services Survey was developed with the assistance of a third-party facilitator, and the survey was distributed to 20 G&T Cooperatives who expressed an interest in participating. The results of the survey are expected to be ready for review in the second quarter of 2019.

• Voltage reduction testing was planned and conducted at several substations through out the system, and potential Member benefits were quantified and presented. • New financial reports were developed and incorporated in the monthly Board Meeting package.

Another area of planning focused on improving and supporting electric reliability in the Rio Grande Valley. After reviewing third party proposals for adding transmission capacity to the area, STEC engaged an engineering firm to develop a proposed transmission project. The goal is to have the proposed project in a form to present and submit to ERCOT for consideration in the second quarter of 2019.

“A man without a vision is a man without a future. A man without a future will always return to his past.”

– P.K. Bernard

In the area of employee development and retention, the second phase of succession planning was conducted during 2018. The planning involves the identification of high potential employees as candidates for critical positions within the organization. Following an assessment of cognitive and behavioral characteristics, an individual-ized development plan was put in place for each candidate to follow, and a range of projects and tasks were assigned to enhance candidate development.

On the financial planning front, the existing syndicated credit facility was amended and extended for an additional five years. The amend-ment included a reduction in commitment from $350 million to $250 million to better align with anticipated borrowing needs and to reduce costs. A $25 million line of credit with CoBank was also extended for a new three-year term. Finally, $100 million of private placement bonds were issued to replace short term borrowing with long term debt instruments. The bonds have a 15-year average life and were issued at very favorable rates.

“Where there is no vision, the people perish...”– Proverbs 29:18

Other tangible results of STEC’s efforts to align vision and action are being realized.

For the second year in a row, Texas Mutual awarded STEC with its Platinum Safety Partner Award. STEC was one of only 200 recipients of this prestigious award (out of a total of 46,000 policyholders in Texas). To be recognized once is a significant accomplishment. To be awarded for two consecutive years is a clear indication that safety remains a core value of the organization.

STEC employees achieved an OSHA Recordable Incident Rate of 1.16 during 2018, well below the industry average of 1.70.

STEC employees also achieved a U.S. DOT Out-of-Service Rate of 9.5% during the year, which is well below the national average of 20.7%.

STEC employee participation in the cooperative’s wellness program reached 85% during 2018, significantly higher than the national participation standard of 40%.

“Always start at the end before you begin.” – Robert Kiyosaki

The STEC Vision Statement identifies who we desire to be, but it is much more than that. It influences each decision we make and every action we take as Members, Directors, and employees of the organization. It puts in focus our planning efforts, and it provides a solid framework against which to evaluate success. The activities of 2018 reflect very positively on our collaborative efforts to achieve our vison, and continue laying the foundation for successful growth.

3 PRESIDENT’S AND GENERAL MANAGER’S REPORT

4-5 BOARD OF DIRECTORS

6-7 MEMBER HIGHLIGHTS & SERVICE AREA

8 SENIOR STAFF & CORPORATE RISK OFFICER

9 HUMAN RESOURCES

10-11 CORPORATE & MEMBER SERVICES

Gary RaybonPresident

Mike KezarGeneral Manager

12-13 POWER SUPPLY

14-15 POWER DELIVERY

16-17 ACCOUNTING & FINANCE

18-41 2018 FINANCIAL REPORT

42 CHARITABLE GIVING & COOPERATIVE SUPPORT

43 MISSION STATEMENT & CORE VALUES

32

South Texas Electric Cooperative is a cutting-edge Generation & Transmission Cooperative and a leader in providing a diverse portfolio of affordable energy, a reliable power delivery system, and services customized to the needs of the members.

Since 2009, South Texas Electric Cooperative (STEC) has experienced significant growth. Over that period of time, annual system peak demand has increased by 80% and annual kWh sales have increased by 88%. Over that same timeframe, the total miles of system transmission line increased by 15.3% and the number of employees increased by 29%. For 2018 alone, system peak demand increased by 15% and kWh sales increased by 6.4% over 2017 levels, clearly indicating that historic growth has not slowed.

“Vision without action is a daydream. Action without vision is a nightmare.”

– Japanese proverb

During this period of unprecedented growth, the STEC Staff and Board of Directors have consistently focused on actions in support of our strategic plan.

The activities of 2018 represent a continuation of both of those elements – vision and action.

A facilitated strategic planning effort, involving face-to-face interviews with Board Members and Staff, culminated in a workshop where six strategic priorities were identified and described, along with strategic considerations and Board oversight criteria for each priority. Staff-assigned key initiatives and action items were also developed with corresponding schedules. As a result of the strategic planning effort, a practical strategic direction has been established for STEC and its Members for the next 3-5 years, and positive results were experienced almost immediately: • An Emergency Response Service Tariff Schedule and a Small Industrial Pass-Through Service Tariff Schedule were developed and approved by the Board. The new tariff schedules were designed to facilitate Member efforts to secure and retain attractive loads. • An ERCOT Market Risk Update and Rate Review Analysis were developed and presented to the Board Members and Member cooperative staff. • Construction of two solar power generation facilities – at the Red Gate and Pearsall Power Plant sites - was initiated in late 2018. The project was undertaken in response to Member interest, and commercial operation of the facilities is expected to occur in April 2019. • A Contracting Process and Life-Cycle Analysis was developed and presented to the Board. • A Member Services Survey was developed with the assistance of a third-party facilitator, and the survey was distributed to 20 G&T Cooperatives who expressed an interest in participating. The results of the survey are expected to be ready for review in the second quarter of 2019.

• Voltage reduction testing was planned and conducted at several substations through out the system, and potential Member benefits were quantified and presented. • New financial reports were developed and incorporated in the monthly Board Meeting package.

Another area of planning focused on improving and supporting electric reliability in the Rio Grande Valley. After reviewing third party proposals for adding transmission capacity to the area, STEC engaged an engineering firm to develop a proposed transmission project. The goal is to have the proposed project in a form to present and submit to ERCOT for consideration in the second quarter of 2019.

“A man without a vision is a man without a future. A man without a future will always return to his past.”

– P.K. Bernard

In the area of employee development and retention, the second phase of succession planning was conducted during 2018. The planning involves the identification of high potential employees as candidates for critical positions within the organization. Following an assessment of cognitive and behavioral characteristics, an individual-ized development plan was put in place for each candidate to follow, and a range of projects and tasks were assigned to enhance candidate development.

On the financial planning front, the existing syndicated credit facility was amended and extended for an additional five years. The amend-ment included a reduction in commitment from $350 million to $250 million to better align with anticipated borrowing needs and to reduce costs. A $25 million line of credit with CoBank was also extended for a new three-year term. Finally, $100 million of private placement bonds were issued to replace short term borrowing with long term debt instruments. The bonds have a 15-year average life and were issued at very favorable rates.

“Where there is no vision, the people perish...”– Proverbs 29:18

Other tangible results of STEC’s efforts to align vision and action are being realized.

For the second year in a row, Texas Mutual awarded STEC with its Platinum Safety Partner Award. STEC was one of only 200 recipients of this prestigious award (out of a total of 46,000 policyholders in Texas). To be recognized once is a significant accomplishment. To be awarded for two consecutive years is a clear indication that safety remains a core value of the organization.

STEC employees achieved an OSHA Recordable Incident Rate of 1.16 during 2018, well below the industry average of 1.70.

STEC employees also achieved a U.S. DOT Out-of-Service Rate of 9.5% during the year, which is well below the national average of 20.7%.

STEC employee participation in the cooperative’s wellness program reached 85% during 2018, significantly higher than the national participation standard of 40%.

“Always start at the end before you begin.” – Robert Kiyosaki

The STEC Vision Statement identifies who we desire to be, but it is much more than that. It influences each decision we make and every action we take as Members, Directors, and employees of the organization. It puts in focus our planning efforts, and it provides a solid framework against which to evaluate success. The activities of 2018 reflect very positively on our collaborative efforts to achieve our vison, and continue laying the foundation for successful growth.

3 PRESIDENT’S AND GENERAL MANAGER’S REPORT

4-5 BOARD OF DIRECTORS

6-7 MEMBER HIGHLIGHTS & SERVICE AREA

8 SENIOR STAFF & CORPORATE RISK OFFICER

9 HUMAN RESOURCES

10-11 CORPORATE & MEMBER SERVICES

Gary RaybonPresident

Mike KezarGeneral Manager

12-13 POWER SUPPLY

14-15 POWER DELIVERY

16-17 ACCOUNTING & FINANCE

18-41 2018 FINANCIAL REPORT

42 CHARITABLE GIVING & COOPERATIVE SUPPORT

43 MISSION STATEMENT & CORE VALUES

32

THE BOARDOF DIRECTORS

of South Texas Electric Cooperative, Inc. are rural

electric leaders who have either been elected to

the Board of their distribution system or are

managers of their distribution system. The Board

consists of two representatives from each of its

eight Member Cooperatives.

54

THE BOARDOF DIRECTORS

of South Texas Electric Cooperative, Inc. are rural

electric leaders who have either been elected to

the Board of their distribution system or are

managers of their distribution system. The Board

consists of two representatives from each of its

eight Member Cooperatives.

54

The combined financial strengths of South Texas Electric Cooperative and its member distribution cooperatives are adequate to serve the needs of South Texas. Together we have the determination and resources to face the challenges of the future.

COMBINED FINANCIAL STRENGTHS OF

SOUTH TEXAS ELECTRIC COOPERATIVE

AND ITS MEMBER SYSTEMS

$ 203,360,854 $ 103,331,452

$ 122,135,717 1,423,986,762

540 33,169

9,624

Total Utility PlantTotal Margins & EquitiesTotal RevenueTotal kWH Sold 2018 New ConnectionsTotal Connections in ServiceTotal Miles of Line

$ 62,613,209 $ 40,869,307 $ 22,392,335 233,021,852

73 7,195 1,274

Total Utility PlantTotal Margins & EquitiesTotal RevenueTotal kWH Sold2018 New ConnectionsTotal Connections in ServiceTotal Miles of Line

$ 90,613,434 $ 127,323,825 $ 95,886,455 1,132,752,705 466 20,286 4,535

Total Utility Plant Total Margins & Equities Total Revenue Total kWH Sold 2018 New ConnectionsTotal Connections in Service Total Miles of Line

$ 61,797,675 $ 42,319,964 $ 28,905,835

276,695,954 237

11,551 3,128

Total Utility PlantTotal Margins & EquitiesTotal RevenueTotal kWH Sold 2018 New ConnectionsTotal Connections in ServiceTotal Miles of Line

$ 377,626,698 $ 263,935,925 $ 222,553,918 2,365,752,392 3,966 117,525 5,249

Total Utility Plant Total Margins & EquitiesTotal Revenue Total kWH Sold 2018 New ConnectionsTotal Connections in Service Total Miles of Line

$ 124,035,364 $ 72,999,232 $ 52,380,390

553,448,640 365

23,021 2,993

Total Utility Plant Total Margins & EquitiesTotal RevenueTotal kWH Sold2018 New ConnectionsTotal Connections in ServiceTotal Miles of Line

Combined Distribution PlantSTEC Plant in ServiceCombined Distribution Margins & EquitiesTotal Retail kWH Sold2018 New Connections

Total Connections in ServiceTotal Miles of Distribution LineTotal Miles of Transmission LineTotal Substations/Delivery Points

$ 1,173,312,888 $ 1,467,547,039

$ 809,713,543 8,035,079,841

6,395

248,145 32,460

2,203 204

BRAD BIERSTEDT • General ManagerKARNES ELECTRIC COOPERATIVE, INC.

Total Utility PlantTotal Margins & EquitiesTotal Revenue Total kWH Sold 2018 New Connections Total Connections in Service Total Miles of Line

$ 113,222,280 $ 57,929,049 $ 54,550,332 750,582,298

375 15,998

2,457

$ 140,043,374 $ 101,004,789 $ 108,824,524 1,298,839,238

373 19,400

3,200

Total Utility PlantTotal Margins & EquitiesTotal RevenueTotal kWH Sold2018 New ConnectionsTotal Connections in ServiceTotal Miles of Line

JAMES COLEMAN • General Manager/CEOJACKSON ELECTRIC COOPERATIVE, INC.

TRACE McCUAN • CEONUECES ELECTRIC COOPERATIVE, INC.

RON HUGHES • General ManagerSAN PATRICIO ELECTRIC COOPERATIVE, INC.

BLAINE WARZECHA • General ManagerVICTORIA ELECTRIC COOPERATIVE, INC.

GARY RAYBON • General Manager/CEOWHARTON COUNTY ELECTRIC COOPERATIVE, INC.

JOHN HERRERA • General ManagerMAGIC VALLEY ELECTRIC COOPERATIVE, INC.

MARK ROLLANS • CEOMEDINA ELECTRIC COOPERATIVE, INC.

76

The combined financial strengths of South Texas Electric Cooperative and its member distribution cooperatives are adequate to serve the needs of South Texas. Together we have the determination and resources to face the challenges of the future.

COMBINED FINANCIAL STRENGTHS OF

SOUTH TEXAS ELECTRIC COOPERATIVE

AND ITS MEMBER SYSTEMS

$ 203,360,854 $ 103,331,452

$ 122,135,717 1,423,986,762

540 33,169

9,624

Total Utility PlantTotal Margins & EquitiesTotal RevenueTotal kWH Sold 2018 New ConnectionsTotal Connections in ServiceTotal Miles of Line

$ 62,613,209 $ 40,869,307 $ 22,392,335 233,021,852

73 7,195 1,274

Total Utility PlantTotal Margins & EquitiesTotal RevenueTotal kWH Sold2018 New ConnectionsTotal Connections in ServiceTotal Miles of Line

$ 90,613,434 $ 127,323,825 $ 95,886,455 1,132,752,705 466 20,286 4,535

Total Utility Plant Total Margins & Equities Total Revenue Total kWH Sold 2018 New ConnectionsTotal Connections in Service Total Miles of Line

$ 61,797,675 $ 42,319,964 $ 28,905,835 276,695,954

237 11,551 3,128

Total Utility PlantTotal Margins & EquitiesTotal RevenueTotal kWH Sold 2018 New ConnectionsTotal Connections in ServiceTotal Miles of Line

$ 377,626,698 $ 263,935,925 $ 222,553,918 2,365,752,392 3,966 117,525 5,249

Total Utility Plant Total Margins & EquitiesTotal Revenue Total kWH Sold 2018 New ConnectionsTotal Connections in Service Total Miles of Line

$ 124,035,364 $ 72,999,232

$ 52,380,390 553,448,640

365 23,021

2,993

Total Utility Plant Total Margins & EquitiesTotal RevenueTotal kWH Sold2018 New ConnectionsTotal Connections in ServiceTotal Miles of Line

Combined Distribution PlantSTEC Plant in ServiceCombined Distribution Margins & EquitiesTotal Retail kWH Sold2018 New Connections

Total Connections in ServiceTotal Miles of Distribution LineTotal Miles of Transmission LineTotal Substations/Delivery Points

$ 1,173,312,888 $ 1,467,547,039

$ 809,713,543 8,035,079,841

6,395

248,145 32,460

2,203 204

BRAD BIERSTEDT • General ManagerKARNES ELECTRIC COOPERATIVE, INC.

Total Utility PlantTotal Margins & EquitiesTotal Revenue Total kWH Sold 2018 New Connections Total Connections in Service Total Miles of Line

$ 113,222,280 $ 57,929,049 $ 54,550,332 750,582,298

375 15,998

2,457

$ 140,043,374 $ 101,004,789 $ 108,824,524 1,298,839,238

373 19,400

3,200

Total Utility PlantTotal Margins & EquitiesTotal RevenueTotal kWH Sold2018 New ConnectionsTotal Connections in ServiceTotal Miles of Line

JAMES COLEMAN • General Manager/CEOJACKSON ELECTRIC COOPERATIVE, INC.

TRACE McCUAN • CEONUECES ELECTRIC COOPERATIVE, INC.

RON HUGHES • General ManagerSAN PATRICIO ELECTRIC COOPERATIVE, INC.

BLAINE WARZECHA • General ManagerVICTORIA ELECTRIC COOPERATIVE, INC.

GARY RAYBON • General Manager/CEOWHARTON COUNTY ELECTRIC COOPERATIVE, INC.

JOHN HERRERA • General ManagerMAGIC VALLEY ELECTRIC COOPERATIVE, INC.

MARK ROLLANS • CEOMEDINA ELECTRIC COOPERATIVE, INC.

76

98

The Cooperative’s Risk Management Department is responsible for the management of current and potential risks throughout the organization. In 2018, the risk categories considered when identifying risks (Safety, Compliance, Financial, Internal Controls, Information Technology, Operations, Strategic and Personnel) were reviewed and updated to include two additional categories: Environmental and Operational Technology.

Risk analysis is conducted by means of risk assessments and internal audits. The primary guide for this risk analysis is the Vision Statement:

South Texas Electric Cooperative is a cutting-edge Generation & Transmission Cooperative and a leader in providing a diverse portfolio of affordable energy, a reliable power delivery system, and services customized to the needs of the members.

The risk assessment process enables the organization to identify, prioritize, control and monitor both existing and potential risks. Risk assessments are performed jointly by the Corporate Risk Officer, General Manager, Division Managers, Department Managers and other key employees. Currently, risk assessments are conducted for each department within the organization. In 2018, risk assessments were performed for all departments within the Power Delivery Division. These departments include: Transmission and Substation, Engineering, Technical Services, SYSOP and the Valley District Office.

Mitigation plans were developed for controlling and managing the risks identified within each of the assessments. These plans will be monitored and routinely reviewed with appropriate personnel.

The internal audit function provides the Board of Directors and management with reasonable assurance regarding effectiveness and efficiency of existing operations, reliability of financial report-ing, and compliance with applicable laws and regulations. In 2018, an internal audit was performed to ensure compliance with STEC’s Purchase of Materials, Equipment & Services policy. The audit indicated favorable results, an overall adherence to the policy, and improvement when compared to the most recent audit.

JOHN PACKARDManager of

Power Supply

CORY ALLENAssistant General ManagerManager of Power Delivery

FRANCES NITSCHMANNChief Financial

Officer

AMY PRATKACorporate

Risk Officer

WENDY OHRTManager of Corporate

& Member Services

MICHELLE GLOORExecutive Assistant

LEANNE KINGHuman Resources

Manager

CORPORATE RISK OFFICER

Payroll & Benefits 38%

Administration 4%

EmployeeRelations 19%

Employee Development 13%

Policy & Program Compliance 11%

Recruitment& Selection 15%

The year 2018 was a journey in accountability.

The Cooperative continues to shift the organizational culture towards establishing and maintaining effective relationships with employees and Members. Establishing meaningful relationships takes commitment, time and accountability in developing outcomes and working towards mutually beneficial goals. Human Resources (HR) made that same commitment to employees and Members. Employees requested that HR be more visible and accessible and, to that end, HR extended office hours (with available staff) and committed to minimum monthly site visits at remote locations. Communications have increased and employees have begun to see HR as a resource for a variety of issues.

Human Resources focused on two big initiatives in 2018: (1) Job Description Updates and (2) Recruitment & Selection Processes. Job Descriptions provide a pathway for the employees to understand roles, responsibilities and expectations of their position. They also offer insight to what might be next in terms of a career roadmap. Supervisors are able to utilize job descriptions to create develop-ment plans and create highly qualified and dynamic teams. Defin-ing Recruitment and Selection Processes provides the engaged candidate with an interactive and informative process to learn about STEC. More importantly, the candidate can visualize how they fit into the bigger landscape and understand the importance of STEC’s core values: Safety, Teamwork, Communication and Integrity. Instilling accountability inside and out is at the forefront of the HR processes.

The journey that employees completed specific to wellness was nothing short of amazing. Employees furthered their personal wellness through participation in the Wellness Incentive Program that began in 2018. Employees are estimated to have participated in more than 2,500 wellness activities over the past 12 months. While national standards for employee participation in wellness programs was 40% for 2017, STEC employees boasted a first full year participation rate of 85% in 2018. Now that demonstrates accountability.

HR ACCOUNTABILITY

98

The Cooperative’s Risk Management Department is responsible for the management of current and potential risks throughout the organization. In 2018, the risk categories considered when identifying risks (Safety, Compliance, Financial, Internal Controls, Information Technology, Operations, Strategic and Personnel) were reviewed and updated to include two additional categories: Environmental and Operational Technology.

Risk analysis is conducted by means of risk assessments and internal audits. The primary guide for this risk analysis is the Vision Statement:

South Texas Electric Cooperative is a cutting-edge Generation & Transmission Cooperative and a leader in providing a diverse portfolio of affordable energy, a reliable power delivery system, and services customized to the needs of the members.

The risk assessment process enables the organization to identify, prioritize, control and monitor both existing and potential risks. Risk assessments are performed jointly by the Corporate Risk Officer, General Manager, Division Managers, Department Managers and other key employees. Currently, risk assessments are conducted for each department within the organization. In 2018, risk assessments were performed for all departments within the Power Delivery Division. These departments include: Transmission and Substation, Engineering, Technical Services, SYSOP and the Valley District Office.

Mitigation plans were developed for controlling and managing the risks identified within each of the assessments. These plans will be monitored and routinely reviewed with appropriate personnel.

The internal audit function provides the Board of Directors and management with reasonable assurance regarding effectiveness and efficiency of existing operations, reliability of financial report-ing, and compliance with applicable laws and regulations. In 2018, an internal audit was performed to ensure compliance with STEC’s Purchase of Materials, Equipment & Services policy. The audit indicated favorable results, an overall adherence to the policy, and improvement when compared to the most recent audit.

JOHN PACKARDManager of

Power Supply

CORY ALLENAssistant General ManagerManager of Power Delivery

FRANCES NITSCHMANNChief Financial

Officer

AMY PRATKACorporate

Risk Officer

WENDY OHRTManager of Corporate

& Member Services

MICHELLE GLOORExecutive Assistant

LEANNE KINGHuman Resources

Manager

CORPORATE RISK OFFICER

Payroll & Benefits 38%

Administration 4%

EmployeeRelations 19%

Employee Development 13%

Policy & Program Compliance 11%

Recruitment& Selection 15%

The year 2018 was a journey in accountability.

The Cooperative continues to shift the organizational culture towards establishing and maintaining effective relationships with employees and Members. Establishing meaningful relationships takes commitment, time and accountability in developing outcomes and working towards mutually beneficial goals. Human Resources (HR) made that same commitment to employees and Members. Employees requested that HR be more visible and accessible and, to that end, HR extended office hours (with available staff) and committed to minimum monthly site visits at remote locations. Communications have increased and employees have begun to see HR as a resource for a variety of issues.

Human Resources focused on two big initiatives in 2018: (1) Job Description Updates and (2) Recruitment & Selection Processes. Job Descriptions provide a pathway for the employees to understand roles, responsibilities and expectations of their position. They also offer insight to what might be next in terms of a career roadmap. Supervisors are able to utilize job descriptions to create develop-ment plans and create highly qualified and dynamic teams. Defin-ing Recruitment and Selection Processes provides the engaged candidate with an interactive and informative process to learn about STEC. More importantly, the candidate can visualize how they fit into the bigger landscape and understand the importance of STEC’s core values: Safety, Teamwork, Communication and Integrity. Instilling accountability inside and out is at the forefront of the HR processes.

The journey that employees completed specific to wellness was nothing short of amazing. Employees furthered their personal wellness through participation in the Wellness Incentive Program that began in 2018. Employees are estimated to have participated in more than 2,500 wellness activities over the past 12 months. While national standards for employee participation in wellness programs was 40% for 2017, STEC employees boasted a first full year participation rate of 85% in 2018. Now that demonstrates accountability.

HR ACCOUNTABILITY

1110

The Corporate & Member Services Division is dedicated to exceeding Member expectations while providing support and services to STEC’s operating divisions. Throughout 2018, Division leadership was actively involved in public engagement and communication with industry and governmental leaders. One example of those efforts was the attendance at NRECA’s 2018 Legislative Conference. The annual conference offers an opportu-nity for electric cooperative leaders to engage elected officials about cooperative priorities.

COMMITMENT TO A SAFE WORKPLACE

In April 2018, NRECA introduced the Commitment to Zero Contacts, an initiative designed to provide senior leaders and field personnel with ideas and resources to help eliminate serious injuries and fatalities (SIFs) due to electrical contacts, and enhance cooperative safety programs. STEC made the pledge to commit to zero contacts.

The year 2018 marked the second consecutive year that STEC received the Platinum Safety Partner Award from Texas Mutual Worker’s Compensation – providing an important milestone to reflect on STEC’s commitment to workplace safety. STEC is one of only 200 recipients out of 46,000 policyholders in Texas to receive this award. It is clear that safety is a core value of the organization.

As a motor carrier, STEC is focused on the Department of Transportation’s (DOT) extensive regulations through the Federal Motor Carrier Safety Administration to prevent and/or reduce crashes, injuries and fatalities. STEC achieved a U.S. DOT Out of Service (OOS) Rate of 9.5% which is well below the national average of 20.7%.

STEC completed the year with an OSHA recordable incident rate of 1.16 which is below the industry average of 1.70. While progress continues toward achieving our goal of zero injuries, employees have continued to build on the safety culture by utilizing STEC’s Safety Manual and performing job hazard analyses (JHAs) to reduce the risk of injury.

MEMBER SERVICES COORDINATION

The Member Services Coordinator acts as a liaison between the eight member cooperatives and STEC, and is actively involved with the Members on many issues. Renewable generation interconnection requests, involving both wind and solar facilities, were active issues during 2018. STEC received nine study requests that ultimately resulted in one solar and two wind gener-ators executing the Standard Generation Interconnection Agree-ment.

During the year, the Member Services Coordinator also assisted in providing member cooperative personnel with training associat-ed with STEC facilities and operations, as well as coordinating Three Part Communication Training. This training is aimed at improving operational safety and reducing miscommunication that could lead to outages.

EXCELLENCE IN RELIABILITY AND COMPLIANCE

During 2018, 12 NERC standards were updated to ensure reliabili-ty and security of STEC assets. To meet all requirements, the Compliance Department took a proactive approach by imple-menting a compliance software system to facilitate workflows and document retention. The software helps ensure STEC is excelling in compliance and enhancing reliability.

ENVIRONMENTAL COMPLIANCE AND AWARENESS

STEC’s Environmental Department was involved in several projects to protect water resources and to ensure compliance with state and local environmental agencies. Projects included completing oil spill plans for applicable substations, monitoring stormwater runoff at the Sam Rayburn Power Plant, installing aeration for the evaporation pond at the Red Gate Power Plant, and installing additional monitoring wells at the Pearsall Power Plant. In addition, two new septic systems were installed at the Sam Rayburn Power Plant to accommodate the recently renovat-ed G3 building. The projects required coordination, strategic planning, flexibility, and risk evaluation.

INFORMATION TECHNOLOGY

During 2018, the Information Technology (IT) Department contin-ued to provide technology-based services to support the fulfillment of STEC’s mission in an efficient and cost-effective manner. In addition, Security Awareness training was added to the safety training program. The training is a vehicle for educat-ing employees on the dangers of phishing or other online scams, and for providing them the tools needed to identify and react to cyber threats.

SECURITY IN THE WORKPLACE

STEC Security conducted physical security surveys of STEC substations and facilities. The survey is an examination of technologies and strategies to make the substations less vulnera-ble to crime and to provide a safer working environment. During 2018, 16 substations received a physical security survey.

COMPETITIVE RETAIL SERVICES

STEC’s Competitive Retail (CR) Services Department works closely with Nueces Electric Cooperative (NEC) to provide billing and member services to NEC Co-op Energy’s members. Throughout 2018, the CR Department continued to assist NEC Co-op Energy with building and adjusting a strategic plan to utilize new software to its fullest capabilities. As a cooperative in the deregu-lated market, the business model is unique within the State of Texas, requiring customization of the software. On-going communication between NEC Co-op Energy and STEC Competi-tive Retail will be a key factor to ensuring the success of the software implementation.

1110

The Corporate & Member Services Division is dedicated to exceeding Member expectations while providing support and services to STEC’s operating divisions. Throughout 2018, Division leadership was actively involved in public engagement and communication with industry and governmental leaders. One example of those efforts was the attendance at NRECA’s 2018 Legislative Conference. The annual conference offers an opportu-nity for electric cooperative leaders to engage elected officials about cooperative priorities.

COMMITMENT TO A SAFE WORKPLACE

In April 2018, NRECA introduced the Commitment to Zero Contacts, an initiative designed to provide senior leaders and field personnel with ideas and resources to help eliminate serious injuries and fatalities (SIFs) due to electrical contacts, and enhance cooperative safety programs. STEC made the pledge to commit to zero contacts.

The year 2018 marked the second consecutive year that STEC received the Platinum Safety Partner Award from Texas Mutual Worker’s Compensation – providing an important milestone to reflect on STEC’s commitment to workplace safety. STEC is one of only 200 recipients out of 46,000 policyholders in Texas to receive this award. It is clear that safety is a core value of the organization.

As a motor carrier, STEC is focused on the Department of Transportation’s (DOT) extensive regulations through the Federal Motor Carrier Safety Administration to prevent and/or reduce crashes, injuries and fatalities. STEC achieved a U.S. DOT Out of Service (OOS) Rate of 9.5% which is well below the national average of 20.7%.

STEC completed the year with an OSHA recordable incident rate of 1.16 which is below the industry average of 1.70. While progress continues toward achieving our goal of zero injuries, employees have continued to build on the safety culture by utilizing STEC’s Safety Manual and performing job hazard analyses (JHAs) to reduce the risk of injury.

MEMBER SERVICES COORDINATION

The Member Services Coordinator acts as a liaison between the eight member cooperatives and STEC, and is actively involved with the Members on many issues. Renewable generation interconnection requests, involving both wind and solar facilities, were active issues during 2018. STEC received nine study requests that ultimately resulted in one solar and two wind gener-ators executing the Standard Generation Interconnection Agree-ment.

During the year, the Member Services Coordinator also assisted in providing member cooperative personnel with training associat-ed with STEC facilities and operations, as well as coordinating Three Part Communication Training. This training is aimed at improving operational safety and reducing miscommunication that could lead to outages.

EXCELLENCE IN RELIABILITY AND COMPLIANCE

During 2018, 12 NERC standards were updated to ensure reliabili-ty and security of STEC assets. To meet all requirements, the Compliance Department took a proactive approach by imple-menting a compliance software system to facilitate workflows and document retention. The software helps ensure STEC is excelling in compliance and enhancing reliability.

ENVIRONMENTAL COMPLIANCE AND AWARENESS

STEC’s Environmental Department was involved in several projects to protect water resources and to ensure compliance with state and local environmental agencies. Projects included completing oil spill plans for applicable substations, monitoring stormwater runoff at the Sam Rayburn Power Plant, installing aeration for the evaporation pond at the Red Gate Power Plant, and installing additional monitoring wells at the Pearsall Power Plant. In addition, two new septic systems were installed at the Sam Rayburn Power Plant to accommodate the recently renovat-ed G3 building. The projects required coordination, strategic planning, flexibility, and risk evaluation.

INFORMATION TECHNOLOGY

During 2018, the Information Technology (IT) Department contin-ued to provide technology-based services to support the fulfillment of STEC’s mission in an efficient and cost-effective manner. In addition, Security Awareness training was added to the safety training program. The training is a vehicle for educat-ing employees on the dangers of phishing or other online scams, and for providing them the tools needed to identify and react to cyber threats.

SECURITY IN THE WORKPLACE

STEC Security conducted physical security surveys of STEC substations and facilities. The survey is an examination of technologies and strategies to make the substations less vulnera-ble to crime and to provide a safer working environment. During 2018, 16 substations received a physical security survey.

COMPETITIVE RETAIL SERVICES

STEC’s Competitive Retail (CR) Services Department works closely with Nueces Electric Cooperative (NEC) to provide billing and member services to NEC Co-op Energy’s members. Throughout 2018, the CR Department continued to assist NEC Co-op Energy with building and adjusting a strategic plan to utilize new software to its fullest capabilities. As a cooperative in the deregu-lated market, the business model is unique within the State of Texas, requiring customization of the software. On-going communication between NEC Co-op Energy and STEC Competi-tive Retail will be a key factor to ensuring the success of the software implementation.

MEMBER LOAD AND MARKET ACTIVITIES

The STEC Wholesale Marketing and Qualified Scheduling Entity (QSE) Department faced a challenging year in 2018 as the ERCOT resource mix continued to evolve and STEC’s Member loads contin-ued to grow. The year began with some very strong cold fronts that ultimately resulted in the STEC system setting an all-time record peak of 1,696 MW on the morning of January 16, 2018. This exceeded the previous STEC peak, set just the summer before, by more than 200 MW. STEC successfully managed its fleet through this period of cold weather, meeting the record demand in an economical fashion for the benefit of its Members. ERCOT also set a price record during the cold experienced in January. On January 23, ERCOT market prices rose to the System Wide Offer Cap of $9,000/MWh for the first time since the current offer cap level was established in 2015. Again, STEC’s fleet was well-positioned and was able to capitalize on this rare event.

While STEC had no capacity additions or retirements in 2018, the ERCOT region experienced more than 4,000 MW of capacity retirements, largely from legacy coal units built in the 1960s and 1970s. Several years of depressed wholesale market prices, driven by low-cost natural gas and further pressured by federally subsidized renewable projects, proved to be too daunting for these resources to overcome. Nearly overnight, these retirements, coupled with the cancellation of other generation projects, dramatically shrunk the ERCOT reserve margin from 18.9%, as shown in the May 2017 version of the ERCOT Capacity Demand and Reserves Report, to 9.3% for the summer of 2018 as revised by the December 2017 version of the report. As would be expected, forward market prices, particularly for the summer months, increased substantially. This resulted in extensive investment of time and money by ERCOT generators during the spring months, including STEC, to ensure that these assets were prepared for a potentially volatile summer.

As the summer approached, the market experienced volatility and periodic high prices while generators and transmission providers took extended outages to ensure that all assets were available for

the expected demands of the summer. As the summer unfolded, June proved to be relatively non-eventful. However, in the month of July, the market experienced approximately one week of sustained hot weather, which resulted in wholesale market prices in the Day Ahead Market far surpassing what had been seen in previous years and culminated in a new all-time ERCOT peak demand. Despite high Day Ahead Market prices, Real Time Market prices were disconnected from the Day Ahead Market and remained relatively low. This phenomenon was presumably a response by generators shifting resources to the Real Time Market to avoid the potential economic losses should a forced outage leave them buying back the energy in Real Time. Following the hot weather in July, the weather moderated and rain entered the ERCOT region, thereby suppressing any further high price market activity for the remainder of the summer. In retrospect, the ERCOT market met the challenge of decreased reserves, due largely to a low number of forced outages during the July hot spell, a high degree of demand response, higher than anticipated imports across the DC ties connecting ERCOT to other regions, and a milder than expected August.

Through these challenges, the STEC QSE continued its role in seeking out the lowest cost energy and capacity to serve its Members. Natural gas prices remained relatively flat throughout

the first ten months of 2018; however, natural gas prices for both the spot market and the forward markets rose significantly in response to early cold weather and forecasts of cold weather throughout the 2018-2019 winter season. Prompt month NYMEX natural gas prices began in November at just over $3.00/mmBtu and quickly rose almost 65% to nearly $5.00/mmBtu by the middle of November before beginning a slow descent for the remainder of the year. While STEC employs a highly diversified portfolio of resources to hedge against fuel price volatility, natural gas increas-es such as those seen in November and December 2018 impact nearly all market participants, directly or indirectly. STEC was able to mitigate the effects of the late year natural gas increases through its effective and active natural gas hedging program. STEC remains committed to a diversified fuel portfolio and market tools, such as natural gas swaps and options contracts, to deliver stable and consistent rates to its Members. STEC ended 2018 with a portion of its natural gas needs secured at attractive prices through 2022.

POWER SUPPLY PORTFOLIO ACTIVITIES

STEC’s diverse portfolio of owned generation resources and long-term purchases was well positioned to meet the challenges posed by tightening ERCOT reserve margins, Real Time Market volatility, and higher pricing in the Day Ahead Market. In particular, STEC’s owned peaking resources felt the effects of the uptick in market pricing. The Sam Rayburn Power Plant generated 231,145 MWh, or 56.3% more than in 2017. Similarly, STEC’s quick-start reciprocating engine-based resources at the Pearsall and Red Gate Power Plants generated at levels exceeding 2017 by 53.3% and 60.9%, respectively. The strategic investment in these flexible technologies enabled STEC to protect its Members from the volatil-ity present in the spring and allowed STEC to capitalize on high prices present during July. STEC’s peaking resources also showed remarkable resiliency through the summer months, as the threat of market blow-outs brought on by diminishing grid reserves forced STEC to defer some preventative and corrective maintenance. Collectively, STEC’s peaking resources maintained an availability of 98% throughout June, July, and August. This high availability level included maintenance shifted to nighttime periods to maximize resource availability over peak.

Generation from STEC’s contracted wind resources stayed compara-tively stable versus 2017, with only a combined 3.7% increase in energy output. However, total renewable portfolio generation was down 6% as output from STEC’s hydro resources decreased versus 2017.

Although there were no major additions to the portfolio as a whole during 2018, STEC began construction in late 2018 of a series of four independent distributed generation solar installations rated at just under 1MW each and split equally between the Red Gate and Pearsall Power Plants. The installations will be connected at distribution voltage and are anticipated to complete construction in early 2019. Solar energy generated by the arrays will be divided equally among STEC’s eight member distribution cooperatives. POWER SUPPLY MAJOR MAINTENANCE ACTIVITIES

In 2018, after over approximately eight years of operation, the Pearsall Power Plant began a series of major engine overhauls. The overhauls were the first in a multi-year effort to complete major maintenance on all 24 engines. Three overhauls were completed in 2018, with a fourth started near the end of the year. The overhauls performed in 2018 were primarily conducted by plant personnel and involved approximately six weeks of maintenance and inspec-tions. The work performed should allow the engines to run at least 16,000 hours until the next scheduled overhaul.

Only in their second full year of operation, several engines at the Red Gate Power Plant eclipsed the 5,000 cumulative running hour mark by the close of 2018. While no major maintenance intervals have yet been reached, plant personnel were busy with minor scheduled and reoccurring preventative maintenance. Even these minor maintenance activities were disrupted by the need to remain available through the extraordinarily capacity-tight summer. Similarly, no major planned maintenance occurred at the Sam Rayburn Power Plant, however, one gas turbine experienced a several week outage in the spring to correct an internal oiling issue. The turbine was repaired and placed back into service before the summer. During the fall, STEC, like other generators in ERCOT, dealt with backlog of maintenance activities postponed due to the summer conditions and began planning for similar constraints in 2019.

1312

Natural Gas65.0%

Renewable14.4%

Coal20.6%

RESOURCES BY FUEL TYPE

RESOURCES BY PLANT NAMEPLATE

CAPACITY

Amistad Falcon Hydro 5.2%

Javelina II Wind PPA3.9%

Penascal Wind PPA5.3%

Red GatePower Plant

11.8%

Pearsall Power Plant

14.0%

Sam Rayburn Combined Cycle

10.2%

Calpine PPA29.0% San Miguel PPA

20.6%

-

406

307

465429

942

1,036

1,242

1,072

1,148

1,303 1,340

1,4021,478

1,696

200

400

600

800

1,000

1,200

1,400

1,600

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

PEAK DEMAND(MW)

MEMBER LOAD AND MARKET ACTIVITIES

The STEC Wholesale Marketing and Qualified Scheduling Entity (QSE) Department faced a challenging year in 2018 as the ERCOT resource mix continued to evolve and STEC’s Member loads contin-ued to grow. The year began with some very strong cold fronts that ultimately resulted in the STEC system setting an all-time record peak of 1,696 MW on the morning of January 16, 2018. This exceeded the previous STEC peak, set just the summer before, by more than 200 MW. STEC successfully managed its fleet through this period of cold weather, meeting the record demand in an economical fashion for the benefit of its Members. ERCOT also set a price record during the cold experienced in January. On January 23, ERCOT market prices rose to the System Wide Offer Cap of $9,000/MWh for the first time since the current offer cap level was established in 2015. Again, STEC’s fleet was well-positioned and was able to capitalize on this rare event.

While STEC had no capacity additions or retirements in 2018, the ERCOT region experienced more than 4,000 MW of capacity retirements, largely from legacy coal units built in the 1960s and 1970s. Several years of depressed wholesale market prices, driven by low-cost natural gas and further pressured by federally subsidized renewable projects, proved to be too daunting for these resources to overcome. Nearly overnight, these retirements, coupled with the cancellation of other generation projects, dramatically shrunk the ERCOT reserve margin from 18.9%, as shown in the May 2017 version of the ERCOT Capacity Demand and Reserves Report, to 9.3% for the summer of 2018 as revised by the December 2017 version of the report. As would be expected, forward market prices, particularly for the summer months, increased substantially. This resulted in extensive investment of time and money by ERCOT generators during the spring months, including STEC, to ensure that these assets were prepared for a potentially volatile summer.

As the summer approached, the market experienced volatility and periodic high prices while generators and transmission providers took extended outages to ensure that all assets were available for

the expected demands of the summer. As the summer unfolded, June proved to be relatively non-eventful. However, in the month of July, the market experienced approximately one week of sustained hot weather, which resulted in wholesale market prices in the Day Ahead Market far surpassing what had been seen in previous years and culminated in a new all-time ERCOT peak demand. Despite high Day Ahead Market prices, Real Time Market prices were disconnected from the Day Ahead Market and remained relatively low. This phenomenon was presumably a response by generators shifting resources to the Real Time Market to avoid the potential economic losses should a forced outage leave them buying back the energy in Real Time. Following the hot weather in July, the weather moderated and rain entered the ERCOT region, thereby suppressing any further high price market activity for the remainder of the summer. In retrospect, the ERCOT market met the challenge of decreased reserves, due largely to a low number of forced outages during the July hot spell, a high degree of demand response, higher than anticipated imports across the DC ties connecting ERCOT to other regions, and a milder than expected August.

Through these challenges, the STEC QSE continued its role in seeking out the lowest cost energy and capacity to serve its Members. Natural gas prices remained relatively flat throughout

the first ten months of 2018; however, natural gas prices for both the spot market and the forward markets rose significantly in response to early cold weather and forecasts of cold weather throughout the 2018-2019 winter season. Prompt month NYMEX natural gas prices began in November at just over $3.00/mmBtu and quickly rose almost 65% to nearly $5.00/mmBtu by the middle of November before beginning a slow descent for the remainder of the year. While STEC employs a highly diversified portfolio of resources to hedge against fuel price volatility, natural gas increas-es such as those seen in November and December 2018 impact nearly all market participants, directly or indirectly. STEC was able to mitigate the effects of the late year natural gas increases through its effective and active natural gas hedging program. STEC remains committed to a diversified fuel portfolio and market tools, such as natural gas swaps and options contracts, to deliver stable and consistent rates to its Members. STEC ended 2018 with a portion of its natural gas needs secured at attractive prices through 2022.

POWER SUPPLY PORTFOLIO ACTIVITIES

STEC’s diverse portfolio of owned generation resources and long-term purchases was well positioned to meet the challenges posed by tightening ERCOT reserve margins, Real Time Market volatility, and higher pricing in the Day Ahead Market. In particular, STEC’s owned peaking resources felt the effects of the uptick in market pricing. The Sam Rayburn Power Plant generated 231,145 MWh, or 56.3% more than in 2017. Similarly, STEC’s quick-start reciprocating engine-based resources at the Pearsall and Red Gate Power Plants generated at levels exceeding 2017 by 53.3% and 60.9%, respectively. The strategic investment in these flexible technologies enabled STEC to protect its Members from the volatil-ity present in the spring and allowed STEC to capitalize on high prices present during July. STEC’s peaking resources also showed remarkable resiliency through the summer months, as the threat of market blow-outs brought on by diminishing grid reserves forced STEC to defer some preventative and corrective maintenance. Collectively, STEC’s peaking resources maintained an availability of 98% throughout June, July, and August. This high availability level included maintenance shifted to nighttime periods to maximize resource availability over peak.

Generation from STEC’s contracted wind resources stayed compara-tively stable versus 2017, with only a combined 3.7% increase in energy output. However, total renewable portfolio generation was down 6% as output from STEC’s hydro resources decreased versus 2017.

Although there were no major additions to the portfolio as a whole during 2018, STEC began construction in late 2018 of a series of four independent distributed generation solar installations rated at just under 1MW each and split equally between the Red Gate and Pearsall Power Plants. The installations will be connected at distribution voltage and are anticipated to complete construction in early 2019. Solar energy generated by the arrays will be divided equally among STEC’s eight member distribution cooperatives. POWER SUPPLY MAJOR MAINTENANCE ACTIVITIES

In 2018, after over approximately eight years of operation, the Pearsall Power Plant began a series of major engine overhauls. The overhauls were the first in a multi-year effort to complete major maintenance on all 24 engines. Three overhauls were completed in 2018, with a fourth started near the end of the year. The overhauls performed in 2018 were primarily conducted by plant personnel and involved approximately six weeks of maintenance and inspec-tions. The work performed should allow the engines to run at least 16,000 hours until the next scheduled overhaul.

Only in their second full year of operation, several engines at the Red Gate Power Plant eclipsed the 5,000 cumulative running hour mark by the close of 2018. While no major maintenance intervals have yet been reached, plant personnel were busy with minor scheduled and reoccurring preventative maintenance. Even these minor maintenance activities were disrupted by the need to remain available through the extraordinarily capacity-tight summer. Similarly, no major planned maintenance occurred at the Sam Rayburn Power Plant, however, one gas turbine experienced a several week outage in the spring to correct an internal oiling issue. The turbine was repaired and placed back into service before the summer. During the fall, STEC, like other generators in ERCOT, dealt with backlog of maintenance activities postponed due to the summer conditions and began planning for similar constraints in 2019.

1312

Natural Gas65.0%

Renewable14.4%

Coal20.6%

RESOURCES BY FUEL TYPE

RESOURCES BY PLANT NAMEPLATE

CAPACITY

Amistad Falcon Hydro 5.2%

Javelina II Wind PPA3.9%

Penascal Wind PPA5.3%

Red GatePower Plant

11.8%

Pearsall Power Plant

14.0%

Sam Rayburn Combined Cycle

10.2%

Calpine PPA29.0% San Miguel PPA

20.6%

-

406

307

465429

942

1,036

1,242

1,072

1,148

1,303 1,340

1,4021,478

1,696

200

400

600

800

1,000

1,200

1,400

1,600

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

PEAK DEMAND(MW)

1514

The Power Delivery Division consists of 146 positions based at Sam Rayburn, Pearsall, and Donna that are responsible for the design, maintenance, operation and repair of 2,203 miles of transmission line, 204 stations, and 21 microwave communica-tions sites.

Early in January 2018, the division set several ambitious goals that were aimed at improving reliability or increasing efficien-cy. In particular, four stations were temporarily removed from service with loads served through mobile substations in order to perform comprehensive maintenance where aging structur-al steel, insulators, arrestors, bushings and air switches were replaced and all equipment was tested. A pilot project was completed where 20 concrete poles were used to replace condemned wood poles to determine the cost of the increased reliability. A new project coordination process was implement-ed to increase the effectiveness of interdepartmental commu-nication and cooperation in performing substation upgrades and installations. Other notable goal achievements were the wildlife cover-up installed at 14 stations in an effort to reduce outage time, and the expansion of real time wind and weather information to a total of 14 sites.

The division continued its focus on improving work place safety by coordinating with the Safety Department to develop new substation safety requirements in compliance with OSHA regulations. In particular, focus was placed on fall protection and energized work processes in substation work and training personnel in their applications.

In January, just a few months following Hurricane Harvey, the system was hit by the worst ice storm, from an outage stand-point, in at least 20 years. Wharton County, Jackson and Medina were the most impacted, with other Members suffering effects of the storm as well. The ice and steady high winds caused extensive conductor galloping and resulted in structure damages that caused significant outages over a period of several hours. The crews worked in those difficult conditions to minimize the outage times, make repairs and attempt to dampen the galloping.

Additional emphasis was placed on equipment maintenance in 2018. Work focused on equipment with expired maintenance intervals such as reclosers and regulators and on devices that were not performing well such as pole mounted switches.

Even with attention shifted toward maintenance, an impressive number of substation projects were completed in 2018. West Edinburg was expanded to accommodate two additional 138

kV line terminals and major transformer upgrades were completed at Hi-Line and Val Verde. The Gillrina substation was completed, Simmons City was modified to accommodate a 69 kV circuit switcher, and the D’Hanis transformer was upgraded. Extensive work was performed at Salt Dome to add 69 kV line terminals and transmission breakers were added at Kittie West. Power Delivery departments worked together with the Power Supply Division to modify the station service at Sam Rayburn to expand service to the G3 Powerhouse.

Several significant transmission line projects were completed, including replacement of the Clemville 69 kV tap line with a concrete-pole, double-circuit line to provide loop feed to the Salt Dome and Clemville station loads. The Mathis to George West 69 kV line was upgraded with concrete poles and 795 ACSR to alleviate line overloads. Transmission crews rehabili-tated 55 miles of 69 kV line by changing out corroded pole top hardware, cross arms and insulators. The sections completed were Ferris Switch to D’Hanis, 17 miles between Bruni and Freer, and El Campo to Nada. One hundred thirteen transmis-sion poles were condemned and replaced and anti-perch devices were installed on six miles of 69 kV lines.

System Operators worked non-stop to schedule transmission outages in front of the maintenance and capital projects and Engineering stayed in front of projects that will be completed in the future. It took all Power Delivery Division Departments from all three offices to coordinate 14 installations of mobile substations and temporary delivery points in order to complete the projects and to make emergency repairs. -

50

100

150

200

250

300

350

400

450

500

316

2011

302

2012

350

2013

422

2014

401

2015

430

2016

470

2017

306

2010

294

2009

505

2018

MEMBER ENERGY SALES(MILLION $)

2,477

4,439 4,483 5,014 5,048

5,499

6,321

6,8707,368

7,839

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

MEMBER ENERGY SALES(GWH)

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

8,327

2018

1514

The Power Delivery Division consists of 146 positions based at Sam Rayburn, Pearsall, and Donna that are responsible for the design, maintenance, operation and repair of 2,203 miles of transmission line, 204 stations, and 21 microwave communica-tions sites.

Early in January 2018, the division set several ambitious goals that were aimed at improving reliability or increasing efficien-cy. In particular, four stations were temporarily removed from service with loads served through mobile substations in order to perform comprehensive maintenance where aging structur-al steel, insulators, arrestors, bushings and air switches were replaced and all equipment was tested. A pilot project was completed where 20 concrete poles were used to replace condemned wood poles to determine the cost of the increased reliability. A new project coordination process was implement-ed to increase the effectiveness of interdepartmental commu-nication and cooperation in performing substation upgrades and installations. Other notable goal achievements were the wildlife cover-up installed at 14 stations in an effort to reduce outage time, and the expansion of real time wind and weather information to a total of 14 sites.

The division continued its focus on improving work place safety by coordinating with the Safety Department to develop new substation safety requirements in compliance with OSHA regulations. In particular, focus was placed on fall protection and energized work processes in substation work and training personnel in their applications.

In January, just a few months following Hurricane Harvey, the system was hit by the worst ice storm, from an outage stand-point, in at least 20 years. Wharton County, Jackson and Medina were the most impacted, with other Members suffering effects of the storm as well. The ice and steady high winds caused extensive conductor galloping and resulted in structure damages that caused significant outages over a period of several hours. The crews worked in those difficult conditions to minimize the outage times, make repairs and attempt to dampen the galloping.

Additional emphasis was placed on equipment maintenance in 2018. Work focused on equipment with expired maintenance intervals such as reclosers and regulators and on devices that were not performing well such as pole mounted switches.

Even with attention shifted toward maintenance, an impressive number of substation projects were completed in 2018. West Edinburg was expanded to accommodate two additional 138

kV line terminals and major transformer upgrades were completed at Hi-Line and Val Verde. The Gillrina substation was completed, Simmons City was modified to accommodate a 69 kV circuit switcher, and the D’Hanis transformer was upgraded. Extensive work was performed at Salt Dome to add 69 kV line terminals and transmission breakers were added at Kittie West. Power Delivery departments worked together with the Power Supply Division to modify the station service at Sam Rayburn to expand service to the G3 Powerhouse.

Several significant transmission line projects were completed, including replacement of the Clemville 69 kV tap line with a concrete-pole, double-circuit line to provide loop feed to the Salt Dome and Clemville station loads. The Mathis to George West 69 kV line was upgraded with concrete poles and 795 ACSR to alleviate line overloads. Transmission crews rehabili-tated 55 miles of 69 kV line by changing out corroded pole top hardware, cross arms and insulators. The sections completed were Ferris Switch to D’Hanis, 17 miles between Bruni and Freer, and El Campo to Nada. One hundred thirteen transmis-sion poles were condemned and replaced and anti-perch devices were installed on six miles of 69 kV lines.

System Operators worked non-stop to schedule transmission outages in front of the maintenance and capital projects and Engineering stayed in front of projects that will be completed in the future. It took all Power Delivery Division Departments from all three offices to coordinate 14 installations of mobile substations and temporary delivery points in order to complete the projects and to make emergency repairs. -

50

100

150

200

250

300

350

400

450

500

316

2011

302

2012

350

2013

422

2014

401

2015

430

2016

470

2017

306

2010

294

2009

505

2018

MEMBER ENERGY SALES(MILLION $)

2,477

4,439 4,483 5,014 5,048

5,499

6,321

6,8707,368

7,839

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

MEMBER ENERGY SALES(GWH)

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

8,327

2018

In 2018, Accounting was active in the successful amendment and extension of the syndicated credit facility led by NRUCFC with the participating bank group as well as the line of credit with CoBank. The syndicated facility was extended five years to February, 2023 and the committed funds were reduced from $350,000,000 to $250,000,000 to better fit anticipated borrow-ing needs and to incur lower costs. The $25,000,000 CoBank line was extended three years to September, 2021.

In August, 2018, $100,000,000 private placement bonds were issued to provide funds to repay the outstanding balance of the syndicated facility.

At December 31, 2018, there was no outstanding balance of the $250 million revolving line of credit with the NRUCFC bank

group. There were no outstanding draws from the $25 million line of credit with CoBank. Principal payments on long-term debt during 2018 totaled $9,414,246 to NRUCFC, $4,166,667 to CoBank and $21,088,237 to bond holders.

Sales to Member Cooperatives increased to 8,326,894 mega-watt hours in 2018 from 7,838,509 megawatt hours in 2017 for an increase of 488,385 megawatt hours or 6.23 percent. The average price paid by Members in 2018 was 60.34 mills per kilowatt hour compared to 59.20 mills per kilowatt hour in 2017, for an increase in per kWh cost of 1.93 percent. Total billed Member revenues for 2018 were $505,313,388, a 7.60% increase over 2017 revenues. The increase in Member revenues is mostly due to greater volume of sales in 2018.

Total assets decreased from $1,405,884,368 in 2017 to $1,404,012,079 in 2018 for a 0.13 percent decrease. Total Equity to Assets Ratio in 2018 was 23.39 percent compared to 21.05 percent in 2017, due to increased equity from margins. Total electric plant decreased to $1,173,434,379 in 2018 from $1,175,733,886 in 2017. Plant and work in progress increased by $35,648,039, and accumulated depreciation increased by $37,947,546.

Interest income for 2018 totaled $1,776,723 which was an increase of $354,807 from 2017. STEC’s cash and cash equivalents as of December 31, 2018 totaled $68,186,529 compared to $67,033,966 for December 31, 2017.

Net deferred credits used to decrease Member rates for 2018 totaled $2,838,986 compared to $5,550,350 for 2017. South Texas Electric Cooperative recorded capital credits from San Miguel Electric Cooperative, Inc. of $1,325,207 in 2018 and $272,380 in 2017.

Net margins for South Texas Electric Cooperative, Inc., for 2018 were $32,462,191 compared to $26,674,056 in 2017. As in previous years, for 2018, the Board acted to reduce generation rates for the final quarter with the objective of decreasing estimated year end debt service coverage toward the midpoint of the range specified in STEC’s financial policy of 1.3 to1.5 times.

TOTAL REVENUEALLOCATION

ELECTRIC PLANT IN SERVICE(MILLION $)

$484

$756$791 $833

$983$1,071

$1,133

$1,371

$

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

2009 2010 2011 2012 2013 2014 2015 2016

$1,449 $1,468

2017 2018

1716

Total Margins 6.12%

Taxes 1.55%

Administra�ve and General Expense 3.19%

Power Plant 4.44%

Deprecia�on Expense 7.59%

Transmission and Distribu�on Expense 3.77%

Interest Expense 8.12%

WHOLESALE POWER COSTSPER MWH

$66.26

$68.34

$62.94

$59.85

$63.71

$66.74

$59.30

$58.70

$59.91

$60.68

$58.00

$60.00

$62.00

$64.00

$66.00

$68.00

$70.00

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Fuel and Purchased Power 65.22%

In 2018, Accounting was active in the successful amendment and extension of the syndicated credit facility led by NRUCFC with the participating bank group as well as the line of credit with CoBank. The syndicated facility was extended five years to February, 2023 and the committed funds were reduced from $350,000,000 to $250,000,000 to better fit anticipated borrow-ing needs and to incur lower costs. The $25,000,000 CoBank line was extended three years to September, 2021.

In August, 2018, $100,000,000 private placement bonds were issued to provide funds to repay the outstanding balance of the syndicated facility.

At December 31, 2018, there was no outstanding balance of the $250 million revolving line of credit with the NRUCFC bank

group. There were no outstanding draws from the $25 million line of credit with CoBank. Principal payments on long-term debt during 2018 totaled $9,414,246 to NRUCFC, $4,166,667 to CoBank and $21,088,237 to bond holders.

Sales to Member Cooperatives increased to 8,326,894 mega-watt hours in 2018 from 7,838,509 megawatt hours in 2017 for an increase of 488,385 megawatt hours or 6.23 percent. The average price paid by Members in 2018 was 60.34 mills per kilowatt hour compared to 59.20 mills per kilowatt hour in 2017, for an increase in per kWh cost of 1.93 percent. Total billed Member revenues for 2018 were $505,313,388, a 7.60% increase over 2017 revenues. The increase in Member revenues is mostly due to greater volume of sales in 2018.

Total assets decreased from $1,405,884,368 in 2017 to $1,404,012,079 in 2018 for a 0.13 percent decrease. Total Equity to Assets Ratio in 2018 was 23.39 percent compared to 21.05 percent in 2017, due to increased equity from margins. Total electric plant decreased to $1,173,434,379 in 2018 from $1,175,733,886 in 2017. Plant and work in progress increased by $35,648,039, and accumulated depreciation increased by $37,947,546.

Interest income for 2018 totaled $1,776,723 which was an increase of $354,807 from 2017. STEC’s cash and cash equivalents as of December 31, 2018 totaled $68,186,529 compared to $67,033,966 for December 31, 2017.

Net deferred credits used to decrease Member rates for 2018 totaled $2,838,986 compared to $5,550,350 for 2017. South Texas Electric Cooperative recorded capital credits from San Miguel Electric Cooperative, Inc. of $1,325,207 in 2018 and $272,380 in 2017.

Net margins for South Texas Electric Cooperative, Inc., for 2018 were $32,462,191 compared to $26,674,056 in 2017. As in previous years, for 2018, the Board acted to reduce generation rates for the final quarter with the objective of decreasing estimated year end debt service coverage toward the midpoint of the range specified in STEC’s financial policy of 1.3 to1.5 times.

TOTAL REVENUEALLOCATION

ELECTRIC PLANT IN SERVICE(MILLION $)

$484

$756$791 $833

$983$1,071

$1,133

$1,371

$

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

2009 2010 2011 2012 2013 2014 2015 2016

$1,449 $1,468

2017 2018

1716

Total Margins 6.12%

Taxes 1.55%

Administra�ve and General Expense 3.19%

Power Plant 4.44%

Deprecia�on Expense 7.59%

Transmission and Distribu�on Expense 3.77%

Interest Expense 8.12%

WHOLESALE POWER COSTSPER MWH

$66.26

$68.34

$62.94

$59.85

$63.71

$66.74

$59.30

$58.70

$59.91

$60.68

$58.00

$60.00

$62.00

$64.00

$66.00

$68.00

$70.00

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Fuel and Purchased Power 65.22%

20 INDEPENDENT AUDITOR’S REPORT

FINANCIAL STATEMENTS

21 BALANCE SHEETS

22 STATEMENTS OF REVENUE AND PATRONAGE CAPITAL

23-24 STATEMENTS OF CASH FLOWS

25-41 NOTES TO FINANCIAL STATEMENTS

1918

20 INDEPENDENT AUDITOR’S REPORT

FINANCIAL STATEMENTS

21 BALANCE SHEETS

22 STATEMENTS OF REVENUE AND PATRONAGE CAPITAL

23-24 STATEMENTS OF CASH FLOWS

25-41 NOTES TO FINANCIAL STATEMENTS

1918

The accompanying notes are an integral part of these financial statements.

Balance Sheets December 31, 2018 and 2017

2120

The accompanying notes are an integral part of these financial statements.

Balance Sheets December 31, 2018 and 2017

2120

The accompanying notes are an integral part of these financial statements. The accompanying notes are an integral part of these financial statements.

Statements of Cash FlowsYears Ended December 31, 2018 and 2017

Statements of Revenue and Patronage Capital Years Ended December 31, 2018 and 2017

2322

The accompanying notes are an integral part of these financial statements. The accompanying notes are an integral part of these financial statements.

Statements of Cash FlowsYears Ended December 31, 2018 and 2017

Statements of Revenue and Patronage Capital Years Ended December 31, 2018 and 2017

2322

The accompanying notes are an integral part of these financial statements.

Notes to Financial Statements December 31, 2018 and 2017

Statements of Cash Flows, Continued Years Ended December 31, 2018 and 2017

2524

The accompanying notes are an integral part of these financial statements.

Notes to Financial Statements December 31, 2018 and 2017

Statements of Cash Flows, Continued Years Ended December 31, 2018 and 2017

2524

Notes to Financial Statements, Continued December 31, 2018 and 2017 December 31, 2018 and 2017

Notes to Financial Statements, Continued

2726

Notes to Financial Statements, Continued December 31, 2018 and 2017 December 31, 2018 and 2017

Notes to Financial Statements, Continued

2726

Notes to Financial Statements, Continued December 31, 2018 and 2017

Notes to Financial Statements, Continued December 31, 2018 and 2017

2928

Notes to Financial Statements, Continued December 31, 2018 and 2017

Notes to Financial Statements, Continued December 31, 2018 and 2017

2928

Notes to Financial Statements, Continued December 31, 2018 and 2017

Notes to Financial Statements, Continued December 31, 2018 and 2017

3130

Notes to Financial Statements, Continued December 31, 2018 and 2017

Notes to Financial Statements, Continued December 31, 2018 and 2017

3130

Notes to Financial Statements, Continued December 31, 2018 and 2017

Notes to Financial Statements, Continued December 31, 2018 and 2017

3332

Notes to Financial Statements, Continued December 31, 2018 and 2017

Notes to Financial Statements, Continued December 31, 2018 and 2017

3332

Notes to Financial Statements, Continued December 31, 2018 and 2017

Notes to Financial Statements, Continued December 31, 2018 and 2017

3534

Notes to Financial Statements, Continued December 31, 2018 and 2017

Notes to Financial Statements, Continued December 31, 2018 and 2017

3534

Notes to Financial Statements, Continued December 31, 2018 and 2017

Notes to Financial Statements, Continued December 31, 2018 and 2017

3736

Notes to Financial Statements, Continued December 31, 2018 and 2017

Notes to Financial Statements, Continued December 31, 2018 and 2017

3736

Notes to Financial Statements, Continued December 31, 2018 and 2017

Notes to Financial Statements, Continued December 31, 2018 and 2017

3938

Notes to Financial Statements, Continued December 31, 2018 and 2017

Notes to Financial Statements, Continued December 31, 2018 and 2017

3938

Notes to Financial Statements, Continued December 31, 2018 and 2017

Notes to Financial Statements, Continued December 31, 2018 and 2017

4140

Notes to Financial Statements, Continued December 31, 2018 and 2017

Notes to Financial Statements, Continued December 31, 2018 and 2017

4140

4342

4342