2004 Annual Report
Financial Information
- Management's Discussion and Analysis
- Consolidated Balance Sheets
- Consolidated Income Statements
- Consolidated Statements of Cash Flows
- Consolidated Statements of Equity
- Notes to Consolidated Financial Statements
Management's Discussion and Analysis
The following section should be read in conjunction with the consolidated financial statements and accompanying footnotes of Golden Spread Electric Cooperative, Inc. and its wholly-owned affiliates, GS Electric Generating Cooperative, Inc. (GSEGC) and Oklaunion Electric Generating Cooperative, Inc. (OEGC).
The matters discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements. Statements made that are not historical facts are forward-looking and are based on estimates, forecasts, and assumptions involving risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. Any forward-looking statements are based on information as of the date of this report.
NET MARGINS
As a cooperative, rather than a typical stockholderheld, investor-owned utility, Golden Spread’s income statement and statement of cash flows, do not reflect the true profitability and full financial capability of Golden Spread. This occurs because the Golden Spread Board of Directors authorizes discretionary rate credits for a portion of net margins, for which such amounts are credited to members’ power bills in the succeeding year. A more meaningful analysis of the profitability of Golden Spread is represented by Golden Spread’s actual operating results, or net margins, before these discretionary credits. Net margins before rate credits are set forth in the table below:
The increase in the overall profitability of Golden Spread from 2002 through 2004 has been due to increased margins from nonmember sales. The components of net margins are set forth in the table below:
Differences in the nonmember sales margins are due to two reasons almost exclusively, the number of megawatt-hours sold to nonmembers and the prices of natural gas. Changes in the former are a function, primarily, of the energy needed to serve member loads, which reduces or increases the excess energy available to sell to SPS, and plant availability (due to outages or planned maintenance). Changes in the latter affect the associated margins due to the manner in which the split-the-savings calculations are determined; higher gas prices result in greater savings to SPS and, therefore, increased margins to Golden Spread. The impact of these two factors can be seen in the following chart:
The above table demonstrates the reasons for the fluctuations in margins from nonmember sales. Although MWh sales to members increased in 2004, the increase was due to the addition of the new members’ ERCOT loads effective July 1, 2004. The SPP loads of the original eleven members declined in 2004 from 2.8 million MWhs to 2.5 million in 2004. Comparing the annual periods, the number of megawatt-hours sold to nonmembers were very comparable in 2002 and 2003. In 2004, the decline in MWh sales to SPP members was due to a cool and wet spring and summer, decreasing irrigation sales, but increasing nonmember sales. Margins per megawatthour on the above table, correlate, for the most part, very directly to gas prices.
The variations in the net margins provided by the Administrative Charge are the result of three factors:
- The total MWh sales to members,
- The amount of the Administrative charge,
- The level of administrative and general expenses, excluding outside professional services cost which are a flow-through item in rates.
The amount of the administrative charge ($/MWh) is set in the budget to achieve a targeted level of earnings from member sales. In 2002 and 2003, the budgeted amount was established at $1 million, and in 2004, with the addition of the new members, the targeted budget amount was $1.5 million. Variations from these amounts are generally due to differences in megawatt-hour sales to members (compared to budget) or a higher or lower level of administrative and general expenses than budgeted. In 2002 and 2003, MWh sales to members were higher than budgeted, resulting in a higher level of net margins from the administrative charge than had been budgeted. In 2004, MWh sales to members were less than budgeted due to the weather conditions. As a result, the net administrative charge for 2004 was less than the budget amount.
Margins provided from GSEGC capacity charges, net of associated depreciation and interest expense increase each year due to annual contract increases in capacity charges.
The components of non-operating margins are set forth on the following table:
Interest income increased substantially in 2004 due to higher cash balances and higher rates earned on invested balances. Interest income decreased in 2002 due largely to lower interest rates, then began increasing again as Golden Spread’s liquidity increased. Other income is derived primarily from farm income earned from both the Denver City and Moore County land sites, and varies somewhat due to annual changes in the government farm program.
REVENUES, PURCHASED POWER AND FUEL COST
The increases in revenues are a function of three elements:
- Fuel cost, including fuel in purchased power,
- Member sales,
- Nonmember sales.
The table that follows shows revenues and the related margin after considering the portion of revenues that is attributable to fuel costs, including fuel in purchased power:
The fluctuations in wholesale power sales, net of related fuel costs is primarily due to changes in operating expenses (excluding fuel and purchased power) which are virtually all fully recoverable under the rate, and increased net margins. The next table shows the amounts of these components of the changes from period to period:
The other changes affecting the fluctuations are as follows:
- For 2004 compared to 2003, revenues net of fuel-related costs increased due to an increase in the base power cost (non-fuel component) due to increases in the DCE capacity charge, increased costs associated with SPS partial requirements contract (due to increase in capacity purchased, effective June 1, 2004), and the increased cost associated with the ERCOT loads that were assumed July 1, 2004.
- For the year 2003 compared to 2002, revenues, net of fuel-related costs increased due to increased base power costs associated with the DCE capacity charges (which increase annually based on the contract) and increased capacity under the SPS PR contract.
OPERATING EXPENSES, EXCLUDING FUEL AND PURCHASED POWER
Operating expenses, excluding fuel and purchased power, are summarized in the following table:
The increases in administrative and general expenses are due to an increase in office space occupied by Golden Spread, the addition of employees, along with the associated benefit costs, and increased outside services costs associated with various projects, such as the acquisition of new resources and additional services required to handle the power supply and other needs associated with the admission of new members.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2004 and December 31, 2003, Golden Spread had available cash of approximately $65 million and $55 million, respectively. In addition to the available cash, Golden Spread, through its wholly-owned affiliate GS Electric Generating Cooperative, Inc. (GSEGC), had $5.4-$5.6 million in reserve funds (i.e., debt service reserve funds, maintenance reserve funds, etc.) and $3.5 million in working capital, all of which have been excluded from the available cash balances. In addition, Golden Spread has a line of credit of $95 million (of which $10 million is reserved in connection with the term loan associated with Mustang Station) which has outstanding borrowings of $10 million at December 31, 2004.
At December 31, 2004, Golden Spread had incurred almost $20 million in costs associated with Mustang Station Unit 4, the planned 7FA peaking unit. These costs, included in construction-work-inprogress, include the costs of the General Electric generating unit and development costs. In May 2005, Golden Spread will close on a private debt placement of $55 million for the project that has an estimated total cost of $56.4 million. Upon financial closing, the proceeds will reimburse Golden Spread for the costs incurred to date and Golden Spread plans to repay the credit line borrowings with these funds. Of the total cash at December 31, 2004, approximately $43 million is held in escrow related to the potential acquisition of an interest in the Oklaunion Power Station. There are no other restrictions, limitations or pledges of any assets, other than as separately identified on the financial statements and in the footnotes.
Over the next several years, Golden Spread has plans to add several generation resources to its power supply portfolio. These resources are needed to serve the growing Southwest Power Pool (SPP) loads, for serving the ERCOT loads, all of which are currently served through market-priced purchase power contracts, and to replace the SPS partial requirements contract, for which SPS gave notice of termination effective 2012. One of Golden Spread’s goals in developing the power supply portfolio is to retain a comparable fuel mix to that represented under the current resources (approximately 60-70% coal).
Due to the significant need for capital to fund generation resources, Golden Spread plans to maintain target ratios to ensure adequate liquidity, equity, and coverages to keep pace with the need for additional debt. Use of the targeted ratios in determining annual budgets and rates, coupled with the ability of the Board of Directors to modify, if necessary, the percentage of net margins before discretionary rate credits that is retained for growth, is expected to provide Golden Spread with adequate financial resources to be able to fund all future projects with an appropriate mix of debt and equity.
Consolidated Balance Sheets
| December 31 | ||||
|---|---|---|---|---|
| 2004 | 2003 | |||
| ASSETS | ||||
| UTILITY PLANT AT COST | ||||
| Electric Plant in Service | $ | 122,740,470 | $ | 102,265,934 |
| Construction Work in Progress | 19,763,136 | - | ||
| Less: Accumulated Provision for Depreciation | 23,596,804 | 13,928,873 | ||
| $ | 118,906,802 | $ | 88,337,061 | |
| OTHER PROPERTY AND INVESTMENTS – AT COST OR STATED VALUE | ||||
| Investments in Associated Organizations | $ | 1,422,693 | $ | 994,331 |
| Land and Water Rights | 529,176 | 427,470 | ||
| Reserve Funds | 5,680,397 | 5,421,425 | ||
| $ | 7,632,266 | $ | 6,843,226 | |
| CURRENT ASSETS | ||||
| Cash | $ | 9,701,265 | $ | 5,501,711 |
| Temporary Cash Investments | 12,144,804 | 49,134,914 | ||
| Special Deposits | 3,500,000 | 3,500,000 | ||
| Restricted Cash - Escrow Deposit | 42,750,000 | - | ||
| Accounts Receivable | 45,265,967 | 32,824,355 | ||
| Prepaid Expenses and Other Current Assets | 1,761,799 | 1,903,593 | ||
| $ | 115,123,835 | $ | 92,864,573 | |
| DEFERRED CHARGES | ||||
| Debt Issuance Costs (Net of accumulated amortization of $1,118,941 in 2004 and $898,488 in 2003) | 3,290,116 | 3,510,568 | ||
| Other | 1,333,933 | - | ||
| $ | 4,624,049 | $ | 3,510,568 | |
| $ | 246,286,952 | $ | 191,555,428 | |
| EQUITIES AND LIABILITIES | ||||
| EQUITIES | ||||
| Patronage Capital | 47,284,617 | 33,700,072 | ||
| Contributed Capital | 14,484,819 | 8,837,092 | ||
| Accumulated Comprehensive Income (Loss) | (12,015,000) | (12,400,000) | ||
| $ | 49,754,436 | $ | 30,137,164 | |
| LONG-TERM DEBT | ||||
| Mortgage Notes Less Current Maturities | $ | 102,699,723 | $ | 92,008,931 |
| CURRENT LIABILITIES | ||||
| Current Maturities of Long-Term Debt | $ | 2,165,897 | $ | 1,156,532 |
| Borrowings Under Line of Credit | $ | 10,393,507 | $ | — |
| Accounts Payable | 44,732,819 | 29,299,468 | ||
| Amounts Due Members | 18,600,290 | 21,033,692 | ||
| Other Accrued Expenses | 2,190,103 | 2,423,954 | ||
| $ | 78,082,616 | $ | 53,913,646 | |
| DEFERRED CREDITS | $ | 15,750,177 | $ | 15,495,687 |
| $ | 246,286,952 | $ | 191,555,428 | |
Consolidated Income Statements
| Years Ended December 31 | ||||||
|---|---|---|---|---|---|---|
| 2004 | 2003 | 2002 | ||||
| OPERATING REVENUES | ||||||
| Wholesale Power Sales | $ | 311,785,556 | $ | 244,730,747 | $ | 181,648,345 |
| Other Operating Revenues | 3,238,686 | 198,622 | 55,669 | |||
| Total Operating Revenues | $ | 315,024,242 | $ | 244,929,369 | $ | 181,704,014 |
| OPERATING EXPENSES | ||||||
| Purchased Power | $ | 214,756,213 | $ | 167,785,538 | $ | 125,156,684 |
| Other Power Supply Expense | 412,406 | 434,614 | 300,287 | |||
| Fuel Expense | 58,772,491 | 45,422,749 | 28,771,888 | |||
| Plant Operations and Management | 1,776,636 | 1,657,671 | 1,458,185 | |||
| Plant Maintenance and Maintenance Services | 4,261,165 | 3,846,800 | 3,082,491 | |||
| Transmission Operations & Maintenance | 337,000 | — | — | |||
| Other Operating Expense | 674,500 | 630,476 | 565,441 | |||
| Administrative and General | 8,425,701 | 6,697,754 | 5,421,695 | |||
| Depreciation | 3,996,768 | 3,426,686 | 3,373,693 | |||
| Taxes Other than Income Taxes | 1,064,758 | 1,166,720 | 1,172,301 | |||
| Interest Expense - Other | 339,097 | 17,643 | 17,093 | |||
| Total Operating Expenses | $ | 294,816,735 | $ | 231,086,651 | $ | 169,319,758 |
| OPERATING MARGINS | ||||||
| Before Fixed Charges | $ | 20,207,507 | $ | 13,842,718 | $ | 12,384,256 |
| FIXED CHARGES | ||||||
| Interest on Long-Term Debt | 7,738,925 | 7,065,235 | 7,027,283 | |||
| Amortization of Debt Issuance Costs | 220,453 | 220,453 | 220,453 | |||
| OPERATING MARGINS | ||||||
| After Fixed Charges | $ | 12,248,129 | $ | 6,557,030 | $ | 5,136,520 |
| NON-OPERATING MARGINS | ||||||
| Interest and Capital Credit Income | $ | 1,141,415 | $ | 599,964 | $ | 788,788 |
| Gain/(Loss) on Retirement of Assets | 14,322 | (288,644) | — | |||
| Other Income | 180,679 | 305,775 | 190,995 | |||
| $ | 1,336,416 | $ | 617,095 | $ | 979,783 | |
| NET MARGINS | $ | 13,584,545 | $ | 7,174,125 | $ | 6,116,303 |
Consolidated Statements of Cash Flows
| Years Ended December 31 | ||||||
|---|---|---|---|---|---|---|
| 2004 | 2003 | 2002 | ||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||
| Net Margins | $ | 13,584,545 | $ | 7,174,125 | $ | 6,116,303 |
| Adjustments to Reconcile Net Margins to Net Cash Provided by Operating Activities | ||||||
| Depreciation and Amortization | 4,217,221 | 3,647,139 | 3,594,146 | |||
| Capital Credits | (104,301) | (116,199) | (136,050) | |||
| Deferred Charges | (1,333,934) | 171,255 | 1,556,855 | |||
| Deferred Credits | 639,490 | 900,934 | (1,718,363) | |||
| Accounts Receivable | (12,441,612) | (3,189,114) | (8,028,178) | |||
| Materials and Supplies | (109,923) | 31,272 | (138,821) | |||
| Prepayments and Other Current Assets | 251,717 | (564,650) | (120,517) | |||
| Payables and Accrued Expenses | 15,199,500 | 5,841,821 | 29,578 | |||
| Amounts Due to Members | (2,433,402) | 2,003,300 | 12,148,448 | |||
| (Gain)/Loss on Retirement of Assets | (14,322) | 288,644 | — | |||
| Other Changes | — | — | 103,560 | |||
| Net Cash Provided by Operating Activities | $ | 17,454,979 | $ | 16,188,527 | $ | 13,406,961 |
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||
| Additions to Utility Plant | $ | (21,027,377) | (479,454) | $ | (461,527) | |
| Land Purchase | $ | (101,706) | — | $ | — | |
| Cost of Removal of Equipment, Net of Salvage | — | (33,540) | — | |||
| Cash Placed in Escrow for Purchase of Oklaunion Investments in Associated Organizations | (42,750,000) | — | — | |||
| Investments in Associated Organizations | (324,061) | 35,992 | 546,681 | |||
| Net Cash Provided by (Used in) Investing Activities | $ | (64,203,144) | $ | (477,002) | $ | 85,154 |
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||
| Additions to Reserve Funds | $ | (258,972) | $ | (918,468) | $ | (300,687) |
| Retirement of Patronage Capital | — | (1,013,406) | (342,037) | |||
| Payments on Long-Term Debt | (1,840,133) | (1,137,182) | (505,082) | |||
| Net Borrowings Under Line of Credit | 10,393,507 | — | — | |||
| Cash Contributed by Members | 5,647,727 | 10,959,236 | — | |||
| Proceeds from Sale of Asset | 15,480 | — | — | |||
| Refund of Membership Fees | — | (1,100) | — | |||
| Net Cash Provided by (Used in) Financing Activities | $ | 13,957,609 | $ | 7,889,080 | $ | (1,147,806) |
| INCREASE IN CASH AND CASH EQUIVALENTS | (32,790,556) | 23,600,605 | 12,344,309 | |||
| CASH AND CASH EQUIVALENTS – BEGINNING OF YEAR | 54,636,625 | 31,036,020 | 18,691,711 | |||
| CASH AND CASH EQUIVALENTS – END OF YEAR | 21,846,069 | 54,636,625 | 31,036,020 | |||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | ||||||
| Interest Paid During the Year | 7,579,074 | 6,920,262 | 5,971,64 | |||
| Income Taxes Paid During the Year | — | — | — | |||
Consolidated Statements of Equity
| Years Ended December 31 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Memberships | Patronage Capital | Contributed Capital | Accumulated Comprehensive Income (Loss) | Total | ||||||
| Balance December 31, 2001 | $ | 1,100 | $ | 21,765,087 | $ | — | $ | (2,400,000) | $ | 19,366,187 |
| Net Margins – 2002 | $ | — | $ | 6,116,303 | $ | — | $ | — | $ | 6,116,303 |
| Items of Comprehensive Income (Loss) | ||||||||||
| Change in Loss on Hedging Contracts | — | — | — | (13,400,000) | (13,400,000) | |||||
| Net Comprehensive Income (Loss) | $ | — | $ | 6,116,303 | $ | — | $ | (13,400,000) | $ | (7,283,697) |
| Patronage Capital Retirement | — | (342,037) | — | — | (342,037) | |||||
| Balance December 31, 2002 | $ | 1,100 | $ | 27,539,353 | $ | — | $ | (15,800,000) | $ | 11,740,453 |
| Net Margins – 2003 | $ | — | $ | 7,174,125 | $ | — | $ | — | $ | 7,174,125 |
| Items of Comprehensive Income (Loss) | ||||||||||
| Change in Loss on Hedging Contracts | — | — | — | 3,400,000 | 3,400,000 | |||||
| Net Comprehensive Income (Loss) | $ | — | $ | 7,174,125 | $ | — | $ | 3,400,000 | $ | 10,574,125 |
| Refund of Membership Fees | (1,100) | — | — | — | (1,100) | |||||
| Patronage Capital Retirement | — | (1,013,406) | — | — | (1,013,406) | |||||
| Contribution of Capital | — | — | 8,837,092 | — | 8,837,092 | |||||
| Balance December 31, 2003 | $ | — | $ | 33,700,072 | $ | 8,837,092 | $ | (12,400,000) | $ | 30,137,164 |
| Net Margins – 2004 | $ | — | $ | 13,584,545 | $ | — | $ | — | $ | 13,584,545 |
| Items of Comprehensive Income (Loss) | ||||||||||
| Change in Loss on Hedging Contracts | — | — | — | 385,000 | 385,000 | |||||
| Net Comprehensive Income (Loss) | $ | — | $ | 13,584,545 | $ | — | $ | 385,000 | $ | 13,969,545 |
| Contribution of Capital | — | — | 5,647,727 | — | 5,647,727 | |||||
| Balance December 31, 2004 | $ | — | $ | 47,284,617 | $ | 14,484,819 | $ | (12,015,000) | $ | 49,754,436 |
Notes to Consolidated Financial Statements
1. Organization and Operations
Golden Spread Electric Cooperative, Inc. (Golden Spread) and its affiliates GS Electric Generating Cooperative, Inc. and Oklaunion Electric Cooperative, Inc. (collectively referred to as the Cooperative) are Texas cooperative corporations with headquarter facilities located in Amarillo, Texas. Through October 31, 2003, Golden Spread’s members included 11 rural electric distribution cooperatives, ten located in the Panhandle and South Plains of Texas and one located in the Panhandle of Oklahoma. Effective November 1, 2003, five additional cooperatives were accepted for membership in Golden Spread. The new members are located in the South Plains and the Edwards Plateau regions of Texas.
Through October 31, 2003, the member loads served by Golden Spread were located solely in the Southwest Power Pool. Four of the five new members operate entirely in the Electric Reliability Council of Texas. The fifth new member has 24% of its load in ERCOT and the remainder in the SPP. In addition to the five new members, two existing members assigned responsibility for their ERCOT loads (which previously were served directly by other power suppliers) to Golden Spread. As a condition of accepting responsibility to serve each of the new members and the additional loads of the existing members, Golden Spread required contributions of capital proportionate to the size of the new loads, relative to the pre-existing load service obligations of Golden Spread. Capital contributions were paid in 2003 and 2004 to fulfill this requirement. Effective July 1, 2004, the power supply contracts related to the ERCOT loads were assigned to Golden Spread. Golden Spread will assume responsibility for serving the SPP load associated with the new member on January 1, 2006.
The Cooperative is subject to the jurisdiction of the Federal Energy Regulatory Commission for corporate and rate regulation related to its activities in the SPP and is subject to the regulation of the Public Utility Commission of Texas for certain activities in both ERCOT and SPP.
The Cooperative is tax-exempt under Internal Revenue Code Section 501(c)(12) as long as 85% of its gross receipts (as defined under the Internal Revenue Code) are derived from sales to members. For the three years ended December 31, 2004, the 85% test was met. Any revenues earned in excess of costs incurred are allocated to members of Golden Spread and are reflected as patronage capital equity in the accompanying consolidated balance sheets.
2. Summary of Significant Accounting Policies
The accounting records of the Cooperative are maintained in accordance with the accounting system prescribed by the Federal Energy Regulatory Commission for electric utilities.
Principles of Consolidation
The consolidated financial statements include the accounts of Golden Spread Electric Cooperative, Inc. and its affiliates GS Electric Generating Cooperative, Inc. and Oklaunion Electric Cooperative, Inc. All intercompany transactions and balances have been eliminated in consolidation.
Operating Revenues
Revenues for wholesale power sales are billed monthly. Unbilled revenues are accrued for amounts that are recoverable under rate tariffs but not yet billed. Amounts billed to members in excess of recoverable costs under rate tariffs are accrued as a reduction of revenues and as a liability to the members. Operating revenues are also reduced for discretionary rate credits to members determined by the Board of Directors on an annual basis. (See note 8.)
Other operating revenues consist of special facilities charges billed to members for use of transmission assets, and, for the last two months of 2003 and the first six months of 2004, the proportionate share of the administrative charges (under the applicable Golden Spread tariff ) billed to the new members.
Depreciation
Depreciation of utility plant is provided using straight-line depreciation rates over the following estimated useful lives:
| Transmission Plant | 15 - 36 Years |
| Production Plant | 30 Years |
| Gas Interconnection | 15 Years |
| General Plant | 5 Years |
Debt Issuance Costs
Debt issuance costs are being amortized on a straight-line basis over the life of the underlying debt.
Cash and Cash Equivalents
For purposes of the consolidated statement of cash flows, the Cooperative considers cash and temporary cash investments as cash and cash equivalents.
Concentrations of Credit Risk
The service areas of the member cooperatives are largely dependent on agriculture and, to a lesser extent, oil and gas.
The Cooperative maintains cash balances with various financial institutions insured by the Federal Deposit Insurance Corporation up to $100,000. At times cash balances may exceed insurance coverage. The Cooperative also maintains cash balances with two cooperative banks whose deposits are not federally insured.
Investments in Associated Organizations
Investments in associated organizations primarily consist of Golden Spread’s purchase of an ownership interest in ACES Power Marketing, L.L.C. The investment in APM is accounted for using the cost method of accounting. At December 31, 2004 and 2003, Golden Spread’s investment in APM was approximately $665,000.
Use of Estimates in the Preparation of Consolidated Financial Statements
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to the 2003 and 2002 financial statement balances to conform to the 2004 presentation.
3. Utility Plant
The components of utility plant are summarized as follows:
| December 31 | ||||
|---|---|---|---|---|
| 2004 | 2002 | |||
| Plant-in-Service Land | $ | 2,826,034 | $ | 2,826,034 |
| Production Plant | 97,111,331 | 96,663,026 | ||
| Transmission Plant | 22,001,317 | 2,146,528 | ||
| General Plant | 801,788 | 630,346 | ||
| Total Electric Plant-in-Service | 122,740,470 | 102,265,934 | ||
4. Short-Term Financing
The Cooperative has a $95,000,000 line of credit for short-term financing with CFC at an interest rate determined at the date of advance. At December 31, 2004 there was $10,393,507 outstanding at an interest rate of 4.05%. At December 31, 2003 there was no amount outstanding.
5. Long-Term Debt
Long-term debt is summarized as follows:
| December 31 | ||||
|---|---|---|---|---|
| 2004 | 2003 | |||
| Variable-Rate Term Loans | $ | 91,455,600 | $ | 92,590,800 |
| 4.20% Variable-Rate Mortgage Note | 3,477,270 | — | ||
| 4.10% Fixed-Rate Mortgage Note | 1,189,644 | — | ||
| 3.75% Fixed-Rate Mortgage Note | 2,871,184 | — | ||
| 6.75% Fixed-Rate Mortgage Note | 5,528,861 | 574,663 | ||
| 6.85% Fixed-Rate Mortgage Note | 343,061 | — | ||
| $ | 104,865,620 | $ | 93,165,463 | |
| Less: Current Maturities | 2,165,897 | 1,156,532 | ||
| $ | 102,699,723 | $ | 92,008,931 | |
The variable-rate term loans were issued upon GSEGC’s purchase of Mustang Station. Under the Credit Agreement with the lending banks, substantially all the assets of GSEGC are pledged as collateral, including the generation facility, a portion of the cash balances, special deposits, and reserve balances of GSEGC totaling approximately $9,254,072 and $7,181,757 at December 31, 2004 and 2003, respectively. The debt is variable-rate debt equal to LIBOR plus an interest margin that ranged from 1.25% to 1.3% in 2002 through 2004, and that increases over time to 1.65% over the term of the loan. GSEGC had entered into agreements to hedge 85% of the outstanding principal at fixed equivalent rates ranging from 7.33% to 7.72% and increasing over time to fixed equivalent rates up to 7.9%. Effective January 1, 2002, GSEGC hedged the remainder of the debt at a fixed equivalent rate of 6.92%, increasing over time to 7.5%. Final maturity of these notes is in 2020.
The Credit Agreement contains various covenants and restrictions, including the maintenance of a debt service reserve equal to six months’ debt service requirements, maintenance of a working capital reserve of approximately $3,500,000, maintenance of a specified minimum Debt Service Coverage ratio (DSC of 1.30 was required in 2002 through 2004), and restrictions on distributions. GSEGC was in compliance with the Credit Agreement at December 31, 2004 and 2003, and has met all the requirements necessary to pay distributions to Golden Spread. Such distributions totaled $4,042,625 in 2004 and $3,884,452 in 2003. At December 31, 2004, GSEGC held in excess of $6,400,000 that was available for distribution to Golden Spread.
All of the mortgage notes are due in quarterly installments of and secured by the Cooperative’s transmission assets (with a book value of $14,114,000 and $573,400 at December 31, 2004, and 2003, respectively) and the revenues recoverable through the special facilities charges associated with the special facilities.
As of December 31, 2004, annual maturities of long-term debt for the next five years are as follows:
| 2005 | 2,165,987 |
| 2006 | 2,539,719 |
| 2007 | 2,886,609 |
| 2008 | 3,226,744 |
| 2009 | 3,435,963 |
6. Derivative Instruments
The Cooperative has entered into interest rate swap agreements to hedge against changes in floating interest rates on its financing for Mustang Station. The interest rate swap agreements effectively convert floating rates into fixed rates so that the Cooperative can predict with greater assurance what its future interest costs will be and protect itself against increases in floating rates.
The Cooperative also routinely enters into physical commodity contracts for purchases of natural gas to ensure favorable utilization of generation and production assets. Such contracts are generally eligible for the normal purchase and sales exception under SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities - An Amendment of Financial Accounting Standards Board (FASB) Statement No. 133.”
Changes in the fair value of derivative instruments designated as cash flow hedges are recorded in Accumulated Comprehensive Income (ACI) for the effective portion. As of December 31, 2004 and 2003, the entire hedge is considered effective and is recorded in ACI.
As a result of the FASB’s issuance of SFAS No. 133 Implementation Issue No. C15, as revised, the Cooperative expects that all of its capacity sales contracts will qualify for the normal purchases and sales exception provided by Implementation Issue No. C15.
The following reflects the amounts that are recorded in assets, liabilities, and in ACI at December 31, 2004 and 2003, for the Cooperative’s derivative instruments:
| December 31 | ||||
|---|---|---|---|---|
| 2004 | 2003 | |||
| Total Derivative Liabilities | $ | 12,015,000 | $ | 12,400,000 |
| Comprehensive Gain (Loss) on Cash Flow Hedges Before Reclassification Adjustment | $ | (385,000) | $ | (3,400,000) |
| Reclassification Adjustment Gain (Loss) included in Net Income | — | — | ||
| Net Comprehensive Gain (Loss) from Derivative Instruments | $ | (385,000) | $ | (3,400,000) |
The above presents the derivative assets, liabilities, and ACI pertaining to derivatives as of December 31, 2004, and 2003. Total unrealized comprehensive loss on cash flow hedges represents the cumulative effect on the Cooperative’s ACI balance from losses from effective cash flow hedges since the adoption of SFAS No. 133. For the year ended December 31, 2004, the gain from effective cash flow hedges was $385,000 resulting in a cumulative loss of $12,015,000 at December 31, 2004.
As of December 31, 2004, the maximum length of time over which the Cooperative is hedging its exposure to the variability in future cash flows for forecasted transactions is 15 years. The Cooperative expects the entire hedge to remain effective throughout the term of the related debt and does not expect to reclassify ACI into earnings in the future.
7. Pension Benefits
Golden Spread provides pension benefits for substantially all of its employees through the National Rural Electric Cooperative Association Retirement and Security Program and Savings Plan. The Retirement and Security plan is a defined benefit pension plan for which Golden Spread makes contributions to the plan equal to the amounts accrued for pension expense. In this multiemployer plan, which is available to all member cooperatives of NRECA, the accumulated benefits and plan assets are not determined or allocated separately by individual employer. Golden Spread’s contributions to the plan in 2004, 2003, and 2002, were $69,558, $59,247, and $54,378, respectively. The savings plan has been established under Code Section 401(K) of the Internal Revenue Code, as a defined contribution plan. Under the savings plan, Golden Spread matches employee contributions up to a maximum of four percent of each participating employee’s salary. Employer contributions to the plan for the years ended December 31, 2004, 2003, and 2002, were $18,882, $17,234, and $15,837, respectively.
8. Rate Matters
Under the Golden Spread tariff, Golden Spread bills its members based on estimated costs and usage. The tariff provides that there will be a reconciliation of actual costs incurred compared to the amounts billed. Any over or under recovery of costs are refunded or surcharged in the subsequent year. The Golden Spread tariff also provides that the Board of Directors, at its sole discretion, may pay to the members all or part of any distributions received from GSEGC, margins from nonmember sales, or other margins earned by Golden Spread. For the years 2004, 2003, and 2002, Golden Spread had accrued, as a reduction of revenues from members, approximately $13,900,000, $20,250,000, and $19,000,000, respectively, of which approximately $13,600,000, $14,350,000, and $11,150,000, represents discretionary rate credits for 2004, 2003, and 2002, respectively. These amounts are refunded to the members as rate credits in the succeeding year.
9. Generation
GSEGC and Denver City Energy Associates, L.L.P., an independent power producer and EWG, jointly own Mustang Station, an approximately 480 megawatt gas-fired combustion turbine generation station located near Denver City, Texas. DCEA is operating agent for Mustang Station, and the operation of the plant is governed by a Joint Operating Agreement between the two owners. Golden Spread, in its role as fuel manager, is responsible for the supply and transportation of natural gas for Mustang Station.
Mustang Station is located on land owned by Golden Spread located near Denver City, Texas. Golden Spread has leased the land to the project under two long-term leases.
Golden Spread purchases all of the Mustang Station capacity. Golden Spread has a Commitment and Dispatch Service Agreement with Southwestern Public Service Company, whereby SPS is under contract to dispatch Mustang Station on behalf of Golden Spread. The Agreement provides that SPS will conduct a joint economic dispatch of Golden Spread and SPS resources to serve combined Golden Spread and SPS loads, and determine after the fact whether sales were made by Golden Spread to SPS or by SPS to Golden Spread. Such sales are priced on a “split-the-savings” basis. Golden Spread retains the right under the agreement to schedule sales to third parties.
10. Significant Customers
In each of the three years ended December 31, 2004, 2003, and 2002, Golden Spread had two customers, whose sales volumes exceed 10% of annual wholesale power sales, including Golden Spread’s member, South Plains Electric Cooperative and SPS. Sales to SPEC represented 12%-13% of both megawatt hour sales and revenues in each of the years. Sales to SPS under the C & D represented almost 47% of megawatt hour sales and 44% of revenues in 2004, 45% of megawatt hour sales and 43% of revenues in 2003, and 45% of megawatt hour sales and 40% of revenues in 2002.
11. Commitments and Contingencies
Golden Spread purchases a portion of its wholesale power and energy from SPS on a partial requirements basis under a Power Sales Agreement (PSA) with a rolling term of 10 years. The PSA provides for a specified megawatt purchase by the Cooperative, with annual adjustments under certain specified conditions. Under the PSA, Golden Spread purchased 285 megawatts through May 2003, 310 megawatts through May 2004, and 330 megawatts thereafter. Effective, June 1, 2005, Golden Spread’s entitlement will increase to 355 megawatts. In 2002, SPS served notice to Golden Spread of termination of the contract effective in 2012.
Under purchase power agreements with DCEA and GSEGC, Golden Spread is obligated to purchase all of the capacity of the generation project described in Note 9.
The power supply contracts related to the ERCOT loads of Golden Spread’s new members and the assumption of additional loads of existing members were assigned to Golden Spread effective July 1, 2004. These contracts are with American Electric Power and TXU. Each of the contracts has varying terms.
In 2001, Golden Spread filed a complaint with the FERC to recover from SPS amounts that were in dispute between the parties with respect to the Commitment and Dispatch Service Agreement, specifically concerning implementation of the agreement by SPS, including calculation of prices under the split-the-savings formula. SPS filed an answer denying Golden Spread’s position and subsequently filed a complaint against Golden Spread claiming that Golden Spread had failed to fulfill certain of its operation obligations under the agreement. Golden Spread filed an answer denying SPS’s complaint. FERC consolidated the complaints, as requested by both parties and, in 2003 the dispute was resolved with a payment by SPS of $5,000,000, representing additional margins on sales to SPS. The settlement payment is included in operating revenues in the accompanying 2003 consolidated income statement.
For the period from January 2001, through May 2001, there was a failure of the Mustang Station steam turbine-generator that resulted in lost sales to SPS under the Commitment and Dispatch Service Agreement and increased costs for replacement power purchases. The Cooperative had claims pending against DCEA and the insurance company providing business interruption coverage. In late 2002, Golden Spread reached a preliminary settlement with the insurance company regarding the claimed damages during the insured period of the outage. In early 2003, the insurance carrier paid $8,551,000 in full settlement of the claim. Of this amount, approximately $2,562,000 represented a reduction in fuel expense, recorded in 2002, that was refunded to the members in 2003. The remaining amount of $5,989,000 represented the estimated margins from nonmember sales that would have been earned had the outage not occurred, and is included in the accompanying 2002 consolidated income statement as operating revenues. In conjunction with the settlement, Golden Spread and DCEA resolved all claims for the period from March 1, 2001, through May 30, 2001.
Claims are pending against DCEA with respect to DCEA’s failure to supply energy at the contractually defined combined cycle heat rate during the 30- day insurance deductible period and during other outages, DCEA’s failure to reimburse Golden Spread for replacement power during certain outages, and DCEA’s failure to provide spinning reserves, as required by the PPA. On May 29, 2003, Golden Spread filed a petition against DCEA in Potter County District Court, seeking relief and declaratory orders concerning these contract breaches. DCEA has filed an answer and counterclaim seeking recovery of payments withheld by Golden Spread. The case is in discovery and scheduled for trial in October 2005. Upon resolution of these claims, reduced expense may result that has not been recorded in the accompanying financial statements. If DCEA prevails in its counterclaim, Golden Spread would be required to pay amounts withheld, which have been accrued as expense in the accompanying consolidated financial statements.
At December 31, 2004, Golden Spread had provided irrevocable letters of credit, aggregating $11,000,000, to secure fuel purchases for Mustang Station.
12. Related Party Transactions
From time to time the Cooperative rents an airplane for transportation needs from Top Prop Leasing, Inc. (Top Prop). Top Prop is wholly owned by Robert W. Bryant, president and general manager of Golden Spread. Transactions between the Cooperative and Top Prop are consummated on terms equivalent to those that prevail in arm’s length transactions.
For the years ended December 31, 2004, 2003, and 2002, the Cooperative paid charges totaling $45,200, $80,200, and $45,640, respectively, for rentals from Top Prop.
13. Disclosures about Fair Value of Financial Instruments
Many of the Cooperative’s financial statements include references to amounts that lack an available market with similar terms, conditions, and maturities as those reflected in the carrying amount recorded. Accordingly, assumptions, estimations, and present value calculations were used for purposes of this disclosure. Estimated fair value has been determined by calculating the present value of financial instruments using the best available data.
Fair value for some amounts carried in the financial statements has not been calculated. The recorded book value for temporary investments approximates fair value given the short period to maturity. Long-term variable interest notes reprice frequently at market rates; therefore, the carrying amounts approximate fair value. Hedges used to offset the variable nature of these notes are recorded in accumulated comprehensive income.
The estimated fair value of the Cooperative’s financial instruments at December 31, 2004, is as follows:
| Carrying Value | Fair Value | |||
|---|---|---|---|---|
| CFC Fixed-Rate Long-Term Debt | $ | 9,932,750 | $ | 9,387,490 |
The fair value of the Cooperative’s CFC fixed rate long-term debt is calculated by computing the present value of the individual notes to the next repricing date. The discount rate used is the current CFC fixed interest rate available for long-term debt.
14. Pending Acquisition of New Generation
On January 30, 2004, Golden Spread entered into a contract with AEP Texas Central Company (TCC), to purchase its 7.81% ownership interest in the Oklaunion Power Station, a 690 megawatt coal-fired generating station located near Vernon, Texas. On January 30, 2004, Golden Spread placed in escrow a cash deposit for the full amount of the purchase price of $42.75 million (including fuel, materials and supplies inventory). Oklaunion is located in the ERCOT West Zone and, if the contract is honored, the 54 MWs acquired in this transaction will be used to serve a portion of the base load requirements of Golden Spread’s ERCOT loads.
Golden Spread’s contract to purchase TCC’s Oklaunion interest is subject to certain contractual rights of first refusal held by co-owners of Oklaunion. Two co-owners, Oklahoma Municipal Power Authority (OMPA) and the City of Brownsville, have sought to exercise their first refusal rights and TCC has entered into separate contracts to sell its interest in Oklaunion to each of them. Golden Spread has filed suit in state district court in Dallas alleging that neither co-owner has effectively exercised its first refusal rights. Among other things, the suit seeks a declaratory judgment that Golden Spread’s contract to purchase TCC’s interest in Oklaunion remains valid and enforceable. OMPA and Brownsville have sought to have their contracts declared valid and filed counterclaims against Golden Spread.
After several months of discovery, all parties to the lawsuit filed motions for summary judgment. In April 2005, the court granted some of the motions filed by Golden Spread and denied all other motions. The Court’s ruling, however, is interlocutory and does not dispose of all the issues in the case, which remains set for trial in July 2005.