2004 Annual Report

Year in Review

2004 SALES RESULTS

Energy sales for 2004 totaled 5.9 billion kilowatt hours, including sales of 2.9 billion kilowatt hours to nonmembers. Energy sales to members totaled 3.0 billion kilowatt hours, an increase of 7.1 percent over sales to members in 2003. Member peak demand (coincident) in 2004 increased to 872 megawatts, up 161 megawatts from the 2003 peak. The average cost to members of power purchased in 2004 from Golden Spread was $55.36 per megawatt hour, exclusive of credits attributable to 2004 operations which Golden Spread is paying during 2005. Golden Spread began providing service to its five new member systems for ERCOT area loads under the dedicated service rate starting July 1, 2004. Golden Spread continues to serve as agent for Lyntegar’s Southwest Power Pool area loads.

The total 2004 purchases of Golden Spread’s members was 3.9 billion kilowatt hours with a coincident peak of 1,001 megawatts.

Monthly average prices for natural gas fuel per MMBtu consumed at Mustang Station ranged from approximately $4.75/MMBtu in September to $6.35/MMBtu in November. Mustang Station is a fuel efficient generating plant and these gas prices resulted in fuel costs ranging from approximately $35.28 to $46.92 per megawatt hour. Energy generated at Mustang Station usually is used to serve Golden Spread loads only during Golden Spread’s high load periods. At other times Golden Spread supplies its loads entirely with energy purchased under a contract with Southwestern Public Service Company, which typically has lower overall fuel costs due to a large amount of low cost coal generated electricity. During its low load periods, Golden Spread sells energy generated at Mustang Station to SPS on a split the savings basis.

FINANCIAL PERFORMANCE

Revenues in 2004 hit a record high of $315 million. The revenue increase of 29%, over 2003 sales of $245 million, was due primarily to the increase in prices of natural gas and increased MWh sales resulting from the addition of the five new members. The ERCOT loads of the five new members, which Golden Spread began serving effective July 1, 2004, represented 504,108 MWhs, or 16.5% of the total sales to members. (The SPP loads of Lyntegar will not be served by Golden Spread until January 1, 2006, after termination of Lyntegar’s contract with SPS.) A significant component of the increase in revenues was a $30 million, or a 24% increase, in sales to nonmembers which totaled $141.8 million in 2004 compared to $111.7 million in 2003. The increase in nonmember sales is due to an increase in the MWhs sold to nonmembers, which also increased 24%, increasing from 2.3 million MWhs in 2003 to almost 2.9 million MWhs in 2004. The increase in nonmember sales and resulting margins from nonmember sales resulted in the largest level of net margins in Golden Spread’s history. Net margins were $13.6 million in 2004, an increase of 89% over 2003 net margins of almost $7.2 million.

RATE CREDITS TO MEMBERS

The higher level of net margins before rate credits in 2004 enabled Golden Spread to maintain a comparable level of rate credits to members, despite a change in policy established by the Board of Directors to retain one-half of net margins to support new capital projects and refund one-half as rate credits, compared to prior policy of retaining only one-third and refunding two-thirds to members. Golden Spread’s net margins before discretionary rate credits were $27.2 million, a 26% increase over 2003 net margins before rate credits of $21.5 million. In 2004, $13.5 million was accrued as rate credits to be paid to the members in 2005. The rate credits represent an effective reduction in power costs of $4.69 per MWh for 2004 for members served under the System Service Rate (SSR).

Subsequent to year-end, the Board of Directors voted to retire patronage capital represented by 1993’s net margins of $1.6 million. This amount was paid to the members in February 2005.

GOLDEN SPREAD RECEIVES INVESTMENT-GRADE CREDIT RATING

In 2004, Golden Spread undertook a significant endeavor that opens up additional and more economical capital markets for Golden Spread for financing of additional power resources. Golden Spread engaged Fitch Ratings, Inc. to perform a credit review and provide Golden Spread, and the investment community, with an objective assessment of Golden Spread’s credit strengths and weaknesses. The culmination of the process is a published writeup of Golden Spread’s operations, management, financial ratios, and other indicators of Golden Spread’s financial capability. The rating was issued in February 2005, with Golden Spread receiving an Acredit rating.

ADDITIONAL CAPITAL CONTRIBUTIONS RECEIVED FROM NEW MEMBERS

In 2004, the Board of Directors voted unanimously to create a single system-wide rate that is applicable to all member loads, whether the loads are located in ERCOT or the Southwest Power Pool. The combined rate, the System Service Rate (SSR) results in a pooling of all power resources and risks, with the combined costs allocated to each member based on a combination of demand and energy. The creation of a combined SSR provides Golden Spread with increased flexibility in purchasing or constructing new resources, as resources can be located in either the SPP or ERCOT, with all members benefitting from the economics of the resource.

To facilitate a combined SSR, the five new members were required to buy-in to Mustang Stationrelated assets, to equalize the equity investment of all members. This resulted in capital contributions of $5.59 million in 2004 related to the ERCOT loads. Effective, January 1, 2006, when Golden Spread commences service to the Lyntegar SPP loads, the total contributed capital associated with the combined SSR buy-in will be $7.8 million, bringing the total capital contributions associated with the new members to a total of almost $17 million.

OKLAUNION POWER STATION

In June of 2004, Golden Spread brought suit against AEP Texas Central Company (TCC), the City of Brownsville, Texas, and the Oklahoma Municipal Power Authority (OMPA) for actions pertaining to the proposed sale of a portion of Oklaunion Power Station. Golden Spread was the successful bidder when TCC (formerly Central Power and Light Company) auctioned its 7.81 percent ownership share of Oklaunion, a 690 megawatt coal-fired generating station located near Vernon, Texas. Three AEP subsidiaries and two other companies jointly own the plant. In addition to the share of the plant owned by TCC, AEP Texas North Company (formerly West Texas Utilities Company) owns 54.7 percent of the facility and AEP Public Service Company of Oklahoma owns 15.6 percent. Oklahoma Municipal Power Authority owns 11.7 percent of the facility and the City of Brownsville, Texas, acting through the Brownsville Public Utilities Board, owns 10.2 percent of the facility. AEP Public Service Company of Oklahoma operates the facility.

When it began its auction for the Oklaunion interest, TCC represented that the successful bidder would not be deprived of its right to purchase the Oklaunion interest except upon the failure to achieve certain regulatory approvals or upon the valid exercise of a right of first refusal by an existing owner. In reliance of those assurances, Golden Spread successfully bid for the Oklaunion interest, and executed on January 30, 2004, an agreement to purchase the interest for $42.75 million. TCC and Golden Spread have since acquired all necessary regulatory approvals.

The ownership agreement among the current Oklaunion owners allows them to exercise a right of first refusal if an owner agrees to sell its Oklaunion interests. On April 16, 2004, OMPA purported to exercise a right of first refusal. On April 28, 2004, Brownsville also purported to exercise this right.

In Cause No. 04-06040, Golden Spread Electric Cooperative, Inc. v. AEP Texas Central Company, City of Brownsville, and Oklahoma Municipal Power Authority, now pending in the F-116th Judicial District of Dallas County, Texas, Golden Spread is seeking a declaratory judgment that Brownsville and OMPA failed to effectively exercise their rights of first refusal to purchase TCC’s interest in Oklaunion, and that Golden Spread is entitled to specific performance of its January 2004 contract with TCC to purchase that interest. Golden Spread has also alleged that, by entering into subsequent contracts with TCC on the basis of which TCC refused to close on its contract with Golden Spread, OMPA and Brownsville tortiously interfered with Golden Spread’s contract with TCC.

OMPA counterclaimed against Golden Spread, alleging that Golden Spread tortiously interfered with its September 2004 contract with TCC by contracting to purchase TCC’s Oklaunion interest and by bringing the lawsuit. In response, Golden Spread has brought a counterclaim against OMPA seeking damages under a statute prohibiting groundless and harassing litigation. Golden Spread has reached an agreement with Brownsville to dismiss the tortious interference claims against one another.

Early this year, Golden Spread amended its pleadings to allege that certain provisions in Texas and Oklahoma law prevented Brownsville and OMPA from accepting all the terms and conditions of TCC’s offer and thus neither had effectively exercised their rights of first refusal.

Motions for summary disposition were filed by all parties and argued in March 2005. 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.

MUSTANG STATION UNIT 4

In 2004, Golden Spread purchased a new General Electric 7FA combustion turbine-generator from Empresa Energética de Mato Grosso do Sul S.A.-Enersul that was surplus to this Brazilian utility’s needs. Golden Spread also purchased a new Areva generation step-up transformer that was surplus to Duke Energy’s needs. Golden Spread is moving forward to construct a 145 MW (summer rating) simple cycle gas-fired generating facility adjacent to the existing Mustang Station. The facility will be owned by Yoakum Electric Generating Cooperative, Inc., an affiliate formed by Golden Spread for the purpose of constructing and owning the facility. Golden Spread will purchase the full output of the facility from Yoakum EGC.

Mustang Power Partners, a joint venture of TIC - The Industrial Company and Lauren Engineers and Constructors, Inc., will provide engineering, procurement and construction services for the facility. Commercial operation is scheduled no later than April 2006. On January 10, 2005, the Texas Commission on Environmental Quality issued an Air Quality Permit for construction of the facility. It is anticipated that the new facility will share certain services with the existing Mustang Station.

DCEA/GS LAWSUIT

On May 29, 2003, Golden Spread filed a petition against Denver City Energy Associates, L.P. in Potter County District Court, 108th Judicial District, seeking relief and declaratory orders concerning DCEA’s breach of a Power Purchase Agreement. DCEA is co-owner of Mustang Station and supplies approximately 240 MW of power and associated energy to Golden Spread under the PPA from Mustang Station or other replacement sources. Golden Spread’s petition seeks relief with respect to DCEA’s failure to supply energy at the contractually defined combined cycle heat rate during certain Mustang Station outages when the steam turbine-generator was not available, DCEA’s failure to reimburse Golden Spread for costs incurred to obtain replacement power during certain Mustang Station outages, and DCEA’s failure to provide spinning reserves as required by the PPA.

DCEA has filed an answer and counterclaim seeking recovery of payments withheld by Golden Spread. The case is scheduled to go to trial in October 2005.

TRANSFER OF TRANSMISSION/SUBSTATION FACILITIES

Effective January 1, 2004, Golden Spread acquired approximately $14 million of transmission and substation assets from its member, South Plains Electric Cooperative. A Special Facilities Agreement between Golden Spread and South Plains governs ownership and maintenance of the lines and substations. Operational details are addressed in an Operations and Maintenance Agreement with South Plains, pursuant to which South Plains will continue to operate and maintain the facilities. Costs associated with the assets are charged to South Plains by Golden Spread through Rider A of the Golden Spread-South Plains Wholesale Power Contract.

Golden Spread and another member, Coleman County Electric Cooperative, are in the process of effectuating transfer of Coleman’s transmission and substation facilities under a similar arrangement. Golden Spread and Coleman will enter into a Special Facilities Agreement and an Operations and Maintenance Agreement similar to those Golden Spread entered into with South Plains, and related costs will flow through to Coleman under Rider A of the Golden Spread- Coleman County Wholesale Power Contract. Other Golden Spread members are considering a similar transfer of transmission and substation assets.