2005 Annual Report

Year in Review

2005 SALES RESULTS

2005 Sales Results Energy sales for 2005 totaled 6.6 billion kilowatt-hours, including sales of 2.8 billion kilowatt-hours to nonmembers. Energy sales to members totaled 3.8 billion kilowatt-hours, an increase of 22.7 percent over sales to members in 2004. Golden Spread began serving the ERCOT loads of five new member systems and two existing members in 2004. The increase in 2005 sales over 2004 values is primarily a result of providing service to those member systems for the full year in 2005.

Member peak demand (coincident) in 2005 increased to 941 megawatts, up 69 megawatts from the 2004 peak. The average cost to members of power purchased in 2005 from Golden Spread was $69.25 per megawatt-hour. Golden Spread continued to serve as agent for Lyntegar’s Southwest Power Pool area loads in 2005. Lyntegar began taking full requirements service for its SPP loads from Golden Spread on January 1, 2006.

The total 2005 purchases of Golden Spread’s members was 4.2 billion kilowatt-hours with a coincident peak of 1,063 megawatts, including the Lyntegar SPP loads.

Monthly average prices for natural gas fuel consumed at Mustang Station ranged from approximately $5.57/MMBtu in January to $12.38/MMBtu in December. Mustang Station is a fuel efficient generating plant and these gas prices resulted in fuel costs ranging from approximately $40.37 to $88.75 per megawatt-hour. Energy generated at Mustang Station is used to serve Golden Spread’s SPP loads during Golden Spread’s high load periods. At other times Golden Spread supplies its load entirely with energy purchased under a partial requirements wholesale power 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 2005 hit a record high of more than $480 million, an increase of $165 million, or 52%, over 2004 sales of $315 million. This increase was due to a 22.7% increase in MWh sales to members, and an increase in natural gas prices. Golden Spread’s ERCOT loads, for which 2005 was the first full year that Golden Spread served those loads, represented 1,017,000 megawatt-hours, or 27% of the total sales to members. A significant component of the increase in revenues was a $62.7 million or 44% increase, in sales to nonmembers which totaled almost $205 million in 2005 compared to $141.8 million in 2004. The increase in nonmember sales is due exclusively to higher natural gas prices, as energy sold to nonmembers remained flat at 2.8 million megawatt-hours in 2005 and 2004. The resulting increase in margins from nonmember sales, coupled with the elimination of rate credits in 2005, resulted in net margins of $47.2 million, compared to $13.6 million in net margins in 2004.

Rate Credits to Members

Golden Spread’s net margins before discretionary rate credits were $47.2 million in 2005, compared to $27.2 million in 2004, a 74% increase. In 2004, $13.6 million was accrued as rate credits and paid to the members in 2005. The rate credits represented an effective reduction in power costs of $4.76 per MWh for 2004. As a result of Golden Spread’s forecasted capital needs for generation resources, discretionary rate credit refunds from 2005 margins were eliminated.

Subsequent to year-end, Golden Spread retired patronage capital represented by 1994's net margins of $2.01 million. This amount was paid to the members in February 2006.

Mustang Station Unit 4 Achieves Substantial Completion

Mustang Station Unit 4, a simple cycle gas-fired generating unit was constructed adjacent to Mustang Station. This new peaking unit achieved substantial completion on March 18, 2006. Mustang Power Partners, a joint venture of TIC - The Industrial Company and Lauren Engineers and Constructors, Inc., provided engineering, procurement and construction services for the project. Mustang Station Unit 4 had been scheduled for completion in April of 2006. In November of 2005, Golden Spread entered into agreements with the owners of Mustang Station which permit the sharing of certain services and facilities between the two adjacent facilities.

Performance test results on the new unit demonstrated a capacity of 152.5 megawatts (summer rating) or 7.5 megawatts better than guaranteed, a heat rate of 10,176 Btu/kWh, which is 400 Btu/kWh better than guaranteed, and stack emissions that are lower than guaranteed by the manufacturer, General Electric Company.

Mustang Station Unit 4 will be transferred to Yoakum Electric Generating Cooperative, Inc., an affiliate formed by Golden Spread for the purpose of owning the facility. Golden Spread will purchase the full output of the facility from YEGC. North American Energy Services Company is providing operating and maintenance services for Mustang Station Unit 4, and Denver City Energy Associates, L.P. is operating agent for the facility. ACES Power Marketing, LLC (owned by 15 electric cooperatives, including Golden Spread) provides fuel procurement and management services. NAES, DCE and ACES provide similar services for Mustang Station. Mustang Station Unit 4 and Mustang Station obtain fuel through a common header system, and operation of the two generation facilities will be coordinated.

Oklaunion Power Station

In June of 2004, Golden Spread filed an action for declaratory judgment in state district court in Dallas County, Texas. Docketed as Cause No. 04-06040, Golden Spread Electric Cooperative, Inc. v. AEP Texas Central Company, Oklahoma Municipal Power Authority, and City of Brownsville, the action seeks a determination that Golden Spread has the right to purchase approximately 54 MW ownership interest in Oklaunion Power Station, a 690 megawatt coal-fired generating station located near Vernon, Texas. In January 2004, following its selection as the winning bidder in an auction conducted by AEP Texas Central Company, Golden Spread executed a contract to purchase TCC’s 7.81 per cent ownership share of Oklaunion. The terms of the auction provided that the successful bidder would only be deprived of its right to purchase the Oklaunion interest upon the failure to achieve certain regulatory approvals or upon the timely and effective exercise of a right of first refusal by an existing owner. In reliance of those assurances, Golden Spread bid $42.75 million to purchase the interest. TCC accepted Golden Spread's bid and, in January of 2004, executed a purchase and sale agreement with Golden Spread.

The ownership agreement among the existing Oklaunion owners, including Brownsville and OMPA, grants a right of first refusal to the other owners if any owner agrees to sell its Oklaunion interest. After TCC executed the purchase and sale agreement with Golden Spread for its interest in Oklaunion, it notified Brownsville and OMPA of their opportunity to acquire that interest on the same terms that it had agreed to sell its interest to Golden Spread. Both Brownsville and OMPA purported to exercise their rights of first refusal pursuant to the terms of their ownership agreement.

Subsequently, TCC executed purchase and sale agreements with each of Brownsville and OMPA and notified Golden Spread that it would not complete the sale to Golden Spread. Upon investigation, Golden Spread determined that neither Brownsville nor OMPA had effectively exercised their right of first refusal and therefore Golden Spread concluded that its contract with TCC remained valid and enforceable. Accordingly, Golden Spread sought a declaratory judgment against TCC, Brownsville, and OMPA. In the lawsuit, Golden Spread seeks specific performance of its January 2004 contract with TCC. Golden Spread also asserted tortuous interference by OMPA with Golden Spread’s contract with TCC. OMPA counter-claimed against Golden Spread, alleging that, in bringing the lawsuit, Golden Spread had tortiously interfered with its contract (entered into in May) to purchase TCC's interest.

On April 18, 2005, the state district court heard arguments on three motions for summary judgment filed by Golden Spread and on cross-motions filed by TCC, Brownsville, and OMPA. After hearing arguments, the court orally indicated an intention to grant Golden Spread's First Motion for Summary Judgment, which sought summary judgment on the grounds that under the terms of the ownership agreement and the requirements of Texas law, Brownsville and OMPA had to match the Golden Spread offer to perfect the exercise of their first right of refusal. However, Oklahoma law precluded OMPA from matching all the terms and conditions on which Golden Spread had agreed to purchase the Oklaunion interest. Under Texas law, Brownsville was not precluded from matching all the terms and conditions on which Golden Spread had agreed to purchase the Oklaunion interest, but Brownsville failed to do so in the manner required by Texas law. Golden Spread argued that OMPA and Brownsville had not effectively exercised their rights of first refusal, and that, therefore, their actions did not form an enforceable contract with TCC before the deadline for exercising their preferential rights, and thus OMPA's and Brownsville's subsequent contracts with TCC were subordinate to Golden Spread's. The court denied all the other motions for summary judgment.

Subsequently, AEP, OMPA and Brownsville sought reconsideration of the court's oral ruling. After a further hearing on July 11, 2005, the court granted Golden Spread's First Motion for Summary Judgment (on its claims against OMPA and Brownsville), denied all other motions, and entered a written order memorializing its decision. Subsequently, all other claims were severed from the declaratory judgment claims so that the court's decision on the motions for summary judgment could be appealed.

TCC, Brownsville, and OMPA appealed to the Dallas Court of Appeals, challenging the district court's decision to grant Golden Spread's First Motion for Summary Judgment and to deny their motions. In its response, Golden Spread appealed the district court's denial of its Second and Third Motions for Summary Judgment, which gives the court alternative grounds on which to affirm the district court's judgment. The Dallas Court of Appeals heard oral argument in January 2006 and is expected to make a decision by mid-year. Whatever its decision, Golden Spread expects that the losing party or parties will seek review by the Texas Supreme Court.

New Generation Resources

To meet the future load growth of its Members and to replace expiring purchase power agreements, Golden Spread continues to pursue the acquisition of additional generation resources, including participation in the development and ownership of new coalfired generation facilities, in both the Southwest Power Pool and the Electric Reliability Council of Texas.

DCEA Litigation

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 a co-owner of Mustang Station and sells its entire ownership entitlement (approximately 240 MW of power and associated energy) to Golden Spread under the PPA.

Golden Spread’s petition seeks relief with respect to DCEA’s failure to supply energy to Golden Spread at the contractually defined heat rates, its failure to reimburse Golden Spread for replacement power that DCE failed to supply, and for its failure to supply spinning reserves as required by the PPA. DCEA filed an answer and counterclaim seeking recovery of payments withheld by Golden Spread.

On August 30, 2005, DCEA and Golden Spread both filed motions for partial summary judgment. On November 15, 2005, the court rendered judgment without discussion granting DCEA's motion for partial summary judgment and denying Golden Spread's motion for partial summary judgment. Golden Spread intends to file a motion for a new trial at the appropriate time, and if that motion is not granted will appeal the decision to the 7th Court of Appeals in Amarillo, Texas. An appeal of the decision will trigger a de novo review.

In July 2005, Golden Spread became aware of certain billing practices of DCE that Golden Spread determined were inconsistent with the requirements of the Joint Operating Agreement for Mustang Station (“JOA”) and the PPA. The effect of these practices is to over allocate costs under the JOA to Golden Spread’s affiliate, GS Electric Generating Cooperative, Inc., a co-owner of Mustang Station, and to subject Golden Spread to a double charge under the PPA. DCE has asserted that its actions are consistent with both the JOA and the PPA. These issues have been submitted to binding arbitration, with a hearing scheduled to commence on May 15th.

Golden Spread and other Cooperatives Challenge Base Rates and SPS Fuel Adjustment Clause Procedures In Multiple Proceedings

On November 2, 2004, Golden Spread, Lyntegar Electric Cooperative, Inc., Farmers’ Electric Cooperative, Inc. of New Mexico, Lea County Electric Cooperative, Inc., Central Valley Electric Cooperative, Inc., and Roosevelt County Electric Cooperative, Inc. filed a complaint against Southwestern Public Service Company at the Federal Energy Regulatory Commission (Docket No. EL05-19-000). That complaint alleges that SPS’ current rates exceed the prudently incurred and properly allocated costs for cost-based service to the requirements customers, including a reasonable rate of return, of providing requirements power supply service, and that SPS has historically violated and continues to violate the applicable fuel charge adjustment clause (FCAC) provisions of the FERC-filed rate schedules and the FERC’s FCAC regulations. The cooperatives submitted a cost of service analysis based on historical calendar year 2003 data showing overcharges for partial requirements service to Golden Spread in excess of $3.2 million annually and to Lyntegar, a member of the full requirements customer class, in excess of $689,000 annually.

On the same day the complaint was filed, SPS filed with FERC (Docket No. ER05-168-000) proposed changes in the FCAC applicable to certain wholesale requirements and interruptible customers, including Golden Spread and Lyntegar. In the filing, SPS purported to revise its FCAC to conform to a more recent version of the Commission’s current regulations. The cooperatives filed a joint motion to intervene, motion to reject, protest, and alternative request for hearing and maximum suspension. The cooperatives alleged that SPS’ new FCAC violates FERC’s regulations due to: the inclusion of the cost of purchases from qualifying facilities, including the costs of purchases other than those with identifiable fuel costs; the inclusion of a market value component for energy purchases originally made for purposes other than to serve obligation load but later used in serving the Company’s obligation load; the inclusion of energy charges for any purchase including, without limitation, the total energy costs associated with purchases from any wind energy projects; and the inclusion of the cost for transmission losses purchased from the Southwest Power Pool. The cooperatives also argued that the filing was deficient because it failed to comply with the Commission’s rate change and FCAC regulations relating to cost support. In the alternative, the cooperatives moved for a hearing, maximum five month suspension, and an investigation of the FCAC.

On December 29, 2004, FERC issued an order setting SPS’ proposed FCAC filing for hearing and suspending the rate to become effective (subject to refund) on January 1, 2005. FERC also consolidated the matter with the cooperatives’ complaint (Docket No. EL05-19-000), which had been set for hearing in an order issued on December 21, 2004, and established settlement procedures for the cases.

Settlement procedures were unsuccessful and the matter proceeded to administrative litigation. A trial before Deputy Chief Administrative Law Judge William J. Cowan of the FERC was held from February 24, 2006 to March 8, 2006. The cooperatives presented testimony regarding cost-of-service issues and FCAC issues relating to past violations of the filed rate and new issues associated with SPS’ proposed changes, as clarified during the discovery process.

The Administrative Law Judge is expected to issue his Initial Decision in June 2006. It is anticipated that one or more parties will take exception to the Initial Decision and a final decision will be made by the Commission. Once a final determination has been made by the Commission, the rates resulting from this complaint case, if lower than the rates in effect when the complaint was filed, will become effective as of January 1, 2005.

During the pendency of the complaint case described above, on December 1, 2005, SPS submitted to the FERC (Docket No. ER06-274-000) a request to increase rates and change rate design for seven of its cost-based wholesale customers, Golden Spread, the five full requirements customers, and Public Service Company of New Mexico, an interruptible customer. SPS sought approximately a $4 million total rate increase when compared to present revenues, of which $3,937,587 (approximately 97 % of the total increase to its customers) was to be recovered from Golden Spread. SPS also proposed certain rate design changes to convert its base energy charge fuel costs from zero to approximately $38/MWh. SPS requested an effective date of February 1, 2006 for the proposed changes in rates.

On December 15, 2005, Golden Spread filed a motion to intervene in the proceeding and on December 22, 2005, filed a protest, request for summary disposition, evidentiary proceedings, and maximum suspension. Golden Spread identified several errors in the cost-of-service accompanying SPS’ filing, as well as many areas of increased expenses that appeared suspect. Golden Spread demonstrated that a rate decrease, not a rate increase, was warranted. Additionally, many of the same rate making issues currently being litigated in the Docket No. EL05-19 et al litigation (see above) were implicated by SPS’ filing. Golden Spread sought the maximum five month suspension permitted by the Federal Power Act, giving the new proposed rates an effective date of July 1, 2006 (not February 1, 2006), and subject to suspension and refund thereafter.

On January 31, 2006, FERC issued an order setting the matter for hearing, suspended the rates for the maximum fivemonth period (July 1, 2006) and allowing rates to become effective subject to refund thereafter. FERC also directed SPS to make a compliance filing in 30 days to correct the errors it had conceded in its answer to protests by Golden Spread and other parties. The Commission also directed the parties to settlement procedures.

Settlement procedures were initiated in February, 2006, and are ongoing. SPS made the compliance filing, which reduced the overall rate increase by over $1 million. Insofar as the proposed rates still represent a significant increase to Golden Spread, not only over present rates, but also the lower rates that are likely to be produced by the complaint proceeding. Golden Spread will be very active in the negotiation of new rates, and if unsuccessful, the litigation of this proceeding.

ERCOT Loads

In July 2004, Golden Spread undertook the responsibility to provide full requirements power service to five new and two existing member systems within the Electric Reliability Council of Texas reliability region. Golden Spread registered and filed for membership with ERCOT. Golden Spread qualified as a Load Serving Entity and became a full voting member of ERCOT within the cooperative segment.

Golden Spread supported several different transmission projects proposed in ERCOT which, if built, would reduce future costs to deliver power to its member systems. These projects will also enable Golden Spread to participate in the development of new generation resources within ERCOT.

The Public Utility Commission of Texas, the ERCOT staff and market participants continued to develop the Texas Nodal Team project. This effort will result in a totally new market design in ERCOT. Currently the market is “zonal,” however, with changes supported by the PUCT, will transition to a “nodal” market, or one that charges loads a “locational marginal price.” Advocates expect this to reduce the cost of electric delivery over the transmission system. The PUCT approved the nodal market design and established January 2009 as the date of transfer. Golden Spread intervened in this case to protect its ability to aggregate its loads in ERCOT into a single load zone when and if it becomes necessary to manage market price exposure.

Texas legislators and regulators continue to encourage the development of renewable resources such as wind generation. The 2005 legislative session resulted in the initial development of competitive renewable energy zones (CREZ) throughout the state. ERCOT is studying the issue and is planning to make a recommendation to the PUCT by the end of 2006 on the number and location of CREZs in Texas. A proposal is being considered to construct large transmission circuits from the ERCOT grid to the Texas Panhandle, which is located within the Southwest Power Pool reliability area, to enable new wind energy resources to be delivered directly to ERCOT loads. Current plans do not show any interconnection of these circuits with the SPP transmission grid.