2006 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 provides an overview of the financial condition and results of operations of Golden Spread Electric Cooperative, Inc. and its wholly-owned affiliates, GS Electric Generating Cooperative, Inc. (GSEGC), Mid-Tex Generation and Transmission Electric Cooperative, Inc. (Mid-Tex), Oklaunion Electric Generating Cooperative, Inc. (OEGC), and Yoakum Electric Generating Cooperative, Inc. (YEGC).
The matters discussed in Management’s Discussion and Analysis contain forward-looking statements that are based on estimates, forecasts, and assumptions involving risks and uncertainties that could cause actual results or outcomes to differ 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
Due to its cooperative ownership, Golden Spread’s income statement and statement of cash flows may not reflect its full financial capability and profitability. This is due to Golden Spread’s practice, prior to 2005, to return to its members a portion of the margins earned on an annual basis through discretionary rate credits. Discretionary rate credits reduced net margins in the year authorized and were credited to members’ power bills in the succeeding year. A more meaningful analysis of the profitability of Golden Spread is represented by the actual operating results, or net margins, before discretionary rate credits. Net margins before rate credits are set forth in the table below:
The changes in the overall profitability of Golden Spread from 2004 through 2006 have primarily been due to changes in margins from nonmember sales, as set forth in the table below:
Differences in the nonmember sales margins are due to variations in the number of megawatt-hours sold to non-members and changes in the price of natural gas. Changes in the number of megawatt-hours sold to nonmembers is a function of the energy needed to serve member loads in the Southwest Power Pool (SPP), plant availability (due to outages or planned maintenance), and market conditions. Changes in natural gas prices affect the associated margins due to the pricing of sales made to SPS on split-the-savings calculations; higher gas prices result in greater savings to SPS and, therefore, increased margins to Golden Spread. Conversely, lower gas prices result in reduced savings and decreased margins to Golden Spread. The impact of these two factors can be seen in the following chart:
The above table demonstrates a significant decline in megawatt-hour sales to nonmembers in 2006 as compared to 2004 and 2005. This is due to increased member sales in the SPP and an outage and planned maintenance at Mustang Station in November and December of 2006. These two months are typically two of the highest months in the volume of megawatt-hour sales to nonmembers. Also, the change in natural gas prices has affected the level of margins from nonmember sales. Particularly in 2005, the higher natural gas prices had a significant effect on the associated margins from nonmember sales.
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 ($/MWh)
- The level of administrative and general expenses, excluding outside professional services cost which are a flow-through item in rates.
From 2005 to 2006, the rate charged to members declined but the decline in the rate was largely offset by higher megawatt-hour sales to members. From 2004 to 2005, the increase is due to a higher volume of megawatt-hour sales to members as shown in the table below:
The increased volume of sales to members is primarily attributable to the addition of five new members in 2003. Effective July 1, 2004, Golden Spread began serving new member loads located in the Electric Reliability Council of Texas (ERCOT). Effective January 1, 2006, Golden Spread began serving new member loads in the SPP. Approximately one-half of the increase in the SPP load in 2006 resulted from the new member loads. The remaining one half of the 2006 increase in the SPP loads and the 2005 increase was due to hot and dry weather conditions in the service territory.
GSEGC capacity charges to Golden Spread increase each year pursuant to the terms of the GSEGC Unit Power Sale Contract, and contribute to increased margins to the extent they exceed associated depreciation and interest expense.
Other Income consists primarily of interest earned on cash balances, which increased substantially in 2006 and 2005 due to higher average cash balances and higher rates earned on invested balances.
Revenues, Purchased Power and Fuel Cost
The changes in revenues are a function of four elements:
- Changes in fuel cost, including fuel in purchased power
- Changes in volume of member sales
- Changes in volume of nonmember sales
- Changes in nonfuel operating expenses
Changes in volume of sales and fuel costs are typically prime determinants of changes in operating revenues in a utility. However, because Golden Spread’s formulary tariff results in the recovery of all operating expenses, changes in all components of operating expenses affect changes in revenues.
The table that follows shows revenues and the related margin after deducting the portion of revenues that is attributable to fuel costs, including fuel in purchased power:
The following table shows the fluctuations in wholesale power sales, net of related fuel costs, and the components of the changes from period to period:
The other changes affecting the fluctuations are increases in the base power costs (non-fuel component) attributable to increases in the DCEA capacity charges and increased costs associated with the SPS partial requirements contract (due to increases in capacity purchased effective June 1 of each year and an increase in the PR rate effective July 1, 2006). Also, part of the increase in 2005 is having a full year of the base power costs associated with the ERCOT loads.
Operating Expenses, excluding Fuel and Purchased Power
Operating expenses, excluding fuel and purchased power, are summarized in the table below:
The increase in plant maintenance and maintenance services in 2006 is due to an outage and planned maintenance at Mustang Station. The increases in administrative and general expenses are due to increases in office space occupied by Golden Spread, the salary and benefit costs associated with additional employees, and increased outside services costs associated with various projects, such as the acquisition of new resources. The 2006 increases in depreciation and other operating expenses are due to the addition of Mustang Station Unit 4, which began commercial operation effective May 1, 2006.
Liquidity and Capital Resources
At December 31, 2006 and 2005, Golden Spread had available cash of approximately $72 million and $87 million, respectively. In addition to the available cash, Golden Spread, through its wholly-owned affiliate GS Electric Generating Cooperative, Inc., had $5.0-$5.8 million in reserve funds (i.e., debt service reserve fund and maintenance reserve funds) and $3.5 million in a required cash working capital deposit, 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 had outstanding borrowings of $13 million at December 31, 2006. Of the total cash at December 31, 2006 and 2005, $42.75 million was held in escrow related to the potential acquisition of an ownership 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. Subsequent to December 31, 2006, the escrowed funds for Oklaunion were released to Golden Spread.
The decline in available cash from 2005 to 2006 is due to Golden Spread’s internal financing of the construction costs associated with Mustang Station Unit 5 and the purchase of an additional combustion turbine-generator and steam turbine-generator (for future use) in 2006. At December 31, 2006, Golden Spread had invested almost $50 million in these assets that was derived from internal financing. Golden Spread expects to issue long term debt in the summer of 2007 to provide permanent financing for these projects.
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) and ERCOT loads, to replace expiring purchased power contracts, and to reduce exposure to volatile wholesale market pricing. Golden Spread’s goal is to develop a power supply portfolio that includes a mix of renewable, gas-fired and coal-fired resources that will supply its members with reliable and reasonably priced power.
Golden Spread maintains target financial ratios that are deemed appropriate to ensure adequate liquidity, equity, and coverages to support the additional debt that will be needed to fund generation resources. The target ratios influence management and the Board of Directors in establishing annual budgets, in setting rates, and in determining the percentage of net margins that will be retained as equity, rather than returned to members as discretionary rate credits. Golden Spread’s financial policies are intended to enable the financing of all future projects with an appropriate mix of debt and equity, while maintaining strong financial ratios.
Consolidating Balance Sheets
Consolidating Income Sheets
Statements of Cash Flow
Statements of Equity
Consolidating Balance Sheets
