Year in Review
Energy sales for 2006 totaled 6.5 billion kilowatthours, including sales of 1.6 billion kilowatt-hours to nonmembers. Energy sales to members totaled 4.9 billion kilowatt-hours, an increase of 31.3 percent over sales to members in 2005. Lyntegar began taking full requirements service for its Southwest Power Pool loads from Golden Spread on January 1, 2006. Approximately fifty percent of the 2006 increase in member sales is attributable to providing full requirements service to Lyntegar’s SPP load. Member peak demand (coincident) in 2006 increased to 1,222 megawatts, up 281 megawatts from the 2005 peak. The average cost to members of power purchased in 2006 from Golden Spread was $69.44 per megawatt-hour, up from $69.25 per megawatt-hour in 2005.
Monthly average prices for natural gas fuel consumed at Mustang Station ranged from approximately $4.74/MMBtu in September to $7.86/ MMBtu in December. Mustang Station is a fuel efficient generating plant and these gas prices resulted in fuel costs ranging from approximately $34.87 to $70.15 per megawatt-hour. Energy generated at Mustang Station is used to serve Golden Spread’s SPP loads during high load periods. At other times during 2006 Golden Spread supplied its SPP 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 low load periods, Golden Spread sells energy generated at Mustang Station to SPS on a split the savings basis.
Financial Performance
Revenues in 2006 were more than $436 million, a decrease of $44 million, or 10%, as compared to 2005 sales of $480 million. This decrease was due to a 44.6% decrease in nonmember MWh sales, a decrease in natural gas prices and an extended maintenance outage at Mustang Station. This also resulted in a reduction in net margins for 2006 as compared to 2005. Net margins in 2006 were $25.2 million, a 46.7% reduction as compared to 2005 net margins of $47.2 million.
Rate Credits to Members
Golden Spread’s net margins before discretionary rate credits were $25.2 million in 2006 compared to $47.2 million in 2005, a 47% decrease. In 2004, $13.5 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. Discretionary rate credit refunds have been discontinued to allow Golden Spread to accumulate equity to support its forecasted capital needs for generation resources. Subsequent to the end of the year, Golden Spread retired patronage capital represented by 1995 net margins of $2.11 million and a pro-rata portion of contributed capital of $0.81 million. This amount was paid to the members in February 2007.
Fitch Rating
Fitch has affirmed the “A-” senior secured rating on Golden Spread’s $55 million 2005 private placement notes. The rating outlook is stable. Golden Spread Purchases Turbine-Generators and Transformer
In September of 2006, Golden Spread purchased two General Electric 7FA combustion turbine- generators and one General Electric steam turbine-generator, each with auxiliary equipment, from Termogaucha-Usina Termeletrica S/A, a Brazilian company with corporate offices in the City of Porto Alegre, State of Rio Grande do Sul, Brazil (TGA). As part of the transaction, TGA assigned to Golden Spread contracts for purchase of the equipment from General Electric International, Inc. (GE), contracts for storage with GE and with Cooper/T. Smith Stevedoring, and a preservation-maintenance agreement with GE. All of the equipment was new and unused and had been maintained under GE supervision in storage facilities located in Houston, Texas and Toronto, Canada. One of the two combustion turbine-generators is being installed as Mustang Station Unit 5. The other combustion turbine-generator and the steam turbine-generator remain in storage. Golden Spread in 2006 also purchased a 18- 230 kV, 132/176/220 MVA generator step up transformer and a 230-4.16 kV, 12/16/20 MVA auxiliary transformer from Equisales Associates, Inc. for installation at Mustang Station Unit 5. The transformers were manufactured by GE PROLEC.
Mustang Station Unit 5 and the Ranger Units Golden Spread moved forward in 2006 with construction of a second simple cycle gas-fired generating unit, Mustang Station Unit 5, located adjacent to and west of Mustang Station Unit 4, also a simple cycle gas-fired generating station which achieved substantial completion on March 18, 2006. Mustang Station Unit 5 is scheduled to achieve substantial completion in May 2007, in time to meet summer peak loads. Unit 5 Mustang Power Partners Joint Venture, a joint venture of TIC - The Industrial Company and Lauren Engineers and Constructors, is providing engineering, procurement and construction service for the project.
Golden Spread is negotiating agreements with the owners of Mustang Station which will permit the sharing of services and facilities with Mustang Station. Services and facilities also are shared with Mustang Station Unit 4.
Mustang Station Unit 5 is a 150 MW (summer rating) simple cycle generating facility consisting of one General Electric 7FA combustion turbinegenerator, an LCI starting system, a 230 kV substation and associated auxiliary facilities. A new fuel gas header is being added at the Mustang Station site to serve Mustang Station Unit 4 and Mustang Station Unit 5. Subject to completion of joint sharing agreements, Mustang Station Unit 5 will also be able to obtain gas through the Mustang Station fuel gas header.
Ownership of Mustang Station Unit 4 and Mustang Station Unit 5 will be transferred by Golden Spread to Yoakum Electric Generating Cooperative, Inc. (YEGC), an affiliate formed by Golden Spread, and Golden Spread will purchase the full output of the facility from YEGC. North American Energy Services Company will provide operating and maintenance services for Mustang Station Unit 5. Golden Spread anticipates that Denver City Energy Associates, L.P. will be operating agent for the facility. ACES Power Marketing, LLC (owned by 15 electric cooperatives, including Golden Spread) will provide fuel procurement and management services. North American, DCEA and ACES provide similar services for Mustang Station and Mustang Station Unit 4.
Golden Spread in 2006 also purchased four nominally rated 1.25 MW diesel-fueled generating units designated Ranger Units 1, 2, 3 and 4. The Ranger Units are Duetz Diesel Power Modules. The units are being installed approximately eight miles south of Allison, Texas, in the service area of Golden Spread member Greenbelt Electric Cooperative. The Ranger Units, which will be in service prior to the 2007 peak season, will be used to maintain reliability during high load periods until necessary transmission upgrades can be completed in the area. Once the transmission upgrades have been completed, the Ranger Units will continue to provide peak load support and, if necessary, can be relocated to provide reliability support in other transmission constrained areas.
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 sought a determination that Golden Spread had the right to purchase approximately a 54 MW ownership interest in Oklaunion Power Station, a 690- megawatt coal-fired generating station located near Vernon, Texas (Oklaunion).
Golden Spread was the winning bidder of an auction conducted by AEP Texas Central Company (TCC) for sale of its 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 on those assurances, Golden Spread bid $42.75 million to purchase the interest. TCC accepted Golden Spread's bid and, in January of 2004, following Golden Spread's payment of the $42.75 million purchase price into escrow, 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 and, subsequently, TCC executed purchase and sale agreements with both Brownsville and OMPA. TCC then 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 sought specific performance of its January 2004 contract with TCC. Golden Spread also asserted tortious interference by Brownsville and OMPA with Golden Spread's contract with TCC. Brownsville and OMPA each counter-claimed against Golden Spread, alleging that, by bringing the lawsuit, Golden Spread had tortiously interfered with their contracts (entered into in May and September 2004, respectively) to purchase TCC's interest.
On April 18, 2005, the state district court heard argument on three motions for summary judgment filed by Golden Spread, and on cross-motions filed by TCC, Brownsville, and OMPA. The court entered an order granting Golden Spread's first Motion for Summary Judgment, which sought summary judgment on the grounds that Oklahoma and Texas law precluded OMPA and Brownsville, respectively, from accepting all the terms and conditions on which TCC had agreed to sell its Oklaunion interest to Golden Spread. That prohibition, Golden Spread argued, meant that OMPA and Brownsville had not effectively exercised their rights of first refusal such as to 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.
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. Golden Spread appealed the district court's denial of its Second and Third Motions for Summary Judgment, which identified alternative grounds supporting Golden Spread's claim that its contract with TCC remained valid and enforceable. In January 2006, the Dallas Court for the Texas Court of Appeals reversed the trial court's decision granting Golden Spread's motion for summary judgment and awarded summary judgment to the City of Brownsville and OMPA. Golden Spread petitioned the Texas Supreme Court for writ of error. The Texas Supreme Court denied Golden Spread's petition. Golden Spread has recovered the full amount of its cash escrow deposit of $42.75 million.
DCEA/GS Litigation
On May 29, 2003, Golden Spread filed a petition against Denver City Energy Associates, L.P. in Potter County Texas District Court, 108th Judicial District, seeking relief and declaratory orders concerning DCEA's breach of a Power Purchase Agreement (PPA). 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 DCEA 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 each filed Motions for Summary Judgment. On November 15, 2005, the court rendered judgment, without discussion, granting DCEA's Motion for Summary Judgment and denying Golden Spread's Motion for Partial Summary Judgment. Golden Spread has filed an appeal of the District Court judgment.
Golden Spread and GSEGC Arbitrations In July 2005, Golden Spread and its affiliate, GS Electric Generating Cooperative, Inc. (GSEGC), a co-owner of Mustang Station, became aware of certain practices of DCEA that Golden Spread and GSEGC determined were inconsistent with the requirements of the Joint Operating Agreement for Mustang Station (JOA) and the PPA. The challenged practices resulted in an over-allocation of costs under the JOA to GSEGC and charging Golden Spread twice for the cost of certain fuel associated with energy purchases under the PPA. DCEA asserted that its actions were consistent with both the JOA and the PPA. DCEA elected not to participate in good faith negotiations as provided under the dispute resolution provisions of the two contracts, and as a result the disputes proceeded to mandatory arbitration.
On November 4, 2005, DCEA filed a single arbitration claim with the American Arbitration Association (AAA) requesting a determination that its practices under the PPA and JOA were proper. On November 28, 2005, Golden Spread filed an answer and counterclaim against DCEA. Golden Spread asserted that DCEA had failed to calculate the Fuel Cost Rate as required under the PPA by improperly including fuel used to generate electricity in the startup component of the Fuel Cost Rate. In its counterclaim, Golden Spread sought monetary damages and an order that DCEA cease and desist from the challenged practices. Golden Spread and GSEGC also challenged DCEA's attempt to include in a single arbitration proceeding the separate Golden Spread and GSEGC disputes. The AAA agreed with Golden Spread and GSEGC and issued an order requiring DCEA to amend its demand for arbitration to remove GSEGC.
On December 28, 2005, GSEGC filed a demand for arbitration with the AAA. GSEGC argued that DCEA had failed to follow the cost allocation requirements of the JOA as they related to the commodity cost of fuel and that DCEA had improperly allocated to GSEGC the cost of fuel used to generate electricity sold by DCEA. GSEGC sought monetary damages and an order requiring DCEA to cease and desist from the challenged practices. The two arbitration proceedings were subsequently consolidated and an evidentiary hearing was held in May 2006. In October 2006, the arbitrator issued an award of monetary damages to Golden Spread and GSEGC, and prohibited DCEA from engaging in the challenged practices. In November 2006, the Arbitrator issued a corrected award that addressed minor typographical errors in the award issued in October 2006. The combined amount of the monetary damages, including interest accrued through September 30, 2006, is in excess of $5.0 million. Golden Spread and GSEGC are seeking enforcement of the arbitration awards in Texas state court. DCEA has filed pleadings in state court seeking to have the arbitration awards vacated.
FERC 206/205 Rate Cases
On November 2, 2004, Golden Spread, Lyntegar Electric Cooperative, Inc., Farmers' Electric Cooperative, Inc., Lea County Electric Cooperative, Inc., Central Valley Electric Cooperative, Inc., and Roosevelt County Electric Cooperative, Inc. (Cooperatives) filed a complaint against Southwestern Public Service Company (SPS) at the Federal Energy Regulatory Commission (Docket No. EL05-19-000) alleging that (1) SPS' current rates recovered more than the prudently incurred and properly allocated costs incurred by SPS, including a reasonable rate of return, to provide requirements power supply service, and (2) the charges SPS imposed pursuant to the fuel charge adjustment clause (FCAC) of its FERC-filed rate schedules were overstated because SPS had determined those charges in a manner that violated the terms of the FCAC and the provisions of FERC's FCAC Regulations. The Cooperatives submitted a cost of service analysis based on historical calendar year 2003 data showing overcharges to Golden Spread for partial requirements service in excess of $3.2 million annually, and overcharges 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 that filing, SPS purported to revise its FCAC to conform to a newer 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 violated FERC's regulations due to: (1) the inclusion of the cost of purchases from qualifying facilities, including the costs of purchases other than those with identifiable fuel costs; (2) the inclusions of a market value component for energy purchases originally made for purposes other than to serve Obligation Load but later used in serving SPS’ Obligation Load; (3) the inclusion of energy charges for any purchase including, without limitation, the total energy costs associated with purchases from any wind energy projects; and (4) 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 a 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.
During the course of the hearing, the issue of an appropriate demand allocation for the SPS system arose. In the litigated SPS cases in the 1980's, SPS was determined (over Golden Spread's objection) to be a summer peaking system, justifying a three coincident peak demand allocation. The full requirements customers of SPS and SPS itself argued that due to changed circumstances, SPS now was a 12 coincident peak system. Golden Spread opposes this change because with the exception of Golden Spread, which has taken action to reduce on-peak loads on the SPS system, SPS retail and wholesale load continue to be prominently summer peaking. A change to a 12 CP will send a fundamentally incorrect price signal to SPS customers.
On May 24, 2006, the Presiding Judge issued his Initial Decision. In large part, Golden Spread and Lyntegar prevailed on the cost of service issues and historic fuel clause issues raised in their complaint. Based on a preliminary calculation of the impacts of the Initial Decision on rates, if approved by the Commission, the partial requirements rate would be reduced to approximately $3.44/kw-month for demand and $0.000883/kWh for base non-fuel energy, and the full requirements rate would be reduced to approximately $3.75/kwmonth for demand and $0.000885/kWh for base non-fuel energy.
With respect to the allegations that SPS misapplied and miscalculated the historic fuel adjustment clause billings to the cost of service requirements customer, the Judge agreed that SPS used its off-system market-based sales in a manner to increase charges to the requirements customers. The Judge found subsidization and determined that SPS' practices had an adverse effect on competition. He ordered refunds dating back to 1999 in a compliance phase of this proceeding. While Golden Spread expects that such refunds would be substantial, it cannot quantify them at this point because SPS must in effect redispatch its system for those years, attributing incremental fuel costs to the market-based sales, rather than average system fuel costs (as paid by the requirements customers).
All of the parties filed briefs on exceptions with respect to various aspects of the Initial Decision. The Initial Decision is now before the Commission for consideration and opinion. SPS Section 205 Rate Increase Filing On December 1, 2005, SPS filed, in FERC Docket No. ER06-274-000, increases and changes in design of the rates charged to Golden Spread, five full requirements customers, and one interruptible customer. SPS’s filing resulted in a total increase to all customers of approximately $4 million, of which $3,937,587 was to be recovered from Golden Spread. The proposed rate design change was 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, initiation of evidentiary proceedings, and the maximum suspension allowed under the Federal Power Act. Golden Spread identified several errors in the cost of service accompanying SPS's filing, as well as many areas of increased expenses that appeared suspect. Golden Spread asserted that a rate decrease, not a rate increase, was warranted.
The FERC set the SPS filing for hearing and suspended the rates for the maximum five month period permitted by the Federal Power Act. Subsequently, the full requirements customers and the partial requirements customer settled with SPS. Golden Spread has continued to challenge the filing, which involves many of the same rate making issues litigated in Docket No. EL05-19 et al (see above). The procedural schedule in this case has been suspended to permit settlement discussions to take place.
Electric Reliability Council of Texas
ERCOT is an independent electrical system located within the central portions of Texas with only two direct current (DC) terminals connecting this electrical grid with the rest of the country. Golden Spread historically operated wholly within the Southwest Power Pool. In July 2004, Golden Spread took on the responsibility to provide full requirements power service for member loads within the ERCOT region. This new load, representing approximately 200 MW at peak, increased Golden Spread’s peak load, at that time, by 25% and its energy requirements by 19%. In connection with undertaking this ERCOT supply responsibility, Golden Spread registered with ERCOT as a Load Serving Entity and became a full voting member of ERCOT within the Cooperative Segment.
Currently, the ERCOT market is a “zonal” market, where prices are determined based upon bidding by suppliers within each zone. The PUCT has determined to change this market design to a “nodal” market by January 2009. The PUCT staff, the ERCOT staff and market participants continued to work on the Texas Nodal Team (TNT) project during the year to work out the details of the new nodal market design. Advocates of the nodal market design expect that it will reduce the cost of power in ERCOT.
ERCOT has a system wide target reserve margin of 12.5%. The reserve margin is intended to ensure that sufficient generation capacity is available during times of system peak loads to maintain reliability. Historically, actual reserve margins in ERCOT have been well in excess of this 12.5% minimum target; recently, however, ERCOT reserve margins have been declining due to a combination of limited additions of new generation, retirements of older generation, and new load grow. The 2006 summer season saw the reserve margin decrease to 16% and the projected margin for 2009 is only 10%. The reduction in reserve margins will have a significant effect upon both the reliability and the cost of power in ERCOT over the next several years.
In order to assure that the ERCOT market is reliable and energy in that market is reasonably priced, it is essential that large baseload plants, fueled with coal, lignite or nuclear energy, be added to the existing ERCOT resource pool. Attempts to add baseload generation are currently being challenged by environmental advocacy groups that seek to curtail all development of coal fueled plants. Such groups favor closing the gap between future load requirements and available generation resources with reliance on renewable energy resources, such as wind, and energy conservation. Renewable energy resources and energy conservation will play a role in meeting the growing energy demands of an expanding Texas economy, but cannot alone assure either reliable or economic power supply for ERCOT. Wind energy resources, for example, have limited, if any, availability, during the hot summer daytime hours when ERCOT experiences its peak energy requirements. Golden Spread is diligently working on the capacity needs of our system within ERCOT to ensure we have a steady supply of reliable cost effective energy.
Southwest Power Pool
To support the development of renewable energy resources, the PUCT is in the process of designating competitive renewable energy zones (CREZ) throughout the state. These CREZs are geographic areas that the PUCT will establish in Texas to support the development of wind energy projects. A number of potential CREZs encompass the service territories of Golden Spread members. The magnitude of the potential wind generation from the CREZs in the Panhandle greatly exceeds the ability of the loads in the Panhandle to absorb that energy. Significant transmission upgrades must be built to move this energy to load centers.
Several transmission expansion projects have been proposed to the PUCT. The Southwest Power Pool (SPP), for example, is recommending that the PUCT consider a transmission expansion plan that will rely in part on existing SPP facilities and existing proposed upgrades, together with CREZ specific expansions that will permit delivery of wind energy to other areas of Texas as well as to other states. The SPP plan appears to have a number of advantages over other proposals in that it would make use of existing infrastructure, thus reducing costs, and would provide wind developers with access to more markets. Every potential CREZ in the Panhandle area will be reached by SPP transmission.
The SPP’s CREZ plan will accelerate construction of the “X-plan,” an already approved transmission expansion in the SPP that will significantly benefit the reliability of supply in the SPS area. The X-plan also provides the transmission path needed by Golden Spread to take delivery of energy from its proposed Holcomb resource.
On February 1, 2007, the SPP established the Energy Imbalance Service Market (EIS) for all wholesale suppliers and customers within the SPP region. With the advent of the EIS market, Golden Spread, for the first time in its history, was entirely responsible for scheduling its own load and resources. Prior to the opening of the EIS market, Golden Spread resources were committed and dispatched pursuant to the provisions of a commitment and dispatch agreement with SPS. With the new EIS market, Golden Spread and SPS are operating under an interim dispatch arrangement.
As a member of the SPP, Golden Spread sits on various committees and task forces that play an important role in the ongoing expansion of the SPP transmission grid and the development of the wholesale power markets. Golden Spread intends to remain engaged in the SPP stakeholder process at every level to protect the existing and future interests of its members. Manager Retirement/Search Golden Spread’s President and General Manager Robert W. Bryant has indicated his intention to retire no later than January 31, 2008. Golden Spread has begun a search process for a replacement.