2007 Annual Report

Results of Operations

Net Margins

Net margins increased to a record high in 2007, exceeding by $1.737 million the margins earned in 2005, the previous record year. Net margins are set forth in the table below:

Changes in net margins are driven by the volume of energy sales and, in large part, by changes in the volume of sales to, and margins earned from, sales to nonmembers as depicted in the table below:

The above table demonstrates a 4.72 percent increase in total energy sales in 2007 compared to 2006 sales volumes, which were 1.22 percent lower than 2005. Nonmember sales varied substantially during the period, with 2007 sales volumes 45 percent higher than 2006 sales volumes, which were 44 percent lower than 2005. As discussed below, changes in non-member sales affected the overall profitability of Golden Spread.

Annual net margins earned during this three-year period varied due to several factors, the most significant of which was the volume and profitability of nonmember sales. The components of total net margins are set forth in the following table.

Differences in the nonmember sales margins are due to variations in the amount of energy sold to nonmembers and changes in the prices of natural gas. Changes in the amount of energy sold to nonmembers are a function, in part, of the availability of energy not required to serve member loads in the Southwest Power Pool (SPP), the frequency and duration of unscheduled outages and planned maintenance that affect plant availability, and market conditions. Changes in natural gas prices affect the associated margins due to the cost based split-the-savings pricing of sales made to SPS. Margins from nonmembers have also been affected in 2007 by Golden Spread’s sales into the Southwest Power Pool’s Energy Imbalance Service (EIS) Market which became effective on February 1, 2007. The table below summarizes some of the important factors affecting nonmember sales margins:

The above table shows a 44 percent reduction in energy sales to nonmembers in 2006 as compared to 2005. Over the same period member sales in the SPP increased by 41 percent. In 2007 SPP member sales dropped by 9 percent and nonmember sales increased by 45 percent. The large 2007 increase in nonmember sales is attributable to growing nonmember loads in the area and operation of the SPP EIS Market. Although 2007 nonmember sales and margins were substantial, both suffered from extended outages at Mustang Station in May, November and December of 2007. In 2006 nonmember sales and margins declined from 2005 levels also due to Mustang Station maintenance outages in November and December. Historically, November and December are two of the highest volume months for energy sales to nonmembers. Also, the change in natural gas prices has affected the level of margins from nonmember sales. Particularly in 2005, and, in part, in 2007, higher natural gas prices increased production costs for all gas-fired generators in the region but the comparatively superior generating efficiency and associated lower production costs of Mustang Station resulted in a positive impact on margins from nonmember sales.

The Golden Spread Administrative Charge also affected margins. The variations in the net margins provided by the Administrative Charge are the result of three factors:

1. The total energy sales to members
2. The amount of the Administrative Charge ($/MWh)
3. The level of actual versus budgeted administrative and general expenses, excluding outside professional services cost which are a flow-through item in rates.

The Administrative Charge is set by contract at $1/MWh but the Golden Spread Board has authority to reduce that charge. In 2007 the Administrative Charge was reduced to $0.68/MWh. The Administrative Charge reduction in 2007 was $0.16/MWh less than the reduction implemented in 2006, and the 2005 Administrative Charge reduction was somewhat less than the 2006 reduction.

In 2007 Golden Spread experienced a reduction in member sales in both the SPP and ERCOT. The decline in SPP member loads in 2007 as compared to 2006 was due to significantly higher levels of precipitation in the service territory, particularly in the late winter and spring months when irrigation loads are typically quite high. The large increase in SPP loads from 2005 to 2006 was attributable in approximately equal parts to hot and dry weather conditions in the service territory and new member loads. ERCOT member sales were relatively stable, with the reduction in 2007 member sales from 2006 levels attributable primarily to weather conditions.

GSEGC capacity charges to Golden Spread change 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.

Mustang Station Unit 4 and Unit 5 were transferred to Yoakum Electric Generating Cooperative, Inc. (YEGC), its non-profit wholly-owned affiliate, effective June 29, 2007, and Golden Spread commenced purchases of wholesale power from YEGC under the terms of a cost based wholesale power contract. The capacity charge in the YEGC contract contributed to the increase in affiliate capacity charge derived margins in 2007.

Other Income consists primarily of interest earned on cash balances. Interest income increased substantially in 2007 and 2006 due to higher average cash balances and somewhat higher rates applicable to investment of this cash during these periods.

Revenues, Purchased Power and Fuel Cost

The changes in revenues are a function of four elements:

1. Changes in fuel cost, including fuel in purchased power
2. Changes in volume of member sales
3. Changes in volume of nonmember sales
4. Changes in nonfuel operating expenses

Changes in volume of sales and fuel costs are typically prime determinants of changes in operating revenues of a utility. Golden Spread deals with changes in fuel costs through a fuel cost adjustment clause. It deals with changes in other expenses with a $1/MWh administrative charge that is more than sufficient to recover administrative expenses, and a formulary rate that automatically passes through all other operating expenses. As a result, all changes in operating expenses are matched by corresponding 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 Denver City Energy Associates, L.P. (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 rate effective July 1, 2006). Also, part of the increase in 2005 results from incurring a full year of base power costs associated with the ERCOT loads.