2011 WFEC Annual Report - Western Farmers Electric Cooperative

G e n e r a t i n g 

Through Time 

2011 Annual Report 

wfec 

western farmers 

electric cooperative 

A Touchstone Energy ® Cooperative 

1

Kansas 

Northwestern 

Alfalfa 

Kay 

Oklahoma 

Cimarron 

Texas 

Northfork 

Harmon 

Kiwash 

South- 

west 

Rural 

Caddo 

Cotton 

Oklahoma 

Rural 

Red River 

Valley Rural 

Canadian 

Valley 

People’s 

East Central 

Oklahoma 

Southeastern 

Kiamichi 

Choctaw 

New Mexico 

Cen 

tral 

Valley 

Farmers’ 

Roo 

sevelt 

County 

Lea 

Cou 

nty 

WFEC 

Service 

Area 

WFEC provides essential electric service to 

23 member cooperatives, Altus Air Force 

Base and other power users. These members 

are located primarily in Oklahoma and 

New Mexico, with some service territories 

extending into portions of Texas and 

Kansas. WFEC crews operate and maintain 

over 3,650 miles of transmission line and 

329 sub and switch stations across this 

service territory. 

2 Generating 

Through Time

About WFEC 

Western Farmers Electric Cooperative (WFEC) is a generation and transmission (G&T) 

cooperative that provides essential electric service to 23 member cooperatives, Altus Air Force 

Base and other power users. These members are located primarily in Oklahoma and New 

Mexico, with some service territories extending into portions of Texas and Kansas. 

Organized in 1941, WFEC marked its 70th year of operation in 2011. The G&T was formed when 

western Oklahoma rural electric distribution cooperatives found it necessary to secure an adequate power 

supply at rates farmers and rural industrial developers could afford. 

WFEC has five generating facilities located at Mooreland, Anadarko and Hugo, and a total power 

capacity of more than 1,700 megawatts (MW) when purchased hydropower is included. WFEC owns 

and maintains approximately 3,650 miles of transmission line to 272 substations and 57 switch stations. 

WFEC maintains a well-balanced and diversified portfolio of generation resources that includes 

owned facilities and capacity and energy provided through purchase power agreements. These resources 

reflect a mix of technologies and fuel types, including one of the state’s largest renewable energy 

portfolios. The diversity in WFEC’s generation mix helps reduce exposure to changing market conditions, 

helping to keep rates competitive. 

WFEC is led by an experienced management group, with years of industry experience, and governed 

by a 24-member Board of Trustees. 

wfec 

(Clockwise, from left) 

Anadarko Headquarters 

Anadarko Plant 

Hugo Plant 

Mooreland Plant 

WFEC Annual Report 3

President & CEO Report 

A 

year of records, at least weather-wise, will mark 

2011. The winter months delivered lots of 

snow and excessively cold temperatures. And 

if that was not enough, the summer brought relentless 

heat and drought. In Anadarko, a record 61 days above 

100 degrees eclipsed the old record of 50 days. Parts of 

Oklahoma saw in excess of 75 days with temperatures 

above the century mark. 

As expected with these extreme temperatures, 

annual sales for Western Farmers Electric Cooperative 

(WFEC) were over 7.8 million megawatt-hours 

(MWh), which is an increase over prior year sales by 

5.8%. Generation for these sales came from a diverse 

mix of resources with 36% generated by coal, 16% from 

natural gas, 17% from renewable resources and 31% 

from economy and contract purchases. 

WFEC also enjoyed several significant 

accomplishments during the year. Among these was 

the completion of WFEC’s new mortgage indenture 

that provides a more predictable and timely process for 

future borrowing alternatives. In addition, WFEC, with 

assistance from CoBank, completed its first multi-year, 

syndicated, line of credit. With the indenture and lines 

of credit, WFEC will be more flexible and responsive to 

its members’ facility requirements, while continuing to 

keep member wholesale power costs competitive. 

During 2011, WFEC completed and received Rural 

Utilities Service (RUS) loan approvals for transmission, 

2011... 

A Year of Records 

distribution and generation projects that will finance 

additions and improvements through 2015. New 

facilities and upgrades provided by these loans will 

continue the steady construction plans required for the 

next few years. 

Stable, competitively priced fuel delivery and 

resources are important to keep wholesale power costs 

low. In 2011, WFEC continued its natural gas hedging 

program by placing positions to cap the cost of natural 

gas for a portion of its portfolio through 2012. Coal 

supply and delivery contracts expiring in early 2012 

were successfully re-negotiated for additional years at 

competitive prices. While coal delivery was sporadic 

during 2011 due to flooding and rail delivery outages, 

WFEC maintained adequate coal inventory at the plant 

site and ended the year at normal levels, above 50 days. 

Plans to provide power to WFEC’s four New 

Mexico members continue with initial service starting 

in mid-2012. Transmission and generation plans for 

additional service are well under way for 

the 2017 period. The transition of these 

new members is expected to be completed 

by 2026. 

Gary Roulet (right) serves as the chief executive 

officer of WFEC, a position he has had since 

July 2003. Overall, Roulet has 37 years of 

service with the G&T. Bob Allen, who serves 

as Board president, represents Harmon Electric 

Association on the WFEC Board of Trustees. 

Allen has served as president since October 

2009. 

4 Generating 

Through Time

The WFEC Board of 

Trustees take part in 

two strategic retreats 

each year to keep 

advised of upcoming 

events within WFEC 

and the utility industry 

as a whole. Senior 

management and other 

WFEC staff discuss 

information from 

within their respective 

departments. 

Nitrogen Oxide (NOx) and mercury reductions 

were all proposed by the Environmental Protection 

Agency (EPA) with the Cross State Air Pollution 

Rule (CSAPR) and the Mercury and Air Toxics 

Standards (MATS). WFEC’s Board of Trustees 

approved projects that would bring WFEC into 

compliance with NOx and CSAPR. The mercury 

reduction rule did not require compliance so 

quickly, but WFEC expects to comply with this rule 

also within the proposed EPA schedule. 

Annual margins needed to exceed $4 million to 

meet all required end-of-year lender covenants and 

ratios. For 2011, margins exceeded $10 million, 

with all margins allocated to member patronage. 

Although many challenges presented themselves 

during 2011, WFEC finished the year with a 

competitive, reliable power supply and sound 

financial performance and is well positioned to 

continue its high level of service into the future. 

wfec 

Bob Allen (right), president of the WFEC Board of 

Trustees, congratulates Leslie Hinds on his 35 years of 

service on the WFEC Board. Thirty-five years is the 

longest length of service of any previous Board member. 

Many longtime members make up the 24-member 

Board. 


2011 Fuel Mix 

Coal 

Natural Gas 

Economy Purchases 

8% 

* 9% 

7% 

36% 

Hydro 

Other * 

Contract Purchases 

24% 

16% 

*Energy generated by wind facilities for which WFEC does not retain or retire the 

environmental attributes. 

6 Generating 

Through Time

2011 Highlights 

Energy Sales (to Members & Cities) 

Total Operating Revenue 

Net Margins 

Assets 

$427 million 

$463 million 

$10 million 

$1,118 million 

Members 24 

Member Consumer Meters Served 

Member Population Served 

System Peak Demand 

Miles of Transmission Line 

273,813 (est.) 

473,500 (est.) 

1,582 megawatts 

3,650 miles 

Substations 272 

Switch Stations 57 

Generating Capacity 

Coal 

Natural Gas 

Purchased Power Capacity 

Natural Gas 

Hydro 

Portfolio of GRDA Assets 

Total Capacity 

450 megawatts 

870 megawatts 

70 megawatts 

260 megawatts 

75 megawatts 

1, 725 megawatts 

Number of Employees 370 


WFEC’s 70 th Year... 

Continued Reliability, Relati 

The energy business is constantly changing. 

Today, the ability to generate and deliver a 

continuous supply of electric power is even 

more significant than in times past. Society, as a whole, 

as well as the economy itself, is dependent on the 

benefits and values provided by affordable, reliable and 

dependable electricity. 

Each of these traits is a key factor in the success of 

Western Farmers Electric Cooperative (WFEC), which in 

2011 marked its 70 th year of “Generating Through Time.” 

2011 was a productive year in many ways, from 

the continuing support of organizational goals to the 

building of valuable financial relationships. However, 

it will also likely be a year remembered most for its 

challenging and record-setting weather extremes. 

Growth & Sales 

Looking back at 2011 from the regional market 

perspective, it was a year of record-setting statistics. 

New records were set for Oklahoma weather for low and 

high temperatures and days above 100 degrees. Drought 

conditions plagued a large section of the service territory 

for much of the summer. All of these factors influenced 

record WFEC peak demands and energy sales. 

Although much of the national economy continued 

in a recessionary mode, WFEC member and municipal 

kilowatt-hour (kWh) sales grew approximately 5.8% in 

2011, compared to about 3% growth in the previous year. 

In August 2011, WFEC recorded a new total system 

hourly peak of 1,582 megawatts (MW), eclipsing the 

8 Generating 

Through Time

onship Building & Record-Setting Extremes 

prior year system peak of 1,509 MW by 73 MW or 5%. 

More significantly, the 2011 peak hour occurred during 

summer conditions, at a time when peak day load 

reductions considerably reduced the potential peak. 

WFEC and its member distribution cooperatives 

continue to utilize the demand management programs 

deployed over the last decade to improve efficiencies. 

These programs provided over 80 MW of peak load 

reduction in 2011. Together with other WFEC 

programs, such as distributed generation, municipal 

generation and load curtailment, the WFEC system can 

remove up to approximately 150 MW of load during 

peak periods to improve overall system efficiency. 

On the other hand, in 2010, the peak occurred 

during the winter when peak day load reductions 

were not being called upon. This factor supports the 

determination that WFEC load is indeed growing 

despite the weather variant. 

Many of our member distribution cooperatives have 

experienced significant growth, much of it oil and gas 

related. In 2011, WFEC member cooperatives signed 

agreements for approximately 75 MW of new load. A 

portion of this load was connected to the electric system 

immediately; however, the remaining portion requires 

upgrades to WFEC’s transmission and distribution 

system, again pointing to continuing growth potential. 

Power sales to members and cities in 2011 were 

approximately $427 million. This reflects a slight 

(Continued on Page 10) 

WFEC Annual Report 9 

(Continued on Page 10)

(Continued from Page 9) 

increase of only $9 million, or 2%, as compared to 

2010 sales. This small increase reflects the support in 

2010 of about $16.5 million of revenue deferred from 

prior years. 

Energy Resources 

Active participation by staff within the Southwest 

Power Pool’s (SPP) working groups has contributed to 

WFEC’s preparedness for the future market. Known as 

the Integrated Market (IM), it has a projected start date 

of March 2014. The first version of these market rules, 

released in April 2011, is continuously evolving and is 

anticipated to affect every aspect of electrical service. 

In addition, rules of the current SPP Energy Imbalance 

Market (EIM), launched in February 2007, present 

another focus of staff’s efforts as the 30 th version of 

these rules was in place for 2011. 

Diversification of fuels, purchased power and 

renewable resources have been among WFEC’s 

priorities and strategies, in an effort to minimize the 

impact of fuel volatility and environmental regulation. 

Generation diversity offers protection against increased 

prices of any single fuel source. WFEC’s strategy 

includes the purchase of fuels on a deliberate and 

planned schedule. The schedule takes into account 

projected member loads, fuel needs and purchased 

power opportunities. WFEC’s fuel risk management 

strategy focuses on catastrophic protection and provides 

a measure of protection against significant price 

increases in natural gas, while participating more fully 

in price decreases. 

WFEC practices a conservative budget strategy to 

serve load with owned generation. The cooperative 

coordinates power supply to members in the SPP 

market, which adds to reliability and helps achieve 

greater value of generating assets. WFEC takes 

advantage of lower-priced economic purchases and 

sales of excess energy, when available, by utilizing the 

bilateral spot market and SPP EIM. Market purchases 

of energy represented approximately 24% of WFEC’s 

total energy during 2011. 

Internal staff reviews day-to-day resource planning 

in collaboration with Aces Power Marketing (APM) 

to position WFEC assets for reliable energy service 

to its members. APM, owned by WFEC and other 

electric cooperatives, serves as an agent for, and 

works with, WFEC in a concerted effort to schedule 

the physical assets, including contract purchases, as 

well as generation from natural gas and coal, while 

participating extensively in the power marketplace. 

This relationship also focuses on risk management 

policies, counterparty credit analysis, locating 

transmission liquidity, market participation and new 

market readiness, identification of potential new 

counterparties, hedging activity and standardized 

contracts. 

Power Production 

Staff provided support for a safe and secure 

workplace by assessing and managing safe work 

practices and training. All of WFEC power generation 

employees, operating and maintaining 15 generating 

units at three locations, achieved an accident-free 2011. 

The diverse energy 

mix, self-generated and 

purchased, actual versus 

budgeted by WFEC 

during 2011 included: 

2011 Actual 2011 Budget 

Coal 36% 45% 

Gas 16% 22% 

Economy Purchases 24% 6% 

Contract Purchases 7% 7% 

Hydro 8% 8% 

Other* 9% 12% 

Total 100% 100% 

* Energy generated by wind facilities for which WFEC does 

not retain or retire all of the environmental attributes. 

10 Generating 

Through Time

Building upon this accomplishment, staff is pursuing 

the development of a safety management system to 

facilitate compliance with safety and security standards. 

Like the utility industry as a whole, WFEC faces 

numerous employee retirements in the near future. 

As part of preparing new employees, a state-ofthe-art 

online, self-paced training curriculum that 

allows employees and apprentices to access hundreds 

of courses related to power plant operations and 

maintenance has also been developed. 

Hugo Plant: 

There were no major outages scheduled in 2011; 

however, there were two planned load reductions, 

during spring and fall, to perform maintenance on 

plant equipment. 

Coal and Transportation 

Maintaining an adequate coal supply to WFEC’s 

coal-fired Hugo Plant can oftentimes range from 

routine to challenging during any given year. In 

2011, coal supply proved challenging as a result 

of unprecedented flooding in the upper Midwest, 

disrupting railroad traffic and delivery of coal. These 

conditions literally put railroad tracks under water and 

even washed away portions of the tracks all together for 

more than five months. 

Using coal supplies stored at the plant site, some 

planned offloading of the plant and 

rerouting of trains, WFEC was able to 

keep the facility online without any fuelrelated 

interruptions. 

Also in 2011, favorable long-term rail 

transportation delivery services and base 

coal supply agreements were put in place. 

These agreements will provide security 

of supply for this important asset and 

continue to position the Hugo facility 

as a competitively priced generation 

resource for the future. 

Anadarko Plant: 

Combined Cycle Units 4 and 5 both 

had combustion inspections in 2011, 

with the generator rotor from Unit 5 

being shipped for a rewind in December. 

Mooreland Plant: 

Mooreland Unit 2 underwent a 

major outage and generator rewind and 

new cooling towers were installed for 

Unit 1 during the year. 


A 140,000 pound generator housing is 

tilted to an impressive 90 degree angle 

for repair work during an overhaul of 

Mooreland Plant Unit 2. This overhaul 

began in September 2011, continuing 

until January 2012. 



Environmental Regulations: 

New and proposed aggressive regulations by the 

Environmental Protection Agency (EPA) continue 

to present challenges, with a significant potential to 

impact WFEC operations, resulting in increased cost 

and complexity associated with timely evaluation and 

modeling of the potential impacts and the most costeffective 

compliance solutions. The Cross State Air 

Pollution Rule (CSAPR) and Mercury and Air Toxics 

Standards (MATS) are two proposed guidelines with 

fast-approaching compliance deadlines. Originally, 

CSAPR required compliance in May 2012, but since 

has been delayed by legal challenges, leaving compliance 

deadlines unclear. To achieve the original May 2012 

deadline, WFEC contracted to install dry low NOx 

burners on three Anadarko gas-fired generating units. 

Since litigation has delayed the compliance deadline, 

WFEC plans to install the burners on Anadarko Units 

4 and 6 in 2012 and on Unit 5 in 2013. The combined 

installed cost at Anadarko is estimated at $16.5 million. 

As for the Hugo Plant, plant staff undertook a study 

to prepare for the MATS regulation, anticipating a 

requirement to install mercury controls in 2014. 

WFEC’s environmental team obtained necessary 

environmental permits for existing and future 

generation resources, while ensuring compliance with 

operating permits. 

Generation Resource Planning 

As a generation and transmission (G&T) 

cooperative, WFEC’s core responsibilities include 

providing reliable and affordable power for its members’ 

current needs, while identifying and planning the 

necessary resources to meet future requirements. 

Even with the implementation of a number of 

member-wide energy-efficiency programs and WFEC’s 

demand side management programs, a much greater 

system load growth was experienced in 2011 than was 

forecast. WFEC met these 2011 demands seamlessly, 

utilizing our diverse fleet of generators and through 

purchases of market energy. 

Integration of the uncharacteristic increase in the 

2011 demand into ongoing WFEC member cooperative 

load forecasts further emphasizes the need for additional 

capacity in the 2017 time frame. Resource planning 

A technician adjusts instrumentation for testing at the 

Hugo Plant stack. These tests provide baseline numbers 

about the plant’s emissions to determine compliance with 

future EPA rules and regulations. 

continues to evaluate those needs through either selfbuild 

or market options. 

Power Delivery 

Member growth also created the need for upgrades 

and new construction of substations and transmission 

lines in 2011. Reliability oriented projects, primarily 

involving WFEC’s switch stations, were a key focus for 

the transmission and distribution crews. 

A large transmission project that will increase 

reliability in the northern part of WFEC’s system and 

allow distribution cooperative members to increase load 

and improve reliability was also supported. This project 

will address tremendous planned load growth in north 

central and northwestern Oklahoma. 

Additionally, a new approach to contracting for 

services was developed to augment current staff. This 

will enable a number of transmission and distribution 

projects to be completed more timely. 

The final repairs due to the 2009 tornado that 

ripped through the transmission and distribution 

maintenance facility were completed during the year. 

This building was reoccupied at year-end 2011. 


12 Generating 

Through Time

2011 WFEC Statistics 

2007 

2008 

2009 

2010 

2011 

Equity 

(Millions of Dollars) 

$112 

$130 

$146 

$170 

$187 

Equity growth is intended to 

ensure that WFEC remains a 

robust resource for members and a 

financially strong player attractive 

to lenders as the balance sheet grows. 

WFEC’s equity balance grew to 

$187 million as of year-end. The 

equity growth prior to 2011 was a 

result of earnings. Equity in 2011 

was boosted by the first year of equity 

contributions by four new members. 

Coincident Peak Demand 

(Megawatts) 

A reflection of the growth, coincident 

peak demand tipped the scale at 

1,582 MW, establishing a new 

all-time peak demand on Aug. 3, 

2011. This summer peak surpassed 

the previous record coincident peak 

demand set in the winter of 2010, 

by 5% 

1,308 

1,392 

1,366 

1,444 

1,352 

1,455 1,479 

1,509 

1,499 

1,582 

2007 2008 2009 2010 2011 

Winter 

Summer 

Energy Sales to Members and Municipals 

(Millions of kWhs) 

2007 

2008 

2009 

2010 

336 6,468 6,804 

306 6,807 7,113 

310 6,860 7,170 

216 7,156 7,372 

Rural Oklahoma growth is an 

important ingredient in WFEC’s 

past and future strategic goals, 

with exciting challenges and new 

opportunities becoming evident 

for many parts of the state. Some 

municipal contracts have been 

allowed to expire to provide for 

members’ load needs. 

2011 

161 7,638 7,799 

Municipal 

Member 



Ron Cunningham (left), 

vice president, power 

delivery, and Terry 

Lisenbery, lead station 

technician, discuss progress 

at the Cana Substation, 

which was completely 

destroyed by a tornado passing through the area on May 24. This facility serves the Devon Energy Cana Gas Plant, located 

west of El Reno. Shown in the background, working with a transformer, are Rex Mathis and Mark Palesano, journeyman 

station technicians, and Jeramy Tackett, apprentice station technician. (Photo inset) Mark Palesano guides crews working at 

the substation site. 

Electronic communication systems continue 

to be a focal point for WFEC and its members. A 

dialogue with member cooperative managers regarding 

necessary system upgrades to accommodate automation 

requirements resulted in a study to develop a longrange 

communication plan. 

Also during the year, staff initiated a project to 

develop a system to access and maintain 360 degree 

photographs for virtual tours of all WFEC substations 

and switch stations. The tour will identify equipment 

and nameplate data to be shared with WFEC and 

members’ employees for purposes of improved 

communications in the field, maintenance activities, 

employee training, troubleshooting and knowledge 

retention. 

A secondary power feed to the headquarters 

complex was designed and installed to improve the 

reliability of headquarters’ operations. Additional efforts 

to improve WFEC efficiencies and operation included 

a transmission maintenance system that will be used to 

track transmission system assets and to schedule, record 

and track system maintenance and testing activities. 

Copper and other metal thefts are costly and time 

consuming issues that WFEC and other electric and 

public service utilities are facing. WFEC has supported 

the Oklahoma Association of Electric Cooperatives, 

which has taken a leading role in organizing the copper 

theft task force in Oklahoma. The task force meetings 

have been well attended by law enforcement, public 

officials, salvage dealers and utilities. The efforts are 

focused on reducing theft activity and may result 

in legislative efforts aimed at preventing theft. New 

Mexico legislature is also considering a proposed law 

intended to regulate salvage of metals and deter thieves. 

Relationship Building & Indenture Mortgage 

Over the next several years, WFEC has plans to 

add capacity through owned plants or purchase power 

agreements (PPAs) needed to serve growing member 

loads and incremental sales to the New Mexico 

members. WFEC’s goal is to continue to develop and 

14 Generating 

Through Time

maintain a power supply portfolio that includes a mix 

of renewable, gas-fired and coal-fired resources and 

a delivery system that will supply its members with 

reliable and reasonably priced power. 

With a strategic planning horizon, WFEC 

maintains target financial ratios that are deemed 

appropriate to ensure adequate liquidity, equity and 

debt service coverage (DSC) ratios to support the 

additional debt that will be needed to fund system 

projects. The target ratios influence management and 

the Board of Trustees in establishing annual budgets 

and setting rates. WFEC’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. 

To support its need for access to capital, in an 

historic move on April 8, 2011, WFEC adopted a 

mortgage indenture (Indenture) to replace its existing 

joint mortgage with the Rural Utilities Service 

(RUS), CoBank, ACB (CoBank) 

and National Rural Utilities 

Cooperative Finance Corporation 

(CFC). The Indenture closely 

models those indentures recently 

adopted by other G&Ts and offers 

opportunities that are a departure 

from the practices used since the 

cooperative’s inception. While the 

Indenture preserves access to RUS 

guaranteed financing, it sets the 

strategic environment to provide 

greater access to a broader range 

of capital sources in a more timely 

fashion when RUS financing is 

not an option. This will help in 

providing greater certainty of 

meeting WFEC’s capital needs and 

supporting strong credit ratings. 

The Indenture provides a more 

predictable approach to issuance 

of additional secured debt, subject 

to objective, mechanical tests. 

The result is a more streamlined 

approach to lending partners as 

WFEC moves forward in financing 

its capital program. WFEC believes 

that long-standing financial 

relationships will continue to be important while new 

relationships will be formed that will provide additional 

options and flexibility for the future. 

Line of Credit Syndication 

To increase access to liquidity in preparation for 

serving an increased volume of sales and developing 

capacity, a short-term $100 million CoBank revolving 

facility was replaced with a $200 million four-year 

unsecured committed syndicated line of credit. 

WFEC selected CoBank to act as lead arranger and 

administrative agent for this effort, and the process 

offered an opportunity to build relationships with other 

financial institutions active in the cooperative utility 

sector. The syndication was over-subscribed by $60 

million and one of the terms of the agreement provides 

a feature to upsize the facility an additional $50 million 


Peter Fozzard (center) speaks to WFEC personnel regarding a newly adopted 

mortgage indenture (Indenture) and Rural Utilities Service (RUS) Loan Contract 

that will affect WFEC loan practices and numerous typical employee activities. 

Within WFEC, power requirement studies, construction work plans and financial 

forecasts will still require Board approval, for example. However, when RUS 

financing is not the preferred option, WFEC will now have greater access to a 

broader range of capital sources subject to objective, mechanical tests. This typically 

represents a much quicker time frame for approval. The model for WFEC’s new 

Indenture is based on those recently adopted by other G&Ts. Fozzard is a law 

partner with Sutherland Asbill & Brennan LLP. 



During 2011, RUS approved a loan guarantee 

commitment in the amount of $184.1 million for the 

purpose of financing certain WFEC generation and 

transmission projects planned for the 2012 to 2015 

construction work plan period. 

Capital Budget 

Approximately $37 million was expended for 

capital construction efforts in 2011 for normal 

transmission additions and replacements and for 

generation system improvement projects. 

In comparison, the $72 million 2012 capital 

budget includes approximately $38 million for 

transmission additions, upgrades and expansion efforts 

for increased oil and gas activity in northern Oklahoma 

as well as generation projects at each plant location. 

These projects include dry low NOx burner conversions 

for certain Anadarko units to address approaching EPA 

compliance deadlines. 

The $72 million 2012 capital budget includes 

approximately $38 million for transmission additions, 

upgrades and expansion efforts for increased oil and gas 

activity in northern Oklahoma. 

with additional commitments from existing lenders 

or new commitments from other financial institutions 

under certain conditions. With this facility and a $75 

million revolving facility with CFC, WFEC is well 

positioned for normal operating needs, bridge financing 

for immediate and on-going construction efforts and to 

take advantage of market opportunities. 

Liquidity is also supported by a Board strategy to 

maintain a fuel hedging program to protect against 

catastrophic prices, a banked fuel balance to moderate the 

volatility of fuel prices to its members and a contingent 

cash reserve for significant unbudgeted events. 

Loans 

Approximately $36 million in Federal Financing 

Bank (FFB) loan funds were advanced at an 

approximate weighted average long-term fixed rate of 

3.3% with maturities ranging from 2024 to 2043. 

Financial Performance 

WFEC reported a net margin of $10.5 million in 

2011, compared with $24.0 million in 2010, which 

included approximately $16.5 million of deferred 

revenue from prior years. A positive operating margin 

target was also achieved. 

WFEC’s DSC ratio in 2011 and 2010 was 1.13 and 

1.20, respectively, exceeding the 1.1 minimum target. 

The equity-to-assets ratio was 16.7% and 15.5% at 

year-end 2011 and 2010, respectively. WFEC has a goal 

of not permitting this ratio to fall below 15% through 

2017, as a substantial multi-year capital expenditure 

program is implemented. Members’ equity increased 

in 2011 due to the normal margin impact, but also 

due to the first year of equity contributions from New 

Mexico members. These equity contribution payments 

are determined by WFEC’s projected capital resource 

additions or purchase power contract, or share thereof, 

required to supply power and energy to the respective 

cooperative. 

In 2011, the cooperatives contributed 

approximately $6.3 million in equity to WFEC, 

which was directly assigned to their respective 

patronage accounts. The target DSC ratio and 

minimum equity ratio are intended to ensure that 

WFEC remains a robust resource for members and a 

16 Generating 

Through Time

financially strong player attractive to lenders as the 

balance sheet grows. 

In addition, WFEC monitors its annual margins 

for interest (MFI) ratio that is defined in its mortgage 

Indenture. A minimum annual MFI ratio of 1.10 is 

required in order to permit the issuance of secured 

obligations under the Indenture. The annual MFI ratio 

was 1.29 and 1.78 for 2011 and 2010, respectively. 

The variable components of the rate schedule 

for members that are adopted each year during the 

annual budget are intended to cover WFEC’s cost 

of service and meet target financial ratios. WFEC 

reviews its financial position each month with the 

Board of Trustees, which may make adjustments to 

certain components of the member rate schedule 

during the year in order to meet financial targets and 

other objectives. 

Wholesale Power Contracts 

Strong credit ratings are an important tool 

for accessing capital as WFEC embarks on its 

next significant construction phase and validates 

the members’ ownership purpose in their G&T 

cooperative. WFEC’s financial stability, a key to 

strong credit ratings, is based on its long-term, allrequirements 

contracts with member-owners and our 

combined financial strength. 

In March 2011, WFEC’s Standard and Poor’s 

“BBB+” rating was affirmed and the outlook revised 

to positive from negative. This action reflected steps 

taken to restructure the 2001 financial lease, the 

addition of four distribution cooperative members, 

the increasing diversity of power supply resources and 

mechanisms for timely cost recovery. When combined 

with its FitchRatings “A-” (stable) ratings, WFEC 

management anticipates access to capital markets on 

favorable terms. 

Twenty-one of 23 cooperative members have allrequirements 

contracts through 2050, with the two 

remaining members’ contracts effective into 2025. 

These commitments facilitate long-term planning to 

meet WFEC’s energy and financing needs. In 2011, 

the distribution cooperative members with contracts 

through 2050 represented 83% of WFEC member 

cooperative sales. There were no sales to the New 

Mexico members in 2010 or 2011. 

Upgrades to the switch station, located adjacent to the 

Anadarko Plant, were among the many transmission, 

switch and substation projects completed during 2011. 

Energy Resources 

A new wholesale tariff and rate structure, R-15(a), 

was developed in cooperation with members and 

implemented in April 2011. The new tariff is designed 

to provide a range of demand and energy surcharge 

rates that will provide adequate recovery for projected 

costs associated with the National Electric Reliability 

Council (NERC) compliance costs, the full cost of 

permanent long-term financing of the Bob Orme 

Combustion Turbine Plant, charges for escalating 

demand associated with long-term PPAs and projected 

costs associated with a 2001 financial lease amendment, 

which had previously been covered by deferred revenue 

in 2010. Members were billed an average price of $53.93 

per MWh in 2011 compared with $52.73 per MWh in 

2010. There was no rate change budgeted for 2012. 




WFEC line crews work to rebuild transmission structures destroyed by a spring tornado. A nearby home and 

adjacent buildings were completely leveled by the same storm that blew through the area west of Fairview, 

Oklahoma. (Photo inset) Journeyman Power Line Technician Vince Lalli drills into a rebuilt cross arm 

structure. Several spring tornadoes destroyed homes and transmission structures across Oklahoma. 

Human Resources 

WFEC continues to prepare for the effects of 

experienced employees retiring. WFEC enrolled its first 

eight participants in the new Growing Leaders Program 

to develop internal talent for future opportunities 

at WFEC. This program, requiring two years to 

complete, provides training courses that support the 

goals identified in the participant’s individual needs 

assessments and participation in several additional on 

and off-site activities. 

Benefit plan design and cost management strategies 

played an important role in meeting the WFEC Board 

of Trustees’ targets for controlling employee benefit 

costs, while continuing to offer competitive benefit 

packages to attract and retain qualified employees. 

Staff continued to meet or exceed the Board’s cost 

targets while providing flexibility and opportunities for 

employees to partially fund programs with tax savings. 

Meeting cost management goals is facilitated by 

increasing numbers of employees and retirees choosing 

consumer-directed health care consisting of high 

deductible health plans, combined with health savings 

accounts. 

Risk Management 

Risk management staff spent a significant portion 

of 2011 directing and assisting with the physical repairs 

and insurance recovery associated with recent storm 

damage. This damage was caused by the direct hit of a 

tornado in the spring of 2009 and hail storms in 2010. 

The damages from the tornado and hail storms were in 

excess of $16 million and recovery is now essentially 

complete. More recently, the May 24, 2011 tornado 

outbreak that swept across parts of the WFEC service 

territory destroyed the Mooreland Power Plant Unit 1 

Cooling Tower and the Cana Substation. 

Fortunately for consumers, 2011 natural gas prices 

continued to decline, seeing a 70% drop since 2008. 

WFEC’s risk management strategy allows its members 

to enjoy lower costs as a result of participation in the 

move to lower prices. WFEC continues to review 

and revise, as warranted, its fuel hedging strategy to 

minimize associated costs. 

Hydro and wind energy deliveries, with their more 

stable pricing, have also reduced exposure to volatile 

fuel prices. WFEC’s portfolio of wind will again 

be expanded in 2012 due to the renewable energy 

18 Generating 

Through Time

purchase agreement for the output of the 150 

MW Rocky Ridge Wind Project in western 

Oklahoma, planned for operation in late spring 

2012. 

Marketing & Communication 

In 2011, WFEC member cooperatives sold 

19,022,700 kWh hours of energy generated by 

local wind resources to Oklahoma cooperative 

consumers through the WindWorks® program. 

This is a 15% increase compared to 2010. The 

WindWorks® program is just one way that 

WFEC is promoting renewables. Other ways 

include events to support Earth Day awareness 

and the promotion of energy efficiency 

websites, such as “Together We Save.” 

Education regarding the development, 

value, limitations and challenges associated 

with renewable energy is essential. 

2011 marked the completion of two 

years of the WFEC Energy Efficiency 

Rebate Program targeting more efficient 

commercial and residential heating and 

cooling. Upon evaluation of the results of 

the program to date, necessary changes were identified 

that will help attain load reduction goals. WFEC 

and its member distribution systems are working to 

implement those changes to the program to enhance its 

success. 

WFEC continues to use the Touchstone Energy® 

brand to offer services and benefits to rural electric 

consumers. For the third straight year, the Co-op 

Connections® Card Program provided rural electric 

consumers in Oklahoma savings on prescriptions 

exceeding $1 million. This success has spurred new 

national programs offering member consumers savings 

on vision, dental and hearing products and services. 

Much of 2011 was focused on the development 

of the new “Member’s Only” section of the WFEC 

corporate website as a primary tool for acquiring 

information. Another endeavor in 2011 for the 

Touchstone Energy brand was the title sponsorship 

of a streaming video network used by over 40 schools 

across Oklahoma and New Mexico. This network has 

been, and will be, used to stream everything from high 

school sporting events to graduation ceremonies over 

Key account managers, commercial customers, cooperative 

representatives and industry-related vendors took part in the annual 

Emerging Technology Conference that was hosted over a two-day 

period in late August. This popular event was hosted by WFEC, with 

the support of its member Touchstone Energy Cooperatives. Various 

speakers addressed a wide range of topics during the conference that 

is designed to allow networking opportunities and discuss innovative 

ideas and cooperative services. 

the Internet. This is just another example of how the 

rural electric cooperatives work to improve the standard 

of living in rural Oklahoma. 

Conclusion 

Overall, 2011 offered some challenging, but 

innovative and exciting, times. As usual, weatherrelated 

events were in the forefront of the year, with 

drought, tornadoes, powerful thunderstorms and 

extreme heat taking its toll across WFEC’s service 

territory. However, work continued for both WFEC 

and its cooperatives. 

Preparations continued to be made for the future 

with the potential to strategically bolster WFEC 

and all of its members into the electrical industry of 

tomorrow. Members can be assured that their G&T 

will continue its strong and loyal commitment to 

provide cost-effective, reliable and quality service, 

with a dedicated focus on future progress. 

wfec 


WFEC Board of Trustees 

Bob S. Allen 

President 

Harmon Electric 

Association 

David Ray 

Vice President 

Kiamichi Electric 

Cooperative 

Mike Lebeda 

Secretary/Treasurer 

Kay Electric 


Rusty Grissom 

Asst. Secretary/Treasurer 

Oklahoma Electric 


Max W. Ott 

Alfalfa Electric 


Bob Thomasson 

Caddo Electric 


Gary Crain 

Canadian Valley 

Electric Cooperative 

Charles G. Wagner 

Central Valley Electric 

Cooperative (NM) 

WFEC is 

governed by 

a 24-member 

Board of Trustees, 

including a 

representative 

from each 

member 

system & Altus 

Air Force Base. 

Bob Holley 

Choctaw Electric 


Russell D. Pollard 

Cimarron Electric 


Charles Spencer 

Cotton Electric 


20 Generating 

Through Time

Jerry Rempe 

East Central Oklahoma 

Electric Cooperative 

Michael B. West 

Farmers’ Electric 


Leslie Hinds 

Kiwash Electric 


John Ingle 

Lea County Electric 


Charles Hickey 

Northfork Electric 


Ray O. Smith 

Northwestern Electric 


Jack Lambert 

People’s Electric 


King Martin 

Red River Valley Rural 

Electric Association 

Jerry W. Partin 

Roosevelt County 

Electric Cooperative (NM) 

Gary Jones 

Rural Electric 


Lloyd G. Owens 

Southeastern Electric 


Fred J. Stowe 

Southwest Rural Electric 

Association 


WFEC 

Senior Management 

A qualifed senior management level staff, with an impressive 

combined 208 years of service with WFEC, oversee the daily 

operations of the G&T. 

Each vice president and senior manager has particular areas 

of expertise within the electric utility industry, providing 

valuable years of experience for WFEC overall and for its 

member cooperatives 

Gary Roulet 

Chief Executive Officer 

Ron Cunningham 


Power Delivery 

Gary Gilleland 


Generation 

Brian Hobbs 


Legal & Corporate Services 

Jane Lafferty 


& Chief Financial Officer 

Dan Fleming 

Senior Manager 

Resource Planning 

Roy Klusmeyer 

Senior Manager 

Regional Market Planning 

22 Generating 

Through Time

KPMG LLP 

210 Park Avenue, Suite 2850 

Oklahoma City, OK 73102-5683 

Independent Auditors’ Report 

Board of Trustees 

Western Farmers Electric Cooperative: 

We have audited the accompanying consolidated balance sheets of Western Farmers Electric Cooperative 

(WFEC) and subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of 

operations, changes in members’ equity and comprehensive income, and cash flows for the years then 

ended. These consolidated financial statements are the responsibility of WFEC’s management. Our 

responsibility is to express an opinion on these consolidated financial statements based on our audits. 

We conducted our audits in accordance with auditing standards generally accepted in the United States of 

America. Those standards require that we plan and perform the audit to obtain reasonable assurance about 

whether the financial statements are free of material misstatement. An audit includes consideration of 

internal control over financial reporting as a basis for designing audit procedures that are appropriate in the 

circumstances, but not for the purpose of expressing an opinion on the effectiveness of WFEC’s internal 

control over financial reporting. Accordingly, we express no such opinion. An audit also includes 

examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 

assessing the accounting principles used and significant estimates made by management, as well as 

evaluating the overall financial statement presentation. We believe that our audits provide a reasonable 

basis for our opinion. 

In our opinion, the consolidated financial statements referred to above present fairly, in all material 

respects, the financial position of WFEC as of December 31, 2011 and 2010, and the results of their 

operations and their cash flows for the years then ended, in conformity with U.S. generally accepted 

accounting principles. 

March 6, 2012 

KPMG LLP is a Delaware limited liability partnership, 

the U.S. member firm of KPMG International Cooperative 

(“KPMG International”), a Swiss entity. 

23

WESTERN FARMERS ELECTRIC COOPERATIVE 

Consolidated Balance Sheets 

December 31, 2011 and 2010 

(In thousands) 

Assets 2011 2010 

Electric utility plant, at cost: 

In-service $ 1,352,795 1,325,257 

Construction work-in-progress 27,554 27,653 

Total electric utility plant 1,380,349 1,352,910 

Less accumulated depreciation and amortization 592,388 572,387 

Net electric utility plant 787,961 780,523 

Investments in associated organizations and other investments, 

at cost 125,039 118,766 

Current assets: 

Cash and cash equivalents 2,449 3,840 

Restricted cash 31,428 23,530 

Accounts receivable from energy sales 36,995 34,592 

Other accounts receivable 15,900 16,229 

Inventories, at average cost: 

Coal and oil 16,731 22,426 

Material and supplies 42,890 43,026 

Other 3,905 3,662 

Total current assets 150,298 147,305 

Other noncurrent assets 1,272 1,272 

Deferred debits 53,050 53,958 

Total assets $ 1,117,620 1,101,824 

Members’ Equity and Liabilities 

Capitalization: 

Patronage capital $ 180,610 170,331 

Contributed capital 6,256 — 

Long-term debt 828,437 784,058 

Total capitalization 1,015,303 954,389 

Current liabilities: 

Current portion of long-term debt 37,012 31,126 

Accounts payable and accrued liabilities 57,183 61,364 

Short-term notes payable — 46,678 

Total current liabilities 94,195 139,168 

Other liabilities 8,122 8,267 

Commitments and contingencies (note 13) 

Total members’ equity and liabilities $ 1,117,620 1,101,824 

See accompanying notes to consolidated financial statements. 

24


Consolidated Statements of Operations 

Years ended December 31, 2011 and 2010 


2011 2010 

Operating revenues: 

Power sales to members and cities $ 427,270 417,959 

Other power sales and operating revenues 35,625 37,693 

Total operating revenues 462,895 455,652 

Operating expenses: 

Operations: 

Production 161,011 170,481 

Purchased and interchanged power 142,977 121,353 

Transmission 44,243 39,300 

Distribution 5,204 4,980 

General and administrative 15,383 14,091 

Maintenance 17,643 19,817 

Depreciation and amortization 31,294 30,299 

Total operating expenses 417,755 400,321 

Operating margin before interest 45,140 55,331 

Interest expense, less amounts capitalized during construction 

of approximately $855 and $1,032 in 2011 and 2010, respectively (43,177) (40,395) 

Interest income 6,678 7,008 

Operating margin 8,641 21,944 

Other nonoperating margin (loss), net (294) 280 

Patronage capital assigned by associated organizations 2,116 1,731 

Net margin $ 10,463 23,955 


25


Consolidated Statements of Changes in Members’ Equity and Comprehensive Income 



Accumulated 

other 

Patronage Contributed comprehensive 

Memberships capital capital income (loss) Total 

Balance, December 31, 2009 $ 2 148,864 — (2,752) 146,114 

Net margin — 23,955 — 23,955 

Change in fair value of derivative 

financial instrument — — — (1,374) (1,374) 

Reclassification adjustment of 

derivative losses reclassified 

into interest expense — — — 1,224 1,224 

Change in net asset associated with 

postretirement benefit plan — — — 412 412 

Total comprehensive income 24,217 

Balance, December 31, 2010 2 172,819 — (2,490) 170,331 

Net margin — 10,463 — — 10,463 

Contributed capital — — 6,256 — 6,256 

Change in fair value of derivative 

financial instrument — — — (1,593) (1,593) 

Reclassification adjustment of 

derivative losses reclassified 

into interest expense — — — 1,147 1,147 

Change in net asset associated with 

postretirement benefit plan — — — 262 262 

Total comprehensive income 16,535 

Balance, December 31, 2011 $ 2 183,282 6,256 (2,674) 186,866 


26


Consolidated Statements of Cash Flows 




Cash flows from operating activities: 

Net margin $ 10,463 23,955 

Adjustments to reconcile net margin to net cash provided by operating activities: 

Depreciation 28,330 27,335 

Other depreciation included in operating expenses 1,876 1,820 

Amortization of regulatory asset expense 2,964 2,964 

Accretion of asset retirement obligation 78 71 

Noncash interest income (5,456) (5,829) 

Noncash interest expense 5,344 5,717 

Deferred (recognized) revenue — (16,530) 

Changes in assets and liabilities: 

Restricted cash (7,898) (283) 

Accounts receivable from energy sales (2,403) (1,004) 

Other accounts receivable 329 (9,071) 

Coal and oil inventory 5,695 (1,740) 

Materials and supplies inventory 136 3,064 

Other current assets (243) (2,386) 

Deferred debits and other 1,693 (788) 

Accounts payable and accrued liabilities (2,402) (13,551) 

Other liabilities (407) 775 

Net cash provided by operating activities 38,099 14,519 

Cash flows from investing activities: 

Net extension and replacement of electric utility plant (39,190) (52,141) 

Proceeds from use of restricted cash – Special Construction Fund (SCF) — 24,757 

Proceeds from liquidation of lease securities — 78,083 

Purchase of lease securities held to maturity — (102,840) 

Net cash used in investing activities (39,190) (52,141) 

Cash flows from financing activities: 

Advances of long-term debt 238,216 63,432 

Payments on long-term debt (191,838) (29,010) 

Advances of short-term debt 351,279 549,617 

Payments on short-term debt (397,957) (545,049) 

Net cash (used in) provided by financing activities (300) 38,990 

Net decrease in cash and cash equivalents (1,391) 1,368 

Cash and cash equivalents, beginning of year 3,840 2,472 

Cash and cash equivalents, end of year $ 2,449 3,840 

Supplemental schedule of cash flow information: 

Cash paid during the year for interest $ 38,372 27,777 

Supplemental schedule of noncash financing and investing activities: 

Lease-leaseback amendments 

Deferral of loss on restructure of lease-leaseback $ 1,179 (40,687) 

Adjustments in present value of long-term debt related to lease-leaseback 

restructure — 3,942 

Loss on restructure of lease-leaseback — 36,745 


27


Notes to Consolidated Financial Statements 


(1) Summary of Significant Accounting Policies 

(a) 

Nature of Operations 

Western Farmers Electric Cooperative (WFEC) is a generation and transmission cooperative 

headquartered in Anadarko, Oklahoma. WFEC owns and operates five generating plants, fueled by 

coal and gas, three located in Anadarko, one in Mooreland, Oklahoma, and one near Hugo, 

Oklahoma. WFEC also owns and maintains more than 3,650 miles of transmission line. WFEC has a 

combined capacity of over 1,700 megawatts, including hydropower allocation. With the addition of 

four New Mexico cooperatives in 2010, member-owners consist of 23 distribution cooperatives and 

a United States Air Force base. Substantially all of WFEC’s assets are currently located in Oklahoma 

and substantially all revenue is related to Oklahoma operations. See note 13 for further information 

related to the addition of and sales to the New Mexico cooperatives. 

(b) 

(c) 

(d) 

Basis of Presentation 

WFEC maintains its accounting records in accordance with the Uniform System of Accounts of the 

United States Department of Agriculture Rural Development Utilities Programs (RDUP), formerly 

known as the Rural Utilities Service, which conforms with U.S. generally accepted accounting 

principles in all material respects. These consolidated financial statements reflect the transactions of 

WFEC and its wholly owned subsidiaries, WFEC Railroad Company and WFEC EnergyCo, LLC 

(EnergyCo). WFEC GenCo, LLC (GenCo) is a wholly owned subsidiary of EnergyCo. All 

significant intercompany balances and transactions have been eliminated upon consolidation. The 

more significant accounting policies of WFEC are described below. 

Use of Estimates 

The preparation of financial statements in conformity with U.S. generally accepted accounting 

principles requires management to make estimates and assumptions that affect the reported amounts 

of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the 

financial statements and the reported amounts of revenues and expenses during the reporting period. 

Actual results could differ from those estimates. 

Electric Utility Plant 

Electric utility plant is stated at original cost. The capitalized cost of additions to electric utility plant 

includes the cost of material, direct labor, contract services, and various other indirect charges, such 

as engineering, supervision and overhead costs, and interest on funds used during construction. 

Retirements or other dispositions of electric utility plant are based on an average unit cost that is 

deducted from plant and, together with removal costs less salvage, is charged to accumulated 

depreciation. The cost of repairs and minor renewals is charged to maintenance expense in the period 

incurred. 

28 

(Continued)




Provision for depreciation of electric utility plant is computed on the straight-line method at rates 

based on estimated service lives and salvage values of the class of property. These rates are applied 

on a composite class basis. Annual depreciation rates used in 2011 and 2010 are as follows: 

Production plant 0.79 – 17.04% 

Transmission plant 2.75 – 10.00% 

Distribution plant 2.88 – 10.00% 

General plant 3.00 – 33.33% 

Depreciation and amortization for the year ended December 31, 2011 was $33,170,000, of which 

$28,330,000 was charged to depreciation expense, $1,876,000 was included in fuel and other 

operating expenses, and $2,964,000 was charged to amortization of regulatory assets. Depreciation 

and amortization for the year ended December 31, 2010 was $32,119,000, of which $27,335,000 was 

charged to depreciation expense, $1,820,000 was included in fuel and other operating expenses, and 

$2,964,000 was charged to amortization of regulatory assets. 

WFEC periodically reviews the carrying values of its utility plant assets for impairment whenever 

events or changes in circumstances indicate the carrying amount of an asset or group of assets may 

not be recoverable through the future net cash flows expected to be generated by the asset or group 

of assets. If such assets are considered impaired, the impairment is recognized by the extent that 

carrying value exceeds fair value. 

(e) 

(f) 

Capitalization of Interest 

Interest costs are capitalized as part of the cost of various capital assets under construction. WFEC 

uses the weighted average rate of interest associated with long-term borrowings. Interest charged to 

construction during 2011 and 2010 totaled $855,000 and $1,032,000, respectively. 

Restricted Cash 

Restricted cash consists of the following: 

 

 

A Contingent Cash Reserve (CCR) that is restricted by WFEC Board Policy to be utilized 

based upon certain significant events or other approved uses as determined by the Board. The 

CCR had a balance of $22,790,000 and $21,896,000 as of December 31, 2011 and 2010, 

respectively. 

A Cushion of Credit (Unapplied Advance Payment) account with the RDUP. As an RDUP 

borrower, WFEC may participate in the RDUP Cushion of Credit Program, which allows 

voluntary prepayment of debt. These advance payments are held on behalf of WFEC and earn 

interest at 5% per annum. The prepaid account balance and earned interest may only be used 

for debt service on loans made or guaranteed under the Rural Electrification Act. The Cushion 

of Credit account had a balance of $29,048,000, of which $22,790,000 represents CCR funds 

as of December 31, 2011, and $17,359,000 as of December 31, 2010 which represented a 

portion of the CCR balance. 

(Continued) 

29




 

Other cash accounts with funds that are restricted as to withdrawal for various purposes had a 

total balance of $2,380,000 and $1,634,000 as of December 31, 2011 and 2010, respectively. 

(g) 

(h) 

(i) 

(j) 

(k) 

 

A Debt Service Reserve account that is set aside in case of default on an interest and/or 

principal payment of long-term debt. The Debt Service Reserve account had a balance of 

$1,272,000 as of December 31, 2011 and 2010, and is reflected as other noncurrent assets in 

the accompanying financial statements. 

Cash and Cash Equivalents 

For purposes of reporting cash flows, cash and cash equivalents include unrestricted cash on hand 

and investments purchased with original maturities of three months or less. 

Investments in Associated Organizations 

Investments in associated organizations are stated at cost plus WFEC’s share of patronage capital 

credits allocated, reduced by distributions received. 

Inventories 

Inventories of coal and oil, and materials and supplies of WFEC are valued at average cost. These 

inventories are consumed by WFEC’s operations or utilized as additions to electric utility plant and 

are not held for resale. 

Emission Allowances 

In accordance with the Federal Clean Air Act, WFEC has received an annual allocation of 

SO 2 (sulfur dioxide) emission allowances from the Environmental Protection Agency as part of a 

nationwide program to limit SO 2 emissions. An allowance provides authority to emit one ton of SO 2 . 

Under this program, WFEC has received more SO 2 allowances than it has utilized. The unutilized 

SO 2 allowances have no cost basis and are therefore not recorded on the balance sheet. 

Electric Rates 

The Board of Trustees of WFEC has full authority to establish the electric rates charged to members, 

subject to approval by RDUP. 

WFEC bills its members fuel costs as a component of electric rates. The fuel billing rate is designed 

to accumulate and maintain an over recovered fuel account balance. An over recovery of 

approximately $10,064,000 and $15,853,000 at December 31, 2011 and 2010, respectively, was 

recorded in accounts payable and accrued liabilities. 

(l) 

Regulatory Assets and Liabilities 

WFEC defers certain expenses that will be recovered through WFEC’s future rates (see note 5) in 

accordance with accounting principles generally accepted in the United States of America applicable 

to rate-regulated enterprises. Regulatory assets are charged as an expense, if and when future 

recovery in rates of that asset is no longer probable. WFEC also defers certain gains that will be 

credited to revenues over future periods for rate making purposes. 

30 

(Continued)




(m) 

(n) 

(o) 

(p) 

Revenues 

Revenues from the sale of electricity are recorded based on energy provided, including cost of fuel, 

to customers and on contracts and scheduled power usages, as appropriate. 

Derivative Instruments and Hedging Activities 

WFEC’s activities expose it to a variety of market risks, including interest rates and commodity 

prices. Management has established risk management policies and strategies to reduce the potentially 

adverse effects that the volatility of the markets may have on its operating results. These policies and 

strategies include the use of derivative instruments for hedging purposes. WFEC designates its 

interest rate cash flow hedge derivatives as such on the date the derivative contract is entered into. 

WFEC formally documents all relationships between interest rate hedging instruments and hedged 

items, as well as its risk-management objective and strategy for undertaking various hedge 

transactions. WFEC also assesses, both at the interest rate hedge’s inception and on an ongoing 

basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting 

changes in cash flows of hedged items. These derivative instruments generally qualify as cash flow 

hedges under Accounting Standard Codification (ASC) 815-30, Derivatives and Hedging – Cash 

Flow Hedges, as amended. If hedge treatment is obtained, unrealized gains or losses resulting from 

these instruments are deferred as a component of accumulated other comprehensive income (loss) 

until the corresponding item being hedged is settled, at which time the gain or loss is recognized. See 

note 12. 

Related Parties 

The members of WFEC purchase power from WFEC. The terms of transactions are based upon 

formal long-term contracts approved by WFEC’s Board of Trustees and are settled monthly, 

generally requiring the members to purchase 100% of the members’ purchased power requirements 

from WFEC. The contracts allow the Board of Trustees to establish base energy rates that allow 

recovery of cost of utility plant, fuel, and other operating costs incurred by WFEC. No collateral is 

pledged to WFEC from its members to collateralize the outstanding accounts receivable. The only 

exception relates to four New Mexico members with Transition Agreements providing for immediate 

and short-term power requirements to be provided from their existing contracts with Southwestern 

Public Service Company (SPS) at prescribed contract quantities and periods. No WFEC power sales 

were made to the New Mexico members in 2010 or 2011. See note 13. WFEC has wholesale power 

contracts with 21 of its distribution cooperative members through the year 2050 and with two of its 

members through the year 2025. In 2011, the distribution cooperative members with contracts 

through 2050 represented 83% of WFEC member cooperative sales. 

Concentration of Credit Risk 

Concentration of credit risk exists with respect to trade accounts receivable of which approximately 

98% of accounts receivable from energy sales at December 31, 2011 are from power sales from 

WFEC’s members. The credit risk for accounts receivable from nonmember sales is managed 

through monitoring procedures. 

(Continued) 

31




(q) 

(r) 

Regional Transmission Organization Accounting 

WFEC participates in the Energy Imbalance Services Market under the Southwest Power Pool (SPP) 

Regional Transmission Organization (RTO). An RTO is an organization that is established to control 

and manage the transportation and flows of electricity over an area that is generally larger than a 

single power company’s system. WFEC records RTO transactions on an hour-to-hour basis. 

Transactions within each individual hour are netted to a single purchase or sale based on actual load 

and net megawatt hour generation. 

New and Recently Adopted Accounting Pronouncements 

In 2011, the FASB issued ASU 2011-09 Disclosures about an Employer’s Participation in 

Multiemployer Plans, which requires additional disclosures related to an employer’s participation in 

multiemployer retirement plans. The additional disclosure requirements are effective for annual 

periods ending after December 15, 2012 for nonpublic entities. Under ASU 2011-09, employers that 

participate in multiemployer pension plans are required to provide a tabular disclosure for 

individually significant pension plans. This disclosure should include, among other items, the plan 

legal name, the most recent “zone status” and the plan’s year-end date, the indication of date(s) of 

collective bargaining agreements, required minimum contributions, and indication of what plans are 

subject to a funding improvement plan, whether the employer paid a surcharge to the plan, the 

amount of contributions made to each individually significant plan, the total contributions made to 

all other plans in aggregate, and whether the employer’s contributions represent more than 5% of 

total plan contributions. The company is currently evaluating this new guidance. 

(2) Electric Utility Plant 

Major classes of electric utility plant as of December 31 are as follows: 



Production plant $ 833,221 699,944 

Transmission plant 280,212 271,791 

Distribution plant 136,554 132,165 

General plant 80,734 78,661 

Unclassified plant 22,074 142,696 

Electric utility plant-in-service 1,352,795 1,325,257 

Construction work-in-progress 27,554 27,653 

Total electric utility plant $ 1,380,349 1,352,910 

Unclassified plant decreased and production plant increased approximately $121,086,000 due primarily to 

the classification of the new 145-megawatt Anadarko capacity addition. 

32 

(Continued)




In May 2001, GenCo completed construction of two 45.5 megawatt simple cycle generating facilities, 

fueled by natural gas, in Anadarko, Oklahoma. An agreement was entered into with another party to 

purchase 100% of the capacity of these units at commercial operation for a term of up to 20 years, with 

WFEC retaining certain recall rights. Currently, WFEC has recalled 51 megawatts. WFEC has the right, 

but not the obligation, to recall the remaining 40 megawatts of capacity of the plant during the remaining 

operating term. In 2007, WFEC entered into a purchase power agreement with the other party to utilize the 

remaining 40 megawatts of capacity of the plant for specific months from June 1, 2007 through 

February 29, 2012. In 2010, the purchase power agreement was extended through February 28, 2017. 

WFEC will be responsible for fuel and related costs under the terms of the agreement for these contracted 

periods. 

The other party provided $6,800,000 of financing. This note has a fixed rate of interest and is payable 

annually through 2021. Interest of approximately $400,000 that had accumulated through September 2001 

(during the construction phase) was added to the note principal. As of December 31, 2011, the balance of 

the note was $4,999,000 and is included in long-term debt. 

(3) Investments in Associated Organizations and Other Investments 



National Rural Utilities Cooperative Finance 

Corporation (CFC): 

3% capital term certificates $ 300 300 

5% capital term certificates 6,130 6,130 

Patronage capital certificates 1,077 971 

CoBank Class A stock 4,577 3,910 

ACES Power Marketing 1,141 1,097 

Lease – leaseback related investments (see note 4) 111,770 106,315 

Other 44 43 

$ 125,039 118,766 

WFEC purchased capital term certificates and stock as required by institutions under borrowing 

arrangements. Fair value of the certificates and stock is not readily determinable. 

In 2002, WFEC joined ACES Power Marketing (ACES) as a member. As of December 31, 2011, WFEC 

owned 5.26% of ACES equity. The investment in the partnership is accounted for using the equity method 

of accounting. 

The Lease – leaseback investment includes $8,930,000 of accrued interest receivable and $102,840,000 of 

government agency obligations presented at cost. Fair value of the government agency obligations at 

December 31, 2011 and 2010, were $146,009,000 and $109,621,000, respectively. 

(Continued) 

33




(4) Lease – Leaseback Transaction 

On May 31, 2001, WFEC entered into a long-term lease transaction with a limited liability company (LLC) 

owned by a partnership for the benefit of two unaffiliated institutional equity investors. Under the terms of 

the transaction, WFEC entered into a 56-year lease of its interest in the Hugo Generation Station and 

certain of its transmission facilities (collectively, the Facility) to such LLC, and simultaneously entered 

into a 26-year lease of the Facility back from the LLC. This transaction is reflected as a financing 

transaction for financial reporting purposes. All rent under the long-term lease of the Facility was paid by 

the LLC to WFEC on the closing date of the transaction in an amount equal to $420,000,000. From these 

proceeds, approximately $293,000,000 was paid to a Payment Undertaker for its entering into a Payment 

Undertaking Agreement (PUA) with WFEC. Under the terms of the PUA, the Payment Undertaker 

assumed primary liability to pay a portion of WFEC’s rental obligations. In accordance with meeting the 

provisions of ASC Topic 860, Transfers and Servicing, such portion of the liability and the corresponding 

PUA were extinguished for financial reporting purposes. As of December 31, 2009, the investments 

balance was $112,474,000 and the debt balance was $156,440,000. 

The investments were pledged as collateral for WFEC’s obligations under certain credit enhancement 

purchased in connection with the lease. In addition, the transaction resulted in a gross cash benefit to 

WFEC of $46,814,000 that, pursuant to U.S. generally accepted accounting principles applicable to rate 

regulated enterprises and as authorized by the Board of Trustees, is being recognized on a straight-line 

basis over the term of the leaseback to WFEC, by deferring interest expense in the early years as a 

regulatory asset and amortizing the deferral in the later years. At the expiration of the leaseback period, 

one option available to WFEC is to exercise a fixed price purchase option, which, if exercised, would 

allow WFEC to terminate the long-term lease from WFEC to the LLC, repay the outstanding debt 

associated with the lease, and retain all other rights of ownership with respect to the Facility. 

The use of the cash benefit of $46,814,000 from the transaction was restricted by the RDUP. With RDUP 

approval, $26,000,000 funded specific construction projects and the balance of $20,814,000 was available 

to be utilized based upon certain significant events. RDUP authorized a transfer of the funds to a Special 

Construction Fund (SCF) account in 2007. The SCF account was available to fund WFEC Board and 

RDUP approved construction projects or other uses as mutually agreed by both parties. The SCF balance 

as of December 31, 2009 was $25,711,000. 

The PUA and Investments described above were entered into with affiliates of Ambac Assurance 

Corporation (Ambac). Ambac also provided the equity investors in the lease with credit enhancement that 

protected their outstanding exposure upon the event of default by WFEC. In 2008, Ambac was 

downgraded on several occasions by the major credit rating agencies principally as a result of its exposure 

to troubled investments in the securitized debt and mortgage markets. Under the terms of the agreement, 

WFEC was required to provide a replacement or additional enhancement within 60 days of Ambac no 

longer meeting the minimum credit criteria. In June 2008, the equity investors notified WFEC of its 

obligation under the lease due to Ambac’s rating falling below the requisite threshold. During this 

challenging credit environment, WFEC pursued a number of options for addressing the situation presented 

by Ambac’s downgrade and at the same time negotiated multiple extensions of the deadline for 

replacement or additional enhancement with the equity investors. 

34 

(Continued)




On February 27, 2009, the participants to the lease-leaseback transaction (lease) agreed to restructure a 

portion of the 2001 lease, which was affected by a prepayment of the portion of basic rent that was due 

from an affiliate of Ambac for 90% of the nonrecourse debt (Series A debt) in the lease. This repayment 

was provided by WFEC using the redemption proceeds of the Payment Undertaking Agreement (PUA), 

which was also held by Ambac. Although the Series A debt, for which the PUA provided economic 

defeasance had been extinguished for financial accounting purposes, continued reliance on the PUA would 

have left WFEC with substantial exposure if Ambac were unable to pay this portion of ongoing rent. The 

Series B debt, which was provided originally by a third party, remained in place. In order to keep the 

equity investors whole, as required by the terms of the lease, the rent prepayment required WFEC to make 

an additional rent payment of $3,749,000 at closing. The additional payment adjusted the original amount 

of transaction gain and, as such, reduced the straight-line gain recognition from approximately $1,819,000 

per year to $1,673,000 per year, prospectively. As of December 31, 2009, the deferred gain was 

approximately $28,601,000. 

On May 3, 2010, the participants to the lease agreed to further amend the 2001 lease and the Ambac Credit 

Products was replaced with Berkshire Hathaway Assurance Corporation as the credit enhancement 

provider. Ambac liquidated the Guaranteed Investment Contracts (GIC) held for the equity investors and 

Series B loan payments at an amount less than full accreted value (for approximately 68% of the accreted 

value or $78,083,000 as of May 3, 2010). In connection with such amendment and liquidation, the Ambac 

credit default swap and surety bond securing such swap, which provided credit enhancement in the lease, 

were terminated and Ambac was released from further liability under such swap, surety bond and GIC’s. 

The proceeds of the liquidation were reinvested in U.S. government agency securities to economically 

defease the remaining equity investor periodic rent payments, the equity investor portion of the purchase 

option price at the end of the lease term and the Series B loan balloon payment due at the end of the lease 

term (2027). This required an additional cash contribution (over and above the Ambac GIC liquidation 

proceeds) of $24,757,000. With Board and RDUP approval, the cash source was a portion of the original 

proceeds of the lease transaction held in the SCF. As a result of the above described substitution of the 

agency securities for the Ambac GIC’s, the amount of interest to be earned on the securities defeasance 

account will be lower over the lease term by $35,848,000. Additional rent of $4,360,000 is owed due to a 

change in interest rate on the Series B debt. In turn, the net gain of the transaction was reduced from 

$1,673,000 per year to $102,000 per year, prospectively. As of December 31, 2011, gain to be recognized 

in the future is $1,523,000. 

The remaining Series B loan payments (prior to the balloon) are no longer economically defeased and 

WFEC will pay them as they are due out of the remaining original proceeds and operating cash flows. At 

December 31, 2011, the Series B debt balance was $35,254,000, of which the present value of the 

nondefeased payment obligations was $26,213,000. 

WFEC contracted with Berkshire Hathaway to provide credit enhancement for the equity termination 

value. WFEC paid the enhancement fee for the remaining portion of 2011 and 2012 at closing and, 

hereafter, is required under the amended lease to make payments every October for the subsequent 

calendar year through the remainder of the lease term. 

(Continued) 

35




WFEC received Board and RDUP authority to defer and amortize as a regulatory asset (a) the reduced gain 

of $2,856,000, (b) the GIC liquidation loss of $36,745,000, (c) the adjustment to reflect reduced interest 

income and the change in pattern of gain amortization of $13,487,000, and (d) the remaining transaction 

fees of $167,000 straight line over the remaining term of the lease (2027) under ASC 980, which 

approximates $2,853,000 annual amortization. At December 31, 2011, the regulatory asset balance is 

$51,456,000. See note 5. WFEC’s electric rates are designed to recover this cost. 

As of December 31, 2011, the investments balance is $111,770,000 and the debt balance is $163,357,000. 

(5) Regulatory Assets and Other Assets and Liabilities 

WFEC is subject to the provisions of ASC 980, Regulated Operations. Regulatory assets represent 

probable future revenue to WFEC associated with certain costs which will be recovered from customers 

through the ratemaking process. Deferred debits and credits at December 31 contained the following: 



Regulatory assets: 

Unamortized cost associated with lease/leaseback 

(see note 4) $ 51,456 53,241 

Other assets: 

Preliminary survey and investigation charges 659 697 

Unamortized debt expense 935 20 

$ 53,050 53,958 

Other liabilities: 

Unearned revenue $ 1,029 1,373 

As of December 31, 2011, WFEC’s regulatory assets are being reflected in rates charged to customers over 

16 years. 

The regulatory and other assets are reflected in deferred debits and unearned revenue is reflected in other 

liabilities in the accompanying consolidated balance sheet. 

With Board and RDUP approval, in 2009 and 2008 WFEC deferred recognition of $13,038,000 and 

$3,492,000, respectively, of revenue from additional utilization of utility plants. This was to mitigate the 

rate impact of a new generation facility and other increased costs to WFEC’s members. The cash 

equivalent of the deferred revenue was segregated and restricted until subsequently amortized into revenue 

in 2010. 

(6) Patronage Capital 

WFEC’s mortgage and certain loan agreements (See note 7) contain restrictions on distributions of capital 

contributed by members. There was no patronage retirement for the years 2010 and 2011. 

36 

(Continued)




(7) Debt 

Patronage capital is calculated based on WFEC’s net income as determined for federal income tax 

purposes. For financial reporting purposes, net margins are assigned to members on a patronage basis. 

Member capital as of December 31, 2011 of $189,538,000 is comprised of $160,326,000, which has been 

assigned to members, $10,463,000 of 2011 net margin and $18,749,000 of prior years net unassigned 

margins. Member capital as of December 31, 2010 of $172,819,000 is comprised of $130,115,000, which 

has been assigned to members, $23,955,000 of 2010 net margin and $18,749,000 of prior years net 

unassigned margins. 

Long-term debt at December 31 consisted of the following: 



First mortgage notes: 

Notes payable to Federal Financing Bank (FFB), interest 

from 2.14% to 11.37%, a weighted average of 5.14%, 

due in quarterly installments through 2043 $ 460,835 444,316 

Notes payable to the RDUP, interest from 4.75% to 5.00%, 

a weighted average of 4.76%, due in monthly and 

quarterly installments through 2025 8,275 8,689 

Note payable to CoBank, interest at 5.71%, due in quarterly 

installments through January 2019 7,832 8,536 

Note payable to CoBank, interest at 6.22%, due in monthly 

installments through November 2025 2,920 3,028 

Notes payable to CFC with varying amounts, interest from 

5.15% to 5.50%, due in annual installments through 2016 3,299 4,615 

Notes payable to CoBank, interest at a weighted average of 

6.36%, due in quarterly installments through April 2038 118,998 120,681 

Notes payable to CFC with varying amounts, interest 

from 2.35% to 4.55%, due in quarterly installments 

through June 2024 18,410 19,740 

Other notes: 

Notes payable to CFC, interest at 5.65% through 2018 

and 5.55% through 2023, due in quarterly 

installments through 2023 16,491 17,430 

Note payable to CoBank, interest at 6.34% due in quarterly 

installments through April 2016 2,183 2,602 

Lease termination obligation payable to Hugo Generation, at 

maturity in 2027, interest imputed at a fixed rate of 4.09% 163,357 159,470 

Note payable to CoBank, at a variable interest rate, with 

a fixed rate swap at 5.88% plus 1.875%, principal due 

annually through 2020, interest payments quarterly 19,125 20,750 

Note payable, interest at 7.56%, due in annual installments 

through 2021 4,999 5,327 

(Continued) 

37






Notes payable to CoBank, interest from 1.56% to 3.50% 

at December 31, 2011, due May 2015, syndicated 

revolving loan agreement $ 38,725 — 

865,449 815,184 

Less current portion of long-term debt 37,012 31,126 

Total long-term debt $ 828,437 784,058 

Annual payments of long-term debt for years subsequent to December 31, 2011 are as follows 

(in thousands): 

2012 $ 37,012 

2013 32,924 

2014 34,462 

2015 74,621 

2016 29,114 

Thereafter 657,316 

$ 865,449 

In 2009, a $150,000,000 CoBank revolving line of credit facility was amended to provide for bridge 

funding and term-out provisions for long-term permanent financing of the 145-megawatt Anadarko 

Capacity Addition declared commercial June 30, 2009. With a lien accommodation authorized by RDUP, 

the commitment was secured and reduced to $125,000,000. WFEC converted the drawn balance of 

$121,086,000 in September 2010 to permanent fixed-rate financing with CoBank maturing April 2038. 

In 2010, WFEC’s unsecured committed revolving line of credit with CoBank to provide interim financing 

of construction projects and general operating needs was increased from $75,000,000 to $100,000,000 and 

the term extended to May 31, 2011. In May 2011, the line was replaced with a $200,000,000 unsecured 

committed four-year syndicated revolver with CoBank acting as lead arranger and administrative agent. 

The outstanding balance on the CoBank lines of credit at December 31, 2011 and 2010 was $38,275,000 

and $46,678,000, respectively. During 2011, WFEC was able to refinance the previous short term notes to 

long term debt. The commitment matures in 2015. 

WFEC also has a three-year unsecured committed revolving line of credit with CFC totaling $75,000,000 

with a term through October 2013. Advances on the CFC facility bear interest at a floating rate and the 

facility is renewable at the discretion of the lender and WFEC. No advances were outstanding on the CFC 

line of credit at December 31, 2011 and 2010, respectively. A $670,000 letter of credit had been issued 

under this arrangement. 

38 

(Continued)




Approximately $161,275,000 and $74,330,000 of borrowing capacity was available on the CoBank and 

CFC lines of credit, respectively, at December 31, 2011, net of outstanding Letters of Credit and line 

advances. 

In order to provide additional financing alternatives, during 2011 WFEC took action to substitute an 

indenture of mortgage for its Restated and Consolidated Mortgage and Security Agreement. Consequently, 

WFEC executed an Indenture of Mortgage, Deed of Trust, Security Agreement and Financing Statement, 

dated as of April 8, 2011 (Indenture), between WFEC, as Grantor, to U.S. Bank National Association, as 

Trustee. All mortgage notes secured by the Indenture are secured equally and ratably by a first priority lien 

on substantially all of the assets of WFEC, subject to certain exceptions and limitations. Under the terms of 

WFEC’s Indenture, substantially all of the after-acquired assets of WFEC become subject to the lien of the 

Indenture. Also, under the terms of the Indenture, the RDUP Loan Contract and other loan agreements, 

WFEC must maintain certain financial covenants. WFEC was in compliance with these financial 

convenants at December 31, 2011. 

WFEC had approximately $120,436,000 of unadvanced funds available at December 31, 2011 from FFB 

on notes previously executed. Approximately $62,474,000 is available for transmission and distribution 

additions and replacements and $57,962,000 for generation system improvement projects. 

During 2011, RDUP approved a loan guarantee commitment in the amount of $184,100,000 for the 

purpose of financing certain WFEC generation and transmission projects planned for the 2012-2015 

construction work plan period. Approximately $62,509,000 is committed for transmission and distribution 

additions and replacement and $121,591,000 for generation system improvement projects. 

In 2001, a construction loan, used to finance GenCo’s two new generating units, totaling approximately 

$35,000,000, was converted to a 20-year term loan with a variable interest rate. GenCo simultaneously 

entered into an interest rate swap agreement to fix the rate at 5.88%. In addition to the variable rate, GenCo 

must pay an additional 1.875% to CoBank, which increases over the life of the loan to 2.25%. This term 

loan is classified as long-term debt. 

(8) Production Expenses 

WFEC’s production expenses for the years ended December 31 include the following: 



Fuel $ 142,782 151,562 

Other production expenses 18,229 18,919 

Total production expenses $ 161,011 170,481 

As disclosed in note 1, under WFEC’s contracts with its members, costs of fuel are recovered through rates 

charged to members. 

(Continued) 

39




(9) Income Taxes 

WFEC is a nonexempt cooperative subject to federal and state income taxes and files a consolidated tax 

return. As a cooperative, WFEC is entitled to exclude patronage dividends from taxable income. WFEC’s 

bylaws require it to declare patronage dividends in an aggregate amount equal to WFEC’s federal taxable 

income from its furnishing of electric energy and other services to its member-patrons. Accordingly, such 

income will not be subject to income taxes. 

Nonmember operations are subject to federal income taxes. Historically, WFEC’s nonmember operations 

have generated tax losses. The primary differences between WFEC’s book income and WFEC’s 

nonmember tax losses are the result of the tax accounting for certain leases. 

As of December 31, 2011 and 2010, WFEC’s deferred tax asset before valuation allowance was 

approximately $8,154,000 and $9,146,000, respectively. Based on WFEC’s historical results, management 

does not believe that it is more likely than not that WFEC will be able to realize the benefit of the deferred 

tax asset, which includes net operating loss carryforwards of approximately $18,512,000, which expire in 

2011 and thereafter. 

No income tax expense was provided in 2011 and 2010, due to the availability of net operating loss 

carryforwards to offset nonmember income for tax purposes. 

The approximate net deferred tax asset and valuation allowance at December 31 were as follows: 



Tax-effected gross deductible temporary differences $ 11,894 13,900 

Tax-effected gross taxable temporary differences (3,740) (4,754) 

Deferred tax asset 8,154 9,146 

Less valuation allowance (8,154) (9,146) 

Net deferred tax asset $ — — 

(10) Retirement Plans 

Substantially all employees of WFEC participate in the National Rural Electric Cooperative Association 

(NRECA) Retirement Security Plan (RS Plan), a defined benefit pension plan qualified under Section 401 

and tax-exempt under Section 501(a) of the Code. WFEC makes monthly contributions to the plan equal to 

the amounts accrued for pension expense, which is dependent on the employee’s date of hire. During 2011 

and 2010, WFEC contributed approximately $6,902,000 and $6,737,000, respectively, to the plan. In this 

master multiemployer plan that is available to all member cooperatives of the NRECA, the accumulated 

benefits and plan assets are not determined or allocated separately by individual employer. 

40 

(Continued)




Substantially all employees of WFEC also participate in the NRECA 401(k) Pension Plan option. Under 

the plan, WFEC contributes amounts not to exceed 8% of the respective employee’s base pay to the plan, 

dependent on the employee’s level of participation and the employee’s date of hire. Employees may 

contribute up to the IRS prescribed limit of their base pay to the plan. Contributions are immediately 100% 

vested. Benefits paid under the plan are limited to the sum of the employee’s and WFEC’s contributions 

and investment earnings or losses on those contributions. WFEC contributed approximately $1,063,000 

and $869,000 to the plan in 2011 and 2010, respectively. 

In addition to the defined benefit and defined contribution retirement plans, WFEC sponsors a health care 

plan that provides postretirement medical benefits to non-Medicare eligible retired employees who meet 

minimum age and years-of-service requirements. The plan is contributory with retiree contributions subject 

to annual adjustment, and contains other cost-sharing features such as deductibles and coinsurance. WFEC 

contributes to retiree health care benefits in years when retiree claims exceed premiums. WFEC’s policy is 

to fund the cost of medical benefits as incurred. 

(11) Fair Value of Financial Instruments 

At December 31, 2011 and 2010, WFEC’s financial instruments included cash, cash equivalents, restricted 

cash, investments in associated organizations and other investments, accounts receivable, accounts 

payable, long-term debt and a cash flow hedge. 

At December 31, 2011 and 2010, the fair market values of cash and cash equivalents, restricted cash, 

accounts receivable, and accounts payable approximated carrying values because of the short-term nature 

of these instruments. The fair value of investments in patronage capital and stock is not readily 

determinable. The carrying value of the capital term certificates are considered to be their fair value, as 

they represent an ownership interest in member-owned institutions and do not have a market for exchange. 

The assumption used in determining the fair value of WFEC’s long-term variable interest rate debt is that 

the fair value approximates the carrying value, as the debt reprices at least annually to a market interest 

rate. Fair value of WFEC’s long-term fixed interest rate debt is calculated to be the discounted cash flows 

of the debt based upon long-term fixed interest rates that WFEC could obtain at December 31, 2011 and 

2010, respectively. Under the provision of ASC 820-10, Fair Value Measurements and Disclosure, the fair 

value is determined based upon Level 2, significant other observable inputs, defined as inputs that are 

either directly or indirectly observable. The estimated fair value of the long-term debt at December 31, 

2011 and 2010 is approximately $898,116,000 and $817,811,000, respectively. See note 12 for a 

discussion of the fair value of derivative instruments. 

(12) Derivative Instruments and Hedging Activities 

The Company periodically enters into commodity swap, collar and option contracts for a portion of its 

anticipated natural gas or power purchases, to manage the price risk associated with fluctuations in market 

prices. These contracts limit the unfavorable effect that price increases will have on natural gas or power 

purchases. WFEC has elected to not designate its commodity contracts as cash flow hedges; therefore, 

changes in the fair value of the commodity contracts are recorded as an asset or liability and as an increase 

or reduction to production or purchased power expense. In accordance with ASC 980-10, Regulated 

Operations, gains and losses from price management activities are included in WFEC’s fuel cost recovered 

from members as part of WFEC’s rate-making policy. As such, an asset or liability, that offsets the change 

(Continued) 

41




in the fair value of the commodity contracts recorded in production or purchased power expense, is 

established to record the amount of fuel costs over collected from or unbilled to members of WFEC. The 

fair value of the commodity swaps resulted in a liability and a related receivable from members (through 

future increased fuel charges) of $4,261,000 and $2,818,000 as of December 31, 2011 and 2010, 

respectively. The fair value of the liability is reflected in accounts payable and accrued liabilities in the 

accompanying financial statements. WFEC has entered into derivative type commodity contracts for future 

transactions with terms expiring through December 2012. 

GenCo entered into an interest rate swap agreement to manage fluctuations in cash flows resulting from 

interest rate risk. This swap changes the variable-rate cash flow exposure on the debt obligation to fixed 

cash flows. Under the terms of the interest rate swap, GenCo receives variable interest rate payments and 

makes fixed interest rate payments, thereby creating the equivalent of fixed-rate debt. Changes in the fair 

value of the interest rate swap, which is designated as a hedging instrument that effectively offsets the 

variability of cash flows associated with variable-rate, long-term debt obligation is reported in equity as 

other comprehensive income. This amount subsequently is reclassified into interest expense as a yield 

adjustment of the hedged interest payments in the same period in which the related interest affects 

earnings. For the years ended December 31, 2011 and 2010, WFEC reclassified losses of $1,147,000 and 

$1,224,000, respectively, into interest expense. The fair value of the interest rate swap was obtained from 

dealer quotes. This value represents the estimated amount WFEC would receive or pay to terminate the 

agreement, taking into consideration current interest rates. The fair value of the swap at December 31, 

2011 and 2010 was a liability of $3,966,000 and $3,520,000, respectively, and is included in other 

liabilities in the accompanying consolidated balance sheets. 

WFEC expects $1,000,000 of the existing losses that are reported on accumulated other comprehensive 

income at December 31, 2011, to be reclassified into earnings within the next twelve months. 

WFEC utilizes valuation techniques that maximize the use of observable inputs and minimize the use of 

unobservable inputs to the extent possible. WFEC determines fair value based on assumptions that market 

participants would use in pricing an asset or liability in the principal or most advantageous market. When 

considering market participant assumptions in fair value measurements, the following fair value hierarchy 

distinguishes between observable and unobservable inputs, which are categorized in one of the following 

levels: 

 

 

 

Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities 

accessible to the reporting entity at the measurement date. 

Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset 

or liability, either directly or indirectly, for substantially the full term of the asset or liability. 

Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent 

that observable inputs are not available, thereby allowing for situations in which there is little, if any, 

market activity for the asset or liability at measurement date. 

42 

(Continued)




The following table presents the placement in the fair value hierarchy of liabilities that are measured at fair 

value on a recurring basis at December 31, 2011 and 2010: 

Quoted prices 

in active Significant 

markets for other Significant 

identical observable unobservable 

assets inputs inputs 

(Level 1) (Level 2) (Level 3) 2011 

Liabilities: 

Commodity derivatives $ — 4,261,000 — 4,261,000 

Interest rate derivatives — 3,966,000 — 3,966,000 

Total liabilities $ — 8,227,000 — 8,227,000 

Quoted prices 

in active Significant 

markets for other Significant 

identical observable unobservable 

assets inputs inputs 

(Level 1) (Level 2) (Level 3) 2010 

Liabilities: 

Commodity derivatives $ — 2,818,000 — 2,818,000 

Interest rate derivatives — 3,520,000 — 3,520,000 

Total liabilities $ — 6,338,000 — 6,338,000 

(13) Commitments and Contingencies 

Addition of and Sales to New Mexico Cooperatives 

In 2010, all necessary approvals were received to add four New Mexico distribution cooperatives 

(Cooperative, collectively Cooperatives) to the membership of WFEC. Each Cooperative executed a 

Wholesale Power Contract (WPC) through 2050 and has one vote on the Board of Trustees through their 

respective elected representative. Together, the Cooperatives have approximately 400 megawatts (MW) of 

load. Their service territories are adjacent to one another in southeastern New Mexico and are located in 

the Southwest Power Pool (SPP) footprint, as is WFEC. The Cooperatives will continue to own and 

maintain their respective transmission and distribution systems. Transmission service will be provided 

through the SPP Open Access Transmission Tariff. 

WFEC and the Cooperatives also executed a Transition Agreement (Agreement), effective in 2010 and 

terminating June 1, 2026. During this transition period, the Cooperatives are members of WFEC with all 

rights, privileges and obligations of membership, but with a separate cost of service rate (Segregated Rate). 

The Segregated Rate shall generate sufficient revenue to cover the Cooperative’s cost of service as well as 

produce sufficient revenues that when combined with all other WFEC revenues, meet WFEC 

Board-determined reserves. During the transition period, each Cooperative shall be responsible for 

(Continued) 

43




(1) costs which are directly and uniquely related to the supply and delivery of electric power and energy to 

the respective Cooperative, (2) its share of costs common to the Cooperatives and (3) its share of costs 

common to all members of WFEC. After the transition period and for the remaining term of the WPC, the 

Segregated Rate shall no longer be used, and the Cooperatives shall be a member with a then applicable 

cost of service rate or rates common with other members of WFEC (Member Rate) and consistent with the 

WPC. 

Immediate and short-term generation requirements of the Cooperatives will continue to be provided from 

their existing contracts with Southwestern Public Service Company (SPS). The Cooperatives will step out 

of those contracts in four increments in 2012, 2017, 2022 and finally 2026 when the contracts terminate. 

WFEC will be responsible for providing approximately 122 MW in 2017, 300 MW in 2022 and fully 

responsible for all needs of the Cooperatives after the SPS contracts terminate in 2026. Each of the 

Cooperatives is responsible for their power supply needs until 2017 through their SPS contracts, self-build 

generation or other third party contracts. When WFEC begins to supply portions of the requirements in 

2017, the remainder will continue to be supplied from the SPS contracts during their remaining term. 

WFEC may, but is not obligated, to provide any power to the cooperatives until 2017. 

All Cooperative power supply resources, including the SPS contracts, shall be assigned to WFEC in the 

next few years, but in any event, no later than spring 2017. Upon such assignment and assumption of 

obligations, the Cooperatives shall, through June 1, 2026, continue to pay all charges and costs arising 

from such third party supplied contracts and contributed generation, as part of the Segregated Rate. 

Beginning June 1, 2026 and thereafter, the charges and costs arising from assigned third party supplier 

contracts and contributed generation shall be included in the WFEC Member Rate. 

One Cooperative has chosen to build capacity to self-generate a portion of its needs. The generation 

resources, declared commercial February 2012, will be assigned along with debt assumption to WFEC by 

2017, possibly sooner, and an appropriate equity credit assigned to the Cooperative for its net contribution. 

This Cooperative has entered into a purchase power agreement for all the output from a wind farm with an 

approximate 28 MW nameplate rating. This wind energy purchase agreement shall be assigned to WFEC, 

like other resources as described above. 

Each Cooperative will contribute equity to WFEC in a manner and amount such that, as of June 1, 2026, 

the Cooperative has contributed equity to WFEC comparable to the amount of equity contributed to WFEC 

by prior existing members. These equity contribution payments are determined by WFEC’s projected 

capital resource additions or purchase power contracts, or share thereof, required to supply power and 

energy to the respective Cooperative, and are collected and paid to WFEC through the Segregated Rate. In 

2011, the Cooperatives had contributed $6,256,000 in equity to WFEC which were assigned to their 

respective patronage accounts. 

The WFEC Board of Trustees and RDUP approved adoption of the Segregated Rate, (WFEC Rate 

Schedule TR-15(a)) in February and March, 2011, respectively. Additionally, the Board approved an 

agreement for WFEC to sell a combined approximately 50 MW of capacity and associated energy to 

three of the Cooperatives to help meet their power supply needs beginning June 2012 and ending 

May 2017. 

44 

(Continued)




Purchase Requirements 

WFEC has a long-term standby power contract with Southwestern Power Administration under which it is 

obligated to purchase a minimum quantity of power annually through May 2012. It is expected that the 

contract will be extended through May, 2027 with the same minimum purchase requirements and with the 

same rate structure. At the prescribed 2012 rates, the minimum requirement approximates $17,916,000. 

During 2011 and 2010, WFEC purchased $20,114,000 and $21,587,000, respectively. 

WFEC has a long-term purchased power contract with a party, effective January 2010 through 

December 2025 under which it is obligated to purchase a minimum quantity of power on a monthly basis. 

Based on contract information and power cost adjustment information currently published, the annual 

obligation for 2012 is estimated at $46,117,000. During 2011 and 2010, WFEC purchased $24,042,000 and 

$12,828,000, respectively. The contract requires WFEC to purchase increasing minimum monthly 

quantities of power at prescribed contract intervals. 

In 2011, WFEC negotiated multiyear contracts to acquire and transport coal for the Hugo Generating 

Station. WFEC’s costs for both coal and transportation purchases were approximately $69,000,000 and 

$65,000,000 for the years ended December 31, 2011 and 2010, respectively. The current projection for the 

minimum contract commitments for coal and coal transportation are approximately $69,000,000 in 2012, 

and $43,000,000 in 2013. 

Environmental 

WFEC, as is common with other electric utilities, is subject to stringent existing environmental laws, rules, 

and regulations by federal, state, and local authorities with regard to air and water quality control, solid and 

hazardous waste disposal, hazardous material management, and toxic substance control. Management 

believes it is in substantial compliance with all existing laws, rules, and regulations. 

Legal 

WFEC was the defendant in two lawsuits, each involving one member distribution cooperative. Each suit 

centered on numerous claims, and one complaint sought to have the parties’ Wholesale Power Agreement 

declared invalid as an unlawful restraint of trade, each related to the adoption and implementation by 

WFEC of a member wholesale power rate, the R-15 rate, effective February 1, 2010. In January 2012, 

one of the suits was settled and dismissed with no monetary amount due. WFEC denies the allegations in 

the remaining suit and intends to vigorously defend the case. 

WFEC is involved in various other legal actions arising in the ordinary course of business. In the opinion 

of management, after consultation with counsel, the ultimate disposition of these matters will not have a 

material adverse effect on WFEC’s financial position or the results of future operations. 

(Continued) 

45




(14) Asset Retirement Obligation 

WFEC has asset retirement obligations arising from regulatory requirements to perform certain asset 

retirement activities at the time that certain machinery and equipment is disposed of. The liability is 

initially measured at its discounted fair value and subsequently adjusted for accretion expense and changes 

in the amount or timing of the estimated cash flows. The corresponding asset retirement costs are 

capitalized as part of the carrying amount of the related long-lived asset and depreciated over the asset’s 

useful life. Activity for the asset retirement obligations for the years ended December 31 are as follows: 



Beginning balance $ 1,107 1,036 

Additional liabilities incurred — — 

Revisions to estimates — — 

Accretion expense 78 71 

Ending balance $ 1,185 1,107 

(15) Subsequent Events 

The Company has evaluated subsequent events from the balance sheet date through March 6, 2012, the 

date at which the financial statements were available to be issued, and determined there are no other items 

to disclose. 

46

2011 WFEC Annual Report - Western Farmers Electric Cooperative

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