2007 WFEC Annual Report - Western Farmers Electric Cooperative

Western Farmers Electric Cooperative 

2007 Annual Report 

A Strong Foundation 

Together, with its member electric cooperatives, 

WFEC is working to build a powerful foundation for 

the future through new growth and service reliability.

(Clockwise, from top) 

Anadarko Plant 

Mooreland Plant 

Hugo Plant 

About WFEC 

In existence for over 66 years, Western Farmers Electric Cooperative (WFEC) has grown 

into Oklahoma’s largest locally owned power supply system. WFEC is a generation and 

transmission (G&T) cooperative that provides essential electric service to 19 member 

cooperatives, Altus Air Force Base and other power users. With three generating plants 

located at Mooreland, Anadarko and Hugo, WFEC has a total power capacity of more 

than 1,400 megawatts when contracted purchased power is included. 

Supplying the electrical needs of more than two-thirds of the geographical rural area of 

Oklahoma, WFEC is still committed to its original purpose...to supply its members with 

electric power at the lowest possible cost consistent with adequate and reliable service, 

efficient operation and financial strength.

President and 

CEO Report 

On the surface, it would be 

easy to look back at 2007 and 

think that the year was fairly 

uneventful. However, with a little more 

reflection, you might reconsider and 

conclude that the past year was truly 

among the most remarkable in Western 

Farmers Electric Cooperative’s (WFEC) 

recent history. 

On February 1, 2007, the Southwest 

Power Pool (SPP) opened the longplanned 

and often-delayed Energy 

Imbalance Market. WFEC was able 

to participate in the market with little 

observable change in operation for 

end-use customers. Advantaged by 

our equity investment in ACES Power 

Marketing (APM), the need for additional 

staffing and technology infrastructure 

was kept to a minimum. Months of 

preparation by employees 

coordinating operations with 

SPP and APM culminated 

in a smooth transfer to new 

market operation. 

Continued coordination 

between WFEC and APM 

has helped to improve 

market efficiency, keep 

market settlement charges 

to a minimum and increase 

market purchases and 

sales opportunities. The smooth market 

start and the ability to share market 

development costs with other APM 

owners point out significant dollar savings 

and increased market access resulting 

from APM membership. 

Weather played a significant part in 

WFEC operations during the year. Record 

Dr. Bruce Scott (left) 

Cotton Electric Cooperative 

WFEC Board President 

Gary Roulet 

WFEC Chief Executive Officer 

rainfall and flooding, along with poor weather 

during spring and summer months, were 

sandwiched between ice storms at the beginning 

and end of the year. 

WFEC’s 2006 peak demand grew 139 

megawatts (MW) to reach 1,409 MW, with a 

complementing 7 percent increase in megawatt-

hour (MWh) sales. This expansion occurred 

primarily in energy industry-related projects, 

in addition to commercial and residential 

development. And, the new peak demand was 

encouraged by extremely dry weather conditions 

and hot temperatures. In 2007, cooling and 

heating degree days were below normal, 

but WFEC’s 

peak demand 

nevertheless 

reached 1,392 

MW, only 1.2 

percent below the 

2006 level. Even 

with slightly lower 

demand readings, 

2007 energy sales 

exceeded 2006 by 

about 3 percent, 

lending additional 

validation of 

continued 

cooperative 

member growth. 

WFEC’s Power 

Production area 

pursued some of 

the most significant 

capital projects 

in our history at 

the Hugo Plant 

during the planned 

two-month spring 

outage. Members 

were immediately 

rewarded for these 

investments with 

a nine-day fall planned maintenance outage 

shortened to five days of reduced loading for 

maintenance activities. As a result, WFEC 

ended 2007 with the longest consecutive “days 

WFEC Journeyman Station Technicians Ronnie Morgan 

(lower left) and Chance Laughlin place a new transformer 

in operation near Hinton, Okla. Improving and 

maintaining high levels of reliability across WFEC’s large 

service territory is an important goal for all employees. 

 

of operation” period of the Hugo Plant’s 25-year 

history. In fact, all of the WFEC power plants 

operated well during 2007. 

In addition, the Rural Utilities Service (RUS) 

approved WFEC’s Generation and Transmission 

and Distribution (T&D) four-year Construction 

Work Plans (CWP) for 2008 through 2011. 

These not only include 

on-going capital 

projects, but also 

investments to meet 

updated generation 

environmental 

requirements 

(including NOx and 

mercury). RUS 

also approved a 

loan guarantee 

commitment for the 

Generation Loan 

Application for the 

same period. This was 

very favorable timing 

from RUS and should 

provide timely funding 

of Generation CWP 

projects. 

Projects for 

T&D included three 

new substations 

being energized, 

eight substations 

being upgraded, the 

purchase of a new 

mobile substation, the 

addition of two new 

switch stations and 

the upgrading of six transmission lines. Most 

new construction is outsourced, allowing WFEC 

(Continued on Page 6)

(Continued from Page 5) 

crews to focus on and perform critical system 

maintenance duties to maintain reliability. 

Requests for capital construction projects for 

T&D facilities continued at record levels in 2007. 

With the overall demand increasing for new 

facilities, steel, transformers, insulators, switches 

and wire continue to have long lead delivery 

times. Staff is selectively increasing inventories 

of key components to continue to accommodate 

time-sensitive construction demands. 

Late in the year, WFEC’s Control Area 

Services completed their first North American 

Electric Reliability Corporation (NERC) Reliability 

Readiness Evaluation since implementation of 

new rules earlier in the year. WFEC received 

a very good report overall. Suggestions for 

improvement included support for completion 

of an off-site emergency operations center and 

improved document management technology. 

We continue to work on communication system 

redundancy, as well as improved communication 

to each substation and switch station facility. 

Other highlights of 2007 included: 

‣ Agreement to purchase additional 

renewable energy from the 19 MW Buffalo 

Bear wind energy project, scheduled for 

completion in 2008. 

‣ Agreement to utilize the remaining 41 MW 

of WFEC GENCO, LLC capacity from a 

third party during peak months from June 

2007 through February 2012. 

‣ Contract to purchase 30 MW of 

distributive generation capacity, up to 500 

hours annually, with in-service expected 

prior to the 2008 summer peak. 

‣ Plans progressing for financing and 

construction of a 136 MW simple cycle 

combustion gas turbine generating facility 

at Anadarko, Okla. 

‣ Approval from RUS to release our 

Emergency Security Reserve (ESR) 

to finance RUS and Board approved 

construction projects. 

 

‣ Board commitment to fund our Contingent 

Cash Reserve (CCR) to almost $20 

million dollars. 

‣ Continued progress on a Federal 

Financing Bank (FFB) Debt Extension of 

the Hugo 1 Power Plant. 

‣ Replacement of a portion of WFEC’s 

steel coal cars with aluminum cars to help 

lower transportation costs. 

‣ Wholesale power costs ending the 

year below budget, with a significant 

$8.5 million Member Revenue Refund 

commitment to our 20 members. 

‣ WFEC meeting Times Interest Earned 

Ratio (TIER) and Debt Service Coverage 

(DSC) goals established by our Board. 

‣ Distribution of over 22,000 compact 

fluorescent light bulbs during the year 

along with educational information and 

related efficiency and conservation ideas. 

‣ Ending the year with six months free 

of recordable accidents for our Power 

Production division. Our T&D employees 

achieved four months free of recordable 

accidents. 

WFEC accomplished a number of good 

things during 2007, with just a few noted above. 

The achievement of these goals was the result 

of a determined leadership by our Board and 

a team effort by our hard-working, dedicated 

cooperative employees. 

New generation capacity, evolving 

environmental rules, wholesale rate pressure 

and the overall increased complexity in the 

electric markets will continue to be large 

obstacles to overcome as we move forward. 

WFEC’s Board and staff are working together to 

develop plans to remain competitive in each of 

these areas, and we believe significant progress 

towards their successful conclusion should occur 

in 2008. 

wfec

2007 At a Glance 

Energy Sales (to Members & Cities) 

Total Operating Revenue 

Net Margins 

Assets 

$391 million 

$425 million 

$20 million 

$855 million 

Member Systems 20 

Member Consumer Meters 

Member Population Served 

System Peak Demand 

Miles of Transmission Line 

261,331 (est.) 

476,000 (est.) 

1,392 megawatts 

3,627 miles 

Substations 267 

Generating Capacity 

Coal 

Natural Gas 

Total 

Purchased Power Capacity 

Natural Gas 

Hydro 

Total 

Total Capacity 

450 megawatts 

678 megawatts 

1,128 megawatts 

50 megawatts 

260 megawatts 

310 megawatts 

1, 438 megawatts 

Number of Employees 360

Building a Strong Foundation... 

Together 

W 

estern Farmers Electric 

Cooperative’s (WFEC) overarching 

goal is to provide affordable, reliable 

power for our members. This goal was achieved 

in 2007, while successfully meeting numerous 

challenges and establishing a strong foundation 

for the future. 

WFEC’s employees know our very 

existence is based on the success of our 20 

members. We are committed to consistently 

providing services that exceed our members’ 

expectations, emphasizing honesty, quality and 

other sound business principles. 

As our business is 

conducted, we will be 

responsible members 

of the communities 

where we live, work 

and provide electrical 

service. WFEC will 

also be good stewards 

of the environment 

and follow sound 

safety practices. 

This year’s Annual 

Report will highlight 

various aspects of 

WFEC’s core business 

practices, while also 

addressing activities of 

particular significance 

occurring during the 

year. We hope that our 

members take pride in 

the accomplishments 

of their Generation and 

Transmission (G&T) 

cooperative. 

 

Meeting Growth & Reliability Needs 

Significant efforts continued in 2007 to 

develop new generation sources, as our 

members’ needs for increased capacity 

continued to grow. Employees from throughout 

WFEC have responded effectively to the 

challenges resulting from more than 18 

percent energy megawatt-hour (MWh) sales 

growth over the past three years. 

During the past year, staff continued to 

pursue Board goals involving the development 

WFEC GENCO, LLC has two gas-fired peaking units on location at the site of 

WFEC’s Anadarko Plant. Plans are in the works for construction of similar simple 

cycle combustion turbine units by WFEC, near this location. Commercial operation is 

expected in 2009.

of base load generation, as well as peaking 

generation. This additional generation is 

necessary to meet the needs resulting from 

past growth, as well as projected future 

growth. 

Simple cycle combustion turbines 

were selected for a natural gas generation 

addition to the Anadarko facility as they 

provide reasonably priced capacity and 

energy in a short development time 

period. These new generators can also 

be converted to combined cycle operation 

should future load growth and economics 

dictate. The existing Anadarko Plant 

site was selected as the location for the 

capacity addition, based on transmission 

availability, existing infrastructure, gas 

delivery and water availability. 

This project will consist of the 

construction of three 45 megawatt (MW) 

General Electric LM6000 Aero Derivative 

Combustion Turbine Generators. Financing 

and equipment acquisition plans are 

advancing for the project, which has a 

planned commercial operation date of 

June 1, 2009. 

In a unique arrangement, WFEC signed 

a seven-year purchase power agreement 

for 30 MW of new distributive generation 

capacity and energy to be utilized up to 500 

hours annually. This will help to alleviate 

some of the near-term capacity issues facing 

WFEC. These facilities are anticipated to be 

commercial before the summer of 2008. 

WFEC recalled an additional 20 MW of the 

capacity of WFEC GENCO, LLC, a 91 MW gas 

facility in Anadarko, Okla., from a third party 

effective January, 2007. This raised the total 

capacity recalled by WFEC to 50 MW. During 

2007, WFEC entered into an agreement with the 

third party to utilize the remaining 41 MW of the 

unit’s capacity for seven peak months of each 

calendar year beginning June, 2007 through 

February, 2012. This peaking capacity choice 

allows WFEC to add minimum required peaking 

A new WFEC mobile substation undergoes initial field testing 

by Station Services crews east of Binger, Okla. Additional 

WFEC personnel from related departments attended the 28 

MVA mobile’s test trials for instruction and discussion of its 

numerous features. 

 

to optimize base load performance from other 

resources. 

WFEC’s Environmental Department staff 

worked during the year to obtain the necessary 

environmental permits to add resources to 

the WFEC generation fleet. The air permits 

have required extensive modeling and 

consultation with the Oklahoma Department 

of Environmental Quality, other regulators, 

consultants and legal counsel. 

All the necessary approvals and environmental 

permits were obtained in a timely fashion to 



allow completion of the projects to meet our 

members’ needs. 

Member growth has also created the need 

for significant upgrades or new construction of 

substations and transmission lines. Transmission 

and Distribution (T&D) projects included 

three new substations being energized, eight 

substations being upgraded, the addition of two 

new switch stations and the upgrading of six 

transmission lines. 

A new mobile substation was added to the 

existing fleet at WFEC to help ensure reliability 

for our members. The 28 megavolt ampere 

(MVA) mobile allows backup service for our 

largest subs with a flexible two-piece design that 

allows it to fit inside the smaller substation sites. 

In addition, it affords WFEC the ability to use the 

older smaller mobile subs in lieu of building more 

expensive temporary substations. 

Continued growth occurring primarily in 

the oil and gas sector has also challenged our 

personnel in meeting in-service dates for new 

transmission and substation facilities. Having 

materials in sufficient quantity to meet not only 

construction demands, but also operations 

and maintenance needs, was also important. 

Adequate manpower also had to be carefully 

directed to be utilized in the most productive way 

possible. 

A major overhaul at the WFEC Hugo Plant was 

successfully concluded in the spring of 2007. 

The two-month project included replacement of 

boiler components to improve reliability at the 

coal-fired facility. Above, contractors prepare to 

lower a burner elbow joint from the upper deck. 

Plant Operations 

WFEC’s Power Production staff achieved a 

number of milestones and initiated several new 

projects in 2007. Plant performance is tracked by 

setting targets on several key indicators. Two of 

these are cost leadership and reliability, as these 

factors are vital in determining how well WFEC’s 

power plants operate. Safety and environmental 

stewardship are also included on this valuable 

10 

Wally Young, plant chemist, checks the progress 

on a Power Production Scorecard. These 

scorecards were introduced at all WFEC plants in 

2007. They allow personnel to track performance 

in areas of safety, environmental stewardship, 

unit availability and cost control.

tool, known as a Power Production 

Scorecard. 

As anticipated, the 2007 

production plan has been to base 

load the Hugo Plant due to the 

cheaper price of coal versus gasfired 

generation. This plant has been 

used as a base load facility since its 

commercial operation date in 1982. 

Although staff practices regular 

planned outages for routine and 

preventative maintenance, the Board 

is committed to capital improvements 

necessary for reliable use of the unit 

well into the future. Staff completed 

a two-month extensive spring outage 

to repair and replace components 

of the unit. Approximately $21 

million was approved for capital 

replacement projects. 

Good planning and prudent 

operations and management 

practices helped WFEC achieve 

high reliability targets. In particular, 

significant modifications were 

made in how Hugo Plant personnel 

schedule planned maintenance 

outages to increase generation hours 

and unit availability. A nine-day fall 

planned maintenance outage was shortened 

to five days of reduced loading for selected 

maintenance activities. Members’ fuel costs 

benefitted when maintenance projects were 

performed at the Hugo Plant without taking the 

unit completely out of service. These successful 

modifications in planning and scheduling saved 

an estimated $2.4 million dollars in purchased 

power costs. 

Mooreland and Anadarko Plant personnel 

have also accepted new performance roles. 

Operation of the units at these sites is now 

extremely flexible. The result is that these units 

are available to meet system load demands by 

cycling and being maintained in standby mode. 

These efforts allow WFEC to purchase lower 

In April of 2007, WFEC purchased 423 new aluminum rail cars to 

deliver coal to its base load generating unit near Hugo, Okla. The 

aluminum cars hold approximately 20 percent more coal than the 

cars they replaced. WFEC’s new fleet of rail cars cost just under 

$30 million. 

11 

cost market energy, when available, to help 

hold down energy costs to our members, while 

still providing reliable service. It is estimated 

that their efforts helped WFEC to access over 

750,000 MWh of energy from lower cost sources 

in 2007. 

The total weighted generation equivalent 

availability during 2007 was 88.4 percent. At 

WFEC’s coal-fired Hugo Plant, a new record of 

224 days of continuous run time was set. The 

Anadarko Combined Cycle Plant operated at an 

83.1 percent service factor, which is the highest 

since 1980. The Anadarko and Mooreland gasfired 

plants operated 27,987 unit fired hours. 



Oklahomans are no strangers to extreme weather 

such as ice storms and tornadoes. In 2007, 

flooding along portions of WFEC transmission 

lines, including structures traversing the 

Canadian River, created challenges for crews 

working to restore or reroute power. 

WFEC provides electric power generated from 

a variety of sources. The Southwestern Power 

Administration provides WFEC with an allocation 

of power generated at its hydroelectric stations. 

In 2007, economical hydro deliveries were some 23 

percent better than budget. 

WFEC’s goal is to provide low-cost, reliable 

energy to our members. To accomplish this 

goal, we work to keep our low-cost coal-fired 

generation base loaded and supplement demand 

and market opportunities with our gas-fired 

generation. The average cost per net MWh for 

2007 was $52.71, which was only a 1 percent 

increase over 2006. 

Changing Market Conditions 

In 2007, WFEC’s Control Area Services 

achieved a successful start of the Southwest 

Power Pool (SPP) Energy Imbalance 

Market. Our staff trained and participated in the 

various SPP readiness exercises and were very 

timely in implementing the necessary changes 

affecting WFEC. 

Significant pricing volatility continued during 

2007. The market price of natural gas and 

energy declined during the year, helping WFEC 

achieve its variable cost of production goals for 

the year. Several factors occurred that reduced 

fuel and energy price pressures even more. 

WFEC met the need for increased energy 

kilowatt-hour sales with more economical 

12 

energy resources helping to keep costs down. 

Coal production, WFEC’s most economical 

generation resource, was approximately 1 

percent better than budget. Hydro deliveries, 

another key economical source of energy, were 

approximately 23 percent better than budget. A 

significant factor in keeping costs down was the 

procurement of economy energy at prices below 

the cost of gas generation. Economy energy 

purchases were three times the annual budgeted 

amount. 

During the year, WFEC management, at the 

direction of the Board of Trustees, revised the 

risk management strategy to focus on protection 

more catastrophic in nature. This allows WFEC 

to protect against significant price increases 

in natural gas while participating more fully 

in price decreases. WFEC continues with the 

procurement of unit contingent insurance for the 

Hugo Plant. This provides protection against 

exposure to the incremental cost of gas versus 

coal, should the coal unit be forced off-line. The 

Board continues to support the use of a fuel 

billing rate designed to accumulate and maintain 


2007 WFEC Statistics 

2003 

2004 

2005 

2006 

Equity 

(Millions of Dollars) 

$58 

$71 

$82 

$93 

2007 $112 

WFEC has steadily built strength 

to add equity through its net 

margins and has consistently 

exceeded budgeted margins. The 

Board continues to hold firm 

to its strategic goal to increase 

financial strength. This goal 

includes yearly margins sufficient 

to grow equity and cash reserves 

that enable the cooperative to 

better manage its projected 

capital expenditures for the 

benefit of its members at 

reasonable interest costs. 

WFEC’s 2006 peak demand grew 139 MW 

to reach 1,409 MW, with a complementing 

7 percent increase in MWh sales. In 2007, 

cooling and heating degree days were 

below normal, but WFEC’s peak demand 

nevertheless reached 1,392 MW, only 1.2 

percent below the 2006 level. Even with 

slightly lower demand readings, 2007 energy 

sales exceeded 2006 by about 3 percent, 

lending additional validation of continued 

cooperative member growth. 

1,225 

1,095 

Coincident Peak Demand 

(Megawatts) 

1,216 

1,093 

2003 2004 2005 2006 2007 

wWinter 

r 

1,409 

1,270 1,248 

1,124 

Summer summe r 

1,308 1,392 

2003 

2004 

2005 

Energy Sales to Members and Municipals 

(Millions of kWhs) 

414 5,108 5,522 

407 5,331 5,738 

357 5,797 6,154 

WFEC and its member 

cooperatives were growing and 

building together in 2007. Rural 

Oklahoma growth quickly 

became an important ingredient 

in WFEC’s future strategic goals, 

with exciting challenges and new 

opportunities becoming evident 

for many parts of the state. 

2006 

373 6,251 6,624 

2007 

336 6,468 6,804 

Municipal 

ipa l 

Member 

e mbe r 

13


an over-recovered fuel account balance. This is 

applied in helping reduce rate volatility during 

relatively short-term fuel related events and 

seasonal price fluctuations. 

WFEC’s staff continues working to realize 

the goal of maximizing the relationship with 

ACES Power Marketing (APM). This relationship 

provides WFEC with risk management expertise, 

resources and knowledge that WFEC would 

otherwise have to staff for itself. Staff has 

worked with APM in developing, monitoring and 

optimizing the risk management strategy with 

the guidance of the WFEC Board of Trustees. 

Staff continues to manage cooperative insurance 

programs to protect the assets and financial 

integrity of the cooperative. 

Financial Strength 

The WFEC Board of Trustees and staff 

continued to implement numerous initiatives to 

strengthen our cooperative for the future. New 

credit facilities were in place to quickly and 

positively respond to unexpected situations. At 

the end of 2006, we were preparing to finance 

the Hugo 2 base load coal plant with an equity 

deposit from the Emergency Security Reserve 

(ESR), a bridge loan from private financing and 

a Rural Utilities Service (RUS) loan application 

near the front of the queue. What a difference a 

few months brings. 

During the first quarter of 2007, the current 

administration effectively stopped RUS financing 

of base load coal generation, suggesting that 

they should be financed through commercial 

markets. The RUS appropriation bill signed into 

law included a significant $6.5 billion of FFB 

funding, but language that would have allowed 

RUS to resume funding of coal-fired plants was 

not included. 

Meanwhile, work on a template G&T 

Indenture to support commercial lending 

continues which will allow alternate financing 

for significant G&T projects. WFEC continues a 

WFEC Financial Services Department staff 

(from left) Kathy Babb, Freida Jones and Radley 

Stevens, look over information for the annual 

financial audit. These three, along with other 

financial employees, spend numerous hours 

gathering information for this yearly task. 

path of building its financial strength to enable 

flexibility to address the many complexities 

facing the industry, with a Board-established 

Debt Service Coverage (DSC) target of 1.1. 

Plans continued to progress for financing a 

newly planned 136 MW simple cycle gas facility 

in Anadarko, Okla. A request was made for a 

lien accommodation from RUS to allow 100 

percent private financing to allow the Board to 

move forward with necessary commitments for 

commercial operation by the summer of 2009. In 

addition, RUS provided direction for the release 

of the ESR of approximately $25 million, to a 

Special Construction Fund to be used on WFEC 

Board and RUS approved construction projects. 

During the year, WFEC received a loan 

guarantee commitment from RUS on its 

$101,105,000 generation loan application 

14

Area load growth is a significant factor in the decision to upgrade the Canadian 

Switch Station located near Noble, Okla. WFEC station technicians performed 

work on the facility and transformer, which have served the area for over 35 

years. 

Inset: Benny Smith, lead station technician, tightens up bolts at the site. 

for the 2008 through 2011 Construction 

Work Plan (CWP) period for upgrades and 

modifications. WFEC will be using the proceeds 

of this loan primarily to finance generation 

system replacements and upgrades to keep 

its assets and infrastructure operating at peak 

performance. 

WFEC advanced over $71.8 million in 

Federal Financing Bank (FFB) loan funds in 

2007 at fixed rates ranging from approximately 

4.3 to 4.9 percent with maturities from 2024 to 

2040 for Generation and T&D CWP projects. 

Seventeen of 19 cooperative members, 

comprising some 84 percent of member load, 

have extended their all-requirements contracts 

for 25 years, through 2050. These commitments 

facilitate long-term planning to meet WFEC’s 

energy and financing needs. 

Based on a useful life assessment and 

depreciation rate study, RUS approved new 

15 

depreciation rates for 

the Hugo, Anadarko 

combined cycle and 

Mooreland production 

plants effective 

January 1, 2007. The 

rate reduction resulted 

in an approximate 

$5.9 million lower 

depreciation expense 

in 2007. 

WFEC staff 

continued to work 

through the details 

necessary to 

accomplish the Hugo 

1 FFB Debt Extension 

under the provisions 

of the Federal Credit 

Reform Act of 1990 

to more closely match 

debt repayment with 

the approved extended 

depreciable life of the 

plant. This extension 

could equate to a significant multi-million dollar 

reduction in debt service payments over the 

next several years, complement the lower 

depreciation rate of the plant effective January 

2007 and accommodate expansion plans for 

new generation. WFEC anticipates a 2008 

completion. 

By mid-year, it was evident net margins 

would exceed budget expectations and the 

FFB Debt Extension would be delayed to 

2008. Cautious to consider summer sales and 

plant performance, members benefited from a 

phased-in rate reduction totaling approximately 

$4.4 million with the discontinuation of a ¾ mill 

energy surcharge from July through December 

($2.1 million) and implementation of a negative 

one mill monthly energy surcharge billed from 

August through December ($2.3 million). 


WFEC Senior Management 

The senior management staff consists of seven individuals, who all have a longtime 

career in the electric utility industry, with many years served locally at WFEC. 

Senior management staff includes (from left): 

Gary Gilleland, general manager, power production; Jane Lafferty, chief financial officer; 

Gary Roulet, chief executive officer; Jim O’Neill, general manager, marketing and 

communications; Brian Hobbs, general manager, legal and administration; Bob Orme, 

general manager, power resources; and Ron Cunningham, treasurer and financial risk 

officer. 

16

WFEC Board of Trustees 

Seated (from left): 

David Ray, Kiamichi Electric Cooperative; Bill McCain, Choctaw Electric Cooperative (Board vice 

president); Fred Stowe, Southwest Rural Electric Association; and James Griffin, Red River Valley 

Electric Association 

Standing, second row (from left): 

Russell Pollard, Cimarron Electric Cooperative; Bob Thomas, People’s Electric Cooperative; Rusty 

Grissom, Oklahoma Electric Cooperative (Board assistant secretary/treasurer); Jerry Rempe, East 

Central Rural Electric Cooperative; Gary Crain, Canadian Valley Electric Cooperative; Bob Allen, 

Harmon Electric Association; and Mike Lebeda, Kay Electric Cooperative 

Standing, top row (from left): 

Leslie Hinds, Kiwash Electric Cooperative; Bob Thomasson, Caddo Electric Cooperative; Ray 

Smith, Northwestern Electric Cooperative (Board secretary/treasurer); Max Ott, Alfalfa Electric 

Cooperative; Charles Hickey, Northfork Electric Cooperative; Lloyd Owens, Southeastern Electric 

Cooperative; Gary Jones, Rural Electric Cooperative; and Dr. Bruce Scott, Cotton Electric 

Cooperative (Board president) 

17


Based on Board action and contingent upon 

lender approval, WFEC will refund over $8.5 

million in cash in the form of a 2007 Member 

Revenue Refund. This is the fifth year in a row 

the Board has been able to return a portion of 

margins to members. After the external audit is 

complete, $1 million will be transferred from the 

general fund to the Contingent Cash Reserve 

(CCR), representing a portion of uncollected 

energy surcharge during the year. Equity as 

a percent of assets rose from $93 million (11 

percent) in 2006 to $112 million (13 percent) in 

2007. 

WFEC budgeted an average total price of 

member energy sales of 61.29 mills/kWh for 

2007. Including the member refund, the 2007 

actual member price was 58.27 mills/kWh, a 5 

percent decrease under budget. 

Currently, WFEC maintains a BBB+/stable 

outlook with Standard and Poor’s and an A-/ 

outlook stable with Fitch Ratings Service. 

Energy Efficiency 

With energy efficiency becoming more 

popular, WFEC launched several programs 

to help our 

cooperatives 

encourage 

conservation, 

while supporting 

efficiency and 

environmental 

opportunities. 

A compact 

fluorescent bulb 

(CFL) initiative 

provided more 

than 22,000 

CFLs, along with 

educational information promoting CFL use, to 

our cooperatives to distribute to their members. 

The Touchstone Energy ® Cooperatives of 

Oklahoma website was upgraded with a full 

suite of energy efficiency and conservation 

educational material and tools for our 

cooperatives to share with their members. This 

includes an easy 

to use on-line 

home energy 

audit to help 

co-op members 

identify their best 

opportunities to 

of Oklahoma conserve energy 

in their homes. 

Over 1,000 

cooperative commercial & industrial (C&I) 

customers receive our customized monthly 

newsletter. Each issue contains energy 

management, conservation ideas, an “Ask the 

Expert” feature and other articles of interest to 

C&I customers. 

Member Relations and Support 

WFEC provides marketing and 

communications support to its member 

systems through a variety of diverse services 

and programs, with the goal of helping to 

position its members as the preferred energy 

providers in the region. Marketing initiatives 

include assistance attracting new large-power 

customers, as well as providing quality marketing 

programs and events to help cooperatives 

strengthen their relationships with existing key 

accounts and attract new ones. 

Marketing staff are directly assigned to assist 

each member cooperative with their key account 

marketing efforts. This has proven beneficial in 

helping to attract new large power customers, 

as well as enhancing internal communication 

to resolve customer service issues and meet 

growth needs. Despite intense competition, our 

cooperatives were able to sign contracts for a 

considerable amount of new large customer load 

during 2007. 

As part of WFEC’s continuing commitment to 

the youth of Oklahoma and the conservation of 

18

Ramp Up/Drill Down: Oklahoma has been a 

hotbed of oil and gas exploration in recent years. 

With renewed drilling in rural areas, electric 

load growth has taken an upturn in many co-op 

service territories. 

Index (ACSI), with a score of 80, eight points 

higher than the industry average. WFEC’s 

cooperatives attained even higher ratings, 

achieving an ACSI score of 82! 

Staff also provided a wide range of 

communications support for WFEC and our 

cooperatives. This ranged from press releases 

and information packets for legislators and 

outside media to timely information updates 

and sample newsletter articles for distribution 

cooperatives and internal audiences. 

During 2007, internally produced television 

ads and promotional videos were created 

in response to cooperative requests. Other 

videos were created in support of Oklahoma’s 

cooperative delegation to the Washington, 

D.C. Youth Tour, WFEC’s 2007 Year in Review 

presentation and the NRECA Annual Meeting. 

(Continued on Page 20) 

our state’s natural resources, WFEC partnered 

with the Oklahoma Association of Conservation 

Districts (OACD) in presenting the WFEC 

Conservation Youth Awards to the winners of 

the OACD poster, essay and speech contests at 

the district and state level. Over 1,000 students 

from throughout Oklahoma participated in these 

contests. 

WFEC hosted a special Cooperative Earth 

Day celebration at the Blue Canyon wind 

generation facility for area school children, with 

over 400 students and teachers attending this 

popular event. 

More than 660 cooperatives from 46 states 

have now joined the Touchstone Energy ® 

Cooperatives’ co-brand program. WFEC is 

one of the regional partners coordinating this 

initiative, and all 19 of our cooperatives are now 

Touchstone Energy members. 

Touchstone Energy Cooperatives are among 

the top-scoring utilities in customer satisfaction 

as rated by the American Customer Satisfaction 

19 

WFEC environmental staff Gerald Butcher (back) 

and Kent Fletcher, support the annual Cooperative 

Earth Day celebration by teaching area school 

children about wind power at the Blue Canyon Wind 

Farm, near the Wichita Mountains.


Johnny Bray, an employee in the Power 

Production Department at Hugo, watches over 

the units at the plant from the control room. 

This department completed the last six months 

of 2007 without any accidents to reach the key 

performance OSHA recordable incident rate 

safety target of 2.55. 

Employees & Benefits 

Human Resources staff implemented 

changes and made additions to some of the 

benefits offered to employees. These changes 

and additions are necessary to continue to 

provide employees with competitive pay and 

benefit packages while balancing the associated 

costs to the cooperative. Providing competitive 

total compensation packages allows WFEC 

to attract and retain quality talent to drive 

the organization through an era of increased 

turnover due to a nationwide exposure of retiring 

baby boomers. 

One of the benefit options added for 

employees was the Roth 401(k). This provided 

employees with yet another option to invest, 

offering a different tax structure than previously 

available to them through WFEC. 

Several changes were implemented in 

2007 that impacted compensation. One of the 

changes was the implementation of a new salary 

structure program that included national, regional 

and local benchmarked salary data. WFEC 

also implemented an improved performance 

assessment program that uses templates to help 

20 

streamline the process. 

Changes involving benefits included the 

implementation of rebalanced defined benefit 

and defined contribution plans for employees 

hired after December 31, 2006. This change 

shifted more resources to the 401(k) program, 

which many new hires relate to much easier 

than the defined benefit plan. There have been 

several positive comments from candidates and 

new hires related to the company’s contribution 

to the 401(k) plan. 

WFEC continued its second year offering a 

High Deductible Health Plan (HDHP) with an 

accompanying Health Savings Account (HSA). 

This health plan option provides employees 

with yet another choice to provide their family 

with health care that meets their family’s needs. 

The HSA provides employees with excellent 

tax advantages and the ability to experience 

financial gains with the money that has been set 

aside tax free for medical care. 

Safety 

Achieving both low cost and reliability 

performance targets is important. However, 

safely achieving these performance indicators 

is even more essential. Safety and security 

continue to be primary areas of focus at our 

cooperative. Staff is continually focused on 

exploring the employee safety program to ensure 

that employees have the training and tools 

necessary to safely perform their jobs. 

Written safety programs have been 

developed and revised. Job safety training 

opportunities for employees have been 

strengthened and provide training using methods 

that are effective for employees and are cost and 

time efficient for the cooperative. Staff works with 

safety committees at each of the power plants 

and in the T&D group to strengthen and support 

their activities. 

The Power Production Department 

completed the last six months of 2007 without 

any accidents to reach the key performance

OSHA recordable incident rate safety target 

of 2.55. The Mooreland Plant set a new safety 

record of 2,084 days worked without a lost time 

accident. T&D worked the last four months 

without a recordable accident. 

Employees are to be commended for their 

efforts and these results. WFEC is proud of our 

long successful employee safety record, and yet 

constantly seek improvement. 

Staff is continually monitoring contracts 

related to security and the inspection and 

maintenance of fire protection systems at all 

locations to make sure they are providing 

WFEC with appropriate services at competitive 

rates. New safety incentive programs are being 

developed to recognize employees’ efforts for 

reducing the number of recordable accidents. 

The program is being created to raise the daily 

awareness of safety. 

Future Foundation 

In conclusion, 2007 was an eventful year in 

many ways. Numerous projects were completed 

through the diligent efforts of WFEC employees. 

As always, WFEC’s goal is to provide affordable, 

reliable power for our members, while 

successfully meeting new 

challenges and reinforcing 

a strong foundation for the 

future. 

wfec 

Mechanic Operator Gabe Hope performs work 

on an FD fan oil system during a scheduled 

maintenance outage at the Mooreland Plant 

during 2007. The Mooreland Plant set a new 

safety record of 2,084 days worked without a 

lost time accident. 

Preparing a Solid 

Foundation 

A Station Services crew 

prepares a new foundation 

for an upgrade to the 

Reeding Substation, west of 

Kingfisher, Okla. Pictured 

(clockwise, from right) are 

WFEC employees: Greg 

Butler, Tommy Subia, Wayne 

Foster and Clay Carr. Load 

growth in Oklahoma has 

WFEC constructing and 

upgrading substations across 

the system. 

21

2007 WFEC Fuel Mix 

Coal 

41% 

Economy 

Purchases 

23% 

Natural 

Gas 

23% 

Hydro 

10% 

Wind 

3% 

22

Service Area Map 

Alfalfa Electric Cooperative 

Caddo Electric Cooperative 

Canadian Valley Electric Cooperative 

Choctaw Electric Cooperative 

Cimarron Electric Cooperative 

Cotton Electric Cooperative 

East Central Oklahoma Electric Cooperative 

Harmon Electric Association 

Kay Electric Cooperative 

Kiamichi Electric Cooperative 

Kiwash Electric Cooperative 

Northfork Electric Cooperative 

Northwestern Electric Cooperative 

Oklahoma Electric Cooperative 

People’s Electric Cooperative 

Red River Valley Rural Electric Association 

Rural Electric Cooperative 

Southeastern Electric Cooperative 

Southwest Rural Electric Association 

Altus Air Force Base 

23

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, 2007 and 2006, and the related consolidated statements of 

operations, changes in members’ equity, 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 and the standards applicable to financial audits contained in Government Auditing Standards, 

issued by the Comptroller General of the United States. 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 the Company’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, 2007 and 2006, and the results of their 

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

accounting principles. 

In accordance with Government Auditing Standards, we have also issued a report dated March 3, 2008 on 

our consideration of WFEC’s internal control over financial reporting and on our tests of its compliance 

with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The 

purpose of that report is to describe the scope of our testing of internal control over financial reporting and 

compliance and the results of that testing, and not to provide an opinion on the internal control over 

financial reporting or on compliance. That report is an integral part of an audit performed in accordance 

with Government Auditing Standards and should be read in conjunction with this report in assessing the 

results of our audits. 

March 3, 2008 

KPMG LLP, a U.S. limited liability partnership, is the U.S. 

member firm of KPMG International, a Swiss cooperative. 

24

WESTERN FARMERS ELECTRIC COOPERATIVE 

Consolidated Balance Sheets 

December 31, 2007 and 2006 

(in 000’s) 

Assets 2007 2006 

Electric utility plant, at cost: 

In-service $ 1,082,751 1,039,113 

Construction work-in-progress 14,347 13,059 

1,097,098 1,052,172 

Less accumulated depreciation and amortization 522,073 526,822 

Net electric utility plant 575,025 525,350 

Investments in associated organizations and other 

investments, at cost 115,217 114,455 

Current assets: 

Cash and cash equivalents 3,917 9,158 

Restricted cash 44,887 50,364 

Accounts receivable from energy sales 36,085 39,066 

Other accounts receivable 4,495 25,168 

Inventories, at average cost: 

Coal and oil 18,085 13,055 

Material and supplies 42,782 32,963 

Other 1,163 1,294 

Total current assets 151,414 171,068 

Other non-current assets 1,272 1,732 

Deferred debits 12,149 11,772 

Total assets $ 855,077 824,377 

Members’ Equity and Liabilities 

Capitalization: 

Members’ equity $ 111,988 92,955 

Long-term debt 620,400 619,171 

Total capitalization 732,388 712,126 

Current liabilities: 

Current portion of long-term debt 39,648 34,705 

Accounts payable and accrued liabilities 64,172 70,515 

Short-term notes payable 12,100 — 

Total current liabilities 115,920 105,220 

Other liabilities 6,769 7,031 

Commitments and contingencies (note 13) 

Total members’ equity and liabilities $ 855,077 824,377 

The accompanying notes are an integral part of these consolidated financial statements. 

25


Consolidated Statements of Operations 

Years ended December 31, 2007 and 2006 

(in 000’s) 

2007 2006 

Operating revenues: 

Power sales to members and cities $ 391,100 382,918 

Other power sales and operating revenues 33,655 22,916 

Total operating revenues 424,755 405,834 

Operating expenses: 

Operations: 

Production 201,057 178,140 

Purchased and interchanged power 108,886 111,207 

Transmission 23,706 22,962 

Distribution 4,955 4,817 

General and administrative 8,774 10,205 

Maintenance 13,574 15,027 

Depreciation 22,078 26,723 

Total operating expenses 383,030 369,081 

Operating margin, before interest 41,725 36,753 

Interest expense, net of amounts capitalized 36,845 35,628 

Interest income 9,238 8,905 

Operating margin 14,118 10,030 

Other nonoperating margin (loss), net 4,724 (94) 

Patronage capital assigned by associated organizations 711 419 

Net margin $ 19,553 10,355 


26


Consolidated Statements of Changes in Members’ Equity 


(in 000’s) 

Accumulated 

Other 

Patronage Comprehensive 

Memberships Capital Loss Total 

Balance, December 31, 2005 $ 2 84,004 (2,070) 81,936 

Net margin — 10,355 — 10,355 

Change in fair value of derivative 

financial instrument — — 440 440 

Reclassification adjustment of 

derivative losses reclassified 

into interest expense — — 224 224 

Balance, December 31, 2006 $ 2 94,359 (1,406) 92,955 

Net margin — 19,553 — 19,553 

Change in fair value of derivative 

financial instrument — — (898) (898) 

Reclassification adjustment of 

derivative losses reclassified 

into interest expense — — 151 151 

Net asset associated with 

postretirement benefit plan — — 227 227 

Balance, December 31, 2007 $ 2 113,912 (1,926) 111,988 


27


Consolidated Statements of Comprehensive Income 


(in 000’s) 


Net margin $ 19,553 10,355 

Other comprehensive income (loss) - 

Cash flow hedge (747) 664 

Comprehensive income $ 18,806 11,019 


28


Consolidated Statements of Cash Flows 


(in 000’s) 


Cash flows from operating activities: 

Net margin $ 19,553 10,355 

Adjustments to reconcile net margin to net cash provided by 

(used in) operating activities: 

Depreciation 22,078 26,723 

Other depreciation included in operating expenses 1,649 1,646 

Accretion of asset retirement obligation 59 55 

Noncash interest income (6,446) (6,261) 

Noncash interest expense 4,627 5,860 

Changes in assets and liabilities: 

Restricted cash 5,477 (11,113) 

Accounts receivable from energy sales 2,981 (4,051) 

Other accounts receivable 20,673 (12,142) 

Coal and oil inventory (5,030) (4,744) 

Materials and supplies inventory (9,819) (6,698) 

Other current assets 131 (80) 

Other non-current assets 460 1,000 

Deferred debits (377) (2,976) 

Accounts payable and accrued liabilities (6,343) (1,835) 

Other liabilities (841) (1,217) 

Net cash provided by (used in) operating activities 48,832 (5,478) 

Cash flows from investing activities: 

Net extension and replacement of electric utility plant (73,402) (29,247) 

Other 1,057 195 

Net cash used in investing activities (72,345) (29,052) 

Cash flows from financing activities: 

Advances of long-term debt 72,024 55,776 

Advances of short-term debt 12,100 — 

Payments on long-term debt (65,852) (36,559) 

Net cash provided by financing activities 18,272 19,217 

Net increase (decrease) in cash and cash equivalents (5,241) (15,313) 

Cash and cash equivalents, beginning of year 9,158 24,471 

Cash and cash equivalents, end of year $ 3,917 9,158 

Supplemental schedule of cash flow information: 

Cash paid during the year for interest $ 38,223 31,060 


29


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 four generating plants, fueled by 

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

WFEC also owns and maintains more than 3,600 miles of transmission line. WFEC has a combined 

capacity of over 1,400 megawatts, including hydropower allocation. Member-owners consist of 19 

distribution cooperatives and a United States Air Force base. Substantially all of WFEC’s assets are 

located in Oklahoma. 

(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. 

30




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 2007 and 2006 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% 

Based on a useful life assessment and depreciation rate study, the RDUP approved new depreciation 

rates for the Hugo, Anadarko Combined Cycle and Mooreland production plants effective January 1, 

2007. The rate reduction resulted in an approximate $5.9 million lower depreciation expense in 2007. 

Depreciation for the year ended December 31, 2007 was $23,727,000, of which $22,078,000 was 

charged to depreciation expense and $1,649,000 was included in fuel and other operating expenses. 

Depreciation for the year ended December 31, 2006 was $28,369,000, of which $26,723,000 was 

charged to depreciation expense and $1,646,000 was included in fuel and other operating expenses. 

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 2007 and 2006 totaled $390,000 and $216,000, respectively. 

Restricted Cash 

Restricted cash consists of the following: 

• An Emergency Security Reserve (ESR) that is restricted by RDUP and WFEC Board Policy 

to be utilized based upon certain significant events. The ESR was transferred in 2007 to the 

Special Construction Fund. The ESR had a balance of $23,767,000 as of December 31, 

2006. See note 4. 

• A Special Construction Fund (SCF) that is restricted by RDUP to be utilized on WFEC 

Board and RDUP approved construction projects or other uses as mutually agreed by both 

parties. The SCF has a balance of $24,997,000 as of December 31, 2007. See note 4. 

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

based upon certain significant events. The CCR had a balance of $18,720,000 and 

$15,032,000 as of December 31, 2007 and 2006, respectively. 

31




• A margin account for purchasing, selling or trading energy futures and options with a 

financial institution. The account had a balance of $419,000 and $10,751,000 as of 

December 31, 2007 and 2006, respectively. See note 12. 

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

a total balance of $2,024,000 and $2,086,000 as of December 31, 2007 and 2006, 

respectively, of which, $1,272,000 as of December 31, 2007 and 2006, is reflected as other 

non-current assets in the accompanying financial statements. 

(g) 

(h) 

(i) 

(j) 

(k) 

Cash and Cash Equivalents 

For purposes of reporting cash flows, cash and cash equivalents include 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. 

Emission Allowances 

In accordance with the Federal Clean Air Act, WFEC maintains an allotment of sulfur dioxide (SO2) 

emission allowances. Currently, emission allowances are recorded under the inventory method with 

no cost. During the years ended December 31, 2007 and 2006, WFEC sold $106,000 and $193,000, 

respectively, of emission allowances through the U.S. Environmental Protection Agency annual 

mandatory auction. These amounts are reflected as revenues in other power sales and operating 

revenues in the accompanying financial statements. 

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 overrecovered fuel account balance. An overrecovery of 

approximately $16,145,000 and $9,528,000 at December 31, 2007 and 2006, respectively, was 

recorded in accounts payable and accrued liabilities. 

32




(l) 

(m) 

(n) 

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 defers certain gains that will be credited 

to revenues over future periods for rate making purposes. 

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. 

Income Taxes 

In 2007 and 2006, less than 85% of WFEC’s gross receipts on a tax basis were derived from sales to 

members; therefore, WFEC’s nonmember operations are not exempt from federal income taxes 

under Section 501(c)(12) of the Internal Revenue Code. See note 9. 

Deferred income taxes arise from nonmember sourced temporary differences between the tax basis 

of an asset or liability and the amount reported in the consolidated financial statements. These 

deferred tax assets and liabilities are determined using the tax rates scheduled by the tax law to be in 

effect when the differences reverse. 

(o) 

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 Statement of Financial Accounting Standard (SFAS) No. 133, Accounting for 

Derivative Instruments and Hedging Activities, as amended. If hedge treatment is obtained, 

unrealized gains or losses resulting from these instruments are deferred as a component of 

accumulated other comprehensive loss until the corresponding item being hedged is settled, at which 

time the gain or loss is recognized. See note 12. 

33




(p) 

(q) 

(r) 

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. In 2006, 17 

of the 19 distribution cooperative members extended their long-term purchase power contracts from 

2025 to 2050. 

Concentration of Credit Risk 

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

95% of accounts receivable from energy sales at December 31, 2007 are from power sales due from 

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

through monitoring procedures. 

New Accounting Pronouncements 

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income 

Taxes – an interpretation of FASB Statement No. 109.” The provisions of Interpretation No. 48 have 

been amended to delay its implementation date. Interpretation No. 48 clarifies the accounting for 

uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with 

FASB Statement No. 109, “Accounting for Income Taxes.” This Interpretation is effective for fiscal 

years beginning after December 15, 2007. The Company has not yet completed a detailed analysis of 

the impact of FIN 48; however, management does not expect that its adoption will have a significant 

impact on its results of operation and financial position. 

In September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurement (Statement 

No. 157). SFAS No. 157 defines fair value, establishes a framework for the measurement of fair 

value, and enhances disclosures about fair value measurements. The Statement does not require any 

new fair value measures. The Statement is effective for fair value measures already required or 

permitted by other standards for fiscal years beginning after November 15, 2007. WFEC is required 

to adopt Statement No. 157 beginning on January 1, 2008. Statement No. 157 is required to be 

applied prospectively, except for certain financial instruments. Any transition adjustment will be 

recognized as an adjustment to opening retained earnings in the year of adoption. WFEC is currently 

evaluating the impact of adopting Statement No. 157 on its results of operations and financial 

position. 

34




In September 2006, the FASB issued FASB Staff Position No. AUG AIR-1, Accounting for Planned 

Major Maintenance Activities. This guidance prohibits the use of the accrue-in-advance method of 

accounting for planned major activities because an obligation has not occurred and therefore a 

liability should not be recognized. The provisions of this guidance were effective for reporting 

periods beginning after December 15, 2006. The provisions of the Staff Position were consistent 

with the WFEC’s current policies and as such WFEC’s adoption of the provisions of this guidance 

did not have a material impact on its results of operation and financial presentation. 

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair 

Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB 

Statement No. 115. Statement No. 159 permits entities to choose to measure certain financial 

instruments and other items at fair value. The objective is to improve financial reporting by 

providing entities with the opportunity to mitigate volatility in reported earnings caused by 

measuring related assets and liabilities differently without having to apply complex hedge 

accounting provisions. Unrealized gains and losses on any items for which WFEC elects the fair 

value measurement option would be reported in earnings. Statement No. 159 is effective for fiscal 

years beginning after November 15, 2007. However, early adoption is permitted for fiscal years 

beginning on or before November 15, 2007, provided WFEC also elects to apply the provisions of 

Statement No. 157, Fair Value Measurements, at the same time. WFEC is currently assessing the 

effect, if any, the adoption of Statement No. 159 will have on its financial statements and related 

disclosures. 

(2) Electric Utility Plant 

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


(in 000’s) 

Production plant $ 659,893 615,557 

Transmission plant 228,672 224,876 

Distribution plant 107,925 102,309 

General plant 68,025 80,007 

Unclassified plant 18,236 16,364 

Electric utility plant-in-service 1,082,751 1,039,113 

Construction work-in-progress 14,347 13,059 

Total electric utility plant $ 1,097,098 1,052,172 

35




In May 2001, GenCo completed construction of two 45-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. 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 was added to the note principal. As of December 31, 2007, the balance of the note 

was $6,178,000 and is included in long-term debt. WFEC recalled an additional 20 megawatts of capacity 

effective January 1, 2007 which raised the total capacity recalled by WFEC to 50 megawatts. WFEC has 

the right, but has no obligation, to recall the remaining capacity of the plant. In 2007, WFEC entered into a 

purchase power agreement with the other party to utilize the remaining capacity of the plant for specific 

months from June 1, 2007 through February 29, 2012. WFEC will be responsible for fuel and related costs 

under the terms of the agreement for these contracted periods. 

(3) Investments in Associated Organizations and Other Investments 


(in 000’s) 

National Rural Utilities Cooperative Finance 

Corporation (CFC): 

3% capital term certificates $ 300 300 

5% capital term certificates 6,130 6,130 

3% subordinated term certificates 30 132 

Patronage capital certificates 824 833 

CoBank Class E stock 2,884 2,787 

ACES Power Marketing 956 887 

Lease – leaseback investment (see note 4) 104,050 103,343 

Other 43 43 

$ 115,217 114,455 

WFEC purchased the subordinated term certificates to secure the CFC’s guarantee of WFEC’s 

indemnification of certain tax benefits (see note 13). The purchase of capital term certificates and stock 

were required by those institutions. 

In 2002, WFEC joined ACES Power Marketing (ACES) as a member. As of December 31, 2007, WFEC 

owned 6.25% of ACES equity. The investment in the partnership is accounted for using the equity method 

of accounting. 

36




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 SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and 

Extinguishments of Liabilities, such portion of the liability and the corresponding PUA were extinguished 

for financial reporting purposes. As a result of the transaction, WFEC’s investments and long-term debt 

increased by $82,082,000 and $129,255,000 respectively, at December 31, 2001. As of December 31, 2007 

and 2006, the investments balances are $104,050,000 and $103,343,000, respectively, and the debt 

balances are $149,352,000 and $149,130,000, respectively. 

The fair market values of the investments and debt are not determinable since they are not readily 

marketable. The investments are pledged as collateral for WFEC’s obligations under 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, in the 

amount of approximately $1.8 million annually, 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 purchase option, which, if exercised, would allow WFEC 

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

for use as an Emergency Security Reserve (ESR) to be utilized based upon certain significant events. If the 

ESR had been utilized, WFEC was required to replenish the fund within 12 months. Pursuant to agreed 

upon terms, RDUP authorized closure of the ESR in 2007 and transfer of the funds to a Special 

Construction Fund (SCF) account. The SCF account is available to fund WFEC Board and RDUP 

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

December 31, 2007 is $24,997,000. All restricted funds are invested in short-term government money 

market funds or investment grade commercial paper issued by various large corporations and are included 

in restricted cash. 

37




(5) Regulatory Assets and Liabilities and Other 

At December 31, 2007 and 2006, deferred debits and credits consisted of the following: 


(in 000’s) 

Regulatory assets: 

Interest expense associated with lease/leaseback 

(see note 4) $ 10,532 9,188 

Transaction costs associated with lease/leaseback 

(see note 4) 191 201 

Other: 

Preliminary survey and investigation charges 1,333 2,265 

Unamortized debt expense 93 118 

$ 12,149 11,772 

Regulatory liabilities: 

Deferred revenue $ — 960 

Other: 

Unearned revenue 986 1,184 

$ 986 2,144 

The regulatory and other liabilities are reflected in other long-term liabilities in the accompanying 

consolidated balance sheet. 

38




(6) Patronage Capital 

WFEC’s mortgage agreement provides that until total members’ equity equals or exceeds 40% of total 

assets, the return of capital contributed by members is limited generally to 25% of net margins of the 

preceding year if, after giving effect to such distribution, members’ equity equals or exceeds 20% of total 

assets. As of December 31, 2007 and 2006, no patronage capital was available for refund or retirement. 

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

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

With Board of Trustee action, margins, or a portion thereof, may be retained to offset prior year losses. 

Patronage capital as of December 31, 2007 of $113,912,000 is comprised of $75,610,000, which has been 

allocated to members, $19,553,000 of 2007 net margin and $18,749,000 of prior years net unallocated 

margins. At December 31, 2006 patronage capital of $94,359,000 was comprised of $68,701,000, which 

has been allocated to members, $10,355,000 of 2006 net margin and $15,303,000 of prior years net 

unallocated margins. 

39




(7) Debt 

At December 31, 2007 and 2006, long-term debt consisted of the following: 


(in 000’s) 

Notes payable to Federal Financing Bank (FFB), interest from 

3.91% to 11.37%, due in quarterly installments through 2040. $ 382,642 342,150 

Notes payable to the RDUP, interest from 2% to 5%, due in 

monthly and quarterly installments through 2025. 34,475 36,960 

Notes payable to CoBank, interest at 5.711%, due in quarterly 

installments through January 2019. 10,275 10,749 

Note payable to CFC, interest at 4.2%, due in quarterly 

installments through 2009. 17 142 

Notes payable to CFC, interest at 6% through 2010 and 5.65% 

through 2018, due in quarterly installments through 2024. 19,915 20,653 

Note payable to CoBank, interest at 5.271%, due in quarterly 

installments through January 2008, followed by a final 

installment of the remaining principal balance in April 2008. 

Prior to maturity, note may be renewed for an additional seven years. 3,680 4,160 

Note payable to CoBank, interest at 5.95% through October 2006 

and refinanced in November 2006 to 6.22% due in monthly installments 

through November 2025. 3,303 3,380 

Lease termination obligation payable to Hugo Generation, LLC 

at maturity in 2027, interest imputed at a fixed rate of 4.09%. 149,352 149,130 

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

rate swap at 5.88% plus 1.50%, principal due annually 

through 2020, interest payments quarterly. 25,062 26,747 

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

through 2021. 6,178 6,423 

Note payable to CFC with varying amounts, interest from 3.9% to 

5.5%, due in annual installments through 2016. 8,996 10,382 

Note payable to CoBank, interest at 6.087% and 6.4375% at 

December 31, 2007 and 2006, respectively, due in October, 2011, 

revolving loan commitment. 16,153 43,000 

660,048 653,876 

Less current portion of long-term debt 39,648 34,705 

Total long-term debt $ 620,400 619,171 

40




Annual payments of long-term debt for years subsequent to December 31, 2007 are as follows (in 000’s): 

2008 $ 39,648 

2009 38,913 

2010 44,095 

2011 55,297 

2012 39,902 

Thereafter 442,193 

$ 660,048 

WFEC has a $50,000,000 unsecured revolving line of credit commitment with CoBank to provide interim 

financing of construction projects and general operating needs. In May 2007, the commitment was 

extended to May 2008. Amounts advanced were equal to $12,100,000 as of December 31, 2007. WFEC 

also has an unsecured revolving line of credit for short-term borrowings with CFC totaling $50,000,000 

with a term through November 2010. The principal balance of this facility must be reduced to zero for a 

period of five consecutive business days at least once during each 12-month period. No advances were 

outstanding on the CFC line of credit at December 31, 2007 or 2006. Advances under these lines of credit 

bear interest at variable rates and are renewable at the discretion of the lender and WFEC. Approximately 

$37,900,000 and $49,330,000 of borrowing capacity was available on the CoBank and CFC lines of credit 

at December 31, 2007 net of outstanding Letters of Credit and line advances. 

Additionally, in 2006 the Cooperative executed a $150,000,000 unsecured revolving line of credit 

commitment with CoBank for general corporate purposes and to provide interim financing of construction 

projects that have been submitted to RDUP for long-term FFB loan guarantees. The facility term extends 

through October 2011. The Cooperative has drawn funds from this facility totaling $16,153,000 and 

$43,000,000 at December 31, 2007 and 2006, respectively. The interest rate on borrowings under this 

facility are, upon expiration of the interest rate period, reset based upon current interest rates for up to sixmonth 

periods at WFEC’s option (a weighted average Libor Rate Option of 6.087% at December 31, 

2007). 

Unsecured line of credit facilities with CoBank limit WFEC’s total unsecured debt outstanding to $250 

million. 

WFEC had approximately $75,214,000 of unadvanced funds available at December 31, 2007 from FFB on 

notes previously executed. During 2007, the RDUP approved a loan guarantee commitment in the amount 

of $101,105,000 for the purpose of financing certain WFEC generation system improvement projects 

planned for the 2008 through 2011 construction work plan period. 

WFEC is subject to various restrictions and covenants from its long-term debt agreements. These 

restrictions include mandatory penalties for the partial or full prepayment of long-term debt. Substantially 

all assets of WFEC are pledged as security for long-term debt to RDUP, FFB, CoBank, and CFC. 

41




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 1.50% 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: 


(in 000’s) 

Fuel $ 185,328 163,026 

Other production expenses 15,729 15,114 

Total production expenses $ 201,057 178,140 

(9) Income Taxes 

As a cooperative, WFEC is generally not subject to federal income tax on its member operations. However, 

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 is the result of the tax accounting for certain leases. 

As of December 31, 2007 and 2006, WFEC’s deferred tax asset before valuation allowance was 

approximately $8,343,000 and $9,452,000, 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 $14,200,000, which expires in 

2007 and thereafter. 

No income tax expense was provided in 2007 and 2006, due to the availability of net operating loss 

carryforwards to offset nonmember income for tax purposes. 

At December 31, 2007 and 2006, the approximate net deferred tax asset and valuation allowance were as 

follows: 


(in 000’s) 

Tax-effected gross deductible temporary differences $ 12,153 12,527 

Tax-effected gross taxable temporary differences (3,810) (3,075) 

Deferred tax asset 8,343 9,452 

Less valuation allowance (8,343) (9,452) 

Net deferred tax asset $ — — 

42




(10) Retirement Plans 

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

(NRECA) Retirement Security Plan, defined benefit pension plan qualified under Section 401 and taxexempt 

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

amounts accrued for pension expense. During 2007 and 2006, WFEC contributed approximately 

$4,257,000 and $4,097,000, respectively, to the plan. In this master multi-employer 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. 

WFEC’s Board of Trustees adopted an amendment to the retirement plan effective for employees hired 

after December 31, 2006. The plan increases WFEC’s contribution to the NRECA 401(k) Pension Plan 

option while reducing the benefit level of the Retirement Security Plan. The expected result is a stabilizing 

control over the growth rate of long-term employee retirement plan expenses. 

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 on those contributions. WFEC contributed approximately $654,000 and $647,000 

to the plan in 2007 and 2006, respectively. 

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

care plan that provides postretirement medical benefits to retired employees who meet minimum age and 

years-of-service requirements. The plan is contributory with retiree contributions adjusted annually, 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. 

43




(11) Fair Value of Financial Instruments 

At December 31, 2007 and 2006, 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, 2007 and 2006, 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, 2007 and 

2006, respectively. The estimated fair value of the long-term debt at December 31, 2007 and 2006 is 

approximately $676,724,000 and $665,142,000, 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 SFAS No. 71, Accounting for 

the Effects of Certain Types of Regulation, 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 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 $2,154,000 and $21,780,000 as of 

December 31, 2007 and 2006, 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 2008. 

WFEC uses variable-rate debt to finance its operations. The debt obligation exposes WFEC to variability 

in interest payments due to changes in interest rates. WFEC believes that it is prudent to limit the 

variability of a portion of its interest payments related to GenCo. To meet this objective, management 

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. 

44




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, 2007 and 2006, WFEC reclassified losses of 

$151,000 and $224,000, respectively into interest expense. During 2007 and 2006, WFEC made voluntary 

prepayments on the debt principal. As a result, WFEC settled a portion of the swap to keep the notional 

amount matched to the outstanding debt principal. The related payments for the partial unwinding fees 

represent an ineffective hedging loss, which WFEC recorded to interest expense in the amount of 

approximately $70,000 and $76,000 for 2007 and 2006, respectively. Ineffectiveness of the hedging 

relationships has been immaterial during the hedging period. 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, 2007 and 2006 was a liability of $2,154,000 and $1,406,000, respectively, and is included in 

other liabilities in the accompanying consolidated balance sheets. 

(13) Commitments and Contingencies 

WFEC has been a party to a lawsuit involving one of its members for several years. The dispute centered 

around the member’s practices regarding wheeling of power and energy for non-all-requirement 

customers. During the course of the dispute, a billing discrepancy resulted in a receivable to WFEC. 

During 2006 the parties reached a settlement agreement which allowed for installation of meter equipment 

to determine the settlement amount and provide a methodology to account for billing on a go-forward 

basis. As a result, WFEC recognized $1,925,000 as uncollectible in 2006 which is recorded in general and 

administrative expense. 

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. 

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, that at the projected 2008 

rates approximates $16,024,000. During 2007 and 2006, WFEC purchased $18,155,000 and $13,283,000, 

respectively. 

In February 2004, WFEC entered into a six-year, $6,175,000 maintenance contract with a third party to 

address future requirements for parts, field services, craft labor and repair services of the three Anadarko 

combined cycle production units. In the event purchases have not reached the minimum purchase volume 

amount by the expiration date of the first six-year term, there will be, without any action required on the 

part of either party, an automatic six-year extension of the agreement. The committed amount is projected 

to be reasonably within WFEC’s needs, provides certain discounted prices, requires no advance cash flow 

requirements, and does not commit WFEC to any specific outage schedule. 

45




In January 2008, WFEC’s Board approved the construction of a 136 MW simple cycle combustion gas 

turbine generating facility and associated substation facilities at Anadarko, Oklahoma. The facility will 

supply energy and capacity needs for its members. It is anticipated that this expected $168 million facility 

will be available beginning June 1, 2009. A lien accommodation has been submitted to RDUP to allow 

private financing of the facility. Financing is expected to be provided by private borrowings and internally 

generated funds. 

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. 

WFEC purchased a significant portion of its coal under a contract expiring March 2007, with terms that 

specified minimum annual purchase commitments (approximately 1,200,000 tons in 2005 and 2006). In 

2006, WFEC negotiated a new coal supply contract for 2007 and 2008. Contract terms specify annual 

purchase commitments of approximately 1,500,000 tons. WFEC has the option to purchase additional coal 

on the spot market for quantities above the contract amount. Approximately $18,358,000 and $13,205,000 

of coal was purchased during 2007 and 2006, respectively. 

(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. The following table presents the activity for the asset retirement obligations for the years ended 

December 31, 2007 and 2006: 


(in 000’s) 

Beginning balance $ 845 790 

Additional liabilities incurred — — 

Revisions to estimates — — 

Accretion expense 59 55 

Ending balance $ 904 845 

46

2007 WFEC Annual Report - Western Farmers Electric Cooperative

Create successful ePaper yourself

Delete template?

Save as template?