2012 WFEC Annual Report

Annual Report 2012 • WFEC 1

wfec western farmerselectric cooperative

A Touchstone Energy®Cooperative

2012 AnnualReport

Annual Report 2012 • WFEC2

Farmers’

Roosevelt County

LeaCounty

CentralValley

New Mexico

Service Area

Northwestern

Cimarron

Alfalfa Kay

Northfork

Kiwash

Caddo

Harmon

South-west Rural Cotton

Oklahoma

Rural

CanadianValley

East Central Oklahoma

People’sKiamichi

ChoctawSouth-eastern

Red River Valley Rural

Oklahoma

Kansas

Texas

WFECService

AreaWFEC provides essential electric service to 23 member cooperatives, Altus Air Force Base and other power users. These members are located primarily in Oklahoma and New Mexico, with some service territories extending into portions of Texas and Kansas. WFEC crews operate and maintain over 3,700 miles of transmission line and 331 sub and switch stations across this service territory.


Western Farmers Electric Cooperative (WFEC) is a generation and transmission (G&T) cooperative that provides essential electric service to 23 member cooperatives, Altus Air Force Base and other power users. These members are located primarily in Oklahoma and New

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

WFEC was organized in 1941 when western Oklahoma rural electric distribution cooperatives found it necessary to secure an adequate power supply at rates farmers and rural industrial developers could afford. WFEC is led by an experienced management group, with years of industry experience, and governed by a 24-member Board of Trustees.

The Anadarko-based G&T has five generating facilities located at Mooreland, Anadarko and Hugo, with a total power capacity of more than 1,800 megawatts (MW) when purchased hydropower is included. WFEC owns and maintains approximately 3,700 miles of transmission line to 274 substations and 57 switch stations.

WFEC maintains a well-balanced and diversified portfolio of generation resources that includes owned facilities and capacity, in addition to energy provided through purchase power agreements. These resources reflect a mix of technologies and fuel types, including one of the state’s largest renewable energy portfolios. The diversity in generation mix helps reduce exposure to changing market conditions, helping to keep rates competitive.

About WFEC

(Clockwise, from left)

Anadarko HeadquartersAnadarko Plant

Hugo Plant Mooreland Plant


Meeting the growing needs of the oil and gas industry was one of the tasks facing Western Farmers Electric Cooperative (WFEC) in

2012. Load began increasing in northern Oklahoma in late 2011, initiated by horizontal drilling and hydraulic fracturing of the Mississippi lime formation. Drilling progressed in that region and moved to other areas as oil production gained momentum during the year.

The need to convert almost 100 miles of older 69 kilovolt (kV) line to 138 kV quickly became apparent as load demands escalated, creating a need for new infrastructure development. New line construction and the addition of multiple substations in these high-growth areas, in a fairly short period of time, was a somewhat challenging feat. Communication and coordination with the Southwest Power Pool (SPP), Oklahoma regulators, producers, member cooperatives, and other involved parties was vital for strategic progress.

With financing through the Rural Utilities Services, as well as private financing under its new mortgage indenture process, WFEC began work on over $80 million in new or improved facilities during the year. Completion of many of these projects should occur during 2013. With the addition of new lines and substations, WFEC members will be able to reliably serve significant new load over the next few years.

A new renewable resource was added to WFEC’s wind portfolio during 2012, with the completion of the 150 megawatt (MW) Rocky Ridge Wind Project, near Rocky. WFEC will purchase the total output for 25 years from this site. With this addition, WFEC boasts of 366 MW of wind generation under long-term contract in Oklahoma.

Another milestone was reached in June, when WFEC began serving a small portion (50 MW) of the load of its four New Mexico members. Over time, service will transition from Southwestern Public Service (SPS) to WFEC for the approximate 400 MW of

member load in that state.With a very mild winter and a hot summer, WFEC

peak demand increased 9 MW from the level recorded in 2011 to 1,591 MW. During the summer period, WFEC load control programs were instrumental in reducing about 80 MW of peak load. Megawatt-hour (MWh) sales for 2012 were slightly higher than 2011 totals, which increased over 300,000 MWh.

WFEC generation performed well during 2012, with a diversified fuel blend, consisting of 30% coal, 16% natural gas, 6% from hydro contracts, and

23% from long-term contracts, with the remaining 25% from bilateral daily purchases or the SPP Energy Imbalance Market. Overall, WFEC was able to generate and deliver wholesale power to its members in 2012 at a cost of approximately 5.3 cents per kilowatt-hour.

Additional highlights during 2012 included existing credit ratings being maintained with Standard and Poor’s and FitchRatings; all required debt covenant financial ratios being met, and over $13 million in patronage capital being allocated to members.

With adequate and diverse generation resources, extensive transmission assets, sound financials, continued load growth in members’ service areas, and an excellent group of employees, WFEC is well positioned to provide member needs for the coming years.

WFEC Board President David Ray (left) & CEO Gary Roulet

wfec

2012 Highlights

Energy Sales (to Members & Cities) $418 million

Total Operating Revenue $457 million

Net Margins $13 million

Assets $1,200 million

Members 24

Member Consumer Meters Served 278,082 (est.)

Member Population Served 465,392 (est.)

System Peak Demand 1,591 megawatts

Miles of Transmission Line 3,700 miles

Substations 274

Switch Stations 57

Generating Capacity Coal 450 megawatts Natural Gas 870 megawatts

Purchased Power Capacity Natural Gas 70 megawatts Hydro 260 megawatts Portfolio of GRDA Assets 175 megawatts

Total Capacity 1, 825 megawatts

Number of Employees 370



Power Behind Potential: Growing Forward Together

Western Farmers Electric Cooperative (WFEC) continued to build upon its commitment of service to the organization,

its member rural electric cooperatives and their respective member consumers throughout 2012. WFEC employees worked diligently to support organizational goals, manage cost and strengthen reliability and service levels, in order to be the power behind potential.

The year may be best remembered for load growth opportunities, new construction, persistent drought and continued regulatory pressures. However, despite these challenges, WFEC and its member cooperatives also faced new opportunities for growing stronger - growing forward - growing together.

Growth & SalesA mild winter and a typical summer, with very little

rainfall, provided a WFEC peak demand increase of approximately 9 megawatts (MW) with energy sales to members and municipals less than 1% higher in 2012 than in 2011. This growth doesn’t seem too significant unless you consider that it was in addition to significant growth in 2011, through relentless heat and drought, combined with winter months of snow and excessively

cold temperatures. Despite the adverse conditions, a 5.8% increase in energy sales and a 73 MW increase in peak load was produced in 2011, as compared to the prior year. As 2012 brought more normalized temperatures, WFEC’s megawatt-hour (MWh) sales growth was still positive in a U.S. economy that has continued to struggle.

In contrast, receipts from sales declined, reflecting reduced energy costs primarily due to the lower average price of delivered gas from $4.21 per MMBtu in 2011 to $2.73 per MMBtu in 2012. Members continued to benefit from natural gas prices, dropping a significant 64% since 2008. WFEC’s risk management strategy allows WFEC’s members to enjoy lower costs as a result of participation in the move to lower prices. WFEC continues to review and revise, if necessary, its fuel hedging strategy to minimize the cost of implementation balanced with protecting fuel costs.

Access to additional wind resources, as well as opportunities to make economy purchases at favorable prices in the spot market, also contributed to reduced member rates of $52.54 per MWh in 2012 compared with $53.93 per MWh in 2011.

WFEC and its member distribution cooperatives continue to utilize demand side management programs that have been deployed to improve efficiencies. These programs provided over 80 MW of peak load reduction in 2012. Together with other WFEC programs, such as distributed generation, municipal generation and

-

2,000

4,000

6,000

8,000

10,000

2008 2009 2010 2011 2012

305 310 215 161 154

6,808 6,860 7,156 7,638 7,664

350 116 166 79 387

Energy Sales (Millions of KWhs)

Municipal Member Off-System

7,463 8,205 7,878 7,537 7,286

Although the U.S. economy continued to struggle in 2012, member sales continued to demonstrate positive growth.


of WFEC’s service footprint presented members with unprecedented growth opportunities. This growth, which has been particularly strong in north central and northwestern Oklahoma, has spurred additional planning, construction, and financing of additional infrastructure to meet rural needs.

While $37 million was expended on capital projects in 2011, an additional $50 million was expended in 2012 for transmission and generation projects. A significant $61 million of that total was focused on transmission and distribution additions, upgrades and expansion efforts. The Board established a 2013 capital budget of $93 million, which includes $55 million of transmission and distribution projects.

In addition, WFEC completed two of three Anadarko unit dry low nitrogen oxide (NOx) burner conversions to address approaching Environmental Protection Agency compliance deadlines, with the final conversion set for the spring of 2013.

Power DeliveryOil and gas load growth was a definite highlight for

2012. Growth initiated by drilling of the Mississippi Lime formation was strong in northern parts of Oklahoma. Two member distribution cooperatives that have been called upon to serve the brunt of this load in 2012 charted a combined kilowatt-hour (kWh) sales increase of approximately 23% over 2011 sales. Drilling progressed in that region and moved to other areas as oil production accelerated during the year. Due to this increase in production, agreements have been signed for over 140 MW of cooperative load growth to be

load curtailment, the WFEC system can manage up to 150 MW of load during peak periods to improve overall system efficiency.

Construction Efforts Although the U.S. economy

continued to search for sure footing in 2012, oil and gas development within portions

Manager of Generation Engineering Justin Soderberg inspects two new NOx burners installed in WFEC combined cycle units.

Coincident peak demand is affected by weather conditions throughout the service territory, with WFEC typically being a summer peaking system. Summer peaks continue to grow even though demand side management programs are capable of managing up to 150 MW of load.

1,000

1,100

1,200

1,300

1,400

1,500

1,600

2008 2009 2010 2011 2012

1,444 1,455 1,479

1,582 1,591

1,366 1,352

1,509 1,499

1,349

Coincident Peak Demand (Megawatts)

Summer Winter


realized as transmission and distribution facilities can be constructed to accommodate the load. Some of the facilities for these projects may take over two years to complete, as coordination with the producers, Southwest Power Pool (SPP) and others shape the landscape.

In 2012, Power Delivery personnel continued to focus on supporting member

load growth opportunities, while maintaining high reliability standards. Significant load growth has required WFEC to undertake alternative methods in the construction process. WFEC worked with consultants and contractors, much like an internal department, in an effort to meet member-requested in-service project dates. Future load growth estimates will require that these processes continue into the foreseeable future with refinements and improvements incorporated along the way. Environmental staff worked diligently to obtain the required approvals and permits to allow completion of these projects during the year.

WFEC also began a major reliability upgrade in Cimarron Electric Cooperative’s service area. The upgrade will convert most of Cimarron’s system to a looped 138 kilovolt (kV) service. A portion of the projects in this service area is also being completed through the outsourced construction methodology. Most, if not all of the projects in Cimarron’s area, are expected to be completed in 2013.

A study of WFEC’s communication system was initiated in 2012 to further evaluate future member needs. Both WFEC and its members rely on the microwave system and field area network to a greater extent, as compared to its original installation and purpose over 10 years ago. The study will allow both WFEC and its members to

determine the most cost-effective way to support digital communications and metering needs in the future.

Oil and gas load growth was a major highlight for the year, initated by drilling in northern portions of Oklahoma.

Base rates have ranged from 1.9 cents per kWh to 2.2 cents per kWh over the past five years, while WFEC’s risk management strategy has allowed members to participate in lower natural gas prices during that same period.

0

1

2

3

4

5

6

7

2008 2009 2010 2011 2012

Average Rate to Members (Cents per KWh) Base Fuel

5.3¢ 5.4¢ 6.0¢

5.3¢ 5.0¢


Project Financing In August, the WFEC Board authorized a

supplemental Rural Utilities Service (RUS) loan application in the amount of $82.7 million for the 2012-2015 work plan period for transmission projects, with adequate lead times for this traditional lending process.

To finance expedited projects associated with the accelerated growth, WFEC took advantage of its new mortgage indenture that provided a predictable approach to issuance of additional secured debt. The result was a more streamlined approach to financing as WFEC completed the financing transaction in a few short months in a low interest rate environment. The Board authorized long-term financing and closed a $60 million First Mortgage Obligation in October with an immediate advance of $30 million for expedited projects. The flexible structure of the financing agreement also provides an option to upsize the facility by $40 million to $100 million for continuing growth potential.

Also in October, a prior year RUS loan application for a $184.1 million Federal Financing Bank (FFB) guaranteed loan was made available for advance, providing WFEC access to financing for generation and transmission projects planned for 2012-2015.

Energy Resources &Market InteractionActive participation by staff within the SPP working

groups has contributed to WFEC’s preparedness for the future Integrated Market (IM) that has a projected start date of March 2014. The first version of these market rules, released in April 2011 (now on its 12th revision), is continuously evolving and is anticipated to affect every aspect of electrical service. In addition, rules of the

current SPP Energy Imbalance Market (EIM), launched in February 2007, present another focus of staff’s efforts until replaced by the IM.

Diversification of fuels, purchased power and renewable resources have been among WFEC’s priorities and strategies, in an effort to minimize the impact of fuel volatility and environmental regulation. Generation diversity offers protection against increased prices of any single fuel source. WFEC’s strategy includes the purchase of fuels on a deliberate and planned schedule. The schedule takes into account projected member loads, fuel needs and purchased power opportunities. WFEC’s fuel risk management strategy focuses on catastrophic protection and provides a measure of protection against significant price increases in natural gas, while participating more fully in price decreases.

WFEC practices a conservative budget strategy to serve load with owned generation. The cooperative coordinates power supply to members in the SPP market, which adds to reliability and helps achieve greater value of generating assets. WFEC takes advantage of lower-priced economic purchases and sales of excess energy, when available, by utilizing the bilateral spot market and SPP EIM. Market purchases of energy represented approximately 25% of WFEC’s total energy during 2012.

Internal staff reviews day-to-day resource planning in collaboration with ACES to position WFEC assets for reliable energy service to its members. ACES, owned by WFEC and other electric cooperatives, serves as an agent for, and works with, WFEC in a concerted effort to schedule the physical assets, including contract purchases, as well as generation from natural gas and coal, while participating extensively in the power marketplace. This relationship also focuses on risk

management policies, counterparty credit analysis, locating transmission liquidity, market participation and new market readiness, identification of potential new counterparties, hedging activity and standardized contracts.

Lower average delivered natural gas prices are one of the determinants of the total average rate to members.

0

2

4

6

8

2008 2009 2010 2011 2012

Average Delivered Natural Gas Price (Dollars per MMBtu)

$2.73

$7.53

$4.21 $4.42 $3.58


To enhance these efforts, a safety management system to facilitate compliance with safety and security standards has been developed. WFEC credits its success in this area to employee involvement and training, as well as audits.

Hugo PlantThe Hugo Plant continued its safety record with no

lost-time accidents in 2012, ending the year with 1,715 days without a lost-time accident and 99 days without a recordable accident. The Unit Availability Factor was 89.0%.

An outage during the spring and a load reduction in the fall were planned to perform maintenance on plant equipment. During the spring outage, projects consisted of the replacement of distributive control system workstations, overhaul of turbine valves, and other routine equipment maintenance. During the planned fall load reduction, maintenance was performed on pulverizers, feedwater pumps, and other plant equipment.

Coal deliveries and inventory returned to normal for the past year, following a challenging previous year, when midwest flooding disrupted rail travel and hampered the delivery of coal.

Plant staff continues to prepare for the Maximum Achievable Control Technology (MACT) Standards that will involve installation of mercury controls in 2014.

Anadarko PlantThe Anadarko Plant cycled 594 units and completed

the year with 86.5% unit availability on the nine units at the plant and two contracted units available through WFEC GenCo, LLC. The Unit 5 generator rotor that

Power ProductionWith good team work, it’s amazing what can

be accomplished. During the past year, all of the generation employees pulled together to complete a safe year without any lost-time accidents. Plant safety teams worked diligently to keep safety awareness at a high standard throughout the year. WFEC’s Safety and Security staff is constantly assessing and managing safe work practices and training. As new employees are introduced to WFEC, the ability to train these individuals effectively and safely is critical for success.

The diverse energy mix, self-generated and purchased, actual versus budgeted by WFEC during 2012 included:

* Energy generated by wind facilities for which WFEC does not retain or retire all of the environmental attributes.

2012 Actual 2012 BudgetCoal 30% 38%Gas 16% 20%Economy Purchases 25% 5%Contract Purchases 10% 14%Hydro 6% 7%Other* 13% 16%Total 100% 100%

Unit Operator James Diggs at work in the control room of WFEC’s Hugo Plant, located in southeastern Oklahoma.


Environmental Regulations New and proposed environmental regulations

continue to present challenges. These regulations come with a significant potential to impact WFEC operations regarding cost and complexity associated with timely evaluation and compliance. WFEC’s environmental staff worked to participate in the rulemaking process and provided feedback to help shape state and federal environmental policies impacting WFEC operations.

The environmental team also supported construction efforts during the year by obtaining necessary transmission and substation build-out environmental permits for existing and potential future generation resources and assuring compliance with operating permits.

Generation Resource PlanningProviding reliable and affordable power for its

members’ current needs is among WFEC’s core values as a generation and transmission (G&T) cooperative. In addition, future obligations must also be identified, with plans made for the necessary requirements of meeting these needs. The availability of transmission is currently a major issue in regards to resource planning, as the ability to gain firm transmission paths seriously impacts new generation options available to WFEC.

During 2012, significant strides were taken towards identifying specific long-term capacity needs, through a joint WFEC-member Power Requirements Study. Results indicated an earlier than anticipated need, possibly as early as 2014, with the greatest need occurring in 2017, commensurate with the timing of additional New Mexico load.

Detailed generation resource modeling was also utilized to determine the best type of resource to meet those needs. While some of WFEC’s needs will be met through increasing annual quantities from a 2009 power purchase agreement (PPA) with the Grand River Dam Authority (GRDA), additional resources are also needed to satisfy WFEC’s robust growth forecast.

In 2012, WFEC executed a long-term PPA with Calpine, Inc. (Calpine) that would satisfy the majority of WFEC’s needs, beginning in 2014. However, WFEC’s ability to obtain firm transmission delivery from SPP is proving to be a formidable obstacle. As a result of the uncertainty of obtaining the firm transmission necessary to implement the Calpine PPA, WFEC embarked upon a parallel path for self-build of a combined cycle resource located at an existing WFEC facility near Mooreland.

was shipped out in December 2011 for a rewind was installed in January 2012. Hot gas path inspections were completed on Combined Cycle Units 4 and 6 during the year, along with dry low NOx combustion systems being installed, in addition to extensive turbine compressor repairs.

There were no lost-time accidents or any environmental excursions during 2012 at the Anadarko site.

Mooreland PlantMooreland’s availability included: Unit 1: 96.7%,

Unit 2: 67.9%, and Unit 3: 82.5%. Operating hours for Unit 1 totaled 1,064 hours, with Unit 2 at 3,116 hours, and Unit 3 with 3,220 hours. The Unit 2 generator was rewound, with the exciter being replaced.

The safety program continues to be excellent at Mooreland, with 3,912 days since their last lost-time accident.

The Rocky Ridge Wind Project, near Rocky, went online in 2012, with a nameplace capacity of 150 MW.


Financial PerformanceOver the next several years, WFEC has plans to add

capacity through owned plants or PPAs. This additional capacity will be necessary to serve growing member loads and increasing sales to the New Mexico members. WFEC’s goal is to continue to develop and maintain a power supply portfolio that includes a mix of renewable, gas-fired and coal-fired resources and a delivery system that will supply its members with reliable and reasonably priced power.

With a strategic planning horizon, WFEC maintains target financial ratios that are deemed appropriate to ensure adequate liquidity, equity and debt service coverage (DSC) ratios to support the additional debt that will be needed to fund system projects. The target ratios influence management and the Board in establishing annual budgets and setting rates. WFEC’s financial policies are intended to enable the financing of all future projects with an appropriate mix of debt and equity while maintaining strong financial ratios.

One such financial target is the DSC ratio of greater than 1.1. WFEC’s DSC ratio in 2012 and 2011 was 1.19 and 1.13, respectively. Another is WFEC’s Margins for Interest (MFI) ratio that is defined in WFEC’s mortgage indenture. A minimum annual MFI ratio of 1.1 is required in order to permit the issuance of secured obligations under the mortgage indenture. WFEC’s MFI ratio was 1.37 and 1.29 for 2012 and 2011, respectively.

A strong balance sheet provides assurance to members and other stakeholders that WFEC can and will meet its obligations. WFEC has sought to increase equity as a

percentage of assets with a long-term goal of 20%. At year-end 2012, the equity-to-assets ratio was 17.4% compared to 16.7% at the prior year-end. The target MFI, DSC and equity ratio are intended to ensure that WFEC remains a robust resource for members and a financially strong player attractive to lenders as the balance sheet grows.

In either case, the Calpine PPA option or the self-build option, WFEC will be prepared to meet its customers’ firm capacity needs when called upon.

WFEC continued reaping the benefits of wind energy through purchasing the output from a fourth wind farm that began commercial operation August 7, 2012. Enel Green Power, through its U.S. subsidiary Enel Green Power North America, Inc., started operations at the Rocky Ridge Wind Project, located near Rocky.

This new wind development has a total installed nameplate capacity of about 150 MW and is composed of 93 General Electric turbines of 1.6 MW each.

Other wind farm locations, from which WFEC receives output, include:

• Blue Canyon Wind Farm (Phase 1), northwest of Lawton, 74.25 MW

• Red Hills Wind Farm, near Elk City, 123 MW • Buffalo Bear Wind Project, near Buffalo, 18.9 MWIn 2012, WFEC member cooperatives sold

19,042,952 kWh of energy generated by local wind resources to Oklahoma cooperative consumers through the WindWorks® program. This is a slight increase compared to 2011.

WFEC does not currently retain or retire all of the environmental attributes with these wind power purchases. A portion of the Renewable Energy Credits (REC) produced by these wind generating facilities is sold on a retail basis to WFEC cooperative members through the WindWorks® program, with the remaining RECs sold at the wholesale level to third parties.

Board-targeted financial ratios were achieved, demonstrating sound financial performance and enabling continuing access to financing.

1.0

1.2

1.4

1.6

1.8

2008 2009 2010 2011 2012

Financial Ratios Debt Service

Coverage (DSC)Margins forInterest (MFI)


Loan Funds AdvancedDuring 2012, approximately

$44.5 million in FFB loan funds was advanced with an approximate weighted average long-term fixed rate of 2.25% and maturities ranging from 2024 to 2043. In addition, $30 million was advanced under the 2012 First Mortgage Notes that included two tranches of 30-year amortizing loans with a weighted average rate of 4.50%.

LiquidityWFEC has developed access to liquidity in

preparation for serving an increased volume of sales and development of capacity. With lines of credit totaling $275 million, WFEC is well positioned for normal operating needs, bridge financing for immediate and on-going construction efforts, and taking advantage of market opportunities.

Liquidity is also supported by a Board strategy to maintain a fuel hedging program to protect against catastrophic prices, a banked fuel balance to moderate the volatility of fuel prices to its members, and a contingent cash reserve for significant unbudgeted events.

Credit Ratings AffirmedIn August 2012, Standard and Poor’s reaffirmed

WFEC’s “BBB+” rating and positive outlook. In December 2012, the FitchRatings “A-” stable rating was reaffirmed.

Wholesale Power ContractsStrong credit ratings are an important tool for

accessing capital as WFEC embarks on its next significant construction phase and validates the members’ ownership purpose in their G&T. WFEC’s

financial stability, a key to strong credit ratings, is based on its long-term all-requirements contracts with member-owners and our combined financial strength.

Rate Increase Effective January 1, 2013The variable components of the rate schedule for

members that are adopted each year during the annual budget are intended to cover WFEC’s cost of services and meet target financial ratios. WFEC reviews its financial position each month with the Board, which may make adjustments to certain components of the member rate schedule during the year in order to meet financial targets and other objectives.

A small rate increase of approximately 0.5% and within the limits of the member rate was approved by the Board as part of the 2013 budget process, effective January 2013. The adjustment provides recovery for projected increases in interest and depreciation expense due to new construction, as well as anticipated increases in costs associated with SPP activity.

Human ResourcesWFEC, like most of the industry, continues to

experience increasing employee turnover, primarily due to retirements. Comprehensive training programs are being developed for our newer and incoming employees to effectively step into roles of increasing responsibility. Benefit plan design and cost management strategies played an important role in meeting Board targets for managing employee benefit costs, while continuing to offer competitive benefit packages to attract and retain

In preparation for growth of its asset base to serve member needs, the Board set a long-term equity-to-asset ratio goal of 20%.

2008

2009

2010

2011

2012

Equity - to - Assets (Millions of Dollars)

EquityAssets

17.4%

13.4%

13.7%

15.4%

16.7%


Legal & ComplianceThree NERC audits were performed in 2012,

including two by the SPP Reliability Entity and one by the Texas Reliability Entity. Combined, the audits included a review of more than 300 mandatory reliability standards that applied to all aspects of WFEC’s operations and maintenance programs, with particular emphasis on cyber security. The Board and management continue to cultivate a culture of compliance and implement process changes to address required standards.

Marketing & CommunicationOn the energy efficiency front, 2012 marked the

introduction of the Go Go Geo Scholarship Video Challenge. This energy efficiency education effort promotes the use of geothermal technology to heat and cool homes. Junior and senior high school students were challenged to use their creativity to deliver a message to their social media network with the opportunity to compete for almost $60,000 in scholarship dollars and grants. The Touchstone Energy® Cooperatives are the title sponsor for this event, with geothermal manufacturers, including ClimateMaster, Bosch and WaterFurnace, as co-sponsors.

Additionally, WFEC’s Energy Efficiency Rebate Program took a new direction in 2012 with a major revamp of the rebate structure by focusing on geothermal technology and how to structure the cost of geothermal systems to be more attractive to a broader set of consumers.

WFEC continues to use the Touchstone Energy® brand to offer services and benefits to rural electric consumers. For the fourth straight year, the Co-op Connections® Card program provided rural electric consumers in Oklahoma savings on prescriptions equal to more than $1 million. This success has spurred new national programs offering member consumers savings on vision, dental and hearing products and services.

Efforts continued on WFEC’s corporate website, www.wfec.com, with both print and video updates posted frequently for both the public and Members Only portions.

ConclusionOverall, 2012 offered new opportunities, as well

as some challenging times. Through it all, WFEC continued its ongoing commitment to provide cost-effective, reliable, and quality service, while maintaining its focus on the future - growing together.

qualified employees. Staff continued to meet or exceed the Board’s cost targets while providing flexibility to employees and opportunities for employees to partially fund programs with tax savings.

Information ServicesThe 2012 calendar year was busy with the integration

of data requirements of new construction into existing systems. There were also preparations made for new power markets, a full North American Electric Reliability Corporation (NERC) audit, and three major new systems on the commercial side of WFEC’s business.

WFEC became the first SPP member to complete the testing of transmission congestion rights needed for the new power market. A plan was also completed for Supervisory Control and Data Acquisition (SCADA) system changes needed for the planned SPP consolidated balance authority that is on schedule to test by summer 2013.

A WFEC crew completes work on the Bearcat Substation, located in northwestern Oklahoma. The substation serves electricity to Air Products, a new plant that supplies products to the region’s oilfield services market.

wfec


2012 Fuel Mix

% GAS

% COAL

% ECONOMY PURCHASES % HYDRO

% OTHER*

30

25 6

13 10 %

CONTRACT PURCHASES

*Energy generated by wind facilities

for which WFEC does not retain

or retire the environmental

attributes.


Bob ThomassonCaddo Electric Cooperative

David RayPresident

Kiamichi Electric Cooperative

Mike LebedaSecretary/Treasurer

Kay Electric Cooperative

Jerry RempeEast Central Oklahoma

Electric Cooperative

Charles SpencerCotton Electric Cooperative

WFEC is governed by

a 24-member Board of Trustees,

including a representative

from each member

system & Altus Air Force Base.

Colin WhitleyAlfalfa Electric Cooperative

Gary CrainAsst. Secretary/Treasurer

Canadian Valley Electric Cooperative

Charles G. WagnerCentral Valley Electric

Cooperative (NM)

Bob HolleyChoctaw Electric

Cooperative

Charles HickeyVice President

Northfork ElectricCooperative

Gene PetersCimarron Electric

Cooperative

WFEC Board of Trustees


Bob S. AllenHarmon Electric

Association

Rusty GrissomOklahoma Electric

Cooperative

Gary JonesRural ElectricCooperative

Lloyd G. OwensSoutheastern Electric

Cooperative

Jerry W. PartinRoosevelt County

Electric Cooperative (NM)

Ernest RileyFarmers’ Electric

Cooperative (NM)

Leslie HindsKiwash Electric

Cooperative

Jack LambertPeople’s Electric

Cooperative

Ray O. SmithNorthwestern Electric

Cooperative

John IngleLea County Electric Cooperative (NM)

Fred J. StoweSouthwest Rural Electric

Association

King MartinRed River Valley Rural

Electric Association


Ron CunninghamVice PresidentPower Delivery

Jane LaffertyVice President

Gary GillelandVice President

Generation

Dan FlemingSenior Manager

Resource Planning

Brian HobbsVice President

Legal & Corporate Services

Roy KlusmeyerSenior Manager

Regional Market Planning

Gary Roulet

WFECSenior Management

A qualifed senior management level staff, with an impressive combined 215 years of service with WFEC, oversee the daily operations of the G&T.

Each vice president and senior manager has particular areas of expertise within the electric utility industry, providing valuable years of experience for WFEC overall and for its member cooperatives.

KPMG LLP210 Park Avenue, Suite 2850 Oklahoma City, OK 73102-5683

KPMG LLP is a Delaware limited liability partnership,the U.S. member firm of KPMG International Cooperative(“KPMG International”), a Swiss entity.

Independent Auditors’ Report

Board of Trustees Western Farmers Electric Cooperative:

Report on the Financial Statements

We have audited the accompanying consolidated financial statements of Western Farmers Electric Cooperative (WFEC) and its subsidiaries, which comprise the consolidated balance sheets as of December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive income, changes in members’ equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion of the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.


Opinion

In our opinion, the consolidated financial statements referred to above present fairly in all material respects, the financial position of WFEC and its subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for the years then ended in accordance with U.S. generally accepted accounting principles.

Oklahoma City, Oklahoma March 12, 2013


WESTERN FARMERS ELECTRIC COOPERATIVE

Consolidated Balance Sheets

December 31, 2012 and 2011

(In thousands)

Assets 2012 2011

Electric utility plant, at cost:In-service $ 1,419,216 1,352,795 Construction work-in-progress 35,996 27,554

Total electric utility plant 1,455,212 1,380,349

Less accumulated depreciation and amortization 616,451 592,388

Net electric utility plant 838,761 787,961

Investments in associated organizations and other investments,at cost 131,512 125,039

Current assets:Cash and cash equivalents 4,548 2,449 Restricted cash 45,920 31,428 Accounts receivable from energy sales 37,561 36,995 Other accounts receivable 8,032 15,900 Inventories, at average cost:

Coal and oil 23,510 16,731 Material and supplies 52,865 42,890

Other 4,316 3,905

Total current assets 176,752 150,298

Other noncurrent assets 1,272 1,272 Deferred debits 51,465 53,050

Total assets $ 1,199,762 1,117,620

Members’ Equity and Liabilities

Capitalization:Patronage capital $ 194,078 180,610 Contributed capital 14,542 6,256 Long-term debt 887,574 828,437

Total capitalization 1,096,194 1,015,303

Current liabilities:Current portion of long-term debt 34,749 37,012 Accounts payable and accrued liabilities 61,158 57,183

Total current liabilities 95,907 94,195

Other liabilities 7,661 8,122

Commitments and contingencies (note 13)Total members’ equity and liabilities $ 1,199,762 1,117,620

See accompanying notes to consolidated financial statements.



Consolidated Statements of Operations

Years ended December 31, 2012 and 2011

(In thousands)

2012 2011

Operating revenues:Power sales to members and cities $ 418,382 427,270 Other power sales and operating revenues 38,783 35,625

Total operating revenues 457,165 462,895

Operating expenses:Operations:

Production 126,716 161,011 Purchased and interchanged power 160,802 142,977 Transmission 49,489 44,243 Distribution 5,385 5,204

General and administrative 13,747 15,383 Maintenance 19,999 17,643 Depreciation and amortization 34,160 31,294

Total operating expenses 410,298 417,755

Operating margin before interest 46,867 45,140

Interest expense, less amounts capitalized during constructionof approximately $715 and $855 in 2012 and 2011, respectively (43,522) (43,177)

Interest income 8,246 6,678

Operating margin 11,591 8,641

Other nonoperating loss, net (240) (294) Patronage capital assigned by associated organizations 1,962 2,116

Net margin $ 13,313 10,463




Consolidated Statements of Comprehensive Income


(In thousands)

2012 2011

Net margin $ 13,313 10,463 Other comprehensive income, net of tax: Pension and other postretirement benefit plans

Net actuarial gain (loss) (186) 359 Less: Amortization of prior service cost included in net periodic

pension cost (84) (97)

Pension and other postretirement benefit plans (270) 262

Effective portion of cash flow hedges (605) (1,593) Less: Reclassification adjustment for losses included in

interest expense 1,029 1,147

Other comprehensive income (loss) 154 (184) Total comprehensive income 13,467 10,279




Consolidated Statements of Changes in Members’ Equity


(In thousands)

Accumulatedother

Patronage Contributed comprehensive Memberships capital capital income (loss) Total

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

Net margin — 10,463 — — 10,463

Contributed capital — — 6,256 — 6,256

Net other comprehensive loss — — — (184) (184)

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

New memberships 1 — — — 1

Net margin — 13,313 — — 13,313

Contributed capital — — 8,286 — 8,286

Net other comprehensive income — — — 154 154 Balance, December 31, 2012 $ 3 196,595 14,542 (2,520) 208,620




Consolidated Statements of Cash Flows


(In thousands)

2012 2011

Cash flows from operating activities:Net margin $ 13,313 10,463 Adjustments to reconcile net margin to net cash provided by operating activities:

Depreciation 31,196 28,330 Other depreciation included in operating expenses 1,786 1,876 Amortization of regulatory asset expense 2,964 2,964 Accretion of asset retirement obligation 83 78 Noncash interest income (5,736) (5,456) Noncash interest expense 5,624 5,344 Changes in assets and liabilities:

Restricted cash (6,206) (7,898) Accounts receivable from energy sales (566) (2,403) Other accounts receivable 7,868 329 Coal and oil inventory (6,779) 5,695 Materials and supplies inventory (9,976) 136 Other current assets (411) (243) Deferred debits and other (1,058) 1,693 Accounts payable and accrued liabilities (10,480) (2,402) Other liabilities (388) (407)

Net cash provided by operating activities 21,234 38,099

Cash flows from investing activity:Net extension and replacement of electric utility plant (69,327) (39,190)

Net cash used in investing activity (69,327) (39,190)

Cash flows from financing activities:Advances of long-term debt 393,075 238,216 Payments on long-term debt (342,883) (191,838) Advances of short-term debt — 351,279 Payments on short-term debt — (397,957) Contributed capital 8,286 6,256 Change in restricted cash from financing activities (8,286) (6,256)

Net cash provided by (used in) financing activities 50,192 (300)

Net decrease (increase) in cash and cash equivalents 2,099 (1,391)

Cash and cash equivalents, beginning of year 2,449 3,840 Cash and cash equivalents, end of year $ 4,548 2,449

Supplemental schedule of cash flow information:Cash paid during the year for interest $ 44,263 38,372

Supplemental schedule of noncash financing and investing activities:Lease-leaseback amendments:

Deferral of loss on restructure of lease-leaseback $ 1,058 1,179




Consolidated Financial Statements


(Continued)

(1) Summary of Significant Accounting Policies

(a) Nature of Operations

Western Farmers Electric Cooperative (WFEC) is a generation and transmission cooperative headquartered in Anadarko, Oklahoma. WFEC owns and operates five generating plants, fueled by coal and gas, three located in Anadarko, one in Mooreland, Oklahoma, and one near Hugo, Oklahoma. WFEC also owns and maintains more than 3,700 miles of transmission line. WFEC has a combined capacity of over 1,700 megawatts (MW), including hydropower allocation. Member-owners consist of 23 distribution cooperatives, 19 in Oklahoma and four in New Mexico, and a United States Air Force base. Substantially all of WFEC’s assets are currently located in Oklahoma and substantially all revenue is related to Oklahoma operations. See note 13 for further information related to the addition of and sales to the New Mexico cooperatives.

(b) 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.

(c) 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.

(d) 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.





(Continued)

Provision for depreciation of electric utility plant is computed on the straight-line method at rates based on estimated service lives and salvage values of the class of property. These rates are applied on a composite class basis. Annual depreciation rates used in 2012 and 2011 are as follows:

Production plant 1.10 – 17.04%Transmission plant 2.75 – 10.00%Distribution plant 2.88 – 10.00%General plant 3.00 – 33.33%

Depreciation and amortization for the year ended December 31, 2012 was $35,946,000, of which $31,196,000 was charged to depreciation expense, $1,786,000 was included in fuel and other operating expenses, and $2,964,000 was charged to amortization of regulatory assets. Depreciation and amortization for the year ended December 31, 2011 was $33,170,000, of which $28,330,000 was charged to depreciation expense, $1,876,000 was included in fuel and other operating expenses, and $2,964,000 was charged to amortization of regulatory assets.

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) 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 2012 and 2011 totaled $715,000 and $855,000, respectively.

(f) Restricted Cash

Restricted cash consists of the following:

A Contingent Cash Reserve (CCR) that is restricted by WFEC Board Policy and approved by the regulator to be utilized based upon certain significant events or other approved uses as determined by the Board. The CCR had a balance of $23,951,000 and $22,790,000 as of December 31, 2012 and 2011, respectively.

A Cushion of Credit (Unapplied Advance Payment) account with the RDUP. As an RDUP borrower, WFEC may participate in the RDUP Cushion of Credit Program, which allows voluntary prepayment of debt. These advance payments are held on behalf of WFEC and earn interest at 5% per annum. The prepaid account balance and earned interest may only be used for debt service on loans made or guaranteed under the Rural Electrification Act. As of December 31, 2012 and 2011 the Cushion of Credit account had a balance of $43,229,000, of which $23,951,000 represents CCR funds and $29,048,000, of which $22,790,000 represents CCR funds, respectively.





(Continued)

Other cash accounts with funds that are restricted as to withdrawal for various purposes had a total balance of $2,691,000 and $2,380,000 as of December 31, 2012 and 2011, respectively.

A Debt Service Reserve account that is set aside in case of default on an interest and/or principal payment of long-term debt. The Debt Service Reserve account had a balance of $1,272,000 as of December 31, 2012 and 2011, and is reflected as other noncurrent assets in the accompanying financial statements.

(g) Cash and Cash Equivalents

For purposes of reporting cash flows, cash and cash equivalents include unrestricted cash on hand and investments purchased with original maturities of three months or less.

(h) 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.

(i) Inventories

Inventories of coal and oil, and materials and supplies of WFEC are valued at average cost. These inventories are consumed by WFEC’s operations or utilized as additions to electric utility plant and are not held for resale.

(j) Emission Allowances

In accordance with the Federal Clean Air Act, WFEC has received an annual allocation of SO2 (sulfur dioxide) emission allowances from the Environmental Protection Agency as part of a nationwide program to limit SO2 emissions. An allowance provides authority to emit one ton of SO2. Under this program, WFEC has received more SO2 allowances than it has utilized. The unutilized SO2 allowances have no cost basis and are therefore not recorded on the balance sheet.

(k) Electric Rates

The Board of Trustees of WFEC has full authority to establish the electric rates charged to members, subject to approval by RDUP.

WFEC bills its members fuel costs as a component of electric rates. The fuel billing rate is designed to accumulate and maintain an over recovered fuel account balance. An over recovery of approximately $10,476,000 and $10,064,000 at December 31, 2012 and 2011, respectively, was recorded in accounts payable and accrued liabilities.

(l) Regulatory Assets and Liabilities

WFEC defers certain expenses that will be recovered through WFEC’s future rates (see note 5) in accordance with accounting principles generally accepted in the United States of America applicable to rate-regulated enterprises. Regulatory assets are charged as an expense, if and when future recovery in rates of that asset is no longer probable. WFEC also recognizes unearned revenue over future periods for rate making purposes.





(Continued)

(m) Revenues

Revenues from the sale of electricity are recorded based on energy provided, including actual cost of fuel, to customers and on contracts and scheduled power usages, as appropriate.

(n) Derivative Instruments and Hedging Activities

WFEC’s activities expose it to a variety of market risks, including interest rates and commodity prices. Management has established risk management policies and strategies to reduce the potentially adverse effects that the volatility of the markets may have on its operating results. These policies and strategies include the use of derivative instruments for hedging purposes. WFEC designates its interest rate cash flow hedge derivatives as such on the date the derivative contract is entered into. WFEC formally documents all relationships between interest rate hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. WFEC also assesses, both at the interest rate hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items. These derivative instruments generally qualify as cash flow hedges under Accounting Standard Codification (ASC) 815-30, Derivatives and Hedging – Cash Flow Hedges, as amended. If hedge treatment is obtained, unrealized gains or losses resulting from these instruments are deferred as a component of accumulated other comprehensive income (loss) until the corresponding item being hedged is settled, at which time the gain or loss is recognized. See note 12.

(o) Related Parties

The members of WFEC purchase power from WFEC. The terms of transactions are based upon formal long-term contracts approved by WFEC’s Board of Trustees and are settled monthly, generally requiring the members to purchase 100% of the members’ purchased power requirements from WFEC. The contracts allow the Board of Trustees to establish base energy rates that allow recovery of cost of utility plant, fuel, and other operating costs incurred by WFEC. No collateral is pledged to WFEC from its members to collateralize the outstanding accounts receivable. The only exception relates to four New Mexico members with Transition Agreements providing for immediate and short-term power requirements to be provided from their existing contracts with Southwestern Public Service Company (SPS) at prescribed contract quantities and periods. WFEC has been providing 50 MW to the New Mexico members since June 2012. See note 13. WFEC has wholesale power contracts with 21 of its distribution cooperative members through the year 2050 and with two of its members through the year 2025. In 2012, the distribution cooperative members with contracts through 2050 represented 83% of WFEC member cooperative sales.

(p) Concentration of Credit Risk

Concentration of credit risk exists with respect to trade accounts receivable of which approximately 98% of accounts receivable from energy sales at December 31, 2012 are from power sales from WFEC’s members. The credit risk for accounts receivable from nonmember sales is managed through monitoring procedures.





(Continued)

(q) Regional Transmission Organization Accounting

WFEC participates in the Energy Imbalance Services Market under the Southwest Power Pool (SPP) Regional Transmission Organization (RTO). An RTO is an organization that is established to control and manage the transportation and flows of electricity over an area that is generally larger than a single power company’s system. WFEC records RTO transactions on an hour-to-hour basis. Transactions within each individual hour are netted to a single purchase or sale based on actual load and net megawatt hour generation.

(r) Comprehensive Income (Loss)

Comprehensive income (loss) consists of net income (loss), changes in the fair value of derivatives that are designated as hedges and changes in the net actuarial gains (losses) and amortization of prior service costs on the defined benefit retirement plan.

(s) Fair Value Measurements

WFEC utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. WFEC determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:

Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.

Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.

Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.

(t) New and Recently Adopted Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Codification (ASU) 2011-05 Comprehensive Income (Topic 220): Presentation of Comprehensive Income. Under this ASU, an entity will have the option to present the components of net income and comprehensive income in either one or two consecutive financial statements. The ASU eliminates the option in U.S. GAAP to present other comprehensive income in the statement of changes in equity. An entity should apply the ASU retrospectively. For a nonpublic entity, the ASU is effective for fiscal years ending after December 15, 2012, and interim and annual periods thereafter. In December 2011, the FASB decided to defer the effective date of those changes in ASU 2011-05 that relate only to the presentation of reclassification adjustments in the statement of income by issuing ASU 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Update 2011-05. WFEC adopted the provisions of ASU 2011-05 by





(Continued)

presenting a separate statement of other comprehensive income following the statement of operations in 2012.

(u) Reclassifications

Certain reclassifications have been made in the 2011 financial statements to property reflect amounts in 2012.

(2) Electric Utility Plant

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

2012 2011(In thousands)

Production plant $ 843,477 833,221 Transmission plant 292,496 280,212 Distribution plant 147,665 136,554 General plant 85,336 80,734 Unclassified plant 50,242 22,074

Electric utility plant-in-service 1,419,216 1,352,795

Construction work-in-progress 35,996 27,554

Total electric utility plant $ 1,455,212 1,380,349

In May 2001, GenCo completed construction of two 45.5 MW simple cycle generating facilities, fueled by natural gas, in Anadarko, Oklahoma. An agreement was entered into with another party to purchase 100% of the capacity of these units at commercial operation for a term of up to 20 years, with WFEC retaining certain recall rights. Currently, WFEC has recalled 51 MW. WFEC has the right, but not the obligation, to recall the remaining 40 MW of capacity of the plant during the remaining operating term. In 2007, WFEC entered into a purchase power agreement with the other party to utilize the remaining 40 MW of capacity of the plant for specific months from June 1, 2007 through February 29, 2012. In 2010, the purchase power agreement was extended through February 28, 2017. WFEC will be responsible for fuel and related costs under the terms of the agreement for these contracted periods.

The other party provided $6,800,000 of financing. This note has a fixed rate of interest and is payable annually through 2021. Interest of approximately $400,000 that had accumulated through September 2001 (during the construction phase) was added to the note principal. As of December 31, 2012, the balance of the note was $4,647,000 and is included in long-term debt.





(Continued)

(3) Investments in Associated Organizations and Other Investments


National Rural Utilities Cooperative FinanceCorporation (CFC):

3% capital term certificates $ 300 300 5% capital term certificates 6,130 6,130 Patronage capital certificates 1,161 1,077

CoBank Class A stock 5,208 4,577 ACES 1,163 1,141 Lease-leaseback related investments (see note 4) 117,506 111,770 Other 44 44

$ 131,512 125,039

WFEC purchased capital term certificates and stock as required by institutions under borrowing arrangements. Fair value of the certificates and stock is not readily determinable.

In 2002, WFEC joined ACES as a member. As of December 31, 2012, WFEC owned 5.26% of ACES equity. The investment in the partnership is accounted for using the equity method of accounting.

The lease-leaseback investment includes $14,666,000 of accrued interest receivable and $102,840,000 of government agency obligations presented at cost. Fair value of the government agency obligations at December 31, 2012 and 2011 was $154,242,000 and $146,009,000, respectively.





(Continued)

(4) Lease-Leaseback Transaction

On May 31, 2001, WFEC entered into a long-term lease transaction with a limited liability company (LLC) owned by a partnership for the benefit of two unaffiliated institutional equity investors. Under the terms of the transaction, WFEC entered into a 56-year lease of its interest in the Hugo Generation Station and certain of its transmission facilities (collectively, the Facility) to such LLC, and simultaneously entered into a 26-year lease of the Facility back from the LLC. This transaction is reflected as a financing transaction for financial reporting purposes. All rent under the long-term lease of the Facility was paid by the LLC to WFEC on the closing date of the transaction in an amount equal to $420,000,000. From these proceeds, approximately $293,000,000 was paid to a Payment Undertaker for its entering into a Payment Undertaking Agreement (PUA) with WFEC. Under the terms of the PUA, the Payment Undertaker assumed primary liability to pay a portion of WFEC’s rental obligations. In accordance with meeting the provisions of ASC Topic 860, Transfers and Servicing, such portion of the liability and the corresponding PUA were extinguished for financial reporting purposes. As of December 31, 2009, the investments balance was $112,474,000 and the debt balance was $156,440,000.

The investments were pledged as collateral for WFEC’s obligations under certain credit enhancement purchased in connection with the lease. In addition, the transaction resulted in a gross cash benefit to WFEC of $46,814,000 that, pursuant to U.S. generally accepted accounting principles applicable to rate regulated enterprises and as authorized by the Board of Trustees, is being recognized on a straight-line basis over the term of the leaseback to WFEC, by deferring interest expense in the early years as a regulatory asset and amortizing the deferral in the later years. At the expiration of the leaseback period, one option available to WFEC is to exercise a fixed price purchase option, which, if exercised, would allow WFEC to terminate the long-term lease from WFEC to the LLC, repay the outstanding debt associated with the lease, and retain all other rights of ownership with respect to the Facility.

The use of the cash benefit of $46,814,000 from the transaction was restricted by the RDUP. With RDUP approval, $26,000,000 funded specific construction projects and the balance of $20,814,000 was available to be utilized based upon certain significant events. RDUP authorized a transfer of the funds to a Special Construction Fund (SCF) account in 2007. The SCF account was available to fund WFEC Board and RDUP approved construction projects or other uses as mutually agreed by both parties. The SCF balance as of December 31, 2009 was $25,711,000.

The PUA and Investments described above were entered into with affiliates of Ambac Assurance Corporation (Ambac). Ambac also provided the equity investors in the lease with credit enhancement that protected their outstanding exposure upon the event of default by WFEC. In 2008, Ambac was downgraded on several occasions by the major credit rating agencies principally as a result of its exposure to troubled investments in the securitized debt and mortgage markets. Under the terms of the agreement, WFEC was required to provide a replacement or additional enhancement within 60 days of Ambac no longer meeting the minimum credit criteria. In June 2008, the equity investors notified WFEC of its obligation under the lease due to Ambac’s rating falling below the requisite threshold. During this challenging credit environment, WFEC pursued a number of options for addressing the situation presented by Ambac’s downgrade and at the same time negotiated multiple extensions of the deadline for replacement or additional enhancement with the equity investors.





(Continued)

On February 27, 2009, the participants to the lease-leaseback transaction (lease) agreed to restructure a portion of the 2001 lease, which was affected by a prepayment of the portion of basic rent that was due from an affiliate of Ambac for 90% of the nonrecourse debt (Series A debt) in the lease. This repayment was provided by WFEC using the redemption proceeds of the Payment Undertaking Agreement (PUA), which was also held by Ambac. Although the Series A debt, for which the PUA provided economic defeasance had been extinguished for financial accounting purposes, continued reliance on the PUA would have left WFEC with substantial exposure if Ambac were unable to pay this portion of ongoing rent. The Series B debt, which was provided originally by a third party, remained in place. In order to keep the equity investors whole, as required by the terms of the lease, the rent prepayment required WFEC to make an additional rent payment of $3,749,000 at closing. The additional payment adjusted the original amount of transaction gain and, as such, reduced the straight-line gain recognition from approximately $1,819,000 per year to $1,673,000 per year, prospectively. As of December 31, 2009, the deferred gain was approximately $28,601,000.

On May 3, 2010, the participants to the lease agreed to further amend the 2001 lease and the Ambac Credit Products was replaced with Berkshire Hathaway Assurance Corporation as the credit enhancement provider. Ambac liquidated the Guaranteed Investment Contracts (GIC) held for the equity investors and Series B loan payments at an amount less than full accreted value (for approximately 68% of the accreted value or $78,083,000 as of May 3, 2010). In connection with such amendment and liquidation, the Ambac credit default swap and surety bond securing such swap, which provided credit enhancement in the lease, were terminated and Ambac was released from further liability under such swap, surety bond and GIC’s. The proceeds of the liquidation were reinvested in U.S. government agency securities to economically defease the remaining equity investor periodic rent payments, the equity investor portion of the purchase option price at the end of the lease term and the Series B loan balloon payment due at the end of the lease term (2027). This required an additional cash contribution (over and above the Ambac GIC liquidation proceeds) of $24,757,000. With Board and RDUP approval, the cash source was a portion of the original proceeds of the lease transaction held in the SCF. As a result of the above described substitution of the agency securities for the Ambac GIC’s, the amount of interest to be earned on the securities defeasance account will be lower over the lease term by $35,848,000. Additional rent of $4,360,000 is owed due to a change in interest rate on the Series B debt. In turn, the net gain of the transaction was reduced from $1,673,000 per year to $102,000 per year, prospectively. As of December 31, 2012, gain to be recognized in the future is $1,422,000.

The remaining Series B loan payments (prior to the balloon) are no longer economically defeased and WFEC will pay them as they are due out of the remaining original proceeds and operating cash flows. At December 31, 2012, the Series B debt balance was $35,560,000, of which the present value of the nondefeased payment obligations was $25,764,000.

WFEC contracted with Berkshire Hathaway to provide credit enhancement for the equity termination value. WFEC paid the enhancement fee for the remaining portion of 2010 and 2011 at closing and, hereafter, is required under the amended lease to make payments every October for the subsequent calendar year through the remainder of the lease term.





(Continued)

WFEC received Board and RDUP authority to defer and amortize as a regulatory asset (a) the reduced gain of $2,856,000, (b) the GIC liquidation loss of $36,745,000, (c) the adjustment to reflect reduced interest income and the change in pattern of gain amortization of $13,487,000, and (d) the remaining transaction fees of $167,000 straight line over the remaining term of the lease (2027) under ASC 980, which approximates $2,853,000 annual amortization. At December 31, 2012, the regulatory asset balance is $49,550,000. See note 5. WFEC’s electric rates are designed to recover this cost.

As of December 31, 2012, the investments balance is $117,506,000 and the debt balance is $167,401,000.

(5) Regulatory Assets and Other Assets and Liabilities

WFEC is subject to the provisions of ASC 980, Regulated Operations. Regulatory assets represent probable future revenue to WFEC associated with certain costs which will be recovered from customers through the ratemaking process. Deferred debits and credits at December 31 contained the following:


Regulatory assets:Unamortized cost associated with lease/leaseback

(see note 4) $ 49,550 51,456 Other assets:

Preliminary survey and investigation charges 1,109 659 Unamortized debt expense 806 935

$ 51,465 53,050

Other liabilities:Unearned revenue $ 725 1,029

As of December 31, 2012, WFEC’s regulatory assets are being reflected in rates charged to customers over 15 years.

The regulatory and other assets are reflected in deferred debits and unearned revenue is reflected in other liabilities in the accompanying consolidated balance sheet.

(6) Patronage Capital

WFEC’s mortgage indenture and certain loan agreements (see note 7) contain restrictions on distributions of capital contributed by members. There was no patronage retirement for the years 2011 and 2012.

Patronage capital is calculated based on WFEC’s net income as determined for federal income tax purposes. For financial reporting purposes, net margins are assigned to members on a patronage basis.





(Continued)

(7) Debt

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


First mortgage notes:Notes payable to Federal Financing Bank (FFB), interest

from 1.31% to 11.37%, a weighted average of 4.84%,due in quarterly installments through 2043 $ 479,671 460,835

Notes payable to the RDUP, interest from 4.75% to 5.00%,a weighted average of 4.76%, due in monthly andquarterly installments through 2025 7,841 8,275

Note payable to CoBank, interest at 5.71%, due in quarterlyinstallments through January 2019 7,055 7,832

Note payable to CoBank, interest at 6.22%, due in monthlyinstallments through November 2025 2,803 2,920

Notes payable to CFC with varying amounts, interest from5.30% to 5.50%, due in annual installments through 2016 2,363 3,299

Notes payable to CoBank, interest at a weighted average of6.36%, due in quarterly installments through April 2038 117,206 118,998

Notes payable to CFC with varying amounts, interestfrom 2.75% to 4.55%, due in quarterly installmentsthrough June 2024 16,944 18,410

Notes payable to CoBank, interest at a weighted average of4.495%, due in quarterly installments through October 2042 30,000 —

Other notes:Notes payable to CFC, interest from 5.55% to 5.65%,

a weighted average of 5.61%, due in quarterly installmentsthrough 2023 15,498 16,491

Note payable to CoBank, interest at 6.34% due in quarterlyinstallments through April 2016 1,741 2,183

Lease termination obligation payable to Hugo Generation, atmaturity in 2027, interest imputed at a fixed rate of 4.09% 167,401 163,357

Note payable to CoBank, at a variable interest rate, witha fixed rate swap at 5.88% plus 1.875%, principal dueannually through 2020, interest payments quarterly 17,325 19,125

Note payable, interest at 7.56%, due in annual installmentsthrough 2021 4,647 4,999





(Continued)


Notes payable to CoBank, interest from 1.50% to 3.50%at December 31, 2012, due May 2015, syndicatedrevolving loan agreement $ 51,828 38,725

922,323 865,449

Less current portion of long-term debt 34,749 37,012

Total long-term debt $ 887,574 828,437

Annual payments of long-term debt for years subsequent to December 31, 2012 are as follows (in thousands):

2013 $ 34,749 2014 36,466 2015 89,780 2016 30,834 2017 34,323 Thereafter 696,171

$ 922,323

In May 2011, WFEC’s $100,000,000 unsecured committed revolving line of credit with CoBank was replaced with a $200,000,000 unsecured committed four-year syndicated revolver with CoBank acting as lead arranger and administrative agent. The outstanding balance on the line of credit at December 31, 2012 and 2011 was $51,828,000 and $38,275,000, respectively. The commitment matures in 2015.

WFEC also has a three-year unsecured committed revolving line of credit with CFC totaling $75,000,000 with a term through October 2013. Advances on the CFC facility bear interest at a floating rate and the facility is renewable at the discretion of the lender and WFEC. No advances were outstanding on the CFC line of credit at December 31, 2012 and 2011. A $29,220,000 letter of credit had been issued under this arrangement at December 31, 2012.





(Continued)

Approximately $148,172,000 and $45,780,000 of borrowing capacity was available on the CoBank and CFC lines of credit, respectively, at December 31, 2012, net of outstanding Letters of Credit and line advances. Both lines of credit are expected to be renewed or extended prior to expiration.

In order to provide additional financing alternatives, during 2011 WFEC took action to substitute an indenture of mortgage for its Restated and Consolidated Mortgage and Security Agreement. Consequently, WFEC executed an Indenture of Mortgage, Deed of Trust, Security Agreement and Financing Statement, dated as of April 8, 2011 (Indenture), between WFEC, as Grantor, to U.S. Bank National Association, as Trustee. All mortgage notes secured by the Indenture are secured equally and ratably by a first priority lien on substantially all of the assets of WFEC, subject to certain exceptions and limitations. Under the terms of WFEC’s Indenture, substantially all of the after-acquired assets of WFEC become subject to the lien of the Indenture. Also, under the terms of the Indenture, the RDUP Loan Contract and other loan agreements, WFEC must maintain certain financial covenants. WFEC was in compliance with these financial covenants at December 31, 2012.

On October 10, 2012, WFEC entered into a long-term loan agreement with CoBank in the amount of $60,000,000 for general corporate purposes, including, but not limited to, capital expenditures. The loan has a maturity date of October 10, 2042. As of December 31, 2012, $30,000,000 had been advanced.

WFEC had approximately $260,078,000 of unadvanced funds available at December 31, 2012 from FFB on notes previously executed. Approximately $109,195,000 is available for transmission and distribution additions and replacements and $150,883,000 for generation system improvement projects.

In 2001, a construction loan, used to finance GenCo’s two new generating units, totaling approximately $35,000,000, was converted to a 20-year term loan with a variable interest rate. GenCo simultaneously entered into an interest rate swap agreement to fix the rate at 5.88%. In addition to the variable rate, GenCo must pay an additional 1.875% to CoBank, which increases over the life of the loan to 2.25%. This term loan is classified as long-term debt.

(8) Production Expenses

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


Fuel $ 108,554 142,782 Other production expenses 18,162 18,229

Total production expenses $ 126,716 161,011

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





(Continued)

(9) Income Taxes

WFEC is a nonexempt cooperative subject to federal and state income taxes and files a consolidated tax return. As a cooperative, WFEC is entitled to exclude patronage dividends from taxable income. WFEC’s bylaws require it to declare patronage dividends in an aggregate amount equal to WFEC’s federal taxable income from its furnishing of electric energy and other services to its member-patrons. Accordingly, such income will not be subject to income taxes.

Nonmember operations are subject to federal income taxes. Historically, WFEC’s nonmember operations have generated tax losses. The primary differences between WFEC’s book income and WFEC’s nonmember tax losses are the result of the tax accounting for certain leases.

As of December 31, 2012 and 2011, WFEC’s deferred tax asset before valuation allowance was approximately $5,757,000 and $8,154,000, 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 $14,627,000, which expire in 2012 and thereafter.

No income tax expense was provided in 2012 and 2011, due to the availability of net operating loss carryforwards to offset nonmember income for tax purposes.

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

2012 2011

(In thousands)

Tax-effected gross deductible temporary differences $ 7,872 11,894 Tax-effected gross taxable temporary differences (2,115) (3,740)

Deferred tax asset 5,757 8,154

Less valuation allowance (5,757) (8,154)

Net deferred tax asset $ — —

(10) Retirement Plans

In 2011, the FASB issued ASU 2011-09 Disclosures about an Employer’s Participation in Multiemployer Plans, which requires additional disclosures related to an employer’s participation in multiemployer retirement plans. The additional disclosure requirements are effective for annual periods ending after December 15, 2012 for nonpublic entities. The provisions of this update were adopted in 2012.

Substantially all employees of WFEC participate in the National Rural Electric Cooperative Association (NRECA) Retirement Security Plan (RS Plan). The RS Plan is a defined benefit pension plan qualified under Section 401 and tax-exempt under Section 501(a) of the Internal Revenue Code. It is a multiemployer plan under the accounting standards. The plan sponsor’s Employer Identification Number is 53-0116145 and the Plan Number is 333.





(Continued)

A unique characteristic of a multiemployer plan compared to a single employer plan is that all plan assets are available to pay benefits of any plan participant. Separate asset accounts are not maintained for participating employers. This means that assets contributed by one employer may be used to provide benefits to employees of other participating employers.

WFEC contributions to the RS Plan in 2012 and 2011 represented less than 5% of the total contributions made to the plan by all participating employers. WFEC makes contributions to the RS Plan equal to the amounts accrued for pension expense, which is dependent on the employee’s date of hire. WFEC made contributions to the plan during 2012 and 2011 of approximately $6,737,000 and $6,902,000, respectively. There have been no significant changes that affect the comparability of 2012 and 2011 contributions.

In the RS Plan, a “zone status” determination is not required, and therefore not determined, under the Pension Protection Act (PPA) of 2006. In addition, the accumulated benefit obligations and plan assets are not determined or allocated separately by individual employer. In total, the RS Plan was between 65% and 80% funded at January 1, 2012 and January 1, 2011 based on the PPA funding target and PPA actuarial value of assets on those dates.

Because the provisions of the PPA do not apply to the RS Plan, funding improvement plans and surcharges are not applicable. Future contribution requirements are determined each year as part of the actuarial valuation of the plan and may change as a result of plan experience.

Substantially all employees of WFEC also participate in the NRECA 401(k) Pension Plan option. Under the plan, WFEC contributes amounts not to exceed 8% of the respective employee’s base pay to the plan, dependent on the employee’s level of participation and the employee’s date of hire. Employees may contribute up to the IRS prescribed limit of their base pay to the plan. Contributions are immediately 100% vested. Benefits paid under the plan are limited to the sum of the employee’s and WFEC’s contributions and investment earnings or losses on those contributions. WFEC contributed approximately $1,164,000 and $1,063,000 to the plan in 2012 and 2011, respectively.

In addition to the defined benefit and defined contribution retirement plans, WFEC sponsors a health care plan that provides postretirement medical benefits to non-Medicare eligible retired employees who meet minimum age and years-of-service requirements. The plan is contributory with retiree contributions subject to annual adjustment, and contains other cost-sharing features such as deductibles and coinsurance. WFEC contributes to retiree health care benefits in years when retiree claims exceed premiums. WFEC’s policy is to fund the cost of medical benefits as incurred.

(11) Fair Value of Financial Instruments

At December 31, 2012 and 2011, 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, 2012 and 2011, 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.





(Continued)

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, 2012 and 2011, respectively. Under the provision of ASC 820-10, Fair Value Measurements and Disclosure, the fair value is determined based upon Level 2, significant other observable inputs, defined as inputs that are either directly or indirectly observable. The estimated fair value of the long-term debt at December 31, 2012 and 2011 is approximately $952,628,000 and $898,116,000, respectively.

The following table presents the placement in the fair value hierarchy of liabilities that are measured at fair value on a recurring basis at December 31, 2012 and 2011:

Quoted pricesin active Significant

markets for other Significantidentical observable unobservable

assets inputs inputs(Level 1) (Level 2) (Level 3) 2012

Liabilities:Commodity derivatives $ — 679,000 — 679,000 Interest rate derivatives — 3,543,000 — 3,543,000

Total liabilities $ — 4,222,000 — 4,222,000

Quoted pricesin active Significant

markets for other Significantidentical observable unobservable

assets inputs inputs(Level 1) (Level 2) (Level 3) 2011

Liabilities:Commodity derivatives $ — 4,261,000 — 4,261,000 Interest rate derivatives — 3,966,000 — 3,966,000

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

(12) Derivative Instruments and Hedging Activities

The Company periodically enters into commodity swap, collar and option contracts for a portion of its anticipated natural gas or power purchases, to manage the price risk associated with fluctuations in market prices. These contracts limit the unfavorable effect that price increases will have on natural gas or power purchases. WFEC has elected to not designate its commodity contracts as cash flow hedges; therefore, changes in the fair value of the commodity contracts are recorded as an asset or liability and as an increase or reduction to production or purchased power expense. In accordance with ASC 980-10, Regulated Operations, gains and losses from price management activities are included in WFEC’s fuel cost recovered from members as part of WFEC’s rate-making policy. As such, an asset or liability, that offsets the change





(Continued)

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 $679,000 and $4,261,000 as of December 31, 2012 and 2011, 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 2013.

GenCo entered into an interest rate swap agreement to manage fluctuations in cash flows resulting from interest rate risk. This swap changes the variable-rate cash flow exposure on the debt obligation to fixed cash flows. Under the terms of the interest rate swap, GenCo receives variable interest rate payments and makes fixed interest rate payments, thereby creating the equivalent of fixed-rate debt. Changes in the fair value of the interest rate swap, which is designated as a hedging instrument that effectively offsets the variability of cash flows associated with variable-rate, long-term debt obligation is reported in equity as other comprehensive income. This amount subsequently is reclassified into interest expense as a yield adjustment of the hedged interest payments in the same period in which the related interest affects earnings. For the years ended December 31, 2012 and 2011, WFEC reclassified losses of $1,029,000 and $1,147,000, respectively, into interest expense. The fair value of the interest rate swap was obtained from dealer quotes. This value represents the estimated amount WFEC would receive or pay to terminate the agreement, taking into consideration current interest rates. The fair value of the swap at December 31, 2012 and 2011 was a liability of $3,543,000 and $3,966,000, respectively, and is included in other liabilities in the accompanying consolidated balance sheets.

WFEC expects approximately $1,000,000 of the existing losses that are reported on accumulated other comprehensive income at December 31, 2012, to be reclassified into earnings within the next twelve months.

(13) Commitments and Contingencies

Addition of and Sales to New Mexico Cooperatives

In 2010, all necessary approvals were received to add four New Mexico distribution cooperatives (Cooperative, collectively Cooperatives) to the membership of WFEC. Each Cooperative executed a Wholesale Power Contract (WPC) through 2050 and has one vote on the Board of Trustees through their respective representative. Together, the Cooperatives currently have approximately 400 MW of load. Their service territories are adjacent to one another in southeastern New Mexico and are located in the Southwest Power Pool (SPP) footprint, as is WFEC. The Cooperatives will continue to own and maintain their respective delivery systems and have delivery points on the utility from which they have historically purchased their power needs. Transmission service for WFEC to serve the cooperative across that utility will be provided through the SPP Open Access Transmission Tariff.

WFEC and the Cooperatives also executed a Transition Agreement (Agreement), effective in 2010 and terminating June 1, 2026. During this transition period, the Cooperatives are members of WFEC with all rights, privileges and obligations of membership, but with a separate cost of service rate (Segregated Rate). The Segregated Rate shall generate sufficient revenue to cover the Cooperative’s cost of service as well as produce sufficient revenues that when combined with all other WFEC revenues, meet WFEC Board-determined reserves. During the transition period, each Cooperative shall be responsible for





(Continued)

(1) costs which are directly and uniquely related to the supply and delivery of electric power and energy to that respective Cooperative, (2) its share of costs common to the Cooperatives located in New Mexico, and (3) its share of costs common to all members of WFEC. After the transition period and for the remaining term of the WPC, the Segregated Rate shall no longer be used, and the Cooperatives shall be a member with a then applicable cost of service rate or rates common with other members of WFEC (Member Rate) and consistent with the WPC. The WFEC Board of Trustees and RDUP approved adoption of the Segregated Rate.

Immediate and short-term generation requirements of the Cooperatives will continue to be provided from their existing contracts with Southwestern Public Service Company (SPS). The Cooperatives will step out of those contracts in four increments in 2012, 2017, 2022 and finally 2026 when the contracts terminate. WFEC is providing 50 MW since June of 2012 and will be responsible for providing approximately 122 MW in 2017, 300 MW in 2022 and fully responsible for all needs of the Cooperatives after the SPS contracts terminate in 2026.

All Cooperative power supply resources, including the SPS contracts, shall be assigned to WFEC in the next few years, but in any event, no later than spring 2017. Upon such assignment and assumption of obligations, the Cooperatives shall, through June 1, 2026, continue to pay all charges and costs arising from such third party supplied contracts and contributed generation, as part of the Segregated Rate.

One Cooperative has chosen to build capacity to self-generate a portion of its needs, that portion that it was required to remove from SPS contract obligation in 2012. The generation resources, declared commercial February 2012, will be assigned along with debt assumption to WFEC by 2017, possibly sooner, and an appropriate equity credit assigned to the Cooperative for its net contribution. This Cooperative has entered into a purchase power agreement for all the output from a wind farm with an approximate 28 MW nameplate rating. This wind energy purchase agreement shall be assigned to WFEC, like other resources as described above.

Each Cooperative will contribute equity to WFEC in a manner and amount such that, as of June 1, 2026, the Cooperative has contributed equity to WFEC comparable to the amount of equity contributed to WFEC by prior existing members. These equity contribution payments are determined by WFEC’s projected capital resource additions or purchase power contracts, or share thereof, required to supply power and energy to the respective Cooperative, and are collected and paid to WFEC through the Segregated Rate. The contributed equity of each Cooperative is assigned to their respective patronage account.

Purchase Requirements

WFEC has a long-term standby power contract with Southwestern Power Administration under which it is obligated to purchase a minimum quantity of power annually through May 2028. At the prescribed 2013 rates, the minimum requirement approximates $17,916,000. During 2012 and 2011, WFEC purchased $19,534,000 and $20,114,000, respectively.





(Continued)

WFEC has a long-term purchased power contract with a party, effective January 2010 through December 2025 under which it is obligated to purchase a minimum quantity of power on a monthly basis. Based on contract information and power cost adjustment information currently published, the annual obligation for 2013 is estimated at $62,427,000. During 2012 and 2011, WFEC purchased $43,805,000 and $24,042,000, respectively. The contract requires WFEC to purchase increasing minimum monthly quantities of power at prescribed contract intervals.

In 2011, WFEC negotiated multiyear contracts to acquire and transport coal for the Hugo Generating Station. WFEC’s costs for both coal and transportation purchases were approximately $69,000,000 for the years ended December 31, 2012 and 2011. The current projection for the minimum contract commitments for coal and coal transportation are approximately $43,000,000 in 2013, and $46,000,000 in 2014.

WFEC has a long-term purchased power contract with a party, effective June, 2014 through December, 2035, under which it is obligated to purchase increasing minimum monthly quantities of power at prescribed contract intervals. The contract is subject to the outcome of firm transmission availability through the Southwest Power Pool study process.

Environmental

WFEC, as is common with other electric utilities, is subject to stringent existing environmental laws, rules, and regulations by federal, state, and local authorities with regard to air and water quality control, solid and hazardous waste disposal, hazardous material management, and toxic substance control. Management believes it is in substantial compliance with all existing laws, rules, and regulations.

Legal

WFEC was the defendant in two lawsuits, each involving one member distribution cooperative. Each suit centered on numerous claims, and one complaint sought to have the parties’ Wholesale Power Agreement declared invalid as an unlawful restraint of trade, each related to the adoption and implementation by WFEC of a member wholesale power rate, the R-15 rate, effective February 1, 2010. In January 2012, one of the suits was settled and dismissed with no monetary amount due.

In the other member lawsuit a settlement has been agreed to by the parties but RDUP approval had been pending. On March 6, 2013, WFEC received notice that the RDUP had approved the Settlement Agreement and Release of All Claims. The Settlement Agreement, by its terms, was effective that same day, March 6, 2013. The specific terms and conditions of the Settlement Agreement are confidential, however, the membership of the distribution cooperative in WFEC terminated as of the effective date and the existing Wholesale Power Agreement between the distribution cooperative and WFEC terminated as of the effective date, and is replaced by a new power sales agreement between the parties. The power sales agreement governs the sale by WFEC and purchase by the customer of power and energy over some period of time as a transition, ultimately resulting in no WFEC obligation to provide any power and energy or other services to the customer. The time period of this transition is flexible to accommodate the need for customer to find new sources of power and energy and arrange for delivery of such power supply. The transition includes incremental steps and “no later than” dates for identified quantities of capacity and energy to be removed from the WFEC obligation to serve. All load must be removed from WFEC and WFEC shall have no obligation to serve no later than June 30, 2025, but could be accomplished much earlier. The settlement, which is effective March 6, 2013, involves transferring certain radial transmission





(Continued)

lines and substations to the customer, a monetary payment by the customer and a customer release of all claims to its patronage capital with WFEC. The patronage capital released to WFEC is $10,988,000. There is one outstanding issue that was not resolved in this Settlement Agreement and that is now the subject of new litigation. That litigation revolves around whether the distribution cooperative, upon termination of its membership in WFEC and termination of its Wholesale Power Agreement with WFEC, has any rights to certain Southwestern Power Administration hydropower allocation. WFEC intends to vigorously defend its position in that litigation.

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.

(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. The liability is initially measured at its discounted fair value and subsequently adjusted for accretion expense and changes in the amount or timing of the estimated cash flows. The corresponding asset retirement costs are capitalized as part of the carrying amount of the related long-lived asset and depreciated over the asset’s useful life. Activity for the asset retirement obligations for the years ended December 31 is as follows:


Beginning balance $ 1,185 1,107 Additional liabilities incurred — — Revisions to estimates — — Accretion expense 83 78

Ending balance $ 1,268 1,185





(15) Comprehensive Income

The accumulated balances for each classification of other comprehensive income are as follows:

AccumulatedPension and other

postretirement Cash flow comprehensivebenefit plans hedges income

(In thousands)

Balance, January 1, 2011 $ 1,030 (3,520) (2,490) Net current period change 262 (1,593) (1,331) Reclassification adjustments for losses

reclassified into income — 1,147 1,147

Balance, December 31, 2011 1,292 (3,966) (2,674) Net current period change (270) (605) (875) Reclassification adjustments for losses

reclassified into income — 1,029 1,029 Balance, December 31, 2012 $ 1,022 (3,542) (2,520)

(16) Subsequent Events

The Company has evaluated subsequent events from the balance sheet date through March 12, 2013, the date at which the financial statements were available to be issued, and determined there are no other items to disclose, other than the item disclosed in Note 13.




Documents

2012 WFEC Annual Report