2013 wfec annual report

BuildingToday

PowerfulTomorrowfor a

2013 Annual Report

wfec western farmerselectric cooperative

Annual Report 2013 • WFEC2

Farmers’

Roosevelt County

LeaCounty

CentralValley

New Mexico

Service Area

WFECService

AreaWFEC provides essential electric service to 22 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 323 sub and switch stations across this service territory.

Northwestern

Cimarron

Alfalfa Kay

Northfork

Kiwash

Caddo

Harmon

South-west Rural Cotton

Oklahoma

Rural

CanadianValley

East Central Oklahoma

Kiamichi

ChoctawSouth-eastern

Red River Valley Rural

Oklahoma

Kansas

Texas

Annual Report 2013 • WFEC 3

Western Farmers Electric Cooperative (WFEC) is a generation and transmission (G&T) cooperative that provides essential electric service to 22 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 is governed by a 23-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), including hydropower allocation and other contract power purchases. WFEC owns and maintains approximately 3,700 miles of transmission line to 264 substations and 59 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

wfec


CEO & WFEC Board President Report

With a solid record of meeting the power supply needs of its members, combined with the aggressiveness of confronting utility

industry challenges, Western Farmers Electric Cooperative (WFEC) experienced an optimistic year in 2013. Internal goals, designed to provide not only competitive pricing, but also ways of meeting continuous load growth needs and opportunities, were established by the Board during the budget process.

These goals included:Keeping wholesale rates as low as possibleIncreasing equityMaintaining positive margins from electric

operationsMeeting member load growth needs

Looking back over the year, the net operating margins were above $16 million, while overall margins exceeded $21 million. Energy sales increased 600,000 megawatt-hours (MWh) from the previous year, with the equity-to-assets ratio surpassing the 20% long-term target. All financial goals were met and member wholesale power costs remained relatively flat.

Another financial highlight occurred when WFEC was able to completely unwind a lease-leaseback transaction of WFEC’s Hugo Plant (lease) and certain transmission facilities. The termination of the lease, which had been in place since 2001, enhanced the transparency of WFEC’s financial statements, removed a source of risk exposure and simplified future Board decisions related to these assets.

Finally on the financial side, WFEC increased its combined lines of credit and extended the maturity dates while interest rates and contract terms remained favorable. These enhancements increased WFEC’s stability and access to short-term liquidity for the near term.

During 2013, WFEC spent considerable time working with the Southwest Power Pool (SPP) in preparation for the beginning of the SPP Integrated Market (IM) scheduled to open March 1, 2014. Fuel delivery, contract issues in New Mexico, transmission rights, bid strategies, coordination with counter-parties and dozens of other issues were identified and addressed in preparation for the new Market.

WFEC budgeted over $90 million in capital projects, with $71 million directed towards Transmission and Distribution (T&D). By the end of the year, the majority of those T&D projects had been completed and placed into service. Many of these upgrades and additions were in the oil fields of northern and south central Oklahoma. Sales through these facilities increased overall MWh member sales substantially during the year.

Generation resources remain adequate with a purchase power agreement (PPA) for natural gas combined cycle generation scheduled to begin delivery during 2014 and a new 100 megawatt (MW) wind PPA scheduled to begin commercial operation in 2015.

Both PPAs are long-term agreements and position WFEC well for continued member growth for the near term.

As in 2012, 2013 was another building block in positioning WFEC to continue to meet the needs and improve the service to our members.

With adequate and diverse generation resources, extensive transmission assets, sound financials, continued load growth and an excellent group of employees, WFEC is well positioned to provide member needs for the coming years. Together, a great deal can be accomplished by Building Today for a Powerful Tomorrow.

WFEC CEO Gary Roulet and Board President David Ray address a recent meeting of the WFEC Board of Trustees. This Board consists of a representative from each member cooperative and Altus Air Force Base.

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Energy Sales (Member & Contract Sales) $482 million

Total Operating Revenue $525 million

Net Margins $21 million

Assets $1,100 million

Members 23

Member Consumer Meters Served 281,209 (est.)

Member Population Served 468,504 (est.)

System Peak Demand 1,546 megawatts

Miles of Transmission Line 3,700 miles

Substations 264

Switch Stations 59

Generating Capacity Coal 450 megawatts Natural Gas 870 megawatts

Purchased Power Capacity Natural Gas 68 megawatts Hydro 260 megawatts Portfolio of GRDA Assets 200 megawatts

Total Capacity 1, 848 megawatts

Number of Employees 371

2013 Highlights


Building Today for a Powerful Tomorrow

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 2013. WFEC employees worked diligently to support organizational goals, manage costs and strengthen reliability and service levels while Building Today for a Powerful Tomorrow.

Each year unfolds with unique challenges and opportunities, and 2013 was no exception, with the occurrence of numerous emerging issues. Recapping 2013, memories include increasing natural gas prices; continuing load growth, especially from the oil and gas sector; expediting upgrades and building out the delivery system; integrating additional renewables into the energy mix; preparing for the Southwest Power Pool (SPP) Integrated Market (IM); and continuing and increasing regulatory pressures.

WFEC and its member cooperatives addressed each challenge creatively, assessing options and selecting the building blocks that would bridge established short- and long-term goals. Advances were made on several fronts, including the use of contractors to supplement internal work forces, the construction of infrastructure to support growth in north central Oklahoma, the education of

staff and member organizations to participate in the new SPP market and the continuous planning for maximum flexibility to address future regulations.

Growth & SalesIn comparison with U.S. averages in 2013, Oklahoma

benefitted from a lower unemployment rate, low cost of living, low energy rates and increased population. Oklahoma shale oil has doubled in production since it began in 2010 and is reportedly growing faster than any other state except Texas and North Dakota.

Impacted by a relatively mild summer, WFEC’s system did not set a new coincident peak demand in 2013; however, energy sales continued a solid growth pattern. Total energy sales increased a significant 7.7% over 2012 comparing sales of 8.2 million megawatt-hours (MWh) in 2012 with 8.8 million MWh sales in 2013. In stark contrast to anemic sales growth in the larger U.S. economy, WFEC has now experienced an annual average MWh sales growth rate of 5.5% over the last three years.

WFEC also continued making a small amount of off-system sales to three of its four New Mexico members. These sales began in June 2012 and continued for the full year in 2013.

Receipts from 2013 power sales increased $64 million over 2012 due to increased MWh sales, a slight increase

in wholesale power rates and a 40% increase in average natural gas prices from $2.73 per MMBtu in 2012 to $3.81 per MMBtu in 2013. The increased natural gas prices resulted in higher generation and purchased power costs. However, retrospectively, 2013 natural gas prices were down approximately 75% from the highs experienced in July 2008. In comparison,

Although energy sales in many sections of the U.S. were stagnant in 2013, WFEC energy sales continued to demonstrate a solid growth pattern.

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4,000

6,000

8,000

10,000

2009 2010 2011 2012 2013

310 215 161 154 663

6,860 7,156 7,638 7,664 7,740

116 166 79 387 436

Energy Sales (Millions of KWhs)

Municipal/Contract Member Off-System

8,839 8,205 7,878 7,537 7,286


average delivered coal prices were $2.34 per MMBtu in 2012 and 2013.

Hydro and wind energy deliveries have also reduced exposure to volatile fuel prices. Hydro energy represented approximately 7% of annual energy in 2013, while energy produced from wind facilities added another 15%.

In 2013, WFEC staff completed an anticipated sale of surplus fuel oil and excess steel railcars, netting approximately $5.4 million. With the installation of dry low nitrogen oxide (NOx) equipment at the Anadarko Combined Cycle Plant, the fuel oil inventory could no longer be burned as a fuel source and was considered

surplus. Also, with the integration of lighter and more economic aluminum railcars for the transport of coal, the steel railcars were no longer useful to WFEC.

Increased fuel prices, interest and depreciation associated with construction and wheeling in the SPP market contributed to an increase in members’ rates from $52.54 per MWh in 2012 to $54.92 per MWh in 2013.

Construction EffortsAlthough the economy in many regions of the U.S.

continued to face headwinds in 2013, development of unconventional oil and natural gas production has played a significant supportive economic role within WFEC’s service footprint in northern and south central Oklahoma. Notably, projected oil and gas prices support continuing business and sales in oil and gas development for years to come. The requests for electric service to serve these loads continued to present certain of WFEC’s members with unprecedented growth opportunities.

This member growth spurred expedited planning, construction and financing of additional transmission and distribution (T&D) infrastructure to meet rural needs. Similar to the $61 million expended on T&D capital projects in 2012, approximately $65 million was expended in 2013 on additions, upgrades and expansion efforts. In addition, WFEC completed the last of three Anadarko unit dry low NOx burner conversions to address approaching Environmental Protection Agency (EPA) compliance deadlines. The Board established a 2014 capital budget of $105 million, topping the $87 million expended in 2013 for transmission and generation projects.

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1,100

1,200

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1,400

1,500

1,600

2009 2010 2011 2012 2013

1,455 1,479

1,582 1,591 1,546

1,352

1,509 1,499

1,349

1,512

Coincident Peak Demand (Megawatts)

Summer Winter

WFEC Power Line Technician Koty Pahukoa (left) and Journeyman Power Line Technician Tadd Holcomb work on a new transmission line to serve a pump station near Cromwell, Okla. Many parts of the state are seeing unprecedented growth due to oil and gas exploration.

Coincident peak demand is affected by weather conditions throughout the service territory. Even with slightly lower peak demand, 2013 energy sales exceeded 2012 by 7.7%, validating continued cooperative growth.


A WFEC line crew, consisting of (clockwise, from left) Scott Turney, Charlie McLemore, Kaleb Riner and George Stafford, repairs damage to a downed transmission structure in the Little Axe, Okla. area. Line and substation crews were called out numerous times during an active storm season in 2013.

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2009 2010 2011 2012 2013

Average Rate to Members (Cents per KWh) Base Fuel

5.3¢ 5.4¢ 5.5¢ 5.3¢ 5.0¢

Power DeliveryWFEC owns and maintains an integrated

transmission system that consists of approximately 3,700 miles of high-voltage transmission lines and related facilities. Through this transmission network and access to transmission as a participant in the SPP Regional Transmission Organization (RTO), WFEC reliably serves members, municipals and others, along with transacting power purchases and sales for their benefit.

In 2013, Power Delivery focused on addressing member reliability needs and meeting load growth opportunities. Much of WFEC’s service area in northern Oklahoma experienced both significant development, as well as new opportunities for growth. In addition to building substations to meet specific customer’s needs, a rebuild and upgrade of the transmission system in the area

was also required. The transmission system was upgraded from 69 to 138 kilovolt (kV) where possible, with an additional new line constructed to complete the connection to a neighboring 345 kV transmission line. Projects are still ongoing in this area. Benefits include the ability to serve additional load and improved reliability.

A rebuild and conversion was completed in the Cimarron Electric Cooperative service area, converting the system from 69 kV to 138 kV. This upgrade also necessitated the conversion of all but one of the substations in Cimarron’s area to 138 kV. The previous transmission system in this area was among the oldest on WFEC’s system and had experienced increasing reliability issues during the past few years. These upgrades were further supported by a new interconnect with a local investor-owned utility at Twin Lakes.

WFEC crews were also involved in power restoration to several of the areas ravaged by last spring’s tornadoes. WFEC’s transmission line in the Moore, Okla. area paralleled the path of the storm and received extensive damage. The crew’s restoration efforts were affected by the devastation to other commercial and personal property in the area.

Financing of Power Delivery ProjectsWFEC has utilized this growth opportunity to build

out and upgrade its transmission system in these regions of Oklahoma in a favorable financing environment. To finance expedited projects associated with accelerated growth, WFEC took advantage of its new mortgage indenture, which provides a faster, predictable approach to issuance of additional secured debt, subject to objective mechanical tests. For projects with adequate

Average rate to members in 2013 increased primarily due to an increase in delivered natural gas prices netted with a slight decrease in base rates.


An extraordinary amount of ongoing coordination, planning and communication between WFEC and ACES staff has been required. The result will be implementation of WFEC’s strategy to efficiently operate in the daily commitment of fuel and generation resources combined with contractual resource purchases of wind, hydro and traditional power purchases. WFEC staff reviews day-to-day resource planning in collaboration with ACES to position its assets for reliable service to its members.

WFEC has continued to provide input while overseeing ACES’ daily activities involving fuel procurement, power

scheduling and commitment of resources based on projected load and wind forecasts. At the same time, WFEC is evolving towards more extensive use of the ACES forecasting tools as the IM places greater economic value on the accuracy of those forecasts.

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2009 2010 2011 2012 2013

Average Delivered Natural Gas Price (Dollars per MMBtu)

$2.73

$3.81 $4.21 $4.42

$3.58

lead times and eligibility, WFEC pursues financing of construction efforts with the Rural Utilities Service (RUS), an important lending source that provides capital at significant savings for members. In August 2012, the WFEC Board authorized a supplemental RUS loan application for the 2012-2015 work plan period for numerous transmission projects. In May 2013, RUS approved a loan guarantee commitment in the amount of $82.4 million, providing traditional long-term financing of many planned infrastructure projects.

Energy Resources & Market Interaction2013 was a year of actively operating in the maturing

SPP Energy Imbalance Service (EIS) market, while also preparing for the March 1, 2014 launch of the SPP IM and the Real Time Balancing Market (RTBM) that will replace the EIS market. In the IM, SPP will functionally control the entire transmission footprint and condense the existing 15 balancing authorities, including WFEC, down to one SPP balancing authority, with the goal of administering tools for efficient and open use of transmission and generation resources.

ACES, owned by WFEC and other rural 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, counter-party credit analysis, locating transmission liquidity, market participation and new market readiness, hedging activity and standardized contracts. WFEC actively manages the ACES resources to gain economic benefit for its members.

Delivered natural gas prices are one of the primary determinants of the total average rate to members. WFEC’s risk management strategy is focused on cushioning significant increases in natural gas prices while allowing members to participate in downside price movement.

A WFEC crew completes work on the Bearcat Substation, located in northwestern Oklahoma. WFEC owns and maintains some 3,700 miles of transmission line to 264 substations and 59 switch stations.


The diverse energy mix, self-generated and purchased, actual versus budgeted by WFEC during 2013 included:

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

2013 Actual 2013 BudgetCoal 33% 31%Gas 12% 9%Economy Purchases 19% 28%Contract Purchases 14% 17%Hydro 7% 6%Other* 15% 9%Total 100% 100%

In 2013, significant man-hours were devoted to representing WFEC in the stakeholder processes of the SPP market development. Numerous changes to the market protocols in the new market resulted in a domino effect to operating criteria, tariff and supporting business practices. The increased requirements of maintaining registrations for the current and future markets and market processes took substantial dedication of manpower for the year.

During 2013, WFEC participated on behalf of our member cooperatives in the first allocation of Auction Revenue Rights and auction of Transmission Congestion Rights process of SPP in an effort to minimize the congestion cost associated with delivery of power

to members after the SPP IM opens. There will be continuing auctions going forward, but the first round was successfully completed following months of work to establish the threshold and registration of those rights through the SPP processes.

In its daily operation, WFEC continued to supply member load requirements, while adhering to the rules of the North American Electric Reliability Corporation (NERC), Federal Energy Regulatory Commission (FERC), Environmental Protection Agency (EPA), SPP and a litany of other rules and regulations. In addition, WFEC continues to support the transition process of serving its New Mexico cooperative members while protecting the rights of all member cooperatives in the SPP market process. WFEC continues to work diligently to prepare for the future market and the associated changes the future brings for cooperatives.

Power ProductionIt was the hard work and dedication of the

employees at WFEC’s generating facilities in Anadarko, Hugo and Mooreland that made 2013 a successful year. Safety and unit availability are our highest priorities. The three plant sites offer a diverse mixture of generating units and technologies, utilizing gas and coal as fuel sources.

Anadarko PlantThe Anadarko Plant, WFEC’s largest facility, consists

of 11 natural gas-fired generating units comprising 588 megawatts (MW) of capacity including the GenCo units. The Anadarko Plant had a busy year operating these units that produced a combined total of 872,349 MWh of electricity in 2013.

The three combined cycle units operated the majority of the time.

Manager of Generation Engineering Justin Soderberg inspects two new dry low NOx burners installed in Anadarko Plant combined cycle units. A conversion project was completed in 2013 to operate in compliance with future environmental standards.


was completed during the year. The Mooreland Plant finished 2013 with an availability factor of 85.19%. Plant personnel also completed the year with no lost-time accidents, adding to their admirable ongoing record of 4,277 days with no lost-time accidents.

Environmental RegulationsWFEC’s environmental team supported efforts of the

organization in responding to load growth and reliability during 2013 by obtaining necessary environmental permits for existing and future generation, T&D projects and monitoring compliance with existing permits.

New and proposed environmental regulations continue to present challenges and a significant potential to impact WFEC operations regarding cost, complexity and compliance. WFEC staff members participated in the rule-making process and provided feedback to help shape state and federal environmental policies related to WFEC’s operations and potential impact on rural member consumers.

Staff resources have been attentive to environmental regulations and activities during the past year through the completion of several projects. The installation of dry low NOx burners at three Anadarko units was completed and a project to limit Hugo Plant mercury emissions has also been tested and planned for future implementation. Staff is monitoring many other rules that are in various stages of proposal, submission and review for potential impacts.

Generation Resource PlanningProviding reliable and affordable power for its

members’ needs is among WFEC’s core values as a generation and transmission (G&T) cooperative. WFEC satisfies its obligations in this regard by performing joint WFEC-member studies to determine future requirements. Then, additional detailed modeling is performed to determine alternative options to meet these member obligations and to develop least-cost solutions.

WFEC’s 2013 peak summer demand remained constant from the previous year, while year over year, energy sales increased substantially.

The G&T met members’ 2013 needs by utilizing a diverse portfolio of existing generation assets and power purchase agreements (PPA), including the Grand River Dam Authority (GRDA) PPA, under which the quantities of energy and capacity increased this past year to the maximum contract quantities.

A dry low NOx conversion project was completed in 2013, which will enable these three units to operate in compliance with coming environmental standards. The five aero-derivative combustion turbine units (Orme and GenCo units) cycled on-line 297 times to control high peak loads. The three 1950 and 1960 vintage steam turbine units operated occasionally during heavy load days. Anadarko Plant availability for all 11 units was 91.67% in 2013, with plant personnel completing the year with no lost-time accidents.

Hugo PlantThe Hugo Plant is WFEC’s largest single unit,

capable of producing 450 MW and is generally the lowest cost generation as well. The Hugo Plant produced 3,182,916 MWh in 2013. Beneficial planning and prudent operation and maintenance practices helped the Hugo facility maintain high reliability targets, with an availability factor of 96.29% achieved in 2013. Hugo Plant personnel also completed the year with no lost-time accidents. Stable coal prices and transportation services were the backdrop, as the Hugo Plant experienced a very good year.

Mooreland PlantThe Mooreland Plant, consisting of three natural

gas-fired steam units, experienced a successful year as well and has a capability of 322 MW. This plant produced 271,303 MWh of electricity in 2013. A major inspection on the Unit 2 steam turbine and generator

WFEC Senior Generation Engineer Kevan Riley looks over work performed on the Unit 2 turbine rotor during a maintenance outage at the Mooreland Plant.


addition, there is approximately 60 MW of nameplate wind in New Mexico that will, in the near future, be included as part of the WFEC portfolio of wind resources. Through PPAs with wind facilities, WFEC has the potential for approximately 17% of its total annual electricity production to come from wind generators.

WFEC does not currently retain or retire all of the environmental attributes associated with these wind power purchases. A portion of the Renewable Energy Credits (REC) produced by these facilities is sold on a retail basis to the end user through WFEC cooperative members’ WindWorks® program and to comply with the State of New Mexico requirements related to renewable energy, for our member cooperatives located in New Mexico. However, the remaining RECs are sold at the wholesale level to third parties.

Construction Loan Funds AdvancedThe cooperative added significant T&D assets in 2013

and advanced debt during a low interest rate environment. During 2013, approximately $60.4 million in FFB loan funds was advanced with an approximate weighted average long-term fixed rate of 3.1% and maturities ranging from 2024 to 2043. In addition, the remaining $30 million of capacity was advanced under 2012 First Mortgage Notes, which resulted in a weighted average rate of 4.515% for the loan facility.

Financial PerformanceThe Board and management have developed a

proactive strategic plan to strengthen WFEC’s long-term financial stability. Based on the plan, steps have been taken to reduce costs and increase operating margins,

support key financial ratios and gain financing flexibility with access to market-based financing through the adoption of a trust indenture. With a strategic planning horizon, WFEC sets and maintains target financial ratios that provide adequate liquidity, equity and debt service coverage (DSC) ratios

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

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2009 2010 2011 2012 2013

Financial Ratios Debt Service

Coverage (DSC)Margins forInterest (MFI)

WFEC’s future projections indicate a need for additional capacity in 2014 and beyond to meet members’ power obligations. WFEC will use a combination of a new Calpine, Inc. (Calpine) PPA and a potential new combined cycle generation plant to meet these needs. The Calpine PPA was negotiated in 2012, with transmission studies substantively completed in 2013, and purchases pursuant to the PPA will commence in 2014.

In regards to the potential new combined cycle generation, WFEC continued activities for the permitting, design and construction of a state-of-the-art facility. This resource is in the advanced planning stage and will be kept in an active status to be implemented in the event of accelerated load growth or as a ready option to compare with market opportunities to serve WFEC’s next capacity expansion.

WFEC’s generation portfolio includes a mix of owned and contracted wind, hydro, gas-fired and coal-fired resources paired with a delivery system that, along with the potential new unit, is projected to supply its members with flexibility and reliable, reasonably priced power through 2022. WFEC’s Board continues to build and strengthen the G&T’s financial position to provide ready access to market financing and flexibility to take advantage of market opportunities.

Other Planned Energy SourcesWFEC’s portfolio of wind energy was expanded in

2013 as a result of the energy purchase agreement for the output of 100 MW of the new Balko Wind Project, to be located near Balko, Okla. and which is scheduled to begin commercial operation in the first half of 2015. In


to support the additional debt that will be needed to fund system projects.

The target ratios guide management and the Board in establishing annual budgets and setting rates. The Board approves rates annually, but has the ability to adjust rates more often, if necessary. This allows timely recovery of fuel, fuel transportation, environmental and market costs. The rate is also designed to incentivize demand management and efficiency capabilities, helping to delay the need for the next capacity resource. WFEC’s financial policies are designed to achieve the financing of all future projects with a targeted mix of debt and equity while maintaining strong financial ratios.

During its 2013 strategic planning session, the Board supported stronger financials by increasing the targeted DSC ratio from 1.1 to 1.2. WFEC’s DSC ratio in 2013 and 2012 was 1.23 and 1.19, respectively. This ratio supports another key metric target of consistently achieving positive operating margins. WFEC earned positive operating margin from electric operations of $16.1 and $11.6 million for the years 2013 and 2012, respectively. Another key financial target 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 1.56 and 1.37 for 2013 and 2012, respectively.

WFEC’s financial performance for the year surpassed budgeted expectations, strengthening WFEC’s overall financial position. Strong sales and efforts to curb expenses resulted in net margins of $21.5 and $13.3 million for the years 2013 and 2012, respectively. With strong margins, New Mexico member equity contributions and the termination of a lease, WFEC

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2013%

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17%

17%

Equity & Assets (Millions of Dollars)

EquityAssets

exceeded its 20% long-term equity target with a strong equity-to-assets position of 21.2%.

A strong balance sheet provides assurance to members and other stakeholders that WFEC can and will meet its obligations. 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.

LiquidityWFEC has developed and maintains access to

two lines of credit with staggered maturities. Taking advantage of a favorable financial environment, WFEC increased its combined lines of credit, extended the maturity and gained favorable market terms and conditions. As of December 31, 2013, WFEC maintains $300 million of committed lines of credit with scheduled expirations in 2016 and 2018. With this liquidity, WFEC is well positioned for normal operating needs of serving an increased volume of sales, bridge financing for immediate and ongoing construction efforts, credit requirements to participate in the SPP IM and to take advantage of market opportunities.

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

Lease TerminationContributing to an improved equity-to-assets ratio

was the successful negotiation of the termination of the 2001 lease-leaseback transaction of WFEC’s Hugo

WFEC exceeded its 20% long-term equity-to-assets ratio goal in 2013 with strong margins, new member equity contributions and the successful termination of a 2001 lease. The lease termination resulted in a reduction of total assets, as investments held as collateral under the lease were liquidated to settle the lease obligations.


construction phase and provides value to our member cooperatives. In 2013, WFEC strengthened its financial position, balancing that strategic objective with members’ need for low, stable wholesale power supply costs.

WFEC’s financial stability, a key to strong credit ratings, is based on its long-term all-requirements contracts with our member cooperatives and our combined financial strength. This team effort is focused on the commonality of our core missions and creates an alignment of strategy. Establishing the right mix in generation, as well as the right mix in financial position, are keys to WFEC providing clean, low-cost, reliable electricity to the end-use rural consumer.

WFEC has all-requirements contracts with 21 of its distribution cooperative members through 2050, and with one member into 2025. These commitments facilitate long-term planning to meet WFEC’s energy and financing needs.

RatesEfforts began in 2013 to redesign WFEC’s member

rates to focus on effectively managing all cost categories with rate designs that provide incentives for members to manage load and to effectively recover costs for WFEC. Rate design is also being driven by changes necessitated by the opening of the SPP IM to ensure appropriate cost recovery of market charges.

A rate increase was approved by the Board as part of the 2014 budget process, effective January 2014. The adjustment provides recovery for projected increases in interest and depreciation expense due to new construction, as well as increased purchased power capacity, wheeling and NERC compliance costs. The average total price of Oklahoma member energy sales in 2014 is anticipated to increase from $54.92 per MWh in 2013 to $58.30 per MWh in 2014.

Legal & ComplianceIn 2013, the WFEC NERC Reliability Compliance

Team finalized its work resulting from the 2012 audits. This included drafting and revising procedures, working with functional areas to install new hardware and continued training on changes to the compliance program. The Compliance Team also monitored new reliability standards. The biggest impact will be Critical Infrastructure Protection Version 5, which will significantly change WFEC’s cyber security processes and framework.

Plant (lease) and certain of its transmission facilities. This lease included credit enhancement providers during the term of the agreement and was restructured in 2009 and 2010 due to the decreased bond rating of the original credit enhancer that would have placed WFEC in default on its lease obligations with the equity investors. The transaction was terminated in October 2013 when the government securities held as collateral under the lease were liquidated and all obligations under the transaction were settled. The most significant portion of debt associated with the lease was extinguished and a small portion of the debt, previously under the lease, was restructured with the same term and amortization profile. This termination enhanced transparency of WFEC financial statements, removed the risk exposure to the equity termination value and cleared the path to any future modification or capacity expansion at the Hugo Plant site.

Credit Ratings Focused attention on operations and improved

financial performance has enabled WFEC to maintain its “A-” rating from Fitch and “BBB+” rating from Standard and Poor’s rating agencies.

Wholesale Power ContractsStrong credit ratings are an important tool for

accessing capital as WFEC anticipates its next significant

Della Amstutz, operations compliance specialist, and Daniel Moore, cyber compliance specialist, look over information from the 2012 NERC audits. In 2013, the WFEC NERC Reliability Compliance Team finalized its work resulting from the previous year’s audits.


Marketing & CommunicationWFEC’s efforts to manage load growth and, in

particular, load during peak usage periods continued in 2013 through a coordinated effort with our member distribution cooperatives that utilize several different perspectives.

First is a demand response program, a rate-driven incentive from which a reduction of up to 100 MW has resulted during peak demand periods. Second, marketing staff has worked with WFEC members to strategically interconnect 34 MW of distributed generation resources across the state at various member key account locations, which are dispatched collectively or individually as needed to manage load. This program is extremely popular as it also provides improved reliability for customers who are willing to utilize this resource at their location.

A more indirect demand side management effort involves an ongoing energy efficiency rebate program

whereby WFEC works with members and the geothermal heating, ventilation and air conditioning (HVAC) industry to promote the use of geothermal technology. Working with the Cooperative Research Network, it has been verified that WFEC realizes approximately 0.58 kilowatt (kW) of on-peak demand reduction per ton of retrofitted geothermal heat and air systems. Through this program, WFEC has a goal of achieving an aggregate demand

reduction of 30 MW by 2020, resulting in reduced future capacity costs.

The Touchstone Energy® Cooperatives spearheaded by WFEC took the role of title sponsor for the GoGoGeo Scholarship Video Challenge in 2013. This energy efficiency education effort promoted the use of geothermal technology to heat and cool homes. Junior and senior high school students in Oklahoma and New Mexico used their creativity to deliver the geothermal message through video entries. Close to $60,000 in scholarships and grants was awarded as a part of this program. In recognition of staffs’ successful efforts, WFEC received the National Rural Electric Cooperative Association’s Community Service Award for Youth Programs.

Human ResourcesWFEC, like most of the industry, continues to

experience increasing employee retirements. WFEC responds with comprehensive training programs to develop incoming employees to effectively step into roles of increasing responsibility. Benefit plan cost management strategies played an important role in meeting the WFEC Board’s targets for managing employee benefit costs, while continuing to offer competitive benefit packages to attract and retain qualified employees.

Information Services2013 was a busy time for information technology

staff given the amount of capital construction completed that requires integration into existing systems, preparations for new power markets and identifying and implementing automation tools to support and improve overall efficiency. Staff helped WFEC successfully complete the SPP testing of market interactions necessary for the new SPP IM. Staff also completed and successfully tested the plan for the Supervisory Control and Data Acquisition (SCADA) system changes needed for the planned SPP consolidated balancing authority.

ConclusionWhile 2013 offered new opportunities for growth

across the state, the Board and staff prepared for current and proposed industry-related challenges and regulations. Through it all, WFEC continued its ongoing commitment to provide cost-effective, reliable and quality service, while Building Today for a Powerful Tomorrow.

WFEC Commercial & Industrial Marketing Manager Kalun Kelley checks energy readings from a home’s circuit breaker, as part of a promotional program for geothermal technology. This also serves as an indirect demand side management effort through an ongoing energy efficiency program. wfec


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 23-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

Jerry W. PartinRoosevelt County

Electric Cooperative (NM)

Donnie BidegainFarmers’ Electric

Cooperative (NM)

Leslie HindsKiwash Electric

Cooperative

Ray O. SmithNorthwestern Electric

Cooperative

John IngleLea County Electric Cooperative (NM)

Gary JonesRural ElectricCooperative

Lloyd G. OwensSoutheastern Electric

Cooperative

Fred J. StoweSouthwest Rural Electric

Association

King MartinRed River Valley Rural

Electric Association


Ron CunninghamVice PresidentPower Delivery

Jane LaffertyVice President

& Chief Financial Officer

Gary GillelandVice President

Generation

Dan FlemingSenior Manager

Resource Planning

Brian HobbsVice President

Legal & Corporate Services

Roy KlusmeyerSenior Manager

Regional Market Planning

Gary RouletChief Executive Officer

WFECSenior Management

A qualifed senior management level staff, with an impressive combined 222 years of service with WFEC, oversees 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.


2013 Fuel Mix

*Energy generated by wind facilities

for which WFEC does not retain

or retire the environmental

attributes.

% GAS

% COAL

% ECONOMY PURCHASES % HYDRO % OTHER*

33 19

7 15 14 %

CONTRACT PURCHASES

KPMG LLP 210 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, 2013 and 2012, 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, 2013 and 2012, 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 11, 2014


WESTERN FARMERS ELECTRIC COOPERATIVE

Consolidated Balance Sheets

December 31, 2013 and 2012

(In thousands)

Assets 2013 2012

Electric utility plant, at cost:In-service $ 1,467,137 1,419,216 Construction work-in-progress 40,305 35,996

Total electric utility plant 1,507,442 1,455,212

Less accumulated depreciation and amortization 623,961 616,451

Net electric utility plant 883,481 838,761

Investments in associated organizations and other investments,at cost 14,565 131,512

Current assets:Cash and cash equivalents 10,367 4,548 Restricted cash 48,459 45,920 Accounts receivable from energy sales 45,923 37,561 Other accounts receivable 5,986 8,032 Inventories, at average cost:

Coal and oil 9,538 23,510 Material and supplies 53,951 52,865

Other 1,786 4,316

Total current assets 176,010 176,752

Other noncurrent assets 1,272 1,272 Deferred debits 59,199 51,465

Total assets $ 1,134,527 1,199,762

Members’ Equity and Liabilities

Capitalization:Patronage capital $ 205,696 194,078 Contributed capital 22,789 14,542 Other capital 12,443 — Long-term debt 783,819 887,574

Total capitalization 1,024,747 1,096,194

Current liabilities:Current portion of long-term debt 37,336 34,749 Accounts payable and accrued liabilities 63,597 61,158

Total current liabilities 100,933 95,907

Other liabilities 8,847 7,661

Commitments and contingencies (note 13)Total members’ equity and liabilities $ 1,134,527 1,199,762

See accompanying notes to consolidated financial statements.



Consolidated Statements of Operations

Years ended December 31, 2013 and 2012

(In thousands)

2013 2012

Operating revenues:Power sales to members, cities, and other $ 482,417 418,382 Other power sales and operating revenues 42,860 38,783

Total operating revenues 525,277 457,165

Operating expenses:Operations:

Production 143,969 126,716 Purchased and interchanged power 193,705 160,802 Transmission 58,028 49,489 Distribution 5,975 5,385

General and administrative 14,330 13,747 Maintenance 19,524 19,999 Depreciation and amortization 36,418 34,160

Total operating expenses 471,949 410,298

Operating margin before interest 53,328 46,867

Interest expense, less amounts capitalized during constructionof approximately $1,106 and $715 in 2013 and 2012, respectively (44,509) (43,522)

Interest income 7,321 8,246

Operating margin 16,140 11,591

Other nonoperating income (loss), net 3,326 (240) Patronage capital assigned by associated organizations 2,002 1,962

Net margin $ 21,468 13,313




Consolidated Statements of Comprehensive Income


(In thousands)

2013 2012

Net margin $ 21,468 13,313 Other comprehensive income, net of tax: Pension and other postretirement benefit plans

Net actuarial gain (loss) 34 (186) Less amortization of prior service cost included in net

periodic pension cost (65) (84)

Pension and other postretirement benefit plans (31) (270)

Effective portion of cash flow hedges 213 (605) Less reclassification adjustment for losses included in

interest expense 956 1,029

Other comprehensive income 1,138 154 Total comprehensive income 22,606 13,467




Consolidated Statements of Changes in Members’ Equity


(In thousands)

Accumulatedother

Patronage Contributed Other comprehensive Memberships capital capital capital income (loss) Total

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

Net margin — 21,468 — — — 21,468

Contributed capital — — 8,247 — — 8,247

Membership termination — (10,988) — 12,443 — 1,455

Net other comprehensive income — — — — 1,138 1,138 Balance, December 31, 2013 $ 3 207,075 22,789 12,443 (1,382) 240,928




Consolidated Statements of Cash Flows


(In thousands)

2013 2012

Cash flows from operating activities:Net margin $ 21,468 13,313 Adjustments to reconcile net margin to net cash provided by operating activities:

Depreciation 33,440 31,196 Other depreciation and amortization included in operating expenses 3,820 1,786 Amortization of regulatory asset expense 2,978 2,964 Accretion of asset retirement obligation 89 83 Noncash interest income (4,792) (5,736) Noncash interest expense 4,704 5,624 Changes in assets and liabilities:

Restricted cash (2,539) (6,206) Accounts receivable from energy sales (8,362) (566) Other accounts receivable 2,046 7,868 Coal and oil inventory 13,972 (6,779) Materials and supplies inventory (1,086) (9,976) Other current assets 2,530 (411) Deferred debits and other (25,127) (1,058) Accounts payable and accrued liabilities 7,977 (10,480) Other liabilities 2,235 (388)

Net cash provided by operating activities 53,353 21,234

Cash flows from investing activity:Net extension and replacement of electric utility plant (88,395) (69,327) Liquidation of government securities and other 139,204 —

Net cash provided by (used in) investing activity 50,809 (69,327)

Cash flows from financing activities:Advances of long-term debt 431,760 393,075 Payments on long-term debt (539,805) (342,883) Other capital 1,455 — Contributed capital 8,247 8,286 Change in restricted cash from financing activities — (8,286)

Net cash provided by (used in) financing activities (98,343) 50,192

Net increase in cash and cash equivalents 5,819 2,099

Cash and cash equivalents, beginning of year 4,548 2,449 Cash and cash equivalents, end of year $ 10,367 4,548

Supplemental schedule of cash flow information:Cash paid during the year for interest $ 39,841 44,263




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 1,800 megawatts (MW), including hydropower allocation and other contract power purchases. Member-owners consist of 22 distribution cooperatives, 18 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.





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 2013 and 2012 are as follows:

Depreciation and amortization for the year ended December 31, 2013 was $40,238,000, of which $33,440,000 was charged to depreciation expense, $2,029,000 was included in fuel and other operating expenses, $1,791,000 was included in employee pension and benefits, and $2,978,000 was charged to amortization of regulatory assets. 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.

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. There were no impairment charges for 2013 and 2012.

(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 2013 and 2012 totaled $1,106,000 and $715,000, respectively.

(f) Restricted Cash

Restricted cash consists of the following:

A Contingent Cash Reserve (CCR) that is restricted by WFEC Board Policy to be utilized based upon certain significant events or other approved uses as determined by the Board. The CCR had a balance of $26,211,000 and $23,951,000 as of December 31, 2013 and 2012, 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, 2013 and 2012 the Cushion of Credit account had a balance of $45,432,000, of which $26,211,000 represents CCR funds and $43,229,000, of which $23,951,000 represents CCR funds, respectively.

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


(Continued)




Other cash accounts with funds that are restricted as to withdrawal for various purposes had a total balance of $3,027,000 and $2,691,000 as of December 31, 2013 and 2012, 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, 2013 and 2012, 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 $4,242,000 and $10,476,000 at December 31, 2013 and 2012, 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 one of its members through the year 2025. In 2013, the distribution cooperative members with contracts through 2050 represented 88% of WFEC member cooperative sales. In March 2013, the membership of one distribution cooperative in WFEC was terminated and the wholesale power contract was replaced with a power sales agreement (see note 13).


(Continued)




(p) Concentration of Credit Risk

Concentration of credit risk exists with respect to trade accounts receivable of which approximately 97% of accounts receivable from energy sales at December 31, 2013 are from power sales from WFEC’s members. The credit risk for accounts receivable from nonmember sales is managed through monitoring procedures.

(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.


(Continued)

32




(Continued)

(2) Electric Utility Plant

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

2013 2012(In thousands)

Production plant $ 861,822 843,477 Transmission plant 303,492 292,496 Distribution plant 145,206 147,665 General plant 81,334 85,336 Unclassified plant 75,283 50,242

Electric utility plant-in-service 1,467,137 1,419,216

Construction work-in-progress 40,305 35,996 Total electric utility plant $ 1,507,442 1,455,212

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 and as amended in 2010, 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 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, 2013, the balance of the note was $4,268,000 and is included in long-term debt.

(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 1,242 1,161

CoBank Class A stock 5,667 5,208 ACES 1,181 1,163 Lease-leaseback related investments (see note 4) — 117,506 Other 45 44

$ 14,565 131,512




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, 2013, WFEC owned 4.76% of ACES equity. The investment in the partnership is accounted for using the equity method of accounting.

At December 31, 2012 the lease-leaseback investment included $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 was $154,242,000. The investments were liquidated in October 2013 with the termination of the lease (see note 4).

(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 the LLC, and simultaneously entered into a 26-year lease of the Facility back from the LLC. 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. At the expiration of the leaseback period, one option available to WFEC was 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 transaction included credit enhancement providers during the term of the agreement, and was restructured in 2009 and 2010 due to decreased bond ratings of the original credit enhancer that would have placed WFEC in default on its lease obligations with the LLC. This transaction and the impact of the restructuring events have been reflected as a financing transaction for financial reporting purposes, and pursuant to U.S. generally accepted accounting principles applicable to rate regulated enterprises the gains and losses resulting from the transaction and subsequent restructurings were deferred as a regulatory asset and recognized on a straight-line basis over the term of the leaseback to WFEC. The transaction also required collateral and at December 31, 2012 the carrying value of investments held as collateral was approximately $117,506,000 and the balance of debt related to the transaction was approximately $167,401,000.

The transaction was terminated in October 2013. The investments held as collateral were liquidated and all obligations under the transaction were settled. Debt of approximately $32,889,000 previously under the lease was restructured with the same term and amortization profile and remains as long-term debt following the termination (See note 7). WFEC received Board and RDUP authority to defer and amortize as a regulatory asset the net impact of the termination. At December 31, 2013, the regulatory asset balance is $38,827,000 (See note 5) and the regulatory asset will be amortized straight line through 2026, which approximates $3,035,000 of annual amortization. WFEC’s electric rates are designed to recover this cost.


(Continued)




(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) $ 38,827 49,550 Other assets:

Unamortized R&S Prepayment (see note 10) 16,121 — Preliminary survey and investigation charges 3,088 1,109 Unamortized debt expense 1,163 806

$ 59,199 51,465

Other liabilities:Unearned revenue $ 2,890 725

As of December 31, 2013, WFEC’s regulatory assets are being reflected in rates charged to customers over 13 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 2012 and 2013.

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 4.61%,due in quarterly installments through 2043 $ 517,496 479,671

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 7,386 7,841

Note payable to CoBank, interest at 5.71%, due in quarterlyinstallments through January 2019 6,198 7,055

Note payable to CoBank, interest at 6.22%, due in monthlyinstallments through November 2025 2,676 2,803

Notes payable to CFC with varying amounts, interest from5.35% to 5.50%, due in annual installments through 2016 1,380 2,363

Notes payable to CoBank, interest at a weighted average of6.36%, due in quarterly installments through April 2038 115,297 117,206

Notes payable to CFC with varying amounts, interestfrom 3.05% to 4.45%, due in quarterly installmentsthrough June 2024 15,402 16,944

Notes payable to CoBank, interest at a weighted average of4.515%, due in quarterly installments through October 2042 59,513 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 14,448 15,498

Note payable to CoBank, interest at 6.34% due in quarterlyinstallments through April 2016 1,276 1,741

Lease termination obligation payable to Hugo Generation, atmaturity in 2027, interest imputed at a fixed rate of 4.09%,terminated in 2013 (see note 4) — 167,401

Note payable to CoBank, at a variable interest rate, witha fixed rate swap at 5.88% plus 2.125%, principal dueannually through 2020, interest payments quarterly 15,403 17,325

Note payable, interest at 7.56%, due in annual installmentsthrough 2021 4,268 4,647


(Continued)





Notes payable to CoBank, interest at 1.24%at December 31, 2013, syndicated revolving loanagreement, expiring December 2018 $ 10,000 51,828

Note payable to CoBank, interest at 3.70%, due in quarterlyinstallments through July 2023 17,523 —

Note payable to CoBank, interest at 8.35%, due in annualinstallments through January 2027, with a balloonpayment due in 2027 32,889 —

821,155 922,323

Less current portion of long-term debt 37,336 34,749 Total long-term debt $ 783,819 887,574

Annual payments of long-term debt for years subsequent to December 31, 2013 are as follows (in thousands):

2014 $ 37,336 2015 39,097 2016 40,509 2017 35,786 2018 42,157 Thereafter 626,270

$ 821,155

WFEC executed an Indenture, dated as of April 8, 2011, between WFEC, as grantor, and U.S. Bank National Association, as trustee (the Indenture). Effective that date, all of the first mortgage notes listed above are secured equally and ratably under the Indenture by a first priority lien on substantially all of the assets of WFEC, subject to certain exceptions and limitations. Under the terms of the 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. Management believes WFEC was in compliance with these financial covenants at December 31, 2013.

On July 31, 2013, WFEC entered into an unsecured long-term credit agreement with CoBank in the amount of $17,913,000 for the purpose of funding certain pension plan prepayments (see note 10). The loan has a maturity date of July 31, 2023. As of December 31, 2013, $17,523,000 was outstanding to CoBank.


(Continued)




On October 17, 2013, WFEC entered into an unsecured long-term credit agreement with CoBank in the amount of $32,889,000 for the purpose of restructuring a loan supporting a 2001 lease obligation that was terminated in October 2013 (see note 4). The loan has a maturity date of January 2, 2027. As of December 31, 2013, $32,889,000 was outstanding to CoBank.

WFEC’s 2010 $75,000,000 three-year committed revolving line of credit agreement with CFC was replaced in October 2013, with a $100,000,000 CFC committed revolving line of credit agreement with a term through October 11, 2016. Advances on the CFC facility bear interest at a floating rate. No advances were outstanding on the CFC line of credit at December 31, 2013 and 2012. Letters of credit totaling $31,501,000 had been issued under this arrangement at December 31, 2013.

In May 2011, WFEC entered into a $200,000,000 credit agreement with a syndication of financial institutions to provide a committed line of credit for four years as support for general corporate purposes. In December 2013, this agreement was amended and restated and the term extended through December 13, 2018. The outstanding balance on this credit agreement at December 31, 2013 and 2012 was $10,000,000 and $51,828,000, respectively.

Approximately $190,000,000 and $68,499,000 of borrowing capacity was available on the syndicated and CFC lines of credit, respectively, at December 31, 2013.

WFEC had $190,539,000 of unadvanced funds available at December 31, 2013 from FFB notes previously executed. Approximately $72,211,000 is available for transmission and distribution additions and replacements and $118,328,000 for generation system improvement projects.

During 2013, RDUP approved a loan guarantee commitment in the amount of $82,438,000 for the purpose of financing certain WFEC transmission projects planned for the 2012-2015 construction work plan period.

(8) Production Expenses

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


Fuel $ 123,307 108,554 Other production expenses 20,662 18,162

Total production expenses $ 143,969 126,716

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, 2013 and 2012, WFEC’s deferred tax asset before valuation allowance was approximately $2,985,000 and $5,757,000, 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 $13,986,000, which expire in 2013 and thereafter.

No income tax expense was provided in 2013 and 2012, 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:

2013 2012

(In thousands)

Tax-effected gross deductible temporary differences $ 4,895 7,872 Tax-effected gross taxable temporary differences (1,910) (2,115)

Deferred tax asset 2,985 5,757

Less valuation allowance (2,985) (5,757) Net deferred tax asset $ — —

(10) Retirement Plans

Substantially all employees of WFEC participate in the National Rural Electric Cooperative Association (NRECA) Retirement Security Plan (RS Plan). 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.

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.


(Continued)




WFEC contributions to the RS Plan in 2013 and 2012 represented less than 5% of the total contributions made to the RS Plan by all participating employers. WFEC makes annual contributions to the RS Plan equal to the amounts accrued for pension expense, which is dependent on the employee’s date of hire. These contributions to the plan during 2013 and 2012 were approximately $7,246,000 and $6,737,000, respectively. In addition, during 2013 WFEC elected to participate in the prepayment option offered to participating employers and made an additional contribution of $17,913,000 resulting in total contributions of $25,159,000 in 2013. See description below for more information on the prepayment program.

For 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 over 80% funded on January 1, 2013 and between 65% and 80% funded on January 1, 2012 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.

At the December 2012 meeting of the I&FS Committee of the NRECA Board of Directors, the Committee approved an option to allow participating cooperatives in the RS Plan to make a contribution prepayment and reduce future required contributions. The prepayment amount is a cooperative’s share, as of January 1, 2013, of future contributions required to fund the RS Plan’s unfunded value of benefits earned to date using RS Plan actuarial valuation assumptions. The prepayment amount will typically equal approximately 2.5 times a cooperative’s annual RS Plan required contribution as of January 1, 2013. After making the prepayment, for most cooperatives the billing rate is reduced by approximately 25%, retroactive to January 1, 2013. The 25% differential in billing rates is expected to continue for approximately 15 years. However, changes in interest rates, asset returns and other plan experience different from expected, plan assumption changes and other factors may have an impact on the differential in billing rates and the 15 year period. On April 17, 2013, the Board approved a prepayment of $17,913,000 to the NRECA RS Plan. WFEC is amortizing this amount over 10 years to employee pensions and benefits which, in turn, is allocated to applicable functional operations, maintenance, administrative, construction, and retirement activities. At December 31, 2013, the balance of the prepayment of $16,121,000 was recorded in deferred debits.

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 $1,161,000 and $1,164,000 to the plan in 2013 and 2012, respectively.


(Continued)




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, 2013 and 2012, 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, 2013 and 2012, 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 is considered to be their fair value, as they represent an ownership interest in member-owned institutions and do not have a market for exchange.

The assumption used in determining the fair value of WFEC’s long-term variable interest rate debt is that the fair value approximates the carrying value, as the debt reprices at least annually to a market interest rate. Fair value of WFEC’s long-term fixed interest rate debt is calculated to be the discounted cash flows of the debt based upon long-term fixed interest rates that WFEC could obtain at December 31, 2013 and 2012, 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, 2013 and 2012 is approximately $829,642,000 and $952,628,000, 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, 2013 and 2012:

Quoted pricesin active Significant

markets for other Significantidentical observable unobservable

assets inputs inputs(Level 1) (Level 2) (Level 3) 2013

Liabilities:Commodity derivatives $ — 130,000 — 130,000 Interest rate derivatives — 2,373,000 — 2,373,000

Total liabilities $ — 2,503,000 — 2,503,000


(Continued)




(Continued)

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

(12) Derivative Instruments and Hedging Activities

WFEC 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 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 $130,000 and $679,000 as of December 31, 2013 and 2012, 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 2014.

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, 2013 and 2012, WFEC reclassified losses of $956,000 and $1,029,000, 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, 2013 and 2012 was a liability of $2,373,000 and $3,543,000, respectively, and is included in other liabilities in the accompanying consolidated balance sheets.





(Continued)

WFEC expects approximately $1,000,000 of the existing losses that are reported in accumulated other comprehensive income at December 31, 2013, 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 (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 three remaining increments in 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.





(Continued)

One Cooperative chose to build capacity to self-generate a portion of its needs, that portion that it was required to remove from SPS contract obligation in 2013. 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 2014 rates, the minimum requirement approximates $19,563,000. During 2013 and 2012, WFEC purchased $21,962,000 and $19,534,000, respectively.

WFEC has a long-term purchased power contract with a party, effective January 2010 through December 2025 under which it is obligated to purchase a minimum quantity of power on a monthly basis. Based on contract information and power cost adjustment information currently published, the annual obligation for 2014 is estimated at $62,916,000. During 2013 and 2012, WFEC purchased $64,614,000 and $43,805,000, 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 $62,000,000 and $69,000,000 for the years ended December 31, 2013 and 2012, respectively. The current projection for the minimum contract commitments for coal and coal transportation is approximately $57,000,000 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 current projection for the minimum contract commitment is $7,560,000 in 2014.





(Continued)

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 a lawsuit with a member distribution cooperative. The suit centered on numerous claims including a complaint seeking to have the party’s Wholesale Power Agreement declared invalid as an unlawful restraint of trade, related to the adoption and implementation by WFEC of a member wholesale power rate, the R-15 rate, effective February 1, 2010.

A settlement was agreed to and on March 6, 2013, WFEC received notice that the RDUP 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 was 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 involved the transfer of certain radial transmission lines and substations to the customer and a monetary payment by the customer resulting in $1,455,000 of donated capital to WFEC. In addition, the customer released all claims to the customer’s patronage capital with WFEC, forfeiting $10,988,000 to WFEC as of December 31, 2013. 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





(Continued)

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 $ 1,268 1,185 Additional liabilities incurred — — Retirement of liability (40) — Revisions to estimates — — Accretion expense 89 83

Ending balance $ 1,317 1,268

(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, 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) Net current period change (31) 213 182 Reclassification adjustments for losses

reclassified into income — 956 956 Balance, December 31, 2013 $ 991 (2,373) (1,382)

(16) Subsequent Events

WFEC has evaluated subsequent events from the balance sheet date through March 11, 2014, the date at which the financial statements were available to be issued, and determined that, other than discussed below, there are no other items to disclose.





On February 10, 2014, WFEC sold to ONEOK Partners Intermediate Limited Partnership (ONEOK) certain WFEC owned natural gas pipeline assets, used in the delivery of natural gas fuel supply to WFEC’s Anadarko and Mooreland power plant locations. Those natural gas pipeline assets, consisting of approximately 160 miles of pipeline and associated equipment, had an approximate net book value of $5,902,000 at January 31, 2014. WFEC simultaneously entered into various long-term operational agreements with ONEOK for the delivery and transport of natural gas to its Anadarko and Mooreland power plant locations. There is no loss associated with the sale and management is reviewing the accounting treatment of the sale.


Documents

2013 wfec annual report