Sherco 3, Becker, Minnesota

Nearman Creek, Kansas City, Kansas

Western Fuels assoCiation

2010/ 2011 annual report

Western Fuels assoCiation inC.

Sikeston Power Station, Sikeston, Missouri

The National Fuel Supply Cooperative

Western Fuels

WESTERN FUELS ASSOCIATION, INC. is a not-for-profit cooperative that supplies coal and transportation services to consumer-owned electric utilities throughout the Great Plains, Rocky Mountain and Southwest regions. Serving a wide variety of public power entities ranging from rural electric generation and transmission cooperatives to municipal utilities. Western Fuels Association provides its members with diverse and extensive expertise in coal exploration, coal mining, coal procurement and transportation management.

FinanCial hiGhliGhts
Consolidated BalanCe sheets
Western Fuels Association, Inc. (in thousands)

Consolidated stateMents oF operations

2009
Western Fuels Association, Inc. (in thousands) 2010 2009

2010

assets
Cash and cash equivalents Investments available for sale Accounts receivable: Members Affiliated companies Other Costs recoverable under coal purchase agreements Prepaid expenses and other assets Investments in other organizations Equipment and railroad properties, net Furniture, office equipment and leasehold improvements, net total assets $ 7,969 32 18,675 163 159 1,604 162 28,764 8,012 5,336 229 $ 42,371 $ 5,427 132 15,671 344 1,069 2,387 663 25,693 11,482 7,112 342 $ 44,629

reVenues
Total coal and transportation revenue $ 317,776 $ 285,772

Cost oF Goods sold

Acquisitions Transportation and delivery costs total cost of goods sold net operating revenue (195,319) (119,683) (315,002) 2,774 (162,542) (120,391) (282,933) 2,839

other inCoMe (expense)

Other income Interest income Annual membership fees Interest expense Gain on sale of assets General and administrative expenses net Margin (deficit) before income taxes Income taxes net Margin (deficit) Unrealized loss on investments available for sale net Comprehensive Gain (loss) $ 102 9 8 (384) (2,790) (281) 20 (261) (1) (262) $ 33 9 9 (547) (2,634) (291) 91 (200) (1) (201)

liaBilities
Accounts payable Accrued interest payable Advance collections for transportation costs Notes payable Capital lease obligations Deferred liabilities $ 20,121 285 2,351 6,824 6,194 572 36,347 $ 15,844 355 2,686 10,277 8,583 598 38,343

MeMBers eQuitY
Initial membership fees Patronage capital certificates Per-unit retain certificates Accumulated margin (deficit) Unrealized loss on investments available for sale 45 3,803 2,564 (389) 1 6,024 total liabilities and Members equity $ 42,371 45 3,803 2,564 (128) 2 6,286 $ 44,629

presidents & Ceos MessaGe

For more than 37 years, Western Fuels Association has provided its members with a low-cost domestic energy source with incomparable reliability: coal. The past 12 months were no different, as our efforts helped keep power lines humming across the Great Plains, Rocky Mountain and Southwest regions of the United States. Increasingly, however, coal has been cast as a globalwarming villain that must be eliminated from the portfolio of options utilized by power producers and industry, despite the fact that coal still generates nearly 50 percent of the nations electricity. So, lets be honest. Today, what are the alternatives for ensuring a cost-effective, reliable baseload fuel for electric-power producers? Furthermore, what will the viable alternatives be 10 years from now? Natural gas? Despite lower prices through much of 2010 and 2011, gas has historically been subject to volatile market swings. Will shale gas be a long term game changer? Nuclear? The rising construction cost of a new nuclear plant and the financial impact of possible additional safety requirements following the tsunami in Japan will likely delay the development of any new nuclear plants for the foreseeable future. And thats not even factoring in the problematic public-approval process. Renewables? Despite years of high hopes and promises, just 3.5 percent of the electricity generated in the United States in 2010 came from non-hydropower renewable sources. Wind and solar accounted for just 2.4 percent. To be clear, Western Fuels Association (WFA) supports smart investments in meaningful emissions-reducing technologyespecially developments in areas such as Carbon Capture and Sequestration and Carbon Capture and Utilizationand doesnt oppose federal subsidies for research and development of viable energy programs. When such efforts result in higher costs; lead to inefficient and costly regulatory burdens; unfairly support otherwise unsustainable business models; single out utilities; and represent U.S.-only initiatives, we believe the U.S. economy and its citizens quality of life is unfairly put at risk. WFA has a tradition of standing up for its members, most prominently in the face of unfair transportation costs. Over the past year, we contended with a fresh batch of challenges to keeping rail cost increases reasonable for our members. For example, the coal industry, led by the Western Coal Traffic League and WFA, was successful via a Surface Transportation Board (STB) ruling in preventing the imposition of a proposed dust mitigation tariff by the BNSF Railway (BNSF) on its shippers. In addition, WFA, along with Basin Electric, is working hard on many fronts to prevent BNSF from attempting to pass on to its customers the significant premium paid by Berkshire Hathaway in its acquisition of the rail carrier. Recently, the STB requested industry comments on the state of competition in the rail industry, and we quickly responded through our membership in the Western Coal Traffic League. From a production standpoint, our Dry Fork Mine in Gillette, Wyoming, celebrated its first delivery of coal to Basin Electrics new Dry Fork Station in April 2011. The 385-megawatt mine-mouth generation facility started

producing energy shortly thereafter and was expected to begin commercial operations in the coming months. WFA is the sole supplier of coal to the power plant, which is projected to consume 1.9 million tons of coal annually. The conveyor system that connects the mine to the electric plant crosses the Dry Fork of the Little Powder River, and we took care to engineer a line that would have minimal impact on the waterway and surrounding wetlands. Our efforts were rewarded with a 2010 National Award for Excellence in Surface Coal Mining, given by the U.S. Department of the Interiors Office of Surface Mining Reclamation and Enforcement. We also made progress on stabilizing the longer-term outlook for our New Horizon Mine in Nucla, Colorado, which supplies coal to Tri-State Generation and Transmission Associations Nucla Station. There, were in the process of permitting a new mine area north of the existing operation, which should begin production in 2013. As for our railroad operations, which consist of 1,600 rail cars and the short-haul Escalante-Western Railway, we continued to meet the needs of our members as well as our non-member customers, such as Cargill, Inc. WFA, utilizing existing spare capacity, supplied the equipment and logistics to provide coal to one of Cargills corn-processing plants in Iowa. Looking ahead, LS Powers Sandy Creek Energy Services contracted with WFA to provide fuelmanagement services for coal deliveries to the new Sandy Creek Station near Waco, Texas, when construction on the 800-megawatt plant is scheduled to be completed in mid-2012. We have also agreed to provide coal and rail procurement services to Summit Power for its development of the Texas Clean Energy Plant outside Odessa, Texas. The cuttingedge 400-megawatt plant, on which construction is scheduled to start in late 2012, will be a commercial clean-coal power plant. For many of our members, the coal we supply is a means to an endthe energy source for the reliable, coal-fired electric power that keeps the lights on for

millions of households and businesses. Recognizing that the bonds between municipal power providers and the communities they serve are unique and deep, weve highlighted a collection of those relationships on the pages of this annual report. With so many uncertainties on the horizon, we understand the desire for alternative approaches to energy generation. Yet, until one establishes itself that is just as cost-effective and reliable as coal, we dont see the value of coal diminishing. Given that, as a notfor-profit cooperative specializing in coal procurement, we remain committed to ensuring a steady stream of fuel to our members and other customers.

Sincerely,

raymond a. hayward
President

duane richards
Chief Executive Officer and General Manager

raymond a. hayward President

duane richards Chief Executive Officer and General Manager

sherCo 3, BeCker, Mn
Sherco 3 at Becker, Minnesota, where Southern Minnesota Municipal Power Agency (SMMPA) owns 41 percent of this unit. WFA provides coal procurement and rail transportation for SMMPAs share of fuel supply. WFA supplied over 1.4 million tons of Powder River Basin coal in 2010.

keY FaCts
97,000 residential customers 12,000 commercial and industrial customers Produces 85% of SMMPAs energy SMMPA owns 41% of Sherco 3 Uses over 1.4 million tons of low-sulfur coal annually Sherco 3 is a pulverizedcoal steam unit Can burn up to 500 tons of coal per hour 884 megawatts of capacity

From left to right: Ray Hayward, Executive Director and CEO, Don Huseby, Power System Operator, and Scott Passentino, Graphics/Media specialist

southern Minnesota MuniCipal poWer aGenCY

Headquartered in Rochester, the Southern Minnesota Municipal Power Agency, a Class A member, generates and sells electricity to its 18 non-profit, municipally owned member utilities. In total SMMPAs members serve over 97,000 residential and over 12,000 commercial and industrial customers. One of its members, RPU serves the City of Rochester and the world-famous Mayo Clinic. Other large customers include Hormel Foods, served by Austin Utilities and 3M, served by Fairmont Public Utilities. SMMPA, a wholesale electricity supplier, supports its members as they maintain strong relationships with all their customers. Eighty-five percent of SMMPAs energy sales in 2010 was generated by Unit 3 of the Sherburne County Power Plant (Sherco). Located in Becker, Minnesota, Sherco 3 is one of the newest, most efficient coal-fired electric-generating facilities in the entire Midwest region. Western Fuels supplies an average of more than 1.4 million tons of low-sulfur coal to Sherco 3 annually. SMMPA owns 41 percent of Sherco 3, or 362 megawatts of the 884 megawatt plant. Sherco 3 is a pulverized-coal steam unit. The unit burns low-sulfur (sulfur content of less than 1 percent) western coal from Montana and Wyoming, which is delivered by railcars. The coal unloading system can empty one car every two minutes. The unit can burn up to 500 tons per hour12,000 tons per dayof coal. Shercos state-of-the-art air quality-control technology uses a bag house and dry scrubbing system that removes up to 90 percent of the sulfur dioxide, 60 percent of nitrogen oxides and 99 percent of particulates emitted by the plant. In 2009, SMMPA helped install additional equipment designed to reduce mercury emissions by 90 percent as well. A capacity upgrade is planned that will boost output by an estimated 2 percent with no fuel consumption or emissions increase. New turbine sections and step-up transformers are planned for the fall of 2011.

keY FaCts
Uses over 1.0 million tons of coal annually Serves approximately 150,000 customers Generates more than 58% of the regions power 309-megawatt plant
1/ 3 1/ 3 1/ 3

residential, commercial, industrial

Provides power to General Motors and Sara Lee, among others

Nearman Creek Station in Kansas City, Kansas, operated by Kansas City Board of Public Utilities. WFA purchases coal and manages deliveries by rail. WFA supplied Nearman Creek 1.0 million tons of Powder River Basin coal in 2010.

nearMan Creek, kansas CitY

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6

kansas CitY Board oF puBliC utilities

Purchasing more than 1.5 million tons of coal annually, the Kansas City Board of Public Utilities, a Class A WFA member, runs an electric system serving over 65,000 electirc meters throughout 155 square miles within the Kansas City, Kansas, area. KCBPUs two coal-fired electric power stations, the 235-coal/311total-megawatt Nearman Creek and 163-coal/298total-megawatt Quindaro plants, translates to coal being 65 percent of the utilities capacity, making it the backbone of KCBPUs capacity. Located in downtown Kansas City, Kansas, BPUs mission is to focus on the needs of its customers and to improve the quality of life in the community while promoting safe, reliable and sustainable electricity. BPU is a publicly owned administrative agency of the Unified Government of Wyandotte County/Kansas City, Kansas, and is self-governed by an elected six-member board of directors. KCBPUs customer load distribution is roughly onethird residential, one-third commercial and one-third industrial. BPUs largest load is the General Motors Fairfax Assembly Plant which make the Chevrolet Malibu and Buick LaCross automobiles. Located along the Missouri River near KCBPUs headquarters, the GM plant cranks out an average of 20,000 cars a month. Fully powered by the BPU, the fuel Western Fuel helps to create several of the top-selling vehicles in GMs fleet. The BPU also supplies constant power to several vital BNSF and UP railroad marshaling yards, including the vast BNSF Argentine facility. BPU also provides power to Sara Lee, the Kelloggs Cheezit Crackers plant and several other large industrial customers. On the western side of the city, the BPU supplies power to the new Kansas Speedway racetrack and the award-winning Legends Outlet Mall. The hundreds of thousands of visitors who flock to Kansas City Kansass new developments benefit from the affordable, reliable energy supplied by Western Fuels and generated by KCBPU.

From left to right: Don Stephen, Darrell Walker, Dong Quach

sikeston Board oF MuniCipal utilities

Located in southeastern Missouri, the Sikeston Board of Municipal Utilities (BMU), a Class B Western Fuels member, is a city-owned utility providing the city of Sikeston with electric, water, sanitary, and sewer. The BMU facilities include a 235-megawatt coal-fired power plant, five electric substations, three water-production plants, two wastewater-treatment plants and a 30-mile fiber-optic communication system. Overall, the BMU services approximately 9,100 residential and business customers. In large part due to their reliance on coal sourced by Western Fuels, the BMUs utility rates are among the lowest in the state of Missouri. The single-unit coal-fired Sikeston Power Station Project is located approximately one mile west of the center of Sikeston on a 622-acre site. Groundbreaking for the project took place on March 25, 1978. Initial energy was produced on June 30, 1981, and commercial operation was achieved on August 27, 1981. Western Fuels supplied over 1.1 million tons of coal for the Sikeston Power Station in the fiscal year ending in May 2011. The power needs of the city of Sikeston account for roughly one third of the generating capacity of the Sikeston Power Station. BMU also has ongoing contracts to resell power to the Missouri cities of Carthage, Columbia, Fulton and West Plains. Thirty-eight percent of the Sikeston BMUs sales volume is residential, almost 38 percent is commercial, and 24 percent is industrial. Maker of Ben & Jerrys, Edys and Good Humor ice creams, the Unilever Corporation is one of the BMUs largest industrial customers. Just over one year ago, the employees of Sikestons BMU moved into their new, beautifully designed headquarters in historic downtown Sikeston.

Front row, left to right: Doug Friend, Steve Taylor, Wayne Mcspadden, Marcia Witt, Lester Wright, Tom Hedrick Back row, left to right: Ron Priday, Rob Clay, Alan Keenan, Ed Throop, Rick Landers, Joe Blanton

sikeston poWer station

Sikeston Power Station in Sikeston, Missouri, operated by Sikeston Board of Municipal Utilities. WFA purchases coal and manages rail transportation. WFA supplied 1.1 million tons of Powder River Basin coal in 2010.

keY FaCts
235-megawatt coal-fired power plant Approximately 9,100 residential and business customers 622-acre site
9

Used 1.1 million tons of coal in 2010 38% residential, 38% commercial, 24% industrial (by kwh usage)

eVents & aWards

On October 18, 2010, representatives from Western Fuels-Wyoming, Western Fuels Association and Basin Electric joined each other in Washington, D.C. to receive the National Award for Excellence in Surface Coal Mining and Reclamation from the U.S. Department of Interior, Office of Surface Mining Reclamation & Enforcement. This award recognizes the accomplishments of companies responsible for outstanding achievements in environmentally sound surface mining and land reclamation as well as to highlight the experience gained from completing exemplary reclamation. In addition to the DOI award, the Dry Fork Mine received three awards: a Wyoming Game and Fish Department award for Industry Reclamation and Wildlife Stewardship, the State of Wyoming Land Quality Division Excellence in Surface Mining award, and the State Mine Inspector safety award for no lost time injuries in 2010; as well as being featured in the Mining and Construction magazine. In May 2011, Western Fuels Association and Western Fuels-Wyoming employees and board members celebrated the first shipments of coal from the Dry Fork Mine to Basin Electrics newly completed Dry Fork Electric Generating Station in Gillette, Wyoming.

Western Fuels celebrates the first shipments of coal from the Dry Fork Mine, in May 2011.

Western Fuels and Basin Electric receive the National Award for Excellence in Surface Coal Mining and Reclamation from the U.S. Department of Interior.

10

oFFiCers & direCtors

Left to right:

Ronald R. Harper, Loren Ochs, Ed Throop, Darrell Dorsey, David P. Geschwind, Don L. Gray, Reuben Ritthaler, Raymond A. Hayward, Tony Casados, Rex Johnson, C. Jim Soehner, Rick Gordon, Claudio Romero L. Earl Watkins Jr.

Not pictured:

oFFiCers raymond a. hayward President Executive Director and CEO Southern Minnesota Municipal Power Agency direCtors tony Casados Assistant Secretary Tri-State Generation & Transmission Association, Inc. darrell dorsey Manager Electric Production and Supply Kansas City Board of Public Utilities david p. Geschwind Chief Operating Officer Southern Minnesota Municipal Power Agency don l. Gray General Manager Kansas City Board of Public Utilities ronald r. harper CEO and General Manager Basin Electric Power Cooperative loren ochs Chairman of the Board Sunflower Electric Power Corp. Claudio romero Director Tri-State Generation & Transmission Association, Inc rick Gordon Chairman of the Board Tri-State Generation & Transmission Association, Inc. ed throop General Manager Sikeston Board of Municipal Utilities rex Johnson Corporate Counsel Sherard, Sherard and Johnson Wheatland, Wyoming reuben ritthaler Vice President Director Basin Electric Power Cooperative l. earl Watkins Jr. Secretary/Treasurer President and CEO Sunflower Electric Power Corp. C. Jim soehner Vice Secretary/Treasurer Secretary Tri-State Generation & Transmission Association, Inc.

11

our MeMBers
Western Fuels Association members are consumerowned utilities, including rural electric generation and transmission cooperatives, municipal utilities, publicpower districts, governmental bodies, and state or regional associations or municipalities. The governing board of directors is comprised of officers of Western Fuels Associations Class A and Class B member organizations. As a not-for-profit cooperative, Western Fuels Association provides its members with a dependable and cost-effective means of coal procurement for their electricity-generating facilities. Western Fuels Associations services allow members to avoid hiring a full-time in-house staff for coal procurement, transportation and management. Western Fuels Association offers three classes of membership. Class A members generally rely on Western Fuels Association for the coal needed to fulfill their power-generation needs; Class B members rely on Western Fuels Association to fuel specifically designated power plants; and Class C members have access to Western Fuels Associations expertise for coal procurement, transportation and other coalrelated services.

Class a MeMBers
1. Basin Electric Power Cooperative Bismarck, North Dakota 3. Southern Minnesota Municipal Power Agency Rochester, Minnesota 4. Sunflower Electric Power Corporation Hays, Kansas 5. Tri-State Generation and Transmission Association, Inc. Westminster, Colorado

2. Kansas City Board of Public Utilities Kansas City, Kansas

Class B MeMBers
6. Sikeston Board of Municipal Utilities Sikeston, Missouri

The numbers coincide with each members location on the adjacent map.

Class C MeMBers
7. Arizona Electric Power Cooperative, Inc. Benson, Arizona 11. City Utilities Springfield, Missouri 12. Colorado Springs Utilities Colorado Springs, Colorado 13. Dairyland Power La Crosse, Wisconsin 14. Fremont Department of Utilities Fremont, Nebraska 15. Great River Energy Maple Grove, Minnesota 16. Heartland Consumers Power District Madison, South Dakota 17. Lincoln Electric System Lincoln, Nebraska 18. Lower Colorado River Authority Austin, Texas 19. Missouri River Energy Services Sioux Falls, South Dakota 20. Nebraska Public Power District Columbus, Nebraska 21. Silicon Valley Power Santa Clara, California

8. Arkansas Electric Cooperative Corporation Little Rock, Arkansas 9. Arkansas River Power Authority Lamar, Colorado 10. Associated Electric Cooperative, Inc. Springfield, Missouri

12

MeMBer BeneFits
Coal purChasinG
Bid solicitation, evaluation and contract negotiations Contract administration Scale calibration and sampler bias testing Market analysis/coal sourcing studies Accounting and auditing

Coal transportation
Bid solicitation, evaluation and contract negotiations Contract administration Train scheduling Railcar ownership and leasing Railcar maintenance Railroad construction/build-out studies/cost analyses Accounting, rail property taxes and insurance

speCial proJeCts
Project management for design of mine facilities and railroads Project management for constructing mines and railroads Power-plant siting studies

Coal Mine deVelopMent

Contracting and on-site management of drilling programs Geology, coal quality and reserve evaluation Mine engineering, planning and feasibility studies Mine capital and operation cost estimates Land acquisition Permitting Market and transportation analysis

stoCkpile inVentorY serViCes

Up-to-Date Industry Information Databases and Records Library Resources for Conducting Research Increased Purchasing Power for all Western Fuels Association members Representation of members Interests through Trade Organization Membership

Coal MininG
Management and supervision Life-of-mine planning Mine surveying Permitting Reserve acquisition Insurance Bonding Liaison with government agencies Reclamation

MeMBer loCations
The numbers on the map coincide with the list of members on page 12

1 15

DRY FORK MINE

16 19 14

13

WFA HEADQUARTERS
5 21 12 4

20 17

2 10, 11 6 8

NEW HORIZON MINE ESCALANTE RAIL OPERATIONS

7

21 MEMBER LOCATIONS CLASS A MEMBERS CLASS B MEMBERS CLASS C MEMBERS

18

13

Corporate headQuarters
1100 W. 116th Avenue Westminster, CO 80234 Phone (303) 254-3070 Fax (303) 254-3079 wfa@westernfuels.org Duane Richards Chief Executive Officer and General Manager

esCalante-Western railWaY
P.O. Box 552 Prewitt, NM 87045 Phone (505) 876-2270 Fax (505) 876-2279 Daniel Duron General Foreman

neW horiZon Mine

P.O. Box 628 Nucla, CO 81424 Phone (970) 864-2165 Fax (970) 864-2168 Lance Wade Mine Manager

drY Fork Mine

P.O. Box 1809 Gillette, WY 82717 Phone (307) 682-2839 Fax (307) 682-6468 Brad Hanson General Manager

Corporate Counsel
Sherard, Sherard & Johnson P.O. Box 69 Wheatland, WY 82201 Phone (307) 322-5555 Rex Johnson Corporate Counsel

WYoMinG operations
2201 S. Douglas Highway, #130 Gillette, WY 82718 Phone (307) 682-8051 Fax (307) 686-6355 Meri Sandlin Director, Rail Transportation

2010/2011 annual report

Western Fuels assoCiation inC.
The National Fuel Supply Cooperative