WesternFuelsassoCiationinC.

The NationalFuel SupplyCooperative

2010/2011 annual report

WesternFuels assoCiation

Nearman Creek, Kansas City, Kansas

Sikeston Power Station, Sikeston, Missouri

Sherco 3, Becker, Minnesota

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.

Consolidated BalanCe sheets

Western Fuels Association, Inc.

(in thousands) 2010 2009

assets

Cash and cash equivalents $ 7,969 $ 5,427

Investments available for sale 32 132

Accounts receivable: Members 18,675 15,671 Affiliated companies 163 344 Other 159 1,069

Costs recoverable under coal purchase agreements 1,604 2,387

Prepaid expenses and other assets 162 663

28,764 25,693

Investments in other organizations 8,012 11,482

Equipment and railroad properties, net 5,336 7,112

Furniture, office equipment and leasehold improvements, net 229 342

total assets $ 42,371 $ 44,629

liaBilities

Accounts payable $ 20,121 $ 15,844

Accrued interest payable 285 355

Advance collections for transportation costs 2,351 2,686

Notes payable 6,824 10,277

Capital lease obligations 6,194 8,583

Deferred liabilities 572 598

36,347 38,343

MeMBers’ eQuitY

Initial membership fees 45 45

Patronage capital certificates 3,803 3,803

Per-unit retain certificates 2,564 2,564

Accumulated margin (deficit) (389 ) (128 )

Unrealized loss on investments available for sale 1 2

6,024 6,286

total liabilities and Members’ equity $ 42,371 $ 44,629

Consolidated stateMents oF operations

Western Fuels Association, Inc.

(in thousands) 2010 2009

reVenues

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

Cost oF Goods sold

Acquisitions (195,319 ) (162,542 )

Transportation and delivery costs (119,683 ) (120,391 )

total cost of goods sold (315,002 ) (282,933 )

net operating revenue 2,774 2,839

other inCoMe (expense)

Other income 102 33

Interest income 9 9

Annual membership fees 8 9

Interest expense (384 ) (547 )

Gain on sale of assets – –

General and administrative expenses (2,790 ) (2,634 )

net Margin (deficit) before income taxes (281 ) (291 )

Income taxes 20 91

net Margin (deficit) (261 ) (200 )

Unrealized loss on investments available for sale (1 ) (1 )

net Comprehensive Gain (loss) $ (262 ) $ (201 )

FinanCial hiGhliGhts

1

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 global-

warming 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 nation’s electricity.

So, let’s 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 that’s 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

technology—especially developments in areas such as

Carbon Capture and Sequestration and Carbon Capture

and Utilization—and doesn’t 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 Electric’s new Dry Fork Station in April 2011. The

385-megawatt mine-mouth generation facility started

2

president’s & Ceo’sMessaGe

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 Interior’s 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 Association’s Nucla Station. There,

we’re 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

Cargill’s corn-processing plants in Iowa.

Looking ahead, LS Power’s Sandy Creek Energy

Services contracted with WFA to provide fuel-

management 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 cutting-

edge 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 end—the 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, we’ve

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 don’t

see the value of coal diminishing. Given that, as a not-

for-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 duane richardsPresident Chief Executive Officer and General Manager

raymond a. hayward duane richards President Chief Executive Officer and General Manager 3

sherCo 3,BeCker, MnSherco 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 SMMPA’s 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 SMMPA’s energy

SMMPA owns 41% of Sherco 3

Uses over 1.4 million tons of low-sulfur coal annually

Sherco 3 is a pulverized-coal steam unit

Can burn up to 500 tons of coal per hour

884 megawatts of capacity

4

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 SMMPA’s 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 SMMPA’s 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 hour—12,000 tons per day—of coal.

Sherco’s 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.

southern Minnesota MuniCipal poWer aGenCY

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

5

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nearMan Creek,kansas CitY

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.

Uses over 1.0 million tons of coal annually

Serves approximately 150,000 customers

Generates more than 58% of the region’s power

309-megawatt plant

1/3 residential, 1/3 commercial, 1/3 industrial

Provides power to General Motors and Sara Lee, among others

keY FaCts

6

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. KCBPU’s two

coal-fired electric power stations, the 235-coal/311-

total-megawatt Nearman Creek and 163-coal/298-

total-megawatt Quindaro plants, translates to coal

being 65 percent of the utilities capacity, making it the

backbone of KCBPU’s capacity.

Located in downtown Kansas City, Kansas, BPU’s

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.

KCBPU’s customer load distribution is roughly one-

third residential, one-third commercial and one-third

industrial. BPU’s largest load is the General Motors

Fairfax Assembly Plant which make the Chevrolet

Malibu and Buick LaCross automobiles. Located along

the Missouri River near KCBPU’s 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 GM’s 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 Kellogg’s 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 Kansas’s new developments benefit from the

affordable, reliable energy supplied by Western Fuels

and generated by KCBPU.

kansas CitY Board oF puBliC utilities

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

7

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 BMU’s 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 BMU’s

sales volume is residential, almost 38 percent is

commercial, and 24 percent is industrial. Maker of

Ben & Jerry’s, Edy’s and Good Humor ice creams,

the Unilever Corporation is one of the BMU’s largest

industrial customers.

Just over one year ago, the employees of Sikeston’s

BMU moved into their new, beautifully designed

headquarters in historic downtown Sikeston.

sikeston Board oF MuniCipal utilities

8

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 stationSikeston 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.

235-megawatt coal-fired power plant

Approximately 9,100 residential and business customers

622-acre site

Used 1.1 million tons of coal in 2010

38% residential, 38% commercial, 24% industrial (by kwh usage)

keY FaCts

9

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 Electric’s newly completed Dry Fork

Electric Generating Station in Gillette, Wyoming.

eVents & aWards

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

raymond a. hayward President

Executive Director and CEOSouthern Minnesota Municipal Power Agency

reuben ritthaler Vice President

DirectorBasin Electric Power Cooperative

l. earl Watkins Jr. Secretary/Treasurer

President and CEOSunflower Electric Power Corp.

C. Jim soehner Vice Secretary/Treasurer

SecretaryTri-State Generation & Transmission Association, Inc.

oFFiCers

direCtors

tony Casados Assistant Secretary Tri-State Generation & Transmission Association, Inc.

darrell dorsey Manager Electric Production and SupplyKansas City Board of Public Utilities

david p. Geschwind Chief Operating OfficerSouthern Minnesota Municipal Power Agency

don l. Gray General ManagerKansas City Board of Public Utilities

ronald r. harper CEO and General ManagerBasin Electric Power Cooperative

loren ochs Chairman of the BoardSunflower Electric Power Corp.

Claudio romero DirectorTri-State Generation & Transmission Association, Inc

rick Gordon Chairman of the BoardTri-State Generation & Transmission Association, Inc.

ed throop General ManagerSikeston Board of Municipal Utilities

rex Johnson Corporate CounselSherard, Sherard and JohnsonWheatland, Wyoming

oFFiCers & direCtors

Left to right:

Not pictured:

11

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.

1. Basin Electric Power Cooperative Bismarck, North Dakota

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

3. Southern Minnesota Municipal Power AgencyRochester, Minnesota

4. Sunflower Electric Power CorporationHays, Kansas

5. Tri-State Generation and Transmission Association, Inc.Westminster, Colorado

Class a MeMBers

Class B MeMBers

6. Sikeston Board of Municipal UtilitiesSikeston, Missouri

Class C MeMBers

7. Arizona Electric Power Cooperative, Inc.Benson, Arizona

8. Arkansas Electric Cooperative Corporation Little Rock, Arkansas

9. Arkansas River Power AuthorityLamar, Colorado

10. Associated Electric Cooperative, Inc.Springfield, Missouri

11. City UtilitiesSpringfield, Missouri

12. Colorado Springs UtilitiesColorado Springs, Colorado

13. Dairyland PowerLa Crosse, Wisconsin

14. Fremont Department of UtilitiesFremont, Nebraska

15. Great River EnergyMaple Grove, Minnesota

16. Heartland Consumers Power DistrictMadison, South Dakota

17. Lincoln Electric SystemLincoln, Nebraska

18. Lower Colorado River AuthorityAustin, Texas

19. Missouri River Energy ServicesSioux Falls, South Dakota

20. Nebraska Public Power DistrictColumbus, Nebraska

21. Silicon Valley PowerSanta Clara, California

Western Fuels Association members are consumer-

owned utilities, including rural electric generation and

transmission cooperatives, municipal utilities, public-

power districts, governmental bodies, and state or

regional associations or municipalities. The governing

board of directors is comprised of officers of Western

Fuels Association’s 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

Association’s 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 Association’s expertise for

coal procurement, transportation and other coal-

related services.

our MeMBers

12

The numbers coincide with each member’s location on the adjacent map.

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 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

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

Coal MininG• Management and supervision

• Life-of-mine planning

• Mine surveying

• Permitting

• Reserve acquisition

• Insurance

• Bonding

• Liaison with government agencies

• Reclamation

speCial proJeCts• Project management for design of

mine facilities and railroads

• Project management for constructing mines and railroads

• Power-plant siting studies

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

MeMBer BeneFitsour MeMBers

MeMBer loCations

ESCALANTE RAIL OPERATIONS

NEW HORIZON MINE

DRY FORK MINE

WFA HEADQUARTERS

ESCALANTE RAIL OPERATIONS

NEW HORIZON MINE

DRY FORK MINE

23 MEMBER LOCATIONS

23 MEMBER LOCATIONS

21 MEMBER LOCATIONS

WFA HEADQUARTERS

ESCALANTE RAIL OPERATIONS

NEW HORIZON MINE

DRY FORK MINE

WFA HEADQUARTERS

1

16

19

10, 11

8

6

133

15

14

17

2

20

4

9

12

5

18

7

21

1

16

20

10, 11

8

6

19

133

15

14

17

2

21

49

125

18

7

22, 23

CLASS “A” MEMBERS

CLASS “B” MEMBERS

CLASS “C” MEMBERS

13

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

WesternFuelsassoCiationinC.

The NationalFuel SupplyCooperative

2010/2011 annual report

Corporate headQuarters

1100 W. 116th Avenue

Westminster, CO 80234

Phone (303) 254-3070

Fax (303) 254-3079

wfa@westernfuels.org

Duane Richards

Chief Executive Offi cer

and General Manager

WYoMinG operations

2201 S. Douglas Highway, #130

Gillette, WY 82718

Phone (307) 682-8051

Fax (307) 686-6355

Meri Sandlin

Director, Rail Transportation

esCalante-Western railWaY

P.O. Box 552

Prewitt, NM 87045

Phone (505) 876-2270

Fax (505) 876-2279

Daniel Duron

General Foreman

drY Fork Mine

P.O. Box 1809

Gillette, WY 82717

Phone (307) 682-2839

Fax (307) 682-6468

Brad Hanson

General Manager

neW horiZon Mine

P.O. Box 628

Nucla, CO 81424

Phone (970) 864-2165

Fax (970) 864-2168

Lance Wade

Mine Manager

Corporate Counsel

Sherard, Sherard & Johnson

P.O. Box 69

Wheatland, WY 82201

Phone (307) 322-5555

Rex Johnson

Corporate Counsel