ML051250417

Lacrosse Boiling Water Reactor - Financial Statement and Auditors' Report

ML051250417
Person / Time
Site:	La Crosse File:Dairyland Power Cooperative icon.png
Issue date:	04/27/2005
From:	Mueller R Dairyland Power Cooperative
To:	Document Control Desk, NRC/FSME
References
LAC 13867
Download: ML051250417 (22)

Text

DAIRYLAND t5/g7j 7 /.7§.G{7/7OPERATIVE

• 3200 EAST AVE. SO.

• P.O. BOX 817

• LA CROSSE, WISCONSIN 54602-0817 OFFICE: (608) 788-4000 WEB SITE: www.dairynet.com April 27, 2005 In reply, please refer to LAC 13867 DOCKET NO. 50-409 U.S. Nuclear Regulatory Commission Attn: Document Control Desk Washington, D.C. 20555

SUBJECT:

Dairyland Power Cooperative La Crosse Boiling Water Reactor (LACBWR)

Possession-Only License No. DPR-45 Financial Statement and Auditors' Report

REFERENCE:

1) 10 CFR 50.71.(b)

In accordance with the requirements of Reference 1, we are forwarding three (3) copies of the Financial Statements and Independent Auditors' Reports for Dairiyland Power Cooperative as of December 31, 2004 and 2003. We will forward our 2004 Annual Report to you as soon as it is completed.

Sincerely, DAIRYLAND POWER COOPERATIVE Robert C. Mueller Vice President Finance and Administration RCM:pls FAFATPMSWORD\AtPDrnAUDIT.DOC Enclosures cc: James Caldwell, Regional Administrator, Region III Kristina Banovac, Project Manager Obolf R. Christians, LACBWR A Touchstone Energy Cooperativeo.t)

m a DairylandPower Cooperative and Subsidiaries ConsolidatedFinancialStatements as of December 31, 2004 and 2003 and Independent Auditors' Report

D elo itte c Deloitte & Touche LLP 400 One Financial Plaza 120 South Sixth Street Minneapolis, MN 55402 USA Tel: +1 612 397 4000 Fax: +1 612 397 4450 www.deloitte.com INDEPENDENT AUDITORS' REPORT Board of Directors Dairyland Power Cooperative We have audited the accompanying consolidated balance sheets of Dairyland Power Cooperative and Subsidiaries (the "Cooperative"), a Wisconsin cooperative, as of December 31, 2004 and 2003, and the related consolidated statements of revenues and expenses, member and patron equities, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Cooperative's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government.AuditingStandards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Cooperative is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Cooperative's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Cooperative as of December 31, 2004 and 2003, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

In accordance with Government Auditing Standards, we have also issued our report, dated March 31, 2005, on our consideration of the Cooperative's internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts, and grants. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be read in conjunction with this report in considering the results of the audit.

March 31, 2005 Member of Deloitte Touche Tohmatsu

DAIRYLAND POWER COOPERATIVE AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF REVENUES AND EXPENSES YEARS ENDED DECEMBER 31, 2004 AND 2003 (In thousands) 2004 2003 UTILITY OPERATIONS:

OPERATING REVENUES:

Sales of electric energy $221,117 S 210,055 Other 7.809 7.036 Total operating revenues 228.926 217.091 OPERATING EXPENSES:

Fuel 74,223 87,113 Purchased and interchanged power 33,077 12,100 Other operating expenses 49,051 47,643 Depreciation and amortization 18,132 18,000 Maintenance 27,830 20,110 Property and other taxes 4.287 6.693 Total operating expenses 206.600 191.659 OPERATING MARGIN BEFORE INTEREST AND OTHER 22,326 25,432 INTEREST AND OTHER:

Interest expense 20,269 21,685 Other-net 220 158 Total interest and other 20.489 21.843 OPERATING MARGIN 1,837 3,589 NON-OPERATING MARGIN 1.309 3.183 NET UTILITY MARGIN 3.146 6.772 NON-UTILITY OPERATIONS:

NET REVENUES 2,492 3,564 OPERATING EXPENSES 545 469 OPERATING INCOME 1,947 3,095 INTEREST INCOME 5 4 NON-UTILITY EARNINGS BEFORE INCOME TAXES 1,952 3,099 BENEFIT FOR INCOME TAXES 22 32 NON-UTILITY EARNINGS 1.2974 3.131 NET MARGIN AND EARNINGS 9,90 S See notes to consolidated financial statements.

DAIRYLAND POWER COOPERATIVE AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF MEMBER AND PATRON EQUITIES (In thousands)

Total Member Membership Patronage and Patron Fees Capital Equities BALANCE-December 31, 2002 $ 13 $ 87,411 $ 87,424 Net margin and earnings 9,903 9,903 Retirement of capital credits (L1748 (1.748)

BALANCE-December 31, 2003 13 95,566 95,579 Additional membership fees I 1 Net margin and earnings 5,120 5,120 Retirement of capital credits (1.91 1) (1,91 1)

BALANCE-December 31, 2004 $ 98,77 L$ 2M2 See notes to consolidated financial statements.

DAIRYLAND POWER COOPERATIVE AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2004 AND 2003 (In thousands) 2004 2003 CASH FLOWS FROM OPERATING ACTIVITIES:

Net margin and earnings $ 5.120 $ 9.903 Adjustments to reconcile net margin and earnings to net cash provided by operating activities:

Depreciation and amortization 20,026 19.825 Changes in operating elements:

Accounts receivable (3,644) (994)

Inventories (6,351) 13,488 Prepaid expenses and other assets (12) (33)

Accounts payable 4,342 6,601 Accrued expenses 5,508 1,414 Deferred charges and other (1.744) 1.376 Total adjustments 18.125 41,677 Net cash provided by operating activities 23245 51,580 CASH FLOWS FROM INVESTING ACTIVITIES:

Electric plant additions (52,616) (30,689)

Purchase of investments (113,156) (86,731)

Sale of investments 114,397 86.695 Net cash used in investing activities (51.375! (30.725)

CASH FLOWS FROM FINANCING ACTIVITIES:

Borrowings under line of credit 70,900 1,500 Repayments under line of credit (46,400) (18,000)

Borrowings under long-term obligations 12,212 25,253 Repayments of long-term obligations (15,609) (16,983)

Retirement of capital credits (1,91 1) (1,748)

Borrowings of advances from member cooperatives 114,244 124,768 Repayments of advances from member cooperatives (113.948) (126.899)

Net cash provided by (used in) financing activities 19.488 (12.109)

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (8,642) 8,746 CASH AND CASH EQUIVALENTS-Beginning of year CASH AND CASH EQUIVALENTS-End of year $=A_ LIA2 SUPPLEMENTAL CASH FLOW INFORMATION-Cash paid for interest $1,4 229 See notes to consolidated financial statements.

DAIRYLAND POWER COOPERATIVE AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2004 AND 2003 (All dollar amounts in thousands)

1. NATURE OF BUSINESS AND ORGANIZATION Business-DairylandPower Cooperative and Subsidiaries ("Dairyland" or the "Cooperative") is an electric generation and transmission cooperative organized under the laws of the states of Wisconsin and Minnesota. The Cooperative, whose principal offices are located in Wisconsin, provides wholesale electric service to Class A members engaged in the retail sale of electricity to member consumers located in Wisconsin, Minnesota, Iowa, Illinois, and Michigan, and provides electric and other services to Class C, D, E, and F members.

The accounting records of the Cooperative are maintained in accordance with the Uniform System of Accounts prescribed by the Federal Energy Regulatory Commission as adopted by the Rural Utilities Service ("RUS"), the Cooperative's principal regulatory agency.

The Cooperative is a member of GEN-SYS Energy ("GEN-SYS"), a power supply and marketing cooperative, the primary purpose of which is to schedule and dispatch generation resources and to provide other power-related support services to its members, which also include Corn Belt Power Cooperative and Distribu-Gen Cooperative. GEN-SYS is owned equally by its members, but in fiscal years 2004 and 2003, substantially all of the GEN-SYS activities that produced margin, including energy purchases and sales, were derived from Dairyland. Dairyland has consolidated the accounts of GEN-SYS in the consolidated balance sheets, the consolidated statements of revenues and expenses in non-utility operations, and the consolidated statements of cash flows for fiscal years 2004 and 2003.

Principles of Consolidation-Theconsolidated financial statements include the accounts of Dairyland, GEN-SYS, and Dairyland's wholly owned subsidiary, Genoa FuelTech, Inc. All significant intercompany balances and transactions have been eliminated in consolidation.

Electric Plant-The cost of renewals and betterments of units of property (as distinguished from minor items of property) includes contract work, direct labor and materials, allocable overheads, and allowance for funds used during construction, and is charged to electric plant accounts. The cost of units of property retired, sold, or otherwise disposed of, plus removal costs, less salvage, is charged to accumulated depreciation. No profit or loss is recognized in connection with ordinary retirements of property units. Maintenance and repair costs and replacement and renewal of minor items of property are charged to operations.

Depreciation-Depreciation,which is based on the straight-line method at rates that are designed to amortize the original cost of properties over their estimated useful lives, includes a provision for the cost of removing and decommissioning the properties. No amounts of the depreciation reserve were categorized as cost of removal in either 2004 or 2003. The provision for depreciation averaged 2.7% of depreciable plant balances in both 2004 and 2003.

Allowancefor Funds Used During Construction-Allowancefor funds used during construction represents the cost of external and internal funds used for construction purposes and is capitalized as a component of electric plant by applying a rate (4.5% in 2004 and 3.9% in 2003) to certain electric plant additions under construction. The amount of such allowance was $1,519 in 2004 and

$461 in 2003 and was included as a reduction of interest expense in the consolidated statements of revenues and expenses.

NuclearDecommissioningFunds-The Cooperative has established two decommissioning funds to accumulate the estimated amounts necessary to decommission a nuclear power plant that the Cooperative formerly operated. The assets of one of these funds, a trust of $73,471 at December 31, 2004, and $70,378 at December 31, 2003, are available solely to satisfy the future costs of decommissioning. The assets of the second fund, a supplemental reserve of $7,134 at December 31, 2004, and $6,991 at December 31, 2003, are designated to be used for such decommissioning efforts, but such designation is subject to change by the Cooperative's Board of Directors.

DeferredCharges-Deferredcharges represent future revenue to the Cooperative associated with costs that will be recovered from customers through the rate making process. As of December 3 1, 2004, the Cooperative's deferred charges are being reflected in rates charged to customers. If all or a separable portion of the Cooperative's operations no longer become subject to the provisions of Statement of Financial Accounting Standards ("SFAS") No. 71, Accountingfor the Effects of Certain Types of Regulation, a write-off of deferred charges would be required, unless some form of transition recovery (refund) continues through rates established and collected for the Cooperative's remaining regulated operations. In addition, the Cooperative would be required to determine any impairment to the carrying costs of deregulated plant and inventory assets. Deferred charges at December 31, 2004, primarily represent a premium on debt refinancing which is being amortized over approximately 20 years (the remaining life of related original debt) and costs associated with preliminary project survey and investigation activities. The preliminary project survey and investigation costs will either be capitalized as property and plant if the projects move forward, or be expensed if the projects are abandoned.

Asset Retirement Obligations-TheCooperative has an asset retirement obligation of

$80.6 million recorded for nuclear decommissioning. In addition, the Cooperative has evaluated its other electric plant assets and determined that an additional asset retirement obligation liability could not be estimated due to the anticipated indefinite lives of the related assets in use.

Investments-Investments in marketable debt and equity securities classified as available-for-sale are reported at fair value, with the interest, dividend income, and realized gains reported in non-operating margin. The unrealized gains and losses increase or decrease the nuclear decommissioning liability (see Note 3). The Cooperative continually monitors the difference between cost and estimated fair value of its investments. If any of the Cooperative's investments experience a decline in value that the Cooperative believes is other than temporary, the Cooperative realizes a loss.

RegulatoryAssets-The Cooperative's accounting policies and the consolidated financial statements conform to accounting principles generally accepted in the United States of America applicable to electric cooperatives in accordance with the provisions of SFAS No. 71.

Cash Equivalents-Cashequivalents include all highly liquid investments with original maturities of three months or less. Cash equivalents consist primarily of commercial paper, stated at cost, which approximates market. The Cooperative classifies certain cash equivalents as investments when they relate to trust funds held for long-term purposes (see Note 3).

Coal Stock and Materialsand Supplies-Coal inventories are stated at the lower of average cost or market prices. Materials and supplies inventories are stated at average cost, which approximates market.

Recoverability ofLong-LivedAssets-The Cooperative follows the provisions of SFAS No. 144, Accounting for the Impairment or DisposalofLong-Lived Assets, which was adopted at the beginning of fiscal year 2002. Under the provisions of SFAS No. 144, property and equipment and other long-lived assets must be periodically reviewed for recoverability whenever events or changes in circumstances indicate the carrying value of the assets may not be recoverable. The Cooperative determines potential impairment by comparing the carrying value of the assets with the net cash flows expected to be provided by the operating activities of the business. Should the sum of the expected future net cash flows be less than the carrying values, the Cooperative would determine whether an impairment should be recognized. An impairment loss would be quantified by comparing the amount by which the carrying value of the asset exceeds the fair value based on the discounted cash flows expected to be generated by the asset. No impairment losses have been identified and recorded in the consolidated financial statements during 2004 and 2003.

Sales of ElectricEnergy-Revenues from sales of electric energy are recognized when energy is delivered.

Other OperatingRevenue-Other operating revenue includes primarily revenue received from transmission service and is recorded as services are provided.

Accountingfor Energy Transactions-Contractsthat did not meet the accounting definition of a derivative, as defined by SFAS No. 133, Accountingfor Derivative Instruments and Hedging Activities, and SFAS No. 149, Amendment of Statement 133 on DerivativeInstruments and Hedging Activities, are accounted for at historical cost. The Cooperative's energy contracts that qualify as derivatives continue to be accounted for at fair value under SFAS No. 133 and No. 149, unless those contracts meet the "normal purchase/normal sale" exclusion provided by SFAS No. 133 and No. 149 and are therefore exempted out of fair value accounting. The Cooperative does not have any energy contracts that are required to be accounted for at fair value as of December 31, 2004 and 2003.

Dairyland and GEN-SYS have evaluated the guidance under Emerging Issues Task Force

("EITF") No. 03-11, ReportingRealized Gains and Losses on Derivative Instruments That Are Subject to FASB Statement No. 133 andNot "Heldfor Trading Purposes" as Defined in Issue No. 02-3, as well as EITF No. 99-19, Reporting Revenue Gross as a Principalversus Net as an Agent, and have determined that GEN-SYS' energy purchases and sales activities will be presented on a net basis within the non-utility operations section of the consolidated statements of revenue and expenses.

Non-operatingMargin andNon-utilityEarnings-Thenon-operating margin and non-utility earnings include the following for the years ended December 31:

2004 2003 Investment income $ 667 $ 1,059 Investment income on decommissioning funds 2,378 3,223 Provision, recorded as estimated decommissioning liabilities (2,378) (3,223)

Other 642 2.124 Non-operating margin 1,309 3,183 Non-utility earnings 1.974 3.131

$= L6,1A Income Taxes-The Cooperative's utility operations are generally exempt from federal and state income taxes and, accordingly, no provision for such taxes is recorded in the consolidated financial statements.

For its non-utility operations, the Cooperative accounts for income taxes using the liability method, under which deferred income taxes are recognized for temporary differences between the income tax and financial reporting bases of the Cooperative's assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. As of December 31, 2004 and 2003, the Cooperative had net operating loss carryforwards of approximately $454 and

$1,216, respectively. These net operating loss carryforwards expire beginning in 2019. Because realization of the related tax benefits is uncertain, a full valuation allowance has been recorded against the related tax asset. At December 31, 2004 and 2003, the Cooperative recognized an income tax benefit of $22 and $32, respectively, due to a reversal of a valuation allowance due to the use of a net operating carryforward.

Use ofEstimates-The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

ConcentrationofRisk-During fiscal years 2004 and 2003, the Cooperative derived 11% and 12%, respectively, of its revenue from a single customer.

Approximately 47% of the labor force for the Cooperative is under a collective bargaining agreement that expires January 31, 2008.

2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In January 2003, the Financial Accounting Standards Board ("FASB") issued Interpretation No.

("FIN") 46, Consolidationof Variable Interest Entities (revised December 2003, FIN 46(R)),

which establishes new standards for consolidation of the financial statements of entities that are controlled by variable interests rather than by voting interests. FIN 46(R) is effective for 2005.

Management is evaluating the provisions and expects that FIN 46(R) will not have a material impact on the Cooperative's consolidated financial statements.

The Cooperative adopted the provisions of SFAS No. 150, Accountingfor CertainFinancial Instruments with Characteristicsof both LiabilitiesandEquity. The Cooperative has determined it does not have any financial instruments with characteristics of both liabilities and equity.

In March 2004, the EITF of the FASB reached a consensus on EITF No. 03-1, The Meaning of Other-Than-TemporaryImpairment and Its Application to Certain Investments. EITF No. 03-01 provides guidance on the meaning of other-than-temporary impairment. The disclosure requirements became effective in 2003 (see Note 3 for these disclosures).

In May 2004, the FASB approved FASB Staff Position ("FSP") No. 106-2, Accounting and Disclosure Requirements Relatedto the MedicarePrescriptionDrugImprovement and ModernizationAct of2003, which established new accounting and disclosure standards for employers that sponsor postretirement health care plans that provide prescription drug benefits.

This FSP is effective for Dairyland in 2005. Dairyland has not yet completed a detailed analysis of the impact of this FSP; however, management does not expect that its adoption effective January 1, 2005, will have a material effect on Dairyland's consolidated financial position or results of operations due to the limited nature of its postretirement benefits.

3. AVAILABLE-FOR-SALE INVESTMENTS Investments under debt agreements and nuclear decommissioning funds are classified as available-for-sale and include the following at December 31:

2004 2003 Fair Fair Value Cost Value Cost Cash and cash equivalents $ 9,246 $ 9,246 $ 3,513 $ 3,513 U.S. government securities 29,598 29,574 33,502 33,107 Corporate bonds 15,556 15,264 14,876 14,424 Common stocks 24,634 20,647 24,197 21,677 Foreign obligations 1.589 1,582 2,365 2.280 Since the Cooperative intends to adjust rates in the future to reflect changes in the fair value of investments held in its nuclear decommissioning trust, unrealized gains of $4,310 and $3,452 on these investments at De6ember 31, 2004 and 2003, respectively, are included in estimated decommissioning liabilities. Investments under debt agreements represent amounts arising from the sale of assets that are encumbered by mortgages and restricted by the RUS for use on future generation and transmission construction projects. At December 31, 2004 and 2003, the fair value of investments under debt agreements approximated cost.

The contractual maturities of marketable debt securities, which include U.S. government securities, foreign obligations, and corporate bonds, were as follows at December 31, 2004:

Fair Value Cost Due within I year $ 5,452 $ 5,387 Due after I year through 5 years 25,762 25,653 Due after 5 years through 10 years 13,500 13,431 Due after 10 years 2,029 1.949

$ 46.74 $ 46.420 Information regarding the sale of available-for-sale marketable securities, including nuclear decommissioning trusts, for the years ended December 31 is as follows:

2004 2003 Proceeds from sale of securities $ 105,801 $ 83,275 Realized gains 564 1,343 For the purposes of determining realized gains and losses, the cost of securities sold is based upon specific identification.

The following table shows gross unrealized losses and the fair value of investments that are in unrealized loss position and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2004. A realized loss has not been recognized on these investments, as their decline in value does not meet the Cooperative's criteria for classification as an other-than-temporary impairment.

Less Than 12 Months Fair Unrealized Value Loss Common stocks $ 5,540 $ 566 Marketable debt securities 21,621 440 Investment income on the consolidated statements of revenues and expenses is net of investment fees of approximately $346 and $290 for the years ended December 31, 2004 and 2003, respectively.

4. LINES OF CREDIT To provide interim financing capabilities, the Cooperative has arranged lines of credit with availability aggregating approximately $52,000 principally through CoBank at a rate of 3.92% at December 31, 2004. Borrowings outstanding were $24,500 and $0 at December 31, 2004 and 2003, respectively. Average borrowings outstanding were $7,300 and $2,200 during the years ended December 31, 2004 and 2003, respectively. Compensating balance requirements and fees relating to the lines of credit were not significant in 2004 or 2003. The line of credit is renewable annually as to terms and conditions, and the principal balance must be paid in full within one business day of expiration unless unilaterally extended by CoBank. The next renewal date is September 2005.

The Cooperative also allows member cooperatives to prepay their power bills and pays interest on these prepayments based on current short-term borrowing rates. Interest expense on member cooperative advances ($176 during 2004 and $178 during 2003) has been included in interest expense in the consolidated statements of revenues and expenses.

5. LONG-TERM OBLIGATIONS Long-term obligations at December 31 consist of the following:

2004 2003 Federal Financing Bank obligations, 3.5% to 6.8% $ 295,918 $ 293,765 RUS obligations, 2%, 5%, and grant funds 24,563 27,671 CoBank notes, 5.8% and 7.4% 52,403 54,698 City of La Crosse, Wisconsin, Pollution Control Bonds, 5.45% to 5.55% 23,605 23,605 Other, 4%, due in installments through 2006 318 465 396,807 400,204 Less current maturities 19.787 18.847 Total long-term obligations $72 3 5 Quarterly principal and interest payments on the long-term obligations to the Federal Financing Bank extend through 2031. Long-term obligations to the RUS are payable in equal quarterly principal and interest installments through 2013. Payments on the CoBank 5.8% and 7.4% notes are due monthly or quarterly through 2019.

Approximately $7,545 of the City of La Crosse, Wisconsin, Pollution Control Bonds (the "Bonds") is due in September 2014, and $16,060 is due in February 2015. On December 27, 2001, the Bonds were reissued at fixed interest rates of 5.45% for the $7,545 of Bonds due in 2014 and 5.55% for the $16,060 of Bonds due in 2015.

Substantially all of the Cooperative's assets are pledged as collateral for these obligations. The Cooperative is required to maintain and has maintained certain financial ratios related to earnings and liquidity in accordance with the covenants of its loan agreements as of December 31, 2004.

Scheduled maturities of the Cooperative's long-term obligations at December 31, 2004, were as follows:

Year Ending December 31 2005 $ 19,787 2006 20,727 2007 21,487 2008 54,350 2009 20,672 Thereafter 259 784

6. OTHER The fair value of the Cooperative's financial instruments other than marketable securities and short-term borrowings, based on the rates for similar securities, is estimated to be as follows at December 31:

2004 2003 Recorded Fair Recorded Fair Value Value Value Value Assets:

Economic development loans and other investments $ 9,674 $ 7,957 $ 11,698 $ 10,388 Investments in capital term certificates of NRUCFC 9,176 5,492 9,176 5,562 Liabilities-Long-term obligations 396,807 421,771 400,204 399,274

7. RETIREMENT OF CAPITAL CREDITS The Cooperative's Board of Directors has adopted a policy of retiring capital credits allocated to members on a first-in, first-out basis. During 2003, as part of an equity development strategy, the Cooperative revised portions of this policy related to patronage capital retirements and the assignment of current year non-operating margins. Prior to 2003, the Cooperative did not retain as patronage capital any capital contributed or deposited more than 20 years prior to the current year.

Beginning in 2003, patronage capital retired will be limited to no greater than 2% of the total patronage capital balance at December31 of the prior year. Accordingly, $1,911 and $1,748, representing a portion of 1983 capital credits, were retired in 2004 and 2003, respectively.

Implementation of this policy is subject to annual review and approval by the Board of Directors and the RUS, and no cash retirements are to be made which would impair the financial condition of the Cooperative or violate any terms of its agreements. As part of the policy revision mentioned above and also beginning in 2003, the amount of non-operating margins assigned to members each year is at the discretion of the Board of Directors. Any unassigned non-operating margins will become unallocated reserves and part of permanent equity. Patronage capital at December 31, 2004, includes 2004 margins assignable of $1,837 and unallocated reserves of $3,283. Patronage capital at December 31, 2003, includes 2003 margins assignable of $8,338 and unallocated reserves of$I,565.

8. COMMITMENTS AND CONTINGENCIES The Cooperative has signed an agreement with Wisconsin Public Service Corporation ("WPSC")

to acquire a 30% ownership share of the Weston 4 power plant currently under construction near Wausau, Wisconsin, which is expected to be in service in 2008. The Cooperative's acquisition is subject to regulatory approvals and financing. The agreement would give the Cooperative a 159-megawatt share of the 531-megawatt supercritical coal-fired facility for which WPSC obtained regulatory approval and began construction in October 2004. As a 30% owner, the Cooperative will be responsible for approximately $235 million of the Weston 4 plant costs plus interest during construction and Dairyland's owner costs for a total estimated project cost of $267 million. The Cooperative's estimated expenditures as of December 31, 2004, were $108 million in 2005, $91 million in 2006, $47 million in 2007, and $21 million in 2008.

The Cooperative's estimated 2005 construction program expenditures are $66,100, with financing expected to be provided by borrowings and internally generated funds.

The Board of Directors of Dairyland and the RUS have approved credit support for GEN-SYS of

$20 million, and the RUS has authorized Dairyland to provide $5 million of net additional funding annually. As of December 31, 2004 and 2003, no additional funding has been provided. As of December 31, 2004 and 2003, Dairyland had issued guarantees on behalf of GEN-SYS for

$9.2 million and $6.4 million, respectively.

The Cooperative is a party to a number of generation, transmission, and distribution agreements, under which costs and/or revenues are recognized currently based upon the Cooperative's interpretations of the provisions of the related agreements. Differences between the estimates used in the consolidated financial statements and the final settlements are recorded in the year of settlement.

The Cooperative has entered into various coal purchase contracts from one to five years. The estimated commitments under these contracts as of December 31, 2004, were $76,167 in 2005,

$14,540 in 2006, $12,987 in 2007, and $15,215 in 2008.

The Cooperative has been named as a defendant in various lawsuits and claims arising in the normal course of business. Although the outcome of these matters cannot be determined at the present time, management and legal counsel believe these actions can be successfully defended or resolved without a material effect on the consolidated financial position, results of operations, or cash flows of the Cooperative.

9. EMPLOYEE BENEFITS Multiemployer Defined Benefit Pension Plan-Pension benefits for substantially all employees are provided through participation in the National Rural Electric Cooperative Association

("NRECA") Retirement and Security Program. Pension benefits are funded in accordance with the provisions of the program and are based on salaries, as defined, of each participant. The Employee Retirement Income Security Act of 1974, as amended by the Multiemployer Pension Plan Amendment Act of 1980, imposes certain liabilities on employers who are contributors to multiemployer plans in the event of a plan termination or an employer's withdrawal. These plans have not been terminated, nor has the Cooperative undertaken any plans to withdraw from participation. Since the program is a multiemployer plan for accounting purposes, the accumulated benefits and plan assets are not determined or allocated separately for each participating company.

The Cooperative may be contingently liable for its share of the plans' unfunded vested liabilities.

The Cooperative cannot obtain information from the plans' administrators to determine its share, if any, of unfunded vested benefits. Pension costs for this pension plan were $4,273 in 2004 and

$3,880 in 2003.

PostretirementHealth InsuranceObligation-Employees of the Cooperative retiring at or after age 55 are eligible to participate in a postretirement health care plan through age 65. Eligible dependents of the retired Cooperative employees are also eligible to participate in this plan through age 65. Retirees pay 100% of the premium amount for this coverage. The premium is based upon the combined medical claims experiences of all active employees and retirees. If premiums were determined based upon the medical claims experience of retirees only, the resulting premium for retirees would be larger. The difference between the premium paid by retirees and the potential actual premium amount is the basis for the postretirement benefit obligation.

The postretirement health care plans are unfunded. The accumulated postretirement benefit obligation and the amounts recognized in the consolidated financial statements as of and for the years ended December 31 are as follows:

2004 2003 Change in benefit obligation:

Benefit obligation-beginning of year $ 5,047 $ 1,219 Service cost 184 175 Interest cost 332 315 Assumption changes 3,588 Participant contributions 136 197 Benefits payments (-412) (447 Benefit obligation-end of year L$5,287 $.

Funded status:

Funded status at December 31 $ (5,287) $ (5,047)

Unrecognized actuarial loss (3,164) (3,369!

Accrued postretirement health insurance obligations recorded at year-end $23 S-1J67 Change in plan assets:

Fair value of assets-beginning of year e $ -

Employer contribution 276 250 Participant contributions 136 197 Benefits paid (412) (447)

Fair value of assets-end of year Components of net periodic postretirement benefit cost:

Service cost-benefits attributed to service during the year $ 184 $ 175 Interest cost on accrued postretirement health insurance obligation 332 315 Amortization of unrecognized prior service cost 205 219 Net periodic postretirement benefit expense L$221 $ 709 For measurement purposes, a 6.5% discount rate was assumed for both 2004 and 2003. The 2004 and 2003 annual health care cost increase assumed is 12.0%, decreasing gradually to 5.0% for 2011 and thereafter.

Postretirement Health Insurance Obligation Expected employer contributions:

2005 $ 247 2006 296 2007 285 2008 328 2009 377 Defined ContributionPlan-Dairyland has a qualified tax-deferred savings plan ("401(k) Plan")

for eligible employees. Eligible participants may make pretax contributions, as defined, with Dairyland matching up to 2.5% of the participants' annual compensation. Contributions to these plans by Dairyland were $812 and $784 for 2004 and 2003, respectively.

Accrued Sick Leave Benefit-Certainemployees are eligible to receive amounts at the time of retirement related to a discontinued sick leave policy. Eligible employees will be paid for a fixed number of sick leave hours at the wage rate in effect at retirement. The liability was $1,634 and

$1,546 at December 31, 2004 and 2003, respectively. The cost for this sick leave benefit was $175 in 2004 and $300 in 2003. Also in 2003, an additional $470 of cost was recognized when the liability related to prior periods was adjusted.

OtherPlans-The Cooperative offers key employees deferred compensation plans available through NRECA. The plans permit qualifying employees to defer a portion of their salary until future years. The accumulated deferred compensation balance is not available to employees until termination, retirement, or death.

All amounts of compensation deferred under the plans and all income attributable to those amounts (until paid or made available to the employee or other beneficiary) are solely the property and rights of the Cooperative (not restricted to the payment of benefits under the plan), subject only to the claim of general creditors. Participants' rights under the plans are equal to those of general creditors of the Cooperative in an amount equal to the fair market value of the deferred account for each participant. The related assets and liabilities, totaling $1,030 and $945 at December 31, 2004 and 2003, respectively, are reported at contract value, which approximates fair value.

The Cooperative also provides employees with medical insurance coverage, short-term and long-term disability, and life insurance, which are funded by employer and employee contributions. The Cooperative's costs related to these benefits was $5,652 and $5,201 for 2004 and 2003, respectively.

10. NUCLEAR REACTOR The La Crosse Boiling Water Nuclear Reactor ("LACBWR") was voluntarily removed from service by the Cooperative effective April 30, 1987. The intent was to terminate operation of the reactor, and a possession-only license was obtained from the Nuclear Regulatory Commission in August 1987.

Under the Nuclear Waste Policy Act of 1982, the United States Department of Energy ("DOE") is responsible for the storage and disposal of spent nuclear fuel removed from nuclear reactors once a long-term underground repository is established and licensed. LACBWR will remain in safe storage status ("SAFSTOR") until the last spent fuel element is removed from the site. The DOE was to have begun accepting spent fuel in January 1998, but has not yet established a repository.

The Cooperative continues to evaluate alternatives for moving the spent fuel to a temporary dry storage facility. Dismantlement of nonessential systems is proceeding on an ongoing basis. The LACBWR Decommissioning Plan calls for final decommissioning no earlier than 2024.

The estimated costs of decommissioning the nuclear generating facility are based on a decommissioning cost study. The Cooperative has adopted a policy of providing additional funding of the nuclear decommissioning trust, as necessary, through rates or through transfers from the supplemental reserve, and with future earnings, to ensure the trust will be sufficient to cover final decommissioning expenses. The annual decommissioning expense, including SAFSTOR costs, is recovered from the Class A members. Earnings on the nuclear decommissioning funds and the equivalent provision for nuclear decommissioning costs are recorded as non-operating margins, since the plant is no longer in service.