ML051890359

Continental Cooperative Services 2004 Annual Report

ML051890359
Person / Time
Site:	Susquehanna
Issue date:	12/31/2004
From:	Continental Cooperative Services
To:	Office of Nuclear Reactor Regulation
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Download: ML051890359 (68)

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ITBL OFT CNTENT TA B L E. O F C N T E N T S S ABOUT CONTINENTAL COOPERATIVE SERVICES ........................................................... 2 A MESSAGE FROM THE EXECUTIVE COMMITTEE AND PRESIDENT & CEO . 4 8 5 CONTINENTAL COOPERATIVE SERVICES AT A GLANCE .................................................... :.6 & 7 CONTINENTAL COOPERATIVE SERVICES GENERATION REPORT. 8-11 CONTINENTAL COOPERATIVE SERVICES BOARD OF DIRECTORS ............................................................... 12 ALLEGHENY ELECTRIC COOPERATIVE, INC. BOARD OF DIRECTORS ...................................................... 13 SOYLAND POWER COOPERATIVE, INC. BOARD OF DIRECTORS ................................................................ 14 &15 h FINANCIAL SECTION TABLE OF CONTENTS ........................................................................ 17 Y

2004 ALLEGHENY ELECTRIC COOPERATIVE, INC. FINANCIAL REVIEW ................................................ 18-45 2004 SOYLAND POWER COOPERATIVE. INC. FINANCIAL REVIEW . .....................................

47-64 A

ABOUT CONTINENTAL COPERATIVE SERVICES 1,'

A trusted energy partner, Continental Cooperative Services (CCS), ensures the delivery of reliable, affordable, and competitive wholesale power to 25 affiliated electric distribution cooperatives in Illinois, New Jersey, and Pennsylvania.

CCS affiliated cooperatives, in turn, provide electric generation to nearly 1 million electric cooperative consumers.

CCS, based in Harrisburg, Pa., was created in March 2000, the result of a strategic alliance between two electric generation and transmission cooperatives (G&Ts) - Allegheny Electric Cooperative, Inc. (Allegheny), the wholesale power supplier to 14 electric distribution cooperatives in Pennsylvania and New Jersey, and Soyland Power Cooperative, Inc. (Soyland), which provides power to 11 electric distribution cooperatives in Illinois. CCS marks the first time two geographically non-contiguous G&Ts have joined forces in this fashion.

Cooperative electric systems comprising the CCS network are a critical part of America's rural infrastructure, dedicated to serving homes, farms, small businesses, and industries with integrity, accountability, innovation, and commitment to community. In Illinois, the 11 electric distribution cooperatives affiliated with CCS serve nearly one-third of the state's land area across 44 counties. The 13 CCS affiliated cooperatives in Pennsylvania own approximately 12 percent of the state's electric distribution lines, spanning one-third of the Commonwealth in 41 counties.

New Jersey's lone electric cooperative maintains roughly 1 percent of the Garden State's total miles of line.

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( 'CE~O A A MESSAGE FROM THE EXECUTIVE COMMITTEE AND PRESIDENT & CEO Continental Cooperative Services (CCS) completed its fourth full year of operations in 2004 in strong fashion. To date, our unique and forward-thinking alliance has produced approximately $7 million in general and administrative cost savings. Even more importantly, the long-term rate:

prognosis for both CCS legacy organizations - Allegheny Electric Cooperative, Inc. (Allegheny) and Soyland Power Cooperative, Inc. (Soyland)

-remains excellent. In just a few years, both Allegheny and Soyland will have reduced debt even further, providing the two organizations with.

substantial flexibility in todays competitive utility environment.

We also expect to see noticeable improvements in the reliability of delivery service provided to our affiliated electric distribution cooperatives, thanks to agreements reached late in the year with private power companies FirstEnergy/Penelec and FirstEnergy/Met-Ed in Pennsylvania and Ameren Corporation in Illinois.

The settlement with the FirstEnergy operating companies -which includes specific milestones and expenditures -culminates intense efforts by CCS and follows on the heels of private power company reliability regulations adopted by the Pennsylvania Public Utility Commission. In addition, the FirstEnergy companies are still mandated to spend roughly $49 million through 2009 repairing and building lines and equipment that feed electric cooperative delivery points. Taken together, these steps should yield more reliable service for Pennsylvania electric cooperative consumers well into the future.

On the Illinois side, CCS and Ameren Corporation have agreed to form a joint dispute resolution committee to resolve territorial conflicts before they reach the Illinois Commerce Commission. Ameren has also agreed to work with CCS on a regular basis to improve power supply reliability.

During 2004, all legal matters involving buyouts by former Soyland member cooperatives were resolved, allowing CCS to enter the new year free of such litigation.

CCS also took steps in 2004 to promote additional growth. Our original structure was created to accommodate generation and transmission cooperatives as members, but it did not provide a clear manner to bring smaller, single entities that could reasonably benefit from CCS into the fold.

As a result, CCS's bylaws were changed to create a new at-large member, or THE CCS EXECUTIVE COMMITTEE: FRONT ROW ALM group. The ALM structure will allow individual electric distribution FROM LEFT TO RIGHT, CURTIN RAKESTRAW 11, AT-LARGE MEMBER; DAVE TURNER. CHAIRMAN: AND cooperatives or other utilities that serve at retail, such as municipal electric MICHAEL CARLS, VICE CHAIRMAN. BACK ROW FROM systems and even private power companies, to join our alliance. LEFT TO RIGHT, ROBERT HOLMES. SECRETARY: JAMES COLEMAN. TREASURER; MURRAY MADSEN, AT-LARGE As 2005 dawned, CCS was evaluating options to secure its power supply MEMBER: AND FRANK BETLEY. PRESIDENT 8 CEO.

future. Thanks to our existing favorable power purchase contracts, we will not need capacity until 2009.

The phrase, "In unity, there is strength," underscores why CCS continues on the path to success. In a deregulated energy marketplace, we continue to believe that CCS - embodying the basic electric cooperative operating principle of 'cooperation among cooperatives" - represents the future of the rural electrification program. Along with our affiliated electric distribution cooperatives, we wvill push ahead to fulfill our primary mission: to provide a competitive and reliable supply of power for rural consumers in Illinois, New Jersey, and Pennsylvania.

E-CCS AT A GLANCE 4,500,000 -

4,000,000-HISTORIC ENERGY SALES 2001-2004 3,500,000-  ;\9-:3jX E3,000,000--g f W R45g 2004 FACT SHEET $ 2,500,000 - _ ji<  ;  ; -S * <=

2000,000 -3?_

wja Energy Sales Soyland ..................... $1,402,798 500,0000 -

Allegheny ..................... $2,749,040 2001 2002 2003 2004 YEAR Total Operating Revenue

• Allegheny l Soyland CCS Systemwide Soyland ..................... $82,117,858 Allegheny ....... .............. $166,197,000 LOAD CONTROL CAPABILITY 2001-2004 70 Net Margin 64 60--s, Soyland ..................... $3,375,304 50 -i Allegheny ...................... $14,877,000 40 -

30 -

Total Assets 20-Soyland ...................... $111,641,449 10 -

Allegheny ..................... $355,325,000 2001 2002 2003 2004 YEAR Budgeted System Rate -*F Allegheny -l Soyland Soyland ..................... 57.9 mills per kWh Allegheny ..................... 57.4 mills per kWh PEAK DEMAND 2001-2004 Member Distribution Systems ..................... 25 1000 900 -

800

• Total Retail Customers ..................... 296,736 700 -

Pennsylvania ..................... 208,279 600 -

Illinois ..................... 77,131 New Jersey ..................... 11,326 s 400 -

• l 300-a- 200 2004 Peak Demand ...................... 964 MW 100 0

Miles of Transmission Line ..................... 670 2001 2002 2003 2004 YEAR I

• Allegheny (winter) I

• Soyland (summer) I* CCS Systemwide (winter) I

ALLEGHENY THE LOCUST COURT BUILDING, CCS HEADQUARTERS OFFICE 2004 OPERATING EXPENSES IN HARRISBURG, PENNSYLVANIA 1% 3%

3% i 0  :: Ae I Energy

• Generation Transmission 24%- E Distribution

• Depreciation

• Amortization

• AG Expenses

& Taxes

• Interest

• Decommissioning 24%

SOYLAND 2004 OPERATING EXPENSES 4%4 4%-~

• Energy Generation 19%- ' Transmission

• Distribution

• Depreciation

• Amortization 4%-

• AG Expenses

& Taxes 1%

• Interest

• Decommissioning 6%

ALLEGHENY SOURCES OF ENERGY 2004 6%-

• Susquehanna 28%- Steam Electric Station Raystown Hydroelectric Project

• Purchased Power N New York Power Authority SOYLAND SOURCES OF ENERGY 2004*

(Peaking facilities less than 1 percent) 10.4%-

• Pearl Station

• Purchased Power

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YEAR IN REVIEW Power Supply CCS continued to enjoy the benefits of advantageous power supply contracts with AmerenEnergy Marketing for the Illinois area and Williams Power Company for the Pennsylvania/New Jersey region. Both arrangements continue until the end of 2008, a move that brings all of the organization's supplemental power contracts into synch and secures a reasonable rate for power over a relatively long period.

Generation

• A diverse mix of self-owned generation coupled with demand-side management capabilities provide the cornerstone for CCS to fulfill its core mission - achieving stable and affordable wholesale power rates for affiliated electric distribution cooperatives in Illinois, New Jersey, and Pennsylvania.

' Fuel diversity" affords CCS better balance and increased leverage in a competitive energy market easily shaped by national and global events.

Crude oil prices, natural gas supplies, drought, even market jitters over regional power crises all affect how electricity markets operate and significantly impact power prices.

CCS's diversified generation portfolio played, a key role in helping the organization negotiate attractive wholesale power supply contracts with':

AmerenEnergy Marketing and Williams Power Company. Here is a look at CCS's power plant portfolio:

Alsey Generating Station: Owned by Soyland and operated by CCS staff, the Alsey Generating Station is a five-unit, natural gas-fired peaking complex located in Scott County, Ill., near the village of Alsey. The facility entered service in July 1999 and has a nameplate rating of 125 megawatts. (The units can also operate on fuel oil, if necessary.)

Alsey Station operates in conjunction with a private power company when it is more cost-effective to run the combustion turbines than purchase power'from other providers. It is designed to run during periods of peak electric use. Since air permits for the facility limit emissions to no more than 250 tons of nitrogen oxides annually, operation is capped at 937 hours0.0108 days <br />0.26 hours <br />0.00155 weeks <br />3.565285e-4 months <br /> per year. Alsey generated 1,216 megawatt-hours during 2004.

Pearl Station: A 22-megawatt, coal-fired baseload power plant located in Pike County, Ill., along the Illinois River, Pearl Station -owned by Soyland and operated by CCS staff- first went on-line in 1968. In fiscal 2004, Pearl produced nearly 147.6 million kilowatt-hours of electricity.

Other Illinois Peaking Plants: During times of peak electricity demand and system emergencies, Soyland can call on a 20-megawatt oil-fired combustion turbine based at Pearl Station and 9 megawatts from five diesel units located at Pittsfield in Pike County, Ill. Typically, both facilities run less than 200 hours0.00231 days <br />0.0556 hours <br />3.306878e-4 weeks <br />7.61e-5 months <br /> per year.

New York Power Authority: Since 1966, Allegheny has purchased power generated by federal hydroelectric projects located along the Niagara and St. Lawrence rivers in upstate New York. Both facilities are operated by the New York Power Authority (NYPA).

In 2004, Pennsylvania received an allocation of 38.7 megawatts (MW) from the 1,880-MW Niagara Power Project and 11.2 MW from the 912-MW St. Lawrence Power Project. Out of this, Allegheny and its member electric cooperatives in the Commonwealth received approximately 32 MW (31 MW from Niagara and nearly 0.5 MW from St. Lawrence). An additional 2 MW from both projects was allocated to Sussex REC, a CCS affiliated electric distribution cooperative in New Jersey.

Allegheny handles all contracts, billing, and transmission arrangements for Pennsylvania utilities that receive NYPA power in its role as state NYPA Bargaining Agent.

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ALSEY UENERATING STATION PEARL STATION NIAGARA POWER PROJECT OPERATED BY THE NEW YORK POWER AUTHORITY 9

YE AR liNTRE,d1H W0 COSNTINUED Raystown Hydroelectric Project Allegheny's Raystown Hydroelectric Project, William F. Matson Generating Station (Raystown) is a two-unit, 21 -megawatt, run-of-river hydropower facility located at Raystown Lake and Dam in Huntingdon County, Pa. Buoyed by abundant rainfall across the Mid-Atlantic region, Raystown in 2004 provided more than 113.9 million kilowatt-hours at delivery - its second highest production level ever - exceeding projections by more than 33 percent.

CCS staff operates the hydro project in close cooperation with the Baltimore District of the U.S. Army Corps of Engineers. The Corps controls water releases from Raystown Lake, the largest man-made body of water in Pennsylvania.

Susquehanna Steam Electric Station: Allegheny owns 10 percent of the Susquehanna Steam Electric Station (SSES), a 2,355-megawatt, two-unit nuclear power plant located in Luzerne County, Pa. PPL Susquehanna, a division of Allentown, Pa.-based PPL Corporation, owns the, remaining 90 percent and operates the boiling water reactor facility.

In 2004, this 10 percent share of SSES provided a record 1.8 billion kilowatt-hours of electricity at delivery to Pennsylvania and New Jersey electric cooperatives. The capacity factor of SSES Unit 1 was 78.2 percent; Unit 2 was 97 percent. This works out to an average annual composite capacity factor for the facility of 87.6 percent.

Both Unit 1 and Unit 2 run on a 24-month refueling cycle.

Load Management: In 1986, Allegheny, along with CCS affiliated electric distribution cooperatives in Pennsylvania and New Jersey, launched.,

the Coordinated Load Management System (CLMS) to reduce electricity consumption during peak demand periods.

By shifting use of residential water heaters, electric thermal storage units, dual fuel home heating systems, and other special equipment in the homes of volunteer cooperative consumers to off-peak hours, CLMS improves system efficiency, cuts costly demand charges cooperatives must pay for purchased power, and reduces the need for new generating capacity. CLMS is also used during summer peaks to reduce CCS capacity obligations under procedures established by the PJM Interconnection.

In 2004, CLMS reduced cooperative purchased power costs by

$4.5 million, bringing total net power cost savings achieved since December 1986 to more than $72.7 million. Currently, 183 substations are being utilized for load control with more than, 45,500 load control receivers installed on appliances, mostly water heaters, in the homes of electric cooperative consumers.

Soyland employs a system control and data acquisition (SCADA) system to monitor load levels, transmission facilities, and generating plant performance. Through SCADA, real-time decisions about generation or purchased power requirements and consumer load reductions can be made based on forecasts, I schedules, and actual system performance. This decision-making -

capability is key in todays market-based electric utility industry.

As part of energy supply agreements with local private power companies, remote terminal units installed on the cooperative's interconnection points are connected through the SCADA system, allowing Soyland to furnish real-time load signals from one control area to another. This helps CCS minimize energy A imbalance costs incurred under transmission tariffs.

SUSQUEHANNA STEAM ELECTRIC STATION

CLEAN POWER LAW RECOGNIZES ELECTRIC COOPERATIVE LOAD MANAGEMENT EFFORTS

- G Because Pennsylvania's electric cooperatives have promoted the benefits of energy conservation and "green" power 2 S for years, they became natural partners in helping shape

- WPennsylvania's renewable portfolio standard (RPS) law,

= enacted in 2004. Under RPS, private power companies and competitive electric generation suppliers across the state must include increasing amounts of green energy in their generation mix - up to 18 percent by 2020.

W Electric cooperatives, on the other hand, must meet RPS requirements by offering a "voluntary program of energy

~ efficiency and demaind-side management." Pennsylvania i-electric cooperatives already do this through the Coordinated Load Management System (CLMS), which launched operations in December 1986.

The Pennsylvania General Assembly realized that imposing RPS on electric cooperatives would go against the his-toric legislative intent of cooperative self-regulation and unnecessarily raise costs for rural residents. As not-for-

__-e - profit, consumer-owned and controlled utilities, electric cooperatives base decisions on economic, operational, and community impact, with the goal of providing a reliable Z4 supply of power at the lowest possible cost.

f l i Electric cooperatives in the Commonwealth successfully

- ~. 1/4 demonstrated to legislators that they have always had an G '  :~interest in renewable generation and energy efficiency, as

_ _ _ _reflectedby their ownership of the 21-megawatt Raystown Hydroelectric Project. But more importantly, cooperatives also advanced the argument that the cleanest megawatt is the one not produced at all. Members of the legislature were impressed that CLMS - which essentially works like a power plant in reverse -. lowers Allegheny power

-. requirements by nearly 10 percent.

COORDINATED LOAD MANAGEMENT SYSTEM 11

FAU I RECTORI)RS ecs BOARD OF DIRECTORS Dave Turner Scott Uphoff David White Chairman Coles-Moultrie Electric Cooperative Rural Electric Convenience Warren Electric Cooperative, Inc. Mattoon, Ill. Cooperative Company Youngsville, Pa. Auburn, Ill.

Bradley Ludwig Michael Carls Eastern Illini Electric Cooperative Lowell Friedline Vice Chairman Paxton, Ill. Somerset Rural Electric Menard Electric Cooperative Cooperative, Inc.

Petersburg, Ill. Merton Pond Somerset, Pa.

Illinois Rural Electric Cooperative Robert Holmes Winchester, Ill. Jack Clark Secretary Spoon River Electric Cooperative, Inc.

Valley Rural Electric Cooperative, Inc. William Pollock Canton, Ill.

Huntingdon, Pa. McDonough Power Cooperative Macomb, Ill. Thomas Webb James Coleman Sussex Rural Electric Cooperative, Inc.

Treasurer Robert Guyer Sussex, N.J.

Shelby Electric Cooperative New Enterprise Rural Electric Shelbyville, Ill. Cooperative, Inc. James Davis New Enterprise, Pa. Tri-County Rural Electric Cooperative, Inc.

Curtin Rakestraw II Mansfield, Pa.

At-Large Kathryn Cooper-Winters Sullivan County Rural Electric Northwestern Rural Electric Stephen Marshall Cooperative, Inc. Cooperative Association, Inc. United Electric Cooperative, Inc.

Forksville, Pa.' Cambridge Springs, Pa. DuBois, Pa.

Murray Madsen Wayne Stiles Haven Vaughn At-Large REA Energy Cooperative, Inc. Western Illinois Electrical Cooperative Farmers Mutual Electric Company Indiana, Pa. Carthage, Ill.

Geneseo, Ill.

fEach affiliatedelectric distributioncooperative ha one seat on the CCS BoardofDirectors. X

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ALLEGLIEN Y ELECT RIC COO PERAT IVE, JNCo BlOARD OF DIRECTORS 11~ (".

ALLEGHENY ELECTRIC COOPERATIVE, INC.

BOARD OF DIRECTORS Lowell Friedline Richard Weaver Thomas Webb Chairman Central Electric Sussex REC Somerset REC Director Director Director a:

Kathryn Cooper-Winters John McNamara James Davis V'ice Chairman Claverack REC Tri-County Northwestern REC Director Rural Electric Director E Director Robert Holmes Robert Guyer Stephen Marshall Secretary/Treasurer New Enterprise REC United Electric Valley REC Director Director Director David Cowan L Wayne Stiles Dave Turner Adams Electric REA Energy Warren Electric Director Director Director C. Robert Koontz Curtin Rakestraw II Bedford REC Sullivan County REC Director Director All Allegheny Electric Cooperative, Inc.

directors also serve as CCS directors.

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)I O/TORIS IRE SOYLAND POWER COOPERATIVE, INC.

BOARD OF DIRECTORS Bruce Giffin Jon Miles Assistant Secretary- At-Large Treasurer f  : McDonough Power Illinois Rural- . Manager Manager I.

M.L (Chris) Jim Thompson Christman Adamns Electric At-Large `: . Manager Coles-Moultrie Electric 3radley Ludwig* Jack Clark* Scott UphoflP Secretary-Treasurer At-Large I Coles-Moultrie Eastern Illini Electric Spoon River Electric Director Director

Wm. David Michael Carls* William Dodds Champion Jr. Menard Electric Spoon River Electric Eastern Illini Electric Director Manager Manager Murray Madsen* David White* Haven Vaughn*

Farmers Mutual RE Convenience Western Illinois Electric Cooperative Electrical Director Director Director Robert Delp David Stuva, Paul Dion Farmers Mutual RE Convenience Western Illinois Electric Cooperative I Electrical Manager Manager Manager Merton Pond* Richard Boggs *Denotes CCS director Illinois Rural Shelby Electric Director Director William Pollock* James Coleman*

McDonough Power Shelby Electric Director  : -Manager SI'~~l,

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2004 FINANCIAL CONTENTS 2004 ALLEGHENY ELECTRIC COOPERATIVE, INC. FINANCIAL REVIEW ................................................ 18-45 2004 SOYLAND POWER COOPERATIVE, INC. FINANCIAL REVIEW .... 47-64 A N N UA L R E PO R T

\AL]EGHYEN4Y El ]E<iCTRiIiC COOPERATIVE, I NC.)

ALLEGHENY ELECTRIC COOPERATIVE, INC.

ACCOUNTANTS' REPORT AND FINANCIAL STATEMENTS DECEMBER 31, 2004 AND 2003 CONTENTS INDEPENDENT ACCOUNTANTS REPORT .......................................... 19 FINANCIAL STATEMENTS BALANCE SHEETS ..................... 20 &;21 STATEMENTS OF INCOME .......................................... 22 STATEMENTS OF MEMBERS' EQUITIES (DEFICITS)..........................................................................................24 8 25 STATEMENTS OF CASH FLOWS .......................................... 26 NOTES TO FINANCIALSTATEMENTS .......................................... 27-45 18 -. , ,t

Independent Accountants' Report Board of Directors Allegheny Electric Cooperative, Inc.

Harrisburg, Pennsylvania We have audited the accompanying balance sheets of Allegheny Electric Cooperative, Inc.

(Cooperative) as of December 31, 2004 and 2003, and the related statements of income, members' equities (deficits), and cash flows for the years then ended. These financial statements are the responsibility of the Cooperative's management. Our responsibility is to express an opinion on these 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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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 financial statements referred to above present fairly, in all material respects, the financial position of Allegheny Electric Cooperative, Inc. 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.

As discussed in Note 8 to the financial statements, during 2003, the Cooperative changed its method of accounting for its asset retirement obligation to comply with Financial Accounting Standard 143 (FAS 143).

8kago L March 4, 2005 225NortWalerSbB Suite40 P.O. Box 1580 Decalur,L62525-1S8O 217429-2411 Fax217429-6109 bkdicom Beyond Your Numbers A S

ALEG EENY EL 11ECTI COOP:ERATIVE, I-NC,.

BALANCE SHEE T S DECEMBER 31, 2004 AND 2003 (IN THOUSANDS)

Assets 2004 2003 Electric Utility Plant, at cost In service (see Note 2) $ 781,139 $ 778,438 Less accumulated depreciation (673,172) (677,589) 107,967 100,849 Construction work in progress 2,862 7,692 Nuclear fuel in process (see Note 1 and 3) 15,334 14,918 Net electric utility plant (see Note 1, 2 and 3) 126,163 123,459 Investments and Other Assets Investments in associated organizations (see Note 4) 739 841 Other investments (see Note I and 6) 47,828 44,065 Notes receivable, members, less current portion (see Note 5) 68 88 Non-utility property, at cost (net of accumulated depreciation of

$4,754 in 2004 and $4,422 in 2003) 4,150 4,332 Other non-current assets 126 158 52,911 49,484 CurrentAssets Cash and cash equivalents 35,781 17,889 Accounts receivable, members (see Note 1) 14,030 13,439 Accounts receivable, affiliated organizations 58 Other receivables 2,882 358 Inventories (see Note 1) 6,350 5,865 Other current assets 1,397 2,594 Total current assets 60,498 40,145 Restricted Investments (see Note 1) 15,837 15,777 Deferred Charges (see Note 1 and 7)

Capital retirement asset 98,953 135,422 Other 963 1,290 99,916 136,712

$ 355,325 $ 365,577 O See Notes to FinancialStatements

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Members' Equities (Deficits) and Liabilities 2004 2003 Members' Equities (Deficits) (see Note 1)

Membership fees $ 3 $ 3 Patronage capital 34,122 34,122 Donated capital 38 38 Retained deficits (52,911) (67,788)

Members' deficits (18,748) (33,625)

Accumulated other comprehensive income 2,905 2,405 Total deficits (15,843) (31,220)

Asset Retirement Obligation (see Note 8) 112,505 108,178 Long-Term Debt (see Note 9) 196,904 232,083 Current Liabilities Current installments of long-term debt 38,833 30,214 Accounts payable and accrued expenses 17,307 21,097 Accounts payable to affiliated organizations 310 Total current liabilities 56,140 51,621 Other Liabilities and Deferred Revenue Accrued decontamination and decommissioning of nuclear fuel 308 617 Deferred income tax obligation from safe harbor lease (see Note 13) 2,423 2,748 Other deferred revenue (see Note 14) 2,888 1,550 5,619 4,915

$ 355,325 $ 365,577

VLL EGH[ENY FL . lBCTRI0 I-'

COOPERATIVE STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2004 AND 2 0 03 (IN THOUSANDS) 2004 2003 Operating Revenues $ 166,197 $ 154,786 Operating Expenses Operations Purchased capacity and energy costs 44,128 47,300 Transmission Operation 19,427 20,785 Maintenance 126 196 Production Operation 21,050 16,693 Maintenance 8,837 8,576 Fuel 7,584 7,021 101,152 100,571 Depreciation 5,066 4,695 Accretion of asset retirement obligation 4,327 4,161 Amortization of capital retirement asset 36,469 31,867 Administrative and general 5,286 5,033 Property and other taxes 457 442 152,757 146,769 Operating Margin Before Interest and Other Expenses 13,440 8,017 Other Expenses Interest expense 966 924 Other deductions, net 1,265 1,202 2,231 2,126 Operating Margin 11,209 5,891 Non-operating Margins Net non-operating rental income 1,275 1,220 Interest income 2,294 2,436 Other income 99 768 Net income before cumulative effect of adoption of FAS 143 14,877 10,315 Cumulative Effect of Adoption of FAS 143 (see Note 8) (51,136)

Net Income (Loss) 14,877 (40,821)

Other Comprehensive Income Unrealized appreciation in investments 500 856 Comprehensive Income (Loss) $ 15,377 $ (39,965) 22 N See Notes to FinancialStatements.  : iZ ij

tripled' VW Fiji is,

1. 1. 4

VLL EGHEN Y EL.. E.CTIRiIC' COO PE RATIVE 1NC STATEMENTS OF MEMBERS' EQUITIES (DE FICITS)

YEARS ENDED D ECEMBER 31, 2004 AND 20 03 (IN THOUSANDS)

Membership Donated Patronage Fees Capital Capital Balance, January 1, 2003 $ 3 $ 38 $ 34,122 Comprehensive income Net loss Change in unrealized appreciation on investments Balance, December 31, 2003 3 38 34,122 Comprehensive income Net income Change in unrealized appreciation on investments Balance, December 31, 2004 $ 3 $ 38 $ 34,122 See Notes to FinancialStatements I

Accumulated Total Other Retained Members' Comprehensive Total Deficits Deficits Income Deficits

$ (26,967) $ 7,196 $ 1,549 $ 8,745 (40,821) (40,821) (40,821) 856 856 (67,788) (33,625) 2,405 (31,220) 14,877 14,877 14,877 500 500

$ (52,911) $ (18,748) $ 2,905 $ (15,843)

ALL EGFIEY EL IBCTiC rl COO0PERATSIVE9 [NC. (5 STATEMENTS OF CASH FLOWS YEARS ENDE D DECEMB ER 31, 2004 AND 2003 (IN THOUSANDS) 2004 2003 Operating Activities Net income (loss) $ 14,877 $ (40,821)

Items not requiring cash Depreciation and fuel amortization 9,840 9,604 Amortization of deferred charges and deferred revenue 36,469 31,867 Accretion of asset retirement obligation 4,327 4,161 Cumulative effect of adoption of FAS 143 51,136 Change in Accounts receivable, members (591) 897 Other receivables (2,524) 677 Inventories (485) (1,004)

Other current and non-current assets 1,336 848 Accounts payable and accrued expenses (3,790) (1,123)

Accounts (receivable) payable, affiliated organizations (368) 250 Other liabilities and deferred credits 1,031 (36,240)

Asset retirement obligation 36,001 Net cash provided by operating activities 60,122 56,253 Investing Activities Additions to electric utility plant and non-utility property, net (12,362) (18,765)

Payments received on notes receivable, members 15 22 Purchase of restricted investments (60) (462)

Purchase of other investments (3,263) (3,824)

Net cash used in investing activities (15,670) (23,029)

Financing Activity Principal payments on long-term debt (26,560) (32,326)

Net cash used in financing activity (26,560) (32,326)

Net Increase in Cash and Cash Equivalents 17,892 898 Cash and Cash Equivalents, Beginning of Year 17,889 16,991 Cash and Cash Equivalents, End of Year $ 35,781 $ 17,889 Supplemental Cash Flows Information Interest paid $ 941 $ 940 Income tax paid 354 250 See Notes to FinancialStatements

NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2004 AND 2003 Note 1: Nature of Operations and Summary of Significant Accounting Policies Nature of Operations Allegheny Electric Cooperative, Inc. (Cooperative) is a rural electric cooperative corporation established under the laws of the Commonwealth of Pennsylvania. Financing assistance has been provided by the U.S. Department of Agriculture, Rural Utilities Service (RUS) formerly known as the Rural Electrification Administration (REA) and, therefore, the Cooperative is subject to certain rules and regulations promulgated for rural electric borrowers by RUS. The Cooperative is a generation and transmission cooperative. The member cooperatives' primary service areas are rural areas throughout much of rural Pennsylvania and a portion of New Jersey. The Cooperative extends unsecured credit to its members. The Cooperative's primary operating asset is its 10% undivided interest in the Susquehanna Steam Electric Station (SSES), a 2,250-megawatt, two-unit nuclear power plant, co-owned by a subsidiary of PPL Corporation (PPL).

The Board of Directors of the Cooperative, appointed by its members, has full authority to establish electric rates subject to approval by RUS. Rates are established on a cost of service basis.

Basis ofAccounting The Cooperative maintains its accounting records in accordance with the Federal Energy Regulatory Commission's (FERC) uniform system of accounts as modified and adopted by RUS.

In accordance with FERC guidelines, the Cooperative also maintains its accounts in accordance with Statement of Financial Accounting Standards Board (FASB) No. 71, Accountingfor the Effects of Certain Types ofRegulations.

Deregulation Pennsylvania retail electric customers have the choice of selecting the power supplier, or generator, from which they buy electricity. The ability to choose alternative energy suppliers has not significantly affected the Cooperative's operations or ability to recover its costs through future rates charged to members.

On a regular basis, the Cooperative reevaluates its application of FASB Statement No. 71, Accountingfor the Effects of Certain Types of Regulation, and No. 101, RegulatedEnterprises- Accountingfor the DiscontinuationofApplication ofFASB Statement No. 71. The Cooperative has determined that regulatory assets and liabilities should continue to be accounted for under the provisions of FASB No. 71 because it is reasonable to assume that the Cooperative will continue to be able to charge and collect its cost of service-based rates.

ALL EG]FENY EL ]BCT-iIIC COO PBRMATVE9 [:NyC.

NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2004 AND 2003 Use of Estimates 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 financial report and the reported amounts of revenues and expenses during the years then ended. Actual results could differ from those estimates.

Electric Utility Plant Electric utility plant is carried at cost. Depreciation of electric utility plant is provided over the estimated useful lives of the respective assets on the straight-line basis, except for nuclear fuel, as follows:

Nuclear Utility Plant Production 39 years Transmission 2.75%

General plant 3%- 12.5%

Nuclear fuel Units of heat production Non-Nuclear Utility Plant 3% - 33%

Maintenance and repairs of property and replacements and renewals of items determined to be less than units of property are charged to expense. Replacements and renewals of items considered to be units of property are charged to the property accounts. At the time properties are disposed of, the original cost, plus cost of removal less salvage of such property, is charged to accumulated depreciation.

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NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2004 AND 2003 Nuclear Fuel Nuclear fuel is charged to fuel expense based on the quantity of heat produced for electric generation. Under the Nuclear Waste Policy Act of 1982, the U.S. Department of Energy (DOE) is responsible for the permanent storage and disposal of spent nuclear fuel removed from nuclear reactors. The Cooperative currently pays to PPL its portion of DOE fees for such future disposal services.

Other Investments Debt and equity securities for which the Cooperative has no immediate plan to sell but that may be sold in the future are classified as available for sale and carried at fair value. Unrealized gains and losses are recorded in members' equities (deficits).

Realized gains and losses, based on the specifically identified cost of the security, are included in net income.

Cash Equivalents Cash and cash equivalents consist of bank deposits in federally insured accounts and temporary investments.

The Cooperative places its cash and temporary investments with high quality financial institutions. Such cash and temporary investments may be in excess of FDIC insurance limits. For purposes of the statements of cash flows, the Cooperative considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Cash equivalents are carried at cost.

The Cooperative's cash and investments are in a variety of financial instruments. The related values as presented in the financial statements are subject to various market fluctuations, which include changes in the equity markets, interest rate environment and the general economic conditions. The Cooperative's credit losses have historically been minimal and within management's expectations.

Accounts Receivable and Notes Receivable Accounts receivable are stated at the amount billed to members. Accounts receivable are due in accordance with approved policies. An allowance for doubtful accounts has not been recorded because all accounts receivable are considered fully collectible.

Notes receivable are stated at their outstanding principal amount. An allowance for uncollectible notes has not been recorded because all notes receivable are considered fully collectible.

ALLEGHENY B COO0PERATIVE, I _1 NC.

NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2004 AND 2003 Inventories The Cooperative accounts for certain power plant spare parts using a deferred inventory method. Under this method, purchases of spare parts under inventory control are included in an inventory account and then charged to the appropriate capital or expense accounts when the parts are used or consumed. Inventories are carried at cost, with cost determined on the average cost method.

Restricted Investments The Cooperative was required by RUS to establish a trust account for the proceeds from the settlement of litigation with a former power supply provider. RUS is a named beneficiary of the trust fund and RUS requires that the Cooperative seek prior approval to utilize any of the amounts from this account. Such uses to date have consisted of providing collateral for financial obligations and for capital expenditures.

Restricted investments consist of interest bearing sweep accounts and are stated at market.

Patronage Capital and Other Margins and Equities (Deficiencies)

The Cooperative has established an unallocated equity account, Retained Deficits, as a result of charges against income. These charges against income were recorded as deficits in an unallocated equity account because the amount is not allocable to the Cooperative's members.

RUS requires that subsequent net income recognized by the Cooperative must be used to reduce the deficits.

Income Taxes Deferred tax assets and liabilities are recognized for the tax effects of differences between the financial statement and tax bases of assets and liabilities. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that a deferred tax asset will not be realized.

Revenue Recognition Revenue from the sale of electricity to members is recorded based on contracted power usage.

Impairment of Long-Lived Assets The Cooperative reviews the carrying amount of an asset for possible impairment whenever events or changes in circumstances indicate that such amount may not be recoverable. For the years ended 2004 and 2003, no such circumstances were noted.

NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 20 04 AND 2003 Note 2: Electric Utility Plant in Service 2004 2003 (In thousands)

Nuclear Utility Plant Production $ 577,381 $ 580,031 Transmission 41,589 41,555 General plant 580 1,298 Nuclear fuel 148,636 142,700 768,186 765,584 Non-Nuclear Utility Plant 12,953 12,854 Total $ 781,139 $ 778,438 Note 3: Susquehanna Steam Electric Station The Cooperative owns a 10% undivided interest in SSES. PPL owns the remaining 90%. Both participants provide their own financing.

The Cooperative's portion of SSES's gross assets, which includes electric utility plant in service, construction and nuclear fuel in progress, totaled $781 million and $778 million as of December 31, 2004 and 2003, respectively. The Cooperative's share of anticipated costs for ongoing construction and nuclear fuel for SSES is estimated to be approximately $73.8 million over the next five years. The Cooperative receives a portion of the total SSES output equal to its percentage ownership. SSES accounted for approximately 62% and 66% of the total kilowatt hours sold by the Cooperative during the years ended December 31, 2004 and 2003, respectively. The balance sheets and statements of income reflect the Cooperative's respective share of assets, liabilities and operations associated with SSES.

&L EG]FIIL" JY EL [IBCi , -.'NEC PE tl e COO PE RjkTJNE, [Nrc."

NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2004 AND 2003 Note 4: Investments in Associated Organizations 20041 2003 (In thousands)

National Rural Utilities Cooperative Finance Corporation (CFC) Subordinated Term Certificates, bearing interest from 0% to 5%, maturingjanuary 1, 2014 through October 1, 2080 $ 427 $ 471 Other 312 370

$ 739 $ 841 The Cooperative is required to maintain these investments pursuant to certain loan and guarantee agreements.

Such investments are carried at cost.

Note 5: Notes Receivable from Members Notes receivable from members arise from the lease of load management equipment to the member cooperatives. Such notes bear interest at a variable rate (4.35% and 2.60% as of December 31, 2004 and 2003, respectively) and mature on March 31, 2009. Notes receivable from members were $90,000 and $105,000 as of December 31, 2004 and 2003, respectively.

NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2004 AND 2003 Note 6: Other Investments Other investments consist of the following as of December 31, 2004 and 2003:

December 31, 2004 Gross Gross

-Unrealized Unrealized Fair Cost Gains Losses Value (In thousands)

Decommissioning Trust Fund A:

Cash $ 246 $ _ $_ $ 246 U.S. Government securities 9,229 19 (114) 9,134 Corporate bonds 5,974 149 (42) 6,081 Other obligations 740 2 (4) 738 Corporate stocks 3,145 1,002 (275) 3,872 19,334 1,172 (435) 20,071 NRC mandated Decommissioning Trust Fund B:

Cash 380 380 U.S. Government securities 10,421 19 (174) 10,266 Corporate bonds 6,706 109 (40) 6,775 Other obligations 791 9 (9) 791 Common stocks 5,454 2,441 (187) 7,708 23,752 2,578 (410) 25,920 Debt Service Reserve Fund -

U.S. Government securities 1,837 1,837

$ 44,923 $ 3,750 $ (845) $ 47,828

ALLEGHENY B I.."L,]BTRIIC 1:dS FFI-,-

, -- a ICOOPERATIVE NOTES TO FINANCIAL STATEME NTS DECEMBER 31, 2004 AND 200k 3 December 31, 2003 Gross Gross Unrealized Unrealized Fair Cost Gains Losses Value (In thousands)

Decommissioning Trust Fund A:

Cash $ 94 $ 94 U.S. Government securities 10,455 78 (78) 10,455 Corporate bonds 4,670 221 (25) 4,866 Other obligations 288 288 Corporate stocks 3,085 645 (262) 3,468 18,592 944 (365) 19,171 NRC mandated Decommissioning Trust Fund B:

Cash 208 208 U.S. Government securities 10,133 38 (87) 10,084 Corporate bonds 4,428 194 (16) 4,606 Other obligations 1,544 37 (26) 1,555 Common stocks 4,919 1,843 (157) 6,605 21,232 2,112 (286) 23,058 Debt Service Reserve Fund -

U.S. Government securities 1,836 1,836

$ 41,660 $ 3,056 $ (651) $ 44,065

NOTES T O F I N ANCIAL STATEMENTS DECEM B E R 31, 2004 AND 2003 Certain investments in debt and equity securities are reported in the financial statements at an amount less than their historical cost.

Total fair value of these investments at December 31, 2004 and 2003, was $22.9 million and $15.9 million, respectively. These declines primarily resulted from increases in market interest rates prior to the balance sheet date and the failure of certain investments to meet projected earnings targets, which management believes is temporary. The gross unrealized losses at December 31, 2004 for a period of less than 12 months was $250,000 and for a period greater than 12 months was $595,000. The gross unrealized losses at December 31, 2003 for a period of less than 12 months was $152,000 and for a period greater than 12 months was $499,000.

Note 7: Deferred Charges Deferred charges consist of the following regulatory assets as of December 31, 2004 and 2003.

2004 2003 (In thousands)

Capital retirement asset $ 98,953 $ 135,422 Accrued decontamination and decommissioning of nuclear fuel 867 1,181 Safe harbor lease closing costs 96 109

$ 99,916 $ 136,712 Based on membership agreements signed by the 14 member distribution cooperatives on March 29, 1999, with an effective date of January 1, 1999, a portion of the SSES impairment writedown, which took place in 1998, has been recognized as a regulatory asset, referred to as the capital retirement asset. Under this agreement, the Cooperative will recover from members certain financing costs related primarily to the Cooperative's investment in SSES in the amount of $311 million over a nine-year period.

Note 8: Asset Retirement Obligation The Cooperative adopted Financial Accounting Standard 143 (FAS 143), "Accounting for Asset Retirement Obligations," effective January 1, 2003. FAS 143 addresses the accounting for obligations associated with the retirement of tangible long-lived assets. In connection with the adoption of FAS 143, the Cooperative recorded a cumulative effect of adoption that decreased net income by $51.1 million.

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-KT-",", I L V I - -- -1 0 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2004 AND 2003 Amounts collected from the Cooperative's members for decommissioning, less applicable taxes, are deposited in external trust funds for investment and can only be used for future decommissioning costs. The fair value of the nuclear decommissioning trust was $46.0 million and $42.2 million for the years ended December 31, 2004 and 2003, respectively.

The changes in the carrying amounts of asset retirement obligations were as follows (in thousands):

2004 2003 (In thousands)

Beginning balance $ 108,178 $ 104,017 Accretion expense 4,327 4,161 Ending balance $ 112,505 $ 108,178 The amount of actual obligation could differ materially from the estimates reflected in these financial statements.

Note 9: Long-Term Debt 2004 2003 (In thousands)

Debt settlement note payable to RUS at an interest rate varying from 0.0% to 7.18%, due in varying amounts through 2007 $ 211,663 $ 236,354 6.00% replacement notes payable to RUS due in varying amounts through 2007 1,439 1,864 Pollution Control Revenue Bonds, payable semiannually, including interest through 2014. Variable rates ranged from 0.9% to 2.18% in 2004 and 1.15% to 1.0% in 2003 18,000 19,100 5.00% mortgage notes payable to RUS due in varying amounts through 2019 4,635 4,979 235,737 262,297 Less current installments 38,833 30,214

$ 196,904 $ 232,083

NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2004 AND 2003 Long-term debt consisted principally of advances under mortgage notes payable for electric utility plant to RUS and to the United States of America acting through the Federal Financing Bank (FFB) and guaranteed by RUS. Substantially all of the assets of the Cooperative are pledged as collateral.

The Cooperative made application for a FFB loan, guaranteed by RUS, in May 2003 in the amount of approximately $50 million to finance system improvements and new construction of existing generating facilities.

Pursuant to the provisions set forth in 7 CFR Part 1717, Settlement ofDebt Owed by Electric Borrowers, the Cooperative entered into a restructuring agreement with RUS on March 29, 1999, with an effective date of January 1, 1999. Under the restructuring, the original advances under the mortgage notes to FFB were replaced with a new RUS note in the amount of $406 million. The new note has a final maturity date on January 1, 2008, with an option for early termination on January 1, 2006 and January 1, 2007. Interest on the new note is 7.18%. The Cooperative, however, can receive an interest credit up to the amount of total interest expense based on the number of participating members. All of the Cooperative's members are currently participating.

Long-term Pollution Control Revenue Bonds (Bonds) were issued by an industrial development authority on the Cooperative's behalf.

The Bonds are subject to purchase on demand of the holder and remarketing on a 'best efforts" basis until the Bonds are converted to a fixed interest rate at the Cooperative's option. If a fixed interest rate is established for the Bonds, the Bonds will cease to be subject to purchase by the remarketing agent or the trustee. The indenture agreement contains various redemption provisions with redemption prices ranging from 100% to 103%. Included in other investments, at December 31, 2004 and 2003, respectively, are $1,837,000 and

$1,836,000 of investments which relate to a debt service reserve fund required under the Bond Indenture.

In the event that the Bonds are called and cannot be remarketed, the Bonds are collateralized by irrevocable letters of credit from Rabobank Nederland (Rabobank). The trustee may draw on the letters of credit to make required payments to the bondholders. If Rabobank draws on such letters of credit and the Cooperative does not reimburse Rabobank for such draws under the terms of the agreements, the letters of credit are converted into a one-year term loan, with payments of principal and interest due quarterly.

The letters of credit and respective reimbursement agreements were amended as of July 21, 2003 and the stated termination date of each of the agreements is on October 31, 2006 or such later date as may be determined by Rabobank.

Future maturities of all long-term debt are as follows (in thousands):

2005 $ 38,833 2006 37,023 2007 36,696 2008 106,571 2009 1,832 Thereafter 14,782

ALL EGI-JENY EL.,]B+CTRIC-COOPERATIVE9 INC)

NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2004 AND 2003 The Cooperative is required by mortgage covenants to maintain certain levels of interest coverage and annual debt service coverage. The Cooperative represents that it was in compliance with the applicable mortgage covenants as of I)ecember 31, 2004 and 2003.

Certain of the Cooperative's long-term debt is at variable interest rates and is therefore subject to various market and interest rate fluctuations.

During 2004 and 2003, the Cooperative incurred interest costs of $966,000 and $924,000, respectively.

Note 10: Income Taxes There was no provision for federal income taxes at December 31, 2004 and 2003. The Cooperative is not subject to state income taxes.

At December 31, 2004, the Cooperative had available nonmember net operating loss carryforwards of approximately $77 million for tax reporting purposes expiring in 2004 through 2021, and alternative minimum tax credit carryforwards of approximately $300,000 which carry forward indefinitely.

Temporary differences that give rise to deferred tax balances are principally attributable to fixed asset basis, safe harbor lease treatment, gain on installment sale, and financial statement accruals. Deferred tax assets also include the effect of net operating loss carryforwards.

The temporary differences and the carryforward items produce a net deferred tax asset at year end. Realization of the net deferred tax asset is contingent upon the Cooperative's future earnings. A valuation allowance had been established against the asset since it has been determined that it is more likely than not that the net deferred tax asset will not be realized.

Note 11: Pennsylvania Public Utility Realty Taxes In December of 1998, the Pennsylvania Department of Revenue issued, pursuant to the Pennsylvania Public Utility Realty Tax Act (PURTA), additional assessments to PURTA taxpayers in order to cover the shortfall between PURTA tax revenues and the distributions.

The Cooperative's additional assessment was $1,868,000, which was recorded as of October 1998. The Cooperative satisfied the 1997 reassessment by applying 1998 prepaid taxes against the assessment.

38 r sI

NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2004 AND 2003 In 1999, approximately 20 utilities and the Cooperative filed suits against the Commonwealth of Pennsylvania challenging provisions of PURTA. The state later amended the PURTA statute and the way in which the tax is calculated retroactive to 1998. The Cooperative subsequently received and paid a 1998 PURTA tax bill of approximately $380,000.

In 2000, the Commonwealth removed electric generation assets from the PURTA tax base and effectively returned those assets to local real estate tax jurisdiction with liability calculations based on assessed values. During 2001, PPL settled the 2000 liability for county, municipality, and school district real estate taxes on the full value of the jointly owned SSES property. Also during 2001, the Cooperative's portion of these real estate taxes was billed by and paid to PPL.

Although the final resolution of 1998 and 1999 PURTA issues remains unknown, the Cooperative believes that it has recorded appropriate liabilities for any remaining PURTA taxes. At December 31, 2004, the Cooperative had letters of credits totaling $355,000 to secure the unpaid tax liability billed by the Commonwealth of Pennsylvania.

Note 12: Related Party Transactions The Cooperative has arrangements with two affiliated organizations, the Pennsylvania Rural Electric Association (PREA) and Continental Cooperative Services (CCS). Both organizations have provided the Cooperative with certain management, general, and administrative services on a cost reimbursement basis. The costs for the services provided by PREA were $510,541 and $252,928 for the years ended December 31, 2004 and 2003, respectively. The costs for services provided by CCS were $5,408,307 and $5,628,271 for the same two comparative periods, respectively.

CCS was incorporated in March 2000, the result of a strategic alliance between the Cooperative, based in Harrisburg, Pennsylvania, and Soyland Power Cooperative, Inc. (Soyland), formerly based in Decatur, Illinois. CCS is organized as a Non-Profit Electric Cooperative Corporation in the Commonwealth of Pennsylvania.

CCS is governed by a board of directors, composed of one representative from each affiliated distribution cooperative in Pennsylvania, New Jersey, and Illinois. Included in the Cooperative's investment in associated organizations is $100,000 for its membership in CCS.

ALL [1EG-fI4Y EL ]BCTTJP(Z ACOOPEIRJXVE [l N C NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2004 AND 2003 Note 13: Commitments and Contingencies Power Supply and Transmission Agreements The Cooperative has entered into power supply and transmission agreements with approximately 45 service providers. A significant amount of these agreements are umbrella type agreements and do not bind the Cooperative to enter into any type of transaction. As of December 31, 2004, there were no significant transactions under these agreements.

The Cooperative has a number of power supply agreements under which it currently purchases capacity and power. These agreements contain no minimum purchase or take-or-pay provisions. Power supply agreements are as follows:

New York Power Authority This contract meets a portion of the Cooperative's base load requirements and its delivered cost to the Cooperative's members is below market. The current contract terminates in August 2007 for the Niagara Project. A new contract for the St. Lawrence Project expires in 2017.

Williams Energy Marketing & Trading, Inc.

Effective on April 1, 2001, the Cooperative entered into an arrangement with Williams Energy Marketing & Trading, Inc. (Williams).

The arrangement provides that Williams receives the output of all power from the Cooperatives' owned and controlled resources and in turn supplies all of the Cooperatives' load requirements in certain geographic areas. The agreement with Williams is scheduled to terminate on December 31, 2008.

The Williams agreement contains certain hourly and monthly energy caps. Energy provided above these thresholds is purchased at market prices. The Williams agreement also contains thresholds related to output from the Cooperative's resources. If the Cooperative fails to provide energy sufficient to meet the thresholds, the balance is purchased from Williams at market prices. Transmission service for this load is provided under the appropriate PJM Open Access Transmission Tariff (OATT) or the GPU WASP agreement as explained below.

The Williams Agreement requires the Cooperative to provide credit support in the amount of $9 million. The National Rural Utilities Cooperative Finance Corporation (CFC) issued an irrevocable standby letter of credit on behalf of the Cooperative in the amount of $9 million in favor of Williams. The letter of credit is valid until June 1, 2006. In a related agreement to facilitate the transmission of power received from Williams, the Cooperative executed a Load Serving Entity Agreement with PJM LLC (PJM). The terms of the agreement required the Cooperative to provide $2 million of credit support for activities with PJM. To provide for the credit support, the Cooperative has an irrevocable standby letter of credit from CFC for $2 million in favor of PJM. This standby letter of credit is also valid until June 1, 2006.

NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2004 AND 2003 SSES Replacement Power Insurance Policy The Cooperative mitigated a portion of the economic risk of an outage by purchasing a Replacement Power Insurance Policy for XL Specialty Insurance Company. Under the terms of the policy, if SSES had a forced outage event, the Cooperative would have been reimbursed the cost of replacement power for the insured quantity of 230 MW. Replacement power cost is the total of the loss, in dollars, as calculated by subtracting the insured price of $50/MWh from the market price index (PJM Western Hub LMP) and multiplying that difference by the insured quantity. The policy stipulates that the outage limit for each such forced outage is 90 consecutive days, the effective policy period is calendar year 2004, and the aggregate coverage limit is $25 million. For this coverage, the Cooperative paid XL a total premium of

$861,000. Effective on January 1, 2005, the Cooperative entered into a similar insurance arrangement. Under the new policy, the Cooperative will pay a total premium of $926,400 for the policy period ending on December 31, 2005.

Pennsylvania Electric Company The Cooperative terminated its supplemental generation portion of its Wheeling and Supplemental Power (WASP) agreement with Pennsylvania Electric Company (Penelec) on March 31, 2001. However, the Cooperative continues to purchase transmission service in the Penelec, Metropolitan Edison Company (Met-Ed), and Jersey Central Power & Light JCP & L) zones from Penelec under the WASP agreement and the PJM OATT. Beginning April 1, 2001, the Cooperative became the sole Load Serving Entity (LSE) for the Cooperatives' load in the Penelec, Met-Ed, and JCP & L zones. Consequently, the Cooperative executed a LSE agreement with PJM, which outlines the responsibilities of each party with respect to the revised transmission and power supply arrangement. As part of its new LSE status, it was also necessary to take Network Integrated Transmission Service (NITS) under the PJM OATT. Penelec reimburses the Cooperative for most of the PJM NITS charges to prevent double billing for NITS.

Insurance PPL, as the 90% owner and sole operator of SSES, and the Cooperative, as owner of a 10% undivided interest in SSES, are members of certain insurance programs which provide coverage for property damage to SSES nuclear generation plant. Under these programs, the plant, as a whole, has property damage coverage for up to $2.75 billion. Additionally, there is coverage for the cost of replacement power during prolonged outages of nuclear units caused by certain specified conditions. Under the property and replacement power insurance programs, PPL and the Cooperative could be assessed retrospective premiums in the event the insurers' losses exceed their reserves. At December 31, 2004, the maximum amount PPL and the Cooperative could jointly be assessed under these programs ranged from $20 million to $40 million annually.

PPL and the Cooperative's public liability for claims resulting from a nuclear incident is currently limited to $11.0 billion under provisions of the Price-Anderson Amendment Acts of 1988.

ALLJEGT4ENY ELw~ LCJR.ILC xCOOE RAT JVE, LNT:

NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2004 AND 2003 In the event of a nuclear incident at any of the reactors covered by the Act, PPL and the Cooperative could be assessed up to $100.6 million per reactor per incident, payable at $20 million per year.

Safe Harbor Lease The Cooperative previously sold certain investment and energy tax credits and depreciation deductions pursuant to a safe harbor lease. The proceeds from the sale, including interest earned thereon, have been deferred and are being recognized on the statements of operations over the 30-year term lease. The deferred gain was $2.4 million and $2.7 million as of December 31, 2004 and 2003, respectively. The net proceeds and related interest were required by RUS to be used to retire outstanding FFB debt.

Under the term of the safe harbor lease, the Cooperative is contingently liable in varying amounts in the event the lessors tax benefits are disallowed and in the event of certain other occurrences. The maximum amount for which the Cooperative was contingently liable as of December 31, 2004 was approximately $7.7 million. Payment of this contingent liability has been guaranteed by CFC.

Purchased Power For years preceding 2004, the Cooperative accrued amounts as a contingency for certain purchased power related costs. In accordance with Financial Accounting Standard 5 (FAS 5), the contingency was reversed during 2004 after the Cooperative received additional information suggesting the imposition of such costs unlikely. Accordingly, the reversal was treated as a credit against purchased capacity and energy costs in the amount of $7.7 million.

Litigation The Cooperative may be subject to claims and lawsuits that arise primarily in the ordinary course of business. At December 31, 2004, no such claims or lawsuits existed.

Note 14: Sale/Leaseback Arrangement The Cooperative previously completed a sale and leaseback of its hydroelectric generation facility at the Raystown Dam (the Facility).

The Facility was sold to a trustee bank representing Ford Motor Credit Company (Ford) for $32.0 million in cash. During 1996, Ford transferred its interest in the Facility to a third party. Under terms of the arrangement, the Cooperative is leasing the Facility for an initial term of 30 years. Payments under the lease are due in semi-annual installments which commenced January 10, 1989. At the end of the 30-year term, the Cooperative will have the option to purchase the Facility for an amount equal to the Facility's fair market value or for a certain amount fixed by the transaction documents.

NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2004 AND 2003 The Cooperative also has the option to renew the lease for a five-year fixed rate renewal and three fair market renewal periods, each of which may not be for a term of less than two years. Payments during the fixed rate renewal period are 30% of the average semi-annual installments during the initial lease term. The Cooperative will retain co-licensee status for the Facility throughout the term of the lease. The gain of

$1.9 million related to the sale is being recognized over the lease term. The unrecognized gain is recorded in other deferred revenue and was

$1.11 million and $1.15 million as of December 31, 2004 and 2003, respectively.

The payments by the Cooperative under this lease were determined in part on the assumption that Ford, or its successor, will be entitled to certain income tax benefits as a result of the sale and leaseback of the Facility. In the event that Ford, or its successor, were to lose all or any portion of such tax benefits, the Cooperative would be required to indemnify Ford, or its successor, for the amount of the additional federal income tax payable to Ford, or its successor, as a result of any such loss.

The leaseback of the Facility is accounted for as an operating lease by the Cooperative. As of December 31, 2004, future minimum lease payments under this lease, which can vary based on the interest paid on the debt used to finance the transaction, are estimated as follows (in thousands):

2005 $ 1,932 2006 1,932 2007 1,932 2008 1,932 Thereafter 21,677 Total minimum lease payments $ 29,405 The future minimum lease payments shown above are for the initial lease term and the five-year renewal period. These payments are based on an assumed interest rate of 8.8% and may fluctuate based on differences between the future interest rate and the assumed interest rate.

Rental expense for this lease totaled $1.4 million and $2.2 million in years ended December 31, 2004 and 2003, respectively.

Note 15: Government Regulations The Energy Policy Act of 1992 established, among other things, a fund to pay for the decontamination and decommissioning of three nuclear enrichment facilities operated by DOE. A portion of the fund is to be collected from electric utilities that have purchased enrichment services from DOE and will be in the form of annual special assessments for a period not to exceed more than 15 years.

The special assessments are based on a formula that takes into account the amount of enrichment services purchased by the utilities in past periods.

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ALLEOFIBINY ELL'CTRJC II IYCL NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2004 AND 2003 The Cooperative has previously recorded its share of the liability in connection with PPL's recognition of the liability in the accounts of SSES. The Cooperative's share of the liability is $4.4 million. The Cooperative recorded its share of the liability as a deferred charge which is being amortized to expense and paid over 15 years, consistent with the ratemaking treatment. The remaining liability to be amortized was

$0.9 million and $1.2 million as of December 31, 2004 and 2003, respectively.

Note 16: Fair Value of Financial Instruments The estimated fair value amounts have been determined by the Cooperative using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value.

Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Cooperative could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments:

Assets Cash and Resti cted Investments - The carrying amounts of these items are a reasonable estimate of their fair value due to the short-term nature of the instruments.

• Other Investments and Investments in Associated Organizations- The fair value of other investments are estimated based on quoted market prices. Fair values of investments in associated organizations approximate their carrying amount.

• Notes Receivablefrom Members - The carrying amount of the Cooperative's notes receivable from members, which primarily relate to sales-type leases, approximates fair value because the notes bear a variable rate of interest which is reset on a frequent basis.

Liabilities

• Long-term debt - The fair value of the Cooperative's fixed rate long-term debt is estimated using discounted cash flows based on current rates offered to the Cooperative for similar debt of the same remaining maturities.

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NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2004 AND 2003 The estimated fair values of the Cooperative's financial instruments at December 31, 2004 and 2003, are as follows (in thousands):

2004 2003 Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value Cash and cash equivalents $ 35,781 $ 35,781 $ 17,889 $ 17,887 Restricted investments 15,837 15,837 15,777 15,777 Other investments 47,828 47,828 44,065 44,065 Investment in associated organizations 739 739 841 841 Notes receivable from members 68 68 88 88 Long-term debt 235,737 201,334 262,297 212,457

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SOYLAIND PO\VER COO PEkATJVE, JNTC e SOYLAND POWER COOPERATIVE, INC.

ACCOUNTANTS' REPORT AND FINANCIAL STATEMENTS DECEMBER 31, 2004 AND 2003 CONTENTS INDEPENDENT ACCOUNTANTS' REPORT .......................................... 48 FINANCIAL STATEMENTS BALANCE SHEETS .......................................... 49 G 50 STATEMENTS OF INCOME .......................................... 51 STATEMENTS OF MEMBERS' EQUITIES .......................................... 52 STATEMENTS OF CASH FLOWS .......................................... 53 NOTES TO FINANCIAL STATEMENTS .......................................... 54-64

Independent Accountants' Report Board of Directors Soyland Power Cooperative, Inc.

Harrisburg, Pennsylvania We have audited the accompanying balance sheets of Soyland Power Cooperative, Inc. (Cooperative) as of December 31, 2004 and 2003, and the related statements of income, members' equities, and cash flows for the years then ended. These financial statements are the responsibility of the Cooperative's management. Our responsibility is to express an opinion on these 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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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 financial statements referred to above present fairly, in all material respects, the financial position of Soyland Power Cooperative, Inc. 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.

As discussed in Note 6 to the financial statements, during 2003, the Cooperative changed its method of accounting for its asset retirement obligation to comply with Financial Accounting Standard 143 (FAS 143).

February 18, 2005 225 Nortlh Water Stro4 Suie400 P.0. Box 1580 Deatur, LR:;5-1580 217429-2411 Fax 217429-6109 bkd.com Beyond Your Numbers A~.d*.~

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SOY'LAND POWER COOPE RATIVE INCa BALANCE SHEE T S DECEMBER 31, 2004 AND 2003 Assets 2004 2003 Electric Utility Plant, at cost In service (See Note 2) $ 83,867,826 $ 79,746,905 Less accumulated depreciation (43,603,437) (40,396,666) 40,264,389 39,350,239 Construction work in progress 2,118,413 4,069,097 Plant site held for future use 3,921,195 3,921,195 Net electric utility plant 46,303,997 47,340,531 Investments (See Notes 3 and 9) 12,600,849 12,312,894 CurrentAssets Cash and temporary investments 8,659,101 2,906,326 Accounts receivable, members 7,804,069 7,902,362 Other receivables 690,330 710,270 Inventories 2,475,348 2,401,370 Prepayments and other assets 358,153 322,813 Advance energy payments 249,050 Total current assets 19,987,001 14,492,191 Deferred Charges (See Note 4)

Deferred loss on asset write-down 4,288,368 16,018,977 Deferred opt-out fee 20,191,245 23,047,005 Deferred recoverable energy 8,269,989 9,196,620 32,749,602 48,262,602

$ 111,641,449 $ 122,408,218 See Notes to FinancialStatements

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BALANCE SHEETS DECEMBEF t 31, 20 04 AND 2003 Members' Equities and Liabilities 2004 2003 Members' Equities Membership fees $ 1,675 $ 1,675 Patronage capital 1,815,155 1,638,736 Retained earnings 13,078,811 9,879,926 Total members' equities 14,895,641 11,520,337 Long-Term Debt (See Notes 5 and 9) 58,392,950 71,674,548 Asset Retirement Obligation (See Note 6) 6,134,354 5,679,957 Current Liabilities Current installments of long-term debt 13,226,066 12,522,838 Line of credit 1,000,000 Accounts payable 6,329,117 5,093,220 Member prepayments 2,459,087 1,780,315 Accrued interest 282,618 353,342 Accrued expenses 476,496 533,068 Total current liabilities 22,773,384 21,282,783 Deferred Revenue (See Note 1) 9,445,120 12,250,593

$ 111,641,449 $ 122,408,218 I =- i .;, , * - -. EI

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STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2004 AND 2003 2004 2003 Operating Revenues Electric energy sales $ 81,043,224 $ 80,098,503 Distribution revenue 1,007,522 922,002 Rent of electric property 67,112 65,740 82,117,858 81,086,245 Operating Expenses Operations Purchased capacity and energy costs 47,611,185 46,625,105 Production-other 4,141,788 4,599,587 Transmission 1,102,854 712,441 Distribution 290,998 217,522 53,146,825 52,154,655 Maintenance 1,219,281 891,479 Administrative and general 3,185,468 2,551,100 Depreciation and amortization 18,832,705 17,506,768 Accretion 454,397 420,737 Property and other taxes 479,887 . 480,858 77,318,563 74,005,597 Net Operating Margin 4,799,295 7,080,648 Other Revenue

• Interest and other patronage capital income 843,080 653,906 Litigation settlement (see Note 7) 1,532,613 Net Margin Before Interest Charges 7,174,988 7,734,554 Interest Charges Interest on long-term debt 3,708,100 4,479,230 Other 91,584 339,985 3,799,684 4,819,215 Net Income Before Cumulative Effect of Adoption of FAS 143 3,375,304 2,915,339 Cumulative Effect of Adoption of FAS 143 (see Note 6) (1,066,041)

Net Income $ 3,375,304 $ 1,849,298 See Notes to FinancialStatements

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COO PERATIVEI INC STATEMENTS 0 F MEMBERS' EQUITIES YEARS ENDED DECEMBER 31, 2004 AND 20 03 Total Membership Patronage Retained Members' Fees Capital Earnings Equities Balance, January 1, 2003 $ 1,675 $ 1,638,736 $ 8,030,628 $ 9,671,039 Net income 1,849,298 1,849,298 Balance, December 31, 2003 1,675 1,638,736 9,879,926 11,520,337 Patronage capital allocation 176,419 (176,419)

Net income 3,375,304 3,375,304 Balance, December 31, 2004 $ 1,675 $ 1,815,155 $ 13,078,811 $ 14,895,641 See Notes to FinancialStatements

STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2004 AND 2003 2004 2003 Operating Activities Net income $ 3,375,304 $ 1,849,298 Items not requiring cash Depreciation of electric utility plant 3,319,705 3,149,768 Amortization of deferred charges 15,513,000 14,357,000 Accretion of asset retirement obligation 454,397 420,737 Loss on equity investment 40,871 Cumulative effect of adoption of FAS 143 1,066,041 Change in Accounts and other receivables 578,720 542,665 Inventories (73,978) 60,645 Prepayments and other assets 213,710 (58,481)

Accounts payable and accrued expenses 1,108,601 (4,331,772)

Deferred revenue (2,805,473) (2,952,774)

Asset retirement obligation 3,656,017 Net cash provided by operating activities 21,683,986 17,800,015 Investing Activities Additions to electric utility plant, net (2,743,658) (1,576,371)

Additions to investments (1,086,170) (2,103,881)

Proceeds from investments 798,215 835,967 Net cash used in investing activities (3,031,613) (2,844,285)

Financing Activities Net payments on line ofcredit (1,000,000) (8,846,615)

Principal payments on long-term debt (12,578,370) (13,428,017)

Proceeds from long-term debt 8,529,463 Change in member prepayments 678,772 (456,072)

Net cash used in financing activities (12,899,598) (14,201,241)

Net Increase in Cash and Cash Equivalents 5,752,775 754,489 Cash and Cash Equivalents, Beginning of Year 2,906,326 2,151,837 Cash and Cash Equivalents, End of Year $ 8,659,101 $ 2,906,326 Supplemental Cash Flows Information Cash paid for interest $ 3,870,408 $ 4,780,058 Transfer of construction in progress to other receivables 460,487 See Notes to FinancialStatements

SOYLAND PON.4KR COOPERATIVE,1 N(

NOTES To FINANCIAL STATEMENTS DECEMBER 31, 2004 AND 2003 Note 1: Nature of Operations and Significant Accounting Policies Nature of Operations Soyland Power Cooperative, Inc. (Cooperative) is a not-for-profit organization engaged in the generation and transmission of wholesale electric service to its eleven members located throughout Illinois. The Cooperative extends unsecured credit to its members. The Cooperative has entered into wholesale power agreements with each of its members which require the members to buy and receive from the Cooperative all of their power and energy requirements and require the Cooperative to sell and deliver power and energy in satisfaction of such requirements. The wholesale power agreements with members extend to various dates from years 2015 to 2017.

The Cooperative has a formal buyout policy under which a member who seeks to buy out of the wholesale power agreement is required to reimburse the Cooperative for all liabilities, including any related to Cooperative's power supply and transmission agreements, incurred in connection with such buyout, in accordance with a predetermined formula.

The Cooperative's wholesale power rate charged to members is established by the Board of Directors. Such wholesale power rate charged to members is determined based on annual cash requirements, including debt service requirements. The formula for determining the rate is subject to the approval of the Federal Energy Regulatory Commission (FERC), which approval has been received. The Cooperative is not subject to the regulatory authority of the Illinois Commerce Commission.

Deregulation In 1997, the State of Illinois passed Public Act 90-561, Electric Service Customer Choice and Rate Relief Law of 1997 (Act). The Act was intended to bring competition to the electric industry in the State of Illinois and ultimately lead to market-based pricing of electric generation services. The Cooperative is exempt from the Act and management believes the Act will not significantly affect the Cooperative's operation or ability to recover its costs through future rates charged to members.

Use of Estimates 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 as of the date of the financial report, as well as the reported amounts of revenues and expenses during the years then ended. Actual results could differ from those estimates.

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NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2004 AND 2003 Basis ofAccounting The accounting records of the Cooperative are maintained in accordance with the Uniform System of Accounts prescribed by FERC. In accordance with FERC guidelines, the Cooperative also maintains its accounts in accordance with Statement of Financial Accounting Standards No. 71, Accountingfor the Effects of Certain Types ofRegulation.

Electric Utility Plant Electric utility plant is carried at cost. Depreciation of electric utility plant in service is provided over the estimated useful lives of the respective assets on the straight-line basis at rates as follows:

Production Plant Steam 3.1% - 4.0%

Gas turbine and diesel 6.7%

Transmission Plant 2.8%

Distribution Plant 3.0%

General Plant 2.5% - 20.0%

Maintenance and repairs of property and replacements and renewals of items determined to be less than units of property are charged to expense. Replacement and renewals of items considered to be units of property are charged to the property accounts. At the time properties are disposed of, the original cost, plus cost of removal less salvage of such property, is charged to accumulated depreciation.

Cash and Cash Equivalents Cash and cash equivalents consist of bank deposits in federally insured accounts and temporary investments. Temporary investments consist of an interest bearing sweep account, which investments are stated at market. The Cooperative has one banking arrangement which requires the maintenance of a compensating balance. The Cooperative places its cash and temporary investments with high quality financial institutions. Such cash and temporary investments may be in excess of the FDIC insurance limit.

For purposes of the statement of cash flows, the Cooperative considers all highly liquid debt instruments, if any, purchased with an original maturity of three months or less to be cash equivalents.

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I SOYfLANsD PON~lr H COPERATIVE i e,II(

NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2004 AND 2003 Accounts Receivable Accounts receivable are stated at the amount billed to members. Accounts receivable are due in accordance with approved policies.

An allowance for doubtful accounts has not been recorded because all accounts receivable are considered fully collectible.

Inventories Inventories consist of fuel, materials and supplies and are stated at moving average cost.

Deferred Charges Deferred charges consist of amounts that are expected to be recovered through future rates.

Member Prepayments Member prepayments represent cash advances from members. The Cooperative uses these advances to reduce borrowings. The Cooperative pays interest on member advances at a rate lower than that on outstanding debt. Such interest payments on member advances totaled $89,900 and $71,604 for the years ended December 31, 2004 and 2003, respectively.

Power Supply Payments Payments made under power supply agreements are classified as purchased capacity and energy costs in the statement of income.

Income Taxes The Cooperative is exempt from income taxes under Section 501 of the Internal Revenue Code and a similar provision of state law.

However, the Cooperative is subject to federal income tax on any unrelated business taxable income. No income taxes were due or paid in 2004 and 2003.

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NOTES TO FIN ANCIAL STATEMENTS DECEMBER 31, 2004 AND 2003 I Deferred Revenue Deferred revenue consists of payments received from members that have bought out of the wholesale power agreement and regulatory asset prepayments. Deferred revenue is being amortized over the period during which it would have been earned (through 2007).

2004 2003 Member buyout payments $ 7,886,768 $ 10,515,691 Regulatory asset prepayments 1,558,352 1,734,902 Total $ 9,445,120 $ 12,250,593 Revenue Recognition Revenue from the sale of electricity to members is recorded based on contracted power use.

Note 2: Electric Utility Plant in Service 2004 2003 Steam and other production plant $ 40,964,798 40,075,298 Transmission plant 30,315,564 27,503,218 Distribution plant 8,770,929 8,741,571 General plant 3,816,535 3,426,818 Total $ 83,867,826 $ 79,746,905

SOYSLANTD POWl -lR CooPER kilN B, I-iNT NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2004 AND 2003 Note 3: Investments 2004 2003 National Rural Utilities Cooperative Finance Corporation (CFC)

Membership fees $ 1,00( $ 1,000 Patronage capital 3,846,488 3,982,639 Subscription capital term certificates 2,252,049 2,252,049 Loan capital term certificates 5,698,062 5,799,881 Total 11,797,599 12,035,569 Debt securities 503,362 Other associated organizations 203,158 180,595 Investments in economic development organizations 96,730 96,730 Total $ 12,600,849 $ 12,312,894 The Cooperative considers CFC capital term certificates to be a condition of borrowing and patronage capital to be directly related to borrowing.

Loan capital term certificates mature at various intervals in the years 2006 through 2022 and bear interest at rates ranging from 0% to 4.92%.

Subscription capital term certificates at December 31, 2004, bear interest at 5% and mature at various dates from years 2070 to 2080.

Note 4: Deferred Charges The amount of the deferred loss on asset write-down relates to an interest in the Clinton nuclear generating facility. The regulatory asset will be amortized to operations as the amounts are collected in the rate charged to members, and is anticipated to be fully amortized by December 31, 2005.

The remaining amount of the Opt-Out Fee paid to AmerenlP, formerly Illinois Power, is expected to be recovered in future rates charged to members and has, therefore, been recorded as a regulatory asset at December 31, 2004 and 2003.

The recoverable energy amount is also expected to be recovered in future rates charged to members and has, therefore, been recorded as a regulatory asset at December 31, 2004 and 2003.

Amortization of regulatory assets totaled $15,513,000 and $14,357,000 in 2004 and 2003, respectively.

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N 0 T ES T 0 FINANCIAL STATEMENTS DECEM B E R 31, 2004 .AND 2003 Note 5: Long-Term Debt 2004 2003 CFC - fixed rates (ranging between 4.90% and 6.95%)

promissory notes payable, due in quarterly installments through 2022 $ 25,354,882 $ 26,157,711 CFC - variable rate (3.05% at December 31, 2004) mortgage note payable, due in various quarterly installments through 2006 6,594,976 12,781,183 CFC - fixed rate (5.95%) capital addition loan note payable, due in quarterly installments through 2014 17,900,000 19,300,000 CFC - fixed rate (5.25%) promissory notes payable, due in quarterly installments through 2007<" 6,944,340 9,558,058 CFC - variable rate (3.05% at December 31, 2004) promissory note payable, due in quarterly installments through 2011 ("' 6,894,455 7,870,971 CFC - variable rate (3.10% at December 31, 2004) capital addition loan note, payable, due in quarterly installments through 2015 6,927,909 7,463,000 CFC - fixed rate (6.15%) promissory note payable, due in quarterly installments through 2015 1,002,454 1,066,463 Total long-term debt 71,619,016 84,197,386 Less current installments 13,226,066 12,522,838 Long-term debt, excluding current installments $ 58,392,950 $ 71,674,548

"' Certain Promissory Notes (Notes) to CFC are partially guaranteed by the members of the Cooperative. All Notes are secured by a mortgage on the assets of the Cooperative.

Annual maturities of long-term debt at December 31, 2004 are as follows: 2005, $13,226,066; 2006, $6,937,750; 2007, $5,864,165; 2008, $4,624,037; 2009, $4,965,943; and thereafter, $36,001,055.

The Cooperative has an $18,000,000 operating line of credit with CFC that expires December 31, 2005.

The line of credit had an outstanding balance of $1,000,000 as of December 31, 2003, and no outstanding balance as of December 31, 2004. The interest rate on the line of credit fluctuates monthly based on CFC's cost of funds (3.10% at December 31, 2004).

SOYLAND POW1 1R COOPERATVE NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2004 AND 2003

.1 During 2003, the Cooperative borrowed $7,463,000 that was used to fund 2002 and estimated 2003 capital additions. During 2004 and in agreement with CFC, the Cooperative reduced the amount available for advance by $1,923,629, the amount borrowed in excess of actual 2003 capital additions. No additional amounts were borrowed for 2004 capital additions. As of December 31, 2004, the Cooperative has approximately $8,546,000 available from long-term loans approved by CFC for capital additions.

All assets of the Cooperative are pledged to secure the CFC debt.

Note 6: Asset Retirement Obligation The Cooperative adopted Financial Accounting Standard 143 (FAS 143), 'Accounting for Asset Retirement Obligations," effective January 1, 2003. FAS 143 addresses the accounting for obligations associated with the retirement of tangible long-lived assets. In connection with the adoption of FAS 143, the Cooperative recorded a cumulative effect of adoption that decreased net income by $1,066,041.

The changes in the carrying amounts of asset retirement obligations were as follows:

2004 2003

$ 5,259,220 Beginning balance $ 5,679,957 $ 5,259,220 Accretion expense 454,397 420,737 Ending balance $ 6,134,354 $ 5,679,957 The amount of actual obligation could differ materially from the estimates reflected in these financial statements.

Note 7: Litigation Settlement In October 2004, the Cooperative received $2,511,026 from a former member cooperative as final settlement of a Federal Energy Regulatory Commission (FERC) order. The payment reflected a total and complete settlement of all claims between the Cooperative and that former member. Of the $2,511,026 received, the Cooperative recorded income of $1,532,613 and refunded $978,413 to other former member cooperatives that elected to participate in the litigation. The amount paid to other former member cooperatives represents their respective share of legal costs and settlement proceeds.

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NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2004 AND 2003 Note 8: Related Parties The Cooperative has an arrangement with an affiliated organization, Continental Cooperative Services (CCS). The organization provides the Cooperative with certain management, general, and administrative services on a cost reimbursement basis. The costs for services provided by CCS were $4,942,363 and $4,204,011 for the years ended December 31, 2004 and 2003, respectively.

The Cooperative had accounts payable to CCS of $307,844 as of December 31, 2004, and accounts receivable from CCS of $328,060 as of December 31, 2003.

CCS was incorporated in March 2000, the result of a strategic alliance between Allegheny Electric Cooperative, Inc. (Allegheny), based in Harrisburg, Pennsylvania, and the Cooperative which is now based in Harrisburg, Pennsylvania. CCS is organized as a Non-Profit Electric Cooperative Corporation in the Commonwealth of Pennsylvania.

CCS is governed by a board of directors, composed of one representative from each affiliated distribution cooperative in Pennsylvania, NewJersey, and Illinois. Included in the Cooperative's investments is $100,000 for its membership in CCS.

Note 9: Disclosures About Fair Value of Financial Instruments The estimated fair value amounts have been determined by the Cooperative using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required in interpreting market data to develop the estimates of fair value.

Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Cooperative could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

S OYLtANIdD POW~N 17KR COO PE RATJIVE~eINC.

NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2004 AND 2003 The following methods and assumptions were used to estimate the fair value of each class of financial instruments:

I Assets

• Investments - The investment balances comprise the following:

2004 2003 CFC capital term certificates (1)

Subscription certificates $ 2,252,049 $ 2,252,049 Loan certificates 5,698,062 5,799,881 7,950,111 8,051,930 Patronage capital certificates Other patronage (I) 3,846,488 3,982,639 Memberships and miscellaneous patronage (2) 204,158 181,595 Debt securities (4) 503,362 Other associated organizations (3) 96,730 96,730 Total $ 12,600,849 $ 12,312,894 Fair value for investments is estimated as follows:

1) The Cooperative considers CFC capital term certificates to be a condition of borrowing and patronage capital to be directly related to borrowing. As such, Cooperative management believes the fair value of these items is not determinable and they are reflected at their carrying amount.

2) Management was not able to estimate the fair value of instruments that represent the Cooperative's investment in memberships and miscellaneous patronage and they remain at their carrying value.

3) Management was not able to estimate the fair value of instruments that represent the Cooperative's investment in economic development instruments and they remain at their carrying amount.

4) Fair value is based on quoted market prices, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

Cash and Temporary Investments -The carrying amounts of these items are a reasonable estimate of their fair value due to the short-term nature of the instruments.

NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2004 AND 2003 Liabilities L

Long-Tern Debt - Due to the current market interest rates and/or short-term maturities of the Cooperative's debt, carrying amount approximates fair value.

2004 2003 Carrying Estimated Carrying -Estimated Amount Fair Value Amount Fair Value Assets Investments $ 12,600,849 (see above) $ 12,312,894 (see above)

Cash and temporary investments 8,659,101 8,659,101 2,906,326 2,906,326 Liabilities Long-term debt (including current maturities) 71,619,016 71,619,016 84,197,386 84,197,386 Note 10: Commitments Power Supply The Cooperative owns generating capacity of 176 MW. Currently, all additional energy requirements are being furnished through a power supply agreement with AmerenEnergy Marketing Company.

Effective January 2003, the Cooperative contracted with AmerenEnergy Marketing Company to purchase energy at varying monthly minimum and maximum quantities of energy through December 2008. The contract commits the Cooperative to purchase an annual minimum of $39,716,270. The members guarantee performance under this contract.

Patronage Capital Allocation In accordance with the Cooperative's bylaws, a patronage capital allocation will be made during 2005. The patronage capital allocation shall be all amounts in excess of operating costs and expenses offset for losses incurred during the current fiscal years. All non-operating revenues in excess of expenses are considered contributions to capital and are not allocated.

Patronage capital retirements are restricted by the terms of the CFC mortgage and the Cooperative's bylaws.

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SOYLATJD POV 'KR CocPE7RŽJrvvTE, NOTES TO FINANCIAL STATEMENTS DECEMBER 31. 2004 AND 2003 Note 11: Contingencies The Cooperative may be subject to claims and lawsuits that arise primarily in the ordinary course of business. At December 31, 2004, no such claims or lawsuits existed.

Note 12: Subsequent Event In February 2005, six of the eleven members of the Cooperative initiated a process for the Cooperative to become a minority owner of the proposed Prairie State Power Project planned for Washington County, Illinois. The Cooperative's investment for the 50 MW share of the two unit 1,500 MW coal plant will be approximately $100 million. The plant is scheduled for commercial operation during 2009.

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