ML081050304

Financial Statement and Auditors Report, for the Years Ended December 31, 2007 and 2006

ML081050304
Person / Time
Site:	La Crosse File:Dairyland Power Cooperative icon.png (DPR-045)
Issue date:	04/04/2008
From:	Mueller R Dairyland Power Cooperative
To:	Document Control Desk, NRC/FSME
References
LAC 14034
Download: ML081050304 (24)

Text

DAIRYLAND POWER COO P.E RATIVE April 4, 2008 In reply, please refer to LAC 14034 DOCKET NO. 50-409 U.S. Nuclear Regulatory Commission Attn: Document Control Desk Washington, D.C. 20555

SUBJECT:

Dairyland Power Cooperative La Crosse Boiling Water Reactor (LACBWR)

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

REFERENCE:

1) 10 CFR 50.7 1.(b)

In accordance with the requirements of Reference 1, we are forwarding three (3) copies of the Financial Statements and Independent Auditors' Reports for Dairyland Power Cooperative as of December 31, 2007 and 2006. We will forward our 2007 Annual Report to you as soon as it is completed.

Sincerely, DAIRYLAND POWER COOPERATIVE Zobert C. Mueller Vice President Finance and Administration RCM:pls F:\\FA\\PLS\\W0RD\\AUDITMAUDIT.DOC Enclosures cc:

James Caldwell, Regional Administrator, Region III Kristina Banovac, Project Manager R. Christians, LACBWR A Touchstone Energy' Cooperative 3200 East Ave. S. 9 PO Box 817 - La Crosse, WI 54602-0817

• 608-788-4000

• 608-787-1420 fax

• www.dairynet.com A~ckc C~DL

~

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Dairyland Power Cooperative and Subsidiaries Consolidated Financial Statements as of and for the Years Ended December 31, 2007 and 2006, and Independent Auditors' Report

D e lo itteo Deloitte & Touche LLP 400 One Financial Plaza 120 South Sixth Street Minneapolis, MN 55402 USA Tel: +1 612 3974000 Fax: +1 612 397 4450 www.deloitte.com INDEPENDENT AUDITORS' REPORT To the Board of Directors of Dairyland Power Cooperative:

We have audited the accompanying consolidated balance sheets of Dairyland Power Cooperative (a Wisconsin cooperative) and subsidiaries (the "Cooperative") as of December 31, 2007 and 2006, and the related consolidated statements of revenues and expenses, member and patronage 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 consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Cooperative's internal control over financial reporting.

Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Cooperative as of December 31, 2007 and 2006, and the results of its operations and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 2 to the consolidated financial statements, the Cooperative adopted Financial Accounting Standards Board (FASB) SFAS No. 158, Employers'Accounting for Defined Benefit Pension and Other Postretirement Plans an amendment to FASB Statements No. 81, 88, 106, and 132(R) as of December 31, 2007.

In accordance with Government Auditing Standards, we have also issued our report dated March 28, 2008, on our consideration of the Cooperative's internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be read in conjunction with this report in considering the results of our audits.

March 28, 2008 Member of Deloitte Touche Tohmatsu

DAIRYLAND POWER COOPERATIVE AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2007 AND 2006 (In thousands) 2007 2006 ASSETS ELECTRIC PLANT:

Plant and equipment

-at original cost

$ 879,327

$ 848,869

• Less accumulated depreciation (406,721)

(391,396) 472,606 457,473 Construction work in progress 419,547 287,450 Total electric plant 892,153 744,923 OTHER ASSETS:

Nuclear decommissioning fuinds 83,059 83,625 Investments under debt agreements

-marketable securities 2,983 2,745 Economic development loans and other investments

.7,136 7,089 Investments in capital term certificates of National Rural Utilities Cooperative Finance Corporation 9,176 9,176 Investment for deferred compensation 1,303 1,195 Deferred charges

.6,927 6,075 Total other assets 110,584 109,905 CURRENT ASSETS:

Cash and cash equivalents 3,519 2,002 Accounts receivable:

Energy sales, net of allowance for doubtful accounts of $60 for 2007 and $60 for 2006 30,443 25,804 Other 3,691 3,249 Inventories:

Fossil fuels 56,283 43,024 Materials and supplies 18,946 15,803 Prepaid expenses 1,233 1,457 Total current assets 114,115 91,339 TOTAL

$1,116,852

$946,167 (Continued)

DAIRYLAND POWER COOPERATIVE AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2007 AND 2006 (In thousands) 2007 2006 CAPITALIZATION AND LIABILITIES CAPITALIZATION:

Member and patronage equities:

Membership fees 14 14 Patronage capital 130,370 118,186 Accumulated other comprehensive income (2,518)

Total member and patron equities 127,866 118,200 Long-term obligations 700,253 586,499 Total capitalization 828,119 704,699 OTHER LIABILITIES:

Estimated decommissioning liabilities 77,167 80,440 Asset retirement obligations 2,833 1,367 Postretirement health insurance obligation 5,997 3,017 Accrued benefits 1,492 1,475 Deferred compensation 1,303 1,195 Other deferred credits 148 6,962 Total other liabilities 88,940 94,456 COMMITMENTS AND CONTINGENCIES (Note 8)

CURRENT LIABILITIES:

Current maturities of long-term obligations 29,015 24,399 Line of credit 113,775 60,500 Advances from member cooperatives 5,598 4,433 Accounts payable 36,477 38,880 Accrued expenses:

Payroll and vacation 7,006 6,464 Interest 2,064 8,181 Property and other taxes 2,410 2,340 Other 3,448 1,815 Total current liabilities 199,793 147,012 TOTAL

$1,116,852

$ 946,167 The accompanying notes are an integral part of the consolidated financial statements.

(Concluded)

DAIRYLAND POWER COOPERATIVE AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF REVENUES AND EXPENSES FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006 (In thousands) 2007 2006 UTILITY OPERATIONS:

Operating revenues:

Sales of electric energy Other

$314,357

$275,449 14,094 8,990 328,451 284,439 Total operating revenues Operating expenses:

Fuel Purchased and interchanged power Other operating expenses Depreciation and amortization Maintenance Property and other taxes Total operating expenses 135,757 36,899 68,670 21,864 26,017 5,682 119,056 22,379 60,922 21,561 22,983 5,054 294,889 251,955 Operating margin before interest and other Interest and other:

Interest expense Allowance for funds used in construction-equity Other -

net 33,562 24,033 (530) 222 32,484 23,228 (602) 400 Total interest and other 23,725 23,026 OPERATING MARGIN NON-OPERATING MARGIN NET UTILITY MARGIN NON-UTILITY OPERATIONS:

Net revenues Operating expenses Non-utility operating income (loss)

Interest income Non-utility income (loss) before income taxes (Provision) benefit for income taxes NON-UTILITY EARNINGS NET MARGIN AND EARNINGS The accompanying notes are an integral part of the consolidated financial statements.

9,837 9,458 2,512 1,924 12,349 11,382 4,488 (2,537) 2,479 (2,548) 1,951 (69) 8 55 1,959 (14) 471 1,951 457

$ 14,300

$ 11,839 DAIRYLAND POWER COOPERATIVE AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF MEMBER AND PATRON EQUITIES FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006 (In thousands)

BALANCE -

December 31, 2005 Net margin and earnings Other comprehensive income -

net of tax Total comprehensive income 2006 Retirement of capital credits BALANCE -

December 31, 2006 Net margin and earnings Other comprehensive income -

net of tax Total comprehensive income 2007 Implementation of SFAS No. 158 -

net of tax Retirement of capital credits BALANCE -

December 31, 2007 Membership Fees

$ 14 14 Accumulated Other Comprehensive Patronage Loss Capital

$108,517 11,839 (2,170) 118,186 14,300 Total Member and Patron Equities

$108,531 11,839 11,839 (2,170) 118,200 14,300 14,300 (2,518)

(2,116)

$127,866 (2,518)

$ 14

$ (2,518)

(2,116

$130,370 The accompanying notes are an integral part of the consolidated financial statements.

DAIRYLAND POWER COOPERATIVE AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006 (in thousands) 2007 2006 CASH FLOWS FROM OPERATING ACTIVITIES:

Net margin and earnings 14,300 S 11,839 Adjustments to reconcile net margin and earnings to net cash (used in) provided by operating activities:

Depreciation and amortization:

Charged to operating expenses 21,900 21,593 Charged through other operating elements such as fuel expense 2,271 2,221 Allowance for funds used in construction -

equity (530)

(602)

Changes in operating elements:

Accounts receivable (5,068) 31 Inventories (16,820)

(19,353)

Prepaid expenses and other assets 495 59 Accounts payable (11,320) 4,780 Accrued expenses (12,477)

(9,355)

Deferred charges and other (1,251) 111 Total adjustments (22,800)

(515)

Net cash (used in) provided by operating activities (8,500) 11,324 CASH FLOWS FROM INVESTING ACTIVITIES:

Electric plant additions (164,903)

(154,788)

.Advances to nuclear decommissioning funds (2,400)

(3,730)

Withdrawals from nuclear decomnmissioning funds 7,029 11,125 Purchase of investments

.(133,577)

(238,915)

Proceeds from sale of investments and economic development loans 133,174 238,368 Net cash used in investing activities (160,677)

(147,940)

CASH FLOWS FROM FINANCING ACTIVITIES:

Borrowings under line of credit 308,276 187,300 Repayments under line of credit (255,001)

(126,800)

Borrowings under long-term obligations 197,145 260,435 Repayments of long-term obligations (78,775)

(181,442)

Retirement of capital credits (2,116)

(2,170)

Borrowings of advances from member cooperatives

-151,242 154,303 Repayments of advances from member cooperatives (150,077)

(156,060)

Net cash provided by financing activities 170,694 135,566 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,517 (1,050)

CASH AND CASH EQUIVALENTS -

Beginning of year 2,002 3,052 CASH AND CASH EQUIVALENTS -

End of year 3,519 2,002 SUPPLEMENTAL CASH FLOW INFORMATION:

Cash paid for interest

$ 47,646

$ 32,233 Electric plant additions funded through accounts payable and accrued expenses

$ 20,444

$ 29,363 The accompanying notes are an integral part of the consolidated financial statements.

DAIRYLAND POWER COOPERATIVE AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006 (All dollar amounts in thousands)

1. NATURE OF BUSINESS AND ORGANIZATION Business

- Dairyland Power Cooperative and subsidiaries (Dairyland or the Cooperative) is an electric generation and transmission cooperative organized under the laws of the states of Wisconsin and Minnesota. The Cooperative, whose principal offices are located in Wisconsin, provides wholesale electric service to Class A members engaged in the retail sale of electricity to member consumers located in Wisconsin, Minnesota, Iowa, and Illinois, and provides electric and other services to Class C, D, E, and F members.

Principles of Consolidation -

The consolidated financial statements include the accounts of Dairyland, GEN-SYS Energy (GEN-SYS), and Dairyland's wholly owned subsidiary, Genoa FuelTech, Inc. All significant intercompany balances and transactions have been eliminated in consolidation.

GEN--SYS Energy -

The Cooperative is a member of GEN-SYS, a power supply and marketing cooperative, the primary purpose of which is to schedule and dispatch generation resources and to provide other power-related support services to its members, which also include Corn Belt Power Cooperative and Distribu-Gen Cooperative. GEN-SYS is owned equally by its members, but in fiscal years 2007 and 2006, substantially all of the GEN-SYS activities that produced margin, including energy purchases and sales, were derived from Dairyland. Dairyland has consolidated the accounts of GEN-SYS in the consolidated balance sheets, the consolidated statements of revenues and expenses in non-utility operations, and the consolidated statements of cash flows for fiscal years 2007 and 2006.

Accounting System and Reporting -

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

Electric Plant -

The cost of renewals and betterments of units of property (as distinguished from minor items of property) includes contract work, direct labor and materials, allocable overhead, and allowance for funds used during construction, and is charged to electric plant accounts. Included in accumulated depreciation are nonlegal or noncontractual costs of removal components. As a result, the cost of units of property retired, sold, or otherwise disposed of, plus removal costs, less salvage, is charged to accumulated depreciation and no profit or loss is recognized in connection with ordinary retirements of property units. A provision for these nonlegal or noncontractual costs of removal components is recognized based on RUS-approved depreciation rates. The Cooperative is unable to obtain the information to separate the cumulative removal costs at December 31, 2007 and 2006.

Maintenance and repair costs and replacement and renewal of minor items of property are charged to operations.

Depreciation -

Depreciation, which is based on the straight-line method at rates that are designed to amortize the original cost of properties over their estimated useful lives, includes a provision for the cost of removing and decommissioning the properties. The provision for depreciation averaged 2.8% and 2.6% of depreciable plant balances in 2007 and 2006, respectively.

Allowance for Funds Used During Construction (AFUDC) -

Allowance for funds used during construction represents the cost of external and internal funds used for construction purposes and is capitalized as a component of electric plant by applying a rate (6.3% in 2007 and 5.7% in 2006) to certain electric plant additions under construction. The amount of such allowance was $5,181 in 2007 and $2,409 in 2006. The borrowed funds component of AIFUDC for 2007 and 2006, was $4,651 and

$1,807, respectively (representing 5.63% and 4.26% in 2007 and 2006, respectively). The equity component of AFUDC for 2007 and 2006 was $530 and $602, respectively, representing 0.64% and 1.42%, in 2007 and 2006, respectively). These amounts were included as a reduction of interest expense in the consolidated statements of revenues and expenses.

Interest During Construction, -

Interest during construction represents the interest expense on debt borrowed during construction for specific projects and is capitalized as a component of the electric plant for which the debt was incurred. These capitalized interest amounts for 2007 and 2006 are $12,144 and

$8,212, respectively.

Deferred Charges -

Deferred charges represent future revenue to the Cooperative associated with costs that will be recovered from customers through the rate making process. As of December 31, 2007, the Cooperative's deferred charges are being reflected in rates charged to customers. If all or a separable portion of the Cooperative's operations no longer become subject to the provisions of Statement of Financial Accounting Standards (SFAS) No. 7 1, A ccounting for the Effects of Certain Types of Regulation, a write-off of deferred charges would be required, unless some form of transition recovery (refund) continues through rates established and collected for the Cooperative's remaining regulated operations. In addition, the Cooperative would be required to determine any impairment to the carrying costs of deregulated plant and inventory assets. Deferred charges at December 31, 2007, primarily represent a premium on debt refinancing, which is be ing amortized over approximately 20 years (the remaining life of related original debt), renewable energy power purchase agreements, which are being amortized over 20 years, and costs associated with preliminary project survey and investigation activities. The preliminary project survey and investigation costs will either be capitalized as property and plant if the projects move forward, or be expensed if the projects are abandoned.

Investments -

Investments in marketable debt and equity securities classified as available-for-sale are reported at fair value, with the interest, dividend income, and realized gains reported in non-operating margin. The unrealized gains and losses increase or decrease the nuclear decommissioning liability (see Note 3). The Cooperative continually monitors the difference between cost and estimated fair value of its investments. If any of the Cooperative's investments experience a decline in value that the Cooperative believes is other than temporary, the Cooperative will realize the loss as a reduction in investment income on decommissioning funds. In 2007 and 2006, the Cooperative realized $1,645 and

$888, respectively, of losses on these investments as a result of other than temporary impairment (OTFI7D.

Regulatory Assets and Liabilities -

The Cooperative's accounting policies and the consolidated financial statements conform to accounting principles generally accepted in the United States of America applicable to electric cooperatives in accordance with the provisions of SIAS No. 7 1.

Cash and Cash Equivalents -

Cash equivalents include all highly liquid investments with original maturities of three months or less, unless the cash equivalent relates to trust funds held for long-term purposes (see Note 3). Cash equivalents consist primarily of commercial paper, stated at cost, which approximates market.

Coal Stock and Materials and Supplies -

Coal inventories as well as materials and supplies inventories are stated at the lower of average cost or market prices.

Recoverability of Long-Lived Assets -

The Cooperative accounts for the impairment or disposal of long-lived assets in accordance with Financial Accounting Standards Board (FASB) Statement No. 144, Accounting for the Impairment or Disposal ofLong-Lived Assets, which requires long-lived assets, such as property and equipment, to be evaluated for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. An impairment loss is recognized when estimated undiscounted cash flows expected to result from the use of the asset, plus net proceeds expected from disposition of the asset (if any) are less than the carrying value of the asset. When an impairment loss is recognized, the carrying amount of the asset is reduced to its estimated fair value based on quoted market prices or other valuation techniques. To date, management has determined that no impairment of these assets exists.

Emission Allowances -

The U.S. Environmental Protection Agency (EPA) has requirements limiting the amount of sulfur dioxide, which can be emitted from the Cooperative power plants. Under these requirements, the Cooperative is allotted one emission allowance per ton of sulfur dioxide emissions.

Currently, emission allowances are recorded under the inventory method at a cost of $0. At December 31, 2007 and 2006, the Cooperative sold $170 and $308, respectively, of emission allowances through the EPA annual mandatory auction. These amounts were recorded as revenues in the non-operating margin.

Sales of Electric Energy -

Revenues from sales of electric energy are recognized when energy is delivered. The Class A wholesale rates approved by the Cooperative's Board of Directors have a power cost adjustment that allows for increases or decreases in Class A member power billings based upon actual power costs compared to plan. For 2007 and 2006, the power cost adjustment to the Class A members resulted in a charge of $1,079 and a credit of $2,275, respectively. These amounts are recorded in sales of electric energy in operating revenues.

Other Operating Revenue -

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

Accounting for Energy Transactions -

Contracts that did not meet the accounting definition of a derivative, as defined by SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, are accounted for at historical cost. The Cooperative's energy contracts that qualify as derivatives continue to be accounted for at fair value under SFAS No. 133 and No. 149, unless those contracts meet the requirements of and have been designated as "normal purchase/normal sale" as provided by SFAS No. 133 and No. 149. The Cooperative does not have any energy contracts that are required to be accounted for at fair value as of December 31, 2007 and 2006.

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

No. 03-11, Reporting Realized Gains and Losses on Derivative Instruments That Are Subject to FASB Statement No. 133 and Not "Held for Trading Purposes" as Defined in Issue No. 02-3, as well as E1TF No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent, and have determined that GEN-SYS' energy purchases and sales activities will be presented on a net basis within the non-utility operations section of the consolidated statements of revenue and expenses.

Non-Operating Margin -

The non-operating margin for the years ended December 31, 2007 and 2006, include the following:

2007 2006 Investment income Investment income on nuclear decommissioning funds:

Net earnings Realized gains Realized losses and losses due to OTTI Provision -

recorded as estimated decommissioning liabilities Other 686 670 2,726 2,193 (2,164)

(2,755) 1,826 3,028 2,092 (2,334)

(2,786) 1,254 Non-operating margin

$ 2,512

$ 1,924 Income Taxes -

The Cooperative's utility operations are generally exempt from federal and state income taxes under section 501 (c)(12) of the Internal Revenue Code, and, accordingly, no provision for such taxes is recorded in the consolidated financial statements.

For its non-utility operations, the Cooperative accounts for the income taxes using the liability method, under which deferred income taxes are recognized for temporary differences between the income tax and financial reporting basis of the Cooperative's assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.

The Cooperative's provision from income taxes December 31 2007 and 2006, consisted of the following:

2007 2006 Current:

Federal

$ 10

$(453)

State (2)

(18)

Deferred Total 8

The total income tax provision (benefit) expense differs from the amount computed by applying the effective income tax rate of 34% to non-utility operating (loss) income at December 31, 2007 and 2006, are as follows:

2007 2006 Overall effective federal and state income tax rate 34%

34%

Tax computed at federal statutory rate

$ 666 (5)

Increase (decrease) in tax from:

Patronage allocation (655)

(591)

State income taxes net of federal income tax benefit 1

(79)

Valuation allowance and carryforward/carryback (4) 204 8

$ (471)

The Cooperative deferred taxes as of December 31, 2007 and 2006, were as follows:

2007 2006 Net operating loss carryforward

$ 286

$ 374 Other 42 (61)

Valuation allowance (328)

(313)

Net deferred tax asset The Cooperative does not anticipate generating taxable income prior to the expiration of the NOL carryforward and accordingly has recorded a full valuation allowance for its net deferred tax asset in an amount equal to the excess of the deferred tax asset over the deferred tax liability is necessary. The realization of the deferred tax assets depends on the ability of the Cooperative to generate sufficient taxable income in the future. As of December 31, 2007, the Cooperative has federal and state NOL carryforwards of $451 and $1,546, which begin to expire in 2026 and 2013, respectively.

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 the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Significant estimates in the consolidated financial statements relate to inventory reserve, postretirement benefit obligations, self-funded medical insurance reserves, asset retirement obligation (ARO) liabilities, fixed asset depreciable lives, and litigation and contingencies. Actual results could differ from those estimates.

Concentration of Risk --:During both fiscal years 2007 and 2006, the Cooperative derived 12% of its revenue from a single customer.

Approximately 48% of the labor force for the Cooperative is under a collective bargaining agreement that expires January 31, 2012.

2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements, but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS No. 157 is effective for fiscal year 2008. The Cooperative is currently evaluating the impact SFAS No. 157 will have on the consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115. SFAS 159 gives entities the option to carry most financial assets and liabilities at fair value, with unrealized gains and losses recorded in earnings, the objective of which is to improve financial reporting by allowing entities to mitigate volatility in reported earnings caused by the measurement of related assets and liabilities using different attributes, without having to apply complex hedge accounting provisions. SFAS 159 is effective for fiscal year 2008. The Cooperative is currently evaluating the impact SFAS No. 159 will have on the consolidated financial statements.

In September 2006, the FASB issued SFAS No. 158, Employers'Accounting for Defined Benefit Pension and Other Postretirement Plans -

an amendment of FASB Statements No. 87, 88, 106, and 132(R). This statement requires the recognition of the overfunded or underfunded status of defined benefit postretirement plans as an asset or liability in the statement of financial position, recognition of changes in the funded status in accumulated other comprehensive income, measurement of the fumded status of a plan as of the date of the year-end statement of financial position, and provides for related disclosures. SFAS 158 is effective for fiscal year 2007. The adoption of SFAS 158 in 2007 resulted in a charge of.$2,518 to accumulated other comprehensive loss. This amount represents the underfunded status of the Cooperative's postretirement health insurance obligation.

In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes -

an interpretation of FASB Statement No. 109. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes, and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The effective date for FIN 48 has been deferred, until fiscal year 2008, with the impact of adoption to be reported as a cumulative effect of an accounting change. The Cooperative is currently evaluating the impact FIN 48 will have on the consolidated financial statements. The Cooperative does not expect FIN 48 to have a material impact as the only impact will be through consolidation with GEN-SYS.

3. AVAILABLE-FOR-SALE INVESTMENTS Investments under debt agreements and nuclear decommissioning funds at December 31, 2007 and 2006, are classified as available-for-sale and include the following:

Fair Value 2007 2006 Cash and cash equivalents

$18,048

$17,127 U.S. government securities 20,821 23,453 Corporate bonds 10,260 11,692 Common stocks 35,778 32,399 Foreign obligations 1,135 1,699

$86,042

$86,370 Since the Cooperative intends to adjust rates in the future to reflect changes in the fair value of investments held in its nuclear decommissioning trust, unrealized gains of $7,944 and $7,510 on these investments at December 31, 2007 and 2006, respectively, are included in estimated decommissioning liabilities. Investments under debt agreements represent amounts arising from the sale of assets that are encumbered by mortgages and restricted by the RUS for use on future generation and transmission construction projects.

The contractual maturities of marketable debt securities, which include U.S. government securities, foreign obligations, and corporate bonds, at December 31, 2007, is as follows:

Fair Value Cost Due within I year 116 116 Due after 1 year through 5 years 8,637 8,560 Due after 5 years through 10 years 5,526 5,446 Due after 10 years 17,937 17,650

$32,216

$31,772 Information regarding the sale of available-for-sale marketable securities, including nuclear decommissioning trusts, for the years ended December 31, 2007 and 2006, are as follows:

2007

.2006 Proceeds from sale of securities

$132,292

$237,113 Realized gains 1,674 645 For the purposes of determining realized gains and losses, the cost of securities sold is based upon specific identification.

Securities in the portfolio are reviewed to determine whether they have been other-than-temporarily impaired. The Cooperative has recorded impairment write-downs of their investments of $1,645 in 2007 as the Cooperative cannot represent that they have the intent and ability to hold securities, until they recover in value since that decision is outside of its sole control. In accordance with restrictions enacted by the Nuclear Regulatory Commission, the Cooperative does not control the day-to-day management of nuclear decommissioning trust fund investments. The nuclear decommissioning trust of the Cooperative is managed by independent investment managers with discretion to buy, sell, and invest to achieve the broad investment objectives set forth by the Cooperative.

Investment income on the consolidated statements of revenues and expenses is net of investment fees of approximately $381 and $364 for the years ended December 31, 2007 and 2006, respectively.

4. LINES OF CREDIT To provide interim financing capabilities, the Cooperative has arranged lines of credit with availability aggregating approximately $250,000 principally through CoBank at a rate of 5.59% and 6.78% at December 31, 2007 and 2006, respectively. The line of credit is split between a long-term potion of

$185,000 and short-term borrowing of $65,000. Borrowings outstanding were $113,775 and $60,500 at December 31, 2007 and 2006, respectively. Average borrowings outstanding were $66,700 and $28,600 during the years ended December 31, 2007 and 2006, respectively. Compensating balance requirements and fees relating to the lines of credit were not significant in 2007 or 2006. The long-term line of credit expires December 2012. The short-term line of credit is renewable annually as to terms and conditions, and the principal balance must be paid in full within one business day of expiration, unless unilaterally extended by CoBank. The next renewal date is December 2008.

The Cooperative also allows member cooperatives to prepay their power bills and pays interest on these prepayments based on current short-term borrowing rates. Interest expense on member cooperative advances were $533 and $611 during 2007 and 2006, respectively. These amounts have been included in interest expense in the consolidated statements of revenues and expenses.

5. LONG-TERM OBLIGATIONS Long-term obligations at December 31, 2007 and 2006, consist of the following:

2007 2006 Federal Financing Bank obligations, 3.5% to 6.8%

$629,559

$ 505,765 RUS obligations, 2%, 5%, 4.125% and grant fuinds 19,868 18,558 CoBank notes, 5.8% and 7.4%

44,729 47,444 City of La Crosse, Wisconsin, Pollution Control Bonds, 5.45% to 5.55%

23,605 23,605 Long-term debt 717,761 595,372 Short-term debt expected to be refinanced -

CoBank, Weston 4 construction notes, 5.75% to 6.125%

11,507 15,526 Adjusted long-term debt 729,268 610,898 Less current maturities 29,015 24,399 Total long-term obligations

$700,253

$ 586,499 Quarterly principal and interest payments on the long-term obligations to the Federal Financing Bank extend through 2040. Long-term obligations to the RUS are payable in equal quarterly or monthly principal and interest installments through 2024. Payments on the CoBank 5.8% and 7.4% notes are due monthly or quarterly through 2019.

The Cooperative has secured a $280,000 construction loan from CoBank, due no later than June 2008, to finance the Cooperative's share of construction costs of the Weston 4 generating station project (the Project) which is expected to be in service in 2008. The Cooperative has borrowed $227,423 of construction advances on this loan through December 31, 2007. The Cooperative has obtained guarantee commitments from the RUS for $280,000 to provide long-term financing for the Project and through the end of 2007 converted $215,916 of the $227,423 to long-term financing, while paying down the CoBank construction loan. In addition, The Cooperative has borrowed additional funds to finance the purchase of unit trains. The outstanding CoBank construction loan is included in long-term obligations in the accompanying consolidated balance sheets. Any advances from RUS for long-term financing for the project are pursuant to the terms of the consolidated mortgage and security agreement between the Cooperative and RUS.

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

Substantially, all of the Cooperative's assets are pledged as collateral for these obligations under the consolidated mortgage and security agreement with RUS, which extends through December31, 2055.

The Cooperative is required to maintain and has maintained certain financial ratios related to earnings and liquidity in accordance with the covenants of its loan agreements as of December 31, 2007.

Scheduled maturities of the Cooperative's long-term obligations, excluding debt to be refinanced, at December 31, 2007, were as follows:

Years Ending December 31 2008

$ 29,015 2009 30,849 2010 32,490 2011 32,099 2012 30,653 Thereafter 574,162 Total

$729,268 The scheduled maturities for the debt to be refinanced with RUS of $11,507 will be determined at the time the debt is refinanced.

6. FINANCIAL INSTRUMENTS The fair value of the Cooperative's financial instruments other than marketable securities and short-term borrowings, based on the rates for similar securities and present value models using current rates available at December 31, 2007 and 2006, is estimated to be as follows:

2007 2006 Recorded Fair Recorded Fair Value Value Value Value Assets:

Economic development loans and other investments 7,136 7,136 7,089 7,089 Investments in capital term certificates of NRUCFC 9,176 9,176 9,176 9,176 Liabilities long-term obligations 729,268 739,984 610,899 712,319

7. RETIREMENT OF CAPITAL CREDITS The Cooperative's Board of Directors has adopted a policy of retiring capital credits allocated to members on a first-in, first-out basis. As part of an equity development strategy adopted in 2003, patronage capital retired will be limited to no greater than 2% of the total patronage capital balance at December 31 of the prior year. Accordingly, $2,116 and $2,170 were retired in 2007 and 2006, respectively. This policy is subject to annual review and approval by the Board of Directors and the RUS, and no cash retirements are to be made, which would impair the financial condition of the Cooperative or violate any terms of its agreements. Also, beginning in 2003, the amount of non-operating margins assigned to members each year is at the discretion of the Board of Directors. Any unassigned non-operating margins will become unallocated reserves and part of permanent equity.

Patronage capital at December 31, 2007, includes 2007 margins assignable of $9,837 and unallocated reserves of $4,463. Patronage capital at December 31, 2006, includes 2006 margins assignable of $9,458 and unallocated reserves of $2,381.

8. COMMITMENTS AND CONTINGENCIES The Cooperative acquired a 30% ownership share of the Weston 4 power plant currently under construction near Wausau, WI, from Wisconsin Public Service Corporation (WPSC) in November 2005.

The Cooperative paid WPSC $95 million for its share of construction costs incurred to the closing date.

The acquisition gives the Cooperative a 159-megawatt share of the 531-megawatt supercritical coal-fired facility for which WPSC obtained regulatory approval and began construction in October 2004.

The plant is expected to be in service in 2008. As a 30% owner, the Cooperative will be responsible for approximately $242 million of the Weston 4 plant costs, plus interest during construction, and Dairyland's owner costs for a total estimated cost of $280 million. The Cooperative is accounting for its share of the jointly owned plant on a proportionate consolidation basis with costs of construction and related financing reported in electric plant and long-term obligations. Both the Cooperative and WPSC must provide financing for their respective portions of the Weston 4 plant costs. The Cooperative's estimated expenditures for 2008 are approximately $19 million.

The Cooperative's estimated 2008 construction program expenditures, including the Weston 4 project, are $118,345, with financing expected to be provided by borrowings and internally generated funds.

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

The Cooperative has entered into various coal purchase contracts with one to five year terms. The estimated commitments under these contracts as of December 31, 2007, were $131,103 in 2008, $58,075 in 2009, $21,467 in 2010, $1,818 in 2011, and $1,893 in 2012.

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

material effect on the consolidated financial position, results of operations, or cash flows of the Cooperative.

9. EMPLOYEE BENEFITS Multiemployer Defined Benefit Pension Plan -

Pension benefits for substantially all employees are provided through participation in the National Rural Electric Cooperative Association (NRECA)

Retirement and Security Program. Pension benefits are funded in accordance with the provisions of the program and are based on salaries, as defined, of each participant. The Employee Retirement Income Security Act of 1974, as amended by the Multiemployer Pension Plan Amendment Act of 1980, imposes certain liabilities on employers who are contributors to multiemployer plans in the event of a plan termination or an employer's withdrawal. These plans have not been terminated, nor has the Cooperative undertaken any plans to withdraw from participation. Since the program is a multiemployer plan for accounting purposes, the accumulated benefits and plan assets are not determined or allocated separately for each participating company. The Cooperative may be contingently liable for its share of the plans' unfunded vested liabilities. The Cooperative cannot obtain information from the plans' administrators to determine its share, if any, of unfunded vested benefits. Pension costs for this pension plan were $5,579 in 2007 and $5,084 in 2006.

Postretirement Health Insurance Obligation -

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

The Cooperative uses a December 31 measurement date for its plan.

The postretirement health care plans are unfunded. The accumulated postretirement benefit obligation (APBO) and the amounts recognized in the consolidated financial statements as of and for the years ended December 31, 2007 and 2006, are as follows:

2007 2006 Amount recognized in the consolidated balance sheets:

Total accrued qualified and nonqualified benefit obligation

$6,259

$3,228 Less current portion included in accrued expenses -

other (262)

(211)

Long-term portion

$5,997

$3,017 Amounts recognized in accumulated other comprehensive loss at December 31, 2007, consist of:

Net actuarial loss

$2,518 Prior service costs Transition obligation Total

$2,518 2007 2006 Change in benefit obligation:

Benefit obligation -

beginning of year

$ 5,898

$ 5,582 Service cost 235 223 Interest cost 338 319 Actuarial gain (1)

(1)

Participant contributions 68 78 Benefits payments (279)

(303)

Benefit obligation -

end of year

$ 6,259

$ 5,898 Funded status:

Funded status at December 31

$(6,259)

$(5,898)

Unrecognized actuarial loss 2,670 Accrued postretirement health insurance obligations recorded at year-end

$ (6,259)

$ (3,228)

Change in plan assets:

Fair value of assets -

beginning of year Employer contribution 211 225 Participant contributions 68 78 Benefits paid (279)

(303)

Fair value of assets -

end of year Components of net periodic postretirement benefit cost:

Service cost -

benefits attributed to service during the year 235 223 Interest cost on accrued postretirement health insurance obligation 338 319 Amortization of unrecognized actuarial loss 151 167 Net periodic postretirement benefit expense 724 709 For measurement purposes, a 5.6% discount rate was assumed for 2007 and 5.6% for 2006. The 2007 and 2006 annual health care cost increase assumed is 9% and 10%, respectively, decreasing gradually to 5% for 2011 and thereafter. A one percentage point increase in the assumed health care cost trend rates would increase the total of service and interest cost components by $88 and the end of year AiPBO by

$699. A one percentage point decrease in the assumed health care cost trend rates would decrease the total of service and interest cost components by $76 and the end of year APBO by $629.

Postreti rement Health Insurance Obligation Expected future benefit payments:

2008

$ 263 2009 318 2010 388 2011 445 2012 431 2013-2017 2,492 Defined Contribution Plan --

Dairyland has a qualified tax-deferred savings plan for eligible employees. Eligible participants may make pretax contributions, as defined, with Dairyland matching up to 2.5% of the participants' annual compensation. Contributions to this plan by Dairyland were $915 and

$870 for 2007 and 2006, respectively.

Accrued Sick Leave Benefit -

Certain employees are eligible to receive amounts at the time of retirement related to a discontinued sick leave policy. Eligible employees will be paid for a. fixed number of sick leave hours at the wage rate in effect at retirement. The total liability was $1,643 and $1,619 at December 31, 2007 and 2006, respectively. The cost for this sick leave benefit was $193 in 2007 and

.$152 in 2006.

Other Plans -

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

All amounts of compensation deferred under the plans and all income attributable to those amounts (until paid or made available to the employee or other beneficiary) are solely the property and rights of the Cooperative (not restricted to the payment of benefits under the plan), subject only to the claim of general creditors. Participants' rights under the plans are equal to those of general creditors of the Cooperative in an amount equal to the fair market value of the deferred account for each participant. The related assets and liabilities, totaling $1,303 and $1,195 at December 31, 2007 and 2006, respectively, are reported at contract value, which approximates fair value.

The Cooperative also provides employees with medical insurance coverage, short-term and long-term disability, and life insurance, which are funded by employer and employee contributions. The Cooperative's costs related to these benefits was $7,229 and $6,266 for 2007 and 2006, respectively.

10. RELATED-PARTY TRANSACTIONS The Cooperative provides electric and other services to its Class A members. The Cooperative received revenue of $251,336 and $218,100 in 2007 and 2006, respectively, for these services. The Cooperative has accounts receivable from its Class A members of $24,565 and $19,990 at December 31, 2007 and 2006, respectively.

The Cooperative has notes payables to the Class A member of $5,598 and $4,433 at December 31, 2007 and 2006, respectively. These notes are related to the prepayment program. Class A members have the option of paying their electric bill in advance and in turn the Cooperative pays the members interest income. The Cooperative's interest expense related to the prepayment program was $533 and $611 in 2007 and 2006, respectively.

The Cooperative has interest-bearing loan receivables from Class A members of $1,448 and $1,988 at December 31, 2007 and 2006, respectively. These loan receivables, which are recorded as part of other assets, are related to the economic development program whereas Class A members can borrow funds from the Cooperative, which the members in turn loan to economic development projects in their service territories. These loans are typically repaid to the Cooperative over 10 years. The Cooperative recorded interest income related to the economic development program of $82 and $41 in 2007 and 2006, respectively.

11. LONG-TERM POWER AGREEMENTS The Cooperative has a power agreement with Great River Energy (GRE) to share costs and benefits of a 380-megawatt coal-fired generating unit ("Genoa 3") located in Genoa, WI. Under the agreement, GRE will pay for 50% of the costs of operating the plant and GRE is entitled to take 50% of the output of the plant. This agreement remains in effect, until the retirement of the unit from service or, until the payment in full of all obligations arising from the construction of the unit, whichever is later. The Cooperative provided substantially all the financing for the construction of the unit and GRE does not guarantee any portion of any debt of the Cooperative. As a result, the Cooperative records the assets, debts, and operating costs of Genoa 3 on the consolidated financial statements. Energy charges to GRE under the agreement were $39,912 and $35,716 during 2007 and 2006, respectively.

12. ASSET RETIREMENT OBLIGATIONS An ARO is the result of legal or contractual obligations associated with the retirement of a tangible long-lived asset that result from the acquisition, construction, or development and/or the normal operation of a long-lived asset. The Cooperative determines, these obligations based on an estimated asset retirement cost adjusted for inflation and projected to the estimated settlement dates and discounted using a credit-adjusted risk-free interest rate. Upon initial recognition of a liability for ARO, the Cooperative capitalizes the asset retirement cost by increasing the carrying amount of the related long-lived asset by the same amount as the liability. The Cooperative allocates that asset retirement cost to expense using the straight-line method over the remaining useful life of the related long-lived asset. The accretion of the obligation is recognized over time up to the settlement date. Any future change in estimate will be recognized as an increase or a decrease in the carrying amount of the liability for an ARO and the related asset retirement cost capitalized as part of the carrying amount of the related long-lived asset.

The Cooperative adopted FIN 47, Accounting for Conditional Asset Retirement Obligations -

an interpretation of FASB Statement No. 143, on December 31, 2005. Upon adoption of FIN 47, the Cooperative has determined that it has AROs related to future removal and disposal of asbestos at its power plants. The Cooperative recorded an additional discounted liability of $1,341 in 2007 and $497 in 2006 related to this obligation.

The Cooperative has established a decommissioning trust to accumulate the estimated amounts necessary to decommission a nuclear power plant that the Cooperative formerly operated. The assets of this trust in the amount of $68,596 at December 31, 2007 and $72,235 at December 31, 2006, are outside the Cooperative's administrative control and are available solely to satisfy the future costs of decommissioning. The assets of a second fund, a supplemental reserve of $14,463 at December.3 1, 2007, and $11,390 at December 31, 2006, are designated to be used for such decommissioning efforts or for removal and temporary storage for the spent nuclear fuel pending permanent storage by the Department of Energy. These amounts are recorded as other noncurrent assets in the consolidated balance sheets. The nuclear decommissioning obligation in other noncurrent liabilities is recorded in the consolidated balance sheets.

There are no assets legally restricted for purpose of settling the ARO related to future removal and disposal of asbestos. This ARO is recorded in other noncurrent liabilities in the consolidated balance sheets.

A reconciliation of the beginning and ending aggregate carrying amount of the obligations as of December 31, 2007 and 2006, is as follows:

2007 2006 Balance -

beginning of year

$81,807

$85,441 Additional obligation due to change in estimated cash flows 1,340 498 Accretion in asset retirement obligation 126 62 Incurred costs on decommissioning projects (9,351)

(12,018)

Provision recorded as decommissioning liabilities 6,078 7,824 Balance -

end of year

$80,000

$81,807 The Cooperative did not record a conditional ARO related to the dismantlement of the dam and drainage reservoir for the hydro generation plant at Flambeau; the restoration of land to pre-existing condition at Genoa Station #3 site related to the Land Rights Permit; dismantlement of equipment and removal of generators related to the easement interest at various power plants; and the removal of transmission lines in various corridors because the Cooperative does not have sufficient information to estimate the fair value of the ARO.

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

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

Dismantlement of nonessential systems is proceeding on an ongoing basis. The LACBWR Decommissioning Plan calls for final decommissioning no later than 2025.