ML101260216

Kansas Electric Power Cooperative, Inc., 2009 Annual Financial Report

ML101260216
Person / Time
Site:	Wolf Creek
Issue date:	04/28/2010
From:	Kansas Electric Power Cooperative
To:	Office of Nuclear Reactor Regulation
References
Download: ML101260216 (35)

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Contents Page Financial Statements PaE Organization and Resources ................................ 1 Report of Independent Public Accountants ......... 1, Leadership M essage ............................................. 2-3 Balance Sheets ............................. 14-1E 2009 H ighlights ............................ ......................... 4-5 Statem ents of Margin ............................................. 1 KEPCo Trustees and Managers ............................. 6-9 Statements of Patronage Capital .............................. 1 KEPCo MemberArea Map ............................ 9 Statements of Cash Flows ..................... 17 O perating Statistics ............................................ 10-11 Notes to Financial Statements ............................. 18-31 Generation Resources ...................................... 32 KEPCo Staff Stephen Parr ........... Executive Vice President Robert Hammersmith ...SCADA/Metering Technician 2

& Chief Executive Officer Shari Koch ... Accounting, Payroll & Benefits Specialist Les Evans ................ Senior Vice President

& Chief Operating Officer Elizabeth Lesline ............. Administrative Assistant/

Receptionist Mark Barbee ............. Vice President of Engineering, KSI Vice President of Engineering Mitch Long ............. Sr. SCADA/Metering Technician Bob Bowser ...... Vice President of Technical Services Michael Morris ........... Sr. SCADA/Metering Technician J. Michael Peters . Vice President of Administration Erika Old ................... Finance & Benefits Analyst 2

& General Counsel Matt O ttm an ............................................. Engineer 3 Coleen W ells ......................................... Vice President

& Chief Financial Officer John Payne ......................................... Senior Engineer Laura Armstrong ..................... Administrative Assistant Robert Peterson ................ Sr. Engineering Technician Marc Doljac ................. Director of Rates & Regulation Rita Petty ....................................... Executive Assistant

& Manager of Office Services Terry Deutscher . EMS/SCADA System Specialist Paul Stone ...................................... System Operator Carol Gardner ................................. Operations Analyst Phil Wages ................... Director of Member Services, Government Affairs & Business Development

Organization & Resources Kansas Electric Power Cooperative, Inc. (KEPCo), headquartered at Topeka, Kansas, was incorporated in 1975 as a not-for-profit generation and transmission cooperative (G&T). It is KEPCo's responsibility to procure an adequate and reliable power supply for its nineteen distribution Rural Electric Cooperative Members at a reasonable cost.

Through their combined resources, KEPCo Members support a wide range of other services such as rural economic development, marketing and diversification opportunities, power requirement and engineering stud-ies, rate design, etc.

KEPCo is governed by a Board of Trustees representing each of its nineteen Members which collectively serve more than 120,000 electric meters in two-thirds of rural Kansas. The KEPCo Board of Trustees meets regularly to establish policies and act on issues that often include recommendations from working committees of the Board and KEPCo Staff. The Board also elects a seven-person Executive Committee which includes the President, Vice President, Secretary, Treasurer, and three additional Executive Committee members.

KEPCo was granted a limited certificate of convenience and authority by the Kansas Corporation Com-mission in 1980 to act as a G&T public utility. KEPCo's power supply resources consist of: 70 MW of owned generation from the Wolf Creek Generating Station; the 20 MW Sharpe Generating Station located in Coffey County; hydropower purchases of an equivalent 100 MW from the Southwestern Power Administration, and 14 MW from the Western Area Power Administration; plus partial requirement power purchases from regional utilities.

KEPCo is a Touchstone Energy" Cooperative. Touchstone Energy5 is a nationwide alliance of more than 650 cooperatives committed to promoting the core strengths of electric cooperatives - integrity, accountability, innovation, personal service and a legacy of community commitment. The national program is anchored by the motto "The Power of Human Connections."

Kansas Electric Power Cooperative, Inc.

P.O. Box 4877 Topeka, KS 66604 600 SW Corporate View Topeka, KS 66615 -t'1lamC (785) 273-7010 www.kepco.org A Touchstone Energy Cooperative

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2009 Message from Kirk Thompson KEPCo President Stephen E Parr Executive Vice President

& Chief Executive Officer Energy policy and climate change continue to encapsulate the utility industry in regulatory uncertainty.

Important questions remain unanswered. Will there be a constraint placed on carbon? What will be the economic impact? What resources will be legislated obsolete? For the utility industry to plan and operate with foresight, a defined and stable regulatory framework needs to be established.

In 2009, this framework was achieved in Kansas at the state level.

In May, an agreement was reached between Governor Mark Parkinson and Sunflower Electric Corpora-tion regarding Sunflower's Holcomb coal-fired generating plant expansion. The governor agreed to the issu-ance of an air permit for the facility, in exchange for expanded renewable energy initiatives by the utility indus-try, which included the implementation of net metering by investor-owned utilities and the implementation of a Renewable Portfolio Standard (RPS) for all utilities.

The electric cooperatives of Kansas have had a long history of supporting the development of renew-able energy in Kansas. Based upon this support, the electric cooperatives began to voluntarily discuss imple-menting net metering tariffs in 2009. A few cooperatives implemented such a tariff in 2009 and many more are expected to do the same in 2010. This voluntary act is evidence of the commitment of the electric cooperatives in renewable energy development.

The RPS provision requires utilities to have ten percent renewable energy by 2011, fifteen percent by 2016, and twenty percent by 2020. KEPCo receives approximately twenty percent of its energy from hydro-electricity, a resource that is considered renewable under Kansas law. KEPCo's hydro allocations are its least cost resource and now will provide an extra dividend by enabling KEPCo to already meet the state's upper tier RPS requirement.

At KEPCo's November Board of Trustees meeting, Mr. Kirk Thompson, manager of CMS Electric Co-operative, Inc, was elected President of KEPCo. Mr. Thompson succeeds Mr. Kenneth Maginley, manager of Bluestem Electric Cooperative, Inc, who served five years as KEPCo's president. Mr. Thompson has served

on the KEPCo Board of Trustees since 1991 and has held various offices during his tenure. Mr. Thompson's knowledge of the electric cooperative industry, and of KEPCo, will be an asset to KEPCo's continued success.

On August 2111,a culmination of over four years of work and negotiations came to realization as the Federal Energy Regulatory Commission (FERC) approved the 36-year cost-based formula rate agreement for full-requirements electric service between KEPCo and Westar Energy. The agreement will enable KEPCo and its Members access to Westar's existing generating resources and mitigate the risk of being vulnerable to price fluctuations in the open market.

Under the agreement, KEPCo will purchase electricity based on Westar's cost to produce the power and combine it with KEPCO's own resources to meet much of its Members' energy needs. KEPCo and its Members will also benefit by hav- 7 ing Westar help manage KEPCo's resources and by participating in joint power supply planning. The agreement allows for KEPCo and Westar to "pool" their respective loads and generating capabilities to make the most efficient use of both companies' resources.

KEPCo will also receive additional nuclear energy and credit for wind energy purchased from Westar un-der the agreement, thus increasing 2009-10 KEPCo Executive Committee (seated):Dwane Kessinger;Kenneth KEPCo's percentage of non-green- Maginley; Larry Stevens; (standing) Stephen Parr, Executive Vice President&

CEO; Kirk Thompson, President; Scott Whittington, Vice President; Dale Short, house gas emitting resources. Secretary; and Kevin Compton, Treasurer.

Throughout 2009, KEPCo staff actively participated with NRECA staff working to shape proposed cap and trade legislation. KEPCo staff also worked with several staff members of the Kansas delegation, offering input on energy legislation, such as a small utility exemption from the proposed Federal Renewable Energy Standard. KEPCo will continue to work with NRECA and our Kansas delegation on ways to soften the impact of any proposed climate change legislation to KEPCo's Members.

At its September Board Meeting, the KEPCo Board of Trustees voted unanimously to deregulate from rate regulation under the Kansas Corporation Commission (KCC). By voting to be rate deregulated, KEPCo will save its Member Cooperatives the costs associated with filing and conducting a rate case proceeding with the KCC, in addition to being able to make rate changes in a more expeditious manner. If a rate change is proposed in the future, KEPCo will conduct a rate review with the Members and the Board of Trustees and any rate change will continue to be approved by the Board of Trustees.

KEPCo's latest investment in a generation resource, latan 2, is scheduled to be commercially available in December of 2010. latan 2 is an 850 MW, state-of-the-art pulverized coal plant located north of Kansas City.

Continued on page 12

2009 KEPCo Highlights On August 21st, the Westar cost-based generation formula rate long-term Power Supply Agreement was approved by the FERC. TheAgreement, which was implemented September 1st,o.7. <'. ,

has a term of thirty-six years, and will provide KEPCo Members /,

access to the Westar fleet of generation on a cost-based basis until 2045.

KEPCo's Board of Trustees annual strategic planning retreat focused on energy efficiency, conservation and smart-grid technology. The retreat was very timely given the escalating interest in the efficient use of energy.

WV" Wolf Creek had a 350-day continuous run since refuel

.. - -- 16. The unit was forced off-line due to lightning strikes to the transmission system serving the plant.

Construction on the latan 2 pulverized coal unit contin-ues to progress and is scheduledfor commercialoperation in December of 2010. KEPCo owns 30 MW of the 850

. MW unit, which will supply approximately 11% of KEPCo's Members' energy needs.

KEPCo was privileged to honor at its 2009 Annual Meeting seven soldiers of the Second Brigade Combat Team, First Infantry Division stationed at Fort Riley that had recently returned from deployment in Iraq.

Long-term firm transmission service was secured for serving load in the Empire District balancing authority with the Westar generation fleet.

KEPCo also secured firm transmission for the deliv-Brigad Fi,-*flrst Infantr-Dviio C0171at.,fTenam, ery points in the Mid-Kansas Electric Company (MKEC) area presently served by Westar.

KEPCo actively participated in NRECA's analysis and lobbying efforts to help minimize the impact ofpro-posed climate change legislation to KEPCo's operations. Fifty percent of KEPCo's diverse power supply is

derived from hydroelectricand nuclear resources,which do not emit greenhouse gases.

KEPCo invested $2.5 million in National Rural Utilities Cooperative Finance Corporation (CFC) through the purchase of Member Capital Securities. This investment will aid in strengthening CFC's equity position, as CFC's viability is critical to KEPCo since CFC is one of KEPCo's primary financing sources for new capital.

KEPCo continues to fund and assist Members in the promotion of an energy efficiency electricwater heater and heating/coolingsystem rebate program. Since inception, KEPCo has issued over 6,200 heating/cooling rebates and over 15,000 water heater rebates.

KEPCo Staff continues to work diligently with KEC and Sunflower on legislative issues in Kansas and in Washington, D.C. Staff testified on several bills in 2009 and tracked numerous pieces of legislation. In Wash-ington, D.C., Staff participated in the NRECA Legislative Conference.

KEPCo s Board of Trustees unanimously voted to be deregulatedfrom rate making jurisdictionof the Kansas CorporationCommission. This strategic vote will enable KEPCo to implement rate changes in a more expeditious manner andsave KEPCo's Members the costs associatedwith rate regulation.

KEPCo supports the development of renewable resources. As such, KEPCo donated $1,000 to the South-east Kansas Education Service Center at Green-bush for the installation of a wind turbine to be used for educational purposes.

KEPCo Staff successfully completed its first NERC/SPP compliance audit which determined that KEPCo was fully meeting all the requirements of the applicableNERC reliability standards.

KSI Engineering effectively supported Kansas cooperatives by working on critical issues with the Federal Emergency Management Agency (FEMA) relating reimbursements for storm damage, including completing d am_-

age assessments and engineering reports.

KS I com-Engineering KEPCo Staff continues to actively participateon many mittees of the Southwest Power Pool (SPP)to assist the nýgion in transmissiondevelopment.

KEPCo Member Cooperatives Trustees, Alternates and Managers Ark Valley Electric Cooperative Assn., Inc.

PO Box 1246, Hutchinson, KS 67504 620-662-6661 Trustee Rep. -- Joseph Seiwert Alternate Trustee Rep. -- Bob Hall ABluestem Manager -- Bob Hall Joseph Seiwert Bob Hall Electric Cooperative, Inc.

PO Box 5, Wamego, KS 66547 785-456-2212 PO Box 513, Clay Center, KS 67432 785-632-3111 Trustee Rep. -- Kenneth J. Maginley Alternate Trustee Rep. -- Robert M. Ohlde Manager -- Kenneth J. Maginley Kenneth Maginley Bob Ohlde Brown-Atchison Electric Cooperative Assn., Inc.

PO Box 230, Horton, KS 66439 785-486-2117 Trustee Rep. -- Kevin D. Compton Alternate Trustee Rep. -- Rodney V. Gerdes Manager -- Rodney V. Gerdes Kevin Compton Rod Gerdes SButler Rural Electric Cooperative Assn., Inc.

PO Box 1242, El Dorado, KS 67042 316-321-9600 Trustee Rep. -- Dale Short Alternate Trustee Rep. -- Richard Pearson Manager -- Dale Short Dale Short Richard Pearson Caney Valley Electric Cooperative Assn., Inc.

PO Box 308, Cedar Vale, KS 67024 620-758-2262 Trustee Rep. -- Dwane Kessinger Alternate Trustee Rep. -- Allen A. Zadorozny Manager -- Allen A. Zadorozny Dwane Kessinger Allen Zadorozny

CMS Electric Cooperative, Inc.

PO Box 790, Meade, KS 67864 620-873-2184 Trustee Rep. -- Kirk A. Thompson Alternate Trustee Rep. -- Clifford Friesen Manager -- Kirk A. Thompson Kirk Thompson Cliff Fnesen DS&O Electric Cooperative, Inc.

PO Box 286, Solomon, KS 67480 785-655-2011 Trustee Rep. -- Hadow L. Haney Alternate Trustee Rep. -- Donald E. Hellwig IFlint Harlow Haney Manager-- Donald E. Hellwig Hills Rural Electric Cooperative Assn., Inc.

PO Box B, Council Grove, KS 66846 620-767-5144 Trustee Rep. -- Robert E. Reece Alternate Trustee Rep. -- Gus H. Hamm Don Hellwig Manager -- Robert E. Reece U Bob Reece Heartland Rural Electric Cooperative, Inc.

PO Box 40, Girard, KS 66743 620-724-8251 Trustee Rep. -- Dennis Peckman Alternate Trustee Rep. -- Dale Coomes GusHam Manager -- Dale Coomes Dennis Peckman Dale Coomes SLJEC PO Box 70, McLouth, KS 66054 913-796-6111 Trustee Rep. -- Larry H. Stevens Alternate Trustee Rep. -- Steven Foss Manager -- Steven Foss Larry Stevens Steven Foss Lyon-Coffey Electric Cooperative, Inc.

PO Box 229, Burlington, KS 66839 620-364-2116 Trustee Rep. -- Scott Whittington Alternate Trustee Rep. -- Donna Williams Manager -- Scott Whittington Scott Whittington Donna Williams

KEPCo Member Cooperatives Trustees, Alternates and Managers Ninnescah Electric Cooperative Assn., Inc.

PO Box 967, Pratt, KS 67124 620-672-5538 Trustee Rep. -- Gordon Coulter Alternate Trustee Rep. -- Carla A. Bickel

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Manager Carla A. Bickel Manager-- Ed Wiltse (01/01/2010)

Gordon Coulter Carla Bickel Ed Prairie Land Electric Cooperative, Inc.

PO Box 360, Norton, KS 67654 785-877-3323 District Office, Bird City 765-734-2311 District Office, Concordia 785-243-1750 Trustee Rep. -- Gilbert Berland Alternate Trustee Rep. -- Allan J. Miller Gilbert Berland Manager -- Allan J. Miller Radiant Electric Cooperative, Inc.

PO Box 390, Fredonia, KS 66736 620-378-2161 Trustee Rep. -- Dennis Duft Alternate Trustee Rep. -- Don Songer Administrative Manager -- Leah Tindle Operations Manager -- Dennis Duft

/I Oon Songer Leah Tindle I

Rolling Hills Electric Cooperative, Inc.

PO Box 307, Mankato, KS 66956 785-378-3151 District Offices, Belleville 785-527-2251 Ellsworth 785-472-4021 Meiroy Kopsa Trustee Rep. -- Melroy Kopsa Alternate Trustee Rep. -- Leon Eck Manager -- Douglas J. Jackson 1M Leon Eck Doug Jackson Sedgwick County Electric Cooperative Assn., Inc.

PO Box 220, Cheney, KS 67025 316-542-3131 Trustee Rep. -- Donald Metzen Alternate Trustee Rep. -- Alan L. Henning Manager -- Alan L. Henning Alan Henning

Sumner-Cowley Electric Cooperative, Inc.

PO Box 220, Wellington, KS 67152 620-326-3356 Trustee Rep. -- Charles Riggs Alternate Trustee Rep. -- Cletas Rains Manager -- Cletas Rains Twin Valley Electric Cooperative, Inc.

PO Box 368, Altamont, KS 67330 620-784-5500 Trustee Rep. -- Bryan W. Coover Alternate Trustee Rep. -- Ron Holsteen Manager -- Ron Holsteen Victory Electric Cooperative Assn., Inc.

PO Box 1335, Dodge City, KS 67801 620-227-2139 Trustee Rep. -- Terry Janson Alternate Trustee Rep. -- Milam Jones Manager -- Terry Janson KEPCo Member Area Map

Operating Statistics Operating Expenses Wolf Creek O&M Nuclear Fuel and A&G 2.2%

KEPCo A&G O&M and 12.5%4 Depr. And 6.8%Antort. Purchased Power Interest_

6.7%

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lOS I Rates OS *5 03 OS OS OS OS OS OS SunflowerWP Sources of Energy IOU*Ift WONfCre" 37.2%25.5%

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2009 Message Continued from page 3 KEPCo will receive 30 MW of capacity and energy from latan 2. latan 2 will be a key component in KEPCo's resource mix by providing its Members with economical and reliable energy and mitigating exposure to volatile and high-priced electric markets and natural gas prices.

KEPCo realized a peak demand of 401 MW in 2009, which is nearly two percent less than 2008 and five percent less than 2006. This decrease can be attributed to a mild summer, the economic downturn, and KEPCo's continued success with its Demand Side Management (DSM) program. This year, KEPCo was able to shed an estimated 20 MW of peak demand. Energy sales for 2009 were nearly equal to that of 2008, thus again illustrating the mild summer, poor economy, and the continued interest and implementation of energy ef-ficiency measures.

Before closing, KEPCo would like to offer its appreciation and gratitude to Mr. Kenneth Maginley for his dedicated service as President of the KEPCo Board of Trustees for the past five years. During his tenure, Mr.

Maginley guided the Board of Trustees through many important issues: including extending most of the Mem-ber contracts to 2045; negotiating KEPCo's new Westar contract; ownership in latan 2; unanimously voting to deregulate; extending the SWPA contract to 2016; Wolf Creek's operating license extension; and making stra-tegic financial decisions that increased GAAP equity by 13.5%. This increase in GAAP equity enabled KEPCo to end 2009 with positive equity for the first time in many years.

Appreciation also needs to be extended to the Board of Trustees and KEPCo Staff for their hard work and dedication. Many of their collective accomplishments are detailed in this annual report.

In the coming months and years, the most important factor facing the utility industry will be an effec-tive regulatory framework that provides the long-term certainty necessary for utilities to operate. Past cycles of one-off, short-term solutions must be broken and give way to a long-term planning horizon. An energy policy that fosters the investment needed over the long-term cannot be fully effective unless there is a clearly defined approach to carbon reduction requirements. There will need to be a collaboration between policy makers and utilities alike that embraces a multi-resource mindset in order to promote increased supply and reduced de-mand. Of equal importance will be the need on behalf of policy makers to balance the environmental need and the economic impact of proposed programs. KEPCo vows to continue to work diligently with policy makers, both at the state and federal level, to achieve such a balance.

Kirk A. Thompson Stephen E. Parr

Kansas Electric Power Cooperative, Inc.

Financial Statements December 31, 2009 and 2008 BKD_

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Independent Accountants' Report on Financial Statements Board of Trustees Kansas Electric Power Cooperative. Inc.

Topeka, Kansas We have audited the accompanying consolidated balance sheets of Kansas Electric Power Cooperative. Inc.

(KEPCo) as of December 31. 2009 and 2008, and the related consolidated statements of margin, patronage capital and cash flows for the years then ended. These financial statements are the responsibility of KEPCo'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 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 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.

As explained in Note 3. certain depreciation and amortization methods have been used in the preparation of the 2009 and 2008 financial statements which, in our opinion. are not in accordance with accounting principles generally accepted in the United States of America. The effects on the financial statements of the aforementioned departure are explained in Note 3.

In our opinion, except for the effects of using the aforementioned depreciation and amortization methods as discussed in Note 3. the consolidated financial statements referred to above present fairly, in all material re-spects, the financial position of Kansas Electric Power Cooperative, Inc., as of December 31, 2009 and 2008, 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 ofAmerica.

In accordance with Government Auditing Standards, we also have issued our report dated April 12, 2010. on our consideration of KEPCo'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 Audit-ing Standards and should be considered in assessing the results of our audit.

April 12. 2010 L3KC t-f Praxit' experiencelilKI ,,BROA IMI °

Kansas Electric Power Cooperative, Inc.

Consolidated Balance Sheets December 31, 2009 and 2008 Assets 2009 2008 Utility Plant In-service $ 2227,090,041 $ 227,579,661 Less allowance for depreciation (1 27,860,384) (125,525,931 Net in-service 99,229,657 102,053,730 Construction work in progress 65,624,879 42,752,891 Nuclear fuel (less accumulated amortization of $13,298,208 and $13,923,600 for 2009 and 2008, respectively) 8,293,682 7,832,587 Total utility plant 1 '3,148,218 152,639,208 Restricted Assets Investments in the National Rural Utilities Cooperative Finance Corporation 13,674,112 6,897,319 Bond fund reserve 4,411,168 4,321,172 Decommissioning fund 0,571,021 8,212,742 Investments in other associated organizations 181,191 176,430 Total restricted assets 28,837,492 19,607,663 Current Assets Cash and cash equivalents 118,631 634,108 Member accounts receivable 11,539,149 10,587,979 Materials and supplies inventory 3,330,502 3,245,861 Other assets and prepaid expenses 638,516 605,181 Total current assets 15,626,798 15,073,129 Other Long-term Assets Deferred charges Wolf Creek disallowed costs (less accumulated amortization of $13,392,227 and $12,635,061 for 2009 and 2008, respectively) 2,590,694 13,347,860 Wolf Creek deferred plants costs (less accumulated amortization of $25,039,356 and $21,909,437 for 2009 and 2008, respectively) 21,909,438 25,039,356 Wolf Creek decommissioning regulatory asset 2,897,014 7,354,075 Deferred incremental outage costs 4,585,364 3,352,986 Other deferred charges (less accumulated amortization of

$7,817,223 and $7,305,536 for 2009 and 2008, respectively) 2,117,526 2,578,448 Unamortized debt issuance costs 510,359 619,634 Other 582,800 311,587 Total long-term assets 4 5,193,195 52,603,946 Total assets $ 262,805,703 $ 239,923,946 14

Kansas Electric Power Cooperative, Inc.

Consolidated Balance Sheets December 31, 2009 and 2008 Liabilities and Patronage Capital 2009 2008 Patronage Capital Memberships $ 3,200 $ 3,200 Patronage capital 37,005,611 27,667,321 Accumulated other comprehensive loss (4,968,938) (5,684,416)

Total patronage capital 32,039,873 21,986,105 Long-term Debt 178,467,513 152,657,243 Other Long-term Liabilities Wolf Creek decommissioning liability 15,761,591 18,384,841 Wolf Creek pension and post retirement benefit plans 7,433,971 8,066,633 Wolf Creek deferred compensation 826,871 749,074 Arbitrage rebate long-term liability 1,049,464 811,354 Other deferred credits 58,155 16,277 Total other long-term liabilities 25,130,052 28,028,179 Current Liabilities Line of credit 13,178,203 Current maturities of long-term debt 14,191,957 13,159,154 Accounts payable 10,963,824 8,914,587 Payroll and payroll-related liabilities 291,619 313,735 Accrued property taxes 1,387,991 1,364,953 Accrued interest payable 332,874 321,787 Total current liabilities 27,168,265 37,252,419 Total patronage capital and liabilities $ 262,805,703 $ 239,923,946

Kansas Electric Power Cooperative, Inc.

Consolidated Statements of Margin December 31, 2009 and 2008 2009 2008 Operating Revenues Sales of electric energy $ 122,7 44,598 $ 121,527,329 Other - 89,422 Total operating revenues 122,7 44,598 121,616,751 Operating Expenses Power purchased 76,4 .54,594 80,023,770 Nuclear fuel 2,5 .10,652 2,296,326 Plant operations 10,2 05,308 9,338,897 Plant maintenance 3,6 88,572 3,477,473 Administrative and general 5,3 47,850 5,413,479 Amortization of deferred charges 4,3 98,770 4,443,886 Depreciation and decommissioning 4,3 53,046 4,208,729 Total operating expenses 106,9 '58,792 109,202,560 Net operating revenues 15,7 85,806 12,414,191 Interest and Other Deductions Interest on long-term debt 7,0 26,677 7,506,538 Amortization of debt issuance costs 1 09,275 115,227 Other deductions 66,090 71,044 Total interest and other deductions 7,2 02,042 7,692,809 Operating income 8,5 83,764 4,721,382 Other Income Interest income 599,470 634,867 Other income 155,056 116,928 Total other income 754,526 751,795 Net margin $ 9,338,290 $ 5,473,177 Kansas Electric Power Cooperative, Inc.

Consolidated Statements of Patronage Capital December 31, 2009 and 2008 Accumulated Other Comprehensive Patronage Comprehensive Income (Loss) Memberships Capital Income (Loss) Total Balance, December 31, 2007 $ 3,200 $ 22,194,144 $ (3.120,448) $ 19,076.896 Net margin $ 5,473,177 - 5,473,177 5.473,177 Defined benefit pension plans Net loss arising during year (2,793,126) - - (2,793,126) (2.793,126)

Other (38,764) - (38,764) (38,764)

Less: amortization of prior service costs included in net periodic pension costs 267,922 - 267,922 267,922 Comprehensive income $ 2,909,209 Balance, December 31, 2008 3,200 27,667,321 (5,684,416) 21,986,105 Net margin $ 9,338,290 - 9,338,290 9,338,290 Defined benefit pension plans Net gain arising during year 344,884 - - 344,884 344,884 Other 15,514 - 15.514 15.514 Less: amortization of prior service costs included in net periodic pension costs 355 080 - 355 080 355,080 Comprehensive income $ 10 053 768 Balance, December 31, 2009 $ 3,200 $ 37,005,611 $ (4,968,938) $ 32,039,873

Kansas Electric Power Cooperative, Inc.

Consolidated Statements of Cash Flows December 31, 2009 and 2008 2009 2008 Operating Activities Net margin $ 9,338,290 $ 5,473,177 Adjustments to reconcile net margin to net cash provided by operating activities Depreciation and amortization 3,889,826 3,794,729 Decommissioning 1,833,811 1,056,613 Amortization of nuclear fuel 2,013,679 1,811,603 Amortization of deferred charges 4,348,006 4,407,592 Amortization of deferred incremental outage costs 4,099,003 3,893,171 Amortization of debt issuance costs 109,275 115,227 Changes in Member accounts receivable (951,170) (1,800,955)

Materials and supplies (84,641) (122,810)

Other assets and prepaid expenses (304,548) (40,657)

Accounts payable 2,049,237 622,581 Payroll and payroll-related liabilities (22,116) 9,625 Accrued property tax 23,038 47,519 Accrued interest payable 11,087 (85,192)

Other long-term liabilities 440,601 273,139 Net cash provided by operating activities 26,793,378 19,455,362 Cash Flows From Investing Activities Additions to electric plant (23,937,741) (26,837,946)

Additions to nuclear fuel (2,474,774) (2,070,599)

Additions to deferred incremental outage costs (5,331,381) (6,153,310)

Investments in decommissioning fund assets (2,358,279) (1,133,809)

Investments in National Rural Utilities Cooperative Finance Corporation (6,781,554) (1,442,965)

Investments in bond reserve assets (89,996) 27,537 Net cash used in investing activities (40,973,725) (37,611,092)

Cash Flows From Financing Activities Net borrowing (payment) under line of credit agreement (13,178,203) 13,178,203 Principle payments on long-term debt (13,209,153) (11,950,139)

Proceeds from issuance of long-term debt 40,052,226 11,429,000 Net cash provided by financing activities 13,664,870 12,657,064 Net decrease in cash and cash equivalents (515,477) (5,498,666)

Cash and Cash Equivalents, Beginning of Year 634,108 6,132,774 Cash and Cash Equivalents, End of Year $ 118,631 $ 634,108 Supplemental Cash Flows Information Cash paid during the year for interest $ 9,113,960 $ 9,052,958

Kansas Electric Power Cooperative, Inc.

Notes to Consolidated Financial Statements December 31, 2009 and 2008 Note 1: Nature of Operations and Summary of Significant Accounting Policies Nature of Operations Kansas Electric Power Cooperative, Inc., and its subsidiary (KEPCo), headquartered in Topeka, Kansas, was incorporated in 1975 as a not-for-profit generation and transmission cooperative (G&T). KEPCo is under the ju-risdiction of the Kansas Corporation Commission (KCC) and was granted a limited certificate of convenience and authority in 1980 to act as a G&T public utility. In 2009, pursuant to statutory amendments, KEPCo elected to be free of the jurisdiction of the KCC for certain purposes, including rate setting, subject to statutory review under certain circumstances. It is KEPCo's responsibility to procure an adequate and reliable power supply for its 19 distribution rural electric cooperative members pursuant to all requirements of its power supply contracts. KEPCo is governed by a board of trustees representing each of its 19 members, which collectively serve approximately 120,000 electric meters in rural Kansas.

System of Accounts KEPCo maintains its accounting records substantially in accordance with the Rural Utilities Service (RUS) Uniform Systems of Accounts and in accordance with accounting practices prescribed by the KCC.

Rates Under a 2009 change in state law, KEPCo has elected to be exempt from KCC regulation for most purposes, including the setting of rates. Rates are set by action of the Board, subject only to statutory review by the KCC if demanded by four or more members. KEPCo's rates were last set by the KCC by an order effective September 1, 2008. KEPCo's rates now include an energy cost adjustment (ECA) mechanism and an annual Demand Cost Adjustment (DCA) mechanism, allowing KEPCo to pass along increases in certain energy and demand costs to its member cooperatives.

Principles of Consolidation The consolidated financial statements include the amounts of KEPCo and its wholly owned subsidiary, KEPCo Services, Inc. Undivided interests in jointly owned generation facilities are consolidated on a pro rats basis. All material intercompany accounts and transactions have been eliminated in consolidation.

Estimates The preparation of consolidated 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 revenues and expenses during the reporting period. Actual results could differ from those estimates.

Utility Plant and Depreciation Utility plant is stated at cost. Cost and additions to utility plant include contractual work, direct labor, materials and interest on funds used during construction. In 2009 and 2008, the amount of capitalized interest was ap-proximately $2.1 million and $1.5 million, respectively. The cost of repairs and minor replacements are charged to operating expenses as appropriate. The original cost of utility plant retired and the cost of removal less salvage are charged to accumulated depreciation.

The composite depreciation rate for electric generation plant for the years ended December 31, 2009 and 2008, was 3.27% and 3.17%, respectively.

The provision for depreciation computed on a straight-line basis for electric and other components of utility plant is as follows:

Transportation and equipment 25-33 years Office furniture and fixtures 10-20 years Leasehold improvements 20 years Transmission equipment (metering, communication and SCADA) 10 years

Kansas Electric Power Cooperative, Inc.

Notes to Consolidated Financial Statements December 31, 2009 and 2008 Nuclear Fuel The cost of nuclear fuel in the process of refinement, conversion, enrichment and fabrication is recorded as utility plant asset at original cost and is amortized to nuclear fuel expenses based upon the quantity of heat produced for the generation of electric power. The permanent disposal of spent fuel is the responsibility of the Department of Energy (DOE). KEPCo pays one cent per net megawatt (MWh) of nuclear generation to the DOE for the future disposal service. These disposal costs are charged to nuclear fuel expense.

Decommissioning Fund Assets/Decommissioning Liability As of December 31, 2009 and 2008, approximately $10.6 million and $8.2 million, respectively, have been col-lected and are being retained in an interest-bearing trust fund to be used for the physical decommissioning of Wolf Creek Nuclear Generating Station (Wolf Creek). The trustee invests the decommissioning funds primarily in mutual funds, which are carried at fair value. During 2003, the KCC extended the estimated useful life of Wolf Creek to 60 years from the original estimates of 40 years only for the determination of decommissioning costs to be recognized for rate making purposes. In2009, the KCC approved a 2008 decommissioning cost study, which increased the estimate of total decommissioning costs to $593.5 million in 2008 ($35.6 million is KEPCo's share).

The study assumes a 3.73% rate of inflation and 6.8% rate of return.

KEPCo recognizes and estimates the liability for its 6% share of the estimated cost to decommission Wolf Creek based on the present value of the asset retirement obligation KEPCo incurred at the time itwas placed into service in 1985. On January 1, 2003, KEPCo initially recognized an asset retirement obligation of $11.7 million; utility plant in-service, net of accumulated depreciation, was increased by $2.9 million; and KEPCo also established a regulatory asset for $3.9 million, which represents the amount of the Wolf Creek asset retirement obligation and accumulated depreciation not yet refunded.

The decommissioning study in 2008 decreased the asset retirement obligation by approximately $3.5 million, utili-ty plant in-service, net of accumulated depreciation by $0.5 million and the regulatory asset by $3.0 million in 2009.

Areconciliation of the asset retirement obligation for the years ended December 31, 2009 and 2008, is as follows:

2009 2008 Balance at January 1 $18,384,841 $17.328,228 Accretion 882,784 1,056,613 Decrease from 2008 study (3,506,034) -

Balance at December 31 $15,761,591 $18,384,841 Any net margin effects are deferred in the Wolf Creek decommissioning regulatory asset created and will be col-lected from members in future electric rates.

Cash and Cash Equivalents All highly liquid investments purchased with an original maturity of three months or less are considered to be cash equivalents and are stated at cost, which approximates fair value. Cash equivalents consisted primarily of repur-chase agreements, money market account and certificates of deposit.

The financial institution holding the Cooperative's cash accounts is participating in the FDIC's Transaction Account Guarantee Program. Under that program, through June 30, 2010, all noninterest-bearing transaction accounts are fully guaranteed by the FDIC for the entire amount in the account.

Effective October 3, 2008, the FDIC's insurance limits increased to $250,000. The increase in federally insured limits is currently set to expire December 31, 2013. At December 31, 2009, the Cooperative's interest-bearing cash accounts were covered by FDIC insurance.

The Cooperative's repurchase agreements have collateral pledged by a financial institution, which are securities that are backed by the full faith of the government.

Kansas Electric Power Cooperative, Inc.

Notes to Consolidated Financial Statements December 31, 2009 and 2008 Accounts Receivable Accounts receivable are stated at the amount billed to members and customers. KEPCo provides allowances for doubtful accounts, which is based upon a review of outstanding receivables, historical collection information and existing economic conditions.

Materials and Supplies Inventory Materials and supplies inventory are valued at average cost.

Unamortized Debt Issuance Costs Unamortized debt issue costs relate to the issuance of the floating/fixed rate pollution control revenue bonds, mortgage notes payable to the National Rural Utilities Cooperative Finance Corporation (CFC) trusts and fees for repricing the Federal Financing Bank (FFB) debt. These costs are being amortized using the effective interest method over the remaining life of the bonds and notes.

Cash Surrender Value of Life Insurance Contracts The following amounts related to Wolf Creek Nuclear Operating Corporation (WCNOC) corporate-owned life insurance contracts, primarily with one highly rated major insurance company, are included in other long-term as-sets on the consolidated balance sheets.

2009 2008 Cash surrender value of contracts $ 5,473,452 $ 5,276,957 Borrowings against contracts (5,236,550) (5,276,957)

$ 236,902 Borrowings against contracts include a prepaid interest charge. KEPCo pays interest on these borrowings at a rate of 6.84% and 5.45% for the years ended December 31, 2009 and 2008, respectively.

Revenues Revenues are recognized during the month the electricity is sold. Revenues from the sale of electricity are re-corded based on usage by member cooperatives and customers and on contracts and scheduled power usages as appropriate.

Income Taxes As a tax-exempt cooperative, KEPCo is exempt from income taxes under Section 501(c)(12) of the Internal Rev-enue Code of 1986, as amended. Accordingly, provisions for income taxes have not been reflected in the accom-panying consolidated financial statements. The Cooperative is no longer subject to federal or state income tax examinations by taxing authorities for years prior to 2006.

Reclassifications Certain reclassifications have been made to the 2008 financial statements to conform to the 2009 financial state-ment presentation. These reclassifications had no effect on net earnings.

Subsequent Events Subsequent events have been evaluated through April 12, 2010, which is the date the financial statements were available to be issued.

Note 2:Factors That Could Affect Future Operating Results KEPCo currently applies accounting standards that recognize the economic effects of rate regulation and, accord-ingly, has recorded regulatory assets and liabilities related to its generation and transmission operations in accor-dance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 980, Regu-lated Operations. In the event KEPCo determines that it no longer meets the criteria of ASC 980, the accounting impact could be a noncash charge to operations of an amount that would be material. Criteria that could give rise to the discontinuance of ASC 980 include: 1) increasing competition that restricts KEPCo's ability to establish

Kansas Electric Power Cooperative, Inc.

Notes to Consolidated Financial Statements December 31, 2009 and 2008 prices to recover specific costs and 2) a significant change in the manner rates are set by regulators from a cost-based regulation to another form of regulation. KEPCo periodically reviews these criteria to ensure the continuing application of ASC 980 is appropriate. Any changes that would require KEPCo to discontinue the application of ASC 980 due to increased competition, regulatory changes or other events may significantly impact the valuation of KEEPCo's investment in utility plant, its investment in Wolf Creek and necessitate the write-off of regulatory as-sets. At this time, the effect of competition and the amount of regulatory assets that could be recovered in such an environment cannot be predicted.

The 1992 Energy Policy Act began the process of restructuring the United States electric utility industry by per-mitting the Federal Energy Regulatory Commission to order electric utilities to allow third parties to sell electric power to wholesale customers over their transmission systems. KEPCo has elected to deregulate its rate making for sales to its members under recent statutory amendments. Subject to the possibility of KCC review, KEPCo's member rates are now set by action of the Board. KEPCo's ability to timely recover its costs is enhanced by this change.

Note 3: Departures From Generally Accepted Accounting Principles Effective February 1, 1987, the KCC issued an order to KEPCo requiring the use of present worth (sinking fund) depreciation and amortization. As more fully described in Note 7, such depreciation and amortization methods constituted phase-in plans that did not meet the requirements of ASC 980-340 Regulated Operation, Other Assets and Deferred Costs.

Effective February 1, 2002, the KCC issued an order that extended the depreciable life of Wolf Creek from 40 years to 60 years. This order also permitted recovery in rates of the $53.5 million cumulative difference between historical present worth (sinking fund) depreciation and amortization and straight-line depreciation and amortiza-tion of the Wolf Creek generation plant and disallowed costs over a 15-year period. Recovery of these costs in rates is included in operating revenues, and the related amortization expense is included in deferred charges in the consolidated statements of margin.

The effect of these departures from generally accepted accounting principles is to overstate (understate) the fol-lowing items in the consolidated financial statements by the following amounts:

2009 2008 Deferred charges $ 24,945,439 $ 28,509,073 Patronage capital $ 24,945,439 $ 28,509,073 Net margin $ (3,563,634) $ (3,563,634)

Note 4: Wolf Creek Nuclear Operating Corporation KEPCo owns 6% of Wolf Creek Nuclear Operating Corporation (WCNOC), which is located near Burlington, Kansas. The remainder is owned by the Kansas City Power & Light Company (KCPL) 47% and Kansas Gas &

Electric Company (KGE) 47%. KGE is a wholly owned subsidiary of Westar Energy, Inc. KCPL is a wholly owned subsidiary of Great Plains Energy, Inc. KEPCo's undivided interest in WCNOC is consolidated on a pro rats basis. Substantially all of KEPCo's utility plant consists of its pro rata share of WCNOC. KEPCo is entitled to a proportionate share of the capacity and energy from WCNOC, which is used to supplement a portion of KEPCo's members' requirements. KEPCo is billed on a daily basis for 6% of the operations, maintenance, administrative and general costs and cost of plant additions related to WCNOC.

WCNOC disposes of all classes of its low-level radioactive waste at existing third-party repositories. Should dis-posal capability become unavailable, WCNOC is able to store its low-level radioactive waste in an on-site facility for up to five years under current regulations.

WCNOC is currently working on a capacity upgrade and received a 20-year operating license extension from the Nuclear Regulatory Commission in 2008.

Kansas Electric Power Cooperative, Inc.

Notes to Consolidated Financial Statements December 31, 2009 and 2008 Note 5: Investments in Associated Organizations Investments in associated organizations are caried at cost. At December 31, 2009 and 2008, investments in as-sociated organizations consisted of the following:

2009 2008 CFC Memberships $ 1,000 $ 1,000 Capital term certificates 395,970 395,970 Subordinated term certificates 2,205,000 2,205,000 Patronage capital certificates 175,343 81,690 Equity term certificates 8,396,799 4,213,659 Member capital certificates 2,500,000 13,674,112 6,897,319 Other 181,191 176,430

$ 13,855,303 $ 7,073.749 Note 6: Bond Fund Reserve KEPCo has entered into a bond covenant whereby KEPCo is required to maintain, with a trustee, a bond fund reserve of approximately $4.4 million. This stipulated amount is sufficient to satisfy certain future interest and principal obligations. The amount held in the bond fund reserve is invested by the trustee in tax-exempt municipal securities, pursuant to the restrictions of the indenture agreement, which are carried at amortized cost.

Note 7:Deferred Charges Wolf Creek Disallowed Costs Effective October 1, 1985, the KCC issued a rate order relating to KEPCo's investment in Wolf Creek, which dis-allowed $26.0 million of KEPCo's investment in Wolf Creek ($12.6 million net of accumulated amortization as of December 31, 2009). A subsequent rate order, effective February 1, 1987, allows KEPCo to recover these disal-lowed costs and other costs related to the disallowed portion (recorded as deferred charges) for the period from September 3, 1985 through January 31, 1987, over a 27.736-year period starting February 1, 1987. Pursuant to a KCC rate order dated December 30, 1998, the disallowed portion's recovery period was extended to a 30-year period. Through December 31, 2001, KEPCo used the present worth (sinking fund) method to recover the disallowed costs, which enabled it to meet the times-interest-eamed ratio and debt service requirements in the KCC rate order dated January 30, 1987. The method used by KEPCo through 2001 constituted a phase-in plan that did not meet the requirements of ASC 980-340, Regulated Operations, Other Assets and Deferred Costs.

Effective February 1, 2002, the KCC issued an order permitting recovery in rates of the $6.5 million cumulative difference between historical present worth (sinking fund) and straight-line amortization of Wolf Creek disallowed costs over a 15-year period. Such depreciation practice does not constitute a phase-in plan that meets the re-quirements of ASC 980-340.

If the disallowed costs were recovered using a method in accordance with accounting principles generally ac-cepted in the United States, the costs would have been expensed in their entirety upon implementation of the KCC order, with a corresponding decrease in patronage capital.

Wolf Creek Deferred Plant Costs Effective February 1, 2002, the KCC issued an order permitting recovery in rates of the $46.9 million cumulative difference between historical present worth (sinking fund) depreciation and straight-line depreciation of Wolf Creek generation plant over a 15-year period. Such depreciation practice does not constitute a phase-in plan that meets the requirements of ASC 980-340. In 2002, this cumulative difference was reclassified from utility plant allowance

Kansas Electric Power Cooperative, Inc.

Notes to Consolidated Financial Statements December 31, 2009 and 2008 for depreciation to deferred charges on the consolidated balance sheets to reflect the amount as a regulatory asset. Amortization of the Wolf Creek deferred plant costs is included in amortization of deferred charges and amounts to $3.1 million for each of the years ended December 31, 2009 and 2008.

If the deferred plant costs were recovered using a method in accordance with accounting principles generally ac-cepted in the United States of America, the costs would have been expensed in their entirety upon implementation of the KCC order, with a corresponding decrease in patronage capital.

Deferred Incremental Outage Costs In 1991, the KCC issued an order that allowed KEPCo to defer its 6% share of the incremental operating, mainte-nance and replacement power costs associated with the periodic refueling of Wolf Creek. Such costs are deferred during each refueling outage and are being amortized over the approximate 18-month operating cycle coinciding with the recognition of the related revenues. Additions to the deferred incremental outage costs were $5.3 million and $6.2 million in 2009 and 2008, respectively. The current year amortization of the deferred incremental outage costs was $4.1 million and $3.9 million in 2009 and 2008, respectively.

Other Deferred Charges KEPCo includes in other deferred charges the early call premium resulting from refinancings. These early call premiums are amortized using the effective interest method over the remaining life of the new agreements.

Note 8: Line of Credit As of December 31, 2009, KEPCo has a $15.0 million line of credit outstanding with the CFC. This line of credit expires in March 2011. There were no funds borrowed against the line of credit at December 31, 2009. There were outstanding borrowings of approximately $13.2 million at December 31,2008. The line of credit requires the Cooperative to pay down the balance to zero biannually. Interest varies and was 4.25% at December 31, 2009, and 5.00% at December 31, 2008.

Note 9: Long-Term Debt Long-term debt consists of mortgage notes payable to the United States of America acting through the FFB, the CFC and others. Substantially all of KEPCo's assets are pledged as collateral: The terms of the notes as of De-cember 31 are as follows:

2009 2008 Mortgage notes payable to the FF8 at fixed rates varying from 3.616% to 9.206%, payable in quarterly installments through 2020 $ 64,822,513 $ 72,149,927 Mortgage notes payable to the Grantor Trust Series 1997 at a rate of 7:522%, payable semiannually, principal payments commencing in 1999 and continuing annually through 2017 34,940,000 38,040,000 Floating/fixed rate pollution control revenue bonds, City of Burlington, Kansas, Pooled Series 1985C, variable interest rate (ranging from 1.05% to 1.75% at December 31, 2009) payable annually through 2017 20,100,000 22,500,000 Mortgage notes payable and equity certificate loans to the National Rural Utilities Cooperative Finance Corporation at fixed rates of 3.20% to 7.70%, payable quarterly through 2034.

Currently, KEPCo has approximately $18.3 million of funds available to borrow, which mature in 2012 72,796,957 33,126,470 192,659,470 165,816,397 Less current maturities 14,191,957 13,159,154

$ 178,467,513 $ 152,657,243

Kansas Electric Power Cooperative, Inc.

Notes to Consolidated Financial Statements December 31, 2009 and 2008 Aggregate maturities of long-term debt for the next five years and thereafter are as follows:

2010 $ 14,191,957 2011 15,288,130 2012 83,516,577 2013 17,488,881 2014 18,822,823 Thereafter 43,351,102

$ 192,659,470 Restrictive covenants require KEPCo to design rates that would enable it to maintain a times-interest-earned ratio of at least one-to-one and debt-service coverage ratio of at least one-to-one, on average, in at least two out of every three years. The covenants also prohibit distribution of net patronage capital or margins until, after giving effect to any such distribution, total patronage capital equals or exceeds 20% of total assets, unless such distribu-tion is approved by RUS. KEPCo was in compliance with such restrictive covenants as of December 31, 2009 and 2008.

In 1997, KEPCo refinanced its mortgage notes payable to the 1988 CFC Grantor Trust through the establishment of a new CFC Grantor Trust Series 1997 (the Series 1997 Trust) by CFC. This refinancing reduced the guaran-teed interest rate payable on the mortgage notes to a fixed rate of 7.522% through the use of an interest rate swap that was assigned by KEPCo to the Series 1997 Trust. The mortgage notes payable are prepayable at any time with no prepayment penalties. However, any termination costs relating to the termination of the assigned interest rate swaps is KEPCo's responsibility. At December 31, 2009, the termination obligation associated with the as-signed swap agreement to early retire the mortgage notes payable is approximately $7.0 million. This fair value estimate is based on information available at December 31, 2009, and is expected to fluctuate in the future based on changes in interest rates and outstanding principal balance.

KEPCo also is exposed to possible credit loss in the event of noncompliance by the counterparty to the swap agreement. However, KEPCo does not anticipate nonperformance by the counterparty.

Note 10: Benefit Plans National Rural Electric Cooperative Association (NRECA) Retirement and Security Program KEPCo participates in the NRECA Retirement and Security Program for its employees. All employees are eligible to participate in this program after one year of service. In the master multiemployer plan, which is available to all members of NRECA, the accumulated benefits and plan assets are not determined or allocated by individual employer members. KEPCo's expense under this program was approximately $0.3 million for the years ended December 31, 2009 and 2008.

NRECA Savings 401(k) Plan All employees of KEPCo are eligible to participate in the NRECA Savings 401(k) Plan. Under the plan, KEPCo contributes an amount not to exceed 5%, dependent upon each employee's level of participation and completion of one year of service, of the respective employee's base pay to provide additional retirement benefits. KEPCo contributed approximately $0.1 million to the plan for each of the years ended December 31, 2009 and 2008.

WCNOC Pension and Postretirement Plans KEPCo has an obligation to the WCNOC retirement, supplemental retirement and postretirement medical plans for its 6% ownership interest in Wolf Creek. The plans provide for benefits upon retirement, normally at age 65.

In accordance with the Employee Retirement Income Security Act of 1974, KEPCo has satisfied its minimum funding requirements. Benefits under the plans reflect the employee's compensation, years of service and age at retirement.

WCNOC uses a measurement date of December 31 for its retirement plan, its supplemental retirement plan and postretirement plan (collectively, the Plans). Information about KEPCo's 6% of the Plans' funded status follows:

Kansas Electric Power Cooperative, Inc.

Notes to Consolidated Financial Statements December 31, 2009 and 2008 Pension Benefits Postretirement Benefits 2009 2008 2009 2008 Benefit obligation $ (14,174,710) $ (12,706,873) $ (1,222,057) $ (1,129,978)

Fair value of plan assets 7,980,796 5,770,218

$ (6,193.914) $ (6,936,655) $ (1,222,057) $ (1,129,978)

Amounts recognized in the consolidated balance sheets:

2009 2008 Other long-term liabilities Wolf Creek pension and postretirement benefit plans $ 7,433,971 $ 8,066,633 Amounts recognized in accumulated other comprehensive income (loss) not yet recognized as components of net periodic benefit cost consist of:

Pension Benefits Postretirement Benefits 2009 2008 2009 2008 Net loss $ (4,449,829) $ (5,208,752) $ (473,458) $ (409,877)

Prior service cost (9,659) (15,188)

Transition obligation (13,910) (21,168) (22,082) (29,7311

$ 4,473,398 $ (5,245,108) $ (495,540) $ (439,608)

Information for the pension plan with an accumulated benefit obligation in excess of plan assets:

Pension Benefits 2009 2008 Projected benefit obligation $ 14,174,710 $ 12,706,873 Accumulated benefit obligation $ 11,590,454 $ 9,854,875 Fair value of plan assets $ 7,980,796 $ 5,770,218 Other significant balances and costs are:

Pension Benefits Postretirement Benefits 2009 2008 2009 2008 Employer contributions $ 933,171 $ 843,543 $ 91,029 $ 105,411 Benefits paid $ 268,433 $ 251,427 $ 147,024 $ 150,853 Benefits cost $ 983,742 $ 791,759 $ 132,912 $ 128,775 The estimated net loss, prior service cost and transition obligation for the defined benefit pension plans that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost over the next fiscal year are approximately $310,000, $4,000 and $7,000, respectively. The estimated net loss and transition obligation for the defined benefit postretirement plan that will be amortized from accumulated other comprehen-sive income (loss) into net periodic benefit cost over the next fiscal year are approximately $35,000 and $7,000, respectively.

Significant assumptions used to determine benefit obligations include:

Pension Benefits Postretirement Benefits 2009 2008 2009 2008 Discount rate 6.05% 6.15% 5.05% 6.05%

Annual salary increase rate 4.00% 4.00% N/A N/A Expected return on plan assets 8.00% 8.25% N/A N/A Assumed health care cost trend rate N/A N/A 8.0% decreasing 8.0% decreasing 0.5% per year to 5.0% 0.5% per year to 5.0%

WCNOC uses an interest yield curve to make judgments. The yield curve is constructed based on yields on over 500 high-quality, noncallable corporate bonds with maturities between 0 and 30 years. A theoretical spot rate

Kansas Electric Power Cooperative, Inc.

Notes to Consolidated Financial Statements December 31, 2009 and 2008 curve constructed from this yield curve is then used to discount the annual benefit cash flows of WCNOC's pen-sion plan and develop a single-point discount rate matching the plan's payout structure.

The expected long-term rate of return on plan assets is based on historical and projected rates of return for cur-rent and planned asset classes in the pension plan's investment portfolio. Assumed and projected rates of return for each asset class were selected after analyzing long-term historical experience and future expectations of the volatility of the various asset classes. Based on target asset allocation for each asset class, the overall expected rate of return for the portfolio was developed, adjusted for historical and expected experience of active portfolio management results compared to benchmark returns and for the effect of expenses from plan assets.

In selecting the discount rate, fixed income security yield rates for corporate high-grade bond yields were consid-ered.

The defined benefit pension plan assets are invested in insurance contracts, corporate bonds, equity securities, United States government securities and short-term investments.

The asset allocation for the defined benefit pension plan at the end of 2009 and 2008 and the target allocation for 2010 by asset category are as follows:

Target Pension Allocation for Plan Assets 2010 2009 2008 Asset category Equity securities 65% 65% 58%

Debt securities 25% 24% 39%

Real estate 5% 4% 1%

Other 5% 7% 2%

100% 100% 100%

WCNOC's pension plan investment strategy supports the objective fund, which is to earn the highest possible return on plan assets consistent with a reasonable and prudent level of risk. Investments are diversified across classes, sectors and manager style to minimize the risk of large losses. WCNOC delegates investment manage-ment to specialists in each asset class and, where appropriate, provides the investment manager with specific guidelines, which include allowable and/or prohibited investment types. Investment risk is measured and moni-tored on an ongoing basis through quarterly investment portfolio reviews.

Following is a description of the valuation methodologies used for pension plan assets measured at fair value on a recurring basis and recognized in the accompanying balance sheets, as well as the general classification of pen-sion plan assets pursuant to the valuation hierarchy.

Where quoted market prices are available in an active market, plan assets are classified within Level 1 of the valuation hierarchy. Level 1 plan assets include cash equivalents, equity and debt investments. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of plan assets with similar characteristics or discounted cash flows. Level 2 investments include cash equivalents, equity, debt and commodity investments. In certain cases where Level 1 or Level 2 inputs are not available, plan assets are clas-sified within Level 3 of the hierarchy and include certain real estate investments. Significant inputs and valuation techniques used in measuring Level 3 fair values include market discount rates, projected cash flows and the estimated value into perpetuity.

The fair values of WCNOC's pension plan assets at December 31, 2010, by asset category are as follows:

Kansas Electric Power Cooperative, Inc.

Notes to Consolidated Financial Statements December 31, 2009 and 2008 Fair Value Measurements Using Quoted Prices in Active Significant Other Significant Markets for Identical Observable Unobservable Fair Value Assets (Level 1) Inputs (Level 2) Inputs (Level 3)

Cash equivalents $ 95,392 $ 112 $ 95,280 $ -

Equity securities U.S. companies 3,625,276 3,184,723 440,553 -

International companies 1,593,063 1,023,957 569,106 -

Debt securities Core bonds 1,514,553 - 1,514,553 -

High-yield bonds 385,277 385,277 Commodities 458,809 - 458,809 -

Real estate 308,426 - - 308,426 Total $ 7,980,796 $ 4,594,069 $ 3,078,301 $ 308,426 The following table provides a reconciliation of KEPCo's 6% share of Wolf Creek's pension plan assets measured at fair value using significant Level 3 inputs for the year ended December 31, 2009.

Fair value measurements using significant unobservable inputs (Level 3):

Real Estate Securities Balance at January 1, 2009 $

Actual return on plan assets Relating to assets still held at the reporting date (47,234)

Relating to assets sold during the year 766 Purchases, sales and settlements 354,894 Balance at December 31, 2009 $ 308,426 WCNOC does not utilize a separate investment trust for the purpose of funding other postretirement benefits as it does for its pension plan. The Wolf Creek pension plan investment strategy supports the objective of the fund, which is to earn the highest possible return on plan assets consistent with a reasonable and prudent level of risk.

Investments are diversified across classes, sectors and manager style to maximize returns and minimize the risk of large losses. Wolf Creek delegates investment management to specialists in each asset class and, where ap-propriate, provides the investment manager with specific guidelines, which include allowable and/or prohibited investment types. Prohibited investments include investments in the equity or debt securities of the companies that collectively own Wolf Creek or companies that control such companies, which includes KEPCo and KGE se-curities. Wolf Creek has also established restrictions for certain classes of plan assets, including that international equity securities should not exceed 25% of total plan assets, no more than 5% of the market value of the plan as-sets should be invested in the common stock of one corporation and the equity investment in any one corporation should not exceed 1% of its outstanding common stock.

The target allocations for Wolf Creek's pension plan assets are 20% to international equity securities, 45% to do-mestic equity securities, 25% to debt securities, 5% to real estate securities and 5% to commodity investments.

The investments in both international and domestic equity securities include investments in large-, mid- and small-cap companies, private equity funds and investment funds with underlying investments similar to those previously mentioned. The investments in debt securities include core and high yield bonds. Core bonds include funds in-vested in investment grade debt securities of corporate entities, obligations of U.S. and foreign governments and their agencies and private debt securities. High yield bonds include a fund with underlying investments in non-investment grade debt securities of corporate entities, private placements and bank debt. Real estate securities

Kansas Electric Power Cooperative, Inc.

Notes to Consolidated Financial Statements December 31, 2009 and 2008 include funds invested in commercial snd residential real estate properties while commodity investments include funds invested in commodity-related instruments.

KEPCo estimates cash contributions of approximately $0.9 million will be made to the Plans in 2010.

Estimated future benefit payments as of December 31, 2009, for the Plans, which reflect expected future services, are as follows:

Pension Benefits Other Benefits 2010 $ 302,880 $ 32,400 2011 340,380 32,040 2012 383,940 31,620 2013 436,740 31,140 2014 495,720 30,660 2015-2019 3,622,080 143,880

$ 5,581,740 $ 301,740 Note 11: Commitments and Contingencies Current Economic Environment The Cooperative considers the current economic conditions when planning for future power supply and liquidity needs. The current instability in the financial markets may have an impact on the Cooperative's members, which may impact the Cooperative's volume of future sales, which could have an adverse impact on the Cooperative's future operating results. The current economic climate may also affect the Cooperative's ability to obtain financ-ing.

Given the volatility of the current economic conditions, the values of assets and liabilities recorded in the financial statements could change rapidly, resulting in material future adjustments that could negatively impact the Coop-erative's ability to meet debt covenants or maintain sufficient liquidity. Currently under state statutes, the Coop-erative's rate making is deregulated and, therefore, expects to be able to recover any economic losses through future rates.

Litigation The Cooperative is subject to claims and lawsuits that arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have an adverse effect on the consolidated financial position, results of operations and cash flows of the Cooperative.

There is a provision in the Wolf Creek operating agreement whereby the owners treat certain claims and losses arising out of the operations of Wolf Creek as a cost to be borne by the owners separately (but not jointly) in pro-portion to their ownership shares. Each of the owners has agreed to indemnify the others in such cases.

Nuclear Liability and Insurance Pursuant to the Price-Anderson Act, which was reauthorized through December 31, 2025, by the Energy Policy Act of 2005, KEPCo is required to insure against public liability claims resulting from nuclear incidents to the full limit of public liability, which is currently approximately $12.5 billion. This limit of liability consists of the maximum available commercial insurance of $300 million, and the remaining $12.2 billion is provided through mandatory participation in an industrywide retrospective assessment program. Under this retrospective assessment pro-gram, owners are jointly and severally subject to an assessment of up to $117.5 million ($7.1 million - KEPCo's share) at any commercial reactor in the country, payable at no more than $17.5 million ($1.1 million - KEPCo's share) per incident per year, per reactor. This assessment is subject to an inflation adjustment based on the Con-sumer Price Index and applicable premium taxes. This assessment also applies in excess of the worker radiation claims insurance. The next scheduled inflation adjustment is scheduled forAugust 2013. In addition, Congress could impose additional revenue-raising measures to pay claims.

Kansas Electric Power Cooperative, Inc.

Notes to Consolidated Financial Statements December 31, 2009 and 2008 The owners of Wolf Creek carry decontamination liability, premature decommissioning liability and property dam-age insurance for Wolf Creek totaling approximately $2.8 billion ($168 million - KEPCo's share). This insurance is provided by Nuclear Electric Insurance Limited (NEIL). In the event of an accident, insurance proceeds must first be used for reactor stabilization and site decontamination in accordance with a plan mandated by the Nuclear Regulatory Commission. KEPCo's share of any remaining proceeds can be used to pay for property damage, de-contamination expenses or, if certain requirements are met, including nuclear decommissioning the plant, toward a shortfall in the decommissioning trust fund.

The owners also carry additional insurance with NEIL to cover costs of replacement power and other extra ex-penses incurred during a prolonged outage resulting from accidental property damage at Wolf Creek. If significant losses were incurred at any of the nuclear plants insured under the NEIL policies, KEPCo may be subject to ret-rospective assessments under the current policies of approximately $1.5 million.

Although KEPCo maintains various insurance policies to provide coverage for potential losses and liabilities re-sulting from an accident or an extended outage, KEPCo's insurance may not be adequate to cover the costs that could result from a catastrophic accident or extended outage at Wolf Creek, Any substantial losses not covered by insurance, to the extent not recoverable through rates, would have a material adverse effect on KEPCo's financial condition and result of operations.

Decommissioning Insurances KEPCo carries premature decommissioning insurance that has several restrictions, one of which can only be used if Wolf Creek incurs an accident exceeding $500 million in expenses to safely stabilize the reactor, to decontami-nate the reactor and reactor station site in accordance with a plan approved by the Nuclear Regulatory Commis-sion (NRC) and to pay for on-site property damages. Once the NRC property rule requiring insurance proceeds to be used first for stabilization and decontamination has been complied with, the premature decommissioning coverage could pay for the decommissioning fund shortfall in the event an accident at Wolf Creek exceeds $500 million in covered damages and causes Wolf Creek to be prematurely decommissioned.

Nuclear Fuel Commitments At December 31,2009, KEPCo's share of WCNOC's nuclear fuel commitments was approximately $6.9 million for uranium concentrates expiring in 2016, $1.1 million for conversion expiring in 2016, $17.3 million for enrichment expiring at various times through 2024 and $6.1 million for fabrication through 2024.

Purchase Power Commitments KEPCo has supply contracts with various utility companies to purchase power to supplement generation in the given service areas. KEPCo has a contract with Westar Energy, Inc., through December 2045.

KEPCo has provided the Southwest Power Pool a letter of credit to help insure power is available if needed.

latan 2 Purchase Commitment Effective June 2006, KEPCo entered into an agreement, subject to RUS approval, to purchase a 3.53% owner-ship in a coal-fired generation facility. KEPCo's estimated costs for the project were $75 million at December 31, 2009, To date, the Cooperative has paid approximately $60 million under the agreement. Financing is currently being provided by CFC.

Note 12: Fair Value of Assets and Liabilities ASC Topic 820, Fair Value Measurements, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level I Quoted prices in active markets for identical assets or liabilities Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities;

Kansas Electric Power Cooperative, Inc.

Notes to Consolidated Financial Statements December 31, 2009 and 2008 quoted prices in markets that are not active; or other inputs that are observable or can be corrobo-rated by observable market data for substantially the full term of the assets or liabilities Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities Following is a description of the valuation methodologies used for assets and liabilities measured at fair value on a recurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classifica-tion of such assets and liabilities pursuant to the valuation hierarchy.

Decommissioning Fund The decommissioning fund consists of various mutual funds where fair value is determined by quoted market prices in an active market and, as such, are classified within Level 1 of the valuation hierarchy.

The following table presents the fair value measurements of assets and liabilities recognized in the accompany-ing consolidated balance sheets measured at fair value on a recurring basis and the level within the ASC 820 fair value hierarchy in which the fair value measurements fall at December 31, 2009:

Fair Value Measurements Using Quoted Prices Significant Other Significant in Active Markets Observable Unobservable for Identical Assets Inputs Inputs Fair Value (Level 1) (Level 2) (Level 3)

Decommissioning fund $ 10,571,021 $ 10,571,021 $ - $ -

The following methods were used to estimate the fair value of all other financial instruments recognized in the ac-companying consolidated balance sheets at amounts other than fair value.

Cash and Cash Equivalents The carrying amount approximates fair value.

investments in CFC and Other Associated Organizations KEPCo considers CFC and other associated organizations certificates to be a condition of borrowing and patron-age capital certificates to be directly related to borrowing. As such, KEPCo management believes the fair value of these assets is not determinable and they are reflected at their carrying amount.

Bond Fund Reserve The bond fund reserve consists of various held-to maturity securities where the fair value is primarily based on quoted market prices.

Line of Credit and Long-Term Debt Variable-Rate Debt - The carrying amount approximates fair value because of the short-term variable rates of those debt instruments.

Fixed-Rate Debt - The fair value of all fixed-rate debt is based on the sum of the estimated value of each issue, taking into consideration the current rate offered to KEPCo for debt of similar remaining maturities.

The following table presents estimated fair values of KEPCo's financial instruments at December 31, 2009 and 2008:

Kansas Electric Power Cooperative, Inc.

Notes to Consolidated Financial Statements December 31, 2009 and 2008 December 31, 2009 December 31, 2008 Carrying Value Fair Value Carrying Value Fair Value Financial assets Cash and cash equivalents $ 118,631 $ 118,631 $ 634,108 $ 634,108 Bond fund reserve $ 4,411,168 $ 4,688,924 $ 4,321,172 $ 4,578,569 Decommissioning fund $ 10,571,021 $ 10,571,021 $ 8,212,742 $ 8,212,742 Financial liabilities Line of credit $ - $ - $ 13,178,203 $ 13,178,203 Long-term debt $ 192,659,470 $ 195,696,622 $ 165,816,397 $ 174,124,971 Note 13: Patronage Capital In accordance with KEPCo's bylaws, KEPCo's current margins are to be allocated to members. KEPCo's cur-rent policy is to allocate to the members based on revenues collected from the members as a percentage of total revenues. If KEPCo's consolidated financial statements were adjusted to reflect accounting principles generally accepted in the United Stated of America, total patronage capital would be substantially less. As noted in the con-solidated statements of changes in patronage capital, no patronage capital distributions were made to members in 2009 and 2008.

31

KEPCo Generation Resources KEPCo power resources include the generation facilities pictured below, as well as long term power supply agree-ments with investor-owned utilities.

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Wolf Creek Nuclear Generating Station latan-2 (Artist's Rendering)

Nuclear Base Load Coal-Fired Base Load Came On-Line in October, 1985 Expected Operational in December, 2010 70 MW (6% Ownership) 30 MW (3% Ownership)

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, - I r.u..r nyur. C ruwer -'rojeta QtLIr; 01narp Uenerauon oralion Southwest Power Administration, 100 MW Peaking Diesel Peaking Western Area Power Administration, 14 MW In Service, June, 2002 20 MW

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