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Yesterday’s VisionTomorrow’s FutureToday’s Cooperative2012 ANNUAL REPORT

Sunfl ower Electric Power Corporation301 W. 13th StreetHays, KS 67601

2012 SEPC cover.indd 12012 SEPC cover.indd 1 5/8/2013 4:23:24 PM5/8/2013 4:23:24 PM

Cooperatives are voluntary organizations, open to all persons able

to use their services and willing to accept the responsibilities of

membership without gender, social, racial, political or religious

discrimination.

Cooperatives are democratic

organizations controlled by their

members who actively participate

in setting their policies and making

decisions. Those serving as

elected representatives are

accountable to the

membership.

Members contribute equally to

and democratically control the

capital of their cooperative. At

least part of that capital is usually

the common property of the

cooperative. Cooperatives are autonomous, self-help organizations controlled by their

members. If they enter into agreements with other organizations, including

governments, or raise capital from external sources, they do so on terms that

ensure democratic control by their members and maintain the cooperative

autonomy.

Cooperatives provide

education and training

for their members, elected

representatives, managers and

employees so they can contribute

effectively to the development of

their cooperatives. They inform

the general public, particularly

young people and opinion leaders,

about the nature and benefi ts of

cooperation.

Cooperatives serve their members

most effectively and strengthen the

cooperative movement by working

together through local, regional,

national, and international structures.

While focusing on member

needs, cooperatives work for

the sustainable development

of their communities

through policies accepted

by their members.

VOLUNTARY & OPEN MEMBERSHIP

DEMOCRATIC MEMBER CONTROLCONCERN FOR COMMUNITY

COOPERATION AMONG COOPERATIVES

EDUCATION, TRAINING, & INFORMATION

AUTONOMY & INDEPENDENCE

MEMBERS’ ECONOMIC PARTICIPATION

2 Today. Tomorrow. Yesterday.

In 2012 cooperatives around the world and in all kinds of businesses celebrated the International Year of the Cooperative. The year-long celebration provided an opportunity to educate people about the principles that guide the business model that allows members to come together for a common purpose. Our electric cooperative celebrates this business model every year by continuing to live the mission of Sunfl ower on behalf of our Members. So how does Sunfl ower embody these cooperative principles? VOLUNTARY AND OPEN MEMBERSHIP – Six rural electric cooperatives came together more than 50 years ago due to a common need for generation and high voltage transmission. Although the technology has changed, the mission to provide service at the lowest possible cost still rings true. DEMOCRATIC MEMBER CONTROL – The Sunfl ower Board is represented by two people from each of our Member systems: the general manager or CEO and an elected representative from the board of trustees. These twelve people each have an equal vote in the policy decisions for Sunfl ower. MEMBERS ECONOMIC PARTICIPATION – The cooperatives that own Sunfl ower share in our success. Capital for the projects we complete is provided ultimately by the ratepayers of western Kansas. AUTONOMY AND INDEPENDENCE –Sunfl ower is fi rst and foremost accountable to our six Members. The decisions that are made in our boardroom are made for the benefi t of our Members directly. EDUCATION, TRAINING, AND INFORMATION – The electric industry is currently in a state of tremendous change. New regulations, new opportunities with technology, and the need to update and expand our system have created the need for clear information about how these changes impact ratepayers. Sunfl ower is committed to providing honest assessments of how these changes will impact you. COOPERATION AMONG COOPERATIVES – Because we believe in the cooperative business model, cooperatives have joined to create other cooperatives that provide needed services for their members. Sunfl ower participates with other cooperatives to provide power supply services, insurance, fi nancing, advocacy, and technology, just to name a few. When we work together, costs are shared by many and ultimately reduced for everyone. COMMITMENT TO COMMUNITY – Every day, Sunfl ower and our Members touch the lives of approximately 200,000 Kansans. Beyond providing reliable electricity to power our homes and

businesses, our commitment to rural development is evidenced by school programs, support of civic organizations, and our efforts to grow our rural economy.

Although the International Year of the Cooperative has concluded, Sunfl ower will continue to celebrate our business model because we believe it returns the best value to our Members. We work every day to provide reliable power and services at the lowest possible cost consistent with sound business and cooperative principles. That is our promise to you – year in and year out.

EXECUTIVE REPORT

Loren OchsChairman

Stuart LowryPresident & CEO

Yesterday. Tomorrow. Today. 3

Terry JansonDirectorVictory

Dodge City13 Years

Charles AyersDirector

WheatlandScott City13 Years

Loren OchsChairman

VictoryDodge City

34 Years

Larry EvansVice Chairman

WesternWaKeeney18 Years

Stephen EppersonDirectorPioneerUlysses2 years

Robert JohnsonDirector

Prairie LandNorton29 years

Bruce MuellerDirector

WheatlandScott City

1 year

Allan MillerDirector

Prairie LandNorton24 years

Perry RubartDirectorPioneerUlysses28 years

Dave SchneiderDirectorWestern

WaKeeney23 years

Paul Seib, Jr.Director

Lane-ScottDighton34 years

Ed WiltseDirector

Lane-ScottDighton1 year

BOARD OF DIRECTORS


S2Capacity: 98 MWFuel: Natural GasType: IntermediateIn service: 1973

S3Capacity: 16 MWFuel: Natural GasType: PeakingIn service: 1968



Holcomb 1Capacity: 349 MWFuel: PRB CoalType: BaseloadIn service: 1983

Smoky Hills Wind FarmPPA 50 MWFuel: WindType: IntermittentIn service: 2008

Transmission Lines: 1,374 miles

Generation and Transmission Facilities


Year In Review

Sunfl ower has a business model based on education, servant leadership, voluntary membership, and democratic governance. But it’s more than just a sound business model; it’s a way of life. At Sunfl ower Electric Power Corporation, our Members, Board of Directors, and staff are dedicated to the cooperative principles and proud to be a part of an organization that serves others. Refl ecting on our cooperative foundation seems particularly appropriate since 2012 was the International Year of the Cooperative, a year-long celebration focusing on the cooperative business model. Within our own history we can see the progress and value that electric cooperatives have provided families and business in central and western Kansas. The formation of local electric distribution cooperatives, and later the formation of generation and transmission cooperatives, made reliable, affordable electricity a reality for rural Kansas.

Preserving the way of life we all value and promoting growth in the communities we serve remain our goals. As the electric utility industry has evolved, Sunfl ower and our Members have collaborated to ensure the needs of our Members and those they serve are met, whether that entails updating infrastructure, constructing new facilities, or expanding the services provided to our Members. Sunfl ower and our Members recognize the importance of having thriving rural communities and support initiatives promoting strong relationships, encouraging economic development, and providing rural stability—such as the Rural Economic Development Loan and Grant program that assists small businesses in obtaining necessary funding.

We have experienced large and small changes over our history, yet the cooperative spirit remains as powerful today as it was more than 50 years ago when Sunfl ower was formed. Although early system struggles are in the distant past, the lessons learned are still relevant and applicable today. We understand that cooperatives exist to serve the needs of their members and that cooperatives need to be socially and economically responsible, concepts we learned yesterday, follow today, and pursue for tomorrow.

GenerationThe Sunfl ower system total net production was 2,088,341 MWh with Holcomb unit 1 (HL1) producing 1,967,701 MWh of the total. This represents the lowest annual production from the unit in 15 years. This is in stark contrast to last year’s production, which was the third highest annual production in the unit’s history. The difference in production is due to four primary factors: a nearly seven-week planned maintenance outage to install EPA-mandated environmental control upgrades, a three-week unplanned outage, additional wind resource commitments, and exceptionally low market energy prices. The Sunfl ower system peaked on June 27 at 566 MW. The combined system of Sunfl ower and Mid-Kansas Electric Company, LLC, peaked at 1,156 MW, which was 52 MW more than the prior year.


In July 2011, the Environmental Protection Agency (EPA) published the Cross State Air Pollution Rule (CSAPR), a rule that was intended to reduce the interstate transport of sulfur and nitrogen oxides. While Kansas had not been included in earlier drafts of the regulation, Kansas was included in the fi nal rule; furthermore, this fi nal rule specifi ed a January 1, 2012, implementation date, forcing Sunfl ower to effectively execute an emergency project to complete massive modifi cations to the HL1 boiler in less than fi ve months. Although the rule was eventually stayed by last-minute action of the U.S. Court of Appeals on Dec. 30, 2011, irrevocable contracts were already in place, requiring the project move forward as planned. As a result of the project, Sunfl ower required an extensive, seven-week outage to install state-of-the-art Hitachi low- NOX burners (LNB) and a Hitachi-designed separated over-fi re air (OFA) system specifi cally engineered for the HL1 boiler and costing more than $22 million. The new LNB OFA equipment cut the unit’s NOX emissions by nearly 50 percent without sacrifi cing combustion performance of the boiler.

Another project included a wash-down system to increase safety and reduce combustible dust at Holcomb Station. Wash-down systems were installed in the tripper deck, transfer house No. 2, crusher house, and several reclaim areas. These wash-down systems and other modifi cations have signifi cantly improved working conditions throughout coal handling systems making these areas cleaner, safer, more effi cient for employees, and reducing the number of man-hours required to clean fugitive dust.

A third project on Sunfl ower’s generation fl eet entailed replacing the control system and numerous fi eld devices on the S4 gas turbine to improve start-up reliability and overall unit performance. The project involved replacing most of the unit’s original fi eld wiring and the original control system, along with repairs and upgrades to the unit’s main gas regulating valve and a number of other fi eld devices. Finally, the project included upgrading the unit’s protection systems and installing automatic synchronization capability.

TransmissionThe Holcomb-to-Pioneer Tap 115 kilovolt (kV) line located in Finney and Haskell counties was completely rebuilt in 2012. Southwest Power Pool (SPP) identifi ed the need to upgrade this line to provide adequate and reliable service to the region. The project included replacing woodenH-frame structures with single, steel poles (known as a steel monopole design) and installing heavier conductor to meet project requirements. These design features not only met the technical requirements specifi ed by SPP, but they also reduced the project’s cost and the overall footprint on private property, providing a measurable landowner benefi t. In addition to these design features, certain sections of the line were relocated to existing county road easements, removing the line from the middle of agricultural areas and further diminishing the project’s impact on private property.


NEW LOW-NOX BURNERS line the turbine deck waiting to be installed on the boiler at Holcomb Station. Low-NOX burners work by controlling the fuel and air mixed at each burner, creating a larger and more branched fl ame. Peak fl ame temperature is thereby reduced, resulting in less NOX formation.

STEVE GLENN, lead EI&C technician (right), and Juan Ollarzabal, EI&C technician (left), calibrate the fl ame scanner on HL1. The fl ame scanner detects the amount of fl ame output and signals if additional heat is required.

The HL1 TRIPPER DECK receives a high-pressure water treatment from the fugitive dust controls to reduce combustible dust in the air. Water is sprayed on the ceilings, walls and fl oor, creating conditions that are much safer and cleaner. The tripper deck transports coal from outside the plant to one of fi ve coal silos located at Holcomb Station.

detects the amount of fl ame output and signals if additional heat is required.

T


THE BUCKNER 345 KV Substation receives high voltage electricity from nearby Cimarron River Station. Once electricity reaches the substation, it is stepped-down and transmitted via a 115 kV transmission line and eventually to an even lower voltage distribution line.

CREWS BEGIN INSTALLATION of the lower rebar cage of the self-supporting transmission pole for the Holcomb-to-Pioneer Tap 115 kV line. Approximately 60 yards of concrete were used to pour the foundation for this tower.

AN ARTIST’S RENDERING of Holcomb Station details

how the plant would appear after construction of a second unit. Despite the issuance of a

construction permit in December 2010, construction of the new

unit has not commenced

and faces legal and regulatory

hurdles.


Another signifi cant 2012 transmission project was the construction of Buckner Substation, a massive 345 kV substation located north of Cimarron, Kansas. This new transmission facility was constructed by a division of Duke Energy to handle additional wind generation in the area and required extensive Sunfl ower resources to complete on an expedited schedule.

Beginning in January, contractors in a jet-powered helicopter used Light Detection and Ranging (LiDAR) equipment to quickly and effi ciently capture large amounts of three-dimensional data on the transmission system to compare actual fi eld conditions to design conditions. North American Electric Reliability Corporation (NERC) issued an alert that required all transmission owners to verify actual fi eld conditions as part of confi rming system ratings, which, in turn, resulted in virtually all U.S. transmission lines being measured with this technology. Utility Risk Management Corporation recorded LiDAR information on more than 2,000 miles of transmission lines in the combined service territory of Sunfl ower and Mid-Kansas. The data was used to identify encroachments into transmission equipment space that can be eliminated or otherwise remediated to protect the system’s transmission capability.

The potential for signifi cant load growth due to recent natural gas and oil exploration in the Mississippi Lime formation resulted in efforts by Kansas stakeholders, led by Sunfl ower, to establish an Extraordinary Load Line Extension Policy. Sunfl ower worked with oil and gas developers and other impacted parties to develop service terms to be used with any ”extraordinary” request for transmission service where the actual load may not support the transmission investment. Extraordinary load service terms require requesting customers pay 100 percent of new transmission facility costs and, in return, provide performance credits for actual added load over a 10-year period. If the requesting customer’s load develops and sustains as expected, the extraordinary customer may receive complete reimbursement of this cost, but if the load does not support the original investment, the investment risk is carried by the requesting customer and not by the system’s current transmission customers and Member-owners. Since the potential for signifi cant load growth caused by the oil and gas industry greatly impacts Sunfl ower and our Members, this Extraordinary Load Line Extension Policy ensures that we are able to provide transmission service to those who need it while protecting the interests of our Members and the existing ratepayers.

Holcomb Expansion ProjectTwo sets of EPA regulations continued to impede the Holcomb Expansion Project (HL2) in 2012: the draft Mercury Air and Toxic Standards (MATS) rule and the New Source Performance Standards (NSPS) for greenhouse gases (GHG). A diverse group of utilities and major equipment vendors collaborated on efforts to oppose signifi cant fl aws in these regulatory efforts to eliminate coal as a fuel choice for electric generation.

The requirements for MATS were issued in December 2011, and the rule was made fi nal on


Feb. 16, 2012. EPA proposed the utility boiler Maximum Achievable Control Technology (MACT) rule and later the MATS rule to reduce emissions from coal and oil-fi red electric generating units (EGUs) by establishing two sets of requirements: one for existing units and a second more restrictive set of limits for new units. Holcomb 1 (HL1) can meet the MATS requirements for existing units by installing new mercury control equipment. However, no vendor was found who could guarantee the emission limits required for new units by the MATS rule. This resulted in Sunfl ower, a coalition of other electric utilities, and an association of emission control equipment manufacturers challenging the requirements of MATS for new units. On Nov. 16, 2012, EPA issued a new proposed rule with modifi ed emission limits for new units.

The proposed NSPS for GHG rule, while not yet fi nal, became effective on April 13, 2012, and imposed greenhouse gas limitations on new fossil-fueled steam electric and natural gas combined-cycle electric generating units with a generating capacity greater than 25 megawatts. The proposed rule included a “transitional unit” sub-category to which the GHG emission limitation would not apply provided the source held a valid prevention of signifi cant deterioration (PSD) construction permit and commenced construction by April 13, 2013. EPA identifi ed approximately 20 potential transitional units, including HL2. It is unclear whether or how EPA might revise this portion of the proposed rule when it is made fi nal; Sunfl ower and other utilities with transitional units took legal actions to protect our projects and to protect the right to maintain coal as a fuel choice option on future generation projects.

On August 31, 2012, the Kansas Supreme Court heard oral arguments for Sierra Club vs. the Kansas Department of Health and Environment. A fi nal decision is expected in 2013.

FinancialsSunfl ower achieved a Net Margin of $32 million in 2012 and increased its equity position to $64 million. Equity as a percentage of total assets grew from 8.5% in 2011 to 16.1% for 2012.

Member megawatt hour (MWh) sales in 2012 increased 3.2% from 2011 of which approximately half of the increase was attributable to a non-member becoming a contract customer of one of the Members. In 2012, Sunfl ower’s rates to Members increased 12.2% from a combination of a 6% increase in base rates to fund environmental control upgrades and scheduled outage costs at HL1 and a 6.2% increase in net power supply costs, both of which pass through Member rates. Overall, Member power sales revenue increased 16.1%.

As noted above, net power costs increased. The cost of generation and purchased power declined 2% from $23.47 per MWh in 2011 to $22.60 per MWh in 2012. However, margins earned on sales of excess energy used to reduce the net power costs to our Members were signifi cantly less than in 2011. The outage on HL1 to install environmental control upgrades reduced the availability of HL1 to make sales of excess energy. Additionally, market energy


DENNIS DEINES, Western Cooperative Electric Association, Inc., member services (left), and Mark Heier,

Wheatland High School faculty member

(right), take time out of their day to grill hamburgers and hotdogs

for participants of the 2012 High

Plains ElectroRally in Hays, Kan. Eleven high schools

participated in the electric car races. Sunfl ower has been involved in the electric car program since its launch in 1997.

SUZANA PRIETO, administrative assistant, douses a fi re during fi re extinguisher training at Holcomb Station. A remote controls the propane-powered fi re tank to ensure a stable fl ame that employees learn to extinguish.

WALKING FOR OTHERS. Left to right: Erica Villarreal, supply chain assistant; Tara Lightner, corporate compliance assistant; Lori Scheuerman, purchasing supervisor; and Karen Ham, buyer, gather at the 2012 United Way Relay for Life event at the Garden City High School Memorial Football Stadium. Sunfl ower had 11 employee team members that walked from 7 p.m. to 6 a.m.


prices in 2012 were lower than in 2011, reducing both the opportunity for sales and the margin on the sales that were made.

In total, operating expenses exceeded 2011 by $10 million. Most of this increase is the $8.7 million increase in production maintenance costs primarily associated with the scheduled outage performed on HL1 at the same time as the environmental control upgrade outage.

SafetyAs technology has changed and improved so have our safety standards, allowing employees to feel even more confi dent about their safety in the workplace. Constant improvements are made to protocols and safety standards to ensure that staff members are trained and aware of the most effective safety procedures and outfi tted with the appropriate gear.

During the past several years, Sunfl ower has boasted a low lost-time rate average of .91 days, compared to the national average of 1.93 days. In addition, the recordable incident rate has averaged 2.58, far less than the national average of 5.79. Safety and service awards are held annually at each location, highlighting the service milestones of employees and commending employees on their attentiveness to safety standards. Annual training and certifi cations, daily vigilance, and a passionate safety department contribute to Sunfl ower’s stellar safety record.

Safety preparedness is only one facet of the precautions taken at Sunfl ower to ensure staff remains as safe and healthy as possible. Employees and their families are offered free annual fl u shots, Red Cross Cardiopulmonary Resuscitation (CPR), and Automated External Defi brillator (AED) training to promote a healthy and safe workplace. Red Cross training for AED and CPR are also provided to the Member systems.

Due to the size of the Sunfl ower service territory and facility locations, many employees are often required to regularly travel long distances. To encourage safety while driving, the safety department asks employees to record their travel miles. When employees achieve certain travel distance milestones without a recordable injury, they are rewarded with a paid day off. In 2012, 57 employees achieved a milestone and were awarded a safety medallion. This incentive provides a reminder that safety protocols must be followed wherever work takes us.


LEN COUTURE, lead substation technician, and Joe Crathorne, relay technician, practice automated external defi brillation (AED). Each Sunfl ower facility has AED equipment available. The safety department oversees training and provides fi rst-aid, blood born pathogen, and CPR. training.

JOHN EDMONDS, journey line technician, perfects his pole-top rescue skills during annual training. Linemen are required to successfully lower the 180 pound, pole-mounted dummy safely to the ground. Skilled linemen are able to perform this task in approximately 10 seconds.

ABOVE, RYAN SMITH, lead line technician, begins preparation for lifting the arm of a wood H-frame structure in order to replace the fi re-damaged pole. Once the damaged pole is removed, a hole is drilled and a new pole is set in the ground, a method known as “scissoring the arm.”


Independent Auditors’ Report

The Board of DirectorsSunflower Electric Power Corporation:

We have audited the accompanying combined financial statements of Sunflower Electric Power Corporation and Sunflower Electric Holdings, Inc. and subsidiaries which comprise the combined balance sheets as of December 31, 2012 and 2011, and the related combined statements of operations and comprehensive income, members’ equity (deficit), and cash flows (hereinafter referred to as the combined financial statements) for the years then ended, and related notes to the combined financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these combined financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of combined financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the combined financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the combined financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the combined financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the combined financial statements referred to above present fairly in all material respects, the financial position of Sunflower Electric Power Corporation and Sunflower Electric Holdings, Inc. and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for the years then ended in accordance with U.S. generally accepted accounting principles.

Kansas City, MissouriMarch 8, 2013


Combined Balance SheetsDecember 31, 2012 and 2011

Assets, Pledged 2012 2011

Net utility plant, at cost $ 275,858,283 254,229,027Land held for future use 3,193,843 3,193,843Construction work in progress 751,720 15,269,751

Total utility plant, net 279,803,846 272,692,621

Investments and other assets:Capital term certificates of the National Rural Utilities

Cooperative Finance Corporation 16,386,912 18,343,928Investments in associated organizations 5,687,450 5,355,866

Escrowed funds 7,337,895 7,323,616

Total investments and other assets 29,412,257 31,023,410

Current assets:Cash and cash equivalents 14,375,715 22,267,357

Accounts receivable:Member 11,479,253 10,171,941Affiliate 5,666,233 3,546,236Other 4,766,703 6,924,646

21,912,189 20,642,823

Inventories:Fuel 5,285,956 4,282,438Materials and supplies 8,897,819 9,011,354

14,183,775 13,293,792

Prepayments and other current assets 2,092,703 1,790,014

Total current assets 52,564,382 57,993,986

Deferred charges 34,405,024 33,266,672Total assets $ 396,185,509 394,976,689

16 Today. Tomorrow. Yesterday

Combined Balance SheetsDecember 31, 2012 and 2011

Capitalization and Liabilities 2012 2011

Capitalization:Long-term obligations, less current maturities $ 215,759,992 244,277,558Obligations under capital leases, less current portion 17,919,715 18,646,095

Members’ equity:Memberships 890 890Donated capital 4,852,989 4,852,989Accumulated surplus 60,632,436 28,482,061Accumulated other comprehensive income (loss) (1,807,515) 148,959

Total member and patron equity 63,678,800 33,484,899

Total capitalization 297,358,507 296,408,552

Current liabilities:Current maturities of long-term obligations 32,323,992 29,694,417Current portion of obligations under capital leases 726,380 673,642Accounts payable 7,393,512 10,807,214Accounts payable – affiliates 508,548 1,792,445Accrued liabilities:

Taxes other than income taxes 5,350,437 5,243,828Other 3,827,950 3,742,160

Total current liabilities 50,130,819 51,953,706

Deferred credits 40,830,768 40,477,862

Other long-term liabilities 7,865,415 6,136,569Total capitalization and liabilities $ 396,185,509 394,976,689

See accompanying notes to combined financial statements.


Combined Statements of Operations and Comprehensive IncomeYears ended December 31, 2012 and 2011

2012 2011

Operating revenue:Member power sales $ 165,193,466 142,229,772Nonmember power sales 39,427,094 44,318,542Affiliate power sales 15,947,140 24,454,856Other operating revenue 21,695,120 22,093,706

Total operating revenue 242,262,820 233,096,876

Operating expenses:Operations:

Production and other power supply 123,306,461 125,601,209Transmission 27,097,400 25,140,635

Maintenance:Production 21,367,408 12,682,601Transmission 2,313,523 2,504,668

Administrative and general 13,444,535 12,258,379Depreciation and amortization 11,626,590 10,942,857Other taxes 8,800 8,629

Total operating expenses 199,164,717 189,138,978

Electric operating margin 43,098,103 43,957,898

Interest expense (12,644,383) (13,724,860) Other deletions, net (526,976) (566,863)

Operating margins 29,926,744 29,666,175

Nonoperating margins:Investment income 756,115 856,256Other, net 1,467,516 1,450,265

Total nonoperating margins 2,223,631 2,306,521

Net margins 32,150,375 31,972,696

Other comprehensive income (loss) – postretirement benefit plan (1,956,474) 5,228,475Total comprehensive income $ 30,193,901 37,201,171



Combined Statements of Members’ and Patron Equity (Defi cit)Years ended December 31, 2012 and 2011

AccumulatedAccumulated other

Donated surplus comprehensiveMemberships capital (deficit) income (loss) Total

Balance, December 31, 2010 $ 890 4,852,989 (3,490,635) (5,079,516) (3,716,272)

Comprehensive income:Net margins — — 31,972,696 — 31,972,696Other comprehensive income

postretirement benefit plan — — — 5,228,475 5,228,475

Balance, December 31, 2011 890 4,852,989 28,482,061 148,959 33,484,899

Comprehensive income:Net margins — — 32,150,375 — 32,150,375Other comprehensive (loss)

postretirement benefit plan — — — (1,956,474) (1,956,474) Balance, December 31, 2012 $ 890 4,852,989 60,632,436 (1,807,515) 63,678,800



Combined Statements of Cash FlowsYears ended December 31, 2012 and 2011

2012 2011

Cash flows from operating activities:Net margins $ 32,150,375 31,972,696Adjustments to reconcile net margins to net cash provided by

operating activities:Depreciation and amortization 11,626,590 10,942,857Amortization of capital leased assets included in rent expense 673,642 732,136Amortization of deferred charges 1,328,554 1,328,065Patronage credits earned from investments (331,584) (384,425) Accretion of residual value notes 3,806,425 3,672,686Changes in assets and liabilities:

Accounts receivable 667,031 (2,670,609) Due to/from affiliate (3,403,894) 1,970,853Inventories (1,119,440) (48,996) Prepayments and other current assets (302,689) (585,260) Accounts payable (155,185) 600,348Interest payable — (34,222) Accrued liabilities 192,399 1,288,190Long-term liabilities (227,628) 1,305,142

Net cash provided by operating activities 44,904,596 50,089,461

Cash flows from investing activities:Utility plant expenditures (23,100,317) (19,868,356) Federal and state disaster proceeds 602,663 —Proceeds from sale of short-term investments 1,957,016 1,200,360Change in escrowed funds related to development (14,279) (319,858) Proceeds from Holcomb development projects 307,449 489,645Proceeds from other development projects 7,815,484 1,099,169Payments for development costs (9,996,196) (3,326,181)

Net cash used in investing activities (22,428,180) (20,725,221)

Cash flows from financing activities:Principal payments under capital lease obligations (673,642) (732,136) Principal payments on long-term obligations (29,694,416) (24,283,319)

Net cash used in financing activities (30,368,058) (25,015,455)

Net increase (decrease) in cash and cash equivalents (7,891,642) 4,348,785

Cash and cash equivalents, beginning of year 22,267,357 17,918,572Cash and cash equivalents, end of year $ 14,375,715 22,267,357

Supplemental information:Sunflower paid $12,644,383 and $13,759,082 in cash for interest during 2012 and 2011, respectively.

Sunflower had capital expenditures within accounts payable of $11,070 and $5,320,335 atDecember 31, 2012 and 2011, respectively.



Notes to Combined Financial StatementsDecember 31, 2012 and 2011

(1) Nature of Operations and Summary of Significant Accounting Policies

(a) Nature of Operations and Liquidity

Sunflower Electric Power Corporation (Sunflower or the Company) is an electric generation and transmission corporation. Sunflower is responsible for the electric power requirements of its six distribution cooperative members (Members) operating within western Kansas: Lane-Scott Electric Cooperative, Inc.; Pioneer Electric Cooperative, Inc.; Prairie Land Electric Cooperative, Inc.; The Victory Electric Cooperative Association, Inc.; Western Cooperative Electric Association, Inc.; and Wheatland Electric Cooperative, Inc. Power supply rates to Sunflower’s Members are subject to approval by the board of directors and the Rural Utilities Service (RUS). Transmission rates are subject to the approval by the Kansas Corporation Commission (KCC). In accordance with this regulation, Sunflower has applied the provisions of FASB Accounting Standards Codification (ASC) Topic 980, Regulated Operations.

Sunflower’s primary resource for supplying the electric power needs of its Members is Holcomb Station. Holcomb Station is a coal-fired generating facility with a net rating of 349 megawatts. Sunflower’s accredited generation with the Southwest Power Pool totals 653 megawatts, and includes all generation assets available. Sunflower purchases its coal through Western Fuels Association, Inc. (Western Fuels), a not-for-profit cooperative that provides coal to consumer-owned utilities, and from DTE Coal Services. During 2012 and 2011, Sunflower purchased approximately $37.2 million and $45.1 million, respectively, for coal and coal transportation. Because Western Fuels is a consumer-owned entity, representatives from Sunflower’s board of directors and management are also members of Western Fuels’ board of directors.

At December 31, 2012, Sunflower had working capital, current assets less current liabilities, of approximately $2.4 million, and $7.3 million of cash in escrowed funds that can be used to make any capital purchases or pay for any development costs incurred by Sunflower on a current basis. Sunflower is dependent on cash flows from member and nonmember long-term power supply contracts to meet its current obligations.

(b) The Financial Reporting Entity

On November 26, 2002, Sunflower Electric Holdings, Inc. (SEHI) completed negotiations to restructure its debt and signed the Agreement and Consent to Sunflower Restructuring, dated as of September 30, 2002, by and among Sunflower, SEP, Holcomb Common Facilities, LLC (HCF), the Government, CFC, Co Bank, and Other Creditors (the Consent Agreement). The Consent Agreement transferred all assets and liabilities, except for the long-term debt and certain assets discussed below, from SEHI to SEP Corporation in exchange for certain debt issued by SEP Corporation as noted in note 5. SEP Corporation legally changed its name to Sunflower Electric Power Corporation in March 2003. Sunflower is operated on a cooperative basis. The ownership of Sunflower is in the same proportion as that of SEHI. Substantially all of Sunflower’s assets, contracts, and revenue are pledged as security under the mortgage provided for in the Consent Agreement.



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Sunflower has six wholly owned subsidiaries: Holcomb 2, LLC (H2); Sunflower Rail Company, LLC (Sunflower Rail); SEPC, LLC; Holcomb 3, LLC (H3); Holcomb 4, LLC (H4); and HCF (Holcomb Common Facilities, effective July 2007). Sunflower Rail, H2, H3, and H4 were created for future activities and currently do not hold any assets or liabilities. SEPC, LLC was formed to purchase and lease communication towers. HCF holds the common facilities located at Holcomb Station; these facilities would be common to multiple generation units that are currently being developed on the Holcomb Station site.

The accompanying combined financial statements include the combined transactions of the above entities, collectively referred to as Sunflower. Intercompany balances and transactions have been eliminated in combination.

(c) Basis of Presentation

The accompanying combined financial statements have been prepared using the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America. The Company has evaluated subsequent events through March 8, 2013, for inclusion in this report.

(d) Use of Estimates

The preparation of combined 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 combined financial statements and the reported amounts of operating revenue, expenses, and other items during the reporting period. Significant items subject to such estimates and assumptions include the useful lives of fixed assets, recoverability of deferred tax assets, derivatives, asset retirement obligations, and key inputs to actuarial calculations of postretirement obligations. Actual results could differ significantly from those estimates.

(e) Utility Plant

Utility plant is stated at cost and expenditures for replacement of property units are recorded as utility plant. The cost of units retired in the normal course of business, including cost of removal, net of any salvage value, is charged to accumulated depreciation. The cost of maintenance and repairs, including renewals of minor items, is charged to operating expenses.

The costs of homogeneous units of property, plant, and equipment are aggregated to form groups of assets that are depreciated on a straight-line basis over the estimated remaining useful life established for each specific group. Estimates and assumptions used in establishing the depreciation rates associated with each group are based on management’s best estimate of useful lives considering input from external studies. Generally, changes in depreciation rates are effected through changes in the remaining depreciable lives of the applicable group assets and are considered a change in accounting estimate.



The average annual depreciation rates from the depreciation study dated January 1, 2009, and in effect for 2012 and 2011 were as follows:

Steam production plant 1.50%Other production plant 1.42Transmission plant 1.74General plant 3.33

(f) Long-Lived Assets

Long-lived assets, such as property, plant, and equipment, and purchased intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, Sunflower first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. For the years ended December 31, 2012 and 2011, there have been no impairments of Sunflower’s long-lived assets.

(g) Investments

Investments in associated organizations are stated at cost plus Sunflower’s share of patronage capital credits allocated and reduced by distributions received. Sunflower’s ownership percentage in these associated organizations is less than 20%. Book value approximates fair value due to the nature of these investments.

Capital term certificates and escrowed funds are carried at cost. Cost is estimated to approximate fair value due to the nature of the certificates and the underlying short-term investments held in escrow.

(h) Cash and Cash Equivalents

Cash and cash equivalents include cash deposits in banks and short-term investments with original maturities of three months or less. Included in short-term investments are overnight repurchase agreements and commercial paper.

(i) Inventories

Fuel inventory is recorded and recognized at cost. Materials and supplies inventory is recorded at cost and recognized on an average-cost basis.




(j) Derivative Instruments

The Company recognizes all derivative instruments as either assets or liabilities in the balance sheets at their respective fair values. The Company’s coal purchase contracts generally meet the definition of a derivative; however, the Company’s coal contracts are designated as normal purchases, and as such are not recorded in the financial statements at fair value. In 2012 and 2011, all coal purchases qualified as normal purchases.

(k) Deferred Charges

As of December 31, 2012 and 2011, deferred charges consist of:

2012 2011Gross Gross

carrying Accumulated carrying Accumulatedamount amortization amount amortization

Financing costs $ 2,267,414 1,552,856 2,267,414 1,373,849 Major maintenance costs 11,495,479 7,472,062 11,495,479 6,322,514 Holcomb development costs 28,290,183 — 26,793,837 —Other deferred costs 1,376,866 — 406,305 —

$ 43,429,942 9,024,918 40,963,035 7,696,363

Deferred financing costs include legal and filing fees incurred to refinance Secured “A” notes, as defined in note 5, Long-Term Debt, in 2004. These charges are amortized over the life of the refinanced notes.

The major maintenance costs are repair and maintenance charges incurred in connection with periodic, planned, major maintenance activities that benefit future periods greater than 12 months. These operations require shutdown of the entire facility to perform planned, major repair and maintenance activities on the generating unit. The frequency of such repair and maintenance activities is predictable and scheduled and typically ranges from 10 to 15 years. In order to recognize the repair and maintenance activities in the period benefited from the maintenance activities, Sunflower capitalizes the actual cost of the major maintenance and amortizes those costs to the next overhaul. The 2006 Holcomb Station major maintenance outage was completed in July 2006, and those costs are being amortized over a 10-year period.

Deferred development costs include legal and engineering fees incurred by Sunflower for studies and the potential construction of new electric power generating stations to be adjacent to Holcomb Station and are being capitalized as project costs associated with the acquisition, development, and construction of the real estate. All charges relating to the construction of new electric generating stations are expected to be recovered through payments from entities participating in the development, except for the development costs related to the proportional share of the units that



Sunflower will own which will be capitalized as a cost of the new electric generating station. See further information on associated deferred credits in note 1(n).

(l) Member and Patron Equity

All net margins are required to first offset any losses incurred during the current or any prior fiscal year. Remaining net margins, if any, are allocated to Members based on each member’s relative percentage revenue contribution to fixed costs and margins. In 2010 and prior, no amounts were allocated to the members, since in those years there were deficits. At December 31, 2012 and 2011, accumulated surplus was allocated as follows:

2012 2011

Lane-Scott $ 2,651,562 1,254,464Pioneer 23,228,487 10,976,852Prairie Land 6,458,903 2,760,582Victory 759,646 329,797Western 4,204,475 1,970,553Wheatland 23,329,363 11,189,813

$ 60,632,436 28,482,061

Under provisions of the mortgage with RUS, patronage capital cannot be distributed without approval from certain long-term creditors.

(m) Income Taxes

Sunflower is a taxable cooperative. Income taxes generally apply to Sunflower to the extent that income or losses are allocated to nonpatron activity. Sunflower accounts for income taxes attributable to nonpatron activity under the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the combined financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income from nonpatron sales in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date.

The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.




(n) Deferred Credits

Deferred credits consist of funds received for participation in the development of the Holcomb site and unearned revenue from contracts with power customers as follows:

2012 2011

Holcomb development $ 38,980,768 38,627,862 Capacity agreements 1,850,000 1,850,000

$ 40,830,768 40,477,862

During 2012 and 2011, Sunflower received cost reimbursements of $0.3 million and $0.5 million,respectively, from two companies participating in the development of the Holcomb site. With RUS approval, this cash is available to pay for current capital improvements and Holcomb site development costs incurred by Sunflower as well as other specifically identified needs. Of the amount shown above, $6.4 million remains in an escrowed fund account on December 31, 2012 to be used for future years cash needs.

The payments received are shown as a deferred credit on Sunflower’s combined balance sheet. Although Sunflower has no obligation to pay back the cash received from the combined participating companies regardless of the outcome of the project development, neither the income nor expense will be recognized until the plans to develop additional units become certain.

(o) Other Long-Term Liabilities

Other long-term liabilities consist of accrued postretirement benefit obligations, measured at each fiscal year-end, and asset retirement obligations for the estimated costs for legally required removal of certain assets.

(p) Postretirement Plans

Sunflower allows eligible retirees to purchase medical insurance from the plan in which Sunflower participates. The premium payments are calculated on an average of both active and retiree participants. Sunflower will incur additional costs as the premium payments of active participants paid by Sunflower will increase due to the retirees’ participation in the plan. Additionally, Sunflower allows eligible retirees to purchase $20 thousand of term life insurance available over the lifetime of the retiree, through the Company’s term life insurance plan. These premiums are paid by the retired employee at the group term rates, not the full age-adjusted premium costs for the coverage. These obligations represent a liability to Sunflower. Sunflower retains the right, subject to existing agreements, to change or eliminate these benefits. In order for retirees to be eligible for these benefits, the participant must pay the premium cost associated with the coverage.

The Company records annual amounts relating to its postretirement plans based on calculations that incorporate various actuarial and other assumptions, including discount rates, mortality, turnover rates, and healthcare cost trend rates. The Company reviews its assumptions on an annual basis and



makes modifications to the assumptions based on current rates and trends when it is appropriate. The effect of modifications to those assumptions is recorded in accumulated other comprehensive income and amortized to net periodic cost over future periods using the corridor method. The net periodic costs are recognized as employees render the services necessary to earn the postretirement benefits. The Company believes that the assumptions utilized in recording its obligations under its plans are reasonable based on its experience and market conditions.

The Company recognizes the unfunded status of the postretirement plan as a liability, and changes in that unfunded status in the year in which the changes occur through other comprehensive income to the extent those changes are not included in the net periodic cost.

(q) Revenue and Fuel Expense Recognition

Electric energy sales and the related fuel expenses are recorded at the time electric energy is generated and delivered.

(2) New Accounting Pronouncements

Upon issuance of exposure drafts or final pronouncements, Sunflower reviews new accounting literature to determine the relevance, if any, to its business. The following represents a summary of pronouncements that Sunflower has determined relate to its operations:

(a) Presentation of Comprehensive Income

In June 2011, the Financial Accounting Standards Board (FASB) issued an amendment to the guidance on the presentation of comprehensive income and its components to be presented in either one continuous statement or two separate, but consecutive statements. The guidance is effective for nonpublic entities for fiscal years ending after December 15, 2012. Sunflower adopted this guidance for the year ended December 31, 2012, and presented comprehensive income and its components in one continuous statement, consistent with previous years. There was no material impact on the Company’s financial condition or results of operations.

(b) Employer’s Participation in a Multiemployer Plan Disclosures

In September 2011, the FASB issued authoritative guidance that requires employers to disclose quantitative and qualitative information about their participation in multiemployer pension and other postretirement benefit plans.

This guidance is effective for nonpublic entities for fiscal years ending after December 15, 2012. Sunflower adopted this guidance for the year ended December 31, 2012, which required disclosures but did not have a material impact on the Company’s financial condition or results of operations.

(3) Related Parties

In 2005, Sunflower’s Members formed Mid-Kansas Electric Company, LLC (Mid-Kansas) to purchase all of the Kansas electric assets and operations of Aquila, Inc. Mid-Kansas is owned by five distribution cooperatives that are also owners of Sunflower, and one corporation operating cooperatively that is a subsidiary of a Sunflower owner. The Mid-Kansas and Sunflower ownership percentages are different for




each entity. Upon Mid-Kansas closing the acquisition on April 1, 2007, Sunflower was contracted by Mid-Kansas to operate the generation and transmission assets of Mid-Kansas. The distribution assets of Mid-Kansas are operated by the Members. Sunflower has no ownership interest in Mid-Kansas. In addition to the relationship between Mid-Kansas’ Members and Sunflower’s Members, the same individual serves as the Chief Executive Officer of both entities.

Sunflower bills to Mid-Kansas all direct and indirect operating costs as well as a portion of Sunflower’sadministrative and general costs as agreed upon in the Service and Operation Agreement between Mid-Kansas and Sunflower. These allocation methodologies are reviewed annually and approved by the Mid-Kansas and Sunflower boards. In addition to the expense allocation and reimbursement arrangement, Sunflower has been directed by the Mid-Kansas and Sunflower boards to jointly dispatch the generation resources of Mid-Kansas and Sunflower in the most efficient and cost effective manner. To do this, a joint dispatch model was developed and utilized on a monthly basis to allocate power costs between the two entities. This model is designed to prevent Sunflower from absorbing any additional costs from this dispatch arrangement yet recognizing that in most months, there are benefits that are allocated to each entity, thus lowering the cost of operating each entities’ generation resources separately. In 2012 and 2011, Sunflower allocated indirect costs to Mid-Kansas of approximately $14 million and $14 million,respectively. In 2012 and 2011, Sunflower sold approximately $16 million and $24 million, respectively, of power to Mid-Kansas and purchased approximately $12 million and $5 million, respectively, of power from Mid-Kansas.

Sunflower has entered into an operating lease with Mid-Kansas for the Rhoades to Phillipsburg transmission line. Sunflower will pay Mid-Kansas approximately $1 million annually. Sunflower has entered into an operating lease with Mid-Kansas for the Holcomb to Pioneer Tap transmission line. Sunflower will pay Mid-Kansas approximately $0.8 million annually.

Sunflower’s financial interest in Mid-Kansas’ operations is limited solely to the items described above. Mid-Kansas is a separate legal entity and Sunflower does not guarantee any debt of Mid-Kansas. Consequently, Sunflower does not consolidate Mid-Kansas.

As of December 31, 2012 and 2011, Sunflower had accounts receivable from Mid-Kansas of $5.7 millionand $3.5 million, respectively. Additionally, Sunflower owed Mid-Kansas $0.5 million and $1.8 million as of December 31, 2012 and 2011, respectively.



(4) Utility Plant

Utility plant balances by major class of asset are as follows at December 31, 2012 and 2011:

2012 2011

Steam production plant $ 506,062,894 484,204,468 Other production plant 18,455,903 17,626,654 Transmission plant 121,454,257 120,943,677 General plant 41,034,818 35,602,011 Capital leases 18,646,095 19,319,736

Total in service utility plant 705,653,967 677,696,546

Less accumulated depreciation (429,799,675) (423,604,729) Completed construction not classified 3,991 137,210

Net in service utility plant 275,858,283 254,229,027

Land held for future use 3,193,843 3,193,843 Construction work in progress 751,720 15,269,751

Total utility plant, net $ 279,803,846 272,692,621

On December 16, 2008, the Kansas Corporation Commission (KCC) ordered Sunflower to use depreciation rates presented in Docket No. 08-SEPE-257 DRS, Exhibit TBD-2 for rate recovery purposes. The KCC depreciation rates differ from the March 3, 2003 depreciation study rates approved by RUS. For financial reporting purposes depreciation and accumulated depreciation have been presented using the KCC depreciation rates. This difference in rates results in a cumulative difference of $12.3 million, which is reported as a reduction of accumulated depreciation in the financial statements as of December 31, 2012. The difference in depreciation rates causes a reduction of depreciation expense of $3.1 million and $3.2 million in 2012 and 2011, respectively.




(5) Long-Term Debt

(a) Outstanding Notes Payable

The outstanding note balances are as follows as of December 31, 2012 and 2011:

2012 2011

Secured “A-2” Notes, interest ranging from 2.80%to 5.50%, due in quarterly principal and interestinstallments through 2016 $ 85,237,801 104,017,801

Unsecured “A” Participation Notes, 8.00% interest,due in quarterly principal and interest installmentsthrough 2016 23,022,833 28,158,111

Secured “B” Notes, bearing no stated interest rate,quarterly installments applied 2 for 1, effectiveinterest rate of 3.80% through 2016 11,647,011 14,293,936

Residual Value Notes, bearing no stated interest rate,lump-sum payment due December 31, 2016, effectiveinterest rate of 3.59% 108,336,806 104,530,381

Unsecured “B” Notes, bearing no stated interest rate,due in quarterly installments through 2027, effectiveinterest rate of 5.30% 7,659,051 8,107,602

National Rural Utilities Cooperative Finance CorporationLoan Capital Term Certificate (LCTC) Notes, interestranging from 2.80% to 5.50%, due in quarterlyprincipal and interest installments through 2016 12,180,482 14,864,144

248,083,984 273,971,975

Less current maturities of long-term obligations (32,323,992) (29,694,417)

Long-term obligations, less currentmaturities $ 215,759,992 244,277,558

On April 22, 2004, Sunflower completed a refinancing of the original outstanding Secured “A”Notes, primarily to reduce the interest rate. The Secured “A” Note debt was refinanced with the proceeds from the issuance of the Secured “A-1” and Secured “A-2” Notes. Upon the refinancing, all outstanding Secured “A” Note debt was extinguished.

The Secured “A-2” Notes, issued in the amount of $138.3 million, consist of 13 separate notes, with one note due each year beginning March 31, 2005, through March 31, 2016, and the final remaining



note due on December 31, 2016. The Secured “A-2” Notes bear interest ranging from 2.80% to 5.50%.

The Unsecured “A” Participation Notes were issued in November 2002 in the amount of $60.5 million bearing 8% interest with principal and interest payments payable quarterly through 2016.

The Secured “B” Notes were issued in November 2002, in the amount of $90 million, without a stated interest rate. The quarterly principal payments are applied to reduce the outstanding note balance on a 2 for 1 basis; for every $1 paid, the outstanding note balance is reduced by $2, resulting in expected future cash outflows of $12.6 million as of December 31, 2012. For financial statement reporting purposes, the expected future quarterly payments have been discounted assuming an effective interest rate of 3.80%, resulting in carrying amounts of $11.6 million and $14.3 million as of December 31, 2012 and 2011, respectively.

The Residual Value Notes were issued for the greater of $125 million, or 43% of the fair value of Holcomb Station on December 31, 2016, without a stated interest rate, payable in one lump-sum amount on December 31, 2016. The Residual Value Note Agreement dated October 1, 2002, provides the terms for determining the fair value of 43% of Holcomb Station upon the December 31, 2016, appraisal date. The Residual Value Notes contain a prepayment provision that is to be used upon prepayment of the notes or upon the sale of the Holcomb Unit 1 facility. Under the prepayment provision, the $125 million could increase to as much as $148 million. For financial statement reporting purposes, the note is reflected at an accreted carrying amount originally equivalent to the beginning Stipulated Value of $75.8 million, fully accreting to $125 million as of December 31, 2016. This results in an effective interest rate of 3.59% per year. Any amount that might be paid on this note in excess of $125 million has been treated as a contingent amount and, as such, is not currently recognized due to the uncertainties of prepayment, sale of the Holcomb Unit 1 facility, or appraised fair value of Holcomb Station as of December 31, 2016.

Unsecured “B” Notes were issued in November 2002, totaling $18 million, without a stated interest rate, payable in quarterly installments through June 30, 2027. For financial statement reporting purposes, the expected future quarterly payments have been discounted assuming an effective interest rate of 5.30%, resulting in carrying amounts of $7.7 million and $8.1 million as of December 31, 2012 and 2011, respectively.

The LCTC Notes were issued in the amount of $19.8 million, or 14.29%, of the Secured “A-2”Notes, as part of the 2004 refinancing to the Cooperative Finance Corporation (CFC). Like the Secured “A-2” Notes, there are 13 separate notes, with one note due each year beginning March 31, 2005, through March 31, 2016. The last note is due on December 31, 2016. The LCTC Notes bear interest ranging from 2.80% to 5.50%. Required as part of CFC loan policy, Sunflower purchased an equity interest in CFC. The proceeds from these notes were used solely to purchase CFC capital term certificates in an amount originally equivalent to the LCTC Note balance. The equity term certificates are reflected as Capital term certificates of the National Rural Utilities Cooperative Finance Corporation on Sunflower’s combined balance sheets. CFC repays the capital term certificates to Sunflower as Sunflower’s outstanding Secured “A-2” Notes and LCTC Notes are




repaid. Quarterly payments on the LCTC Notes, like the original borrowing, are equivalent to 14.29% of the quarterly payments made on the Secured “A-2” Notes.

At December 31, 2012, scheduled maturities of the long-term debt are as follows:

Year ending December 31:2013 $ 32,323,992 2014 33,370,779 2015 34,917,957 2016 141,862,432 2017 410,749 Thereafter 5,198,075

$ 248,083,984

Financial covenants require the Company to maintain an average times interest earned ratio (TIER) of not less than 1.25 in two best years out of the three most recent calendar years. Financial covenants also require an average debt service coverage ratio (DSC) of not less than 1.05 in two out of the three most recent calendar years, provided that in no year shall DSC be less than 1.0. As of December 31, 2012 and 2011, the Company was in compliance with these financial covenants.

Sunflower currently maintains a $20 million hybrid facility with CFC for purposes of managing seasonal fluctuations in cash flow and to issue various letters of credit necessary in the normal operations of the Company. The facility may be used for any combination of letters of credit or cash so long as the total does not exceed $20 million. As of December 31, 2012, Sunflower had outstanding letters of credit to Southwest Power Pool (SPP), Midwest Independent System Operator (MISO), Tenaska, and Omaha Public Power District (OPPD) for approximately $3.1 million. These securities were issued in the ordinary course of business. Sunflower is current with regard to all purchases, and accordingly, no draw was or has been made on those letters of credit. The hybrid facility expires July 1, 2014. As part of a tax benefit transfer transaction entered into in the early 1980s, Sunflower was required to maintain a letter of credit for the benefit of the tax lessor in the unlikely event that Sunflower’s actions might give rise to the potential loss of benefits sold. Sunflower obtained a letter of credit agreement with CoBank to satisfy this requirement. As of December 31, 2012, the maximum amount that could be drawn upon the letter of credit was $8.0 million. Further, events have not occurred that might give rise to the potential loss of benefits sold, and accordingly, no draw has been made. This letter expires on September 8, 2013. On October 2, 2012 Sunflower entered into an additional $20 million line of credit facility with CFC for purposes of managing seasonal fluctuations in cash flow. This credit facility expires on October 2, 2014. As of December 31, 2012 there were no outstanding draws on this facility.

(b) Contingent Notes

The November 26, 2002 Consent Agreement modified the Sunflower reporting entity. The Consent Agreement transferred assets and liabilities, except for SEHI long-term debt and the legal title to the Holcomb Common Facilities (Common Facilities) and Retained Infrastructure, to SEP Corporation



in exchange for debt issued by Sunflower. The Common Facilities and Retained Infrastructure included property necessary to operate one or more additional units if built on the Holcomb Station site. If additional generation units are constructed, rental payments for use of the Common Facilities and Retained Infrastructure were to be paid to HCF. Under terms of the 1988 credit agreement outstanding for SEHI, the proceeds would then flow to the creditors of SEHI since HCF was a wholly owned subsidiary of SEHI.

By transferring HCF to Sunflower, Sunflower will now be the recipient of any rental payments for use of the Common Facilities and Retained Infrastructure used by any additional generating units. Management estimates annual rental payments of $10 million from the owners of the three planned generating units over a minimum of 19 years.

An Unsecured “B” Contingent Note was issued by Sunflower to one creditor in connection with the November 26, 2002 transaction. The note is payable upon receipt by Sunflower of cash flows from the lease of property that would be used to build additional generating units on the Holcomb Station site if the site is ever to be developed. The amount of the lease payments has not been established; thus, the amount of the note is contingent upon determining an agreed upon lease payment.

Holcomb 3 Contingent Notes, totaling $3.1 million, were issued in connection with the November 26, 2002 transaction. These are contingent notes bearing no interest through January 1, 2008, and accruing interest at 5% thereafter until paid. Interest attributable to these notes as of December 2012 is $0.9 million. The principal and accrued interest are payable in full upon the commercial operation date of a third unit (Holcomb Unit 3) located on the Holcomb Station site. The amounts are not considered a liability until financial close of the respective unit. If commercial operation does not commence prior to December 31, 2021, or if Sunflower is not an owner or operator of Holcomb Unit 3, the notes, including accrued interest, are canceled.

In July 2007, Sunflower reached agreement with the RUS regarding Holcomb site development. The agreement transferred the membership certificate of HCF from SEHI to Sunflower. Sunflower issued contingent notes Holcomb 2, Holcomb 3-B, and Holcomb 4 for $52 million, $23 million, and $16 million, respectively. These are contingent notes bearing 5% interest beginning January 1, 2008, through the payment date. Interest attributable to these notes as of December 2012 is $14.4 million,$6.4 million, and $4.4 million. The principal and accrued interest are payable upon commercial operation of the respective units; as such, the amounts are not considered a liability until financial close of the respective unit. If commercial operation does not commence prior to December 31, 2021, the notes and interest are canceled.

In July 2007, Sunflower issued contingent Holcomb 2 notes to CoBank and CFC. These contingent notes bear no interest. Annual payment amounts are $12.5 thousand and $50 thousand, respectively, for 35 years. The principal is payable on the last business day of December beginning with the first year of commercial operation of the Holcomb 2 unit; as such, the amounts are not considered a liability until financial close of the respective unit. If commercial operation does not commence prior to December 31, 2021, the notes are canceled.




Although discussions continue in an effort to develop the plant site, no construction agreements were effected and no construction activities for additional generating units have begun as of December 31, 2012; thus, Sunflower’s contingent long-term debt agreements discussed above are not considered probable as to payment and, accordingly, are not reflected in the accompanying combined financial statements.

(6) Income Taxes

Sunflower is a taxable cooperative. For the years ended December 31, 2012 and 2011, Sunflower reported net operating losses for income tax purposes. Income taxes generally apply to Sunflower to the extent that income or losses are allocated to nonpatron activity. During 2012 and 2011, Sunflower incurred no current or deferred income tax expense. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 2012 and 2011, are presented below:

2012 2011

Deferred tax assets:Property and equipment, principally due to safe harbor

leasing transactions $ 11,322,657 11,666,901 Property and equipment, principally due to differences

in depreciation 10,120 2,590,958 Accrued vacation and other 895,863 143,478 Investment in SEHI notes 1,200,328 1,139,760 Investment in Holcomb 2, LLC 1,580,451 1,586,419 Net operating loss carryforwards 108,206,044 101,711,754

Total gross deferred tax assets 123,215,463 118,839,270

Less valuation allowance (86,531,027) (82,822,407)

Deferred tax assets, less allowance 36,684,436 36,016,863

Deferred tax liabilities:Debt, principally due to differences in effective

interest rates 35,375,592 34,737,767 Other 1,308,844 1,279,096

Total gross deferred tax liabilities 36,684,436 36,016,863 Net deferred tax assets $ — —

Although the table above presents the deferred tax assets and liabilities on a combined basis, SEHI and Sunflower each file separate income tax returns. As of December 31, 2012, Sunflower has approximately $44 million, and SEHI has approximately $233 million of net operating loss carry forwards for regular and alternative minimum tax purposes that, if not utilized, begin to expire from 2018 through 2022.



Management believes that it is more likely than not that the net deferred tax assets will not be utilized;accordingly, it has provided a valuation allowance to reduce the net deferred tax assets to zero.

There are no unrecognized tax benefits to be accrued or disclosed, and thus, no interest and penalties to accrue thereon.

(7) Leases

Sunflower is obligated under various leases for transmission plant that are accounted for as capital leases. At December 31, 2012 and 2011, the net amount of plant and equipment under capital leases was $18.6 million and $19.3 million, respectively.

Amortization of assets held under capital leases is included within the operations-transmission expense line item. Rental expense incurred for capital leases amounted to $2.2 million and $1.7 million for the years ended December 31, 2012 and 2011, respectively. Interest costs associated with capital leases amounted to $1.5 million and $1.0 million for the years ended December 31, 2012 and 2011, respectively. Amortization of leased assets in association with capital leases amounted to $0.7 million and $0.7 million for the years ended December 31, 2012 and 2011, respectively.

Sunflower has several types of operating leases, including leases of transmission lines and substations and leases with Western Fuels for the use of aluminum railcars. One 128-car set, leased by Western Fuels to Sunflower, the Board of Public Utilities of Kansas City, Sikeston Board of Municipal Utilities, and Southern Minnesota Municipal Power Agency on a shared basis, is referred to as the “Pool” train, and expires in May 2026. Sunflower is invoiced by Western Fuels monthly at the rate of $22.762 per car, per day. Western Fuels has leased to Sunflower beginning August 2010 one 128-car set, referred to as the “CIT Train,” which will expire in August 2015. Sunflower is charged $235 per car, per month for the months January through August and is charged $295 per car, per month for the months of September through December, for a total annual lease amount of $0.4 million.

Minimum rent payments under operating leases are recognized on a straight-line basis over the term of the lease including any periods of free rent. Total expense associated with operating leases was $6.5 millionand $5.7 million for the years ended December 31, 2012 and 2011, respectively.




Future minimum lease payments under noncancelable operating leases and capital leases as of December 31, 2012 are as follows:

Capital Operatingleases leases

Year ending December 31:2013 $ 2,209,725 5,103,5732014 2,161,722 4,698,2892015 2,113,830 4,557,4892016 2,107,469 4,122,2902017 2,107,469 4,122,290Thereafter 26,198,355 26,326,510

36,898,570 $ 48,930,441

Less amount representing interest 18,252,475

Present value of minimum lease payments 18,646,095

Less current portion 726,380Long-term obligations under capital leases $ 17,919,715

(8) Pension Plan

All Sunflower employees are covered by a defined benefit pension plan that is funded through participation in the National Rural Electric Cooperative Association (NRECA) Retirement Security Plan (RS Plan). The RS Plan is a defined benefit pension plan qualified under Section 401 and tax-exempt under Section 501(a) of the Internal Revenue Code. It is a multiemployer plan under the accounting standards. The plan sponsor’s Employer Identification Number is 53-0116145 and the Plan Number is 333.

A unique characteristic of a multiemployer plan compared to a single employer plan is that all plan assets are available to pay benefits of any plan participant. Separate asset accounts are not maintained for participating employers. This means that assets contributed by one employer may be used to provide benefits to employees of other participating employers.

Sunflower’s contributions to the RS Plan in 2012 and 2011 represented less than 5% of the total contributions made to the plan by all participating employers. Contributions are required by a collective bargaining agreement which expires on June 30, 2013. Sunflower made contributions to the plan for the years ended December 31, 2012 and 2011, of approximately $8.1 million and $7.6 million, respectively. There have been no significant changes that affect the comparability of 2012 and 2011 contributions. A portion of these contributions were allocated to Mid-Kansas as part of the agreed-upon allocation and reimbursement of costs. See note 3 for an explanation of the allocation and reimbursement agreement.



In the RS Plan, a “zone status” determination is not required, and therefore not determined, under the Pension Protection Act (PPA) of 2006. In addition, the accumulated benefit obligations and plan assets are not determined or allocated separately by individual employer. In total, the RS Plan was between 65% and 80% funded at January 1, 2012 and January 1, 2011 based on the PPA funding target and PPA actuarial value of assets on those dates.

Because the provisions of the PPA do not apply to the RS Plan, funding improvement plans and surcharges are not applicable. Future contribution requirements are determined each year as part of the actuarial valuation of the plan and may change as a result of plan experience.

(9) Postretirement Benefit Obligations

Sunflower allows eligible retirees to purchase medical insurance from the multiple employer plan in which Sunflower participates. In order for retirees to be eligible for healthcare benefits, the retiree must pay the premium cost associated with the coverage. Sunflower pays a portion of current employees’ premiums and is reimbursed by retirees for their premium cost. The premium payments are calculated on an average of both active and retiree participants. As such, Sunflower will incur additional costs for the premium payments of active participants due to the retirees’ participation in the plan. This obligation represents a liability to Sunflower. Sunflower retains the right, subject to existing agreements, to change or eliminate these benefits.

The Company recognizes the obligation as a liability on its combined balance sheet as there are no plan assets. Actuarial gains and losses are generally amortized subject to the corridor method, over the average remaining service life of the Company’s active employees.

The Company measured its benefit obligations as of December 31 of each year. The following table sets forth the plan’s benefit obligations recognized in the combined balance sheet and related benefit cost at December 31, 2012 and 2011:

Postretirement benefitsDecember 31

2012 2011

Change in accumulated benefit obligation:Accumulated benefit obligation, beginning of year $ 5,449,711 9,418,578 Service cost 306,500 505,517 Interest cost 246,764 571,158 Actuarial loss 1,401,429 2,241,274 Plan amendment — (7,068,822) Net benefits paid (274,610) (217,994) Accumulated benefit obligation, end of year $ 7,129,794 5,449,711




December 312012 2011

Funded status:Accumulated benefit obligation $ (7,129,794) (5,449,711) Plan assets — —

Net liability recognized $ (7,129,794) (5,449,711)

Net periodic benefit cost:Service cost $ 306,500 505,517 Interest cost 246,764 571,158 Amortization of transition obligation — 25,000 Amortization of prior service cost (1,126,187) —Recognized net actuarial loss 571,142 375,927

Total net periodic benefit cost $ (1,781) 1,477,602

Amounts recognized in the balance sheet consist of:Current liability $ 185,000 245,000 Noncurrent liability 6,944,794 5,204,711 Accumulated other comprehensive income (loss) (1,807,515) 148,959

The net loss (income) and prior service cost (credit) for the postretirement plan that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are $0.6 million and $(1.1) million, respectively. Weighted average assumptions used to determine benefit obligations and cost for 2012 and 2011 were as follows:

Postretirement benefits2012 2011

Discount rate – obligation 4.01% 4.83%Discount rate – cost 4.83 5.82Healthcare cost trend rate 8.0% – 5.0% 8.0% – 5.0%

For measurement purposes at December 31, 2012, an 8.0% annual rate of increase in the per capita cost of covered healthcare benefits was assumed for 2013. The rate was assumed to decrease gradually to 5.0% for 2023 and remain at that level thereafter. If the annual rate increased (decreased) by 1.0% point, the effect on the accumulated benefit obligation would be $1.1/$(0.9) million.



The following table summarizes benefits paid during 2012 and 2011:

2012 2011

Gross benefits paid $ 561,337 438,908 Retiree contributions (286,727) (220,914)

Net benefits paid $ 274,610 217,994

The benefits expected to be paid, net of retiree contributions, from the postretirement benefit plan are as follows:

Year ending December 31:2013 $ 185,000 2014 245,000 2015 297,000 2016 343,000 2017 374,000 Five years ending 2022 2,366,000

$ 3,810,000

The expected benefits are based on the same assumptions used to measure the Company’s benefit obligation at December 31 and include estimated future employee service.

(10) Fair Value Measurements

(a) Fair Value of Financial Instruments

The following table presents the carrying amounts and estimated fair values of the Company’sfinancial instruments at December 31, 2012 and 2011. The fair value of a financial instrument is the amount 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.

2012 2011Carrying Carryingamount Fair value amount Fair value

Financial assets:Investments in associated

organizations $ 5,687,450 5,687,450 5,355,866 5,355,866 Capital term certificates

in NRUCF 16,386,912 16,386,912 18,343,928 18,343,928

Financial liabilities:Debt $ 248,083,984 259,030,253 273,971,975 284,254,740

The carrying amounts shown in the table are included in the combined balance sheets.




The fair values of the financial instruments shown in the above table as of December 31, 2012 and 2011 represent management’s best estimates of the amounts that would be received to sell those assets or that would be paid to transfer those liabilities in an orderly transaction between market participants at that date. Those fair value measurements maximize the use of observable inputs. However, in situations where there is little, if any, market activity for the asset or liability at the measurement date, the fair value measurement reflects the Company’s own judgments about the assumptions that market participants would use in pricing the asset or liability. Those judgments are developed by the Company based on the best information available in the circumstances.

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

Cash and cash equivalents, accounts receivable, investments and certificates, escrowed funds, and accounts payable approximate the fair value as December 31, 2012 and 2011. The method used to estimate the fair value of the Company’s long-term debt is based on quoted market prices for the same or similar issues or on the current rates offered to the Cooperative for the debt of the same maturity.

(b) Fair Value Hierarchy

The Company has adopted standards for fair value measurements of financial assets and liabilities that establish a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3 inputs are unobservable inputs for the asset or liability.

The level in the fair value hierarchy within which a fair measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety.

At December 31, 2012, the Company had no assets or liabilities that are measured at fair value on a recurring basis.



Notes to Combined FFFFiiinnnnanciaallll SStaaattteementtssDecember 31, 20001012 2 22 ananananaa d 2011

(11) Commitments and Contingencies

Sunflower has entered into various multiyear contracts with third parties through December 31, 2016, to acquire and transport coal for Holcomb Station. Under these contracts, the Company estimates it will pay $24.0 million in 2013, $23.1 million in 2014, and $16.7 million in 2015.

In 2007, the Sierra Club challenged RUS’ approval of certain Sunflower transactions, including the 2002 corporate restructuring and the 2007 consent to an option to Tri-State for development of up to two coal-fired units at Sunflower’s Holcomb Station. In March 2011, the judge granted summary judgment to the Sierra Club on all substantive points and sought further briefing on remedies. In January 2012, the judge issued his final ruling, enjoining RUS from issuing “any approvals or consents for agreements orarrangements directly related to the Holcomb Expansion Project” or taking “any other major federal actions in connection with the Holcomb Expansion Project” until it has prepared an Environmental Impact Statement (EIS), but expressly declining to enjoin Sunflower’s development activities or to invalidate past RUS approvals. Sunflower has appealed the decision and may pursue options that would not require further RUS action. Should further RUS action be required, the estimated costs of completing an EIS could range from $2 million to $3 million and could take two years to complete.

Sunflower is a defendant in other litigation matters and a party to various claims arising from its normal activities. In management’s opinion, based on advice from legal counsel, these actions will not result in a material adverse effect on the financial position, results of operations, or liquidity of Sunflower.

Sunflower has commitments to provide power to its member cooperatives through 2038. Likewise, the member cooperatives are committed to purchase all of their power requirements from Sunflower through the same period. Sunflower is also party to a number of other electricity contracts that expire in various future years.

Sunflower has a commitment to purchase the output from Smoky Hills Wind Farm. Sunflower does not have fixed cost obligations and pays only for the energy produced. These purchases are set at a contracted price for 20 years from inception of the contract. Sunflower purchased wind power at a cost of $7.7 million and $7.9 million in 2012 and 2011, respectively.

During 2011, Sunflower incurred construction costs of $5.0 million, respectively, to replace assets damaged in natural disasters. In 2012, Sunflower received state and federal proceeds of $0.6 million. In 2011, Sunflower did not receive any state and federal reimbursements. Sunflower does not anticipate spending any additional funds in 2013 for costs relating to assets previously damaged by storms.

In relation to the Holcomb site development, the Kansas Department of Health and Environment (KDHE) issued an air permit for the construction of an 895 MW coal-fired generating unit on the existing Holcomb Plant site in December 2010. In January 2011, an environmental group filed suit against KDHE challenging the air permit. Management will vigorously contest the claims and believes the permit will be upheld.

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