2014 Annual Report

2 014 ANNUAL REPORT CONTENTS

TO OUR STAKEHOLDERS ...... 2

ABOUT GREAT RIVER ENERGY ...... 4

OUR RESOURCE PORTFOLIO...... 6

COOPERATIVE ELECTRICITY ...... 8

RELIABLE SERVICE...... 12

FINDING ENERGY IN NEW PLACES ...... 16

2014 FINANCIAL REPORT...... 21

MANAGEMENT AND BOARD OF DIRECTORS ...... 56 TO OUR STAKE HOLDERS

MINNESOTANS KNOW WHAT Our wholesale electricity rates are below Station power plants operate solely on Great River Energy and our member the weighted regional average, despite DryFine coal, and are the only facilities in cooperatives have spent decades finding TO EXPECT WHEN THEY FLIP ON the fact that cooperatives serve just 7.5 the world fueled by beneficiated coal. ways to deliver reliable service at A LIGHT SWITCH: DEPENDABLE customers per mile of line – far fewer than affordable rates. Continuing to deliver We have also spent 11 years as leaders municipal utilities or investor-owned on this promise will require courage, ELECTRICITY. in the CapX2020 organization. The COOPERATIVES MAKE utilities, which serve, on average, 48 and leadership and new ideas. $2 billion investment is the largest Approximately one-third of the people in 34 customers per mile of line, respectively. BUSINESS DECISIONS transmission grid expansion in our Our strategy is designed to improve our Minnesota receive their electricity from a This is possible because cooperatives are region in decades. competitive position decades into the FOCUSED ON WHAT cooperative. Just like their counterparts in free to approach our business differently. future, while keeping our short-term agriculture or housing, cooperative utilities Great River Energy is in the midst of a IS BEST FOR THEIR In a world that focuses on quarterly financial results strong and our wholesale are owned by the members they serve. two-year construction program that will financial results and daily market trends, rates competitive. In 2014, we delivered MEMBERS OVER THE Great River Energy is a cooperative result in 20 solar installations across member-owned cooperatives make on all three of these objectives. serving the approximately 660,000 Minnesota. We pursued these projects LONG TERM. business decisions based on what is best members, or 1.7 million Minnesotans, voluntarily because of our members’ As we begin 2015, Great River Energy for their members over the long term. who receive electricity through the 28 growing interest in solar energy, to and all of our member-owners are electric cooperatives that collectively own Successful cooperatives are the product of demonstrate solar electricity in our service implementing the strategies and devoting the company. thriving communities. Great River Energy area, and also develop efficient financing the resources to keep cooperative energy supports Minnesota and North Dakota methods, technologies and configurations. competitive and bring about the future Every cooperative can trace its origin to businesses through a long-running “buy our members want. a need in the community. Electric local” program whereby we work to seek cooperatives are the result of rural suppliers from within our states. We also communities banding together to obtain collaborate with our member cooperatives the same safe and dependable electricity to attract and retain businesses in rural that first took hold in the city centers communities. across the state. Over time, our service has evolved in step with the needs of We believe electricity is a smart choice to our membership. power our lives and economy. While manufacturers improve batteries and Collectively, our members want cleaner chargers, Great River Energy is working electricity and programs that help with industry partners to plan efforts to conserve energy at home. They also want promote the use of electric vehicles. competitively priced electricity. Over the past decade, Great River Energy has We spent many years developing Michael Thorson David Saggau increased our efficiency and reduced our DryFiningTM technology, a process that environmental impact while working to enhances lignite coal and results in minimize the cost of electricity. greater efficiency and lower emissions. Our Coal Creek Station and Spiritwood Great River Energy Great River Energy Board Chair President and CEO

2 3 TO OUR STAKE HOLDERS

2 3 ABOUT GREAT RIVER ENERGY

GREAT RIVER ENERGY IS A NOT-FOR-PROFIT

COOPERATIVE WHICH PROVIDES WHOLESALE

ELECTRIC SERVICE TO 28 DISTRIBUTION COOPERATIVES IN MINNESOTA AND PARTS OF Member Great River Energy Systemwide Load WISCONSIN. THOSE MEMBER COOPERATIVES Cooperatives 2014 Financial Characteristics DISTRIBUTE ELECTRICITY TO APPROXIMATELY Highlights

660,000 MEMBER ACCOUNTS – OR ABOUT Number of Revenue...... $1.0 billion Residential...... 57.0% 1.7 MILLION PEOPLE. WITH $3.9 BILLION IN member accounts...... 660,000 Net margin attributable to Seasonal...... 1.6% ASSETS, GREAT RIVER ENERGY IS THE SECOND Sales to members . ....12,111,551 Great River Energy. ..$52.0 million LARGEST ELECTRIC POWER SUPPLIER IN megawatt hours Commercial, industrial Total assets...... $3.9 billion and other...... 41.4% MINNESOTA AND ONE OF THE LARGEST Total distribution *Based on energy sales GENERATION AND line...... 88,000 miles Utility plant investment (net)...... $2.8 billion TRANSMISSION Average COOPERATIVES IN THE density...... 7.5 consumers/mile

UNITED STATES. GREAT RIVER Distribution substations...... 555 ENERGY’S MEMBER COOPERATIVES Combined annual RANGE FROM THOSE IN THE OUTER- revenue...... $1.35 billion RING SUBURBS OF THE TWIN CITIES Electric plant in TO THE ARROWHEAD REGION OF service (net)...... $1.9 billion MINNESOTA TO THE FARMLAND OF Distribution employees...... 1,575 SOUTHWESTERN MINNESOTA. GREAT RIVER

ENERGY’S LARGEST DISTRIBUTION COOPERATIVE

SERVES MORE THAN 125,000 MEMBER-

CONSUMERS; THE SMALLEST SERVES

ABOUT 2,500. LEARN MORE AT

GREATRIVERENERGY.COM.

4 5 ABOUT GREAT RIVER ENERGY

GREAT RIVER ENERGY IS A NOT-FOR-PROFIT

COOPERATIVE WHICH PROVIDES WHOLESALE

ENERGY’S LARGEST DISTRIBUTION COOPERATIVE

SERVES MORE THAN 125,000 MEMBER-

CONSUMERS; THE SMALLEST SERVES

ABOUT 2,500. LEARN MORE AT

GREATRIVERENERGY.COM.

4 5 OUR RESOURCE PORTFOLIO 9 St. Bonifacius Station 12 Arrowhead Emergency Location: St. Bonifacius, Minnesota Generating Station Generating capability: Location: Cook County, Minnesota 58 MW (summer) Generating capability: 18 MW* GREAT RIVER ENERGY CAREFULLY Fuel: Fuel oil Fuel: Fuel oil

10 Rock Lake Station 13 Trimont Wind CRAFTS AND MAINTAINS A Location: Pine City, Minnesota Purchase: 100 MW* Generating capability: Turbine: 67 General Electric 1.5-MW PORTFOLIO OF POWER 1 4 5 6 20 MW (summer) wind turbines Fuel: Fuel oil Coal Creek Station Elk River Energy Recovery Station Elk River Peaking Station Cambridge Station 14 Elm Creek Wind GENERATION FACILITIES AND 11 Maple Lake Station Location: Underwood, N.D. Location: Elk River, Minnesota Location: Elk River, Minnesota Location: Cambridge, Minnesota Purchase: 99 MW* Generating capability: 1,139 MW Generating capability: 33 MW Generating capability: 187 MW (summer) Generating capability: 184 MW (summer) Location: Maple Lake, Minnesota Turbine: 66 General Electric 1.5-MW TRANSMISSION RESOURCES IN Start of operation: Start of operation: Units 1 & 2, 1951; Start of operation: 2009 Start of operation: 2007 Generating capability: wind turbines Unit 1, 1979; Unit 2, 1980 Unit 3, 1959 Fuel: Natural gas; backup, fuel oil Fuel: Fuel oil (Unit 1), and natural gas (Unit 2) 20 MW (summer) Fuel: Lignite coal and DryFineTM Fuel: Refuse-derived fuel Fuel: Fuel oil 15 Prairie Star Wind ORDER TO DELIVER RELIABLE AND lignite coal Purchase: 101 MW* Turbine: 61 Vestas 1.65-MW AFFORDABLE WHOLESALE wind turbines

16 Ashtabula II Wind ELECTRICITY TO THE REGIONAL Purchase: 51 MW* Turbine: 34 General Electric 1.5-MW ELECTRICITY MARKET AND ITS wind turbines 17 Endeavor I Wind MEMBER COOPERATIVES. Purchase: 100 MW* Turbine: 40 Clipper 2.5-MW 2 GENERATION RESOURCES OF wind turbines Stanton Station VARYING SIZES, LOCATIONS AND Location: Stanton, N.D. Generating capability: 189 MW Start of operation: FUELS EACH SERVE A SPECIFIC Unit 1, 1966; Unit 10, 1982 Fuel: Powder River Basin coal OTHER ASSETS PURPOSE WITHIN GREAT RIVER Midwest AgEnergy Group Midwest AgEnergy Group is a biofuels enterprise, of which ENERGY’S RESOURCE NETWORK. Great River Energy is a majority owner. Midwest AgEnergy Group owns Blue Flint Ethanol, a 65 million-gallon-a-year TRANSMISSION LINES AND biorefinery near Underwood, North Dakota, and Dakota Spirit AgEnergy, a 65 million-gallon-a-year biorefinery currently under construction near Jamestown, North Dakota. SUBSTATIONS ARE DESIGNED TO Elk River Resource Processing Plant DELIVER ELECTRICITY PRECISELY Municipal solid waste (MSW) is processed to create refuse-derived fuel (RDF) for powering Great River Energy’s 3 7 8 Elk River Energy Recovery Station. Up to 300,000 tons of WHERE AND WHEN IT IS NEEDED MSW is transformed into RDF each year. Spiritwood Station Lakefield Junction Station Pleasant Valley Station WITH MINIMAL INTERRUPTION. Location: Jamestown, N.D. Location: Martin County, Minnesota Location: Mower County, Minnesota Other wind energy purchases: Generating capability: 99 MW* Generating capability: 500 MW (summer) Generating capability: 413 MW (summer) 17 MW* from four Minnesota wind farms. Start of operation: November 2014 Start of operation: 2001 Start of operation: Units 11 & 12, 2001; Location: Jackson, Dodge and Murray counties. Fuel: DryFine lignite coal Fuel: Natural gas; backup, fuel oil Unit 13, 2002 Fuel: Natural gas; backup, fuel oil Generating capability based on Summer Net Dependable Capacity per NERC Generating Availability Data System for the 2015 - 2016 planning year. *Nameplate generating capacity

Does not include lines partially owned by Great River Energy.

6 7 OUR RESOURCE PORTFOLIO 9 St. Bonifacius Station 12 Arrowhead Emergency Location: St. Bonifacius, Minnesota Generating Station Generating capability: Location: Cook County, Minnesota 58 MW (summer) Generating capability: 18 MW* GREAT RIVER ENERGY CAREFULLY Fuel: Fuel oil Fuel: Fuel oil

Does not include lines partially owned by Great River Energy.

6 7 COOPERATIVE ELECTRICITY Our mission for Seeking new sources members of power

Great River Energy’s mission is Great River Energy’s generation portfolio to deliver reliable, affordable continually evolves to reflect changes in electricity in harmony with a the industry and better serve its membership. The cooperative made sustainable environment. The significant additions to its resources in cooperative works constantly 2014, highlighted by a solar build-out to achieve that goal for its and the start-up of a state-of-the-art members. combined heat and power plant.

Great River Energy must secure a diverse portfolio of resources that can provide economical electricity in any weather, at any time of day and under all market conditions. Those resources must be meticulously maintained so they are ready when needed. Coal-based power plants are designed to run without interruption. Natural gas peaking facilities must be ready to meet electricity needs at any time. Other resources only produce when the sun shines or the wind blows.

Once electricity is generated, a complex network of wires and other facilities ensures it is delivered where it is needed without interruption. Every part of that Early in 2014, Great River Energy vast network must be safe for the people announced plans to construct more than who live and work near electric 600 kilowatts (kW) of new solar energy infrastructure. installations. This began with the June In June 2014, Great River Energy completed the first completion of a 250-kW solar array Great River Energy’s goal is to achieve and largest in a series of solar arrays that will be built located at Great River Energy’s in the service areas of 20 member-owner cooperatives. this balance 24 hours a day, every day. headquarters facility. That installation The projects are designed to test various solar technologies and identify ways to integrate solar includes a mix of technologies designed to energy installations into cooperative systems. identify how solar energy installations can be integrated into cooperative systems.

8 9 COOPERATIVE ELECTRICITY Our mission for Seeking new sources members of power

8 9 GREAT RIVER ENERGY MUST SECURE A DIVERSE PORTFOLIO OF RESOURCES THAT CAN PROVIDE Ramping up ECONOMICAL ELECTRICITY IN ANY WEATHER, AT ANY renewables TIME OF DAY AND UNDER ALL MARKET CONDITIONS. Manitoba Hydro’s Long Spruce Generating Station generates more than 1,000 megawatts of electricity Great River Energy generated on the Nelson River. Great River Energy purchases approximately 12 percent of its electricity hydroelectric power from Canada. from renewable sources in 2014, which includes 468 megawatts of generation capacity from wind farms in Minnesota, In total, Great River Energy will build 20 Iowa and North Dakota. solar installations throughout the state. In Former mine becomes wildlife preserve addition to adding to a growing portfolio A long-running renewable power plant Great River Energy and The Falkirk Mining Company donated more than 700 acres of renewable resources, these projects celebrated a milestone when the Elk River of reclaimed land to the North Dakota Department of Transportation that is now open will provide Great River Energy and its Resource Recovery Project achieved 25 to public access for fishing, hunting, trapping and other outdoor activities. member-owner cooperatives with years of successful operation in 2014. experience in solar development, and Each year, the project avoids sending as After land is mined, Great River Energy and Falkirk Mine must return the area to a demonstrate solar technologies that are much as 300,000 tons of municipal solid diverse productive landscape – at least as productive and diverse as it was before effective with cooperative electric systems. waste to the landfill as it converts that mining started. This reclamation effort begins by restoring the topography to waste into renewable electricity and By testing different solar generation approximate original contours that restore watersheds and land-use areas to the recovers recyclable materials. technologies, Great River Energy intends post-mining landscape. to better understand the opportunities and Great River Energy also obtains a challenges of this generation source. significant amount of carbon-free energy More than 150 people attended the dedication ceremony for the Coal Lake Wildlife With that knowledge, the cooperative can through hydroelectric purchases from the Management Area near Underwood, North Dakota, in September. Prior to the continue to deliver on its mission while Western Area Power Administration and ceremony, the North Dakota Game and Fish Department hosted an outdoor providing energy-supply options for seasonal exchange agreements with educational program at the site for fourth-grade students. members who want solar power. Manitoba Hydro. Hydroelectric power provided 8 percent of Great River Falkirk Mine has received numerous state and national awards for Great River Energy is also working with Energy’s electricity in 2014. its reclamation projects. the National Rural Electric Cooperative Association (NRECA) and Department of In February, Manitoba Hydro and Great Energy (DOE) to analyze various business River Energy signed a memorandum of cases for distributed generation and solar understanding to investigate the sale of installations. That work, which is funded up to an additional 600 megawatts of by a joint DOE/NRECA grant and part of electricity from Manitoba Hydro to DOE’s SunShot Initiative, will provide Great River Energy, commencing in On the site of a former mine now valuable information for cooperatives approximately 2020. sits Coal Lake Wildlife Management Area, a public space for outdoor across the country. activities.

10 11 GREAT RIVER ENERGY MUST SECURE A DIVERSE PORTFOLIO OF RESOURCES THAT CAN PROVIDE Ramping up ECONOMICAL ELECTRICITY IN ANY WEATHER, AT ANY renewables TIME OF DAY AND UNDER ALL MARKET CONDITIONS. Manitoba Hydro’s Long Spruce Generating Station generates more than 1,000 megawatts of electricity Great River Energy generated on the Nelson River. Great River Energy purchases approximately 12 percent of its electricity hydroelectric power from Canada. from renewable sources in 2014, which includes 468 megawatts of generation capacity from wind farms in Minnesota, In total, Great River Energy will build 20 Iowa and North Dakota. solar installations throughout the state. In Former mine becomes wildlife preserve addition to adding to a growing portfolio A long-running renewable power plant Great River Energy and The Falkirk Mining Company donated more than 700 acres of renewable resources, these projects celebrated a milestone when the Elk River of reclaimed land to the North Dakota Department of Transportation that is now open will provide Great River Energy and its Resource Recovery Project achieved 25 to public access for fishing, hunting, trapping and other outdoor activities. member-owner cooperatives with years of successful operation in 2014. experience in solar development, and Each year, the project avoids sending as After land is mined, Great River Energy and Falkirk Mine must return the area to a demonstrate solar technologies that are much as 300,000 tons of municipal solid diverse productive landscape – at least as productive and diverse as it was before effective with cooperative electric systems. waste to the landfill as it converts that mining started. This reclamation effort begins by restoring the topography to waste into renewable electricity and By testing different solar generation approximate original contours that restore watersheds and land-use areas to the recovers recyclable materials. technologies, Great River Energy intends post-mining landscape. to better understand the opportunities and Great River Energy also obtains a challenges of this generation source. significant amount of carbon-free energy More than 150 people attended the dedication ceremony for the Coal Lake Wildlife With that knowledge, the cooperative can through hydroelectric purchases from the Management Area near Underwood, North Dakota, in September. Prior to the continue to deliver on its mission while Western Area Power Administration and ceremony, the North Dakota Game and Fish Department hosted an outdoor providing energy-supply options for seasonal exchange agreements with educational program at the site for fourth-grade students. members who want solar power. Manitoba Hydro. Hydroelectric power provided 8 percent of Great River Falkirk Mine has received numerous state and national awards for Great River Energy is also working with Energy’s electricity in 2014. its reclamation projects. the National Rural Electric Cooperative Association (NRECA) and Department of In February, Manitoba Hydro and Great Energy (DOE) to analyze various business River Energy signed a memorandum of cases for distributed generation and solar understanding to investigate the sale of installations. That work, which is funded up to an additional 600 megawatts of by a joint DOE/NRECA grant and part of electricity from Manitoba Hydro to DOE’s SunShot Initiative, will provide Great River Energy, commencing in On the site of a former mine now valuable information for cooperatives approximately 2020. sits Coal Lake Wildlife Management Area, a public space for outdoor across the country. activities.

10 11 R E L I A B L E SERVICE Massive grid was completed and placed in service. B R O O K I N G S expansion nears In April, two more segments of the line were energized. A 20-mile segment COUNTY- completion between the Chub Lake and Helena H A M P T O N B Y For years, Great River Energy’s capital substations was energized followed by an budget was largely devoted to power 18-mile segment between the Chub Lake THE NUMBERS generation projects, with a small and Hampton substations. Later that percentage required for transmission. In month, the Chub Lake Substation was the last few years, however, that has placed in service. 250 miles of changed. Transmission now represents a Great River Energy owns approximately line from South Dakota to larger portion of Great River Energy’s 18.5 percent of the Brookings County- Hampton, Minnesota capital spending, primarily as a result of Hampton project. The entire project is Great River Energy’s involvement in the expected to be in service in 2015. CapX2020 projects, the largest 1,435 investment in the region’s transmission structures installed grid in decades. Cold weather shows Great River Energy has invested in three cooperatives’ value 64,000 of the CapX2020 projects. The Brookings pounds of concrete poured The early months of 2014 were marked County-Hampton and Fargo-St. Cloud for the largest pole’s with energy challenges, as record cold projects will be completed in 2015, foundation weather coincided with propane shortages concluding a major investment in the and high natural gas prices. As the price Midwest transmission system. and availability of other fuels caused 345,000 In 2014, Great River Energy continued concerns, the electric grid was called upon volts of electricity carried by its leadership as construction manager more frequently as many homeowners the line for the Brookings County-Hampton relied on electricity to heat their homes. In 345-kV project. fact, Great River Energy witnessed January electric load 6.7 percent higher than the In March, a 50-mile segment from the same period in 2013. Cedar Mountain Substation to the Lyon County Substation and a 4-mile substation Throughout this period, Great River connection segment to the Franklin Energy’s baseload power plants generated Great River Energy Substation Substation were energized. Also in electricity reliably, and the cooperative’s Engineer Greg Schutte reviews plans transmission system remained strong. at the Chub Lake Substation, one of March, the Cedar Mountain Substation two new substations built for the 345-kilovolt CapX2020 Brookings County-Hampton transmission line.

12 13 R E L I A B L E SERVICE Massive grid was completed and placed in service. B R O O K I N G S expansion nears In April, two more segments of the line were energized. A 20-mile segment COUNTY- completion between the Chub Lake and Helena H A M P T O N B Y For years, Great River Energy’s capital substations was energized followed by an budget was largely devoted to power 18-mile segment between the Chub Lake THE NUMBERS generation projects, with a small and Hampton substations. Later that percentage required for transmission. In month, the Chub Lake Substation was the last few years, however, that has placed in service. 250 miles of changed. Transmission now represents a Great River Energy owns approximately line from South Dakota to larger portion of Great River Energy’s 18.5 percent of the Brookings County- Hampton, Minnesota capital spending, primarily as a result of Hampton project. The entire project is Great River Energy’s involvement in the expected to be in service in 2015. CapX2020 projects, the largest 1,435 investment in the region’s transmission structures installed grid in decades. Cold weather shows Great River Energy has invested in three cooperatives’ value 64,000 of the CapX2020 projects. The Brookings pounds of concrete poured The early months of 2014 were marked County-Hampton and Fargo-St. Cloud for the largest pole’s with energy challenges, as record cold projects will be completed in 2015, foundation weather coincided with propane shortages concluding a major investment in the and high natural gas prices. As the price Midwest transmission system. and availability of other fuels caused 345,000 In 2014, Great River Energy continued concerns, the electric grid was called upon volts of electricity carried by its leadership as construction manager more frequently as many homeowners the line for the Brookings County-Hampton relied on electricity to heat their homes. In 345-kV project. fact, Great River Energy witnessed January electric load 6.7 percent higher than the In March, a 50-mile segment from the same period in 2013. Cedar Mountain Substation to the Lyon County Substation and a 4-mile substation Throughout this period, Great River connection segment to the Franklin Energy’s baseload power plants generated Great River Energy Substation Substation were energized. Also in electricity reliably, and the cooperative’s Engineer Greg Schutte reviews plans transmission system remained strong. at the Chub Lake Substation, one of March, the Cedar Mountain Substation two new substations built for the 345-kilovolt CapX2020 Brookings County-Hampton transmission line.

12 13 Investing in the communities we serve

As residential growth has slowed in areas served by electric cooperatives during the past few years, the importance of supporting economic development efforts has increased. The ongoing efforts of Great River Energy’s economic development team to attract and retain businesses benefits all member cooperatives. These efforts will help Minnesota’s rural communities to thrive.

A partnership between Great River Energy and a member-owned cooperative helped and seek solutions that meet property Community outreach secure a major data center to be served by Dakota Electric Association. High-tech owners’ needs and engineering businesses are attracted to cooperatives’ reliable service, robust transmission CAPX2020 IS THE vital requirements for projects. infrastructure and competitive rates. Large customers like these benefit all of Great River LARGEST REGIONAL Whether Great River Energy is preparing Energy’s member cooperatives by making more efficient use of wholesale electricity. to build new transmission infrastructure or INVESTMENT IN Continually to remove trees growing dangerously near TRANSMISSION IN power lines, connecting with those in the improving operations DECADES. community is essential. Great River Energy employees are always Great River Energy works with property seeking ways to improve efficiency and owners, local leaders, local news media operations. A company-sponsored and the public about upcoming business improvement program has transmission projects. In September, public produced $226 million in operational outreach began for significant transmission savings since 2002. line projects needed to ensure continued One such effort seeks to improve Great reliability and to power new crude oil River Energy’s metering processes and pipeline pumping stations. technology, in anticipation of the Great River Energy works closely with exponential growth in meter data collection state and local government to obtain the as a result of the deployment of advanced permits and approvals necessary for metering infrastructure, distributed building new transmission projects. generation, demand response, distribution Employees take time to meet property automation and other technologies. owners face to face to discuss easements

14 15 Investing in the communities we serve

14 15 FINDING ENERGY IN NEW PLACES Spiritwood Station Biorefinery posts starts up strong returns

For decades, coal-fueled power plants A significant contributor to Great River have followed a traditional, tried-and-true Energy’s 2014 financial results was the design: coal is mined and then combusted performance of Blue Flint Ethanol. The 65 to produce steam, which is used to million-gallon-per-year biorefinery generate electricity. When Great River contributed $28.2 million to Great River SPIRITWOOD STATION Energy planned Spiritwood Station, the Energy’s bottom line, due to its highly “ cooperative discovered improvements at efficient operations and a favorable PROVES THAT every step in the process. When the plant ethanol market. Great River Energy’s newest generation resource, CONSUMERS CAN began producing electricity for the Spiritwood Station, is a combined heat and Blue Flint Ethanol uses process steam power plant, which generates electricity for the regional grid in November, it set a new RECOGNIZE THE generated by Great River Energy’s Coal regional grid and process steam for industrial standard for efficiency and environmental operations. Pictured here are (left to right) Creek Station power plant, which ECONOMIC BENEFITS performance. Spiritwood Station Plant Operations Leader eliminates the need for a dedicated Corey Riedinger, Plant Engineering Leader FROM COAL-FUELED Jeff Krumwiede and Plant Maintenance Leader Located near Jamestown, North Dakota, boiler. In addition to ethanol, the facility Jeff Comer. The silver pipe above their heads Spiritwood Station is a combined heat and produces dry distillers grains, E85 ELECTRICITY GENERATION carries steam to a nearby malting facility. power plant. That simply means that, in blended motor fuel and fuel-grade WITHOUT SACRIFICING addition to generating electricity, energy is corn oil. used for other purposes. At Spiritwood ENVIRONMENTAL Blue Flint Ethanol is part of Midwest Station, that energy – in the form of heat AgEnergy Group, an Upper Midwest PERFORMANCE OR or “process steam” – powers an adjacent biofuels enterprise of which a majority is malting facility as well as an ethanol RELIABILITY.” owned by Great River Energy. Midwest biorefinery scheduled to open in 2015. AgEnergy Group will add a second — GREAT RIVER ENERGY The more uses a utility can find for steam, biorefinery in May 2015 with the start-up PRESIDENT AND CEO the more efficiency is gained. Most of Dakota Spirit AgEnergy. DAVID SAGGAU conventional coal-fueled power plants are Like Blue Flint Ethanol, Dakota Spirit 30 to 35 percent efficient. Spiritwood AgEnergy will also use process steam Station will be capable of achieving about from a power plant. The biorefinery is 60 percent efficiency with both steam being built adjacent to Spiritwood partners in operation. Efficiencies could Station. be higher with additional steam loads.

16 17 FINDING ENERGY IN NEW PLACES Spiritwood Station Biorefinery posts starts up strong returns

16 17 Taking the long view hydro energy, maintain its strong energy GENERATION ACCOLADES efficiency and conservation programs, In June, when the U.S. Environmental and continue to operate its valuable, Protection Agency (EPA) released a draft efficient coal-based power plants. Great Stanton Station and Coal Creek rule regulating greenhouse gas emission River Energy’s plan results in a projected Station achieved Occupational Health and Safety Assessment Series 18001 from existing coal-fired power plants, 28 percent reduction in the carbon certification, a system designed to called the Clean Power Plan, Great River dioxide intensity of its system by 2029 ensure continuous improvement to employee safety. Coal Creek Station Energy had already started to prepare. from 2012 levels, using EPA’s draft GREAT RIVER In fact, the cooperative adopted its compliance formula for the Clean April May June July August ENERGY’S 15-YEAR strategy to mitigate the effects of that rule Power Plan. nearly a year earlier. That strategy OUTLOOK PROJECTS charged Great River Energy with, among Sharing industry Pleasant Valley Station received a The Solid Waste Association of North America A 28 PERCENT other goals, reducing emissions over time. Best Practices Award from Combined awarded Great River Energy’s Elk River Resource Cycle Journal for an innovative Recovery Project with the 2014 Excellence Award Great River Energy is investing in low- expertise solution to persistent fuse failures in the waste-to-energy category (bronze). REDUCTION IN THE during extremely cold weather. carbon and carbon-free energy sources, As the EPA prepared its Clean Power Plan CARBON DIOXIDE and accelerating the depreciation of its during the first half of 2014, Great River INTENSITY OF ITS Coal Creek Station and Stanton Station Energy was an active participant in the power plants. By the time the EPA issued creation of the long-awaited regulations. SYSTEM BY 2029 the draft Clean Power Plan, Great River Great River Energy was involved in FROM 2012 LEVELS. Energy had already taken action toward regional and national coalitions to each of those objectives. provide regulators with input from Great River Energy filed its 2014 utilities. Great River Energy also led the Will Kaul was on hand to share his President and CEO David Saggau sits Integrated Resource Plan with the development of a market-based, regional expertise and lend the cooperative on the Electricity Subsector Coordinating Minnesota Public Utilities Commission. compliance strategy that gained national perspective on regional and state Council, a group of industry CEOs The document details the cooperative’s attention as an innovative approach to energy policies. that sets strategies for addressing plan to reliably meet its member-owners’ emission reductions. cybersecurity issues. The council works Great River Energy Vice President of energy needs in a cost-effective and with administration officials to coordinate Among the employees who work every Business Development and Strategy Greg environmentally responsible way as it and align utility efforts toward common day for Great River Energy, you will find Ridderbusch was named vice chair of the continues to adapt to a changing industry national security, resilience and some of the most respected individuals in Research Advisory Committee, an Electric and economy. preparedness‐related goals. specialized aspects of the industry. When Power Research Institute advisory group The 15-year outlook in the Integrated the Midwestern Governors Association that advises on key aspects of research, These are just a few examples of Great Resource Plan details Great River discussed the regional electric grid, Great and provides guidance on issues that River Energy’s reputation as a thought Energy’s plans to add new wind and River Energy Transmission Vice President impact the power industry. leader in the utility industry.

18 19 Taking the long view hydro energy, maintain its strong energy GENERATION ACCOLADES efficiency and conservation programs, In June, when the U.S. Environmental and continue to operate its valuable, Protection Agency (EPA) released a draft efficient coal-based power plants. Great Stanton Station and Coal Creek rule regulating greenhouse gas emission River Energy’s plan results in a projected Station achieved Occupational Health and Safety Assessment Series 18001 from existing coal-fired power plants, 28 percent reduction in the carbon certification, a system designed to called the Clean Power Plan, Great River dioxide intensity of its system by 2029 ensure continuous improvement to employee safety. Coal Creek Station Energy had already started to prepare. from 2012 levels, using EPA’s draft GREAT RIVER In fact, the cooperative adopted its compliance formula for the Clean April May June July August ENERGY’S 15-YEAR strategy to mitigate the effects of that rule Power Plan. nearly a year earlier. That strategy OUTLOOK PROJECTS charged Great River Energy with, among Sharing industry Pleasant Valley Station received a The Solid Waste Association of North America A 28 PERCENT other goals, reducing emissions over time. Best Practices Award from Combined awarded Great River Energy’s Elk River Resource Cycle Journal for an innovative Recovery Project with the 2014 Excellence Award Great River Energy is investing in low- expertise solution to persistent fuse failures in the waste-to-energy category (bronze). REDUCTION IN THE during extremely cold weather. carbon and carbon-free energy sources, As the EPA prepared its Clean Power Plan CARBON DIOXIDE and accelerating the depreciation of its during the first half of 2014, Great River INTENSITY OF ITS Coal Creek Station and Stanton Station Energy was an active participant in the power plants. By the time the EPA issued creation of the long-awaited regulations. SYSTEM BY 2029 the draft Clean Power Plan, Great River Great River Energy was involved in FROM 2012 LEVELS. Energy had already taken action toward regional and national coalitions to each of those objectives. provide regulators with input from Great River Energy filed its 2014 utilities. Great River Energy also led the Will Kaul was on hand to share his President and CEO David Saggau sits Integrated Resource Plan with the development of a market-based, regional expertise and lend the cooperative on the Electricity Subsector Coordinating Minnesota Public Utilities Commission. compliance strategy that gained national perspective on regional and state Council, a group of industry CEOs The document details the cooperative’s attention as an innovative approach to energy policies. that sets strategies for addressing plan to reliably meet its member-owners’ emission reductions. cybersecurity issues. The council works Great River Energy Vice President of energy needs in a cost-effective and with administration officials to coordinate Among the employees who work every Business Development and Strategy Greg environmentally responsible way as it and align utility efforts toward common day for Great River Energy, you will find Ridderbusch was named vice chair of the continues to adapt to a changing industry national security, resilience and some of the most respected individuals in Research Advisory Committee, an Electric and economy. preparedness‐related goals. specialized aspects of the industry. When Power Research Institute advisory group The 15-year outlook in the Integrated the Midwestern Governors Association that advises on key aspects of research, These are just a few examples of Great Resource Plan details Great River discussed the regional electric grid, Great and provides guidance on issues that River Energy’s reputation as a thought Energy’s plans to add new wind and River Energy Transmission Vice President impact the power industry. leader in the utility industry.

18 19 CONTENTS

FINANCIAL HIGHLIGHTS...... 22

FINANCIAL DISCUSSION AND ANALYSIS...... 22 2 014 FINANCIAL REPORT MANAGEMENT REPORT...... 26

INDEPENDENT AUDITORS’ REPORT...... 27

CONSOLIDATED BALANCE SHEETS...... 28

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME...... 30

CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL...... 31

CONSOLIDATED STATEMENTS OF CASH FLOWS...... 32

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.. 33

MANAGEMENT AND BOARD OF DIRECTORS...... 56 CONTENTS

FINANCIAL HIGHLIGHTS...... 22

FINANCIAL DISCUSSION AND ANALYSIS...... 22 2 014 FINANCIAL REPORT MANAGEMENT REPORT...... 26

INDEPENDENT AUDITORS’ REPORT...... 27

CONSOLIDATED BALANCE SHEETS...... 28

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME...... 30

CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL...... 31

CONSOLIDATED STATEMENTS OF CASH FLOWS...... 32

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.. 33

MANAGEMENT AND BOARD OF DIRECTORS...... 56 GREAT RIVER ENERGY GREAT RIVER ENERGY Financial Highlights Financial Discussion and Analysis (DOLLARS IN MILLIONS) CONTINUED

2014 2013 Change Electric revenue from non-members decreased $3.3 million and maintenance increased $11.8 million due to an or 4.0 percent to $79.0 million in 2014 from $82.3 million increase of $4.6 million for Great River Energy’s share of OPERATIONS in 2013. This decrease in revenue was the result of a expenses associated with regional and area transmission Revenues $ 1,020.2 $ 980.4 $ 39.8 6.1 percent decrease in megawatt hour (MWh) sales due projects owned by others within the MISO territory and an Purchased Power $ 212.2 $ 196.4 $ 15.8 to milder summer weather in 2014 compared to 2013. additional $6.0 million in transmission expense to serve Fuel $ 223.5 $ 225.7 $ (2.2) Offsetting the decrease in MWh sales was a 1.0 percent member load under inter-utility transmission agreements in Other Operating Expenses $ 305.5 $ 279.9 $ 25.6 increase in average market energy prices for these sales and 2014 compared to 2013. General and administrative Depreciation and Amortization $ 130.5 $ 115.6 $ 14.9 an increase in capacity sales in 2014 compared to 2013. expense in 2014 was relatively flat compared to 2013, Interest Expense $ 127.4 $ 134.1 $ (6.7) increasing 0.9 percent. Other Income $ 2.7 $ 3.4 $ (0.7) OTHER OPERATING REVENUE Nonutility Operations, excluding noncontrolling interest $ 28.2 $ 10.7 $ 17.5 Other operating revenue increased $5.8 million or Net Margin Attributable to Great River Energy $ 52.0 $ 42.8 $ 9.2 9.3 percent to $68.2 million in 2014 from $62.4 million 220140 14 EXPENEXPENSESSES AND M MARGINARGIN FINANCIAL POSITION in 2013 due primarily to increased transmission revenue Electric Plant and Plant Held for Future Use $ 4,292.5 $ 4,079.3 $ 213.2 from the MISO market and inter-utility transmission INTEREST EXPENSE Utility Plant - net $ 2,798.7 $ 2,743.9 $ 54.8 agreements of $4.7 million. %1.21 PURCHASED POWER Deferred Charges $ 283.5 $ 215.9 $ 67.6 PROPER TAXTY %2.02 OPERATING EXPENSES Cash and Cash Equivalents $ 243.7 $ 271.6 $ (27.9) 4%.2 Total Assets $ 3,885.5 $ 3,704.4 $ 181.1 Total operating expenses for 2014 were $871.7 million, NET MARGIN AATTTRIBUTTAABLE an increase of $54.1 million or 6.6 percent from TO GREAATT RIVER ENERGY Long-term Obligations $ 2,660.0 $ 2,605.8 $ 54.2 %94. Members’ Capital $ 540.8 $ 487.7 $ 53.1 $817.6 million in 2013. Equity to Capitalization Ratio 16.7% 15.4% 1.3% Purchased power increased $15.8 million or 8.0 percent DEPRECIAATTION AND FUEL AMORTIZAATTION to $212.2 million in 2014 from $196.4 million in 2013. 3%.12 The increase is largely due to the average energy price 12.4% GREAT RIVER ENERGY 4.5 percent from $835.7 million in 2013. The member paid increasing 14.6 percent to $37.50/MWh in 2014 OPERAATTION AND MAINTENANCE revenue increase was due to increased member energy compared to $32.71/MWh in 2013 as a result of elevated 26.7% Financial Discussion and Analysis and demand unit sales of 1.5 percent and 0.8 percent, market prices due to record cold weather in early 2014. respectively, compared to 2013 and a power cost adjustment This increase was offset by 4.8 percent fewer MWhs Great River Energy’s 2014 financial results were very strong. purchased from the MISO market and under bilateral Great River Energy exceeded $1.0 billion in utility operating (PCA) charge of $19.5 million in 2014 compared to a PCA Depreciation and amortization increased $14.9 million or credit of $10.2 million in 2013. The PCA allows Great River contracts during 2014 due to less time spent in scheduled 12.9 percent to $130.5 million in 2014 from $115.6 million revenue for the first time ever; exceeded its budgeted margin outages and milder summer weather compared to 2013. of $29.0 million by $23.0 million; improved its equity to Energy to bill or credit differences between actual and in 2013. Beginning in July 2013, Great River Energy capitalization to 16.7 percent, well on the way to Great budgeted results in Midcontinent Independent System Fuel expense decreased $2.2 million or 1.0 percent to shortened the estimated service lives for CCS and Stanton River Energy’s targeted 20 percent by 2020; maintained its Operator (MISO) market activity, purchased power, $223.5 million in 2014 from $225.7 million in 2013. to the year 2028. Due to a full year of depreciation with the investment grade credit ratings; and sustained its strong non-member revenue, and fuel. The 2014 PCA charge was Fuel expense at Coal Creek Station (CCS) decreased shortened lives, depreciation expense for CCS and Stanton liquidity position. The results of 2014 continue to improve due to unfavorable market prices caused by transmission $1.6 million or 1.0 percent due to decreased repairs and increased $10.0 million in 2014 compared to 2013. Great River Energy’s financial standing and solidly position congestion early in the year, which was the result of record maintenance to the coal handling system. Fuel expense at Additionally, depreciation expense increased $2.6 million in the cooperative for the future. cold weather coinciding with planned transmission the peaking plants decreased $7.9 million or 32.8 percent 2014 compared to 2013 due to CapX2020 projects being maintenance outages by other utilities. in 2014 compared to 2013 due primarily to a 60.9 percent completed and placed in service and $1.9 million due to the MARGINS decrease in MWhs generated in 2014. This was offset by completion of Spiritwood Station. higher average natural gas prices ($6.55/MMBtu in 2014 Net margin attributable to Great River Energy for the year ELECTELECTRICRIC REVENUE BILLBILLEDED compared to $3.70/MMBtu in 2013) and an increase in OTHER INCOME (EXPENSE) ended December 31, 2014, was $52.0 million and fuel oil consumption, which is more expensive than natural includes the net income from Midwest AgEnergy Group (dollars in millions) Interest expense – net of amounts capitalized decreased gas, due to the unusually cold winter and natural gas (MAG) of $28.0 million. This compares to a budget of 900 79 $6.7 million or 5.0 percent to $127.4 million in 2014 from 82 delivery constraints in early 2014. Fuel expense at Stanton $29.0 million for 2014 and actual results of $42.8 million 69 $134.1 million in 2013. Interest incurred on Great River 800 60 Station (Stanton) increased $4.4 million or 21.4 percent in Energy’s long-term obligations decreased $3.9 million in for 2013. Great River Energy’s indenture requires the 76 836 873 700 2014 compared to 2013 due to Stanton generating maintenance of a margin-for-interest (MFI) ratio of 1.1x in 801 2014 compared to 2013 due to a lower average outstanding 743 768 22.0 percent more MWhs in 2014, primarily the result order to issue additional secured debt. In addition, Great 600 long-term obligations balance. Capitalized interest increased of a scheduled major maintenance outage in 2013. River Energy’s board of directors targeted a debt service 500 $2.8 million to $11.1 million in 2014 compared to 2013 due to construction resuming on Spiritwood Station in 2014. coverage (DSC) ratio of 1.17x when setting member rates 400 Operation and maintenance expense increased $26.2 million for 2014. Great River Energy’s 2014 operations produced or 10.3 percent to $280.1 million in 2014 from $253.9 300 NONUTILITY OPERATIONS a DSC of 1.22x and an MFI of 1.16x. million in 2013. Generation operation and maintenance 200 increased $13.6 million due to a $5.2 million increase in Nonutility operating revenue and expense represent the ELECTRIC REVENUE 100 the outage costs expensed in 2014 compared to 2013, operations of MAG, a subsidiary of Great River Energy. Electric revenue increased $34.0 million or 3.7 percent to 0 increased boiler tube maintenance at CCS of $1.3 million MAG’s operating income, which is due to the operations of its subsidiary, Blue Flint Ethanol, increased $25.4 million $952.0 million in 2014 from $918.0 million in 2013. 102210211020102 3 4102 in 2014 compared to 2013, and a $5.0 million increase in Electric revenue from member cooperatives was $873.0 operation and maintenance costs related to Spiritwood to $35.4 million in 2014 from $10.0 million in 2013 as a million during 2014, an increase of $37.3 million or Member Non-Member Station in 2014 compared to 2013. Transmission operation result of strong crush margins per gallon and a record

22 23 GREAT RIVER ENERGY GREAT RIVER ENERGY Financial Highlights Financial Discussion and Analysis (DOLLARS IN MILLIONS) CONTINUED

22 23 GREAT RIVER ENERGY GREAT RIVER ENERGY Financial Discussion and Analysis Financial Discussion and Analysis CONTINUED CONCLUDED production year. Contributing factors to Blue Flint Ethanol’s MMEMBERE M BER AAVERAGEVERAGE RATERAT E PERPER kWh Station of $3.2 million and an increase in the coal stockpile Current liabilities increased $33.8 million to $389.2 million record year were increased production efficiency due to Excluding WAPA inventory at Falkirk mine of $3.8 million. in 2014 from $355.4 million in 2013. Current portion capital investments, increased storage, plentiful inexpensive of long-term obligations increased $16.7 million to Members’ capital increased $53.2 million to $540.8 million feedstock supply, and constricted regional rail transportation, (mills per kWh) $143.7 million in 2014 due to an increase in scheduled in 2014, the result of the 2014 net margin attributable to which put pressure on ethanol supplies, driving up ethanol 70 debt repayments and the addition of two new debt Great River Energy of $52.0 million and MAG related prices and margins, but didn’t significantly impact Blue Flint issuances. Obligations under line of credit decreased 72.2 additional paid-in capital of $1.2 million. 60 68.5 70.4 Ethanol’s shipments. 66.3 $10.0 million as there were no outstanding borrowings at 64.0 Noncontrolling interest-subsidiary represents the capital year end 2014. Accounts payable increased $9.1 million to In January 2011, Great River Energy entered into agreements 50 attributable to MAG’s third-party investors, who own $77.1 million in 2014 due to construction-related payables with North Dakota Refined Coal LLC (NDRC) and its 40 21.57 percent of MAG. at MAG. Derivative instruments increased $20.6 million to subsidiaries for the lease and operation of Great River $27.9 million in 2014 due to an increase in the mark-to- Energy’s DryFining facility. Although Great River Energy Noncontrolling interest – variable interest entity represents 30 market valuation of certain derivative instruments in a does not have any ownership interest in NDRC, it represents the capital attributable to NDRC. liability position at year end 2014. a variable interest entity of Great River Energy and is 20 Other noncurrent liabilities increased $13.8 million to consolidated in the financial statements. NDRC recognized $86.5 million in 2014 from $72.7 million in 2013. This 10 LIQUIDITY POSITION AND FINANCING a net loss of $15.1 million and $16.1 million for the years increase was due primarily to the $11.6 million increase in Great River Energy’s year end 2014 unrestricted available ended December 31, 2014 and 2013, respectively. the defined benefit plan obligations for Great River Energy 0 liquidity of $650.2 million was comprised of cash and cash and Falkirk to $28.2 million in 2014, which is due to a 41023102210211020102 equivalents of $243.7 million and unused capacity on its NONCONTROLLING INTEREST decrease in the discount rate in 2014 compared to 2013 existing unsecured credit facilities of $406.5 million. Great River Energy owns 78.43 percent of MAG and has and the adoption of updated mortality tables for both plans. Great River Energy’s unsecured credit facilities include a reflected the third-party investors’ 21.57 percent share of Great River Energy’s investment in transmission projects, Regulatory liabilities decreased $13.4 million to $70.5 $600.0 million revolving credit agreement that expires in MAG’s operating income as noncontrolling interest. including CapX2020, Spiritwood Station, other generation, million in 2014 from $83.9 million in 2013. This decrease general plant, and Falkirk additions of $186.8 million. June 2017 and a $30.0 million line of credit with CoBank Because Great River Energy does not have any ownership was due primarily to a decrease of $18.5 million in the Additions were offset by retirements and depreciation of ACB (CoBank) that expires in October 2015. Great River interest, NDRC’s entire net loss is reflected as noncontrolling deferred liability under regulatory accounting of certain $132.0 million. Energy uses its unsecured credit facilities for general interest. derivative instruments with fair values recorded as assets. working capital and for financing its construction program. Nonutility plant and equipment – net increased $98.8 million This decrease was offset by an increase of $5.5 million in Great River Energy has the option to increase the revolving to $161.7 million in 2014 from $62.9 million in 2013 due to the regulatory liability associated with the incentive-based credit agreement to $775.0 million, subject to certain terms 220140 14 REV ENUES REVENUES the continued construction of the Dakota Spirit AgEnergy, LLC rate treatment for the CapX2020 transmission projects and conditions. (DSA) biorefinery, which is expected to be complete in 2015. Long-term obligations increased $54.2 million to $2.7 billion Construction borrowings on the unsecured credit facilities NON-MEMBER Other assets and investments increased $71.8 million to in 2014 from $2.6 billion in 2013. The increase is due are repaid periodically with issuances of long-term secured 77..4% $360.8 million in 2014 from $289.0 million in 2013. primarily to Great River Energy’s two new debt issuances, debt under Great River Energy’s Indenture of Mortgage, OTHER Deferred charges-financing increased to $140.1 million in totaling $200.0 million, and additional debt issued by MAG Security Agreement and Financing Statement. Since Great .56 % 2014 from $97.3 million due to a $21.3 million increase of $60.2 million in 2014 offset by classifying to current the River Energy’s 2007 prepayment of its debt under the RUS NOONOPERAATTING in the market valuation of certain derivative instruments 2015 scheduled principal payments of $143.7 million and Mortgage with the issuance of the $1.3 billion Series 0.3% in a liability position accounted for under regulatory reduced borrowings on the unsecured syndicated credit 2007A bonds, Great River Energy has issued an additional NONONUTILITYONUTILITY OPERAATTIONS accounting and the cash settlement of interest rate hedges facility of $75.0 million. $1.545 billion of secured debt. EXCLUDING of $24.7 million in 2014 accounted for under regulatory NONCONTROLLING Great River Energy executed a $350.0 million private INTEREST .7%2 accounting. The cash settlement of the interest rate derivatives will be amortized over the related debt term. LLONGLONG-TERM- TERM DEBT placement debt issuance in November 2014 with a MEMBER Deferred charges-other increased to $143.5 million from delayed draw feature allowing Great River Energy to fund 83.1% $118.6 million due to the deferral under regulatory (dollars in millions) (interest rate) $300.0 million in February 2015 and $50.0 million in accounting of refined coal purchase costs associated with June 2015. Great River Energy’s next planned long-term 3000 10% the DryFining lease transaction of $12.0 million and an debt issuance is expected to be in 2017 to reduce its borrowings on the revolving credit agreement. Utilizing MEMBER RATE increase in the deferred charges associated with the 2500 9% postretirement defined benefit pension and medical plans debt proceeds drawn in 2015, existing available cash Great River Energy’s 2014 member billed rate was of $16.7 million. 2000 8% and cash equivalents, budgeted internally generated funds, 72.2 mills/kilowatt hour (kWh) compared to 70.4 mills/kWh and planned short-term borrowings under credit facilities, in 2013. There was no budgeted rate increase for 2014 Current assets decreased $44.3 million to $564.3 million in 1500 7% Great River Energy anticipates being able to fund the compared to 2013; however, the increase in member rate 2014 from $608.6 million in 2013. Cash and cash equivalents remainder of the CapX2020 transmission project and was due to the impact of a PCA charge of $19.5 million in decreased $27.9 million to $243.7 million in 2014 due to a 1000 6% additions and upgrades to existing generation, transmission, planned strategy to reduce cash on hand. Accounts and other general plant facilities in 2015 and 2016. 2014 and a PCA credit of $10.2 million in 2013. 500 5.93% 5.75% 5% receivable-other decreased $5.3 million to $12.7 million due 5.50% 5.53% 5.41% primarily to a decrease in MAG receivables. Derivative The strong financial results of 2014 continue the momentum BALANCE SHEET REVIEW 0 4% instruments decreased $12.3 million to $9.4 million due to to improve the cooperative’s financial strength and prepare 41023102210211020102 Great River Energy’s total consolidated assets increased fewer unsettled interest rate hedge derivatives in a mark-to- for the future, as outlined in the goals established by Great $181.1 million to $3.9 billion in 2014. River Energy’s board of directors. In management’s view, market asset position at year end 2014. These decreases Long-term Obligations, including current maturities Utility plant – net increased $54.8 million to $2.8 billion in were offset by an in increase in fuel inventory of $6.0 million Great River Energy is well positioned to continue making 2014. Utility plant increased due to additions related to to $28.9 million due to an increase in inventory at Spiritwood Weighted Average Interest Rate progress toward this goal.

24 25 GREAT RIVER ENERGY GREAT RIVER ENERGY Financial Discussion and Analysis Financial Discussion and Analysis CONTINUED CONCLUDED production year. Contributing factors to Blue Flint Ethanol’s MMEMBERE M BER AAVERAGEVERAGE RATERAT E PERPER kWh Station of $3.2 million and an increase in the coal stockpile Current liabilities increased $33.8 million to $389.2 million record year were increased production efficiency due to Excluding WAPA inventory at Falkirk mine of $3.8 million. in 2014 from $355.4 million in 2013. Current portion capital investments, increased storage, plentiful inexpensive of long-term obligations increased $16.7 million to Members’ capital increased $53.2 million to $540.8 million feedstock supply, and constricted regional rail transportation, (mills per kWh) $143.7 million in 2014 due to an increase in scheduled in 2014, the result of the 2014 net margin attributable to which put pressure on ethanol supplies, driving up ethanol 70 debt repayments and the addition of two new debt Great River Energy of $52.0 million and MAG related prices and margins, but didn’t significantly impact Blue Flint issuances. Obligations under line of credit decreased 72.2 additional paid-in capital of $1.2 million. 60 68.5 70.4 Ethanol’s shipments. 66.3 $10.0 million as there were no outstanding borrowings at 64.0 Noncontrolling interest-subsidiary represents the capital year end 2014. Accounts payable increased $9.1 million to In January 2011, Great River Energy entered into agreements 50 attributable to MAG’s third-party investors, who own $77.1 million in 2014 due to construction-related payables with North Dakota Refined Coal LLC (NDRC) and its 40 21.57 percent of MAG. at MAG. Derivative instruments increased $20.6 million to subsidiaries for the lease and operation of Great River $27.9 million in 2014 due to an increase in the mark-to- Energy’s DryFining facility. Although Great River Energy Noncontrolling interest – variable interest entity represents 30 market valuation of certain derivative instruments in a does not have any ownership interest in NDRC, it represents the capital attributable to NDRC. liability position at year end 2014. a variable interest entity of Great River Energy and is 20 Other noncurrent liabilities increased $13.8 million to consolidated in the financial statements. NDRC recognized $86.5 million in 2014 from $72.7 million in 2013. This 10 LIQUIDITY POSITION AND FINANCING a net loss of $15.1 million and $16.1 million for the years increase was due primarily to the $11.6 million increase in Great River Energy’s year end 2014 unrestricted available ended December 31, 2014 and 2013, respectively. the defined benefit plan obligations for Great River Energy 0 liquidity of $650.2 million was comprised of cash and cash and Falkirk to $28.2 million in 2014, which is due to a 41023102210211020102 equivalents of $243.7 million and unused capacity on its NONCONTROLLING INTEREST decrease in the discount rate in 2014 compared to 2013 existing unsecured credit facilities of $406.5 million. Great River Energy owns 78.43 percent of MAG and has and the adoption of updated mortality tables for both plans. Great River Energy’s unsecured credit facilities include a reflected the third-party investors’ 21.57 percent share of Great River Energy’s investment in transmission projects, Regulatory liabilities decreased $13.4 million to $70.5 $600.0 million revolving credit agreement that expires in MAG’s operating income as noncontrolling interest. including CapX2020, Spiritwood Station, other generation, million in 2014 from $83.9 million in 2013. This decrease general plant, and Falkirk additions of $186.8 million. June 2017 and a $30.0 million line of credit with CoBank Because Great River Energy does not have any ownership was due primarily to a decrease of $18.5 million in the Additions were offset by retirements and depreciation of ACB (CoBank) that expires in October 2015. Great River interest, NDRC’s entire net loss is reflected as noncontrolling deferred liability under regulatory accounting of certain $132.0 million. Energy uses its unsecured credit facilities for general interest. derivative instruments with fair values recorded as assets. working capital and for financing its construction program. Nonutility plant and equipment – net increased $98.8 million This decrease was offset by an increase of $5.5 million in Great River Energy has the option to increase the revolving to $161.7 million in 2014 from $62.9 million in 2013 due to the regulatory liability associated with the incentive-based credit agreement to $775.0 million, subject to certain terms 220140 14 REV ENUES REVENUES the continued construction of the Dakota Spirit AgEnergy, LLC rate treatment for the CapX2020 transmission projects and conditions. (DSA) biorefinery, which is expected to be complete in 2015. Long-term obligations increased $54.2 million to $2.7 billion Construction borrowings on the unsecured credit facilities NON-MEMBER Other assets and investments increased $71.8 million to in 2014 from $2.6 billion in 2013. The increase is due are repaid periodically with issuances of long-term secured 77..4% $360.8 million in 2014 from $289.0 million in 2013. primarily to Great River Energy’s two new debt issuances, debt under Great River Energy’s Indenture of Mortgage, OTHER Deferred charges-financing increased to $140.1 million in totaling $200.0 million, and additional debt issued by MAG Security Agreement and Financing Statement. Since Great .56 % 2014 from $97.3 million due to a $21.3 million increase of $60.2 million in 2014 offset by classifying to current the River Energy’s 2007 prepayment of its debt under the RUS NOONOPERAATTING in the market valuation of certain derivative instruments 2015 scheduled principal payments of $143.7 million and Mortgage with the issuance of the $1.3 billion Series 0.3% in a liability position accounted for under regulatory reduced borrowings on the unsecured syndicated credit 2007A bonds, Great River Energy has issued an additional NONONUTILITYONUTILITY OPERAATTIONS accounting and the cash settlement of interest rate hedges facility of $75.0 million. $1.545 billion of secured debt. EXCLUDING of $24.7 million in 2014 accounted for under regulatory NONCONTROLLING Great River Energy executed a $350.0 million private INTEREST .7%2 accounting. The cash settlement of the interest rate derivatives will be amortized over the related debt term. LLONGLONG-TERM- TERM DEBT placement debt issuance in November 2014 with a MEMBER Deferred charges-other increased to $143.5 million from delayed draw feature allowing Great River Energy to fund 83.1% $118.6 million due to the deferral under regulatory (dollars in millions) (interest rate) $300.0 million in February 2015 and $50.0 million in accounting of refined coal purchase costs associated with June 2015. Great River Energy’s next planned long-term 3000 10% the DryFining lease transaction of $12.0 million and an debt issuance is expected to be in 2017 to reduce its borrowings on the revolving credit agreement. Utilizing MEMBER RATE increase in the deferred charges associated with the 2500 9% postretirement defined benefit pension and medical plans debt proceeds drawn in 2015, existing available cash Great River Energy’s 2014 member billed rate was of $16.7 million. 2000 8% and cash equivalents, budgeted internally generated funds, 72.2 mills/kilowatt hour (kWh) compared to 70.4 mills/kWh and planned short-term borrowings under credit facilities, in 2013. There was no budgeted rate increase for 2014 Current assets decreased $44.3 million to $564.3 million in 1500 7% Great River Energy anticipates being able to fund the compared to 2013; however, the increase in member rate 2014 from $608.6 million in 2013. Cash and cash equivalents remainder of the CapX2020 transmission project and was due to the impact of a PCA charge of $19.5 million in decreased $27.9 million to $243.7 million in 2014 due to a 1000 6% additions and upgrades to existing generation, transmission, planned strategy to reduce cash on hand. Accounts and other general plant facilities in 2015 and 2016. 2014 and a PCA credit of $10.2 million in 2013. 500 5.93% 5.75% 5% receivable-other decreased $5.3 million to $12.7 million due 5.50% 5.53% 5.41% primarily to a decrease in MAG receivables. Derivative The strong financial results of 2014 continue the momentum BALANCE SHEET REVIEW 0 4% instruments decreased $12.3 million to $9.4 million due to to improve the cooperative’s financial strength and prepare 41023102210211020102 Great River Energy’s total consolidated assets increased fewer unsettled interest rate hedge derivatives in a mark-to- for the future, as outlined in the goals established by Great $181.1 million to $3.9 billion in 2014. River Energy’s board of directors. In management’s view, market asset position at year end 2014. These decreases Long-term Obligations, including current maturities Utility plant – net increased $54.8 million to $2.8 billion in were offset by an in increase in fuel inventory of $6.0 million Great River Energy is well positioned to continue making 2014. Utility plant increased due to additions related to to $28.9 million due to an increase in inventory at Spiritwood Weighted Average Interest Rate progress toward this goal.

24 25 GREAT RIVER ENERGY GREAT RIVER ENERGY Management Report Independent Auditors’ Report

To the Board of Directors and To the Board of Directors of Great River Energy Members of Great River Energy: Maple Grove, Minnesota

Management is responsible for the fairness and accuracy of the financial information presented in this annual report. We have audited the accompanying consolidated financial statements of Great River Energy (GRE), which comprise The accompanying financial statements have been prepared in accordance with generally accepted accounting the consolidated balance sheets as of December 31, 2014 and 2013, and the related consolidated statements of principles, using management’s best estimates and judgments where appropriate. Great River Energy maintains an operations and comprehensive income, changes in capital, and cash flows for each of the three years in the period internal accounting control system that provides reasonable assurance of the integrity and reliability of the financial ended December 31, 2014, and the related notes to the consolidated financial statements. statements and the protection of assets from loss or unauthorized use or disposition. Directors, who are not employees, make up the Finance and Audit Committee of the Board of Directors. The committee meets regularly with MANAGEMENT’S RESPONSIBILITY FOR THE CONSOLIDATED FINANCIAL STATEMENTS management and independent public accountants to review and discuss Great River Energy’s internal accounting Management is responsible for the preparation and fair presentation of these consolidated financial statements in controls and financial reports. The independent public accountants have free access to the committee and the Board accordance with accounting principles generally accepted in the United States of America; this includes the design, of Directors, without management present, to discuss the findings of their audits. implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated 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 consolidated financial statements based on our audits. We did not audit the consolidated financial statements of Midwest AgEnergy (MAG), a consolidated subsidiary, which David Saggau statements reflect total assets constituting 4% and 1% of consolidated total assets as of December 31, 2014 and President and CEO 2013 and total revenues constituting 14%, 16%, and 18% respectively, of consolidated total revenues for each of the Great River Energy three years in the period ended December 31, 2014. Those statements were audited by other auditors, whose report Maple Grove, Minnesota has been furnished to us, and our opinion, insofar as it relates to the amounts included for MAG, is based solely on March 17, 2015 the report of the other auditors. 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 consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to GRE’s preparation and fair presentation of the consolidated 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 GRE’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 consolidated financial statements. We believe that the audit evidence obtained is sufficient and appropriate to provide a basis for our audit opinion.

OPINION In our opinion, based on our audit and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of GRE as of December 31, 2014 and 2013, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, in accordance with accounting principles generally accepted in the United States of America.

March 17, 2015

26 27 GREAT RIVER ENERGY GREAT RIVER ENERGY Management Report Independent Auditors’ Report

To the Board of Directors and To the Board of Directors of Great River Energy Members of Great River Energy: Maple Grove, Minnesota

March 17, 2015

26 27 GREAT RIVER ENERGY GREAT RIVER ENERGY Consolidated Balance Sheets Consolidated Balance Sheets AS OF DECEMBER 31, 2014 AND 2013 AS OF DECEMBER 31, 2014 AND 2013 (IN THOUSANDS) (IN THOUSANDS)

ASSETS 2014 2013 CAPITAL AND LIABILITIES 2014 2013 UTILITY PLANT: CAPITAL: Electric plant $ 4,291,667 $ 3,653,224 Members: Plant held for future use 761 426,068 Patronage capital $ 539,635 $ 487,663 Coal mine plant 345,680 351,486 Memberships 33 Construction work in progress 173,287 221,242 Additional paid-in capital—subsidiary—MAG 1,195 Less accumulated depreciation and amortization (2,012,729) (1,908,156) Total members’ capital 540,833 487,666 Utility plant—net 2,798,666 2,743,864 Noncontrolling interest: NONUTILITY PLANT AND EQUIPMENT—Net 161,690 62,893 Subsidiary—MAG 22,763 OTHER ASSETS AND INVESTMENTS: Variable interest entity—NDRC 75,848 60,043 Restricted investments—deferred compensation 12,526 12,285 Total noncontrolling interest 98,611 60,043 Other investments 28,785 28,223 Total capital 639,444 547,709 Deferred charges: OTHER NONCURRENT LIABILITIES 86,476 72,717 Financing related 140,061 97,259 REGULATORY LIABILITIES 70,496 83,895 Other 143,476 118,632 LONG-TERM OBLIGATIONS—Less current portion 2,660,041 2,605,797 Other long-term assets 32,868 29,045 Other long-term receivables—net of allowance for doubtful accounts of $100 for both 2014 and 2013 3,072 3,567 DEFERRED COMPENSATION 12,526 12,285 Total other assets and investments 360,788 289,011 DEFERRED INCOME TAXES 27,246 26,636 CURRENT ASSETS: COMMITMENTS AND CONTINGENCIES (Notes 4, 5, and 10) Cash and cash equivalents 243,704 271,610 CURRENT LIABILITIES: Accounts receivable: Current portion of long-term obligations 143,686 126,950 Members 142,487 146,000 Notes payable to members 23,886 24,969 Others—net of allowance for doubtful accounts of $1,190 and $535 for 2014 and 2013, respectively 12,704 17,968 Obligations under line of credit 10,000 Inventories: Accounts payable 77,129 68,057 Materials and supplies 66,205 69,702 Property and other taxes 25,206 25,228 Fuel 28,900 22,904 Other accrued liabilities and notes payable 28,817 27,804 Other 13,934 10,833 Accrued interest payable 62,646 65,056 Prepaids and other current assets 18,554 20,672 Derivative instruments 27,864 7,298 Derivative instruments 9,425 21,762 Total current liabilities 389,234 355,362 Deferred income tax benefit 28,406 27,182 TOTAL $ 3,885,463 $ 3,704,401 Total current assets 564,319 608,633 See notes to consolidated financial statements. TOTAL $ 3,885,463 $ 3,704,401 Concluded

Continued

28 29 GREAT RIVER ENERGY GREAT RIVER ENERGY Consolidated Balance Sheets Consolidated Balance Sheets AS OF DECEMBER 31, 2014 AND 2013 AS OF DECEMBER 31, 2014 AND 2013 (IN THOUSANDS) (IN THOUSANDS)

Continued

28 29 GREAT RIVER ENERGY GREAT RIVER ENERGY Consolidated Statements of Operations and Comprehensive Income Consolidated Statements of Changes in Capital FOR THE YEARS ENDED DECEMBER 31, 2014, 2013, AND 2012 FOR THE YEARS ENDED DECEMBER 31, 2014, 2013, AND 2012 (IN THOUSANDS) (IN THOUSANDS)

UTILITY OPERATIONS 2014 2013 2012 Noncontrolling Interest Additional Variable UTILITY OPERATING REVENUE: Patronage Paid-in Subsidiary— Interest Total Electric revenue $ 951,993 $ 917,998 $ 869,619 Capital Memberships Capital MAG Entity—NDRC Capital Other operating revenue 68,183 62,444 51,578 BALANCE—January 1, 2012 $ 399,456 $ 3 $ - $ - $ 78,197 $ 477,656 Total utility operating revenue 1,020,176 980,442 921,197 Net margin (loss) and comprehensive income (loss) 45,371 (14,539) 30,832 UTILITY OPERATING EXPENSES: Capital distributed to noncontrolling interest (21,016) (21,016) Purchased power 212,213 196,423 167,780 Dividends paid by noncontrolling interest (759) (759) Fuel 223,523 225,680 217,889 BALANCE—December 31, 2012 444,827 3 - - 41,883 486,713 Operation and maintenance 280,070 253,948 226,572 Net margin (loss) and comprehensive income (loss) 42,836 (16,058) 26,778 Depreciation and amortization 130,461 115,600 100,463 Capital contributed by noncontrolling interest 34,989 34,989 Property and other taxes 25,465 25,968 23,872 Dividends paid by noncontrolling interest (771) (771) Total utility operating expenses 871,732 817,619 736,576 BALANCE—December 31, 2013 487,663 3 - - 60,043 547,709 UTILITY OPERATING MARGIN 148,444 162,823 184,621 Net margin (loss) and comprehensive income (loss) 51,972 7,414 (15,061) 44,325 OTHER INCOME (EXPENSE): Capital contributed by noncontrolling Other income—net 1,420 1,897 2,128 interest—net of issuance costs 1,195 15,349 48,352 64,896 Interest income 1,316 1,580 2,326 Capital distributed to noncontrolling interest (16,704) (16,704) Interest expense—net of amounts capitalized (127,382) (134,137) (143,783) Dividends paid by noncontrolling interest (782) (782) Other expense—net (124,646) (130,660) (139,329) BALANCE—December 31, 2014 $ 539,635 $ 3 $ 1,195 $ 22,763 $ 75,848 $ 639,444 NET UTILITY MARGIN 23,798 32,163 45,292 NONUTILITY OPERATIONS: See notes to consolidated financial statements. Operating revenue 165,255 190,603 197,210 Operating expense 129,882 180,576 197,331 Operating income (loss) 35,373 10,027 (121) Income from equity method investments 215 646 200 Loss from variable interest entity—NDRC (15,061) (16,058) (14,539) Net nonutility operations 20,527 (5,385) (14,460) NET MARGIN AND COMPREHENSIVE INCOME, INCLUDING NONCONTROLLING INTEREST 44,325 26,778 30,832 NONCONTROLLING INTEREST NET (INCOME) LOSS: Subsidiary—MAG (7,414) Variable interest entity—NDRC 15,061 16,058 14,539 TOTAL NONCONTROLLING INTEREST NET LOSS 7,647 16,058 14,539 NET MARGIN AND COMPREHENSIVE INCOME ATTRIBUTABLE TO GREAT RIVER ENERGY $ 51,972 $ 42,836 $ 45,371

See notes to consolidated financial statements.

30 31 GREAT RIVER ENERGY GREAT RIVER ENERGY Consolidated Statements of Operations and Comprehensive Income Consolidated Statements of Changes in Capital FOR THE YEARS ENDED DECEMBER 31, 2014, 2013, AND 2012 FOR THE YEARS ENDED DECEMBER 31, 2014, 2013, AND 2012 (IN THOUSANDS) (IN THOUSANDS)

See notes to consolidated financial statements.

30 31 GREAT RIVER ENERGY GREAT RIVER ENERGY Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements FOR THE YEARS ENDED DECEMBER 31, 2014, 2013, AND 2012 AS OF DECEMBER 31, 2014 AND 2013, AND (IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31, 2014, 2013, AND 2012

2014 2013 2012 1. ORGANIZATION $2.7 million, and $3.0 million in 2014, 2013, and ORGANIZATION— Great River Energy (GRE) is a 2012, respectively; and net income of $11.9 million, CASH FLOWS FROM OPERATING ACTIVITIES: Minnesota electric generation and transmission cooperative $12.0 million, and $11.6 million in 2014, 2013, and Net margin, including noncontrolling interest $ 44,325 $ 26,778 $ 30,832 corporation providing wholesale electric service to member 2012, respectively, all of which are part of the contract Adjustments to reconcile net margin to net cash provided by operating activities: distribution cooperatives engaged in the retail sale of cost of coal purchased under the coal sales agreement. Depreciation and amortization: electricity to member consumers in Minnesota and a Accordingly, the net effect of consolidating the income Charged to operating expenses 130,461 115,600 100,463 small section of Wisconsin. This service is provided in statement of Falkirk had no impact on GRE’s margin for Charged to fuel expense and other accounts 27,156 30,251 16,958 accordance with the terms of the power purchase and the years ended December 31, 2014, 2013, and 2012. Income from equity method investments (215) (646) (200) transmission service contracts between GRE and the Assets and liabilities of Falkirk included in the consolidated Patronage credits earned from investments (1,279) (1,205) (906) members. These contracts have expiration dates of balance sheets as of December 31, 2014 and 2013, after Deferred charges (11,180) (39,075) (12,000) December 31, 2045, and December 31, 2050, intercompany eliminations, are as follows (in thousands): Regulatory liabilities (2,038) 13,750 respectively. 2014 2013 Changes in working capital (excluding cash, investments, and borrowings): BASIS OF ACCOUNTING— The consolidated financial Accounts and long-term receivables 10,046 (17,538) (2,262) statements are prepared on the accrual basis of accounting Coal mine plant $ 297,375 $ 297,855 Inventory and other assets (15,029) 8,737 (26,690) and include the accounts of GRE as well as the following Construction work in progress 3,421 1,582 entities: Accounts payable, taxes, and other accrued expenses (1,895) 4,183 (9,492) Accumulated depreciation and amortization (165,035) (158,152) Accrued interest (2,410) (2,374) (2,355) Deferred charges 18,768 10,838 Noncurrent liabilities (1,793) (6,275) 7,772 Entity Relationship Other long-term assets 6,662 6,784 Net cash provided by operating activities 176,149 132,186 102,120 The Falkirk Mining Company (Falkirk) Variable interest entity Fuel inventory 8,862 5,175 CASH FLOWS FROM INVESTING ACTIVITIES: North Dakota Refined Coal LLC (NDRC) Variable interest entity Materials and supplies inventory 20,243 21,037 Utility plant additions (180,813) (164,275) (150,745) Midwest AgEnergy Group, LLC (MAG) Subsidiary of GRE Deferred income tax benefit 1,160 546 Nonutility plant and equipment additions (98,797) Blue Flint Ethanol LLC (Blue Flint) Subsidiary of MAG Other current assets 347 323 Proceeds from sale of property 339 348 374 Dakota Spirit AgEnergy Finance, LLC (DSAF) Subsidiary of MAG Other noncurrent liabilities 35,968 26,150 Purchase transactions and investment in equity method Dakota Spirit AgEnergy, LLC (DSA) Subsidiary of DSAF Long-term obligations 50,237 63,627 investments—net of cash acquired of $24,174 in 2012 (25) 5,660 Current liabilities 28,600 25,791 Redemption of patronage capital from investments 742 698 449 The consolidation of NDRC also includes NDRC’s wholly Proceeds from maturity of investments 60,000 owned subsidiaries, North Dakota Refined Coal Project Falkirk is a wholly owned subsidiary of the North American Net cash used in investing activities (278,554) (163,229) (84,262) Company A LLC and North Dakota Refined Coal Project Coal Corporation (NACC), which is a wholly owned Company B LLC. CASH FLOWS FROM FINANCING ACTIVITIES: subsidiary of NACCO Industries, Inc. Falkirk is principally Proceeds from issuance of long-term obligations 652,132 315,205 120,000 All intercompany balances and transactions have been engaged in lignite mining through the operation of a Repayments of long-term obligations (585,555) (416,726) (127,141) eliminated in consolidation, except for the steam sales surface mine in North Dakota. between GRE and Blue Flint discussed within Note 1. Proceeds from interest rate hedging instruments settlement 42,915 NDRC— Beginning on January 21, 2011, GRE has an Cost of new debt issuances, leases, and interest rate hedging instruments (28,405) (474) (6,445) FALKIRK— GRE has an agreement with Falkirk for the agreement with NDRC, or its wholly owned subsidiaries, Borrowings on line of credit—net (10,000) 10,000 development and operation of a lignite coal mine. Falkirk for the lease and operation of the DryFining facility at Notes (paid to) received from members—net (1,083) 4,407 4,975 is the coal supplier for the Coal Creek Station (CCS), CCS. NDRC purchases coal from GRE under fixed pricing, Capital contributed by noncontrolling interest—subsidiary—MAG 17,000 GRE’s steam-generating facility located near Underwood, refines the coal in the DryFining facility, and sells the Equity issuance costs—subsidiary—MAG (456) North Dakota. GRE is required to provide financing for all refined coal to GRE under fixed pricing. GRE provides Variable interest entity—NDRC: costs associated with the mine development and operation. certain other services to NDRC under fee arrangements. Capital contributed by noncontrolling interest 48,352 34,989 Accounting principles generally accepted in the United The lease and related agreements have a 16-year term; Capital distributed to noncontrolling interest (16,704) (21,016) States of America (generally accepted accounting however, included in the participation agreement is a principles) require GRE to consolidate its financial Dividends paid by noncontrolling interest (782) (771) (759) purchase option to buy out the remaining term of the statements with Falkirk since Falkirk qualifies as a variable transaction on January 31, 2020. Generally accepted Net cash provided by (used in) financing activities 74,499 (20,455) (20,386) interest entity for which GRE is the primary beneficiary. accounting principles require GRE to consolidate its NET DECREASE IN CASH AND CASH EQUIVALENTS (27,906) (51,498) (2,528) The coal purchase price includes all costs incurred by financial statements with NDRC, since NDRC qualifies as CASH AND CASH EQUIVALENTS—Beginning of year 271,610 323,108 325,636 Falkirk for development and operation of the mine, a variable interest entity for which GRE is the primary CASH AND CASH EQUIVALENTS—End of year $ 243,704 $ 271,610 $ 323,108 including Falkirk’s interest expense of $2.9 million, beneficiary. NDRC entered into an operating and $3.5 million, and $3.9 million in 2014, 2013, and maintenance agreement with NoDak Energy Services LLC 2012, respectively; income tax expense of $3.1 million, See notes to consolidated financial statements.

32 33 GREAT RIVER ENERGY GREAT RIVER ENERGY Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements FOR THE YEARS ENDED DECEMBER 31, 2014, 2013, AND 2012 AS OF DECEMBER 31, 2014 AND 2013, AND (IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31, 2014, 2013, AND 2012

32 33 GREAT RIVER ENERGY GREAT RIVER ENERGY Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements CONTINUED CONTINUED

(NoDak) to perform the day-to-day operation and BLUE FLINT— Blue Flint operates an ethanol biorefinery Utility net margin and nonutility operating income (loss) as of December 31, 2014, 2013 and 2012, would be as follows maintenance of the DryFining facility. NoDak qualifies as facility located in Underwood, North Dakota. Blue Flint had this transaction been eliminated (in thousands): a variable interest entity for which NDRC is the primary has a production capacity of approximately 65 million beneficiary. As a result, GRE is also consolidating NoDak gallons of undenatured ethanol per year. Blue Flint is a 2014 2013 2012 as part of NDRC. The utility fuel operating expense in the dry-mill production facility that produces and sells ethanol, As With As With As With consolidated statements of operations and comprehensive dry and modified distillers grain, and distillers oil. Presented Elimination Presented Elimination Presented Elimination income includes a net benefit to GRE of $10.2 million, Prior to 2012, GRE owned 49% of Blue Flint and $11.4 million, and $10.1 million for the years ended Net utility margin $ 23,798 $ 18,256 $ 32,163 $ 26,564 $ 45,292 $ 39,792 accounted for Blue Flint as an equity method investment. Nonutility operating income (loss) 35,373 40,915 10,027 15,626 (121) 5,379 December 31, 2014, 2013, and 2012, respectively, On January 1, 2012, GRE purchased the remaining related to this agreement. This includes the revenue from 51% ownership interest in Blue Flint for a cash purchase Total $ 59,171 $ 59,171 $ 42,190 $ 42,190 $ 45,171 $ 45,171 the lease and other agreements partially offset by the price of $18.3 million. As GRE is subject to regulatory costs incurred for the purchase of refined coal from NDRC. accounting, the fair value of GRE’s 49% equity interest in The net loss incurred by NDRC of $15.1 million, Blue Flint was determined to be net book value, as of 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES $16.1 million, and $14.5 million for the years ended January 1, 2012, of $23.9 million. The transaction price REGULATORY ACCOUNTING— As the board of directors sets rates on a cost-of-service basis, GRE follows generally December 31, 2014, 2013, and 2012, respectively, is of $18.3 million was determined to be fair value for the reported as nonutility operations in the consolidated accepted accounting principles related to the effects of certain types of regulation, which provide for the reporting of 51% ownership interest using both the market and income assets and liabilities consistent with the economic effect of the rate structure. As such, regulatory assets are recorded to statements of operations and comprehensive income and approaches. GRE did not recognize any gain or loss is all attributed to the noncontrolling interest owners. reflect probable future revenues associated with certain costs that are expected to be recovered from customers through related to this transaction. the ratemaking process. Regulatory liabilities are recorded to reflect probable future reductions in revenues associated The agreements include various operational metrics, such During 2013, GRE transferred its ownership interest in with amounts that are expected to be credited to customers through the ratemaking process. For further information, as minimum requirements on the tons of refined coal Blue Flint to another GRE subsidiary, MAG. see Note 11. purchased by GRE and the achievement of qualified emission reductions. In the event that the operational MAG— As of December 31, 2013, MAG had two wholly PUBLIC BUSINESS ENTITY— GRE believes it meets the definition of a public business entity due to the issuance of metrics are not met over the life of the transaction, GRE owned subsidiaries, Blue Flint and DSAF. DSAF’s wholly debt securities that are traded on an over-the-counter market. may be required to pay specified amounts to NDRC at owned subsidiary, DSA, began construction in 2013 of a CASH AND CASH EQUIVALENTS— Cash equivalents include all highly liquid investments with original maturities of transaction termination. No liability has been recorded biorefinery facility located near Jamestown, North Dakota. three months or less (e.g., money market funds). Certain cash and cash equivalents are classified as investments when by GRE in the consolidated financial statements related Construction is expected to be completed in 2015. DSA they relate to trust funds held for long-term purposes. to these operational metrics as of December 31, 2014 will be a dry-mill production facility that produces and sells SUPPLEMENTAL CASH FLOW INFORMATION— Supplemental cash flow information for the years ended and 2013. ethanol, dry and modified distillers grain, and distillers oil, and it will have a production capacity of approximately December 31, 2014, 2013, and 2012, is as follows (in thousands): Assets and liabilities of NDRC included in the consolidated 65 million gallons of undenatured ethanol per year. balance sheets as of December 31, 2014 and 2013, after 2014 2013 2012 intercompany eliminations, are as follows (in thousands): During 2014, in exchange for a 21.57% ownership interest, MAG transferred 17,000 ownership units to Supplemental disclosure of cash flow information: 2014 2013 third-party investors for $17.0 million. Cash paid for interest—net of amounts capitalized $ 139,011 $ 144,429 $ 154,320 Cash $ 4,436 $ 4,016 Blue Flint purchases steam and water under a long-term Cash paid for taxes—Falkirk $ 3,201 $ 1,759 $ 3,642 Prepaids 71 73 contract from CCS for use in the production of ethanol Noncash investing and financing activities: Current liabilities 387 234 and related products. Steam and water purchases were $5.5 million, $5.6 million, and $5.5 million for the Utility and nonutility plant acquisitions included in accounts payable $ 22,601 $ 8,375 $ 6,994 JPM Capital Corporation and WM Refined Coal, LLC hold years ended December 31, 2014, 2013, and 2012, Utility plant acquired under capital lease $ 3,397 $ 1,264 $ 19,653 a 55% and 45% membership interest, respectively, in respectively. The sale of steam and water by CCS is NDRC. NoDak is a wholly owned subsidiary of TRU recorded as utility other operating revenue, and the purchase by Blue Flint is recorded as nonutility operating Interest on borrowed funds in the amount of $14.2 million, $8.4 million, and $4.1 million was capitalized in 2014, Global Energy Services LLC, a wholly owned subsidiary 2013, and 2012, respectively, and these amounts are excluded from the cash payments for interest noted above. of NACC. expense. This transaction was not eliminated in consolidation for 2014, 2013, and 2012.

34 35 GREAT RIVER ENERGY GREAT RIVER ENERGY Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements CONTINUED CONTINUED

INVENTORIES— Fuel inventory is carried at average depreciation are nonlegal or noncontractual costs of A summary of nonutility plant and equipment as of estimates and assumptions that affect the reported amounts cost and includes coal, lime, oil, and gas used for electric removal components in the amount of $50.7 million and December 31, 2014 and 2013, is as follows of assets and liabilities and disclosure of contingent assets generation. Other inventory represents corn, chemical, $48.0 million for 2014 and 2013, respectively. When (in thousands): and liabilities at the date of the consolidated financial ethanol, and distillers grain inventory held at MAG. Corn other property assets are retired or sold, the cost and statements and the reported amounts of revenues and 2014 2013 and chemical inventory is stated at the lower of cost (on related accumulated depreciation are eliminated and any expenses during the reporting period. The significant the first-in, first-out method) or market. Ethanol and distillers gain or loss is reflected in depreciation expense. Land improvements $ 7,621 $ 7,572 estimates in the consolidated financial statements relate to grain inventory is stated at the lower of cost (average key inputs to actuarial calculations of defined benefit PLANT HELD FOR FUTURE USE— Plant held for future Buildings and improvements 15,000 14,661 monthly cost) or market. Materials and supplies inventory obligations, compensation and benefit accruals, asset use represented the costs associated with Spiritwood Equipment and other 41,311 40,463 is stated at the lower of average cost or market. retirement obligation liabilities, accrued property and Station, the related coal load-out facility at CCS, and land Construction work in progress 108,570 7,393 other taxes, useful lives of utility and nonutility plant, Emission allowances are also accounted for as fuel held for future use. The plant costs include materials, Less accumulated depreciation (10,812) (7,196) recoverability of deferred tax assets, and contingencies inventory and recorded at the lower of cost or market. contract and direct labor, overhead, and interest during The U.S. Environmental Protection Agency (EPA) has construction. At December 31, 2013, construction $ 161,690 $ 62,893 and other reserves. Actual results could differ from those requirements limiting the amount of sulfur dioxide that can activities at Spiritwood Station had ceased and the plant estimates. be emitted from GRE-owned power plants. Under these was not considered substantially complete. Spiritwood RECOVERABILITY OF LONG-LIVED ASSETS— REVENUE RECOGNITION— Electric revenue is requirements, GRE was allotted one emission allowance Station was completed during 2014 and placed in service GRE reviews its long-lived assets whenever events or changes recognized when energy is delivered to GRE’s members or per ton of sulfur dioxide emissions based upon historic beginning November 2014. in circumstances indicate the carrying value of the assets to other non-member organizations. The GRE rate schedule may not be recoverable. GRE determines potential emission levels. GRE had approximately 212,000 and DEPRECIATION AND AMORTIZATION— includes a power cost adjustment that allows for increases impairment by comparing the carrying value of the asset or decreases in member power billings based upon actual 196,000 allowances in inventory and available-for-sale at Depreciation for financial reporting purposes is provided with the net cash flows expected to be provided by the power costs compared to plan. For 2014, the power cost December 31, 2014 and 2013, respectively, with a based upon the straight-line method at rates designed to operating activities of the business or related products. adjustment was a charge of $19.5 million. For 2013 recorded cost of $0 for both years. amortize the original cost of properties over their Should the sum of the expected cash flows be less than and 2012, the power cost adjustments were credits to Renewable energy credits (RECs) are either purchased or estimated service lives. During 2013, GRE revised the the carrying values, GRE would determine whether an GRE members of $10.2 million and $5.6 million, acquired in the course of generation, or purchased as a estimated service lives for CCS and Stanton Station impairment loss should be recognized. No impairment losses respectively. Charges or credits are recorded as an result of meeting load obligations, and are recorded as (Stanton) to be 2028. These plants, along with any future have been identified in the consolidated financial statements. increase or decrease, respectively, in electric revenue in fuel inventory at cost. GRE had approximately 5.8 million additions, will be fully depreciated by the end of 2028. the consolidated statements of operations and and 4.5 million RECs in fuel inventory and available-for- The effective depreciation rate was 3.0%, 2.9%, and INCOME TAXES— GRE accounts for income taxes using comprehensive income. In 2013, GRE deferred the sale at December 31, 2014 and 2013, respectively, with 2.6% for 2014, 2013, and 2012, respectively. The range the liability method. Under this method, deferred income recognition of $13.8 million of member electric revenue a recorded cost of $0.4 million and $0.5 million, of useful lives for utility plant is three to 50 years. Coal taxes are recognized for temporary differences between under regulatory accounting (see Note 11). respectively. mine equipment is amortized using a straight-line method the tax and financial reporting bases of assets and over the estimated useful lives. Amortization of coal lands liabilities using enacted tax rates in effect for the year in OTHER OPERATING REVENUE— Other operating UTILITY PLANT— Utility plant is stated at original cost, and leaseholds is calculated on the units-of-production which the differences are expected to reverse. GRE revenue includes revenue related to the processing plant which includes materials, contract and direct labor, establishes a regulatory asset or liability to account for the overhead, allowance for funds used for construction, and method based upon estimated recoverable tonnages and that transforms municipal solid waste into refuse-derived difference between GRE’s deferred tax assets or liabilities. fuel and the burning of that fuel at the Elk River Energy interest during construction. Interest charged to construction is included in utility fuel expense in the consolidated A regulatory asset or liability associated with deferred Recovery Station; revenue received from other utilities on borrowed funds and allowance for funds used for statements of operations and comprehensive income. income taxes generally represents the future increase or related to providing transmission service under various construction (other than borrowed funds) are included as Amortization expense also includes the amortization of decrease in income taxes payable that will be received or integrated transmission agreements; and revenue from a component of utility plant cost and credited to interest bond discounts, accretion expense related to asset settled through future rate increases. the sale of utility plant byproducts, such as steam and fly expense and interest income, respectively. The rates retirement obligations, and the amortization of deferred ash. Other operating revenue is recorded as services applied reflect the actual rates for borrowed funds and charges, except as described in Note 11. MEMBERS’ PATRONAGE CAPITAL— Revenues in are provided. the prevailing short-term investment rates for other than NONUTILITY PLANT AND EQUIPMENT—NET excess of current-period costs (net margin attributable to borrowed funds. Repairs and maintenance are charged to Nonutility plant and equipment represents the plant and GRE) in any year are designated as assignable margins. NONUTILITY OPERATIONS— Nonutility operating operations as incurred. When generation and transmission equipment assets of MAG, including Blue Flint plant and These assignable margins are considered capital furnished revenue and expense represent MAG consolidated assets are retired, sold, or otherwise disposed of, the equipment and DSA construction work in progress. Blue by the members and are credited to the members’ operations for the year ended December 31, 2014, and original cost, plus the cost of removal, less salvage, is Flint plant and equipment is recorded at fair value, as individual accounts. Assignable margins are held by GRE solely Blue Flint operations for the years ended December charged to accumulated depreciation and the determined as of the acquisition date of the remaining until they are retired and returned, without interest, at the 31, 2013 and 2012. Except for interest expense, MAG corresponding gain or loss is amortized over the remaining 51% ownership interest. Depreciation for financial discretion of the board of directors and subject to long- and its subsidiaries, DSAF and DSA, had minimal life of the plant. Included in accumulated depreciation are reporting purposes is provided based upon the straight- term obligation agreement restrictions (see Note 5). operations during 2014. Revenue from the production of retired assets totaling $(44.0) million and $(42.8) million line method. The range of useful lives for nonutility plant Retained assignable margins are designated as patronage ethanol and related products is recorded at the time the at December 31, 2014 and 2013, respectively, that will and equipment is three to 40 years. capital in the consolidated balance sheets. title of the goods and all risks of ownership transfer to continue to be amortized. Also included in accumulated USE OF ESTIMATES— The preparation of consolidated customers and settlement price is realizable. Transfer of financial statements in conformity with generally accepted ownership generally occurs when the product is shipped accounting principles requires management to make and risk of loss is assumed by the customer.

36 37 GREAT RIVER ENERGY GREAT RIVER ENERGY Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements CONTINUED CONTINUED

SUBSEQUENT EVENTS— GRE has considered CAPITAL LEASES— GRE is the lessee of a dragline used 5. LONG-TERM OBLIGATIONS subsequent events for recognition or disclosure through in the Falkirk coal mining operations. The original lease The consolidated long-term obligations as of December 31, 2014 and 2013, are as follows (in thousands): March 17, 2015, the date the consolidated financial agreement was due to expire in 2005. GRE amended this statements were available to be issued. lease in 2001 to extend the term to 2015, at which time 2014 2013 GRE will purchase the asset for $1. The gross amount of First Mortgage Bonds, Series 2007A, 5.829%, due 2015–2017 $ 148,600 $ 200,300 3. RECENTLY ISSUED ACCOUNTING this lease was $48.3 million at December 31, 2014, First Mortgage Bonds, Series 2007A, 6.254%, due 2018–2038 739,100 739,100 with accumulated amortization of $47.8 million and STANDARDS First Mortgage Bonds, Series 2008A, 7.233%, due 2015–2038 358,698 366,816 In May 2014, the Financial Accounting Standards Board $46.7 million as of December 31, 2014 and 2013, respectively. GRE has the right of first refusal should a First Mortgage Bonds, Series 2008B, 3.0999%, due 2015–2023 15,000 16,667 (FASB) issued Accounting Standards Update No. 2014-09, First Mortgage Notes, Series 2009A, 5.0% to 7.15%, due 2015–2024 93,200 106,800 Revenue from Contracts with Customers (Topic 606), disposition of property occur. The principal and interest First Mortgage Bonds, Series 2009B, 5.81% to 6.94%, due 2015–2031 365,000 380,000 which is effective for GRE in 2017. The core principle of payments were $1.6 million for both 2014 and 2013. the guidance is that an entity should recognize revenue to GRE entered into an agreement as the lessee of railroad First Mortgage Note, Series 2010A, 4.875%, due 2026 23,000 23,000 depict the transfer of promised goods or services to cars to be used in the future operation of the Spiritwood First Mortgage Note, Series 2010B, 5.15%, due 2040 50,000 50,000 customers in an amount that reflects the consideration to Station generation facility. The lease expires in 2020. The First Mortgage Note, Series 2010C, 3.5%, due 2038 33,000 33,000 which the entity expects to be entitled in exchange for gross amount of the lease was $7.6 million at December First Mortgage Bonds, Series 2010D, 4.478%, due 2015–2030 372,000 382,000 those goods or services. GRE is in the process of 31, 2014, with accumulated amortization of $3.4 million First Mortgage Note, Series 2014A, 2.84%, due 2015–2021 100,000 evaluating the guidance in this Accounting Standards and $2.7 million at December 31, 2014 and 2013, First Mortgage Note, Series 2014B, LIBOR plus 1.15%, 1.32% at December 31, 2014, due 2015–2038 100,000 Update and has not yet determined if the adoption of this respectively. The principal and interest payments were guidance will have a material impact on GRE’s $1.1 million for both 2014 and 2013. Syndicated Credit Facility, National Rural Utilities Cooperative Finance Corp, consolidated financial statements. LIBOR plus 1.25%, 1.42% at December 31, 2014, due 2017 210,000 285,000 Falkirk has also leased certain equipment that is used in mining operations. The gross amount of these leases was Department of Energy, 0%, due 2015–2028, 5.2% to 6.1% imputed interest 5,993 6,463 4. LEASING TRANSACTIONS $129.5 million and $131.1 million and the accumulated Term Note, LIBOR plus 1.375%, 1.545% at December 31, 2014, due 2015–2019 7,000 9,000 OPERATING LEASES— GRE is the lessee on various amortization was $61.2 million and $54.1 million as Term Note, 2.35%, due 2015–2019 4,300 5,205 operating leases for equipment used in its operations. of December 31, 2014 and 2013, respectively. These Term Note, 2.55%, due 2015–2019 3,681 These transactions are governed by the terms of various amounts are recorded in coal mine plant and accumulated Capitalized lease obligations, mining equipment, 6.3% imputed interest 1,527 2,962 master lease agreements. The lease term of each leased depreciation and amortization in the consolidated balance Capitalized lease obligations, Spiritwood Station coal cars, 6.9% imputed interest 4,643 5,353 item is determined at the time it is added to its respective sheets. master lease. Original lease terms ranged from 60 to Capitalized lease obligations, Falkirk Mine, 1.2% to 5.9% imputed interest 67,768 78,419 The schedule of future minimum lease payments for GRE 120 months. Falkirk is the lessee on various short-term Term Note, Blue Flint, 5.8%, due 2015–2021 12,923 14,769 and Falkirk leases as of December 31, 2014, is as follows operating leases for equipment. MAG is the lessee on Term Note, Blue Flint, LIBOR plus 3.75%, 3.92% at December 31, 2014, due 2015–2021 10,253 13,898 (in thousands): operating leases for railroad cars, equipment, and land, Term Note, DSAF, EB-5 Program, 7%, due 2019 75,000 25,000 with terms expiring at various times through 2022 for the Years Ending Term Note, DSA, 5.66%, due 2015–2023 10,225 railroad cars and equipment and 2045 for the land. Lease December 31 Falkirk GRE Other—at various rates and maturities 6,194 3,581 expense was $5.6 million, $4.0 million, and $4.7 million 2015 $ 19,840 $ 2,656 in 2014, 2013, and 2012, respectively. Less unamortized bond discount (13,378) (14,586) 2016 16,857 1,056 2,803,727 2,732,747 The schedule of GRE and MAG’s future minimum lease 2017 13,234 1,056 payments as of December 31, 2014, is as follows Current maturities (143,686) (126,950) 2018 10,875 1,056 (in thousands): Long-term obligations—net $ 2,660,041 $ 2,605,797 2019 10,074 1,056 Years Ending Thereafter 2,675 264 December 31 MAG GRE Total minimum lease payments 73,555 7,144 2015 $ 4,065 $ 766 Amounts representing interest (5,787) (974) 2016 2,761 686 Present value of minimum lease payments 67,768 6,170 2017 1,776 620 Current maturities (17,531) (2,288) 2018 1,694 592 2019 1,689 458 Long-term capital lease obligations—net $ 50,237 $ 3,882 Thereafter 8,306 626 The current and long-term portions of the capital lease $ 20,291 $ 3,748 obligations are included in current portion of long-term obligations and long-term obligations in the consolidated balance sheets (see Note 5).

38 39 GREAT RIVER ENERGY GREAT RIVER ENERGY Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements CONTINUED CONTINUED

GRE issues secured debt under an Indenture of Mortgage, October 2015. At December 31, 2014 and 2013, the The capital term certificates bear interest ranging from 5% to 7.5% and a portion of them are required under borrowing Security Agreement, and Financing Statement (Indenture). outstanding balance of this facility was $0 million and arrangements with CFC. At December 31, 2014, GRE had no commitments to purchase additional capital term The Indenture requires GRE to establish and collect rates $10.0 million, respectively. certificates from CFC. Capital term certificates are classified as held to maturity and reported at amortized cost using the reasonably expected to yield a specified margins-for- specific identification method. GRE is subject to a number of customary covenants under interest level. Under the Indenture, GRE has limitations on the Indenture, other debt agreements, and the revolving GRE’s cooperative investment patronage allocations are reported at cost plus allocated equities. the retirement of patronage capital if, after the distribution, credit facility. an event of default would exist or GRE’s members’ capital GRE’s investments held for deferred compensation are reported at fair value. would be less than 20% of total long-term debt and Blue Flint has a revolving line of credit with a limit of The investments reported at amortized cost at December 31, 2014 and 2013, are as follows (in thousands): members’ capital. Substantially all of the tangible assets of $14.0 million that expires on December 31, 2016. At GRE and the power purchase and transmission service December 31, 2014 and 2013, the outstanding balance Gross contracts with the members (see Note 1) are pledged as of this facility was $0 million for both years. Amortized Unrealized Unrealized Fair security under the Indenture. Substantially all of the assets of Blue Flint are pledged as 2014 Cost Gains Losses Value The First Mortgage Note, Series 2010C (Series 2010C security under the Blue Flint Term Notes. Blue Flint is Long-term investments — held-to-maturity Note) bears an initial fixed interest rate (3.5%) through the subject to a number of restrictive covenants under its debt securities — capital term certificates $ 19,644 $ - $ - $ 19,644 initial term rate period, which ends June 30, 2015. At the agreements. expiration of the initial term rate period, subject to DSAF’s and DSA’s term notes are collateralized by a 2013 provisions in the debt agreements, GRE may, at its election, subordinated security interest in substantially all of the Long-term investments — held-to-maturity effect a change in interest rate mode for all or any portion assets of DSA. securities — capital term certificates $ 19,644 $ - $ - $ 19,644 of the Series 2010C Note from term rate mode to a fixed- rate mode or multiple variable-rate mode options. Future maturities on long-term obligations as of December 31, 2014, are as follows (in thousands): Maturities on investments reported at amortized cost as of December 31, 2014, are as follows (in thousands): The First Mortgage Note, Series 2014B currently bears interest at a variable rate based on London InterBank Years Ending One to five years $ - Offered Rate (LIBOR); however, GRE may, at its election, December 31 Five to 10 years change the interest rate option to a fixed interest rate 2015 $ 143,686 Greater than 10 years 19,644 subject to the applicable provisions in the debt agreement. 2016 149,218 $ 19,644 In November 2014, GRE closed on $350.0 million of 2017 430,086 First Mortgage Notes, Series 2015A–D issued under the 2018 137,092 Interest income received on all investments was $1.3 million, $1.6 million, and $2.3 million in 2014, 2013, and 2012, Indenture. The proceeds will be drawn in 2015 under a 2019 220,024 respectively. delayed draw feature in the note purchase agreement. Thereafter 1,723,621 The notes will bear interest at fixed rates ranging from 7. DERIVATIVE INSTRUMENTS exposure due to delays in the anticipated timing of 3.76% to 4.70%. $ 2,803,727 As part of its risk management program, GRE may forecasted debt issuances. The proceeds from the GRE has a $600.0 million unsecured revolving credit periodically use interest rate swaps and swaptions to termination of these instruments, less fees and the swaption facility for which National Rural Utilities Cooperative 6. INVESTMENTS manage market exposures. Terms and tenor of the swap premium, of $36.2 million are deferred as a regulatory Finance Corporation (CFC) is the administrative agent. and swaption agreements are generally structured to match liability. As the termination of these instruments did not This facility expires in June 2017. This facility can be GRE’s investments as of December 31, 2014 and 2013, coincide with a related debt issuance, the net proceeds will are as follows (in thousands): the terms of the risk being managed. Mark-to-market gains increased, at GRE’s option, to $775.0 million subject to and losses related to the interest rate hedging agreements be amortized to the consolidated statements of operations certain terms and conditions. At December 31, 2014 2014 2013 are deferred as regulatory assets or liabilities until the and comprehensive income under regulatory accounting as and 2013, the outstanding balance of this facility was execution of the related debt transaction and the determined by the board of directors. $210.0 million and $285.0 million, respectively. These Other investments: Capital term certificates—CFC $ 19,644 $ 19,644 agreements are settled. The amount paid or received at GRE is exposed to credit risk as a result of entering into amounts are recorded in long-term obligations in the settlement is then deferred as a regulatory asset or liability these interest rate hedging agreements. However, as of Cooperative investment patronage allocations 9,141 8,579 consolidated balance sheets. GRE also has an unsecured and amortized to the consolidated statements of operations December 31, 2014, all of the counterparties with line of credit facility with CoBank, ACB (CoBank) for Total other investments 28,785 28,223 and comprehensive income as a component of interest transaction amounts outstanding under GRE’s hedging $30.0 million. This facility’s terms and conditions are Restricted investments—investments for expense over the term of the related debt issuance. program are rated investment grade by the major rating renewable annually, and the principal balance must be deferred compensation 12,526 12,285 During 2013, GRE terminated certain interest rate swaps agencies. The contractual agreements contain provisions paid in full within one business day of expiration, unless that could require GRE or the counterparty to post collateral unilaterally extended by CoBank. This facility expires in $ 41,311 $ 40,508 and a swaption as these instruments were considered less effective hedges in the management of interest rate or credit support. No amounts have been posted by GRE or the counterparties as of December 31, 2014 and 2013.

40 41 GREAT RIVER ENERGY GREAT RIVER ENERGY Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements CONTINUED CONTINUED

See additional information regarding the fair value of executing an exchange-traded futures contract as an 8. FAIR VALUE OF FINANCIAL INSTRUMENTS these instruments in Note 8 and amounts recorded in offsetting position. In this situation, the forward commodity Generally accepted accounting principles establish a framework for measuring fair value by creating a hierarchy for deferred charges and regulatory liabilities in Note 11. contract is valued at market price until delivery is made observable independent market inputs and unobservable market assumptions and provide for required disclosures about GRE enters into contracts for the purchase and sale of against the contract. MAG does not enter into derivative fair value measurements. Considerable judgment may be required in interpreting market data used to develop the estimates commodities for use in its business operations. Generally transactions for trading purposes. of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that could be realized accepted accounting principles require an evaluation of MAG’s derivative (losses) gains included in the in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a these contracts to determine whether the contracts are consolidated statements of operations and comprehensive material effect on the estimated fair value. derivatives. Certain contracts that meet the definition of a income for the years ended December 31, 2014 and A description of the inputs used in the valuation of assets and liabilities is as follows: derivative may be exempted from derivative accounting as 2013, are as follows (in thousands): normal purchases or normal sales. GRE evaluates all of its Level 1—Inputs represent unadjusted quoted prices for identical assets or liabilities exchanged in active markets. 2014 2013 contracts at inception to determine if they are derivatives Level 2—Inputs include directly or indirectly observable inputs other than Level 1 inputs, such as quoted prices for similar and if they meet the normal purchases and normal sales Realized and unrealized (losses) gains recognized assets or liabilities exchanged in active or inactive markets, quoted prices for identical assets or liabilities exchanged in designation requirements. All of the contracts for the from undesignated hedges: inactive markets, and other inputs that are considered in fair value determinations of the assets or liabilities. purchase and sale of commodities used in business Nonutility operating revenue $ (10,827) $ (9,126) operations, with a few limited exceptions, qualify for a Level 3—Inputs include unobservable inputs used in the measurement of assets and liabilities. Management is required to normal purchases or normal sales designation. The Nonutility operating expenses (30) 2,348 use its own assumptions regarding unobservable inputs because there is little, if any, market activity in the assets or commodity contracts that do not qualify for a normal liabilities or related observable inputs that can be corroborated at the measurement date. purchases or normal sales designation are recorded at fair MAG is exposed to credit and market risk as a result of Assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. value, and the gains or losses are deferred as regulatory entering into these contracts. MAG manages the credit GRE’s policy is to recognize significant transfers between levels at December 31. assets or liabilities. The realized gains and losses on risk by entering into transactions with high-quality A summary of the assets and liabilities at fair value at December 31, 2014 and 2013, set forth by level within the fair settled commodity derivatives, which include exchange- counterparties. Futures contracts entered into by MAG are value hierarchy, is as follows (in thousands): traded futures contracts and financial transmission rights, governed by an International Swap Dealers Association are recognized as purchased power. See additional Master Agreement. MAG manages market risk associated Assets at Fair Value as of December 31, 2014 information regarding the fair value of these derivatives with commodity price contracts by establishing and Active Markets Other Significant in Note 8. monitoring parameters that limit the types and degree of for Identical Observable Unobservable market risk that may be undertaken. Actual results could Assets Inputs Inputs MAG enters into derivative transactions to hedge its materially differ based on the changes in commodity Total (Level 1) (Level 2) (Level 3) exposure to commodity price fluctuations. In connection prices. Assets: with the execution of forward commodity contracts, MAG normally elects to create a hedging relationship by Cash equivalents—money market funds $ 141,921 $ 141,921 $ - $ - Restricted investments—deferred compensation: The location and fair value of GRE’s and MAG’s derivative instruments in the consolidated balance sheets as of Money market funds 2,442 2,442 December 31, 2014 and 2013, are as follows (in thousands): Mutual funds: Domestic stock funds 5,448 5,448 Balance Sheet Location 2014 2013 Balanced funds 1,897 1,897 Derivatives in an asset position, none of which are Fixed income funds 1,222 1,222 designated as hedging instruments: International stock funds 1,517 1,517 Interest rate contracts Derivative instruments $ 147 $ 18,653 Interest rate contracts 147 147 Commodity contracts Derivative instruments 9,278 3,109 Commodity derivatives 9,278 9,246 32 Total derivative instrument assets $ 9,425 $ 21,762 Total assets $ 163,872 $ 163,693 $ 179 $ - Derivatives in a liability position, none of which are Liabilities: designated as hedging instruments: Interest rate contracts $ 23,574 $ - $ 23,574 $ - Interest rate contracts Derivative instruments $ 23,574 $ 2,227 Commodity derivatives 4,290 1,549 2,741 Commodity contracts Derivative instruments 4,290 5,071 Total liabilities $ 27,864 $ 1,549 $ 26,315 $ - Total derivative instrument liabilities $ 27,864 $ 7,298

42 43 GREAT RIVER ENERGY GREAT RIVER ENERGY Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements CONTINUED CONTINUED

Assets at Fair Value as of December 31, 2013 The estimated fair values of financial instruments carried at cost, other than capital leases, at December 31, 2014 and Active Markets Other Significant 2013, are as follows and are provided for disclosure purposes only (in millions): for Identical Observable Unobservable Assets Inputs Inputs 2014 2013 Total (Level 1) (Level 2) (Level 3) Carrying Fair Carrying Fair Assets: Cost Value Cost Value Cash equivalents—money market funds $ 181,171 $ 181,171 $ - $ - Long-term receivables $ 3.1 $ 3.1 $ 3.6 $ 3.5 Restricted investments—deferred compensation: Long-term obligations 2,729.8 3,282.9 2,646.0 3,066.5 Money market funds 3,202 3,202 Mutual funds: The estimated fair values of long-term receivables and long-term obligations, other than capital leases, were based on Domestic stock funds 4,951 4,951 present value models using current rates available for similar issues with similar credit ratings. These fair value Balanced funds 1,131 1,131 measurements would be characterized as Level 2. Fixed income funds 1,324 1,324 The carrying amounts of remaining financial instruments included in current assets and current liabilities approximate their International stock funds 1,677 1,677 fair value. For other investments—capital term certificates, the carrying amount is assumed to approximate fair value as Interest rate contracts 18,653 18,653 these instruments generally must be held as a condition of financing. Commodity derivatives 3,109 3,106 3 Total assets $ 215,218 $ 196,562 $ 18,656 $ - 9. INCOME TAXES Liabilities: GRE is a nonprofit taxable cooperative subject to federal and state income taxation and is allowed a deduction for margins allocated to members as patronage capital. Interest rate contracts $ 2,227 $ - $ 2,227 $ - Commodity derivatives 5,071 3,499 1,572 GRE had no regular federal income tax expense during 2014, 2013, or 2012 due to a net tax loss position. This net tax loss position was primarily the result of the allocation of margins to members, tax depreciation in excess of depreciation Total liabilities $ 7,298 $ 3,499 $ 3,799 $ - recorded for financial reporting purposes, and the deduction of certain costs for income tax reporting purposes, which were deferred for financial reporting purposes. For the years ended December 31, 2014 and 2013, there comparing the difference between the net present value of The consolidated deferred income taxes as of December 31, 2014 and 2013, are as follows (in thousands): were no significant transfers in or out of Levels 1, 2, or 3. the cash flows at the initial price and the current market MONEY MARKET ACCOUNTS— Fair value is price. The initial price is quoted in the contract and the 2014 2013 market price is corroborated by observable market data. determined using quoted prices in active markets for Current deferred income tax asset—net: These contracts are categorized as Level 2. identical assets. GRE current deferred income tax assets—net $ 27,246 $ 26,636 GRE continuously monitors the creditworthiness of the MUTUAL FUNDS— Shares of registered investment Falkirk current deferred income tax assets—net 1,160 546 counterparties to its derivative contracts and assesses the companies (mutual funds) are categorized as Level 1; they Total current deferred income tax asset—net $ 28,406 $ 27,182 are valued at quoted market prices available on an active counterparties’ ability to perform on the transactions set clearing exchange for identical assets. forth in the contracts. Liability positions are generally not Noncurrent deferred income tax asset—net: adjusted, as GRE has the ability and intent to perform Falkirk long-term deferred income tax assets $ 14,965 $ 12,427 INTEREST RATE CONTRACTS— Fair value is determined under each of the contracts. In the instance of asset Falkirk long-term deferred income tax liabilities (11,726) (9,012) by comparing the difference between the net present value positions, GRE considers general market conditions and of the cash flows for the swaps at their initial fixed rate the observable financial health and outlook of specific Total noncurrent deferred income tax asset—net $ 3,239 $ 3,415 and the current market fixed rate. The initial fixed rate is counterparties; forward-looking data, such as credit Noncurrent deferred income tax liability—net: quoted in the swap agreement and the current market default swaps, when available; and historical default GRE long-term deferred income tax assets $ 184,300 $ 188,758 fixed rate is corroborated by observable market data and probabilities from credit rating agencies in evaluating the GRE long-term deferred income tax liabilities (211,060) (215,063) categorized as Level 2 potential impact of nonperformance risk to derivative GRE valuation allowance (486) (331) COMMODITY DERIVATIVES— Exchange-traded futures positions. Given this assessment, when determining the contracts and financial transmission rights are valued at fair value of derivative assets, the impact of considering Total noncurrent deferred income tax liability—net $ (27,246) $ (26,636) active quoted market prices and are categorized as credit risk was immaterial to the fair value of derivative Level 1. Fair value for forward contracts is determined by assets presented in the consolidated balance sheets.

44 45 GREAT RIVER ENERGY GREAT RIVER ENERGY Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements CONTINUED CONTINUED

The noncurrent deferred income tax asset—net is recorded management’s evaluation of the facts, circumstances, and PURCHASED POWER CONTRACTS— GRE has a FUEL CONTRACTS— GRE has an agreement with Cloud in deferred charges—other in the consolidated balance information available at the reporting dates. For those tax power agreement with Dairyland Power Cooperative (DPC) Peak Energy to provide coal to Stanton in North Dakota. sheets. positions where it is more likely than not that a tax benefit to share costs and benefits of a 379 megawatt generating GRE also has an agreement with The Burlington Northern These deferred income taxes result from differences in will be sustained, GRE records the largest amount of tax unit (Genoa 3) located near Genoa, Wisconsin. This Santa Fe Railroad for the delivery of this coal. The freight the recognition of accounting transactions for tax and benefit with a greater than 50% likelihood of being agreement remains in effect until the retirement of the unit and coal agreements run through the end of 2018; financial reporting purposes. The primary temporary realized upon ultimate settlement with a taxing authority from service or until the payment in full of all obligations however, there are no minimum commitments under the differences relate to depreciation, the sale and leaseback that has full knowledge of all relevant information. For arising from the construction and operation of the unit, coal contract. GRE’s expenses under these agreements transaction, deferred charges, retirement benefits, and those income tax positions where it is not more likely than whichever is later. Under the agreement, the capacity costs were $22.5 million, $18.1 million, and $22.7 million in certain financial reserves not deductible for tax purposes not that a tax benefit will be sustained, no tax benefit has are shared equally by GRE and DPC, and GRE is required 2014, 2013, and 2012, respectively. until paid. been recognized in the consolidated financial statements. to pay additional amounts for actual energy purchased. RECLAMATION GUARANTEE— Falkirk is required by Where applicable, associated interest and penalties will Included as future commitments in the table on page 46 As of December 31, 2014, GRE had a federal net the North Dakota Public Service Commission (PSC) to also be recognized. is GRE’s share of the estimated annual capacity costs carry bonds to cover reclamation of mined lands in the operating loss (NOL) of $368.2 million that can be used through the end of Genoa 3’s economic useful life, which GRE has determined that its taxable years ended event the surface mining and reclamation permit is to offset taxable income in the carryforward period. is estimated by DPC to be 2029. GRE’s expenses for December 31, 2008, 2011, 2012, 2013, and 2014, revoked. These bonds are released by the PSC after a These NOLs expire in varying amounts from 2022 capacity, energy, and transmission charges under the are still subject to examination under federal tax statutes. period of time, generally at least 10 years after final through 2031. GRE also has a tax credit carryforward of agreement were $44.3 million, $41.3 million, and GRE has completed examinations by the Internal Revenue reclamation is complete, and it has been determined that $7.8 million and a prepaid alternative minimum tax (AMT) $38.3 million for 2014, 2013, and 2012, respectively. Service of taxable years ended December 31, 2009 and the land has been returned to its approved postmining credit of $0.6 million. The tax credits expire in varying At December 31, 2014 and 2013, GRE had provided 2010. GRE’s taxable years ended December 31, 2008 use. Under the PSC’s self bond program, GRE provides amounts from 2015 through 2034, while the AMT credit $6.6 million and $12.0 million, respectively, to DPC to through 2014, are still subject to examination under state a guarantee for the majority of Falkirk’s reclamation has no expiration. fund its share of fuel inventory, which is allowed under the tax statutes. obligation. As of December 31, 2014, the aggregated There were no uncertain tax positions that were material agreement. This amount is recorded in prepaids and other value of this guarantee is $77.4 million. No liability has TANGIBLE PROPERTY REGULATIONS— The U.S. to GRE’s results of operations or financial position, and current assets in the consolidated balance sheets. See been recorded in the consolidated financial statements Department of Treasury issued final regulations addressing GRE does not expect any change to these positions in the additional information regarding this contract in Note 15. related to this guarantee as of December 31, 2014 and next 12 months. the tax consequences associated with amounts paid to acquire, produce, or improve tangible property, which GRE has long-term power agreements for the purchase of 2013. Falkirk has recorded an asset retirement obligation In the ordinary course of business, there is inherent were effective for GRE for 2014. The adoption of the 468 megawatts of wind energy from various power for the costs to cover final reclamation (see Note 14). uncertainty in quantifying GRE’s income tax positions. provisions of the final regulations had no material impact suppliers. The agreements have varying terms, and some LETTERS OF CREDIT— GRE has issued a letter of credit GRE assesses its income tax positions and records tax on the consolidated financial statements. have extension options. The longest contract term extends to for $2.4 million to MISO in connection with its commodity benefits for all years subject to examination based upon 2041. GRE is obligated to purchase the energy generated derivatives. GRE has also issued two letters of credit from these facilities at fixed prices for the term of the totaling $11.0 million to the Stutsman Rural Water District agreements. GRE’s expenses for energy purchased under 10. PENDING LITIGATION, CONTINGENCIES, AND COMMITMENTS in connection with its water supply agreement. No amount these agreements were $64.8 million, $60.5 million, and is outstanding as of December 31, 2014. MIDCONTINENT INDEPENDENT SYSTEM OPERATOR (MISO)— GRE is a member of the MISO market, and due $59.9 million for 2014, 2013, and 2012, respectively. to the nature of the market, various disputes and resettlements have taken place and some are still in process. It is the MEMBER GUARANTEES— As of December 31, 2014 GRE has long-term power agreements for the purchase of and 2013, GRE has guaranteed $1.1 million and opinion of management that the resolution of the various open MISO disputes and resettlements will not have a material energy from various other power suppliers. Agreement effect on the consolidated financial position, results of operations, or cash flows. $0.8 million, respectively, of rural development loans that terms vary with the longest extending to 2045. GRE is various member distribution cooperatives have secured LITIGATION— GRE is involved in various legal actions arising in the normal course of business. It is the opinion of obligated to purchase energy at either fixed or variable from the Rural Utilities Service. The guaranteed loans are management that the resolution of such actions will not have a material adverse effect on the consolidated financial prices for the term of the agreements. GRE also has a collateralized in the form of land, buildings, or equipment. position, results of operations, or cash flows. contract for transmission associated with some of these A liability of $0.1 million has been recorded in the agreements that extends into 2015. GRE’s expenses for FUTURE COMMITMENTS— GRE is committed to the following estimated expenditures under the various purchased consolidated financial statements related to these energy and transmission purchased under these power and fuel contracts discussed below (in millions): guarantees as of December 31, 2014 and 2013. agreements were $14.1 million, $18.3 million, and 2015 2016 2017 2018 2019 Thereafter Total $19.4 million for 2014, 2013, and 2012, respectively. Dairyland Power Cooperative $ 19.1 $ 22.6 $ 20.1 $ 20.3 $ 20.5 $ 221.9 $ 324.5 Wind energy purchases 65.0 67.4 67.4 67.7 67.4 1,304.8 1,639.7 Other purchased power 37.7 32.8 33.1 35.1 36.4 423.4 598.5 Fuel contracts 11.3 7.7 7.8 8.0 34.8 $ 133.1 $ 130.5 $ 128.4 $ 131.1 $ 124.3 $ 1,950.1 $ 2,597.5

46 47 GREAT RIVER ENERGY GREAT RIVER ENERGY Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements CONTINUED CONTINUED

11. DEFERRED CHARGES AND REGULATORY LIABILITIES PREMIUMS ON REFINANCED LONG-TERM DEBT— amortization is included as fuel expense in the consolidated The amounts of deferred charges recorded by GRE and Falkirk as of December 31, 2014 and 2013, are as follows GRE has refinanced various issues of long-term debt, statements of operations and comprehensive income. which resulted in the payment of premiums. This amount (in thousands): REFINED COAL PURCHASE COSTS— In connection tized by 2038, the maturity date of the will be fully amor with the facility lease with NDRC and the related refined 2014 2013 2007A bonds. coal purchase agreement, GRE is deferring certain refined Regulatory assets: POSTRETIREMENT BENEFIT PLANS— GRE and coal purchase costs until January 31, 2020, which is the Premiums on refinanced long-term debt $ 10,043 $ 11,186 Falkirk have defined benefit pension plans and exercise date of the purchase option to buy out of the Postretirement benefit plans 46,307 29,642 postretirement medical plans for certain employees. GRE transaction. GRE plans to expense these costs at the time Interest rate derivatives 23,574 2,226 records regulatory assets related to items that are normally the purchase option is exercised or amortize over the last Settled interest rate hedging instruments 83,725 62,706 reported as accumulated other comprehensive income for seven years of the lease agreement in the event the these plans. A regulatory asset has been recorded for purchase option is not exercised. Transaction costs related to NDRC 8,483 9,186 GRE’s plans of $30.3 million and $23.6 million, and INTEREST AND PLANT COSTS— GRE deferred facility Refined coal purchase costs 42,000 30,000 Falkirk’s plans of $16.0 million and $6.0 million at costs totaling $17.3 million for interest, maintenance, and Interest and plant costs 17,249 17,336 December 31, 2014 and 2013, respectively. These other costs associated with Spiritwood Station. This amount amounts are adjusted each year as a result of the Scheduled major outage maintenance 26,255 27,075 is being amortized over the useful life of the facility. Other 375 476 remeasurement of the obligations related to these plans. SCHEDULED MAJOR OUTAGE MAINTENANCE— INTEREST RATE DERIVATIVES— Total regulatory assets 258,011 189,833 GRE has interest rate Beginning in 2013, GRE is deferring scheduled major Other deferred charges 25,526 26,058 swaps that have not been settled as of December 31, outage maintenance costs for CCS and Stanton and 2014 and 2013. Certain interest rate swaps are recorded Total deferred charges $ 283,537 $ 215,891 amortizing these costs over the maintenance cycle period, at fair value as a liability, with an offsetting regulatory which is three years for CCS and four years for Stanton. Reported as: asset, of $23.6 million and $2.2 million as December 31, The amortization is included in operation and maintenance Deferred charges—financing related $ 140,061 $ 97,259 2014 and 2013, respectively. Certain interest rate swaps expense in the consolidated statements of operations and Deferred charges—other 143,476 118,632 are recorded at fair value as an asset, with an offsetting comprehensive income. regulatory liability, of $0.1 million and $18.7 million as Total deferred charges $ 283,537 $ 215,891 of December 31, 2014 and 2013, respectively. Once OTHER DEFERRED CHARGES— Other deferred these interest rate derivatives are settled, any deferred charges primarily relate to unamortized debt issuance The amounts of regulatory liabilities recorded by GRE as of December 31, 2014 and 2013, are as follows regulatory asset or liability will be amortized over the life costs, deferred lease costs, and deferred income taxes. (in thousands): of the related debt, unless there is no related debt issuance, DEFERRED REVENUE— GRE deferred the recognition of 2014 2013 and then the amortization period will be determined by the $13.8 million of member electric revenue during 2013 in board of directors under regulatory accounting. Regulatory liabilities: accordance with regulatory accounting requirements. GRE SETTLED INTEREST RATE HEDGING INSTRUMENTS— recognized $2.0 million of this amount in 2014 as member Interest rate derivatives $ 147 $ 18,653 GRE settled interest rate swaps related to the 2015A–D electric revenue. The remaining amount of deferred revenue Settled interest rate hedging instruments 36,212 36,212 bonds, the 2010D bonds, and the 2008A bonds (see will be recognized in member electric revenue in the future Deferred revenue 11,712 13,750 Note 5) resulting in payments to the swap counterparties. as determined by the board of directors. Incentive-based rate treatment 15,920 10,422 These settled swaps are amortized over the life of the INCENTIVE-BASED RATE TREATMENT— Other 6,505 4,858 related debt and the amortization is included in interest GRE received approval from the Federal Energy Regulatory Total regulatory liabilities $ 70,496 $ 83,895 expense in the consolidated statements of operations and Commission for incentive-based rate treatment for the comprehensive income. During 2013, GRE terminated CapX2020 transmission projects and is collecting a return certain interest rate swaps and a swaption without a on investment from MISO while these projects are under related debt issuance for net proceeds of $36.2 million. construction. As a result, GRE has recorded amortization The net proceeds from this termination are recorded as a expense in an amount equal to the interest capitalized to regulatory liability and will be used to reduce future the project in the current year and has recorded an member rates in 2015 and 2016. offsetting regulatory liability. Once a project is complete TRANSACTION COSTS RELATED TO NDRC— and placed in service, the regulatory liability will be GRE incurred $11.3 million in external transaction costs in amortized over the useful life of the underlying assets and connection with executing agreements with NDRC, or its recorded as a reduction to depreciation expense. subsidiaries, for the sale and purchase of lignite and coal The regulatory assets and regulatory liabilities are and for the lease of GRE’s refined coal processing facility recorded as per regulatory accounting requirements and (see Note 1). This amount is being amortized over the have all been approved by the board of directors. life of the facility lease, which is through 2027. The

48 49 GREAT RIVER ENERGY GREAT RIVER ENERGY Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements CONTINUED CONTINUED

12. EMPLOYEE BENEFIT PLANS The accumulated benefit obligation for the GRE defined benefit pension plans reflected above was $64.0 million and GRE offers various benefit plans to its employees. Approximately 29% of total employees that receive benefits are $57.6 million as of December 31, 2014 and 2013, respectively. The accumulated benefit obligation for the Falkirk represented by two local labor unions under three collective bargaining agreements. Two agreements extend through the defined benefit pension plan was $70.7 million and $59.9 million as of December 31, 2014 and 2013, respectively. end of 2015, and one agreement extends through 2016. Components of net periodic benefit cost for the GRE and Falkirk defined benefit pension plans as of December 31, 2014, PENSION PLANS— GRE has a defined benefit plan that covers certain employees who chose to remain in a defined 2013, and 2012, are as follows (in thousands): benefit plan, a nonqualified supplemental defined benefit plan that is frozen, and a qualified defined contribution 2014 2013 2012 retirement plan for other employees. GRE also has a nonqualified defined contribution plan for certain employees. Falkirk GRE Falkirk GRE Falkirk GRE Falkirk has a defined benefit plan that covers employees hired before January 1, 2000, a nonqualified supplemental Service cost $ - $ 139 $ 912 $ 165 $ 1,045 $ 149 defined benefit plan that is frozen, and a defined contribution plan for other employees. During 2013, Falkirk amended Interest cost 2,783 2,263 2,793 1,887 2,902 2,269 the defined benefit plan to freeze pension benefits effective January 1, 2014. As a result of this amendment, Falkirk Expected return on assets (4,170) (2,004) (3,833) (1,880) (3,397) (1,912) remeasured the plan and recorded a curtailment loss of $0.4 million during 2013. Amortization of prior service cost 102 13 1,493 28 1,700 35 Changes in benefit obligations and plan assets for all defined benefit plans for the years ended December 31, 2014 and Recognized net actuarial loss 8 1,105 134 1,333 225 1,145 2013, and the amounts recognized in the consolidated balance sheets as of December 31, 2014 and 2013, are as follows (in thousands): Curtailment 442 Amortization of net transition obligation 63 63 63 2014 2013 Falkirk GRE Falkirk GRE Net periodic benefit cost (benefit) $ (1,277) $ 1,579 $ 1,941 $ 1,596 $ 2,475 $ 1,749 Change in benefit obligation: Benefit obligation—beginning of year $ 59,914 $ 58,668 $ 71,896 $ 65,442 The estimated amounts to be amortized from deferred charges into net periodic benefit cost in 2015 are $1.3 million for the GRE plans and $0.4 million for the Falkirk plans. Service cost 139 912 165 Interest cost 2,783 2,263 2,793 1,887 Weighted-average assumptions used to determine benefit obligations for GRE and Falkirk defined benefit pension plans as Actuarial loss (gain) 10,569 8,238 (7,772) (3,846) of December 31, 2014, 2013, and 2012, are as follows: Curtailment (5,360) 2014 2013 2012 Plan amendment (151) Falkirk GRE Falkirk GRE Falkirk GRE Benefits paid (2,579) (4,624) (2,404) (4,980) Discount rate 3.95% 3.55% 4.75% 4.25% 3.90% 3.25% Benefit obligation—end of year 70,687 64,684 59,914 58,668 Rate of compensation increase N/A 3.75 N/A 3.75 3.75 3.75 Change in plan assets: Fair value of plan assets—beginning of year 59,200 53,456 47,698 50,571 GRE and Falkirk adopted updated mortality tables to determine benefit obligations as of December 31, 2014. Actual return on assets 4,594 2,559 9,004 2,247 Weighted-average assumptions used to determine periodic benefit cost for GRE and Falkirk defined benefit pension plans Employer contributions 19 4,513 4,902 5,618 as of December 31, 2014, 2013, and 2012, are as follows: Benefits paid (2,579) (4,624) (2,404) (4,980) 2014 2013 2012 Fair value of plan assets—end of year 61,234 55,904 59,200 53,456 Falkirk GRE Falkirk GRE Falkirk GRE Funded status—end of year $ (9,453) $ (8,780) $ (714) $ (5,212) Discount rate 4.75% 4.25% 3.90/4.70% 3.25% 4.55% 4.20% Rate of compensation increase N/A 3.75 3.75 3.75 3.75 3.75 Amounts recognized in the consolidated balance sheets as of December 31, 2014 and 2013, are as follows (in thousands): Expected return on assets 7.75 4.00 7.75 4.00 8.25 4.50 2014 2013 Falkirk used a discount rate of 3.90% for the period from January 1, 2013, to July 31, 2013, and a rate of 4.70% for the period from August 1, 2013, to December 31, 2013. Falkirk GRE Falkirk GRE Other noncurrent liabilities $ 9,453 $ 8,780 $ 714 $ 5,212 During 2014, GRE adjusted its strategy to achieve 100% fixed income securities for near-term and longer-term benefit payments. For 2013, GRE’s strategy was to achieve 80% fixed income securities. The investment strategy has a Amounts not yet recognized as components of net periodic cost as of December 31, 2014 and 2013, are as follows diversification of asset types, fund strategies, and fund managers. (in thousands): 2014 2013 Falkirk GRE Falkirk GRE Transition obligation $ - $ 205 $ - $ 268 Prior service cost 155 76 163 89 Accumulated loss 14,371 28,413 4,327 21,835 $ 14,526 $ 28,694 $ 4,490 $ 22,192

50 51 GREAT RIVER ENERGY GREAT RIVER ENERGY Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements CONTINUED CONTINUED

GRE’s defined benefit plan investments at December 31, 2014 and 2013, are as follows (in thousands): GRE and Falkirk expect to make contributions of approximately $0.4 million and $0 million, respectively, to the defined benefit pension plans during 2015. 2014 2013 GRE makes defined contributions to all employees not covered in the GRE defined benefit plan and matching Cash $ 313 $ 317 contributions to all eligible employees under a defined contribution savings plan. Effective January 1, 2013, GRE merged Money market funds 3,815 6,052 its defined contribution plan with its defined contribution savings plan and renamed it a retirement plan. GRE made Mutual funds: savings and matching contributions to its defined contribution retirement plan of $8.9 million and $8.7 million in 2014 Domestic stock funds 11,996 and 2013, respectively, and $8.0 million to its two plans in 2012. Falkirk’s contributions to the defined contribution Fixed income funds 51,776 35,091 pension plan were $2.2 million, $1.3 million, and $1.2 million for 2014, 2013, and 2012, respectively. Falkirk’s contributions to a defined contribution savings plan were $1.9 million, $1.7 million, and $1.6 million for 2014, 2013, $ 55,904 $ 53,456 and 2012, respectively. POSTRETIREMENT MEDICAL BENEFITS— Employees retiring from GRE who elected to remain in the defined benefit The invested funds are stated at fair value using quoted market prices in active markets for identical assets as the fair pension plan, have attained age 55, and have at least 10 years of service are entitled to participate in the GRE medical value measurement (Level 1). For the years ended December 31, 2014 and 2013, there were no significant transfers in insurance plan. Benefits to the former employees are in the form of monthly payments to cover a portion of the premium or out of Levels 1, 2, or 3. charged for participation in the program. Additionally, employees retiring under a previously offered early retirement The Falkirk plan maintains an investment policy that, among other things, establishes a portfolio asset allocation program could elect to participate in a medical insurance plan until they reach age 65. Benefits to these retirees are in methodology with percentage allocation bands for individual asset classes. This investment policy sets target allocations the form of monthly payments to cover a portion of the premium charged for participation in the program. Employees for the plan assets ranging from approximately 50% to 78% in equity securities and 30% to 50% in fixed-income retiring from Falkirk also are eligible to participate in Falkirk’s medical insurance plan with the benefit in the form of a securities. The investment policy further divides investments in equity securities among U.S. and non-U.S. companies. supplement to the premium. The investment policy provides that investments be reallocated between classes as balances exceed or fall below the Costs for the unfunded postretirement medical plan are recognized in the year the employees render service. appropriate allocation bands. Changes in benefit obligations for the years ended December 31, 2014 and 2013, and amounts recognized in the Falkirk’s defined benefit plan investments at December 31, 2014 and 2013, are as follows (in thousands): consolidated balance sheets as of December 31, 2014 and 2013, are as follows (in thousands): 2014 2013 2014 2013 Money market funds $ 289 $ 321 Falkirk GRE Falkirk GRE Domestic equity securities 33,855 31,707 Change in benefit obligation: International equity securities 6,923 7,670 Benefit obligation—beginning of year $ 7,481 $ 3,228 $ 7,670 $ 4,132 Fixed income securities 20,167 19,502 Service cost 119 2 139 6 $ 61,234 $ 59,200 Interest cost 281 114 230 119 Actuarial (gain) loss (107) 243 (81) (252) The invested funds are stated at fair value using quoted market prices in active markets for identical assets as the fair Benefits paid (549) (805) (477) (777) value measurement (Level 1). For the years ended December 31, 2014 and 2013, there were no significant transfers in Benefit obligations—end of year $ 7,225 $ 2,782 $ 7,481 $ 3,228 or out of Levels 1, 2, or 3.

To develop the expected long-term rate of return on asset assumptions, GRE and Falkirk considered the historical returns Amounts recognized in the consolidated balance sheets as of December 31, 2014 and 2013, are as follows (in thousands): and the future expectations for returns on each asset class, as well as target allocation of the pension portfolio. This resulted in a long-term rate of return assumption of 4.0% for both 2014 and 2013 for GRE and a long-term rate of return 2014 2013 assumption of 7.75% for both 2014 and 2013 for Falkirk. Falkirk GRE Falkirk GRE The expected future benefits to be paid as of December 31, 2014, are as follows (in thousands): Current liabilities $ 551 $ 447 $ 586 $ 639

Years Ending Other noncurrent liabilities 6,674 2,335 6,895 2,589 December 31 Falkirk GRE $ 7,225 $ 2,782 $ 7,481 $ 3,228 2015 $ 2,939 $ 5,238 2016 3,186 5,205 Amounts not yet recognized as components of net periodic cost as of December 31, 2014 and 2013, are as follows 2017 3,447 5,388 (in thousands): 2018 3,718 4,593 2014 2013 2019 3,885 4,416 Falkirk GRE Falkirk GRE 2020–2024 21,166 19,660 Prior service cost (credit) $ 18 $ - $ (134) $ 238 Accumulated loss 1,136 1,620 1,347 1,195 $ 1,154 $ 1,620 $ 1,213 $ 1,433

52 53 GREAT RIVER ENERGY GREAT RIVER ENERGY Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements CONTINUED CONTINUED

52 53 GREAT RIVER ENERGY GREAT RIVER ENERGY Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements CONTINUED CONCLUDED

Components of net periodic cost as of December 31, 2014, 2013, and 2012, are as follows (in thousands): disposal of equipment containing polychlorinated These obligations are recorded in other noncurrent liabilities biphenyls. During 2013, GRE evaluated the timing of the in the consolidated balance sheets. The obligations settled 2014 2013 2012 CCS and Stanton ash disposal obligations in conjunction are the only transactions recognized in the consolidated Falkirk GRE Falkirk GRE Falkirk GRE with GRE’s change in estimated service lives for CCS and statements of cash flows. Service cost $ 119 $ 2 $ 139 $ 6 $ 160 $ 9 Stanton and recorded an additional liability of $7.9 million EPA REGULATIONS— In December 2014, the EPA Interest cost 281 114 230 119 289 175 due to this change in estimate. Falkirk has recorded an released a prepublication version of the final rule for Amortization of prior service credit (152) (5) (560) (31) (560) (31) obligation related to the final costs to close its surface mines regulation of coal combustion residuals (CCRs). The rule and reclaim the land disturbed as a result of normal mining Recognized net actuarial losses 104 61 123 71 94 50 will regulate CCRs under the Resource Conservation and operations. There are no assets legally restricted for Recovery Act Subtitle D, which determines them to be Net periodic cost (benefit) $ 352 $ 172 $ (68) $ 165 $ (17) $ 203 purpose of settling these obligations. nonhazardous. It will require increased groundwater GRE also has an obligation to retire its direct current monitoring, reporting, recordkeeping, and posting related The estimated amounts to be amortized from deferred GRE also received various services from the members and transmission line upon abandonment. This line transmits information to the Internet. The rule also will establish charges into net periodic cost in 2015 are a net cost of paid $10.3 million, $9.9 million, and $7.5 million for the energy from CCS in North Dakota to the GRE service requirements related to CCR management, impoundments, less than $0.1 million for the GRE plan and a net cost these services in 2014, 2013, and 2012, respectively. territory in Minnesota. GRE has not recorded a liability landfills, and storage. The rule will allow GRE to continue of less than $0.1 million for the Falkirk plan. GRE has accounts payable to the members of $2.7 million related to this obligation because the fair value cannot be its byproduct beneficial use program. GRE is currently The weighted-average assumptions used to determine and $1.9 million at December 31, 2014 and 2013, reasonably estimated due to the retirement date being evaluating the rule to determine the necessary postretirement obligations and net periodic postretirement respectively. indefinite at this time. infrastructure and CCR management modifications and unable to estimate the cost of compliance at this time. benefit costs for the years 2014, 2013, and 2012 are the GRE has other long-term receivables from the members of A reconciliation of the beginning and ending aggregate same applicable assumptions used for the defined benefit $0.5 million and $0.6 million as of December 31, 2014 carrying amount of the obligations as of December 31, 15. SUBSEQUENT EVENT pension plans, except for Falkirk’s discount rate. Falkirk and 2013, respectively. These notes were issued at face 2014 and 2013, is as follows (in thousands): used 3.25%, 3.85%, and 3.05% for the discount rate for value and have an effective average interest rate of 5%. In February 2015, GRE and DPC signed a term sheet 2014, 2013, and 2012, respectively. 2014 2013 GRE has notes payable to the members of $23.9 million agreeing in principle on terms to end GRE’s purchase of The expected future benefit payments to be paid as of and $25.0 million at December 31, 2014 and 2013, Balance—beginning of year $ 50,255 $ 40,347 power and energy from DPC’s Genoa 3 power plant. The December 31, 2014, are as follows (in thousands): respectively. These notes relate to funds invested with New obligations incurred 623 settlement will end GRE’s obligation to share the costs and output of Genoa 3. GRE will be required to prepay GRE by the members under a member investment Obligations recorded as a result of changes Years Ending financial obligations for investments made in the facility of program. These funds are used by GRE to reduce short- in estimated cash flows 7,911 December 31 Falkirk GRE $83.1 million. GRE will also remain responsible for its term borrowings. The members receive investment Accretion expense 2,928 2,606 2015 $ 551 $ 447 earnings based on GRE’s blended rate of return for share of eventual decommissioning costs and any liability Obligations settled (1,131) (609) 2016 683 327 specified investments, adjusted for administrative costs. for disposal of coal combustion byproducts. The transaction is expected to close and take effect on June 1, 2015, 2017 756 237 Balance—end of year $ 52,675 $ 50,255 14. ASSET RETIREMENT OBLIGATIONS subject to execution of definitive agreements and 2018 786 200 regulatory approvals. 2019 879 191 Generally accepted accounting principles require the 2020–2024 3,596 792 recording of liabilities related to asset retirement obligations. An asset retirement obligation is the result The effect of a one percentage point change in health care of legal or contractual obligations associated with the cost trend rates on service and interest costs is not material retirement of a tangible long-lived asset that result from in relation to the consolidated financial statements taken the acquisition, construction, or development and/or the as a whole. normal operation of a long-lived asset. GRE determines these obligations based on an estimated asset retirement 13. MEMBER RELATED-PARTY TRANSACTIONS cost adjusted for inflation and projected to the estimated settlement dates, and discounted using a credit-adjusted, GRE provides electric and other services to the members. risk-free interest rate. GRE allocates the amortization for GRE received revenue of $873.4 million, $836.4 million, the offsetting capitalized asset retirement cost to expense and $803.3 million in 2014, 2013, and 2012, using the straight-line method over the remaining useful life respectively, for these services. GRE received 39.2%, of the related long-lived asset being retired. 39.8%, and 40.4% of total member revenue from two members for the years ended December 31, 2014, 2013, GRE has recorded obligations related to capping and and 2012, respectively. GRE has accounts receivable from reclamation of ash disposal sites for certain base load the members of $142.5 million and $146.0 million at power plants, obligations related to future removal and December 31, 2014 and 2013, respectively. disposal of asbestos, and obligations related to the

54 55 GREAT RIVER ENERGY GREAT RIVER ENERGY Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements CONTINUED CONCLUDED

54 55 MANAGEMENT AND BOARD OF DIRECTORS

GREAT RIVER ENERGY SENIOR Dale Anderson, Kandiyohi Power Itasca-Mantrap Cooperative STAFF Cooperative Electrical Association, Park Rapids David Saggau, president and CEO Robert Bruckbauer, Lake Country Michael Monsrud, president and CEO Power Jon Brekke, vice president, membership Kandiyohi Power Cooperative, and energy markets Dale Long, Lake Country Power Spicer Jim Jones, vice president and chief Ken Hendrickx, Lake Region Electric Scott Froemming, CEO information officer Cooperative Lake Country Power, Grand Rapids Will Kaul, vice president, transmission Randy Hlavka, McLeod Cooperative Greg Randa, general manager Power Association Rick Lancaster, vice president, generation Lake Region Electric Cooperative, Harold Harms, Mille Lacs Energy Pelican Rapids Eric Olsen, vice president and general Cooperative Tim Thompson, CEO counsel Lee York, Nobles Cooperative Electric McLeod Cooperative Power Kandace Olsen, vice president, Association, Glencoe communications and human resources Bruce Leino, North Itasca Electric Carrie Buckley, general manager Cooperative, Inc. Greg Ridderbusch, vice president, Meeker Cooperative Light & business development and strategy Audrey Hjelle, Runestone Electric Power Association, Litchfield Association Tim Mergen, CEO/general manager Larry Schmid, vice president and chief financial officer Dennis O’Donnell, Stearns Electric Mille Lacs Energy Cooperative, Association Aitkin Louy Theeuwen, director, executive Jay Porter, general manager services MEMBER COOPERATIVE CEOs Minnesota Valley Electric Cooperative, Jordan GREAT RIVER ENERGY BOARD Agralite Electric Cooperative, Roger Geckler, general manager OF DIRECTORS Benson Kory Johnson, general manager Nobles Cooperative Electric, Chair Michael Thorson, Todd-Wadena Worthington Electric Cooperative Arrowhead Cooperative, Inc., Richard Burud, general manager Lutsen Vice Chair Brad Leiding, BENCO Joe Buttweiler, acting general manager North Itasca Electric Cooperative, Electric Inc., Bigfork BENCO Electric, Mankato Jared Echternach, CEO Secretary Gary Wilson, Steele- Wade Hensel, general manager Waseca Cooperative Electric Redwood Electric Cooperative, Brown County Rural Electrical Treasurer Robert Thompson, East Clements Association, Sleepy Eye Ron Horman, general manager Central Energy Wade Hensel, general manager Runestone Electric Association, Thomas Spence, Arrowhead Connexus Energy, Ramsey Cooperative, Inc. Alexandria Mike Rajala, president and CEO Rick Banke, CEO Reuben Kokesch, Brown County Rural Cooperative Light and Power, Electrical Association South Central Electric Association, Two Harbors St. James Steven Wattnem, CEO/general manager Fran Bator, Connexus Energy Ron Horman, general manager Crow Wing Power, Brainerd Donald Holl, Connexus Energy Stearns Electric Association, Melrose Bruce Kraemer, CEO Rick Banke, general manager Peggy Kuettel, Cooperative Light and Dakota Electric Association, Power Steele-Waseca Cooperative Farmington Electric, Owatonna Margaret Schreiner, Dakota Electric Greg Miller, president and CEO Syd Briggs, general manager Association East Central Energy, Braham Todd-Wadena Electric Clay Van De Bogart, Dakota Electric Steve Shurts, president and CEO Cooperative, Wadena Association Federated Rural Electric Robin Doege, president and CEO Joe Morley, East Central Energy Association, Jackson Wright-Hennepin Cooperative Richard Burud, general manager Electric Association, Rockford David Hernke, Goodhue County Mark Vogt, president and CEO Cooperative Electric Association Goodhue County Cooperative Electric Association, Zumbrota Tim Kivi, Itasca-Mantrap Cooperative Douglas Fingerson, general manager Electrical Association Management and board of directors listed as of printing of annual report.

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