Basin Electric Power Cooperative

Kansas City Board of Public Utilities

Southern Minnesota Municipal Power Agency

Sunflower Electric Power Corporation

Tri-State Generation and Transmission Association, Inc.

Sikeston Board of Municipal Utilities

Arizona Electric Power Cooperative, Inc.

Arkansas Electric Cooperative Corporation

Arkansas River Power Authority

Associated Electric Cooperative, Inc.

The City of Grand Island

City Utilities

Colorado Springs Utilities

Dairyland Power

Great River Energy

Hastings Utilities

Heartland Consumers Power District

Lincoln Electric System

Lower Colorado River Authority

Missouri River Energy Services

Nebraska Public Power District

Silicon Valley Power

F U E L S A S S O C I A T I O N

2013/2014 Annual Report

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W E S T E R N

About Us

A not-for-profit cooperative, Western Fuels Association supplies

coal and transportation services to consumer-owned and

investor-owned electric utilities throughout the Great Plains,

Rocky Mountain and Southwest regions. We currently serve a

wide variety of public power entities ranging from rural electric

generation and transmission cooperatives to municipal utilities.

Western Fuels Association provides its members with diverse

and extensive expertise in coal exploration, coal mining, coal

procurement and transportation management.

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Selected Financials

Western Fuels Association, Inc. (In thousands)

Year Ended December 31 2013

Assets

Cash and cash equivalents $ 6,737

Investments available for sale 12

Accounts receivable:

Members 16,612

Affiliated companies 504

Other

Costs recoverable under coal purchase agreements (575)

Prepaid expenses and other assets 429

23,719

Investments in other organizations 575

Restricted investments in Western Fuels-Wyoming 34,010

Equipment and railroad properties, net 2,011

Furniture, office equipment and leasehold improvements, net 193

Total Assets $ 60,508

Liabilities

Accounts payable $ 16,720

Accrued interest payable 126

Advance collections for transportation costs 1,318

Notes payable

Capital lease obligations 1,010

Other notes payable

Deferred liabilities 773

19,947 Members Equity Initial membership fees 0

Patronage capital certificates 3,854

Per-unit retain certificates 2,564

Restricted equity in Western Fuels-Wyoming 34,010

Accumulated margin (deficit) 132

Unrealized gain on investments available for sale 1

40,561

Total Liabilities and Members Equity $ 60,508

Western Fuels Association, Inc. (In thousands)

Year Ended December 31 2013

Revenues

Total coal and transportation revenue $ 296,366

Cost of goods sold

Acquisitions

Transportation and delivery costs (289,233)

Total cost of goods sold (289,233)

Net operating revenue 7,133

Other income (expense)

Other income 783

Interest income 9

Annual membership fees 8

Interest expense (90)

Gain on sale of assets

General and administrative expenses (7,249)

Net margin (deficit) before income taxes 594 Income taxes

Net margin (deficit) 594 Investment in Western Fuels-Wyoming to specific members 782

Unrealized gain (loss) on investments available for sale

Net Comprehensive Gain (Loss) $ 1,376

CONSOLIDATED BALANCE SHEETS CONSOLIDATED STATEMENTS OF OPERATIONS

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CEO Message

Forty years ago, a circle of professional friends committed themselves to the

advancement of rural electric cooperative interests in an exceedingly challenging

business environment. They created Western Fuels Association, Inc. (WFA), to

meet the need for long-term fuel supplies at consumer-owned electric utility power

plants.

The details of the challenges to WFAs operations in 2014 are significantly

different from those of 1974. But the founders legacy their commitment to

deliver coal on a not-for-profit basis at the lowest possible cost consistent with

sound business practices lives on. This year, we celebrate our singular heritage

with a recollection of four decades of history.

While our founders could not have predicted the scale and manner in which

WFA would evolve to meet member fuel supply needs, they would share my pride

in this organization and our employees.

Fuel supply

WFAs primary responsibility is to deliver coal to its members power plants

whether from mines managed by WFA or purchased from other coal producers. By

providing these services our members are assured that the coal they use to gen-

erate electricity for their consumer owners is affordable and reliable. Coal remains

the nations consistently low-cost fuel supply and produces over 40 percent of the

electricity used in homes, business and industry throughout the U.S. Sufficient

reserves exist to provide a reliable source of domestic energy more than 200 years

into the future.

As was envisioned at the outset, Western Fuels coal acquisition program

involves us in contractual relationships with a number of coal producers. Most of

that coal originates from surface mines in the Powder River Basin; the worlds most

prolific coalfield and a national treasure, though it's seldom characterized that way.

Through management services agreements with Western Fuels-Wyoming

(WFW) and Western Fuels-Colorado (WFC), WFA manages three surface coal

operations in Colorado and Wyoming. The approximately 350 employees at the Dry

Fork, Colowyo and New Horizon mines supplied nearly one-third of our members

annual coal requirements in 2013 and produced an additional 2 million tons for

sales to non-members.

Because WFA functions as both a coal buyer and coal seller, WFA is uniquely

positioned in the coal industry. Our members benefit not only from that market

knowledge, but also from our understanding of the cost to mine coal, in evaluating

coal supply proposals. This translates to a better understanding of the dynamics of

the thermal coal market as we are routinely in the market on behalf of our members

for spot and long term coal purchases.

Mine Operations

Our coal mining operations are detailed mine-by-mine elsewhere in the

annual report, however, two aspects merit mention here.

Lost Time Accidents are a familiar metric of employee health and safety.

Western Fuels-Colorado employees at the New Horizon Mine in Nucla, Colorado,

have worked more than three-and-a-half years without a single Lost Time Accident.

In fact, there has been no reportable injury at New Horizon within the last year!

Even though New Horizon is a small truck/shovel operation, the fact the people

who work there can work that long without significant injury is a testament to their

commitment to create a safe working environment for one another. The Colorado

Mining Association recognized that accomplishment earlier this year by awarding

New Horizon its small mining operation safety award.

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Western Fuels-Wyomings Dry Fork Mine enjoys an even longer stretch without

a Lost Time Accident. Wyoming Governor Matt Mead recognized this significant

achievement in awarding Dry Fork employees their first-ever State Mine Inspectors

Small Mine Safety Award. Again this is a testament to people who work together

committing to one another to create and maintain a safe work environment. Their

commitment now extends to four-and-a-half years without a Lost Time Accident

and almost two years without a reportable injury.

Western Fuels-Colorado only became responsible for operations at Colowyo

Mine in the last few years. Over that time period they have achieved a 40 per-

cent reduction in federal Mine Safety and Health Administration citations. The

Colorado Mining Association (CMA), during its annual membership meeting this

past February, recognized five innovative safety improvements WFC has imple-

mented in Colowyo operations. Also at the meeting, a Colowyo heavy equipment

operator, Robert Everette Jr, was recognized for having worked a total of 30 years

at Colowyo without experiencing a single lost time accident.

Colowyo and Dry Fork mine employees have incorporated elements of the

National Mining Associations CORESafety program into their respective safety

processes. The goal of the CORESafety program is for the industry to achieve

zero mine fatalities and a 50 percent reduction in reportable injuries over the next

five years.

The second area I believe to be of great, but understated significance, concerns

recent decisions by the WFW and WFC Boards of Directors in authorizing the pur-

chase of new loaders. Loaders are the workhorse machines at the mines and form

the backbone of coal production. The Boards decisions are an affirmation of their

continued support and dedication to the associated mines to increase productivity

and lower the cost of coal they consume.

Railroads

To meet soaring consumer electric-

ity demand during 2013/2014s harsh

winter, our members drew down coal

stockpiles to record low levels. With the

end of winter and the promise of bet-

ter weather, spring generally provides

an opportunity to replenish coal stock-

piles. However, 2014 is proving to be a

challenge.

We understand that harsh weather

conditions can disrupt rail, utility and mining operations alike. But the current prob-

lem isnt related to coal production; its coal delivery. While it would appear that WFA

is achieving above average success in our effort to replenish member stockpiles,

we will continue our focus on rail logistics until each members stockpiles reach

their target limits.

The BNSF Railway has committed itself to a 2014 capital budget of $5 billion

for infrastructure improvements while adding 500 locomotives and 5,000 employ-

ees to improve productivity. This is happening because of increased rail business

demand from nearly all aspects of BNSFs business units. But the heightened

demand primarily is related to booming domestic oil production from North Dakotas

Bakken oil field. The demand for oil transportation has exceeded the capacity in

many areas of the existing trackage.

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Railroads do understand the importance of domestic thermal coal production

and consumption to their bottom line and to their investors. We know this because

they and the Association of American Railroads make substantial contributions to

the work of the American Coalition for Clean Coal Electricity. Utilities, coal produc-

ers, railroads and their suppliers are working together to ensure that Americas

electricity consumers continue to have a coal option for their electricity generation.

Distressing disharmony

That there would be repeated failure by a forty-year succession of Democratic

and Republican presidential administrations and U.S. Congresses to craft coherent

policies at the intersection of this nations vital energy and environmental interests

would have been beyond the imagination of WFAs founders. The lost treasure

and opportunities for everyone involved undermines our national interest. The

cost of continued irresolution is a national disaster not yet fully appreciated by

the American people. Without a reasonable National Energy Policy, utilities will be

unable to effectively plan the next generation of electricity supply due to constantly

shifting definitions of what constitutes good stewardship of air and water quality.

WFA members serve the interests of people who live in the rural areas and

smaller cities and towns across the Great Plains, throughout the Rocky Mountain

West and in the Southwest. Our employees live and work in those same areas.

For many it is a lifestyle choice. They live where they do because they enjoy the

many benefits the area provides them and their families. They know firsthand the

degree to which their work activity is regulated to protect air, water and wildlife.

That WildEarth Guardians feels it necessary to single out western coal mining

operations as beneficiaries of lax federal regulatory oversight is not only unfair, it

is an inaccurate characterization.

The disruption in energy markets and operations resulting from the recent

cascade of federal regulations intended to improve air and water quality in a com-

pressed timeframe seems sufficiently punitive to have engendered the war on

coal rhetoric. Regulations have outpaced efforts to devise, demonstrate and

cost-effectively implement use of technologies capable of meeting the revised

standards, including those involving carbon dioxide emissions. The utilities that have

made good faith efforts to get ahead of the CO2 issue have been denounced by

the very entities that insisted the effort be made. The consequence is a narrower

base of options for maintaining the supply of electricity our nation needs while

significantly inflating electricitys cost to consumers.

I will close this years message with an echo of last year's message: Western

Fuels Association enters our 41st year of continuous service to its membership in

the manner its founders intended. In behalf of consumer-owned utility interests,

Western Fuels leverages economies of scale to deliver both the lowest delivered

cost of coal and the highest level of fuel supply advocacy with the expertise acquired

through 40 years of service to that cause.

DUANE RICHARDS

Chief Executive Officer and General Manager

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Dry Fork Mine

In 2013, mine production of 5.4 million tons was down from 2012s record

6.0 million tons of production, but it was more typical of production going for-

ward. About two-thirds of Dry Forks coal production is shipped by rail. Half of

that is delivered to the Missouri Basin Power Projects Laramie River Station at

Wheatland, Wyoming, and the balance to Basin Electric Power Cooperatives

Leland Olds Station near Stanton, North Dakota; the Lower Colorado River

Authoritys Fayette Power Project outside LaGrange, Texas; and PacifiCorps

Dave Johnston Plant near Glenrock, Wyoming. The remaining third of mine

production moves by conveyor to Basin Electrics Dry Fork Station, the adjacent

mine-mouth power plant that began operation in 2011.

Dry Fork Mine continues to enjoy one of the lowest stripping ratios in the

Powder River Basin. Mine operations moved about 8.7 million cubic yards of

overburden in 2013 at a 1.6:1 stripping ratio. Mined land reclamation continues

apace with land disturbance. This years conversion of a CAT 789 haul truck

into a larger 44,000-gallon water truck, enables the mine to water haul roads

with a single, road-wide pass. This enhances the mines ability to control dust

and meet mine safety and environmental standards.

In July 2014, Wyoming Governor Matt Mead presented Dry Fork Mine with

the Wyoming State Mine Inspectors Mine Safety Award for a small mining

operation (operations with fewer than 500,000 man-hours in a year). At about

Mine Highlights

As of the end of June 2014, Dry Fork Mine has operated 4.5 years without a

lost time accident and almost two years without a reportable injury.

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View of silos over reclaimed pond at Dry Fork Mine.

161,000 man-hours in 2013, this is the first time Dry Fork Mine has received

this award recognizing its employees safety efforts. As of the end of June

2014, Dry Fork Mine has operated 4.5 years without a lost time accident and

almost two years without a reportable injury. In a further commitment to the

health and safety of its employees, Dry Fork Mine has joined the National

Mining Associations CORESafety Initiative.

New Horizon Mine

Operations at Western Fuels-Colorados New Horizon Mine were dom-

inated by the closing and reclamation of the mines previous pit and the

beginning of operations at nearby New Horizon North. Combined production

in both locations totaled 209,602 tons in 2013.

Preparations for the move to New Horizon North began in the fall of 2012

with a contractor removing and storing topsoil from a reclaimed strip of an

adjacent former Peabody mining operation. A delay in issuance of an interim

air-quality permit meant that once the permit was received in August 2013,

there was a very compressed timeframe for moving and assembling the

mining equipment and beginning to remove previously undisturbed topsoil

for creation of the initial box cut prior to initiation of coal mining. November

marked the first coal delivery from New Horizon North to Tri-State Generation

& Transmission Associations Nucla Station.

There were no lost time accidents in New Horizon mining operations

during 2013, extending a record begun on September 8, 2010. Additionally,

there were no reportable injuries at the mine in 2013. New Horizon received

two significant awards in 2013: the Colorado Mining Associations Safety

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Award for a small mining operation and a Pollution Prevention Award recog-

nizing innovations in the mines recycling program.

Colowyo Mine

2013 and early 2014 have been a time of transition for Western Fuels-

Colorados Colowyo Mine. Safety continued as a top priority and resulted in a

40 percent reduction in federal Mine Safety and Health Agency citations over

the last several years.

Installation of a Cat MineStar equipment-monitoring system during 2013

is paving the way for mining engineers to evaluate methods of increasing

the efficiency of mine operations through acquisition of real-time operational

statistics. The system tracks production and task training, provides real-time

equipment tracking and monitors equipment health.

Underground Mining Solutions (UGM) began highwall mining using its

proprietary ADDCAR Mining System coal recovery technology in the South

Taylor Pit late in 2013. In nine months of operation, the highwall miner produced

600,000 tons of coal for shipment to Tri-State Generation and Transmission

Associations Craig Station.

Colowyo completed two decades of surface mining operations in the

West Pit during 2013. Highwall mining coal recovery began here in 2014 and

will continue into 2015 in preparation for reclamation of the site.

Another milestone was reached in 2013, after South Taylor Pit develop-

ment began in 2007 to create the 450-foot deep 4,000-foot long boxcut, so

that the truck/shovel operation could transition into dragline operations.

Work that continues into 2014 replaces the primary road that provides

access to the South Taylor Pit, allows for reclamation of the West Pit and

Backfill opeations at New Horizon Mine.

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Colowyo employees survey activity in West Pit.

reduces both the distance and grade along the route. Such seemingly subtle

improvements (1000 feet shorter distance and a reduction in grade maximum

from 11 percent to 8 percent) are expected to achieve significant savings in fuel

consumption, equipment maintenance, and repair costs over the life of the South

Taylor Pit.

Implementation of a Leadership Development Program has been a primary

contributor to Colowyos 2013 safety accomplishments. Various training modules

are used to promote supervisory leadership to enhance safety and respect in the

workplace. Meanwhile a dozen practical procedures and processes have been

incorporated into the Colowyo Safety Toolbox to guide safe work behaviors.

During 2013, Colowyo shipped 2,170,950 tons of coal to the Craig Station

and moved 22,736,000 cubic yards of overburden. As part of the mines ongoing

reclamation program, 97 acres were regraded and topsoil was replaced on 163

acres prior to seeding.

The Colorado Mining Association recognized Colowyo Mine with seven awards

during its April 2014 annual conference. Equipment operator Robert Everette Jr.

received individual recognition for working more than 30 years without a lost time

accident. Another five awards highlighted innovative safety improvements in mine

operations. The seventh was a Pollution Prevention Program Award for enhance-

ments in waste handling.

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Western Fuels mining operations at Dry Fork, New Horizon and Colowyo are

experiencing significant transitions as they prepare to meet member needs well

into the future. The accumulated experience of the mine managers and workforces

assures sustained value as the mines operate for the benefit of particular members:

Tri-State Generation and Transmission Association (at Colowyo and New Horizon)

and Basin Electric Power Cooperative (Dry Fork).

Dry Fork evolves

Western Fuels-Wyomings Dry Fork Mine

reserve consists of relatively low-Btu coal but

continues to enjoy one of the lowest stripping

ratios in the Powder River Basin (PRB). Dry Fork

has been ranked one of the top producers in the

PRB on a tons per man-hour basis, according to

the National Mining Association.

Developed to provide supplemental coal for

the Missouri Basin Power Projects Laramie

River Station (LRS) at Wheatland, Wyoming,

Dry Forks production continues to serve as a

hedge, helping assure fuel price stability for the

power plant. While the mine continues to deliver on that promise under Dave

Gauntner's management, Basin Electrics decision to construct Dry Fork Station

on the property as a mine-mouth facility magnifies those original advantages.

Because Dry Fork Station is specifically designed to use Dry Fork Mine coal,

careful monitoring of coal quality during production often enables the mine to cull

higher-quality coal for use at LRS and for sales into the spot market while meeting

Dry Fork Stations day-to-day needs.

The mine and power plant are named Dry Fork because the Dry Fork of the

Little Powder River runs through the property. Because of that, water flows not

only on the surface but in several directions underground as well. It long has been

an operations routine to dewater the coal in advance of mining, not only to increase

its heating value but also to ease the work of the loaders used to place coal into

haul trucks. A wet floor in the pit creates operational difficulties and problems for

equipment. Wet coal also presents challenges in operation of the mines preparation

plant.

In 2019, coal mining is expected to begin in Pit 1A a re-orientation of the

current Pit 1, which is reaching the limit of its current mining direction. Because the

geology in Pit 1A will make for even wetter mining conditions than normal, extra

effort will be necessary to dewater the coal ahead of mining. As a consequence,

mining engineers have budgeted for a program of dewatering the coal further

ahead in time than is the current practice.

Colowyo recovers highwall coal

At 8,000 feet up in the Rocky Mountains south of Craig, Colorado, Colowyo

Mine Manager Chris McCourt and his staff are engaged in mining operations that

differ significantly from those in the Powder River Basin.

In the Powder River Basin (PRB), overburden is stripped back, and seams of

coal, often more than a hundred feet thick, are exposed for mining. At Colowyo,

12 seams of coal ranging from 18 inches to 18 feet thick are separated by interbur-

den that tends to be harder than that encountered in the PRB. As a consequence,

Colowyo operations not only shoot (blast) the coal, but the overburden as well.

Mining has left highwalls exposed in Colowyos West and South Taylor Pits

in the West Pit because pit advancement has come to an end and in the South

Taylor Pit, as a consequence of boxcut completion. In both instances, one can

easily discern the various strata of rock and coal across the face of the highwall.

UGM has brought its ADDCAR highwall coal recovery technology out West to

Colowyo. UGMs system incorporates a rotating drum on the machines business

end similar to that of a continuous miner used in underground operations to gouge

coal from the seam. The ADDCAR system replaces the shuttle cars that haul coal

Meeting the Challenges of the Future

Dave Gauntner

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away from the continuous mining machine in an

underground operation with a series of cars

or conveyor belt flights that are attached to the

rear of the highwall miner (HWM). As the HWM

gouges up to 1,400 feet into the coal seam at the

base (toe) of the highwall, cars are added as the

miner pulls the one ahead deeper into the seam.

The HWM is operated from a two-story-tall

armored enclosure outside in the pit, along the

toe of the highwall. The operator is protected

inside the machine, which is a bit longer than one

of the ADDCAR conveyor flights. The operator

uses computer-based technology and video equipment to monitor mining condi-

tions within the seam.

In the West Pit, the HWM is working its way along the F coal seam and

leaving behind a series of seam-thick, rectangular mouse holes from which

coal and the miner have been extracted. Each hole is separated by a pillar of coal

approximately 13 feet wide. Once the miners work along the seam is done, the pit

will be backfilled as part of the reclamation process to create a ramp along which

the HWM will recover coal from the E seam, which now is high up on the wall.

Over in the South Taylor Pit the boxcut has been completed and awaits arrival

of a dragline to begin removing overburden to advance the pit. Here UGMs HWM

will be used to mine a high-quality seam that now is halfway up the highwall.

Initial dragline operations will backfill the South Taylor Pit box cut to an elevation

permitting access to that seam by the HWM.

Combined use of the HWM and surface operations produce coal for Tri-States

Craig Station, while permitting progresses so that mining can begin in the Collom

Pit, the site of a nearby reserve.

Collom Pit operations represent the future of Colowyo operations. Although a

mining permit has already been secured from the State of Colorado, federal approval

is under further review with particular attention to the environmental impact of

operations on sage grouse breeding grounds.

New Horizons challenges

Operating a truck/shovel mine within the

bounds of restrictive environmental permits

is proving to be an ongoing challenge for New

Horizon Mine Manager Rick Wolney and his

team on Colorados Western Slope, near Nucla

in the southwest corner of the state.

Over the last year, New Horizon has had to

operate under limited, temporary authorizations

prior to receiving final permits. That has impacted

the ability to assemble mining equipment and

begin preparing a new area of the reserve for

mining north of the original operations. This was coupled with a delay in the air

permit that governs how many tons of overburden or coal can be moved each day;

the number of miles traveled by haul trucks; the number of hours dozers operate,

and the size and number of shots that can be made to loosen overburden for

the mines hydraulic shovel to load into haul trucks.

As mining engineers developed their plans for accessing the million-ton reserve

over the next five years, it became apparent that a drainage draw which passes

through the middle of the property must be protected. Wetland protection ultimately

will require an additional boxcut to access the 12 to 16 inch thick Upper Dakota

coal seam and the 5 to 6 foot thick Lower Dakota on the north side of the draw.

Meanwhile, final reclamation of the New Horizon 2 Mine is underway. Final

overburden placement and grading, topsoil replacement and prime farmland resto-

ration is continuing. These activities, when complete, will begin the final reclamation

bond release period.

Chris McCourt

Rick Wolney

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Western Fuels Associations story ranks as nothing less than a classic American response to a national crisis through application of ingenuity, drive

and regional cooperation. Western Fuels calls itself the national fuel supply cooperative. We have operated for 40 years on a not-for-profit basis as

the nations only coal supply and transportation cooperative supporting electricity generation by its member consumer-owned utilities. Our operations

span the Great Plains, Rocky Mountain West and Southwestern states. In its first decade of operation, Western Fuels emerged as the nations

single largest purchaser and shipper of coal from Wyoming and Montanas Powder River Basin (PRB), an area of such resource abundance that in and

of itself legitimizes the claim of the United States as the Saudi Arabia of coal.

Anyone younger than fifty years of age is unlikely to appreciate the experience of the Organization of Petroleum Exporting Countries (OPEC) oil

embargoes. Those economic cataclysms gave rise to the energy-independence rhetoric that stokes energy, environmental and foreign policy debates

to this day. The majority of the population residing on the East and West coasts is likely unfamiliar with or never learned about cooperatives as a form

of business. The energy crisis forced action, and in Western Fuels case, cooperation became the business response.

OPEC embargoes

OPEC's oil embargoes served as the opening salvos in their assertion of economic and political relevance in the 20th Century. OPEC put the West

on notice that Middle Eastern geopolitics pose a national security concern far from the oil fields. The economic and psychological effects of volatile and

dramatically higher petroleum prices systematically riddled Western economies where dependence on cheap oil had become endemic. President Jimmy

Carter called for an energy policy response. The federal coal reserves in Wyoming and Montana emerged as a critical area to meet America's energy

needs. Domestic oil companies had years before secured leases to the low-sulfur coal reserves in the PRB. They had not done much with them in the

absence of sufficient economic incentive. OPECs embargoes provided the catalyst. With electricity fast emerging as the primary source of energy in

Our Story

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American homes, businesses, and industry, coal was the least expensive domestic fuel available for electricity generation. There was a sticking point,

however: petroleum is pervasive in the surface mining of coal. Not only would the value of coal be driven higher in competition with oil, the cost of

mining coal would rise on higher-priced production inputs. No one understood this better than the oil companies with the federal leases.

Western Fuels cooperative roots

The Depression-era experience of the Dust Bowl years gave rise to an era of giant power. Building upon the experience of federal dams constructed

for flood protection, water conservation and electricity generation along the Tennessee, Colorado and Columbia river systems, farmers, ranchers and

smaller communities along the Missouri River were promised hydroelectricity on a preferential basis. Investor-owned utilities had repeatedly demon-

strated their narrow focus on profitable population centers, all but ignoring rural areas where the number of consumers per mile of transmission line to

reach them rendered electricity service unprofitable.

In the Dakotas, a strain of prairie populism emphasizing agrarian self-sufficiency had already emerged. Farmers organized themselves into cooper-

atives to help market the fruits of their labors and supply themselves with the production inputs they required feed, seed, fertilizer, fuel, etc. on a

not-for-profit basis. It seemed logical to extend this experience of consumer-owned, democratically governed, cooperative business to other challenges

electrical service prominent among them. Western Fuels founders had deep experience in this approach to problem solving and doing business.

By 1963 when it became apparent the era of giant power was nearing its end, rural leaders perceived a threat to sustained economic growth and

development. Having already organized themselves into distribution cooperatives to deliver the federally generated electricity to their farms, ranches

and communities, the distribution co-ops further organized themselves into generation and transmission cooperatives (G&Ts) to produce and deliver

the electricity needed to meet increasing consumer demand. G&Ts like North Dakotas Basin Electric Power Cooperative, Tri-State Generation and

Transmission Association in Colorado, and Cajun Electric Power Cooperative in Louisiana were instrumental in creating Western Fuels Association.

What follows is a brief history of the organization they created and which, this year, celebrates its 40th anniversary.

Duane Richards

Chief Executive Officer and General Manager

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Ken Holum, Western Fuels Associations first General Manager, keenly felt

his fathers helplessness upon losing three wheat crops to the droughts of the

1930s. Operating the family farm in northeastern South Dakota in the 1940s and

1950s stimulated in him a desire to improve conditions for rural families. He helped

organize and manage rural electric cooperative organizations, including his local dis-

tribution cooperative Northern Electric East River Electric Power Cooperative

and the Mid-West Electric Consumers Association.

He served in the South Dakota Legislature from 1949-53 and in 1954 decided

to run for the U.S. Senate, even though it had been 18 years since a Democrat had

held statewide office. He ran again in 1956, and his razor-thin loss attracted the

attention of national party leaders. Then President-elect John F. Kennedy appointed

him Assistant Secretary of the Interior for Water and Power Development and when

he left the Department of the Interior at the end of the Johnson Administration,

Holum opened a consulting business in Washington, DC.

Basin Electric Power Cooperative, Tri-State Generation and Transmission

Association, the Lincoln (Nebraska) Electric System, Missouri River Energy

Services, Wyoming Municipal Power Agency and Heartland Consumers Power

District recognized that the upper Great Plains would need additional electricity

generation capacity by 1977. They became partners in the Missouri Basin Power

Project (MBPP) to build what would become a three-unit, coal-fired, 1710 MW

power plant. They retained Ken Holum & Associates to identify potential water and

fuel supplies for the power plant and acquire the land necessary for its construction

in Wyoming or either of the Dakotas.

In his 1987 memoir, A Farmer Takes a Stand, Holum explains what he saw as

the four keys to successful power plant siting for the MBPP.

There must be a substantial footprint of land available. Abundant open space

nearly defines Wyoming and the Dakotas.

A coal-fueled power plant requires a long-term supply for the never-ending

stream of coal feeding its boilers. Massive federal coal resources were under

lease or available for lease in the Powder River Basin (PRB) of Wyoming

and Montana.

Coal consumption would be so enormous that trucking would prove to be

impractical. Either the facility needed to be close to a mine or along a major

railroad. The Burlington Northern and Chicago Northwestern/Union Pacific

railroads were expanding operations in the PRB.

Finally, there must be abundant water to create the super-heated steam that

spins the generators turbines and for power plant process water. That seemed

likely to be the greatest challenge in the arid West.

The MBPP partners wanted to take advantage of U.S. Rural Electrification

Administration (REA) low-interest financing for their project, but REA required

assurance of a dependable, long-term fuel supply. With OPEC era energy markets

in turmoil, Holums difficult and frustrating assignment to nail down a fuel supply

eventually led to the creation of Western Fuels.

Two events influenced the thinking of energy executives: The OPEC oil embar-

go and a federal court decision in Sierra Club v. Morton, a lawsuit that stopped all

leasing of coal on public lands, Holum wrote. The energy companies began to

say and think a BTU of coal in Wyoming is as valuable as a BTU of oil in Kuwait.

They were waiting for the new higher oil-indexed prices they anticipated and were

refusing to make quotations.

With Cajun Electric Power Cooperative experiencing the same predicament

in securing its fuel supply, Holum was convinced that the ability to bring a large,

collective demand to market would help both the MBPP and Cajun Electric strength-

en their bargaining positions. In 1974, he explored the concept of a fuel supply

cooperative with Cajun manager Merl Burgin during the National Rural Electric

1974IN THE BEGINNING

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Cooperative Associations (NRECA) annual meeting. When the two shared their

idea with Tri-States executive vice president, Wendell Garwood, and Basin

Electrics general manager Jim Grahl, both were intrigued. Although Cajuns

Board of Directors was divided on whether to participate, Tri-States president,

Everett Chesney, Basin Electrics president, Art Jones, Grahl, Garwood, Holum,

and Wheatland, Wyoming attorney Don Sherard began hammering out details.

With their focus on western coal resources, they settled on Western Fuels

Association as the name for their Wyoming not-for-profit corporation and elected

Chesney as President and Jones, Vice President. Garwood served as secretary-trea-

surer and Sherard as corporate counsel. Holum was named general manager while

maintaining his independence as an energy consultant.

Basin and Tri-State agreed to finance Western Fuels with loans to be reimbursed

once coal deliveries began earning margins. In the language of cooperatives, a

margin represents revenue above current expenses. Cooperative member-owners

impose a margin on themselves through direct democratic participation in their

cooperative.

When Cajun Electric joined the two founding members in November, it was

time to structure a Board of Directors.

Class A members provide initial capital and sign contracts with Western Fuels,

agreeing to use the Association for all future fuel requirements. They get two seats

on the Board. Burgin and Cajun president Alfred Bubba Robinson joined Jones

and Grahl (Basin Electric) and Garwood and Chesney (Tri-State) as Directors.

Members who enter into an agreement to purchase coal from WFA are Class

B members and have a single seat on the Board. Class C members pay annual

dues and are kept abreast of Western Fuels activities in anticipation of future fuel

requirements or other services.

Coal supply contracts

Once the MBPP decided on Wheatland as the site for the Laramie River Station,

Wyoming Governor Stan Hathaway told Holum he wanted to help the power plant

secure the fuel it required. Western Fuels began receiving coal supply offers and

signed its first contract with Sunoco Energy Development Company for 60 million

tons to be delivered over 20 years.

Other contracts and companies soon followed: Carter Oil Co. (later Exxon

U.S.A.) at 73.5 million tons over 25 years and; Kerr-McGee Coal Corporation for 16

million tons over 5 years; Shell Oil (Triton Coal Company) at 60 million tons and 15

years; and Mobil Oil Corporations Energy Mineral Division with a 50 million ton,

20-year commitment.

Upon execution of the coal supply contracts and a corresponding Fuels Supply

Agreement with MBPP for the Laramie River Station, Western Fuels was officially

in business.

At the energy companies insistence, early coal contracts contained provisions

for reopeners to align prices with the current market in the event that elaborate

escalation provisions failed to fully capture the cost of production. At the time,

the REA and some of Basin Electrics members preferred fixed-price contracts. It

wasnt very many years before those market price reopeners cut the other way

to benefit Western Fuels members.

The pivotal years

By 1979, Western Fuels membership had expanded beyond Basin, Tri-State,

and Cajun Electric to include the Kansas City (Kansas) Board of Public Utilities

(KCBPU), Sunflower Electric Power Cooperative, Plains Electric Generation

and Transmission Cooperative, Sikeston (Missouri) Board of Municipal Utilities,

North Carolina Membership Corporation, and municipal utilities in Springfield and

Independence, Missouri, and in Rochester, Minnesota.

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At the time, Board President Everett Chesney opined, In a real sense, the

requirements that led to Western Fuels creation have been satisfied. We can

supervise our existing contracts, manage our trains, keep our bills paid as they

come due, and say to ourselves that having done that, weve accomplished our

mission. After completing this initial phase, Western Fuels members then chose

a more expansive path. They decided to develop the cooperatives first mining

operation, pursue additional coal supply responsibilities, and involve the Association

in governmental affairs at the national, state, and local levels in hopes of guiding

energy and environmental policy.

The roster of early employees reflects those decisions. Bob Norrgard left the

St. Paul Bank for Cooperatives to become Manager of Finance and Administration.

Lloyd Ernst, with his Basin Electric experience in managing socio-economic mitiga-

tion for the Laramie River Station, became manager of operations. Orren Beaty, a

Holum colleague at Interior, handled federal and state legislative relations. Cameron

Engineers Don Deardorff opened the Lakewood, Colorado, Office of Engineering

and Exploration. Fred Palmer moved his office from Duncan Weinberg Palmer &

Brown to supervise contracts and other legal matters as general counsel.

Western Fuels was not forecast to earn its first margin until 1981. It happened

sooner, in six years rather than seven, with a net margin of $1,306 in revenue

above $66 million in operating expenses. It would have been difficult to have hit

our non-profit goal more precisely, Holum quipped.

When Holum retired on March 1, 1985, the board of directors named Fred

Palmer to replace him as general manager.

The economic environment in which we operate is in acute distress, Palmer

said at the time. 1982s dramatic recovery in financial markets bypassed rural

America, heavy industry, and the minerals and energy sectors. Palmer called on

those doing business with Western Fuels to preserve long-term profitable rela-

tionships in exchange for a short-term diminution of profits. He and Manager of

Corporate Affairs Hank Walters began an aggressive program to achieve lower

contract prices under prevailing market conditions using the very contract reopeners

that had been designed to justify higher prices.

Cajun Electric, Southern Minnesota Municipal Power Agency (SMMPA),

Basin Electric, and Tri-State realized lower fuel costs from those efforts. Litigation

settlements benefited Cajun Electric and SMMPA. An appeal of federal royalty

rates reduced fuel costs for Deseret, a rural electric distribution cooperative along

the Colorado Utah border. Refinancing activity lowered costs for Plains Electric.

Transportation negotiations yielded rate reductions and price stability for Sunflower.

New rail contracts resulted in lower-cost deliveries for KCBPU.

Western Fuels celebrated delivery of its first 100 million tons of coal supply at

the end of 1988. More than 85 percent originated from Powder River Basin surface

mines and relied on the Burlington Northern railroad to haul the coal.

Things pivot the other way

In 1995 two events motivated the board of directors to move Western Fuels

headquarters from Washington, DC, to Denver, Colorado. There were disconcerting

changes in the Illinois Basin market, triggered by changes in the Clean Air Act and

the shifting role of competing fuels, that impacted operation of the Brushy Creek

Mine for the benefit of Sikeston and Kansas City. Additionally, both Cajun Electric

and Deseret were experiencing financial turmoil that cast their futures in doubt.

Deregulation of electricity markets contributed to Cajuns problem. Absence of

significant load growth within Deserets service territory contributed to its financial

issues. The combination of these potential financial challenges for the mine and

members threatened a third of Western Fuels business.

Most senior staff made the move to Denver while CEO Fred Palmer remained

behind in a small office suite in NRECAs headquarters building in order to maintain

Western Fuels Washington presence.

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The subsequent bankruptcy of Cajun Electric and financial reorganization at

Deseret, coupled with changes in operation of the Brushy Creek Mine, confirmed

its necessity.

Palmer retired as general manager/CEO in 2000, and Bob Norrgard succeeded

him as General Manager.

Evolution to the next stage

Dramatic spikes in natural gas prices in the early 2000s induced fundamental

changes in the way financial markets perceived coal and coal transportation services

to be commodities. Recognizing the concentration of market power in the Powder

River Basin the principle source of Western Fuels coal the board of directors

believed their fuel supply cooperative needed to develop new procurement skills

and strategies. They hired Duane Richards as general manager/CEO in mid-2004.

Ten years later, Richards focus remains on delivering benefits to WFA mem-

bers. As he sees it, the organization they created in 1974 has evolved in its ability

to apply unique knowledge of coal markets, because Western Fuels is both a

buyer and seller of coal and a constant presence in the marketplace in behalf of

one member or another. With responsibility for railcar maintenance and logistics,

the knowledge Western Fuels brings to the table in negotiation of transportation

agreements is greater than that of any one member.

Like Holum before him, having grown up on a rural electric cooperative system

in Minnesota, Richards understands the fundamental strength of consumer-owned

business. Working with an investor-owned utility earlier in his career proved to

him that potential benefits to ratepayers dont often happen if they cost investors

capital.

Every decision we make whether by the board of directors or the man-

agement team and staff is in pursuit of consumer benefit. Whether its a rail

rate case, routine coal supply negotiation, change in mine operations or the way

we manage our railcar fleet, our effort is focused on achieving the lowest possible

cost consistent with sound business practices, Richards says. Through our mem-

bers, Western Fuels serves the electricity consumer at the end of the line. They

arent simply a customer to us or a source of revenue that consumer owns us.

Through their democratically elected representatives on their local cooperative or

municipal utility board, all the way up the chain, they control this one of a kind fuel

supply business. I feel that responsibility to our consumer/owners every day.

WESTERN FUELS AND Rail Operations

Securing transportation of coal from mines to member power plants is a critical

component of Western Fuels operations.

In 1978, railroad incentives for shippers to own their own cars resulted in an

order for the first 242 railcars bearing the WFAX ownership designation. The board

authorized hiring employees to manage railcar maintenance, schedule unit-train

shipments, oversee car loading at the mines and assure coal quality for optimal

power plant boiler performance.

Jim Kaufman oversaw railcar maintenance from Alliance, Nebraska. Rod Wolf

handled relations with the mines and railroads at Gillette, Wyoming.

Leveraged leasing was used in 1979 to add 452 railcars to the growing WFAX

fleet for service to the Missouri Basin Power Projects Laramie River Station (LRS),

Kansas City (Kansas) Board of Public Utilities Nearman Station and Cajun Electric

Power Cooperatives Big Cajun #2.

To achieve maximum flexibility in using WFAX trains at various member power

plants with different coal-dumping systems, in 1983 Ortner Rail Car Company

received Western Fuels order for a pool train of 115 specially-built cars unique

in U.S. rail operations.

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The pool train could be bottom dumped like traditional gondola cars or through

dumpers using rotary-couplings that enabled coal to be unloaded out of the tops

of the cars. The train quickly became a favorite among rail fans stuck at crossings

and used to staring at 110 identically colored (usually black) cars rolling by. Ortner

painted horizontal yellow, orange and red stripes along the cars sides, earning it

the nickname "The Rainbow Train". The racing stripes soon became a theme for

the Deseret-Western Railway and Escalante-Western Railway equipment as well.

By late 1985, the WFAX fleet consisted of 745 cars. The Alliance office

was closed to take advantage of a new PLM Railcar Maintenance facility at Bill,

Wyoming. Fleet management was transferred to Wolf and the Gillette office at that

time. As of today, Western Fuels owns and maintains 1,700 railcars comprising over

15 unit-train sets and continues to manage the fleet through the Gillette office.

Escalante-Western Railway

After executing a 1982 coal supply contract with SF Coal Corporation to supply

Plains Electrics Escalante Generating Station west of Albuquerque, New Mexico,

Western Fuels began to operate a 43-car (now 52-car), rotary-dumped unit train for

the 42-mile journey along the Lee Ranch Spur from the power plant to the mine.

Under the initial arrangement, Atchison Topeka & Santa Fe Railroad (ATSF)

employees operated the three remanufactured diesel locomotives while Western

Fuels staffed an equipment maintenance and repair shop. It proved to be ineffi-

cient for the train to leave the power plant and enter a short stretch of the ATSF

high-speed east-west mainline, only to be diverted onto the Lee Ranch Spur a

short distance east. Construction of a 4.5 mile Escalante-Western Railway Spur

connecting the Lee Ranch Spur to the power plant loop remedied the problem.

In 1986, Western Fuels employees became certified engineers and conduc-

tors, replacing the ATSF crews. Their productivity in continuing to perform diesel

and electrical maintenance reduced crew size, enhanced coordination of operations

and resulted in lower member costs.

Transportation contract negotiations

Generally, Western Fuels seeks a long-term agreement with price stability

throughout each year of a rail transportation contract and a rate reduction if it

seems warranted. Achieving these goals has been an ongoing challenge. To ensure

that members receive the lowest possible rates, it has been necessary for Western

Fuels to file formal complaints with regulators at the Surface Transportation Board

(STB).

Little is served in recounting and reciting the series of negotiations, settle-

ments, and decisions that have found for one side or the other over the 40 years

of Western Fuels existence. Western Fuels efforts to deliver coal to its members

at the lowest possible cost consistent with sound business practices, is a key

measure of success in service to its members. Therefore WFAs laser-like focus

on the cost of rail transportation can hardly come as a surprise.

RAILROAD Advocacy

Coals delivered price has two components: the price of its purchase and the

price for delivery to the power plant. Of the two, the price of delivery is generally

higher. This is because it is often subject to less competition as a consequence of

either the mine, the power plant or both being served by a single railroad.

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Mining coal in the Powder River Basin (PRB) is relatively low cost because of

thick seams and thin overburden. Because clean-air policy favors low-sulfur coal,

PRB producers believed the combination of economic and regulatory attractiveness

would make them prime beneficiaries of a utility turn to Western coal. However,

the market for PRB coal is constrained by the transportation rates offered by the

carriers serving the area mines. The combined effects of limited rail access to PRB

mines and the deregulatory climate in Washington, DC, enabled railroads, using a

variety of techniques, to harvest economic rent created by the increased value of

Western coal.

Early on, the railroads charge for hauling Wyoming coal to Texas represented

75 percent of its delivered cost. On hauls to Kansas, transportation was well over

half the coals delivered cost. Even on a short haul within Wyoming, transportation

represented 40 to 50 percent.

In 1982, Burlington Northern, without prior negotiation, unilaterally filed a tariff

that dramatically changed the formula for escalating the cost of coal delivery. On

behalf of three affected members, Western Fuels filed suit in Wyoming Federal

District Court charging BN with breach of contract and violation of antitrust laws.

It took two years, but the lawsuit was settled out of court and the contracts

extended well into the future. WFAs new general manager, Fred Palmer, had

managed the litigation as general counsel. The experience left him convinced of

three things: Railroads 1) when able to do so, will differentially price their service; 2)

allocate markets among themselves, and 3) have the ability to influence the relative

cost of power charged by utilities that compete with one another for customers.

Western Fuels and others began making arguments before the Interstate

Commerce Commission (ICC) concerning the railroads market power. By way

of example, Western Fuels and other shippers protested the railroads refusal to

share with them savings achieved through increased productivity. The ICC agreed

that the savings should be shared. The result was a lower delivered price of coal.

Railroad Deregulation

The Railroad Rehabilitation and Reform Act of 1976 had set the stage for vir-

tual deregulation of railroads. In passing the Staggers Rail Act in 1980, Congress

believed regulation had been achieved. In fact, the railroads were only partially

deregulated, because the Act forced reliance upon the ICC for captive shipper

protection.

A round of rail industry consolidation and mergers in the mid-1990s ignited

Western Fuels member frustrations over the railroads tactical pricing for captive

shippers. When the ICC considered the merger of the BN and Atchison Topeka

& Santa Fe railroads, Western Fuels asked the railroad and ICC to grant certain

trackage rights. When neither was responsive, Western Fuels joined Consumers

United for Rail Equity (CURE) to work with other shippers of bulk commodities in

seeking to amend transportation law and effect meaningful regulation for captive

shippers.

The railroads continued dismissal of captive shipper concerns and the absence

of timely, effective ICC regulation convinced Congress to terminate the agency in

1995. In its place, it created the Surface Transportation Board.

Continued deterioration of rail service led Western Fuels in 1997 to help form

a broader coalition of shippers to pursue rail regulatory reform by Congress. Called

the Alliance for Rail Competition, ARC continues its efforts to ensure reasonable

rail transportation rates to this day. Western Fuels leadership and participation in

ARC and the Western Coal Traffic League affords its members additional leverage

in focusing the STB on the various financial and service issues that confront a

broad-based coalition of shippers, not simply those delivering coal.

20

expanding industry on local units of government. Once $160 million had been col-

lected, the taxation was to cease. When it didnt, Western Fuels and the Wyoming

Mining Association challenged the state attorney general and in 1987 prevailed

before the Wyoming Supreme Court, saving electricity consumers $16 million in

1988 alone.

Late in the first Bush Administration, a push for deficit reduction led to a pro-

posal for a BTU tax to achieve environmental objectives. Although dismissed by

environmental activists as just another pleading by a special interest, Western

Fuels opposed the tax because of its impact on consumers.

As Board President Charles Underwood explained in 1992, Western Fuels

and its member/consumer-owned utilities do not simply speak for coal or seek

to defend consumer-owned utilities investment in billions of dollars of coal-fired

electric generation facilities, although we do both of these things. Rather we unite

our voices on behalf of the people who use the electricity we generate the con-

sumers who actually own the utility that serves them.

The newly elected Clinton/Gore Administrations advocacy of the BTU tax lent

it an aura of political inevitability. The shock upon its defeat shifted the momentum

to do something about fossil fuel use to the states.

Doing something about CO2

The focus on carbon dioxide began in 1988 with NASA scientist Jim Hansens

testimony before a U.S. Senate sub committee. Hansen told the senators that his

study of computer-based climate models convinced him that the planet was seeing

the first signs of human-caused warming. He prescribed severely curtailing CO2

emissions.

Former Manager of Communications and Advocacy Ned Leonard recalls how

quickly Fred Palmer grasped the threat to his members. If theyre going to control

CO2, he remembers Palmer saying after reading the sub committee proceedings,

theyre going to have to do something about fossil fuels. They wont tax auto

BTU TAX, EXTERNALITY &

Climate-Change Advocacy

Like it or not, General Manager Ken Holum explained in

1978, we have found ourselves to be one of the organizations

attempting to get the ear of government decision makers.

We support legislative and executive branch decisions that

achieve conservation and best possible use of resources.

We are committed to environmental protection, but we are equally

concerned about the costs paid by consumers and consider

it to be essential that the nations energy needs be met from

domestic resources. We deplore activities that will inevitably lead

to energy shortages and increase costs without counterbalancing

benefits to the environment or conservation.

Thats it Western Fuels Associations advocacy mission as understood within

the organization, and as often, misperceived by its opponents.

Coal taxes

When the coal boom began, Wyomings legislature apportioned a 2 percent

slice of its 10.5 percent coal-severance tax to mitigate the impact of the rapidly

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emissions because every driver instantly will see it and punish the politicians who

vote for it. Theyre going to come after the coal plants because theyre a point

source, already regulated, and few people know how dependent they are upon

coal for their lifestyle. Electricity was the most important source of energy in the

residential, commercial, and industrial sectors of the economy and more than

half was generated by burning coal.

The strategy for the necessary advocacy program was simple: promote the

role of coal-based electricity and defend its use.

Environmental externalities

Environmental externalities at first seemed to be an arcane economic theory.

Various costs of using electricity are not captured in the price consumers pay, its

advocates claimed, leading to inefficient markets and environmental degradation.

Externalities became a tool in state proceedings when regulators weighed the

merits of competing resource plans. The threat to fossil fuels and coal in partic-

ular soon became apparent.

Although the costs of clean air and clean water mitigation already were captured

in the price consumers paid for coal-based electricity, externality proponents placed

a thumb on the scale. They advocated limiting CO2 emissions to prevent global

warming even though CO2 was not among pollutants enumerated by Congress in

the Clean Air Act.

Western Fuels first intervened in California, arguing that national energy policy

dictated the switch to coal as a way to assure energy independence and that in

a good-faith response, Western Fuels members had built some of the cleanest

and most efficient power plants in the world. Now they were to be penalized for

doing so. Western Fuels subsequently confronted efforts to impose environmental

externalities in Colorado, New Mexico, Minnesota, Illinois, Kansas, North Dakota,

Arizona and Texas.

Promoting coal-based electricity

Fred Palmer joined the National Coal Council in 1991 and was asked to chair

a working group that would prepare a report on coals image. In January 1992 the

Council dispatched its findings, Improving Coals Image: A National Energy Strategy

Imperative, to Energy Secretary James Watkins. In an accompanying cover letter

the Council chairman stated, That coal has a poor image is indisputable. Although

it is our most abundant energy fuel, it enjoys little public awareness or appreciation.

The Council believes coals negative image impedes sound energy strategy.

Western Fuels joined the Denver-based Center for the New West later that

year and commissioned a report ascertaining the direct investment in coal and the

size and economic impact of utility investments in coal-fired power plants west

of the Mississippi River. Two studies by Resources Data International bolstered

the Centers report, Energy, the Environment, and Global Climate Change: A New

Economic Perspective.

The report led Western Fuels to tap physicist Mark Mills to help make the

case for coal-based electricity. Mills published Sustainable Development and Cheap

Electricity (October, 1992), an evaluation of the impact of lower electricity prices

on the U.S. economy and U.S. carbon dioxide emissions. Does Price Matter? fol-

lowed in January, 1995 and stressed the importance of cheap electricity. That led

to the joint publication of Coal: Cornerstone of Americas Competitive Advantage

in World Markets (March, 1997) by Western Fuels, the Center for Energy and

Economic Development, and the National Mining Association. It was followed by

the uncannily prescient The Internet Begins With Coal (May, 1999).

Advocacy on climate change

In addition to promoting the benefits of coal-based electricity, Western Fuels

began making a case that a higher atmospheric concentration of carbon dioxide

would yield overlooked benefits.

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When introduced to the work of U.S. Department of Agriculture research

scientist and physicist Dr. Sherwood Idso through his book Carbon Dioxide and

Global Change: Earth in Transition, the Western Fuels Board of Directors decided

to finance a video production that would make the research more accessible.

The Greening of Planet Earth drew upon research explained in Idsos book and

incorporated interviews with ten botanists, agronomists, tree-ring researchers,

meteorologists, and other university and government scientists concerning their

findings about CO2s environmental benefits.

The video premiered in October 1992 before 200 delegates representing 10

nations at an international coal conference in Washington, DC. Word of mouth

increased demand. Advertisements offering promotional copies in New Republic,

National Review and American Spectator moved it into wider circulation.

The politically charged months running up to the first United Nations Conference

on Environment and Development in Rio de Janeiro and subsequent meetings

in Japan, South Africa and elsewhere convinced the board of the need for an

ongoing examination of global warming research. It seemed that each conference

to decide international climate policy was preceded by a crescendo of just-released

research findings publicized to compel United States and United Nations action.

Western Fuels began financing a quarterly magazine called World Climate

Review, edited by Virginia State climatologist Pat Michaels, a PhD associate profes-

sor of climatology at the University of Virginia. Its first two editions were included

with a copy of The Greening of Planet Earth in a 1993 Earth Day Kit delivered to

every member of Congress and asking, Is the future of U.S. Energy Policy worth

60 minutes of your time?

After eleven editions, World Climate Review was reconstituted as the World

Climate Report monthly newsletter. In 1996, Western Fuels began publication of

an annual state of the Climate Report which was released each Earth Day.

In his 1995 Earth Day speech at George Washington University, Vice President

Al Gore declared Western Fuels to be political extremists. Paul and Anne Ehrlich

in Beyond Science and Reason described the WFA as special interests no

different in kind from the American Tobacco Institute. The Des Moines Register

characterized WFA as a $400 million consortium of coal interests pouring mil-

lions into a campaign to perpetuate the myth that there is no such thing as global

warming.

Secretary of the Interior Bruce Babbitt told listeners of a nationally syndicated

radio program, The oil companies and the coal companies in the United States

have joined in a conspiracy to hire pseudo scientists to deny the facts and to begin

raising political arguments that are essentially fraudulent. What they are doing is

un-American in the most basic sense.

Proving otherwise, Western Fuels May 1997 campaign explaining the linkage

between proposed climate-change policy and Iowas reliance on coal-fired elec-

tricity resulted in organizations representing more than 10,000 Iowa businesses,

and 160,000 Iowa farmers and labor union members, signing an open letter to

Congress, President Bill Clinton and Vice President Gore. When it appeared in The

Des Moines Register, New Republic, Weekly Standard and Roll Call, the Registers

editorial board conceded, There is no painless solution to correcting a mistake

weve perpetuated for more than a century.

In November 1998, The Greening Earth Society, an organization created by

Western Fuels, produced a video sequel, The Greening of Planet Earth Continues:

The Promise for the 21st Century and Beyond, further amplifying Idsos work with

appearances by 15 additional researchers.

Palmer appeared on the MacNeil-Lehrer NewsHour, Nightline, Dateline, and

@Issue. The high water mark had been hit.

After President George W. Bush declared no interest in helping ratify the Kyoto

Protocol, bipartisan opposition to designating CO2 a pollutant emerged in the U.S.

Senate and House of Representatives. Western Fuels' formal advocacy on the

climate-change issue came to an end.

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WESTERN FUELS-ILLINOIS:

Brushy Creek Mine and Liberty Coal

Western Fuels Associations first significant expansion in operations came with a

decision to finance, construct and operate a coal mine in southern Illinois to meet

the needs of municipal utility members at the Kansas City, Kansas, Board of Public

Utilities (KCBPU) and Sikeston, Missouri, Board of Municipal Utilities (SBMU).

In 1977, WFA secured a 20-year lease in the #6 Illinois coal seam near Harco,

Illinois. The coals moderate sulfur content made it suitable for use at Kansas Citys

older power plants, the Kaw and Quindaro Stations. The design of SBMUs new

235 MW power in plant in Sikeston would accommodate the mines product.

Western Fuels-Illinois (WFI) was incorporated to supply 1.2 million tons of coal

per year using continuous miner/room-and-pillar mining methods in the 5.5 foot

-thick seam. Lacking experience in underground mine development, WFI hired

Buddie R. Morris and Sons to construct and operate Brushy Creek Mine through

two subsidiaries: Midwest Mining and Construction, and Kennellis Energies.

The mine was dedicated on May 30, 1980, with U.S. Senator Paul Simon

(D-IL) in attendance. WFI began coal deliveries to KCBPUs Quindaro Station along

the Illinois Central Gulf Railroad (ICG) and later used a combination of the ICG

and Missouri Pacific Railroad (MoPac) for shipments to the Kaw Station. SBMUs

deliveries began in December using the ICG.

A nationwide strike by the United Mine Workers of America halted production

in March 1981. When work resumed in June, the use of continuous miner sec-

tions increased from two to three. Brushy Creeks production capacity exceeded

KCBPUs and SBMUs annual requirements for coal burn. A combination of member

and non member sales enabled the mine to surpass its design capacity in 1984.

Brushy Creek made a cameo appearance in the 1984 presidential campaign

when Vice President George H.W. Bush brought an entourage of 60 media

representatives to record his tour of the facilities and his lunch underground

with mine workers.

Shrinking demand for electricity and the economic downturn a year later idled

the mine again. WFI held the mine in ready-to-run status for nearly eight months

in 1985 and 1986 while pursuing efforts to improve its economic viability through

a combination of lower-cost transportation and high productivity.

When negotiations with the ICG broke down, WFI sought permission from

the Saline (Illinois) County Commission to increase truck traffic for a 26-mile run

to Marion, where WFI built a coal-loading facility alongside the Crab Orchard &

Egyptian (COE) short line railroad. Once a loader filled enough gondola cars to

comprise a unit train, COE hauled it to a junction with the MoPac, which could

make deliveries to both cities without ICG involvement.

The effort to achieve additional production cost savings for the cities benefit

required litigation with Kennellis Energies. The 1987 settlement created a limited

partnership called Marion Coal Sales, that enabled Kennellis to benefit from high

productivity through sales of what WFI regarded as coal surplus in excess of the

cities needs.

In 1988, all-rail deliveries were restored under a new transportation agreement

with the ICG and MoPac.

When Buddy R. Morris Jr. died in mid-1991, WFI worked with his heirs

and arranged for the mine to be operated by WFI through a new entity, Brushy

Creek Coal Company (BCCC). At first, changes in electricity markets triggered by

amendment of the federal Clean Air Act created price pressure on Brushy Creeks

production.

Brushy Creek was idled again in May when coal demand in 1996 only drew

upon half of the mines designed capacity. WFI began preparing for the mines

closure and for reclamation of the surface facilities.

Even so, Brushy Creek would be one of southern Illinois last coal mines to

close. Governor George Ryan displayed tenacity in his desire to keep coal mining

alive. A new entity, Liberty Coal Company (LCC), proposed beginning operations

24

By 1978, the Uinta/Piceance Basin was already the site of extensive oil-and- gas

development. Given the nations energy crisis, oil shale reserves along the Western

Slope seemed ripe for development. Rural electric distribution cooperatives along

the Colorado/Utah border realized that if such energy intensive operations materi-

alized, they would dramatically increase demand for electricity.

Moon Lake Electric Cooperative of Roosevelt, Utah, acquired coal leases and

made preference-right lease applications for thick seams of reserves near Rangely,

Colorado. WFA was asked to evaluate the feasibility of developing the resource as

a fuel supply for a new power plant.

Supervised by Don Deardorff, WFAs Office of Engineering and Exploration in

Lakewood, Colorado began an extensive drilling program on Moon Lakes proper-

ties; prepared a geologic report; developed a preliminary mine plan, and reviewed

coal transportation alternatives. WFA began consulting federal and state officials

and initiated an environmental impact analysis. Meanwhile, local distribution coop-

eratives created Deseret Generation and Transmission Cooperative to plan what

became the Bonanza Power Project.

An obvious alternative for Deseret was to site its power plant near the coal

reserve in a classic mine-mouth configuration. While there was no politically pal-

atable way that Colorados Governor Dick Lamm as a Carter Administration ally in

its moral equivalent of war could forestall development of the coal reserve, the

governor opposed construction of another coal-based power plant in Colorado.

Utah Republican Governor Scott Matheson green-lighted construction of the

proposed 800 MW coal plant just 30 miles west of Rangely and across the border

on the high-desert floor in Utah. With that, Western Fuels-Utah (WFU) was incor-

porated to construct and operate the coal mine and the transportation system that

would connect it to the power plant.

WFU purchased lease rights for a mine with annual production of 2.7 million

tons of federally owned coal. Until both 400 MW units were operating, mine

production would remain at half that rate. As a consequence, the Bonanza Power

on the property in the deeper and thinner Illinois #5 coal seam. The Ryan admin-

istration provided $1.95 million in grants, $1.25 million in low-interest loans, and a

guarantee for 80 percent of a $3.3 million loan to get LCC operations under way.

Nubay Mining was hired to develop operations in the 48 to 51 inch-thick seam

using a single super unit consisting of two continuous miners, four battery-driven

ram cars and two double-boom roof bolters. LCC trucked part of its production

to nearby Tarex Construction, Inc., and shipped the remainder over the Canadian

National Railroad to the Tennessee Valley Authority. Nonetheless, the absence of

a robust market for the mines production and difficult geologic conditions drove

LCC out of business within a few years.

Visitors to the former Brushy Creek Mine site might find it difficult to discern

that a mine once operated there. Grassy hillsides cover what were once coal slurry

ponds from which 600,000 tons of carbon were recovered for sale to the Southern

Illinois Power Cooperative. The mine slope is filled in; the mine shaft and all bore

holes sealed. The rotary breaker, mine buildings, physical plant, slurry ponds

and a mound of mine waste have disappeared. The rail loop has been torn out. A

19.5-acre freshwater pond provides waterfowl and fish habitat, while the reclaimed

mine site is home to populations of turkey, deer, quail, rabbit, geese, duck, hawks,

beaver, coyotes and a family of bobcats.

WESTERN FUELS-UTAH:

Deserado Mine/Deseret-Western Railway

Western Fuels Associations experience in overseeing construction and man-

agement of Brushy Creek Mine in southern Illinois encouraged WFA management

to play a larger role in developing another underground mine, this time on the

Western Slope of the Rocky Mountains.

25

Projects first phase involved an underground mine producing 1.35 million tons of

coal per year. However, the coal mine and transportation system were scalable to

handle twice that production.

Developing Deserado Mine seemed straight forward; however, the means for

transporting its coal production was not. The absence of available trackage for rail

transportation resulted in consideration of various transportation alternatives. Lack

of an adequate source of water necessary to slurry coal by pipeline to the power

plant would mean possible construction of a dam and reservoir. The difficulty of

obtaining permits for the operation of coal trucks along county, state and federal roads

would necessitate dedicated haul roads. An overland conveyor system emerged

as the preferred alternative.

WFU contracted with Stone & Webster Engineering Corporation for design

of the transportation system and with Ford Bacon & Davis-Utah for design of the

mines surface area and facilities. North American Mining Consultants studied the

mines feasibility and developed an underground mining plan. WFA supervised

production of a four-volume environmental assessment.

Deseret-Western Railway

Environmental permitting experience with the Trans-Alaska Pipeline System

impacted the Bonanza project. To minimize disruption of caribou and other big-game

migration, Alaska pipeline designers had incorporated a series of raised wildlife

crossings. The Deserado-to-Bonanza conveyor system might similarly impact elk

and antelope. Revisiting their options, designers calculated that building a 30-mile

conveyor system for relatively low capital cost but with high ongoing costs of

operation and maintenance was comparable to a railroad with high initial capital

cost offset by lower O&M costs.

What came off their drawing boards was the 35-mile Deseret-Western Railway,

powered by relatively inexpensive off-peak electricity from the power plant for

overnight delivery of the power plants daily fuel supply. Two electric locomotives

would use an overhead catenary system to pull a 35-car coal train.

Landmark socioeconomic impact mitigation

Western states experience of energy boom growth similarly impacted the

Bonanza Power Project. In an effort to avoid the hodgepodge of trailer and RV parks,

traffic congestion and additional strain on public services that turned life upside

down in other Western boomtowns, WFU drew upon Basin Electrics positive

experience when it built the Laramie River Station outside Wheatland, Wyoming.

WFU negotiated with the mayor, town council, and Rio Blanco County

Commission to craft a landmark socioeconomic-impact-mitigation agreement

designed to avoid forcing higher taxes on local residents or undermine the areas

quality of life.

Deserado Mine operations

Mine operations began using a single continuous miner operating during a

single shift. Late in 1985, that single shift became two and early in 1986, a third

continuous miner unit was added. At midyear, a fourth began mining coal. Then the

four continuous miner units began working two shifts per day to prepare a panel

for inserting a longwall system. Mine personnel swelled from 90 in mid-1985 to

300, 18 months later. By November 1986 WFU had mined its first 1 million tons.

The hourly workforce voted for the United Mine Workers of America to serve as

their exclusive bargaining agent with WFU. Three months of negotiation, including

a two-month strike, led to a three-year contract between WFU and Local #1984 in

May 1988. The union negotiated a third contract for five years prior to expiration

of the three-year contract.

Sustained high productivity was a key in controlling Deserets cost of coal.

Nonetheless, the G&T began to feel severe financial pressure having financed

its project under totally different economic circumstances and in anticipation of

dramatic load growth. Instead, the electricity market in the Rocky Mountain West

experienced rapid erosion by 1993. Natural gas prices plummeted under provisions

of the North American Free Trade Act which deemed Canadian imports to be

domestic production.

26

While consumers benefited from lower-priced energy, the situation raised

havoc in electricity markets. The fickle nature (or absence) of U.S. energy policy

placed Deseret at risk. Oil shale development could not go ahead in a lower-cost

market for oil and natural gas. Deseret cut 1995s coal production in half and made

a decision to idle the mine for three and a half months.

Deserado Mine fire

Barely six weeks back into operation, early in the afternoon of January 31,

1996, a welders torch ignited methane gas far underground in the longwalls

tailgate section. The resulting fire forced the mines immediate evacuation.

The conflagration pulsed for days. Underground and on the surface, men and

women from Deserado Mine and nearby mines mobilized alongside government

representatives and contractors in a heroic struggle to contain and extinguish the

fire. Under extreme winter conditions, WFA employees George OHara, Dave

Anderson and Steve Powell supervised round-the-clock drilling operations in an

effort to thread a drill-bit into a small target hundreds of feet underground so that

carbon dioxide could be pumped to the coal face to smother the blaze.

After a week, it was decided to permanently seal a portion of the mine. There

had been no loss of life or serious injury during the mines evacuation and the effort

to save it. Tens of millions of dollars worth of mining equipment including the

longwall system and three continuous miner units were left behind a permanent

seal.

With three and a half years of coal reserves remaining in the D Seam and

another 40 years in the B Seam, Deserado Mine soon resumed production using

continuous miner units until a new longwall could be designed and installed.

Deseret completed its financial restructuring in 1997. Debt forgiveness by

the Rural Utilities Service and an infusion of new money from the National Rural

Utilities Cooperative Finance Corporation dictated that all assets of the Bonanza

Power Project be moved under one roof in case of future financial difficulty. As a

consequence, WFUs ownership interest in the mine and railway was transferred

to Deseret, which then withdrew its membership in WFA.

WESTERN FUELS-WYOMING: Dry Fork Mine

Western Fuels-Wyoming (WFW) initiated Western Fuels third mining venture

through development of a surface coal reserve northeast of Gillette, Wyoming,

as a low-cost supplemental supply for Missouri Basin Power Projects (MBPP)

Laramie River Station.

In 1987, Phillips Coal approached Western Fuels to explore the possibility of

joint participation in mining a 270 million ton reserve of relatively low Btu coal with

one of the lowest stripping ratios in the Powder River Basin (PRB). Thick seams of

coal lay near the surface at the potential mine site and were overlain by relatively

thin layers of soil and rock (overburden). This meant coal could be exposed for

mining at much less cost and effort than is typical elsewhere in the PRB.

In February, 1989, a Phillips affiliate North Gillette Coal Company (NGCC) and

WFW formed a limited partnership called Dry Fork Coal Company (DFCC). Mining

got under way in August, 1991, with WFW serving as DFCCs general partner and

NGCC as a limited partner, meaning NGCC would share in the mines revenue

without actual involvement in mining.

WFW was able to become Dry Forks sole owner when Phillips Petroleu