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Annual Report to Membership Cities Aggregation Power Project, Inc. December 7, 2006 The year 2006 began with Cities Aggregation Power Project, Inc. (CAPP) having to deal with the very high energy prices from the aftermath of Hurricanes Katrina and Rita. These storms wreaked havoc to energy supplies, and hence, energy prices from August until January 2006, when energy prices finally started to decline. Unfortunately, energy prices did not sharply decline before CAPP had to lock in its contract price for 2006. Fortunately, CAPP was able to negotiate an option with its supplier FPL Energy (FPLE) so that it only had to lock in the first six months of calendar year 2006, but that price was 11.8601 cents per kWh including REP provider fee. When energy prices began to fall, CAPP was able to lock in the second six months of 2006 at a price of 7.7517 cents per kWh. CAPP also negotiated a 3-year contract extension (covering 2007-2009) with. Direct Energy Business Services (DEBS) for REP services. DEBS has provided outstanding performance in its role as CAPP's billing and customer service provider. CAPP also went through an RFP process for energy supply. After consideration of the proposals received, CAPP negotiated a 2-year contract with FPLE (covering 2007-2008), locking in a heat rate multiplier in July, and then waiting until September 15th to lock in a price of 8.132 cents per kWh for 2007, and 8.571 cents per kWh for the first six months of 2008. The new 2007 pricing is expected to reduce CAPP member electricity cost for fiscal year 2007 by approximately 8.6% over fiscal year 2006. CAPP will have until the end of 2007 to ascertain the optimum time to lock in a commodity price for the last six months of 2008 JAC Project-Long Term Energy Contract Simultaneously, CAPP continued its three year effort to develop a better long term solution to steeply rising energy costs. In early 2006, the deal to purchase capacity in Sempra's Twin Oaks plant evaporated when Sempra sold its plant to PNM Resources, which had acquired original owner TNMP. In March, CAPP shifted its attention to TXU and Texas Genco. These two companies were interested in constructing coal fired plants and were looking for customers who might be interested in entering into long term contracts or who might want to buy an equity interest in their plants to help them fund the plant construction. In April, CAPP invited the Executive Director of the North Central Texas Council of Governments to brief the Board of Directors on environmental concerns posed by the construction of solid fuel electric generation plants and the effects they could have on area air quality non-attainment. The Board adopted a statement of policies and procedures for the acquisition and consideration oflong term contracts for power. The policies favored acquisition of a capacity contract rather than equity ownership; fuel diversification in favor of non-gas fired generation sources; minimizing counterparty risk; prepaying the capacity component; and demonstrating economic benefit to members. CAPP eventually entered into a six month (later extended to 9 months) exclusive