JACKSON ELECTRIC MEMBERSHIP CORPORATION JEFFERSON, GEORGIA FINANCIAL STATEMENTS AS OF MAY 31, 2014 AND 2013 AND REPORT OF INDEPENDENT ACCOUNTANTS

Transcription

1 JACKSON ELECTRIC MEMBERSHIP CORPORATION JEFFERSON, GEORGIA FINANCIAL STATEMENTS AS OF MAY 31, 2014 AND 2013 AND REPORT OF INDEPENDENT ACCOUNTANTS

2 MCNAIR, MCLEMORE, MIDDLEBROOKS & CO., LLC CERTIFIED PUBLIC ACCOUNTANTS 389 Mulberry Street Post Office Box One Macon, GA Telephone (478) Facsimile (478) August 13, 2014 The Board of Directors Jackson Electric Membership Corporation Report on the Financial Statements REPORT OF INDEPENDENT ACCOUNTANTS We have audited the accompanying financial statements of Jackson Electric Membership Corporation (the Corporation), which comprise the balance sheets as of May 31, 2014 and 2013 and the related statements of operations, changes in members equity and cash flows for the years then ended, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of 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 financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Corporation s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Corporation 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 financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion

3 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Jackson Electric Membership Corporation as of May 31, 2014 and 2013 and the results of its operations and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued a report dated August 13, 2014 on our consideration of Jackson Electric Membership Corporation s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and in considering Jackson Electric Membership Corporation s internal control over financial reporting and compliance. McNAIR, McLEMORE, MIDDLEBROOKS & CO., LLC - 2 -

4 JACKSON ELECTRIC MEMBERSHIP CORPORATION BALANCE SHEETS MAY 31 ASSETS Utility Plant Electric Plant in Service-At Cost $ 873,374,700 $ 843,308,685 Construction Work in Progress 23,307,507 14,547,245 Gross Utility Plant 896,682, ,855,930 Accumulated Provision for Depreciation (261,167,376) (244,556,676) 635,514, ,299,254 Investments in Associated Organizations 126,013, ,597,799 Current Assets Cash and Cash Equivalents 27,836,650 18,913,185 Accounts Receivable (Net of Accumulated Provision for Uncollectibles of $3,751,638 in 2014 and $2,931,480 in 2013) 23,391,767 21,128,873 Materials and Supplies 9,440,079 9,358,999 Prepaid Power Cost 22,514,601 43,610,000 Other 1,783,701 2,299,547 84,966,798 95,310,604 Deferred Debits 14,374,926 16,577,436 Total Assets $ 860,869,785 $ 842,785,093 See accompanying notes which are an integral part of these financial statements

5 JACKSON ELECTRIC MEMBERSHIP CORPORATION BALANCE SHEETS MAY 31 MEMBERS EQUITY AND LIABILITIES Members Equity Membership Fees $ 3,099,785 $ 2,996,840 Patronage Capital 337,666, ,206,982 Other Equities 604, , ,370, ,835,752 Long-Term Debt 404,281, ,712,398 Other Long-Term Liabilities Accumulated Provision for Postretirement Benefits - Noncurrent 31,727,244 23,004,626 Current Liabilities Long-Term Debt - Current Portion 12,211,000 11,517,000 Accumulated Provision for Postretirement Benefits - Current Portion 1,545,000 1,277,000 Accounts Payable 33,505,495 30,276,697 Consumers Deposits 9,907,860 9,206,319 Other 15,048,824 13,774,494 72,218,179 66,051,510 Deferred Credits 11,271,796 6,180,807 Total Members Equity and Liabilities $ 860,869,785 $ 842,785,093 See accompanying notes which are an integral part of these financial statements

6 JACKSON ELECTRIC MEMBERSHIP CORPORATION STATEMENTS OF OPERATIONS FOR THE YEARS ENDED MAY 31 Operating Revenues $ 486,442,180 $ 475,270,872 Operating Expenses Cost of Power 369,273, ,553,539 Distribution Operations 12,954,020 12,217,562 Distribution Maintenance 16,320,932 15,662,833 Consumer Accounts 14,706,981 13,563,795 Consumer Information and Sales 7,837,519 6,928,592 Administrative and General 12,180,501 11,288,507 Depreciation 29,329,494 28,770, ,603, ,985,173 Operating Margins Before Interest Expense 23,839,120 29,285,699 Interest Expense 21,763,698 21,265,089 Operating Margins After Interest Expense 2,075,422 8,020,610 Nonoperating Margins 6,230,678 5,683,001 Generation and Transmission Cooperative Capital Credits 8,483,651 7,880,449 Other Capital Credits and Patronage Capital Allocations 218, ,070 Net Margins $ 17,008,364 $ 21,803,130 See accompanying notes which are an integral part of these financial statements

7 JACKSON ELECTRIC MEMBERSHIP CORPORATION STATEMENTS OF CHANGES IN MEMBERS EQUITY FOR THE YEARS ENDED MAY 31 Total Membership Patronage Other Equities Fees Capital Equities Balance, May 31, 2012 $ 312,957,797 $ 2,899,475 $ 309,409,969 $ 648,353 Net Margins 21,803,130-21,803,130 - Patronage Capital Retirements (5,006,117) - (5,006,117) - Membership Fees 97,365 97, Retired Capital Credit Gains 1, ,407 Donated Capital (17,830) - - (17,830) Balance, May 31, ,835,752 2,996, ,206, ,930 Net Margins 17,008,364-17,008,364 - Patronage Capital Retirements (5,548,656) - (5,548,656) - Membership Fees 102, , Retired Capital Credit Gains 1, ,496 Donated Capital (29,179) - - (29,179) Balance, May 31, 2014 $ 341,370,722 $ 3,099,785 $ 337,666,690 $ 604,247 See accompanying notes which are an integral part of these financial statements

8 JACKSON ELECTRIC MEMBERSHIP CORPORATION STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED MAY 31 Cash Flows from Operating Activities Net Margins $ 17,008,364 $ 21,803,130 Adjustments to Reconcile Net Margins to Net Cash Provided by Operating Activities Depreciation and Amortization 30,357,002 30,598,534 Patronage Capital from Associated Organizations (10,449,108) (9,892,147) Deferred Revenue - (8,105,682) Postretirement Benefits 10,957,160 4,024,541 Change In Accounts Receivable (2,262,894) 1,413,707 Prepaid Power Cost 21,095,399 (18,610,000) Other Current Assets 515,846 (515,021) Accounts Payable 3,228,798 (796,242) Other Current Liabilities 1,274,330 1,384,687 71,724,897 21,305,507 Cash Flows from Investing Activities Extension and Replacement of Plant (52,572,579) (43,998,450) Return of Equity from Associated Organization 1,944,993 1,560,792 Deferred Debits 2,202,510 (12,071,994) Materials and Supplies (81,080) (396,500) (48,506,156) (54,906,152) Cash Flows from Financing Activities Advances from Long-Term Debt - 28,000,000 Membership Fees 102,945 97,365 Principal Repayment of Long-Term Debt (12,736,554) (12,106,599) Retirement of Patronage Capital (5,548,656) (5,006,117) Postretirement Benefit Payments (1,966,542) (1,632,169) Investment in Capital Term Certificates 88,684 81,780 Deferred Credits 5,090, ,001 Consumers Deposits 701, ,752 Other Equities (27,683) (16,423) Restricted Funds - 8,105,682 (14,295,276) 18,686,272 Net Increase (Decrease) in Cash and Cash Equivalents 8,923,465 (14,914,373) Cash and Cash Equivalents - Beginning 18,913,185 33,827,558 Cash and Cash Equivalents - Ending $ 27,836,650 $ 18,913,185 See accompanying notes which are an integral part of these financial statements

9 JACKSON ELECTRIC MEMBERSHIP CORPORATION NOTES TO FINANCIAL STATEMENTS (1) Summary of Significant Accounting Policies Accounting policies of Jackson Electric Membership Corporation (the Corporation) reflect practices appropriate to the electric utility industry and generally accepted accounting principles of the United States (U.S. GAAP). The records of the Corporation are maintained in accordance with the Uniform System of Accounts prescribed by the Federal Energy Regulatory Commission as modified and adopted by the Rural Utilities Service (RUS). The following describes the more significant of those policies. Nature of Operations The Corporation is a member-owned, not-for-profit corporation organized to provide electric service to its members. The Corporation operates as a cooperative whereby all monies in excess of cost of providing electric service are capital, at the moment of receipt, and are credited to each member s capital account. Use of Estimates The preparation of financial statements in conformity with U. S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Long-Lived Assets The Corporation evaluates long-lived assets for impairment when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. The determination of whether an impairment has occurred is based on either a specific regulatory disallowance or an estimate of undiscounted future cash flows attributable to the assets, as compared with the carrying value of the assets. If an impairment has occurred, the amount of the impairment recognized is determined by estimating the fair value of the assets and recording a provision for loss if the carrying value is greater than the fair value. For assets identified as held for sale, the carrying value is compared to the estimated fair value less the cost to sell in order to determine if an impairment provision is required. Until the assets are disposed of, their estimated fair value is reevaluated when circumstances or events change. U.S. GAAP requires the present value of the ultimate cost for an asset s future retirement be recorded in the period in which the liability is incurred. The cost should be capitalized as part of the related longlived asset and depreciated over the asset s useful life. The Corporation has no legal retirement obligations related to its distribution facilities; therefore, a liability for the removal of these assets will not be recorded. Management believes the actual cost of removal, even though not a legal obligation, will be recovered through rates over the life of the distribution assets

10 (1) Summary of Significant Accounting Policies (Continued) Utility Plant Utility plant is capitalized at cost less related contributions in aid of construction. In general, utility plant is capitalized at the time it becomes part of an operating unit and has been energized. Depreciation and Maintenance Depreciation of capitalized cost is provided using straight-line rates. When property subject to depreciation is retired or otherwise disposed of in the normal course of business, its capitalized cost and its cost of removal less salvage are charged to the accumulated provision for depreciation. Provision has been made for depreciation of distribution plant at straight-line rates ranging from 2.3 to 6.7 percent per annum. Depreciation of general plant is provided on a straight-line basis over the estimated useful lives of the various assets. The rates range from 3.0 to 14.3 percent per annum. The costs of maintenance, repairs and replacements of minor items of property are charged to maintenance expense accounts. Accounts Receivable Accounts receivable are stated at the amount management expects to collect. Once a consumer s service is disconnected and the account is six months past due, the Corporation writes off the associated account receivable. Any write-offs are approved monthly by the board of directors. An allowance is made for doubtful accounts based on experience and other circumstances which may affect the ability of consumers to meet their obligations. Accounts considered uncollectible are charged against the allowance. Recoveries of accounts receivable previously written off are recorded when received. Receivables are reported in the balance sheets net of such accumulated balance. Materials and Supplies Materials and supplies are generally used for construction and for operation and maintenance work, and are not for resale. Cost is determined by the moving average method of inventory valuation. Materials and supplies are charged to construction or operations at moving average cost when used. Patronage Capital and Margins The Corporation operates under the cooperative form of organization. As provided in the bylaws, any excess of revenues over expenses from operations is treated as advances of capital by the patrons and credited to each of them on an individual basis. Under provisions of the long-term debt agreements, until the total equities and margins equal or exceed 30 percent of the total assets of the Corporation, the return to patrons of capital contributed by them is limited. Total equities approximated 40 and 39 percent of total assets as of May 31, 2014 and 2013, respectively. Regulated Operations The Corporation, in its rate-making capacity, has the ability to account for certain revenue and expense deferrals in accordance with Accounting Standards Codification

11 (1) Summary of Significant Accounting Policies (Continued) Operating Revenues and Patronage Capital Electric revenues include patronage capital and are billed monthly to consumers on a cycle basis. Electric rates for the Corporation include provisions to permit the board of directors to adjust billings for fluctuations in fuel costs, purchased power costs and certain other costs. Electricity which had been used by the members of the Corporation but had not been billed to the members was not recorded. The components of this unbilled revenue can fluctuate based on factors including rate structure, weather, period of use, cost of purchased power and other factors. As a result, the overall estimate of unbilled revenues could be significantly affected, which could have a material impact on the Corporation s results of operations if recorded in the financial statements. Unbilled electric revenue totaled approximately $20,846,000 and $19,127,000 as of May 31, 2014 and 2013, respectively. A portion of the Corporation s sales are subject to sales taxes. The Corporation collects the sales taxes from the customers and remits the taxes to the appropriate taxing authority. The Corporation excludes the taxes collected and remitted from revenues and cost of sales. Cost of Purchased Power Cost of power is expensed as consumed. Generation and Transmission Cooperative Capital Credits Generation and transmission cooperative capital credits represent the annual capital furnished to generation and transmission cooperatives through payment of power bills. The capital is recorded in the calendar year provided, even though notification of the capital allocation is not received until later. Cash Equivalents For purposes of the statements of cash flows, cash equivalents include time deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less. Income Taxes The Corporation has obtained exemption from federal and state income taxes under Section 501(c)(12) of the Internal Revenue Code which provides, in part, that the Corporation derive at least 85 percent of its annual gross income from members. The Corporation met the requirement for the tax year ended December 31, Accordingly, no provision for income taxes has been made in the financial statements. Currently, the Corporation s federal information returns for 2012, 2011 and 2010 are subject to examination by the Internal Revenue Service. In addition, the Corporation is subject to income taxes on its net unrelated business income. Subsequent Events In preparing these financial statements, the Corporation has evaluated events and transactions for potential recognition or disclosure through August 13, 2014, the date the financial statements were available to be issued

12 (2) Utility Plant Listed below are the major classes of the electric utility plant as of May 31: Distribution Plant $ 766,527,080 $ 738,708,402 Generation Plant 11,675,724 11,675,724 General Plant 95,171,896 92,924,559 Electric Plant in Service 873,374, ,308,685 Construction Work in Progress 23,307,507 14,547,245 $ 896,682,207 $ 857,855,930 (3) Investments in Associated Organizations National Rural Utilities Cooperative Finance Corporation Capital Term Certificates $ 3,071,138 $ 3,159,822 Member Capital Securities 3,000,000 3,000,000 Capital Credits 1,938,416 1,855,327 Oglethorpe Power Corporation Capital Credits 84,703,262 78,185,915 Georgia System Operations Corporation Capital Credits 28,263 27,199 CoBank Stock 89, ,570 Georgia Transmission Corporation Contributed Capital 5,166,245 5,166,245 Capital Credits 20,769,412 19,021,680 GRESCO Utility Supply, Inc. Capital Credits 2,231,826 2,192,489 Smarr EMC Contributed Capital 414, ,223 Capital Credits 2,882,846 2,665,337 Green Power EMC Contributed Capital 12,400 12,400 The National Rural Telecommunications Cooperative Capital Credits 18,250 17,144 Cooperative Choice, LLC 1,686,131 1,708,308 Memberships in Associated Organizations 1,130 1,130 Other $ 126,013,230 $ 117,597,

13 (4) Deferred Debits Deferred debits are comprised of the following as of May 31: Underrecovery of Wholesale Power Cost $ - $ 390,592 NRECA Retirement Security Plan Prepayment 14,329,206 15,966,830 Other 45, ,014 $ 14,374,926 $ 16,577,436 (5) Patronage Capital Assignable $ (4,101,668) $ (671,218) Assigned 440,439, ,000, ,337, ,329,178 Cumulative Retirements (98,670,852) (93,122,196) $ 337,666,690 $ 326,206,982 (6) Other Equities Capital Gains and Losses $ 534 $ 534 Retired Capital Credits-Gain 331, ,199 Donated Capital 272, ,197 $ 604,247 $ 631,930 (7) Long-Term Debt Long-term debt consists primarily of mortgage notes payable to the United States of America acting through RUS, NRUCFC and the Federal Financing Bank (FFB). The notes are secured by a mortgage agreement among the Corporation, RUS, NRUCFC and FFB. Substantially all the assets of the Corporation are pledged as security for long-term debt of the Corporation. The notes generally have 35- year maturity periods and are payable on an installment basis. The notes contain certain affirmative and negative covenants, including maintenance of certain financial ratios as defined in the agreement. At May 31, 2014 and 2013, the Corporation was in compliance with the covenants

14 (7) Long-Term Debt (Continued) Interest Rate Holder of Note at May 31, 2014 RUS 4.46% to 5.75% $ 187,942,490 $ 192,234,831 NRUCFC 2.90% to 6.90% 104,806, ,931,724 FFB 2.78% to 3.84% 183,743, ,061, ,491, ,228,357 RUS Cushion-of-Credit (59,998,959) (59,998,959) Maturities Due Within One Year (12,211,000) (11,517,000) Principal maturities of long-term debt are as follows: $ 404,281,844 $ 417,712,398 Year Amount 2015 $ 12,211, ,718, ,246, ,795, ,367,000 Thereafter 410,154,803 $ 476,491,803 The Corporation has a $50,000,000 line-of-credit with NRUCFC at 2.9 percent as of May 31, 2014 and There was no outstanding balance as of May 31, 2014 and The Corporation also has a $50,000,000 line-of-credit at 2.81 percent with CoBank which had no outstanding balance as of May 31, 2014 and Interest payments totaled $21,554,650 and $21,287,817 for the years ended May 31, 2014 and 2013, respectively. The Corporation has made unapplied advance payments to the RUS Cushion-of-Credit program. Under this program the Corporation may make voluntary deposits into a special cushion-of-credit account. The cushion-of-credit account balance accrues interest to the Corporation at a rate of 5 percent per annum. The use of the cushion-of-credit account is restricted to funding the future debt service payments that the Corporation is obligated to pay against its outstanding indebtedness to RUS and FFB

15 (8) Deferred Credits Deferred credits are comprised of the following as of May 31: Unclaimed Retired Capital Credits $ 6,267,811 $ 5,851,449 Overrecovery of Wholesale Power Cost 5,003,985 - Other - 329,358 $ 11,271,796 $ 6,180,807 (9) Retiree Benefits Pension Plan (Defined Benefit) Pension benefits for substantially all employees of the Corporation are provided through participation in the NRECA Retirement Security Plan (RS Plan), a defined benefit plan qualified under Section 401 and tax-exempt under 501(a) of the Internal Revenue Code. The plan sponsor s employer identification number is and the plan number is 333. A unique characteristic of a multiemployer plan compared to a single employer plan is that all plan assets are available to pay benefits of any plan participant. Separate asset accounts are not maintained for participating employers. This means that assets contributed by one employer may be used to provide benefits to employees of other participating employers. The Corporation s annual contributions to the program represented less than 5 percent of total contributions made to the plan by all participating employers and are equal to the amounts recorded for pension cost. Contributions were $5,072,262 and $5,221,084 for the years ended May 31, 2014 and 2013, respectively. In the RS Plan, a zone status determination is not required, and therefore not determined, under the Pension Protection Act (PPA) of In addition, the accumulated benefit obligations and plan assets are not determined or allocated separately by individual employer. In total, the RS Plan was greater than 80 percent funded at January 1, 2014 and 2013 based on the PPA funding target and PPA actuarial value of assets on those dates. Because the provisions of the PPA do not apply to the RS Plan, funding improvement plans and surcharges are not applicable. Future contribution requirements are determined each year as part of the actuarial valuation of the plan and may change as a result of plan experience

16 (9) Retiree Benefits (Continued) Pension Plan (Defined Contribution Plan) The Corporation also provides additional employee benefits to substantially all employees through the NRECA sponsored defined contribution Savings Plan (401-k). In this defined contribution plan, the Corporation s contributory portion of costs of this plan totaled $695,175 and $709,125 for the years ended May 31, 2014 and 2013, respectively. Postretirement Healthcare Benefits The Corporation provides healthcare benefits and life insurance to qualified retirees and directors. U.S. GAAP requires cooperatives to recognize the estimated future cost of providing healthcare and any other postretirement benefits on an accrual basis. The status of the Corporation s postretirement healthcare plan as of May 31 is detailed as follows: Accumulated Benefit Obligation, Beginning of Year $ 54,922,639 $ 47,399,389 Service Cost 2,065,265 1,697,318 Interest Cost 2,828,526 2,368,044 Amortization of Actuarial Loss 10,859,864 5,090,056 Benefits Paid (1,966,542) (1,632,168) Accumulated Benefit Obligation, End of Year $ 68,709,752 $ 54,922,639 Fair Value of Plan Assets, Beginning of Year $ 30,641,013 $ 25,510,135 Participant Contributions 28,701 31,740 Employer Contributions 3,000,000 3,000,000 Benefits Paid (1,966,542) (1,632,168) Gain on Plan Assets 3,734,336 3,731,306 Fair Value of Plan Assets, End of Year $ 35,437,508 $ 30,641,013 Funded Status $ 33,272,244 $ 24,281,

17 (9) Retiree Benefits (Continued) Postretirement Healthcare Benefits (Continued) The following table shows key assumptions used for the measurement of obligations for the plan. May 31 Description 2012 Discount Rate 4.50% 4.75% 4.90% Long-Term Rate of Return 8.00% 8.00% 8.00% Medical Trend Rate Medicare Ineligible Initial 7.50% 8.00% 8.00% Ultimate 5.00% 5.00% 5.00% Fiscal Year Reached Medicare Eligible Initial 7.50% 7.375% 7.375% Ultimate 5.00% 5.00% 5.00% Fiscal Year Reached The Corporation has elected to amortize gains and losses from changes in actuarial assumptions at a rate which exceeds the minimum rate prescribed by U.S. GAAP. The following benefits are expected to be paid: Year Amount 2015 $ 1,545, ,685, ,815, ,962, ,048, ,359,

18 (9) Retiree Benefits (Continued) Postretirement Healthcare Benefits (Continued) The following table sets forth the weighted-average asset allocations of the Corporation s postretirement medical benefits at May 31, 2014 and 2013 by asset category. Year Money Market Funds Bonds Equities Totals % 39.0% 60.0% % % 38.0% 59.0% % The Corporation employs a total-return investment approach whereby a mix of equities and fixed income investments is used to maximize the long-term return of plan assets for a prudent level of risk. Risk tolerance is established through careful consideration of plan liabilities, plan funded status and corporate financial condition. Investment risk is measured and monitored on an ongoing basis through quarterly investment portfolio reviews and annual liability measurements. Plan assets are measured at fair value. The fair value measurement is based on quoted market prices in active markets for identical assets. This is considered a Level 1 fair value measurement in accordance with U.S. GAAP. The Corporation estimates that it will make a voluntary contribution of approximately $1,545,000 to its postretirement medical plan in (10) Nonoperating Margins Nonoperating margins are comprised of the following as of May 31: Interest and Dividend Income $ 4,710,211 $ 4,279,695 Gain on Sale of Property (Net) 37,386 59,395 Equity in Earnings of Cooperative Choice, LLC 1,483,081 1,343,911 $ 6,230,678 $ 5,683,

19 (11) Fair Value of Financial Instruments Fair Value Hierarchy The Corporation records certain financial and nonfinancial assets using fair value measurements. The Corporation uses a hierarchical disclosure framework that prioritizes the level of market price observability to measure investments at fair value. The guidance establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows: Level 1. Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Corporation has the ability to access. Level 2. Valuations based on quoted market prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets of liabilities. Level 3. Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The following valuation techniques were used to estimate the fair value of each class of financial instruments: (1) Market approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business) and deriving fair value based on these inputs. (2) Income approach. The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted). The measurement is based on the value indicated by current market expectations about those future amounts. (3) Cost approach. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (often referred to as current replacement cost). This approach assumes that the fair value would not exceed what it would cost a market participant to acquire or construct a substitute asset or comparable utility, adjusted for obsolescence. Recurring and Nonrecurring Fair Value Measurements The Corporation had no recurring and nonrecurring fair value measurements to be included in the financial statements

20 (11) Fair Value of Financial Instruments (Continued) Other Fair Value Disclosures Required by U.S. GAAP The estimated fair values of the Corporation s financial instruments are as follows: FINANCIAL ASSETS May 31, 2014 May 31, 2013 Carrying Fair Carrying Fair Level Technique Value Value Value Value Cash and Cash Equivalents (1) (1) $ 27,836,650 $ 27,836,650 $ 18,913,185 $ 18,913,185 FINANCIAL LIABILITIES Long-Term Debt (1) (2) 416,492, ,492, ,229, ,229,398 Lines-of-Credit (1) (2) Consumer Deposits (1) (1) 9,907,860 9,907,860 9,206,319 9,206,319 Investments in other cooperative organizations, which are included in investments in associated organizations, represent capital investments made primarily to obtain an economical source of financing, product or service. These investments were made without an expectation of a return of capital and therefore not considered to be financial instruments. Furthermore, the Corporation does not consider NRUCFC term certificates and member capital securities to be financial instruments due to the fact that these investments are directly related to borrowing. The fair value of the Corporation s long-term debt is based on the current rates offered to the Corporation for debt of the same or similar maturities. The fair value of the Corporation s benefit plan assets is valued based on the observable net asset value of the underlying investments. These measurements are considered to be Level 1 fair value measurements. The fair value of the Corporation s benefit plan obligations is based on actuarial assumptions (See Note 9), which are considered to be Level 3 fair value measurements. (12) Concentration of Credit Risk Financial instruments that potentially subject the Corporation to concentrations of credit risk consist principally of cash and cash equivalents and consumer accounts receivable. The Corporation maintains interest-bearing and noninterest-bearing transaction accounts at several financial institutions. Cash balances throughout the year periodically exceed federally insured deposit limits of $250,000. The Corporation believes that its cash is not exposed to any significant risk and the Corporation has not experienced any loss in accounts which exceed federally insured limits. At May 31, 2014, the amount exceeding insured limits totaled $26,658,

21 (12) Concentration of Credit Risk (Continued) At May 31, 2014, NRUCFC commercial paper and select notes in the amount of $26,100,000 was included as a component of cash and cash equivalents. The amount is not secured or otherwise subject to federally insured deposit liability coverage. The Corporation serves consumers in the state of Georgia. The geographic concentration of the Corporation s consumers results in a concentration of credit risk with respect to the collection of accounts receivable. Credit evaluations are performed on most potential customers before accepting them for service. Depending upon the results of the credit evaluation, a deposit may be required. (13) Commitments The Corporation has entered into various long-term contracts to meet the power supply demands of its consumers. The Corporation has a commitment to pay for its assignment of fixed costs through the term of these contracts, as well as any variable cost incurred above the allocated fixed cost amounts. The most significant of these contracts and related fixed costs as of May 31, 2014 are as follows: Corporation/Facility Contract Expiration Percentage of Fixed or Designated Costs Fixed Costs Oglethorpe Power Corporation Doyle Energy Facility % $ 1,424,613 Chattahoochee Energy Facility % 3,454,300 Talbot EMC % 668,207 All Other OPC Resources % 79,503,574 Smarr EMC Smarr Energy Facility % 664,632 Sewell Creek Energy Facility % 1,497,679 In addition to these items, the Corporation has agreed to guarantee percent of the outstanding indebtedness of Smarr EMC related to the Sewell Creek Facility. The total balance of indebtedness for the facility at December 31, 2013 was approximately $25,800,000. The Corporation is a member of a transmission cooperative known as Georgia Transmission Corporation and, as such, has a Member Transmission Service Agreement which was executed in This agreement, and an approved extension, requires the Corporation to take transmission-related services through December 31, Transmission services under this agreement were approximately $28,506,000 for the year ended May 31, 2014 and are expected to remain relatively constant in the immediate future. Transmission service is recorded as a component of cost of power. Effective February 20, 2001, the Corporation entered into a power supply and energy call agreement. The agreement commenced on October 1, 2001 and will continue through December 31, Under the terms of the agreement, the Corporation is required to maintain a debt service coverage ratio of greater than or equal to In the event this condition is not met, the Corporation will be required to provide the supplier with acceptable credit support in an amount equal to $65 million. Once the condition is again met by the Corporation, the remaining amount of credit support will be returned. Also under the terms of the agreement, the supplier will supply 100 percent of all reserve requirements for load obligations

22 (13) Commitments (Continued) On June 1, 2012, the Corporation entered into a power supply agreement. Under the terms of the Agreement, the seller will provide capacity and associated energy starting on January 1, 2016 and continuing through January 1, Under current law, the Corporation has the ability to recover these costs from its members; however, any change to existing laws could adversely affect the ability to recover these costs. (14) Litigation A class-action lawsuit was filed on March 13, 2014 against the Corporation and other cooperatives. The lawsuit challenges patronage capital distribution practices. The Corporation has filed an answer to the complaint and filed a motion to dismiss. Management intends to contest the case vigorously. It is not possible to estimate the likelihood of an unfavorable outcome in the case; however, a decision in favor of the plaintiffs could significantly impact the financial position of the Corporation. The Corporation is involved in litigation arising in the ordinary course of business. After consultation with legal counsel, management estimates that these matters will be resolved without a material adverse effect on the Corporation s future financial position or results from operations