Board of Directors PO Box 1 Johnson City, TX Regular Meeting

Transcription

1 Board of Directors PO Box 1 Johnson City, TX Regular Meeting ~ Agenda ~ Call PEC Toll Free Monday, April 21, :00 AM PEC Headquarters Auditorium 1. Call to Order and Roll Call 10:00 AM Meeting called to order on April 21, 2014 at PEC Headquarters Auditorium, 201 South Avenue F, Johnson City, TX. 2. Adoption of Agenda 3. Employee/Director Recognitions A. Introduction of Don Ballard, VP of Legal Services 4. Minutes Approval A. Monday, March 17, 2014 Regular Meeting B. Tuesday, March 25, 2014 Special Meeting C. Wednesday, April 9, 2014 Special Meeting 5. Items from Members 6. Consent Agenda A. (Resolution (ID # 2632)) Appointment of Member to the Plan Administration Committee B. (Resolution (ID # 2613)) Utility Plant CIP Amendment - Hero Way Road Widening C. (Resolution (ID # 2631)) NiSC 2014 Budget D. (Resolution (ID # 2629)) Budgeting Software Application E. (Resolution (ID# 2642)) Advanced Metering Opt Out 7. Items from Outside General Counsel A. (Resolution (ID #2585)) Approval of Director Candidates and Ballot B. (Resolution (ID # 2621)) Proposed Ballot Language on Election Method for Directors 8. Chief Executive Officer Board of Directors Page 1 Revised 4/16/2014

2 Regular Meeting Agenda April 21, 2014 A. CEO - Reports 1. Chief Executive Officer Update 2. Financial Services Report 3. Corporate Services Report 4. Operations Report 5. Engineering and Energy Innovations 6. Power Supply Report 7. Member Services Report 8. Information Technology Report 9. Communications & Business Services Report B. CEO - Action Items/Other Items 1. Cost of Service Study Update 2. Facilities Assessment Study 3. (Resolution (ID # 2611)) Presentation of BSGM 2013 Financial Audit and Management Letter 4. Open Records Process Report C. Announcements 9. Future Items for Board Consideration 10. Future Meetings A. Announce May Special Meeting scheduled for 10:00 am on May 8, 2014 in the PEC Auditorium. B. Announce May Special Meeting of the Committees scheduled for 9:30 am on May 12, 2014 in the PEC Auditorium. C. Announce May Regular Board Meeting scheduled for 10:00 am on May 19, 2014 in the PEC Auditorium. D. Announce June Special Meeting of the Committees scheduled for 9:30 am on June 9, 2014 in the PEC Auditorium. E. Announce June Regular Board Meeting scheduled for 10:00 am on June 16, 2014 in the PEC Auditorium. F. Announce Annual Meeting scheduled for 10:30 am on June 21, 2014 at Leander ISD South PAC. Board of Directors Page 2 Revised 4/16/2014

3 Regular Meeting Agenda April 21, Executive Session A. Competitive Matters 1. Facilities Matters 2. Report on Liability, Property and Casualty Insurance 3. CEO Competitive Matters B. Legal Matters 1. Metering Audit Update 2. Power Supply 3. Information Services 4. Transmission Line Matters 5. Update on Litigation and Other Legal Matters 6. (Resolution (ID # 2640)) Discussion and Possible Action Regarding Pending or Contemplated Litigation; Possible Settlement of Litigation 7. Whistleblower Administrator Update 12. Reconvene to Regular Meeting 13. Items from Executive Session 14. Adjourn Board of Directors Page 3 Revised 4/16/2014

4 Board of Directors Meeting: 04/21/14 10:00 AM PO Box 1 Johnson City, TX Sponsors: RESOLUTION (ID # 2611) DOC ID: 2611 Subject: Presentation of BSGM 2013 Financial Audit and Management Letter Submitted By: Tracy Golden Department: Financial Services Background: HISTORY: 04/14/14 Board of Directors RECOMMENDED Next: 04/21/14 ATTACHMENTS: 2013 Final Draft SAS 114 Letter (PDF) 2013 Final Draft Audit Report (PDF) 2013 Final Draft SAS 114 Letter (PDF) 2013 Final Revised Draft Audit Report (PDF) Updated: 4/14/ :26 PM by Renee Oelschleger Page 1

5 Pedernales Electric Cooperative, Inc. Regular Meeting April 21, 2014 RESOLUTION (ID # 2611) Presentation of BSGM 2013 Financial Audit and Management Letter BE IT RESOLVED BY THE BOARD OF DIRECTORS OF THE COOPERATIVE that the Board of Directors hereby approves the draft Auditor's Report and Financial Statements for the fiscal year ending December 31, 2013, in the form attached hereto, as the final Auditor's Report and Financial Statements ( Financial Statements ); and BE IT FURTHER RESOLVED BY THE BOARD OF DIRECTORS OF THE COOPERATIVE that the Chief Financial Officer of the Cooperative, or his designee, and the Cooperative s accountants are authorized to publish the Financial Statements as the final and official Financial Statements of the Cooperative for fiscal year ending December 31, Updated: 4/14/ :26 PM by Renee Oelschleger Page 2

6 BOLINGER, SEGARS, GILBERT & MOSS, L.L.P. certified public accountants PHONE: (806) FAX: (806) Nashville Avenue LUBBOCK, TEXAS April 2, 2014 Board of Directors Pedernales Electric Cooperative, Inc. Johnson City, Texas We have audited the financial statements of Pedernales Electric Cooperative, Inc. (the Cooperative) for the year ended December 31, 2013, and have issued our report thereon dated April 2, Professional standards require that we provide you with the following information related to our audit. Our Responsibility under U.S. Generally Accepted Auditing Standards As stated in our engagement letter dated October 17, 2013, our responsibility, as described by professional standards, is to express an opinion about whether the financial statements prepared by management with your oversight are fairly presented, in all material respects, in conformity with accounting principles generally accepted in the United States of America. Our responsibility is to plan and perform the audit to obtain reasonable, but not absolute, assurance that the financial statements are free of material misstatement. As part of our audit, we considered the internal control over financial reporting of Pedernales Electric Cooperative, Inc. Such considerations were solely for the purpose of determining our audit procedures and not to provide any assurance concerning such internal control over financial reporting. We are responsible for communicating significant matters related to the audit that are, in our professional judgment, relevant to your responsibilities in overseeing the financial reporting process. However, we are not required to design procedures specifically to identify such matters. Our audit of the financial statements does not relieve you or management of your responsibilities. Planned Scope and Timing of the Audit We performed the audit according to the planned scope and timing previously communicated to you in our engagement letter and meetings about planning matters. Significant Audit Findings Qualitative Aspects of Accounting Practices Management is responsible for the selection and use of appropriate accounting policies. In accordance with the terms of our engagement letter, we will advise management about the appropriateness of accounting policies and their application. The significant accounting policies used by Pedernales Electric Cooperative, Inc. are described in the notes to the financial statements. In 2013, no new accounting policies were adopted.

7 Board of Directors Pedernales Electric Cooperative, Inc. April 2, 2014 Page 2 We noted no transactions entered into by the Cooperative during the year for which there is a lack of authoritative guidance or consensus. There are no significant transactions that have been recognized in the financial statements in a different period than when the transaction occurred. Accounting estimates are an integral part of the financial statements prepared by management and are based on management's knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ significantly from those expected. The most sensitive estimate affecting the financial statements are unbilled revenue calculations, the allowance for uncollectible accounts, and lives used to calculate depreciation on distribution plant in service. Management s estimates related to unbilled revenue are based on industry accepted guidelines and the revenue calculations are within those guidelines. Management s estimates of the allowance for uncollectible accounts are based on historical activity and current regulatory actions. Management s estimate of the depreciation life used is based on industry accepted guidelines and the lives selected are within those guidelines. We evaluated the key factors and assumptions used to develop unbilled revenue estimates, the allowance for uncollectible accounts, and accumulated depreciation and depreciation expense in determining that it is reasonable in relation to the financial statements taken as a whole. The disclosures in the financial statements are neutral, consistent, and clear. Key disclosures are Notes 3, 7, 8 and 11 relating to plant, equity, debt and commitments and contingencies. Difficulties Encountered in Performing the Audit We encountered no significant difficulties in dealing with management in performing and completing our audit. Corrected and Uncorrected Misstatements Professional standards require us to accumulate all known and likely misstatements identified during the audit, other than those that are trivial, and communicate them to the appropriate level of management. Management has corrected all misstatements. There were no audit adjustments. Disagreements with Management For purposes of this letter, professional standards define a disagreement with management as a financial accounting, reporting, or auditing matter, whether or not resolved to our satisfaction, that could be significant to the financial statements or the auditor's report. We are pleased to report that no such disagreements arose during the course of our audit. Management Representations We have requested certain representations from management that are included in the management representation letter dated April 2, 2014.

8 Board of Directors Pedernales Electric Cooperative, Inc. April 2, 2014 Page 3 Management Consultations with Other Independent Accountants In some cases, management may decide to consult with other accountants about auditing and accounting matters, similar to obtaining a "second opinion" on certain situations. If a consultation involves application of an accounting principle to the Cooperative's financial statements or a determination of the type of auditor's opinion that may be expressed on those statements, our professional standards require the consulting accountant to check with us to determine that the consultant has all the relevant facts. To our knowledge, there were no such consultations with other accountants. Other Audit Findings or Issues We generally discuss a variety of matters, including the application of accounting principles and auditing standards, with management each year prior to retention as the Cooperative's auditors. However, these discussions occurred in the normal course of our professional relationship and our responses were not a condition to our retention. This information is intended solely for the use of Board of Directors and management of Pedernales Electric Cooperative, Inc. and is not intended to be and should not be used by anyone other than these specified parties. Very truly yours, Certified Public Accountants

9 JOHNSON CITY, TEXAS FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 AND REPORT OF CERTIFIED PUBLIC ACCOUNTANTS

10 JOHNSON CITY, TEXAS FINANCIAL STATEMENTS WITH ACCOMPANYING INFORMATION FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 TABLE OF CONTENTS Page No. Independent Auditor s Report 1 Financial Statements Balance Sheet 3 Statement of Income and Patronage Capital 4 Statement of Cash Flows 5 Notes to Financial Statements 6 Compliance Section Letter to Board of Directors Regarding Policies Concerning Audits of CFC Borrowers 20

11 BOLINGER, SEGARS, GILBERT & MOSS, L.L.P. certified public accountants WORKING PHONE: (806) DRAFT FAX: (806) Nashville Avenue LUBBOCK, TEXAS Board of Directors Pedernales Electric Cooperative, Inc. Johnson City, Texas INDEPENDENT AUDITOR S REPORT We have audited the accompanying financial statements of Pedernales Electric Cooperative, Inc. (the Cooperative), which comprise the balance sheets as of December 31, 2013, and the related statements of income and patronage capital and cash flows for the year 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. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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 entity 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 entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. -1-

12 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Pedernales Electric Cooperative, Inc. as of December 31, 2013, and the results of their operations and cash flows for the year ended in accordance with accounting principles generally accepted in the United States of America. Other Matter The financial statements of Pedernales Electric Cooperative, Inc. as of December 31, 2012, were audited by other auditors whose report dated April 26, 2013, expressed an unmodified opinion on those statements. Lubbock, Texas April 2, 2014 Certified Public Accountants -2-

13 -3- BALANCE SHEET DECEMBER 31, 2013 AND 2012 ASSETS December 31, UTILITY PLANT AT COST Utility Plant in Service $ 1,396,426,791 $ 1,352,403,330 Construction Work in Progress 38,516,167 39,621,497 $ 1,434,942,958 $ 1,392,024,827 Less: Accumulated Provision for Depreciation 275,768, ,729,374 $ 1,159,174,063 $ 1,138,295,453 OTHER PROPERTY AND INVESTMENTS - AT COST OR STATED VALUE Investments in Associated Organizations $ 11,310,714 $ 11,375,588 Other Investments 14,000,000 14,000,000 $ 25,310,714 $ 25,375,588 CURRENT ASSETS Cash and Cash Equivalents $ 62,703,927 $ 61,900,147 Accounts Receivable - Energy (Less allowance for uncollectibles 25,708,049 19,852,814 of $133,245 in 2013 and $718,751 in 2012) Accounts Receivable - Other (Less allowance for uncollectibles 1,806,143 3,017,233 of $371,557 in 2013 and $476,732 in 2012) Unbilled Revenue 26,404,200 21,465,300 Materials and Supplies Inventory 22,552,944 20,908,875 Other Current and Accrued Assets 1,583,085 1,371,149 Total Current Assets $ 140,758,348 $ 128,515,518 DEFERRED CHARGES AND OTHER ASSETS $ 48,970,200 $ 93,919,541 TOTAL ASSETS $ 1,374,213,325 $ 1,386,106,100 EQUITIES AND LIABILITIES EQUITIES Memberships $ 10,328,522 $ 9,990,459 Patronage Capital 378,650, ,788,042 Other Equities 99,294,991 68,717,883 Total Equities $ 488,273,665 $ 449,496,384 LONG-TERM DEBT Mortgage Bonds less Current Maturities $ 439,037,000 $ 461,215,000 CFC Mortgage Notes less Current Maturities 221,157, ,500,364 Total Long-Term Debt $ 660,194,908 $ 686,715,364 ACCUMULATED PROVISION FOR PENSIONS AND BENEFITS $ 99,153,036 $ 153,655,262 CURRENT LIABILITIES Current Maturities of Long-Term Debt $ 26,520,459 $ 24,762,293 Purchased Power- Payable and Accrued 49,055,176 31,301,096 Accounts Payable 20,727,427 15,818,156 Power Cost Adjustments 1,168,414 1,042,360 Tax Payable 8,546,107 7,632,495 Interest Payable 4,540,412 4,693,599 Consumer Deposits 4,816,072 3,793,021 Other Current and Accrued Liabilities 4,118,449 3,852,753 Total Current Liabilities $ 119,492,516 $ 92,895,773 DEFERRED CREDITS $ 7,099,200 $ 3,343,317 TOTAL EQUITIES AND LIABILITIES $ 1,374,213,325 $ 1,386,106,100 See accompanying notes to financial statements.

14 -4- STATEMENT OF INCOME AND PATRONAGE CAPITAL FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 December 31, Amount Amount OPERATING REVENUES Residential $ 406,459,902 $ 387,805,996 Small Power 61,893,715 57,300,006 Industrial 9,183,731 9,792,936 Large Power 72,596,186 72,726,847 Public Authorities 670, ,165 Other Operating Revenues 29,310,965 29,118,477 Unbilled Revenue 4,938,900 (389,700) Power Cost Adjustment 12,305,080 10,860,805 Total Operating Revenues $ 597,358,518 $ 567,821,532 OPERATING EXPENSES Purchased Power $ 343,552,629 $ 323,014,037 Transmission - Operation 901, ,143 Transmission - Maintenance 1,795,575 1,825,420 Distribution - Operation 30,472,953 32,750,340 Distribution - Maintenance 15,319,275 13,000,824 Consumer Accounts 27,473,081 23,267,339 Customer Service and Information 3,246,883 3,748,237 Sales 1,098,472 1,222,655 Administrative and General 27,290,904 29,630,241 Depreciation 50,539,821 45,913,145 Taxes 7,023,188 6,567,653 Other Deductions 508, ,353 Total Operating Expenses $ 509,222,750 $ 482,447,387 OPERATING MARGINS - Before Fixed Charges $ 88,135,768 $ 85,374,145 FIXED CHARGES Interest and Amortization on Long-Term Debt $ 40,925,829 $ 40,789,612 Interest Charged to Construction (1,565,848) (1,202,575) $ 39,359,981 $ 39,587,037 OPERATING MARGINS - After Fixed Charges $ 48,775,787 $ 45,787,108 Capital Credits 1,390, ,316 NET OPERATING MARGINS $ 50,166,739 $ 46,645,424 NON-OPERATING MARGINS Interest and Dividend Income $ 342,476 $ 570,853 Other Non-operating Income (Loss) 258,128 (253,177) $ 600,604 $ 317,676 NET MARGINS $ 50,767,343 $ 46,963,100 COMPREHENSIVE INCOME $ 50,767,343 $ 46,963,100 PATRONAGE CAPITAL - BEGINNING OF YEAR 370,788, ,443,098 Patronage Capital Retired (12,328,126) (11,802,515) Transfers to Other Equities (30,577,107) (35,815,641) PATRONAGE CAPITAL - END OF YEAR $ 378,650,152 $ 370,788,042 See accompanying notes to financial statements.

15 -5- STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 December 31, CASH FLOWS FROM OPERATING ACTIVITIES Net Margins $ 50,767,343 $ 46,963,100 Adjustments to Reconcile Net Margins to Net Cash Provided by Operating Activities Depreciation & Amortization Charged to Expense 50,933,953 46,431,973 Provision for Uncollectible Accounts 628,729 1,066,557 Capital Credits (1,390,952) (858,316) Deferral/Accrual Activity for Pension/Post-retirement Plans 16,038,521 13,997,400 Payments on Post-retirement Benefits (1,613,527) (2,727,175) Payments to Defined Benefit Plan (10,578,240) (10,731,030) Changes in assets and liabilities: Accounts Receivable, Net (5,272,876) (2,478,054) Accrued Unbilled Revenue (4,938,900) 870,618 Materials & Supplies (1,644,069) (11,067,382) Prepayments & Other Current Assets (211,936) (436,175) Deferred Charges & Other Assets (12,210,639) 910,535 Accrued and Accounts Payable 22,926,860 (6,482,965) Consumer Deposits 1,023, ,605 Accrued Taxes 913, ,243 Accrued Interest (153,187) (27,925) Other Current Liabilities 128,243 (795,732) Other Deferred Credits & Liabilities 2,172,752 3,282,416 Net Cash Provided by Operating Activities $ 107,518,739 $ 78,680,693 CASH FLOWS FROM INVESTING ACTIVITIES Other Investments $ - $ 35,000,000 Net Additions to Property, Plant & Equipment (71,418,433) (48,186,615) Capital Credit Retirements from Associated Organizations 1,455, ,660 Net Cash Used in Investing Activities $ (69,962,607) $ (12,569,955) CASH FLOWS FROM FINANCING ACTIVITIES Payments on Long-Term Debt $ (24,762,289) $ (20,611,343) Retirement of Patronage Capital (12,328,126) (11,802,515) Increase in Memberships, Net 338, ,918 Net Cash Used in Financing Activities $ (36,752,352) $ (32,121,940) INCREASE IN CASH AND CASH EQUIVALENTS $ 803,780 $ 33,988,798 CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 61,900,147 27,911,349 CASH AND CASH EQUIVALENTS - END OF YEAR $ 62,703,927 $ 61,900,147 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash Paid During the Year for: Interest on Long-Term Debt $ 40,692,298 $ 40,298,708 Patronage Capital Retired by Noncash Discounting $ 30,577,107 $ 35,815,641 See accompanying notes to financial statements.

16 -6- NOTES TO FINANCIAL STATEMENTS 1. Nature of Operations and Summary of Significant Accounting Policies Nature of Operations Pedernales Electric Cooperative, Inc. (the Cooperative) is a non-profit corporation organized to provide electric service at the retail level to primarily residential and commercial accounts in a designated service area. As of December 31, 2013, the Cooperative served approximately 256,000 meters. Power delivered at retail is purchased wholesale from the Lower Colorado River Authority (LCRA) and American Electric Power (AEP). Any revenues earned in excess of costs incurred are allocated to members of the Cooperative and are reflected as patronage capital in the balance sheet. System of Accounts The Cooperative maintains its accounting records substantially in accordance with the Uniform System of Accounts as prescribed by the Federal Energy Regulatory Commission for Class A and B electric utilities modified for electric borrowers of the National Rural Utilities Cooperative Finance Corporation (CFC). Utility Plant Plant is stated at the original cost of construction which includes the cost of contracted services, direct labor, materials, and overhead items. Contributions from others toward the construction of electric plant are credited to the applicable plant accounts. When property, which represents a retirement unit, is replaced or removed, the average cost of such property as determined from the continuing property records is credited to electric plant and such cost, together with cost of removal less salvage, is charged to the accumulated provision for depreciation. Maintenance and repairs, including the renewal of minor items of plant not comprising a retirement unit, are charged to the appropriate maintenance accounts, except that repairs of transportation and service equipment are charged to clearing accounts and redistributed to operating expense and other accounts. Interest Charged to Construction Interest is capitalized on construction work in progress using a capitalization rate based on the Cooperative s weighted-average borrowing rate on long-term debt. The rate is applied to the current month s average cumulative balance of work in progress and materials. Cash and Cash Equivalents For purposes of the statement of cash flows, cash and short-term investments are considered cash and cash equivalents. Accounts Receivable In the normal course of business the Cooperative recognizes accounts receivable for energy delivered and billed. The Cooperative allows 16 days from the statement date for payment to be received or the service is considered delinquent.

17 -7- NOTES TO FINANCIAL STATEMENTS The Cooperative provides an allowance for uncollectible accounts to recognize the portion of receivables considered uncollectible. The allowance is estimated based on historical trends, aging of receivables, and review of potential bad debts. Accounts remaining unpaid 120 days after the due date of the final bill are written off. Unbilled Revenue At December 31, 2013 and 2012, respectively, the Cooperative had $26,404,200 and $21,465,300 of unbilled revenue consisting of its revenue accrued for power delivered but not billed and its revenue accrued attributable to purchased power. These amounts are included in the other current and accrued assets on the balance sheet. Materials and Supplies Inventory Materials and supplies inventories are valued at average unit cost. Electric Revenues The Cooperative records electric revenues as billed to customers on a monthly basis. Revenue is accrued for power delivered but not billed at the end of each month. The Cooperative's tariffs for electric service include adjustment clauses under which billings to customers are adjusted to reflect changes in the cost of purchased power. In order to match power cost and related revenues, power cost to be billed in subsequent periods is reflected as an asset, and power cost billed in advance is reflected as a liability. At December 31, 2013 and 2012, respectively, the Cooperative had $1,168,414 and $1,042,360 reflected as liabilities related to this adjustment clause. Federal Income Taxes The Cooperative is exempt from federal income taxes under Section 501(c)(12) of the Internal Revenue Code. More than 85% of the gross income is collected from members. The Cooperative follows the uncertain tax positions provisions of accounting principles generally accepted in the United States of America. The primary tax position of the Cooperative is its filing status as a tax exempt entity. The Cooperative determined that it is more likely than not that its tax positions will be sustained upon examination by the Internal Revenue Service (IRS) and that all tax benefits are likely to be realized upon settlement with taxing authorities. The Cooperative files income tax returns in the U.S. federal jurisdiction. The Cooperative is no longer subject to examinations by federal taxing authorities for years before The Cooperative recognizes interest expense and penalties, if any, related to tax activities in operating activities. There were no interest or penalties recognized during the years ended December 31, 2013 and Group Concentration of Credit Risk The Cooperative's headquarters facility is located in Johnson City, Texas. The service area extends into 24 counties in the Central Texas region. The Cooperative records a receivable for electric revenues as billed on a monthly basis. The Cooperative may require a deposit from new members upon connection which is applied to unpaid bills and fees in the event of default. The

18 -8- NOTES TO FINANCIAL STATEMENTS deposit accrues interest annually and is returned to residential accounts along with accrued interest after one year of prompt payments. As of December 31, 2013 and 2012, deposits on hand totaled $4,816,072 and $3,793,021, respectively. The Cooperative maintains its cash balances in institutions insured by the Federal Deposit Insurance Corporation (FDIC). Pursuant to legislation enacted in 2010, the FDIC fully insured all noninterest-bearing transaction accounts beginning December 31, 2010 through December 31, Beginning January 1, 2013, noninterest-bearing transaction accounts are now subject to the $250,000 limit on FDIC insurance per covered institution. The cash balances exceeded applicable insurance coverage at times during Patronage Capital Certificates Patronage capital from associated organizations is recorded at the stated amount of the certificate. Defined Benefit Plan and Other Post-Retirement Benefits The Cooperative has a defined benefit (pension) plan for employees meeting eligibility requirements. In 2005, the pension was amended to close entry to new participants after January 1, The benefit is based on years of service and the average of the employee s highest 36 months of compensation. The Cooperative also sponsors a health care plan for retirees who satisfy eligibility requirements. The cost of the Cooperative s obligation is actuarially determined based on certain weightedaverage assumptions. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications and Comparative Information Some 2012 amounts have been reclassified to be consistent with 2013 amounts. 2. Assets Pledged Substantially all assets are pledged as security for the long-term debt due to Bank of New York (BONY) and National Rural Utilities Cooperative Finance Corporation (CFC).

19 -9- NOTES TO FINANCIAL STATEMENTS 3. Utility Plant The major classes of utility plant are as follows: December 31, Transmission Plant $ 94,482,651 $ 86,919,018 Distribution Plant 1,166,661,878 1,135,630,741 General Plant 135,282, ,853,571 Total Utility Plant in Service $ 1,396,426,791 $ 1,352,403,330 Construction Work in Progress 38,516,167 39,621,497 Total Utility Plant $ 1,434,942,958 $ 1,392,024,827 Provision for depreciation of utility plant is computed using straight-line rates as follows: Transmission Plant 2.75% Distribution Plant 2.05%-20.00% General Plant 2.50%-20.00% Depreciation for the years ended December 31, 2013 and 2012, was $53,623,102 and $49,144,215, respectively, of which $50,539,821 and $45,913,145 was charged to depreciation expense and $3,083,281 and $3,231,070 was allocated to other accounts. 4. Investments in Associated Organizations Investments in associated organizations consisted of: December 31, CFC Capital Term Certificates $ 4,887,296 $ 4,887,296 Patronage Capital 2,849,994 2,461,366 Texas Electric Cooperative Patronage Capital 3,384,207 3,874,608 Other 189, ,318 $ 11,310,714 $ 11,375, Materials and Supplies Inventory Materials and supplies inventories consist of construction materials and supplies. The ending balances for materials and supplies at December 31, 2013 and 2012 were $22,552,944 and $20,908,875, respectively.

20 -10- NOTES TO FINANCIAL STATEMENTS 6. Deferred Charges and Other Assets Deferred charges and other assets included the following: December 31, Regulatory Asset - Defined Benefit Plan $ 25,008,957 $ 68,141,712 Regulatory Asset - Post-Retirement Medical - 13,633,094 Regulatory Asset - LCRA FPCRF 18,180,512 5,749,378 Unamortized Debt Issuance Costs 4,321,570 4,715,702 LCRA Radio Services 1,459,161 1,679,655 $ 48,970,200 $ 93,919,541 The Cooperative recognizes a regulatory asset for the portion of the unfunded status of its pension and other post-retirement benefit plans that has not been recognized as a component of net periodic pension and other post-retirement benefit costs. Accordingly, no amounts have been recorded in other comprehensive income. The unfunded portion is being amortized into pension and other postretirement benefit costs over the average future service of current active plan participants expected to receive benefits. The LCRA fuel & power cost recovery factor (FPCRF) represents the amount that the Cooperative will be billed by LCRA in future periods for electricity previously purchased. Since this amount will be collected from members in the future through the power cost adjustment (PCA), it is classified as a regulatory asset. A corresponding liability is also recorded for the same amount. Costs incurred with respect to the issuance of bonds have been capitalized and are being amortized over the terms of the bonds. The Cooperative has an agreement in place to utilize LCRA s trunked radio system in the Junction district. The associated costs were paid upon initiation of the agreement. The costs have been capitalized and are being amortized over the contract term, which ends in August Patronage Capital Patronage capital represents the Cooperative s accumulated retained net margins that have been allocated annually to its members. Distributions to members are made at the discretion of the Board in accordance with the bylaws, subject to the covenants contained in the long-term debt agreements.

21 -11- NOTES TO FINANCIAL STATEMENTS The loan agreements contain provisions that must be met for the Cooperative to make patronage capital retirements. These provisions include maintaining debt service coverage ratios of 1.15 for Bank of New York bonds and 1.35 for CFC debt. The Cooperative is in compliance with these provisions at December 31, 2013 and Under certain circumstances, the Board may choose to retire patronage capital earlier than the Cooperative s current approximate 30-year retirement schedule. In these instances, the Cooperative retires and pays the net present value of patronage capital to a member or former member before the time the Cooperative anticipates normally retiring and paying patronage capital. Patronage capital totaling $12,328,126 and $11,802,515 was retired during 2013 and 2012, respectively. Patronage capital assigned and assignable at December 31, 2013 and 2013, is as follows: December 31, Assigned to date $ 473,606,716 $ 426,253,916 Assignable 72,232,644 68,818,100 $ 545,839,360 $ 495,072,016 Less: Retirements to date 67,894,217 55,566,091 Less: Discounted patronage capital to permanent equity 99,294,991 68,717,883 $ 378,650,152 $ 370,788,042 The Cooperative s bylaws provide that amounts received by the Cooperative in excess of costs and expenses shall, insofar as permitted by law, (a) be used to offset any losses incurred during the current or any prior fiscal year and, (b) to the extent not needed for that purpose, be allocated to its members on a patronage basis. The changes in the membership certificates balance of $338,063 and $291,918 for the years ended December 31, 2013 and 2012, respectively, resulted from net increases in the charges for new members and refunds to disconnected members in those years.

22 -12- NOTES TO FINANCIAL STATEMENTS 8. Long-term Debt At December 31, 2013 and 2012, long-term debt consisted of the following: December 31, Senior Mortgage Bonds, Series 1993; 8.55%; due 2020 interest payable semi-annually on May 15 and November 15; principal payments begin 2017 $ 65,000,000 $ 65,000,000 Senior Mortgage Bonds, Series 1993; 8.85%; due 2016 interest payable semi-annually on May 15 and November 15; principal payments begin 2015 $ 15,000,000 $ 15,000,000 First Mortgage Bonds, 1995 Series A; 7.55%; due 2015 interest payable semi-annually on May 15 and November 15; principal payments began 1996 $ 22,640,000 $ 33,597,000 First Mortgage Bonds, 2002 Series A; 5.952%; due 2022 interest payable semi-annually on May 15 and November 15; principal payments began 2013 $ 119,075,000 $ 128,900,000 First Mortgage Bonds, 2002 Series A; 6.202%; due 2032 interest payable semi-annually on May 15 and November 15; principal payments begin 2023 $ 239,500,000 $ 239,500,000 CFC Bridge Loan; 3.85%; due 2043 interest and principal payable quarterly principal payments began 2012 $ 225,500,367 $ 229,480,657 $ 686,715,367 $ 711,477,657 Less: Current Maturities 26,520,459 24,762,293 Total Long-term Debt $ 660,194,908 $ 686,715,364 Annual maturities of long-term debt for the next five years and thereafter are as follows: 2014 $ 26,520, ,194, ,563, ,526, ,651,710 Thereafter 537,259,379 The Cooperative has $70,000,000 of long-term loan funds available from CFC with funds available through March 27, 2016.

23 -13- NOTES TO FINANCIAL STATEMENTS 9. Short-Term Borrowing The Cooperative has a perpetual line of credit at a variable interest rate with CFC not to exceed $100,000,000. There was no balance outstanding at December 31, 2013 and The line of credit agreement requires the Cooperative to pay down the balance to zero annually and automatically renews unless either party gives a 90-day notice. 10. Deferred Credits Deferred credits include the following: December 31, Patronage Capital - Pre-Escheat $ 5,489,620 $ 3,299,420 Post-Retirement Medical Benefits Regulatory Liability 1,583,131 - Unclaimed Property Payable 26,449 43,897 $ 7,099,200 $ 3,343,317 The patronage capital pre-escheat component represents unclaimed patronage capital checks that do not meet escheat criterion. The liability is increased when unclaimed patronage capital checks are voided and transferred from cash. As the funds are claimed or reach escheat status, the liability is reduced. During 2013, the Cooperative realized a gain for post-retirement medical benefits. The Cooperative recognizes a regulatory liability for the net amount of the unrecognized gain. 11. Commitments and Contingencies Power Supply Contracts The Cooperative entered into contracts for the purchase and delivery of electric energy to satisfy its electric energy requirements. In 2013 and 2012, the Cooperative purchased energy from the Lower Colorado River Authority (LCRA) and American Energy Partners (AEP). LCRA was the primary wholesale electric energy supplier, while AEP supplied electric energy to serve a portion of the electric energy requirements for the Cooperative s delivery points within LCRA s service territory and the full electric energy requirements for delivery points outside of LCRA s service territory. All of the electric energy purchased by the Cooperative is procured through term contracts of varying durations. As these terms expire, they may or may not be replaced with new agreements. Transmission Lease Contracts LCRA leases and operates certain transmission facilities and equipment owned by the Cooperative. Payments for the leased facilities vary from year to year and are based on the original cost of the facilities, adjusted for depreciation, and are updated annually to reflect additions, retirements and depreciation. The terms of the lease are perpetual, but may be terminated by LCRA or the Cooperative upon five years written notice. The Cooperative s transmission lease revenues totaled approximately $5,201,891 and $5,394,000 in 2013 and 2012, respectively.

24 -14- NOTES TO FINANCIAL STATEMENTS Litigation The Cooperative is often involved in various claims and litigation, including matters involving the Cooperative s insurance providers. Although management is unable to predict the ultimate outcome of all legal proceedings, management and the Cooperative s legal counsel do not believe that the ultimate resolution of litigation involving the Cooperative will have a material adverse effect, if any, after considering available insurance coverage on the Cooperative s results of operations and financial condition. 12. Pension Benefits The Cooperative has a defined benefit plan covering eligible employees. The cost of the plan is determined by an independent actuary and is funded in amounts sufficient to meet the minimum funding requirements under applicable regulations. Contributions paid to the defined benefit plan for the years ended December 31, 2013 and 2013, were $10,578,240 and $10,731,030, respectively. The measurement date used for the current valuation is December 31, The following weighted-average assumptions were used to develop the benefit obligation for 2013 and 2012: Discount Rate 4.85% 3.80% Rate of Compensation Increase 3.79% 3.49% The following weighted-average assumptions were used to determine the net benefit cost for 2013 and 2012: Discount Rate 3.80% 4.25% Rate of Compensation Increase 3.49% 3.49% Expected Long-Term Return on Plan Assets 6.50% 6.50%

25 -15- NOTES TO FINANCIAL STATEMENTS Amounts recognized in the Cooperative's financial statements and funded status of the plan are as follows: December 31, I) Net Periodic Benefit Cost Service Cost $ 4,816,959 $ 5,309,794 Interest Cost 7,149,538 7,138,300 Amortization 5,525,366 5,723,928 Return on Assets (7,699,410) (6,609,485) II) $ 9,792,453 $ 11,562,537 Projected Benefit Obligation (PBO) Reconciliation: PBO Balance at Beginning of Year $ 191,423,813 $ 169,114,033 Net (Gain)/Loss (27,464,553) 15,118,433 Interest Cost / Service Cost 11,966,497 12,448,094 Benefits Paid (7,025,360) (5,256,747) Projected Benefit Obligation at Year End $ 168,900,397 $ 191,423,813 III) Reconciliation of Funded Status Accumulated Benefit Obligation $ 168,900,397 $ 191,423,813 Fair Value of Assets (139,846,165) (118,451,039) Under Funded Status at Year End $ 29,054,232 $ 72,972,774 IV) Accumulated Other Comprehensive Loss Accounted for as Regulatory Asset Loss - Beginning of Year $ 68,141,712 $ 64,438,485 Amortization (5,525,366) (5,723,928) Net (Gain)/Loss (37,607,389) 9,427,155 Loss- End of Year $ 25,008,957 $ 68,141,712 The accumulated benefit obligation for the plan was $152,785,831 and $170,675,632 at December 31, 2013 and 2012, respectively. Plan Asset Information Information related to fair value hierarchy measurements are disclosed in footnote 14. The defined benefit plan asset fair value measurements are substantially Level 1.

26 -16- NOTES TO FINANCIAL STATEMENTS Fair value of plan assets at December 31, 2013 and 2012 and asset allocation follows: December 31, Cash and Cash Equivalents $ 5,790,893 $ 10,872,859 Pooled, Common and Collective Funds 7,765,476 33,209,020 Government Agencies, Bonds and Notes 12,841,800 15,396,548 Mutual Funds 113,447,996 49,753,367 Other - 9,219,245 $ 139,846,165 $ 118,451, Mutual Funds and Equity Securities 87% 42% Debt Securities 9% 49% Other 4% 9% Total 100% 100% Benefit payments for the next ten years are estimated as follows: 2014 $ 7,200, ,363, ,543, ,841, ,221, ,028,895 The estimated 2014 plan year minimum required contribution is $7,680,000. The Cooperative has a defined contribution plan (401(k) plan) for employees that are eligible to participate. For employees that are also eligible to participate in the defined benefit plan, the maximum contribution is 6 percent of the employees base annual salary. For employees not eligible for the defined benefit plan, the 401(k) plan contribution cost is a maximum of 10 percent of the employee s base annual salary. These costs are funded each pay period as accrued. The Cooperative s contributions to the 401(k) plan (net of forfeitures) were $3,086,624 and $3,147,624 in 2013 and 2012, respectively. 13. Post-Retirement Benefits Other than Pensions The Cooperative provides post-retirement medical benefits for eligible employees through a plan with a third-party insurance provider. For purposes of this statement, the written plan in effect is the substantive plan and is considered a defined benefit plan. The Cooperative contributes varying amounts dependent on retirement date, age, and years of service.

27 -17- NOTES TO FINANCIAL STATEMENTS Benefits are paid on behalf of retirees and are a function of medical insurance costs and number of retirees. Benefits paid for the years ended December 31, 2013 and 2012, were $1,709,941 and $2,968,515, respectively. The Cooperative s policy for contributions is to contribute the amount of the current benefits in that year. The measurement date used for the current valuation is December 31, The weighted-average discount rate used to develop the accumulated post-retirement benefit obligation for the years ended December 31, 2013 and 2012, were 4.85% and 3.95%, respectively. The assumed health care cost trend rate is 9.00% for 2013, declining to an ultimate level of 5.00% in Amounts recognized in the Cooperative's financial statements and funded status of the plan are as follows: December 31, I) Net Post-retirement Benefit Cost Service Cost $ 1,610,000 $ 1,417,687 Interest Cost 3,140,000 3,366,809 Amortization 1,592,482 1,467,311 II) $ 6,342,482 $ 6,251,807 Accumulated Post-retirement Benefit Obligation (APBO) Reconciliation: APBO Balance at Beginning of Year $ 80,682,488 $ 77,106,884 Net (Gain)/Loss (13,623,743) 1,759,623 Interest Cost / Service Cost 4,750,000 4,784,496 Benefits Paid (1,709,941) (2,968,515) Net Post-retirement Benefit Liability at Year End $ 70,098,804 $ 80,682,488 III) Reconciliation of Funded Status APBO $ 70,098,804 $ 80,682,488 Accrued Post-retirement Benefit Cost $ 70,098,804 $ 80,682,488 IV) Accumulated Other Comprehensive Loss (Gain) Accounted for as Regulatory Asset/Liability Loss - Beginning of Year $ 13,633,094 $ 13,340,782 Amortization 1,592,482 1,467,311 Net (Gain)/Loss (13,623,743) 1,759,623 Loss (Gain)- End of Year $ (1,583,131) $ 13,633,094 The estimated actuarial loss for the post-retirement medical benefit plan that will be amortized from accumulated other comprehensive income into net post-retirement benefit cost over the next fiscal year is expected to be $1,369,545.

28 -18- NOTES TO FINANCIAL STATEMENTS The Cooperative has not funded any plan assets as of December 31, 2013 or Estimated future benefit payments for the next 10 years are as follows: 2014 $ 2,413, ,674, ,838, ,082, ,379, ,188, Disclosures About Fair Value of Financial Instruments Many of the Cooperative's financial instruments lack an available market with similar terms, conditions, and maturities as those reflected in the carrying amount recorded. Accordingly, significant assumptions, estimations, and present value calculations were used for purposes of this disclosure. Estimated Fair Value has been determined by calculating the present value of financial instruments using the best data available. Patronage Capital from Associated Organizations The right to receive cash is an inherent component of a financial instrument. The Cooperative holds no right to receive cash since any payments are at the discretion of the governing body for the associated organizations. As such, the Cooperative believes the fair value is not readily determinable and they are reflected at their carrying amount. CFC Capital Term Certificates and Member Capital Securities It is not practicable to estimate fair value for these financial instruments given the lack of a market and their long holding period. Relevant information with respect to these is as follows: INTEREST AMOUNT RATE MATURITY $ 960, % $ 1,715, % 2043 $ 2,210, % Cash and CFC Medium Term Note Investments The recorded book value approximates fair value given the liquidity and short period to maturity. Long-Term Debt - Estimated by computing the present value by individual note to maturity, using currently quoted or offered rates for similar issues of debt.

29 -19- NOTES TO FINANCIAL STATEMENTS The carrying values of the Cooperative's financial instruments and debt and the estimated fair values are as follows: December 31, 2013 December 31, 2012 CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE Assets: Cash and cash equivalents $ 62,703,927 $ 62,703,927 $ 61,900,147 $ 61,900,147 Short-term investments 14,000,000 14,000,000 Long-term investments 14,000,000 14,411,692 Patronage capital and capital term certificates 11,310,714 11,310,714 11,375,588 11,375,588 Liabilities: Long-term debt 686,715, ,113, ,477, ,272,725 Fair Value Hierarchy The Fair Value Measurements Topic of the FASB Accounting Standards Codification establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows: Level 1 - Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Cooperative has the ability to access at the measurement date. Level 2 - Inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 - Inputs are unobservable inputs for the asset or liability. Long-Term Debt valuations are considered Level Subsequent Events The Cooperative has evaluated subsequent events through April 2, 2014, the date which the financial statements were available to be issued.

30 COMPLIANCE SECTION

31 BOLINGER, SEGARS, GILBERT & MOSS, L.L.P. certified public accountants WORKING PHONE: (806) DRAFT FAX: (806) Nashville Avenue LUBBOCK, TEXAS LETTER TO BOARD OF DIRECTORS REGARDING POLICIES CONCERNING AUDITS OF CFC BORROWERS Board of Directors Pedernales Electric Cooperative, Inc. Johnson City, Texas We have audited, in accordance with auditing standards generally accepted in the United States of America, the balance of Pedernales Electric Cooperative, Inc. as of December 31, 2013, and the related statements of income and patronage capital and cash flows for the year ended, and have issued our report thereon dated April 2, In connection with our audit, nothing came to our attention that caused us to believe that the Cooperative failed to comply with the terms of Article V of the National Rural Utilities Cooperative Finance Corporation Loan Agreement insofar as they relate to accounting matters. However, our audits were not directed primarily toward obtaining knowledge of such incompliance. This report is intended solely for the information and use of the Boards of Directors and management of Pedernales Electric Cooperative, Inc. and the National Rural Utilities Cooperative Finance Corporation and is not intended to be and should not be used by anyone other than these specified parties. Certified Public Accountants Lubbock, Texas April 2,