EMERALD PEOPLE S UTILITY DISTRICT

Transcription

1 EMERALD PEOPLE S UTILITY DISTRICT AUDIT REPORT Years Ended December 31, 2012, and 2011 KENNETH KUHNS & CO. Certified Public Accountants 570 Liberty Street S.E., Suite 210 Salem, Oregon Telephone: (503)

2 TABLE OF CONTENTS Board of Directors and General Manager/Registered Agent 1 Independent Auditor's Report 2 to 3 Management's Discussion and Analysis 4 to 8 Financial Statements: Balance Sheet Exhibit A 9 Statement of Revenues, Expenses and Changes in Net Position Exhibit B 10 Statement of Cash Flows Exhibit C 11 to 12 Notes to Financial Statements 13 to 31 Required Supplementary Information: Schedule of Funding Progress for Retiree Health Plan Schedule 1 32 Other Supplementary Information: Schedule of Revenues, Operating Expenses and Net Revenues Available for Debt Service Schedule 2 33 Schedule of Bond and Revenue Obligations Debt Service Transactions Schedule 3 34 Schedule of Future Bond and Revenue Obligations Debt Service Requirements Schedule 4 35 Independent Auditor's Comments Required By Oregon State Regulations 36 to 37 Page

3 Board of Directors Penny Jordan Marcola Road President Springfield, Oregon Bruce Pilling 2960 Hillside Drive Treasurer Cottage Grove, Oregon Patti Chappel PO Box 1120 Director Veneta, Oregon Katherine Schacht Coburg Bottom Loop Road Director Eugene, Oregon Bill Tanner Valley Road Director Pleasant Hill, Oregon General Manager/Registered Agent Scott Coe Seavey Loop Road Eugene, Oregon

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6 MANAGEMENT'S DISCUSSION AND ANALYSIS

7 EMERALD PEOPLE S UTILITY DISTRICT MANAGEMENT' S DISCUSSION AND ANALYSIS The Governmental Accounting Standards Board has issued GASB 34, which requires all governmental entities to add this section to their annual report. It is referred to as the Management's Discussion and Analysis (MD&A). This section is meant to help the reader understand better, through the eyes of management, the financial activities based on current known facts, decisions and other conditions. Please read this with the understanding that it is a summary of the past two years activities, as well as some expected future conditions. Be sure to review the financial statements and accompanying notes that follow this report. OVERVIEW OF THE FINANCIAL STATEMENTS The Annual Audit Report includes Management s Discussion and Analysis, Financial Statements with accompanying notes, Required Supplementary Information, Other Supplementary Information, Independent Auditor s Comments and the Independent Auditor s Report. The financial statements of the District are designed to provide readers with a broad overview of the District s finances similar to a private-sector business. They have been prepared using the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (GAAP). Under this basis of accounting, revenues are recognized in the period in which they are earned and expenses are recognized in the period in which they are incurred, regardless of the timing of related cash flows. These statements offer short- and long-term financial information about the District s activities. The Balance Sheet presents information on all of the District s assets and liabilities and provides information about the nature and amounts of investments in resources (assets) and the obligations to District creditors (liabilities). It also provides the basis for computing rate of return, evaluating the capital structure of the District and assessing the liquidity and financial flexibility of the District. All of the current year s revenues and expenses are accounted for in the Statement of Revenues, Expenses and Changes in Net Position. This statement provides a measurement of the District s operations over the past year and can be used to determine whether the District has successfully recovered all its costs through rates and other charges and to analyze profitability and credit worthiness. The Statement of Cash Flows provides relevant information about the District s cash receipts and cash payments during the reporting period. This statement reports cash receipts and cash payments resulting from operating, financing and investing activities. When used with related disclosures and information, a statement of cash flows should provide insight into (a) the District s ability to generate future net cash flows, (b) the District s ability to meet its obligations as they come due, (c) the District s needs for external financing, (d) the reasons for differences between operating income and associated cash receipts and payments and (e) the effects on the District s financial position of both its cash and its non-cash investing, capital and financing transactions during the period. The changes in cash balances are an important indicator of the District s liquidity and financial condition. Notes to financial statements. The notes provide additional information that is essential to a full understanding of data provided in the financial statements. This includes, but is not limited to, significant accounting policies, significant financial statement balances and activities, material risks, commitments and obligations and subsequent events, as applicable. FINANCIAL HIGHLIGHTS The District s total assets and deferred outflows of resources decreased $2 million from 2011 to An increase in utility plant assets of $3 million, which includes $958,813 of customer contributions for power line extensions and subdivision development, and an increase in depreciation reserves of $1.5 million left an overall increase in net utility plant of $1.6 million. Cash and investments decreased $849,706 and special deposits for bond funds increased $1.6 million. Accounts receivable net of the provision for uncollectible accounts decreased $160,

8 Long-term debt decreased $4.3 million. Current liabilities decreased by $605,641 including current maturities of long-term debt, which decreased $604,607. Other liabilities and deferred credits increased $33,070, which includes the collection of funds from two large industrial customers for public purpose spending. Public purpose funds decreased by $121,387. Once the industrial customer obtains approval for an energy efficient project, the funds are returned. Cash is held in a separate account to fund this accrual. FINANCIAL ANALYSIS Condensed Balance Sheet (thousands) Assets Net electric plant $ 68,741 $ 67,124 $ 64,665 Notes and Loans Receivable Investments in associated organizations 593 1,152 1,752 Segregated Funds 2,423 5,525 5,512 71,877 73,921 72,052 Cash and temporary investments 14,263 13,562 11,629 Notes & accounts receivable - net 4,591 4,752 4,465 Other Current Assets 1,359 1,340 1,135 Total current assets 20,213 19,654 17,229 Other assets and deferred debits 1,177 1,135 2,431 Total assets 93,267 94,710 91,712 Total deferred outflows of resources 1,208 1,734 2,221 Total Assets and deferred outflows of resources $ 94,475 $ 96,444 $ 93,933 Liabilities Long term debt $ 37,158 $ 41,461 $ 46,367 Current Liabilities 9,592 10,198 9,240 Other liabilities and deferred credits 1,603 1,570 1,260 Total liabilities 48,353 53,229 56,867 Total deferred inflows of resources Total liabilities and deferred inflows of resources 48,630 53,295 56,916 Net Position Invested in Capital Assets 28,500 22,494 16,252 Restricted: Rate Stabilization Fund 2,375 2,375 2,375 Restricted: for Debt Service 3,436 4,948 4,817 Unrestricted 11,534 13,332 13,573 Total Net Position 45,845 43,149 37,017 Total net position, liabilities and deferred inflows of resources $ 94,475 $ 96,444 $ 93,933-5-

9 REVENUES Revenue from sales of electricity, excluding the two large industrial customers, increased $439,788, a 1.3% change from Revenue for Large Industrial customers decreased $1.2 million. Large Industrial customer revenue reflects a fixed contribution to base revenue, any operations and maintenance on the system serving the two mills plus their responsibility to pay debt service for a new substation (which ended with their final payment in June 2012), property taxes, annexation funding, and transmission services. Miscellaneous electric revenue ($2.5 million in 2012), consisting principally of resale of power purchases, decreased $775,540 from POWER SUPPLY Emerald was a full requirements customer of Bonneville Power Administration (BPA) through September 30, Beginning October 1, 2011, The District began a new 17-year Regional Dialogue contract with BPA under which it is granted a fixed amount of cost-based PF Tier 1 power. Power needs beyond this fixed amount are procured through BPA s PF Tier 2 product, directly from the market, or through one or more of its own generation sources. In order to serve retail load, the District purchased 2.2% less energy in 2012 at an average cost of 3.73 cents per kwh in 2012 compared to 3.06 in Power cost in 2012 includes $556,047, compared to $672,692 in 2011, in transmission services for one large industrial customer, without energy (kwh). The one large industrial customer purchased energy directly from the open market, and is responsible for its own energy purchases. The District received some funds and credits beginning in 2008 as a result of a settlement reached between BPA and the Investor Owned Utilities (IOU s) receiving the Residential Exchange Program. The 2012 funds and credits received by The District totaled $659,652 and were applied against the cost of purchased power. The District has a power purchase agreement with LLP Wind, LLC to purchase wind power from the White Creek Wind Farm. The District does not yet need this energy to serve retail load, and is thus reselling it to third-parties. In 2012 the District s cost of purchasing wind power was $1,530,145 and the resale amount was $477,180, resulting in a net loss of $1,052,965. Excluding $646,996 in one-time proceeds related to prior-year over-charges, the District s 2012 cost of purchasing wind power was $2,177,141. In December 2010, the District entered into agreements to sell its allocated ownership interests in Fall Creek Hydro LLC and Dorena Hydro LLC to Symbiotics LLC for $664,450 and $1,807,950, respectively, payable at the closing date. Under the terms of the agreements, closing shall take place on a date agreed upon by both parties, but no later than July 1, The sale of the Dorena Hydro LLC interest was completed on June 29, The sale of the Fall Creek Hydro LLC interest was in progress at December 31, 2011, with the District receiving $73,860 of the sale price in December 2011 and the remainder of $590,590 in January In 2012, 49% of operating expenses were for acquisition of power. Emerald owns a small methane generation plant at the Lane County landfill and uses the power produced to serve retail load. Historically, Emerald has received billing credits from BPA for the power produced at this facility. This billing credit contract will end in July 2013, after which time Emerald will continue to serve retail load from the facility but will no longer receive a financial offset from BPA. The cost to produce power in 2012 was $336,337 less than 2011, and production was 8.9% lower (2,097,500 kwh). The net benefit to the District as a result of the methane plant in 2012 was $348,230, down from $684,567 in

10 OTHER OPERATION EXPENSES Distribution expense Operations increased $64,957 or 5.7%. Maintenance costs decreased $357,453 or 13.2%. Cost of customer accounts expense increased $38,841, or 2.6%. Customer service and informational and conservation expense decreased $13,029 or 2.4%. Administrative expenses increased $419,320 or 12.5%. Condensed Income Statement (thousands) Sales of electricity $ 34,373 $ 33,933 $ 32,339 Large industrial 585 1,770 1,885 Other operating revenues 2,515 3,291 2,984 Total operating revenue 37,473 38,994 37,208 Generation expense (225) 151 (66) Purchased power (18,244) (16,614) (15,906) Total cost of power (18,469) (16,463) (15,972) Transmission expense Operating expenses (9,395) (9,242) (9,554) Depreciation and amortization (4,509) (4,359) (4,262) Taxes (906) (866) (855) Interest (2,111) (2,401) (2,686) Cost of electric service (35,390) (33,331) (33,329) Operating revenue over cost of electric service 2,083 5,663 3,879 Interest and other income Net income $ 2,696 $ 6,132 $ 4,716-7-

11 2013 BUDGET REVIEW The 2013 budget was approved at $40,375,479, $266,272 more than the 2012 budget. Net power cost is $751,069 higher, operations and maintenance is $536,846 lower, interest expense is $801,668 lower, and debt service payments are $22,619 lower. Total Revenue of $38 million, which is $337,763 higher than the 2012 revenue budget and includes a 3% average rate increase beginning April 1, 2013 adopted by the Board of Directors on February 12, The 2013 budget is based on prices (rates) adopted by the Board of Directors on December 11, Miscellaneous Revenue 338,000 Large 1% Industrial 320,000 1% Irrigation & Lighting 616,002 2% Industrial 2,226,851 6% Interest Income 258,600 1% 2013 REVENUE Non-Operating Income 158,999 0% Contributions in Aid 750,000 2% 3% Rate Increase 795,170 2% General Service 7,643,327 20% Principal Payments 4,416,522 11% Construction & Capital Expenditures 6,599,953 16% Interest Expense 1,418,734 4% 2013 EXPENDITURES Residential 24,854,713 65% Non-Operating Expenses 90,422 0% Net Power Cost 16,890,036 42% Operations & Maintenance Expenses 10,959,811 27% -8-

12 FINANCIAL STATEMENTS

13 EXHIBIT A Balance Sheet December 31, Assets Electric plant: (Note 2) In service - at cost $ 108,549,441 $ 105,493,062 Acquisition adjustment (Note 3) 18,992,352 18,992,352 Construction work in progress 2,008,830 1,967,393 Total electric plant 129,550, ,452,807 Less: Accumulated provision for depreciation (43,438,886) (42,685,124) Accumulated provision for amortization of acquisition adjustment (Note 3) (17,371,074) (16,643,795) Net electric plant 68,740,663 67,123,888 Other assets and investments: Loans receivable 119, ,768 Investments in associated organizations (Note 4) 593,303 1,151,941 Cash and investments: (Note 5) Rate stabilization fund 2,375,000 2,375,000 Bond reserve account - 3,101,913 Loan accounts 47,700 47,676 Total other assets and investments 3,135,771 6,796,298 Current assets: Cash and investments: (Note 5) Cash and cash equivalents 10,543,255 11,392,961 Special deposits related to bonds and revenue obligations 3,720,430 2,169,545 Accounts receivable (net of allowance for doubtful accounts of $121,108 in 2012 and $92,596 in 2011) 4,590,876 4,751,659 Materials and supplies 933, ,017 Prepayments 425, ,681 Total current assets 20,213,384 19,653,863 Other assets and deferred charges: Derivative asset (Note 8) 262,826 34,932 Preliminary investigation - hydro projects - 27,320 Other deferred charges 914,748 1,073,201 Total other assets and deferred charges 1,177,574 1,135,453 Total assets 93,267,392 94,709,502 Deferred Outflows of Resources Unamortized loss on refunding (Note 6) 1,151,106 1,686,282 Deferred derivative charge (Note 8) 56,487 47,696 Total deferred outflows of resources 1,207,593 1,733,978 Total assets and deferred outflows of resources $ 94,474,985 $ 96,443,480 The accompanying notes are an integral part of this statement. -9a-

14 EXHIBIT A Balance Sheet December 31, Net Position Net position: Invested in capital assets - net of related debt $ 28,500,219 $ 22,493,925 Restricted for rate stabilization fund 2,375,000 2,375,000 Restricted for debt service 3,435,744 4,947,567 Unrestricted 11,533,807 13,332,008 Total net position 45,844,770 43,148,500 Liabilities Long-term debt: Bonds and revenue obligations payable, less current maturities (Note 6) 36,300,000 40,430,000 Unamortized premium (Note 6) 874, ,378 Unamortized discount (Note 6) (33,368) (36,762) Loans payable, less current maturities (Note 7) 16, ,107 Net long-term debt 37,157,769 41,460,723 Current liabilities: Current maturities of bonds and revenue obligations payable (Note 6) 4,130,000 4,740,000 Current maturities of loans payable (Note 7) 89,502 84,109 Accounts payable 2,599,281 2,589,009 Customer deposits 365, ,045 Accrued interest 332, ,567 Accrued payroll and employee benefits 2,049,499 2,031,356 Other accruals 26,485 27,808 Total current liabilities 9,592,253 10,197,894 Other liabilities and deferred credits: Post-employment healthcare benefits obligation (Note 10) 847, ,665 Derivative liability (Note 8) 56,487 47,696 Deferred credits 699, ,657 Total other liabilities and deferred credits 1,603,088 1,570,018 Total liabilities 48,353,110 53,228,635 Deferred Inflows of Resources Unamortized gain on debt reacquisition (Note 6) 14,279 31,413 Deferred derivative credit (Note 8) 262,826 34,932 Total deferred inflows of resources 277,105 66,345 Total net position, liabilities and deferred inflows of resources $ 94,474,985 $ 96,443,480-9b-

15 EXHIBIT B Statement of Revenues, Expenses and Changes in Net Position Operating revenues: Sales of electricity: Years Ended December 31, Residential $ 23,770,321 $ 23,393,283 Commercial and industrial 10,061,746 10,065,157 Irrigation 476, ,517 Other 2,494,972 3,251,444 Other operating revenues 669,697 1,870,161 Total operating revenues 37,473,276 38,993,562 Operating expenses: Cost of power 18,469,302 16,462,623 Distribution expense: Operation 1,209,524 1,144,567 Maintenance 2,353,073 2,710,526 Customer accounts expense 1,534,542 1,495,701 Customer service and informational and conservation expense 526, ,950 Administrative and general expense 3,770,823 3,351,503 Depreciation 3,347,053 3,196,938 Amortization of electric plant acquisition adjustment 727, ,279 Taxes 905, ,969 Total operating expenses 32,844,079 30,495,056 Net operating revenues 4,629,197 8,498,506 Nonoperating revenues-(expenses): Investment income 400, ,724 Patronage capital credits 14,630 41,681 Miscellaneous income 240, ,238 Interest on debt (2,219,046) (2,474,546) Less amount charged to construction 107,745 73,641 Other interest (64) 30 Loss on sale of plant (42,293) (60,835) Amortization of debt premium, discount, loss on refunding and gain on debt reacquisition (434,978) (434,978) Total nonoperating revenues-(expenses) (1,932,927) (2,367,045) Net income 2,696,270 6,131,461 Net position - beginning of year (as restated) 43,148,500 37,017,039 Net position - end of year $ 45,844,770 $ 43,148,500 The accompanying notes are an integral part of this statement. -10-

16 EXHIBIT C Statement of Cash Flows Years Ended December 31, Cash flows from operating activities: Cash received from customers $ 37,645,114 $ 38,720,953 Cash payments for purchased power (18,565,765) (16,355,501) Cash payments to suppliers for goods and services (2,086,818) (1,639,915) Cash payments to employees for services (8,170,500) (7,891,238) Net cash provided by operating activities 8,822,031 12,834,299 Cash flows from capital and related financing activities: Principal payments on bonds and revenue obligations payable (4,740,000) (4,140,000) Principal payments on loans payable (84,497) (78,568) Interest payments on debt, net of amount capitalized (2,150,482) (2,435,278) Other interest (64) 30 Construction and acquisition of plant (5,511,589) (6,626,607) Proceeds from sale of Fall Creek Hydro LLC 27,320 - Proceeds from sale of Dorena Hydro LLC - 1,250,389 Proceeds from sale of plant 22,224 9,000 Net cash used in capital and related financing activities (12,437,088) (12,021,034) Cash flows from investing activities: Proceeds from sale of Fall Creek Hydro LLC 563,271 73,860 Proceeds from sale of Dorena Hydro LLC - 557,561 Receipts from loans receivable - 3,325 Net decrease-(increase) in: Bond reserve 3,101,913 (12,891) Loan debt service reserve (24) 8 Investments - 1,980,555 Special deposits related to bonds and revenue obligations (1,550,885) (83,359) Investment income 400, ,724 Payments received for patronage capital credits 9,997 10,366 Miscellaneous income 240, ,238 Net cash provided by investing activities 2,765,351 3,017,387 Net increase-(decrease) in cash and cash equivalents (849,706) 3,830,652 Cash and cash equivalents - beginning of year 11,392,961 7,562,309 Cash and cash equivalents - end of year $ 10,543,255 $ 11,392,961 The accompanying notes are an integral part of this statement. -11-

17 EXHIBIT C (Continued) Statement of Cash Flows Years Ended December 31, Reconciliation of net operating revenues to net cash provided by operating activities: Net operating revenues $ 4,629,197 $ 8,498,506 Adjustments to reconcile net operating revenues to net cash provided by operating activities: Depreciation 3,347,053 3,196,938 Amortization 727, ,279 Decrease-(increase) in: Accounts receivable 160,783 (286,463) Materials and supplies (4,200) (187,069) Prepayments (14,925) (18,425) Other deferred charges - 217,240 Increase-(decrease) in: Accounts payable (75,310) 152,076 Customer deposits 11,055 13,854 Accrued payroll and employee benefits 18, ,856 Other accruals (1,323) 362 Post-employment healthcare benefits obligation 145,666 92,263 Other deferred credits (121,387) 169,882 Total adjustments 4,192,834 4,335,793 Net cash provided by operating activities $ 8,822,031 $ 12,834,299 Noncash investing, capital and financing activities: Debt premium, discount, loss on refunding and gain on debt reacquisition $ 434,978 $ 434,978 Amortization of debt premium, discount, loss on refunding and gain on debt reacquisition (434,978) (434,978) Carrying amount of property sold 64,517 69,835 Loss on disposition of property (64,517) (69,835) Investments in associated organizations (14,630) (41,681) Patronage capital credits 14,630 41,681 Derivative asset (227,894) (34,932) Deferred derivative credit 227,894 34,932 Deferred derivative charge (8,791) (47,696) Derivative liability 8,791 47,696 Total noncash investing, capital and financing activities $ - $ - The accompanying notes are an integral part of this statement. -12-

18 Notes to Financial Statements December 31, 2012, and SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Emerald People's Utility District is a people's utility district organized under Oregon Revised Statutes Chapter 261 operating principally as a power distribution utility. It has the authority to set rates and charges for commodities and services furnished. The District's service area is primarily located in Lane County and consists of two sectors, one north of Eugene and Springfield, the other to the south and east of Eugene and Springfield. The District also serves two mills in Halsey, Oregon. Substantially all revenues are derived from the sale of electric power to residential, commercial and industrial customers as well as market resales of excess power. The Governmental Accounting Standards Board (GASB) is the accepted standard setting body for establishing governmental accounting and financial reporting principles. Additionally, although the District is not subject to the regulations of the Federal Energy Regulatory Commission (FERC), its accounting policies generally conform to the accounting requirements of the FERC. Significant accounting policies are described below. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of 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. Reporting Entity - The financial statements of the District include all financial activities for which the Board of Directors is financially accountable. The District has no component units. Recognition of Revenue - Utility revenues are recognized on the accrual basis, whereby unbilled revenues are estimated and recorded in the period in which the revenue is earned. Revenues related to the District s principal operations are considered to be operating revenues. All other revenues are considered to be nonoperating. Investments in Associated Organizations - Investments in associated organizations consist of patronage capital credits allocated by certain cooperative organizations of which the District is a member and the District s investment in a limited liability company (LLC). The patronage capital investments are stated at cost. The LLC investment is accounted for under the equity method of accounting. Cash Equivalents - For purposes of the cash flows statement, the District considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. Cash and investments shown as segregated funds, construction funds (unspent debt proceeds) and special deposits related to bonds and revenue obligations are restricted, and are therefore not considered to be cash equivalents. Investments - Investments are stated at fair value. Materials and Supplies - Inventories of materials and supplies are carried at average cost. -13-

19 Notes to Financial Statements December 31, 2012, and SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Contd) Deferred Items - Established utility accounting procedures permit deferral of items which affect the time at which various items enter into the determination of net income. Amortization - Premiums and discounts are being amortized over the terms of the respective debt issues. Unamortized loss on refunding related to the Series 2003A Bonds is being amortized over the remaining term of the Series 1992 Bonds. Unamortized loss on refunding related to the Series 1996 Bonds is being amortized over the remaining term of the Series 1996 Bonds. Unamortized gain on debt reacquisition is being amortized over the remaining term of the Series 1996 Bonds. Restricted Net Position - Restricted net position reported in the balance sheet represents amounts for which constraints were imposed by creditors, grantors, contributors or laws or regulations. The District s policy is to first use restricted resources when an expense is incurred for which both restricted and unrestricted net position is available. Additional significant accounting policies are summarized in Notes 2 and ELECTRIC PLANT AND DEPRECIATION PROCEDURES: Electric plant activity for the year ended December 31, 2012 was as follows: Balance Balance January 1, 2012 Increases Decreases December 31, 2012 Electric plant not being depreciated: Land $ 350,941 $ 5,100 $ - $ 356,041 Construction in progress 1,967,393 4,288,521 4,247,084 2,008,830 Total electric plant not being depreciated 2,318,334 4,293,621 4,247,084 2,364,871 Electric plant being depreciated: Production 4,452, ,879 9,105 4,555,860 Transmission 1,810, , ,593 2,017,988 Distribution 86,234,511 4,086,385 1,055,781 89,265,115 General 12,594, , ,394 12,309,590 Intangible plant 50,229-5,382 44,847 Acquisition adjustment 18,992, ,992,352 Total electric plant being depreciated 124,134,473 4,771,534 1,720, ,185,752 Less accumulated depreciation: Production 2,256, ,026 9,104 2,420,986 Transmission 664,743 53, , ,381 Distribution 31,934,065 2,426,605 1,666,511 32,694,159 General 7,830, , ,877 7,894,360 Less accumulated provision for amortization of acquisition adjustment 16,643, ,279-17,371,074 Total electric plant being depreciated, net 64,805, ,205 (687,033) 66,375,792 Electric plant, net $ 67,123,888 $ 5,176,826 $ 3,560,051 $ 68,740,

20 Notes to Financial Statements December 31, 2012, and ELECTRIC PLANT AND DEPRECIATION PROCEDURES: (Contd) Electric plant activity for the year ended December 31, 2011 was as follows: Balance Balance January 1, 2011 Increases Decreases December 31, 2011 Electric plant not being depreciated: Land $ 350,941 $ - $ - $ 350,941 Construction in progress 1,857,724 4,401,901 4,292,232 1,967,393 Total electric plant not being depreciated 2,208,665 4,401,901 4,292,232 2,318,334 Electric plant being depreciated: Production 4,332, ,340 89,561 4,452,086 Transmission 1,572, ,436 70,662 1,810,481 Distribution 83,583,177 4,357,800 1,706,466 86,234,511 General 12,462, , ,787 12,594,814 Intangible plant 55,610-5,381 50,229 Acquisition adjustment 18,992, ,992,352 Total electric plant being depreciated 120,998,991 5,429,339 2,293, ,134,473 Less accumulated depreciation: Production 2,175, ,909 89,561 2,256,064 Transmission 726,560 49, , ,743 Distribution 32,027,474 2,338,882 2,432,291 31,934,065 General 7,696, , ,952 7,830,252 Less accumulated provision for amortization of acquisition adjustment 15,916, ,279-16,643,795 Total electric plant being depreciated, net 62,456,488 1,658,180 (690,886) 64,805,554 Electric plant, net $ 64,665,153 $ 6,060,081 $ 3,601,346 $ 67,123,888 Electric plant is recorded at cost. Other than general plant assets, the costs of additions, renewals and betterments with a useful life exceeding one year are capitalized regardless of dollar amount, and repairs and maintenance of property is charged to expense. General plant additions of approximately $1,000 or more with a useful life exceeding one year are capitalized. The District capitalizes an allowance for funds used during construction equivalent to the interest cost incurred to finance plant under construction. Property units renewed or replaced are removed from plant at their average cost. The cost of plant retired, plus removal cost, less salvage, is charged to the depreciation reserve. Provision has been made for depreciation of electric plant on annual straight-line composite rates as follows: Production plant 3.1% % Transmission plant 2.8% Distribution plant 1.8% - 4.0% General plant 2.0% % -15-

21 Notes to Financial Statements December 31, 2012, and ELECTRIC PLANT ACQUISITION ADJUSTMENT: The electric plant acquisition adjustment is the excess cost over the established value of electric plant purchased from Pacific Power and Light Company (currently Pacificorp) in 1983 and The 1983 acquisition adjustment totaled $16,777,342 and is being amortized over a life of 30 years. The 2002 acquisition adjustment totaled $2,215,010 and is being amortized over a life of 20 years. 4 - INVESTMENTS IN ASSOCIATED ORGANIZATIONS: Investments in associated organizations consisted of the following at December 31, 2012, and 2011: Fall Creek Hydro LLC $ - $ 563,271 Patronage capital credits invested in National Rural Telecommunications Cooperative 558, ,550 All other 35,031 24,120 Totals $ 593,303 $ 1,151,941 The Fall Creek Hydro LLC investment represented the District's ownership in the hydro-electric power project being developed by the LLC. In December 2010, the District entered into an agreement to sell its ownership interest in Fall Creek Hydro LLC. The sale was in progress at December 31, 2011, with the District receiving $73,860 of the sale price in December 2011 and the remainder in January CASH AND INVESTMENTS: 2011: Cash and investments are comprised of the following as of December 31, 2012, and Working funds $ 1,500 $ 1,500 Deposits with financial institutions 4,158,576 5,459,585 Investments held by State of Oregon, Department of Energy 47,700 47,676 Investments 12,478,609 13,578,334 Total cash and investments $ 16,686,385 $ 19,087,

22 Notes to Financial Statements December 31, 2012, and CASH AND INVESTMENTS: (Contd) Deposits Deposits with financial institutions include bank demand deposits. The total bank balance, as shown on the banks' records, was $4,048,636 at December 31, 2012, and $5,720,523 at December 31, Of these deposits, the total covered by federal depository insurance was $500,000 at December 31, 2012, and $500,000 at December 31, Oregon Revised Statutes (ORS) Chapter 295 requires public officials of municipal corporations to notify the Oregon State Treasurer of financial institutions where their public funds are deposited. The Oregon State Treasurer is responsible for monitoring public funds held by bank depositories in excess of FDIC insured amounts, and for assuring that public funds on deposit are collateralized to the extent required by ORS Chapter 295. ORS Chapter 295 requires depository banks to place and maintain on deposit with a third-party custodian bank securities having a value of 10%, 25% or 110% of public funds on deposit depending primarily on the capitalization level of the depository bank. Custodial credit risk for deposits is the risk that in the event of a bank failure, the District s deposits may not be returned to it. The District follows State law with respect to custodial credit risk and has not adopted a separate policy. Of the District s bank balance, $3,548,636 was exposed to custodial credit risk as of December 31, 2012, and $5,220,523 was exposed to custodial credit risk as of December 31, 2011, because deposits in excess of FDIC insurance were uncollateralized and/or were collateralized but not held by the thirdparty custodian bank in the District s name. Investments Held by State of Oregon, Department of Energy The investments held by State of Oregon, Department of Energy are in connection with the Small Scale Energy Loan Program and consist of a debt service reserve with a balance of $47,700 and $47,676 at December 31, 2012, and December 31, 2011, respectively. Investments State statutes authorize the District to invest in general obligations of the U.S. Government and its agencies, certain bonded obligations of Oregon municipalities, bank repurchase agreements, bankers' acceptances, and the Oregon Local Government Investment Pool, among others. The District has an investment policy that is consistent with these state statutes and does not further limit its investment choices. -17-

23 Notes to Financial Statements December 31, 2012, and CASH AND INVESTMENTS: (Contd) Investments (Contd) The composition of the District's investments as of December 31, 2012, and 2011, is shown below: Fair Value Percent Fair Value Percent U.S. Government agencies securities: Federal Home Loan Banks $ 612, % $ - 0.0% Federal National Mortgage Association - 0.0% 540, % U.S. Government securities 3,106, % 3,578, % Investment in Oregon Local Government Investment Pool 8,758, % 9,456, % Investments held by State of Oregon, Department of Energy 47, % 47, % Other 1, % 2, % Total investments $ 12,526, % $ 13,626, % The Oregon Local Government Investment Pool is an open-ended, no-load diversified portfolio pool. The fair value of the District s position in the pool is substantially the same as the value of the District s participant balance. The Oregon Local Government Investment Pool is an external investment pool which is part of the Oregon Short-Term Fund. Investment policies are governed by the Oregon Revised Statues and the Oregon Investment Council (Council). The State Treasurer is the investment officer for the Council. Investments are further governed by portfolio guidelines issued by the Oregon Short-Term Fund Board. The Oregon Short-Term Fund does not receive credit quality ratings from nationally recognized statistical rating organizations. Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of an investment. The Oregon Short-Term Fund manages this risk by limiting the maturity of the investments held by the fund. Weighted average maturities of investments in the Oregon Short-Term Fund at December 31, 2012 were: 70% mature within 93 days, 15% mature from 94 days to one year, and 15% mature from one to three years. Weighted average maturities of investments in the Oregon Short-Term Fund at December 31, 2011 were: 65% mature within 93 days, 16% mature from 94 days to one year, and 19% mature from one to three years. -18-

24 Notes to Financial Statements December 31, 2012, and CASH AND INVESTMENTS: (Contd) Investments (Contd) As of December 31, 2012, and 2011, maturities for the District s other investments are as follows: Less than One to Two Less than One to Two One Year Years One Year Years U.S. Government agencies securities $ 612,816 $ - $ 540,962 $ - U.S. Government securities 3,106,254-3,578,857 - Investments held by State of Oregon, Department of Energy 47,700-47,676 - Other 1,360-2,025 - Total $ 3,768,130 $ - $ 4,169,520 $ - The District s investments in U.S Government agencies securities consist of U.S. Government instrumentalities which are generally rated AA+ by Standard & Poor s and/or Aaa by Moody's. The District s investments in U.S. Government securities consist of U.S. Treasury securities which do not require a rating. Custodial credit risk for investments is the risk that, in the event of the failure of the counterparty, the District will not be able to recover the value of its investments or collateral securities that are in the possession of an outside party. The securities underlying the District s investment in U.S. Government agencies securities and U.S. Government securities are held by the District s counterparty, not in the District s name. The District established a rate stabilization fund as permitted by the District's Master System Bond Resolution. The District funded the rate stabilization fund from temporary cash investments. The Resolution allows the District to use amounts in this fund for its debt service coverage calculation as defined in the District's Master System Bond Resolution. -19-

25 Notes to Financial Statements December 31, 2012, and BONDS AND REVENUE OBLIGATIONS PAYABLE: At December 31, 2012, bonds and revenue obligations payable consist of the following: Current Long-Term Electric System Revenue Bonds, Series 1996, due annually through 2013 plus interest at 7.35%. Bonds are not subject to optional redemption prior to their stated maturities. $2,675,000 $ - Electric System Refunding Revenue Bonds, Series 2003A, due annually through 2022 plus interest from 3.75% to 5.25%. Bonds maturing on or after November 1, 2014 are redeemable, at the option of the District, on or after November 1, 2013, in whole or in part at par plus accrued interest, if any, to the date of redemption. 635,000 24,295,000 Electric System Revenue Obligations, Series 2003B, due annually through 2022 plus interest from 3.75% to 4.5%. Obligations maturing on or after November 1, 2014 are redeemable, at the option of the District, on or after November 1, 2013, in whole or in part at par plus accrued interest, if any, to the date of redemption. 390,000 4,270,000 Electric System Revenue Obligations, Series 2006, due annually through 2026 plus interest from 4.25% to 5%. Obligations maturing on or after November 1, 2016 are redeemable, at the option of the District, on or after November 1, 2015, in whole or in part at par plus accrued interest, if any, to the date of redemption. 430,000 7,735,000 Unamortized premium - 874,920 Unamortized discount - (33,368) Totals $4,130,000 $37,141,

26 Notes to Financial Statements December 31, 2012, and BONDS AND REVENUE OBLIGATIONS PAYABLE: (Contd) Bond and revenue obligations principal and interest transactions for 2012 are as follows: Outstanding Outstanding 1/1/2012 Issues Retirements 12/31/2012 Principal $ 45,170,000 $ - $ 4,740,000 $ 40,430,000 Matured Matured 1/1/2012 Maturities Payments 12/31/2012 Interest $ (19,792) $ 2,268,988 $ 2,249,196 $ - As of December 31, 2012, scheduled maturities of bond and revenue obligations principal and interest are as follows: Total Principal Interest 2013 $ 6,124,313 $ 4,130,000 $ 1,994, ,970,989 3,230,000 1,740, ,973,351 3,365,000 1,608, ,975,101 3,505,000 1,470, ,970,239 3,675,000 1,295, ,307,388 19,665,000 3,642, ,180,180 2,860, ,180 Total $ 52,501,561 $ 40,430,000 $ 12,071,561 In 2003, the District extinguished $31,105,000 of Electric System Revenue Refunding Bonds, Series 1992 by redeeming those bonds with the proceeds of the Electric System Refunding Revenue Bonds, Series 2003A. The excess of the reacquisition price of the extinguished debt over its carrying value is included in deferred outflows of resources and is being amortized over the remaining term of the Series 1992 Bonds. Unamortized loss on refunding of $1,151,106 at December 31, 2012, shown in deferred outflows of resources represents the excess of the reacquisition price of defeased debt over its carrying value for bond issues which were refunded. Unamortized loss of $900,993 related to the Series 2003A Bonds is being amortized over the remaining term of the Series 1992 Bonds. Unamortized loss of $250,113 related to the Series 1996 Bonds is being amortized over the remaining term of the Series 1996 Bonds. Unamortized gain on debt reacquisition of $14,279 at December 31, 2012 represents the excess of the carrying value of the refunded bond issue over the reacquisition price of the refunded debt. The unamortized gain is being amortized over the remaining term of the Series 1996 Bonds. -21-

27 Notes to Financial Statements December 31, 2012, and BONDS AND REVENUE OBLIGATIONS PAYABLE: (Contd) To satisfy the District s System Reserve Account requirement on the Series 1996 Bond issue, the District was required to fund the reserve account with permitted investments totaling no less than the maximum annual debt service of $2,875,515. This requirement was not applicable at December 31, 2012 since only one year of debt service payments remain. 7 - LOANS PAYABLE: Loans payable consist of the following amounts due to the State of Oregon, Department of Energy under the Small Scale Energy Loan Program at December 31, 2012, and 2011: Short Mountain Methane Generating Plant Loan $ 105,719 $ 190,216 The Short Mountain Methane Generating Plant Loan, in the original amount of $1,067,282, was received during The proceeds were used to replace funds used for expansion of the plant during The loan is payable in monthly installments of $7,794, including interest at 6.18% per annum. Loan principal and interest transactions for 2012 are as follows: Outstanding Outstanding 1/1/2012 Issues Retirements 12/31/2012 Principal $ 190,216 $ - $ 84,497 $ 105,719 Matured Matured 1/1/2012 Maturities Payments 12/31/2012 Interest $ - $ 9,031 $ 9,031 $ - Scheduled maturities of loan principal and interest are as follows: Total Principal Interest 2013 $ 93,528 $ 89,502 $ 4, ,348 16, Total $ 109,876 $ 105,719 $ 4,

28 Notes to Financial Statements December 31, 2012, and DERIVATIVE INSTRUMENTS: The District adopted Governmental Accounting Standards Board (GASB) Statement No. 53, Accounting and Financial Reporting for Derivative Instruments. Subject to certain exceptions GASB Statement No. 53 requires that every derivative instrument be recorded in the statement of net position as an asset or liability measured at its fair value, and that changes in the derivatives fair value be recognized currently in earnings unless such derivatives meet specific hedge accounting criteria and be determined as effective. Effective hedges qualify for hedge accounting and such changes in fair values are deferred. The District would use GASB guidance on regulated operations contained in GASB Statement No. 62 to defer until settlement unrecognized gains or losses for hedging derivatives that are not deemed to be effective. When hedging derivatives settle, the deferral balance is recognized as either cost of power or wholesale power sales revenue. As of December 31, 2012, the District had the following derivative instruments outstanding: Cash flow hedges: Changes in Fair Value Fair Value at 12/31/12 Notional Classification Amount Classification Amount Quantity Commodity forward Deferred inflows $ 262,826 Derivative asset $ 262,826 80,280 MWh Commodity forward Deferred outflows 56,487 Derivative liability 56,487 21,960 MWh As of December 31, 2011, the District had the following derivative instruments outstanding: Cash flow hedges: Changes in Fair Value Fair Value at 12/31/11 Notional Classification Amount Classification Amount Quantity Commodity forward Deferred inflows $ 34,932 Derivative asset $ 34,932 10,920 MWh Commodity forward Deferred outflows 47,696 Derivative liability 47,696 15,920 MWh Fair values are based on the futures price curve for the Mid-Columbia Intercontinental Exchange for electricity. -23-

29 Notes to Financial Statements December 31, 2012, and DERIVATIVE INSTRUMENTS: (Contd) Objectives and Strategies The District enters into derivative energy transactions to hedge its known or expected positions within its approved Power Risk Management Policy. Decisions are made to enter into forward transactions to protect its financial position, specifically to deal with expected long and short positions as determined by projected load and resource balance positions. Generally, the following strategies are employed to hedge the District s resource portfolio: Surplus purchased power resources - The District hedges projected surpluses in future periods by selling power forward or by purchasing put options. Surplus power is generally sold forward at a fixed price, either physically or financially, when the probability of surplus is very high, and hedged through the purchase of physical or financial put options when the projected surplus is less certain, but nevertheless expected to be available under projected scenarios. Deficit power resources - The District hedges projected power resource deficits in future periods by purchasing power forward or by purchasing call options. Power is generally purchased forward at a fixed price, either physically or financially, when the probability of the deficit position is very high, and hedged through the purchase of physical or financial call options when the projected deficit is less certain, but nevertheless expected to be needed under projected scenarios. Transactions authorized under the Power Risk Management Policy include (but are not limited to) physical forward purchases and sales, financial forward purchases and sales, physical call and put options, and financial call and put options. The following table displays the terms of the District s hedging derivative instruments outstanding at December 31, 2012, along with the credit rating of the associated counterparty or parent company guarantor, as applicable. Counterparty credit ratings provided are from Standard & Poor s and Moody s. All of the instruments presented in the table are commodity forward contracts with the objective to hedge changes in cash flows due to market price fluctuations related to expected sales of electricity. In addition, all of the instruments settle at expiration using the Mid-Columbia Intercontinental Exchange as the index. -24-

30 Notes to Financial Statements December 31, 2012, and DERIVATIVE INSTRUMENTS: (Contd) Objectives and Strategies (Contd) Notional Effective Counterparty Settlement Quantity Date Maturity Credit Rating Price Received 3,720 MWh (HLH,LLH) 10/3/2012 January 2013 A-/A3 $30.25 / MWh 3,360 MWh (HLH,LLH) 10/3/2012 February 2013 A-/A / MWh 3,715 MWh (HLH,LLH) 10/3/2012 March 2013 A-/A / MWh 2,080 MWh (HLH) 1/4/2012 April 2013 A-/A / MWh 1,520 MWh (LLH) 1/4/2012 April 2013 A-/A / MWh 3,600 MWh (HLH,LLH) 10/3/2012 April 2013 A-/A / MWh 3,600 MWh (HLH,LLH) 6/6/2012 April 2013 Not rated/a / MWh 2,080 MWh (HLH) 1/4/2012 May 2013 A-/A / MWh 1,640 MWh (LLH) 1/4/2012 May 2013 A-/A / MWh 3,720 MWh (HLH,LLH) 10/3/2012 May 2013 A-/A / MWh 3,720 MWh (HLH,LLH) 6/6/2012 May 2013 Not rated/a / MWh 3,720 MWh (HLH,LLH) 12/5/2012 May 2013 Not rated/a / MWh 2,000 MWh (HLH) 1/4/2012 June 2013 A-/A / MWh 1,600 MWh (LLH) 1/4/2012 June 2013 A-/A / MWh 3,600 MWh (HLH,LLH) 10/3/2012 June 2013 A-/A / MWh 3,600 MWh (HLH,LLH) 6/6/2012 June 2013 Not rated/a / MWh 3,600 MWh (HLH,LLH) 12/5/2012 June 2013 Not rated/a / MWh 3,720 MWh (HLH,LLH) 10/3/2012 July 2013 A-/A / MWh 3,720 MWh (HLH,LLH) 9/6/2012 July 2013 Not rated/a / MWh 3,720 MWh (HLH,LLH) 12/5/2012 July 2013 Not rated/a / MWh 3,720 MWh (HLH,LLH) 10/3/2012 August 2013 A-/A / MWh 3,600 MWh (HLH,LLH) 10/3/2012 September 2013 A-/A / MWh 3,720 MWh (HLH,LLH) 10/3/2012 October 2013 A-/A / MWh 3,605 MWh (HLH,LLH) 10/3/2012 November 2013 A-/A / MWh 3,720 MWh (HLH,LLH) 10/3/2012 December 2013 A-/A / MWh 2,080 MWh (HLH) 1/10/2012 April 2014 Not rated/a / MWh 1,520 MWh (LLH) 1/10/2012 April 2014 Not rated/a / MWh 3,600 MWh (HLH,LLH) 7/10/2012 April 2014 Not rated/a / MWh 2,080 MWh (HLH) 1/10/2012 May 2014 Not rated/a / MWh 1,640 MWh (LLH) 1/10/2012 May 2014 Not rated/a / MWh 3,720 MWh (HLH,LLH) 7/10/2012 May 2014 Not rated/a / MWh 2,000 MWh (HLH) 1/10/2012 June 2014 Not rated/a / MWh 1,600 MWh (LLH) 1/10/2012 June 2014 Not rated/a / MWh 3,600 MWh (HLH,LLH) 7/10/2012 June 2014 Not rated/a / MWh HLH - Heavy Load Hours LLH - Light Load Hours -25-

31 Notes to Financial Statements December 31, 2012, and DERIVATIVE INSTRUMENTS: (Contd) Objectives and Strategies (Contd) The following table displays the terms of the District s hedging derivative instruments outstanding at December 31, 2011, along with the credit rating of the associated counterparty or parent company guarantor, as applicable. Counterparty credit ratings provided are from Standard & Poor s and Moody s. All of the instruments presented in the table are commodity forward contracts with the objective to hedge changes in cash flows due to market price fluctuations related to expected sales of electricity. In addition, all of the instruments settle at expiration using the Mid-Columbia Intercontinental Exchange as the index. Notional Effective Counterparty Settlement Quantity Date Maturity Credit Rating Price Received 2,000 MWh (HLH) 5/25/2011 April 2012 A-/A / MWh 1,600 MWh (LLH) 5/25/2011 April 2012 A-/A / MWh 2,080 MWh (HLH) 5/25/2011 May 2012 A-/A / MWh 1,640 MWh (LLH) 5/25/2011 May 2012 A-/A / MWh 2,080 MWh (HLH) 10/13/2011 May 2012 A-/A / MWh 1,640 MWh (LLH) 10/13/2011 May 2012 A-/A / MWh 1,640 MWh (LLH) 11/15/2011 May 2012 Not rated/a / MWh 2,080 MWh (HLH) 5/25/2011 June 2012 A-/A / MWh 1,520 MWh (LLH) 5/25/2011 June 2012 A-/A / MWh 2,080 MWh (HLH) 10/13/2011 June 2012 A-/A / MWh 1,520 MWh (LLH) 10/13/2011 June 2012 A-/A / MWh 1,520 MWh (LLH) 11/15/2011 June 2012 Not rated/a / MWh 2,000 MWh (HLH) 10/13/2011 July 2012 A-/A / MWh 1,720 MWh (LLH) 10/13/2011 July 2012 A-/A / MWh 1,720 MWh (LLH) 11/15/2011 July 2012 Not rated/a / MWh HLH - Heavy Load Hours LLH - Light Load Hours Risks Credit risk - The District has developed credit procedures that establish guidelines for setting credit limits and monitoring credit exposure. The procedures state that the District will utilize The Energy Authority s (TEA) system for establishing counterparty credit evaluations and credit limits. The District also performs additional third party credit reviews on counterparties when deemed necessary by the Financial Risk Management Team (FRMT). Commodity transactions, both physical and financial, are entered into only with counterparties approved by the District s FRMT for creditworthiness. The District has entered into master enabling agreements called International Swaps and Derivatives Association Agreements (ISDA) with three counterparties, which enable hedging transactions. Credit ratings for these ISDA counterparties range from not rated/a3-26-