RAYBURN COUNTY ELECTRIC COOPERATIVE, INC. ROCKWALL, TEXAS FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS REPORT

Transcription

1 RAYBURN COUNTY ELECTRIC COOPERATIVE, INC. ROCKWALL, TEXAS FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS REPORT FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011 AND REPORT OF BOLINGER, SEGARS, GILBERT & MOSS, L.L.P. LUBBOCK, TEXAS

2 ROCKWALL, TEXAS FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS REPORT FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011 AND REPORT OF

3 ROCKWALL, TEXAS FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011 TABLE OF CONTENTS Statement Identification Page No. Independent Auditors' Report 1 Financial statements Balance Sheet Exhibit A 3 Statement of Income and Patronage Capital Exhibit B 4 Statement of Cash Flows Exhibit C 5 Notes to Financial statements 6

4 BOLINGER, SEGARS, GILBERT & MOSS, L.L.P. certified public accountants PHONE: (806) FAX: (806) Nashville Avenue LUBBOCK, TEXAS INDEPENDENT AUDITORS' REPORT Board of Directors Rayburn Country Electric Cooperative, Inc. Rockwall, Texas We have audited the accompanying financial statements of Rayburn Country Electric Cooperative, Inc. (the Cooperative), which comprise the balance sheets as of December 31, 2012, 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-

5 -2- Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Rayburn Country Electric Cooperative, Inc. as of December 31, 2012, and the results of their operations and their cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Other Matter The financial statements of Rayburn Country Electric Cooperative, Inc. as of December 31, 2011, were audited by other auditors whose report dated March 20, 2012, expressed an unmodified opinion on those statements. Lubbock, Texas Certified Public Accountants April 3, 2013

6 -3- BALANCE SHEET DECEMBER 31, 2012 AND 2011 Exhibit A ASSETS December 31, UTILITY PLANT AT COST Electric Plant in Service $ 175,584,408 $ 174,305,374 Construction Work in Progress 15,694,287 10,337,717 Plant Acquisition Adjustment 126,992, ,501,827 Less: Accumulated Depreciation - Electric Plant in Service 61,830,233 57,314,198 Less: Accumulated Amortization - Plant Acquisition 9,369,279 4,624,108 Total Utility Plant at Cost $ 247,071,387 $ 247,206,612 OTHER PROPERTY AND INVESTMENTS - AT COST OR STATED VALUE Investments in Associated Organizations $ 17,948,764 $ 18,088,811 Total Other Property and Investments - At Cost or Stated Value $ 17,948,764 $ 18,088,811 CURRENT ASSETS Cash $ 26,966,036 $ 17,838,433 Temporary Cash Investments 1,876,784 Accounts Receivable- Members 19,837,232 14,944,334 Accounts Receivable- Others 464, ,846 Other Current and Accrued Assets 1,246, ,012 Total Current Assets $ 48,514,381 $ 35,949,409 OTHER ASSETS Deferred Charges $ 2,509,673 $ 20,172,316 TOTAL ASSETS $ 316,044,205 $ 321,417,148 EQUITIES AND LIABILITIES EQUITIES Patronage Capital $ 49,095,123 $ 32,627,830 Donated Capital 2,800,000 2,800,000 Accumulated Comprehensive Loss (655,000) (174,200) Total Equities $ 51,240,123 $ 35,253,630 LONG-TERM DEBT CFC Mortgage Notes $ 127,768,216 $ 134,798,629 CoBank Mortgage Notes 99,000, ,500,000 Notes Payable - Member Cooperatives 2,535,062 2,673,040 Capital Lease Obligations 7,482 13,507 Less: Current Portion of Long-Term Debt 12,734,716 12,674,418 Total Long-Term Debt Less Current Maturities $ 216,576,044 $ 229,310,758 OTHER NONCURRENT LIABILITIES Accumulated Provision for Post-retirment Benefits $ 1,576,300 $ 989,700 CURRENT LIABILITIES Current Maturities of Long-Term Debt $ 12,734,716 $ 12,674,418 Accounts Payable 18,322,756 18,526,171 Rate Refund Payable 2,548,751 3,929,358 Taxes Accrued 23,108 15,057 Other Current and Accrued Expenses 2,098,140 2,373,986 Total Current Liabilities $ 35,727,471 $ 37,518,990 DEFERRED CREDITS Deferred Credits $ 10,924,267 $ 18,344,070 TOTAL EQUITIES AND LIABILITIES $ 316,044,205 $ 321,417,148 See accompanying notes to financial statements.

7 -4- STATEMENT OF INCOME AND PATRONAGE CAPITAL FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011 Exhibit B Years Ended December 31, OPERATING REVENUES Wholesale Power Sales $ 259,367,174 $ 314,499,222 Total Operating Revenues $ 259,367,174 $ 314,499,222 OPERATING EXPENSES Purchased Power $ 162,157,865 $ 212,785,172 Transmission Expense 21,935,440 18,302,441 Power Generation Expense 35,685,353 44,735,041 Administrative and General 2,116,942 2,567,061 Depreciation and Amortization 10,480,927 8,816,479 Taxes 265, ,950 Interest Expense - Other 102,394 94,280 Total Operating Expenses $ 232,744,574 $ 287,551,424 OPERATING MARGINS - Before Fixed Charges $ 26,622,600 $ 26,947,798 FIXED CHARGES Interest on Long-Term Debt $ 12,846,215 $ 13,353,835 OPERATING MARGINS - After Fixed Charges $ 13,776,385 $ 13,593,963 NON-OPERATING MARGINS Interest Income $ 976,331 $ 1,039,570 Capital Credit Income 1,700, ,785 Other Income (Expense) 13,780 (93,893) Total Non-Operating Margins $ 2,690,908 $ 1,463,462 NET MARGINS $ 16,467,293 $ 15,057,425 OTHER COMPREHENSIVE INCOME (LOSS) Post-retirement Benefit Adjustment (480,800) 222,800 COMPREHENSIVE INCOME $ 15,986,493 $ 15,280,225 Post-retirement Benefit Adjustment 480,800 (222,800) PATRONAGE CAPITAL - BEGINNING 32,627,830 17,570,405 PATRONAGE CAPITAL - ENDING $ 49,095,123 $ 32,627,830 See accompanying notes to financial statements.

8 -5- STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011 Exhibit C December 31, CASH FLOWS FROM OPERATING ACTIVITIES Net Margins $ 16,467,293 $ 15,057,425 Adjustments to Reconcile Net Margins to Net Cash Provided by Operating Activities Provision for Depreciation and Amortization 10,480,927 8,883,194 Patronage Capital Allocations (1,700,797) (517,785) Provision for Post-retirement Benefits 105, ,500 (Gain) Loss on General Plant (6,900) 13,294 Accounts Receivable (4,532,166) 6,317,841 Other Current and Accrued Assets (781,987) (234,346) Deferred Debits 17,662,643 (18,606,307) Accounts Payable (203,415) (2,387,295) Rate Refund Payable (1,380,607) (5,932,166) Accrued Taxes 8,051 14,591 Other Current and Accrued Liabilities (275,846) 1,312,132 Deferred Credits (7,419,803) (2,406,634) Net Cash Provided by Operating Activities $ 28,423,193 $ 1,653,444 CASH FLOWS FROM INVESTING ACTIVITIES Additions to Utility Plant $ (10,338,802) $ (7,156,747) Decrease in Certificates of Deposit 4,768,094 Investments in Associated Organizations 1,840, ,199 Net Cash Used in Investing Activities $ (8,497,958) $ (2,078,454) CASH FLOWS FROM FINANCING ACTIVITIES Principal Payments on Long-Term Debt $ (12,674,416) $ (12,539,012) Net Cash Used in Financing Activities $ (12,674,416) $ (12,539,012) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 7,250,819 $ (12,964,022) CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 19,715,217 32,679,239 CASH AND CASH EQUIVALENTS - END OF YEAR $ 26,966,036 $ 19,715,217 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Interest Paid During the Year $ 12,857,693 $ 14,797,295 Income Taxes Paid During the Year $ 0 $ 0 See accompanying notes to financial statements.

9 -6-1. Nature of Operations and Summary of Significant Accounting Policies Nature of Operations Rayburn Country Electric Cooperative, Inc. (the Cooperative) is a non-profit company organized and incorporated in 1979, pursuant to the Texas Electric Cooperative Corporation Act. The Cooperative is owned by five electric distribution cooperative members. These are Fannin County Electric Cooperative, Inc., Farmers Electric Cooperative, Inc., Grayson-Collin Electric Cooperative, Inc., Trinity Valley Electric Cooperative, Inc. and Lamar County Electric Cooperative, Association. The Cooperative was organized to coordinate power supply planning for its member cooperatives, to represent their interests in power related proceedings before state and federal agencies, legislative bodies and the courts, to negotiate and contract for generation and transmission services and to provide billing services. All margins in excess of cost of providing wholesale power is credited to each member cooperative s capital credit account on the basis of patronage provided by the member during the year. System of Accounts The accounting records of the Cooperative are maintained in accordance with the Uniform System of Accounts as prescribed by the Federal Energy Regulatory Commission. Plant in Service, Maintenance, and Depreciation Plant is stated at the original cost of construction which includes the cost of contracted services, direct labor, materials, and overhead items. When property which represents a retirement unit is replaced or removed, the cost of such property 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. Inventories Materials and supplies inventories are valued at average unit cost. Receivables and Bad Debts The Cooperative records a receivable for power delivered monthly. All amounts owed at year end are from member cooperatives and considered fully collectible. As a result no provision for bad debts is recorded in these financial statements. Patronage Capital Certificates Patronage capital from associated organizations is recorded at the stated amount of the certificates. Cash Equivalents For purposes of the statement of cash flows, the Cooperative considers cash and temporary cash investments to be cash equivalents.

10 -7- Group Concentration of Credit Risk The Cooperative's headquarters facility is located in Rockwall, Texas. The service area includes the service territory of its five member cooperatives all of which reside in northeastern Texas. The Cooperative records a receivable for electric revenues as billed on a monthly basis. These amounts are considered fully collectible and no deposits are required from the members. At times during the year, cash balances exceeded FDIC insurance limits. 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. Federal Income Tax Status The Cooperative qualifies for exempt status under Internal Revenue Code section 501(c)(12) which requires that 85% or more of income consists of amounts collected from members. The Cooperative follows the provisions of uncertain tax positions as addressed in FASB Accounting Standards Codification 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 their tax positions will be sustained upon examination by the Internal Revenue Service (IRS), or other state taxing authority, 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 U.S. federal income tax examinations by taxing authorities for years before The Cooperative recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. There were no penalties or interest recognized during the years ended 2012 and Fair Value of Financial Instruments The Cooperative has adopted accounting standards required for reporting fair value of financial instruments. The standards establish a hierarchical disclosure framework that prioritizes and ranks the level of market price observability used in measuring financial instruments. The three levels of fair value hierarchy are described below: Level 1 Valuations based on quoted prices in active markets for identical assets or liabilities that the entity has the ability to access. Level 2 Valuations based on quoted prices for similar assets and liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities. Level 3 Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

11 -8- Reclassifications Certain prior year numbers have been reclassified to conform to the current year presentation. There were no changes to net margins or total equities as previously reported. 2. Assets Pledged Substantially all assets of the Cooperative including the Member Notes Receivable are pledged as collateral for the debt due CFC and CoBank. 3. Plant in Service The major classes of electric plant are as follows: December 31, Production Plant $ 132,693,919 $ 131,505,431 Transmission Plant 37,275,325 37,147,625 Distribution Plant General Plant 5,614,801 5,651,955 Total Electric Plant in Service $ 175,584,408 $ 174,305,374 Construction Work in Progress 15,694,287 10,337,717 Total Utility Plant $ 191,278,695 $ 184,643,091 Provision has been made for depreciation of plant at the straight-line composite rates as follows, for both 2012 and Production Plant 2.85% Transmission Plant 2.75% Distribution Plant 3.20% General Plant: Structures and Improvements 2.50% Office Furniture and Equipment 6.00% Computer Equipment 16.00% Transportation Equipment 20.00% Communication Equipment 6.67% Miscellaneous Equipment 5.00% Depreciation for the years ended December 31, 2012 and 2011, was $5,383,469 and $4,192,371, respectively.

12 -9- In December, 2010 the Cooperative purchased a 25% interest in a gas fired generation station owned by Calpine Corporation. The difference in original net book value carried by Calpine Corporation and the purchase price was recorded as an acquisition adjustment on the Cooperative s books and totaled $121,136,762. As per the original contract additional payments were made in 2011 and 2012 reflecting measured capacity of the plant and resulted in an increase in the acquisition adjustment of $5,855,442. No additional adjustments to the purchase price remain. The acquisition adjustment is being amortized over the estimated remaining useful life of the generation plant and resulted in amortization expense of $5,097,458 and $4,624,108 for 2012 and 2011, respectively. 4. Investments in Associated Organizations Investments in associated organizations consisted of the following as of December 31, 2012 and 2011: December 31, CFC Membership $ 1,000 $ 1,000 Capital Term Certificates 15,216,577 16,045,673 Member Capital Securities 1,000,000 1,000,000 Patronage Capital 1,292, ,818 CoBank Patronage Capital 399,594 26,315 Texas Electric Cooperative Patronage Capital 4,141 3,352 National Renewables Cooperative Organization Patronage Capital 34,715 32,653 $ 17,948,764 $ 18,088,811 Patronage capital certificates are recorded at the stated amount of the certificates. All other investments are recorded at cost. 5. Deferred Charges Deferred charges consist of the following: December 31, Unamortized Debt Expense $ 678,763 $ 572,031 Unamortized Legal and Consulting 755, ,328 Gas Lock Agreements 977,273 18,830,888 Other 98,487 72,069 $ 2,509,673 $ 20,172,316 Unamortized Debt Expense Unamortized Legal and Consulting cost are loan fees and legal and

13 -10- consulting cost that the Cooperative incurred with the purchase of the undivided twenty five percent interest in the gas fired generation plant as explained above. These costs have been deferred and are being amortized to expense over twenty years. This also includes costs in 2012 for committed lines of credit amortized over five years. Gas Lock Agreements During 2011, the Cooperative paid a $4,300,000 fee to amend the Power Purchase Agreement with Constellation Energy Commodities Group, Inc. This payment is being amortized over the remainder of the original contract at a rate of $195,455 per month. In addition, the two entities entered into an amended and restated fixed fuel confirmation, requiring an upfront payment of $15,508,161 for 2012 calendar year. This contract was expensed during Return of Capital No patronage capital has been retired in 2012 or Patronage Capital December 31, Assigned $ 33,028,816 $ 17,971,392 Assignable 16,467,293 15,057,424 $ 49,496,109 $ 33,028,816 Less: Retired 400, ,986 Balance $ 49,095,123 $ 32,627, Donated Capital December 31, Donated Capital $ 2,800,000 $ 2,800,000 The Board approved previous amounts owed to the Member Cooperatives on the TU Settlement for Transmission charges to be reclassified to donated capital.

14 Long-Term Debt Notes payable at December 31, 2012 and 2011 are summarized as follows: December 31, CFC Mortgage Notes: Maturing in 2024 to 2025, Interest rates fixed at 6.15%-8.13% $ 14,442,039 $ 15,176,553 Maturing in 2030, Interest rate fixed at 7.32% $ 14,326,177 $ 15,122,076 Maturing in 2013 to 2030, Interest rates fixed at 3.25%-7.15% $ 99,000,000 $ 104,500,000 CoBank Mortgage Notes: Maturing in 2013 to 2030, Interest rate fixed at 5.05% $ 99,000,000 $ 104,500,000 Member Notes Payable: Maturing over a 32 year period, Interest rate fixed at 7.125% $ 2,535,062 $ 2,673,040 Current maturities for the next five years are as follows: 2013 $ 12,734, ,799, ,869, ,944, ,026,555 The Cooperative has available unadvanced loan funds from CFC totaling $11,429,000 at December 31, Short-Term Borrowing The Cooperative has $37,500,000 available under two line of credit agreements for short-term financing with CFC at a variable interest rate of which the first agreement expires on June At December 31, 2012, the Cooperative did not have an outstanding balance on the line of credit. The Cooperative has $22,500,000 available under a committed line of credit agreement with CoBank for short-term financing at a variable interest rate. The agreement expires in October, Accumulated Provision for Post-retirement Benefits (APBO) The Board of Directors of the Cooperative had previously voted to provide medical insurance benefits to retired employees. On October 26, 2011, the Board voted to discontinue other post-employment benefits for any and all persons employed after November 1, 2011, with all other employees employed before this date grandfathered in. The Cooperative has adopted accounting standards requiring the recognition of the estimated future cost of providing healthcare to retirees. In addition, accounting standards require that the funded status of this plan be fully recognized in the balance sheet.

15 -12- The status of the APBO is as follows: Accumulated Post-retirement Benefit Obligation: 2012 Retirees and Dependents $ 197,700 Actives, Fully Eligible 0 Actives, Not Yet Eligible 1,378,600 Total APBO $ 1,576,300 Fair Value of Assets $ 0 Unfunded Status $ 1,576,300 Employer Contributions $ 0 Plan Participant Contributions $ 0 Benefits Paid $ 0 Amounts Recognized in the Balance Sheet consisted of: Accumulated Provision for Post-retirement Benefits $ 1,576,300 Accumulated Comprehensive Loss $ 655,000 Net Periodic Benefit Cost Expensed Service Cost $ 53,800 Interest Cost 58,500 Amortization of Actuarial Loss 7,500 Total $ 119,800 The estimated net loss for the Post-retirement Healthcare Plan that will be amortized through benefit cost over the next fiscal year is $55,300. The following assumptions were used to determine benefit obligations and cost for the year ended December 31, 2012: Discount Rate-Benefit Obligation 4.00% Discount Rate-Benefit Cost 6.00% The following benefits are expected to be paid: 2013 $ 23, , , , , ,000 The healthcare cost trend rate was 7.00% decreasing gradually to 5.00% by the year 2017.

16 Deferred Credits December 31, Accrued Interest Payable - Rate Refunds $ 1,819,242 $ 2,716,929 Purchase Power Cost Over Recovery 7,252,716 13,774,832 AEP/SWEPCO Refund 1,852,309 1,852,309 $ 10,924,267 $ 18,344,070 The amount due for rate refunds and over recoveries of $9,071,958 and $16,491,761 for 2012 and 2011, respectively, will be refunded to members in future periods through credits to wholesale power cost. The Cooperative received a refund of power cost of $1,852,309 from Southwestern Electric Power Company (SWEPCO) and American Electric Power (AEP) for overcharges based on a ruling by FERC. The refund will also be refunded to the Cooperative members through credits to power cost. 13. Litigation, Commitments, and Contingencies There is no pending litigation which would materially affect the financial position of the Cooperative. The Cooperative has Power sales contracts with the member distribution cooperatives for the sale of all electric power, which the cooperatives will require for the operation of their respective systems. These all-requirements contracts have a termination date of December 31, 2041, and extend thereafter until terminated by either party giving to the other not less than six months written notice. The Cooperative has in effect wholesale power supply agreements with SWEPCO and the Southwestern Power Administration for its SPP load requirements. The Cooperative has entered into a hydropower pooling services agreement with Tex-La Electric Cooperative, Inc. and Constellation Energy Commodities Group, Inc. Also, the Cooperative has in effect an all-requirements Power Purchase Agreement with Constellation Energy Commodities Group, Inc. for Rayburn s ERCOT load requirements. This agreement continues through May 31, Pension Benefits The National Rural Electric Cooperative Association (NRECA) Retirement Security Plan (RS Plan) is a defined benefit pension plan qualified under Section 401 and tax-exempt under Section 501(a) of the Internal Revenue Code. It is a multiemployer plan under the accounting standards. The RS Plan sponsor s Employer Identification Number is and the RS Plan Number is 333.

17 -14- A unique characteristic of a multiemployer plan compared to a single employer plan is that all plan assets are available to pay benefits of any plan participant. Separate asset accounts are not maintained for participating employers. This means that assets contributed by one employer may be used to provide benefits to employees of other participating employers. The Cooperative contributions to the RS Plan in 2012 and in 2011 represented less than 5 percent of the total contributions made to the RS Plan by all participating employers. The Cooperative made contributions to the RS Plan of $96,666 in 2012 and $49,405 in There have been no significant changes that affect the comparability of 2012 and 2011 contributions. In the RS Plan, a zone status determination is not required, and therefore not determined, under the Pension Protection Act (PPA) of In addition, the accumulated benefit obligations and plan assets are not determined or allocated separately by individual employer. In total, the Retirement Security Plan was between 65 percent and 80 percent funded at January 1, 2012 and January 1, 2011 based on the PPA funding target and PPA actuarial value of assets on those dates. Because the provisions of the PPA do not apply to the RS Plan, funding improvement plans and surcharges are not applicable. Future contribution requirements are determined each year as part of the actuarial valuation of the RS Plan and may change as a result of plan experience. The employees also participate in a 401-K plan, a defined contribution plan provided through National Rural Electric Cooperative Association. The Cooperative makes monthly contributions to the plan. The cost for the Cooperative was $35,400 and $28,738 for the years ended December 31, 2012 and 2011, respectively. 15. Lease Commitments The Cooperative has leased certain transmission and sub-station facilities from Trinity Valley Electric Cooperative, Inc. in connection with the construction of transmission lines and facilities to facilitate the purchase of power from Southwestern Electric Power Company. Trinity Valley is a member of Rayburn Country Electric Cooperative, Inc. These agreements became effective June 1, 1993 and terminate December 31, 2018 or until either party gives five years prior notice. Lease payments for 2012 and 2011 totaled $210,900 and $218,964, respectively. Monthly lease payments are determined by a formula based on the net book value of property leased and Rayburn s cost of debt. The Cooperative accounts for these leases as operating leases. The approximate annual lease payments for the next five years are detailed as follows: 2013 $ 202, , , , ,541

18 -15- The Cooperative entered into an operating lease effective June 1, 1999 for a 14 MVA Mobile Substation, between Farmers Electric Cooperative, Inc., Grayson-Collin Electric Cooperative, Inc., and Trinity Valley Electric Cooperative, Inc. The lease terms provide for annual payments of $3,000 to each lessor, per year, for a total of $9,000 per year. The lease term continues in effect year to year unless one of the parties shall have given ninety days notice of its intention to terminate this lease. Lease payments for 2012 and 2011 totaled $9,000 and $9,000 respectively. Annual lease payments for the next five years are detailed as follows: 2013 $ 9, , , , ,000 The Cooperative entered into separate operating agreements effective June 1, 2002, with Grayson- Collin Electric Cooperative, Inc. and Trinity Valley Electric Cooperative, Inc. (operators). Each operator is responsible for complete operation and maintenance of a Mobile Substation stored at their location. The agreements provide for total monthly payments of $1,584. The agreements are in effect until a party gives one year s written notice of its intention to terminate the agreement. Annual operating payments for the next five years are as follows: 2013 $ 19, , , , , Disclosures about Fair Value of Financial Instruments Many of the Cooperative s fixed-rate obligations included in the accompanying financial statements are obligations that lack an available market with similar terms, conditions, and maturities. Accordingly, assumptions, estimations, and present value calculations were used for purposes of determining the fair value of such financial instruments. Estimated fair value has been determined by calculating the present value of financial instruments using the best available data. Fair value for some amounts carried in the financial statements has not been calculated. The recorded book value for temporary investments approximates fair value given the short period to maturity.

19 -16- The estimated fair value of the Cooperative s financial instruments at December 31, 2012, is as follows: Carrying Fair Value Value CFC Fixed Rate Long-Term Debt $ 127,768,216 $ 139,599,150 CoBank Fixed Rate Long-Term Debt 99,000,000 96,724,476 Notes Payable - Member Cooperatives 2,535,062 2,988,408 $ 229,303,278 $ 239,312,034 The fair value of the Cooperative s fixed rate long-term debt is calculated by computing the present value of the individual notes to the term of the note by using a discount rate that is the current CFC fixed interest rate available for long-term debt of the same term. Assessing the significance of a particular input to the fair value measurement requires judgment considering factors specific to the asset or liability. Long-term debt valuations are considered Level Subsequent Events The Cooperative has evaluated subsequent events through April 3, 2013, the date which the financial statements were available to be issued.