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KENNETH KUHNS & CO. Certified Public Accountants

570 Liberty Street S.E., Suite 210 Salem, Oregon 97301-3594

Telephone: (503) 585-2550

EMERALD PEOPLE’S UTILITY DISTRICT

AUDIT REPORT

Years Ended December 31, 2012, and 2011

TABLE OF CONTENTS Page 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

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EMERALD PEOPLE'S UTILITY DISTRICT

Board of Directors Penny Jordan 91947 Marcola Road President Springfield, Oregon 97478 Bruce Pilling 2960 Hillside Drive Treasurer Cottage Grove, Oregon 97424 Patti Chappel PO Box 1120 Director Veneta, Oregon 97487 Katherine Schacht 31499 Coburg Bottom Loop Road Director Eugene, Oregon 97408 Bill Tanner 36366 Valley Road Director Pleasant Hill, Oregon 97455

General Manager/Registered Agent

Scott Coe 33733 Seavey Loop Road Eugene, Oregon 97405

MANAGEMENT'S DISCUSSION AND ANALYSIS

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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 2012. 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 $160,783.

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• 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

Assets 2012 2011 2010Net electric plant 68,741$ 67,124$ 64,665$ Notes and Loans Receivable 120 120 123Investments in associated organizations 593 1,152 1,752Segregated Funds 2,423 5,525 5,512

71,877 73,921 72,052Cash and temporary investments 14,263 13,562 11,629Notes & accounts receivable - net 4,591 4,752 4,465Other Current Assets 1,359 1,340 1,135 Total current assets 20,213 19,654 17,229Other 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 2,221Total 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 9,240Other liabilities and deferred credits 1,603 1,570 1,260Total liabilities 48,353 53,229 56,867

Total deferred inflows of resources 277 66 49Total liabilities and deferred inflows of resources 48,630 53,295 56,916

Net PositionInvested in Capital Assets 28,500 22,494 16,252Restricted: Rate Stabilization Fund 2,375 2,375 2,375Restricted: for Debt Service 3,436 4,948 4,817Unrestricted 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$

(thousands)

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REVENUES

Revenue from sales of electricity, excluding the two large industrial customers, increased $439,788, a 1.3% change from 2011. 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 2011.

POWER SUPPLY

Emerald was a full requirements customer of Bonneville Power Administration (BPA) through September 30, 2011. 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 2011. 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, 2011. The sale of the Dorena Hydro LLC interest was completed on June 29, 2011. 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 2012.

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 2011.

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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 Statement2012 2011 2010

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 613 469 837 Net income 2,696$ 6,132$ 4,716$

(thousands)

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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, 2013. The 2013 budget is based on prices (rates) adopted by the Board of Directors on December 11, 2012.

2013 REVENUE

2013 EXPENDITURES

Residential24,854,713

65%

General Service

7,643,32720%

Industrial2,226,851

6%

Irrigation & Lighting 616,002

2%

Large Industrial320,000

1%

Miscellaneous Revenue338,000

1%

Interest Income258,600

1%

Non-Operating Income158,999

0%

Contributions in Aid

750,000 2%

3% Rate Increase795,170

2%

Net Power Cost

16,890,036 42%

Operations & Maintenance

Expenses10,959,811

27%

Construction & Capital

Expenditures6,599,953

16%

Principal Payments4,416,522

11%

Interest Expense1,418,734

4%

Non-Operating Expenses

90,422 0%

FINANCIAL STATEMENTS

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EXHIBIT AEMERALD PEOPLE'S UTILITY DISTRICT

Balance Sheet

December 31,Assets 2012 2011

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 129,550,623 126,452,807

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 119,768 119,768 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 accountsof $121,108 in 2012 and $92,596 in 2011) 4,590,876 4,751,659

Materials and supplies 933,217 929,017 Prepayments 425,606 410,681

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.

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EXHIBIT AEMERALD PEOPLE'S UTILITY DISTRICT

Balance Sheet

December 31,Net Position 2012 2011

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) 874,920 961,378 Unamortized discount (Note 6) (33,368) (36,762) Loans payable, less current maturities (Note 7) 16,217 106,107

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 365,100 354,045 Accrued interest 332,386 371,567 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) 847,331 701,665 Derivative liability (Note 8) 56,487 47,696 Deferred credits 699,270 820,657

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$

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EXHIBIT BEMERALD PEOPLE'S UTILITY DISTRICT

Statement of Revenues, Expenses and Changes in Net Position

Years Ended December 31,2012 2011

Operating revenues:Sales of electricity:

Residential 23,770,321$ 23,393,283$ Commercial and industrial 10,061,746 10,065,157 Irrigation 476,540 413,517 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 526,921 539,950 Administrative and general expense 3,770,823 3,351,503 Depreciation 3,347,053 3,196,938 Amortization of electric plant acquisition adjustment 727,279 727,279 Taxes 905,562 865,969

Total operating expenses 32,844,079 30,495,056

Net operating revenues 4,629,197 8,498,506

Nonoperating revenues-(expenses):Investment income 400,162 228,724 Patronage capital credits 14,630 41,681 Miscellaneous income 240,917 259,238 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$


EXHIBIT C


Statement of Cash Flows


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 relatedfinancing 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 400,162 228,724 Payments received for patronage capital credits 9,997 10,366 Miscellaneous income 240,917 259,238

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$


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EXHIBIT C(Continued)


Statement of Cash Flows


Reconciliation of net operating revenues to net cashprovided 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 727,279 727,279 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 18,143 257,856 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 -$ -$


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Notes to Financial Statements December 31, 2012, and 2011

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1 - 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.

EMERALD PEOPLE'S UTILITY DISTRICT Notes to Financial Statements December 31, 2012, and 2011

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1 - 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 3. 2 - 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 4,452,086 112,879 9,105 4,555,860 Transmission 1,810,481 350,100 142,593 2,017,988 Distribution 86,234,511 4,086,385 1,055,781 89,265,115 General 12,594,814 222,170 507,394 12,309,590 Intangible plant 50,229 - 5,382 44,847 Acquisition adjustment 18,992,352 - - 18,992,352

Total electric plant being depreciated 124,134,473 4,771,534 1,720,255 127,185,752

Less accumulated depreciation:Production 2,256,064 174,026 9,104 2,420,986 Transmission 664,743 53,434 288,796 429,381 Distribution 31,934,065 2,426,605 1,666,511 32,694,159 General 7,830,252 506,985 442,877 7,894,360

Less accumulated provision foramortization of acquisition adjustment 16,643,795 727,279 - 17,371,074

Total electric plant being depreciated, net 64,805,554 883,205 (687,033) 66,375,792

Electric plant, net 67,123,888$ 5,176,826$ 3,560,051$ 68,740,663$


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2 - 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 4,332,307 209,340 89,561 4,452,086 Transmission 1,572,707 308,436 70,662 1,810,481 Distribution 83,583,177 4,357,800 1,706,466 86,234,511 General 12,462,838 553,763 421,787 12,594,814 Intangible plant 55,610 - 5,381 50,229 Acquisition adjustment 18,992,352 - - 18,992,352

Total electric plant being depreciated 120,998,991 5,429,339 2,293,857 124,134,473

Less accumulated depreciation:Production 2,175,716 169,909 89,561 2,256,064 Transmission 726,560 49,122 110,939 664,743 Distribution 32,027,474 2,338,882 2,432,291 31,934,065 General 7,696,237 485,967 351,952 7,830,252

Less accumulated provision foramortization of acquisition adjustment 15,916,516 727,279 - 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% - 15.5% Transmission plant 2.8% Distribution plant 1.8% - 4.0% General plant 2.0% - 14.0%


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3 - 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 2002. 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:

2012 2011

Fall Creek Hydro LLC -$ 563,271$ Patronage capital credits invested in National

Rural Telecommunications Cooperative 558,272 564,550 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 2012.

5 - CASH AND INVESTMENTS:

Cash and investments are comprised of the following as of December 31, 2012, and 2011:

2012 2011

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$ 19,087,095$


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5 - 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, 2011. Of these deposits, the total covered by federal depository insurance was $500,000 at December 31, 2012, and $500,000 at December 31, 2011.

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 third-party 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.


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5 - CASH AND INVESTMENTS: (Contd)

Investments (Contd)

The composition of the District's investments as of December 31, 2012, and 2011, is shown below:

2012 2011

Fair Value Percent Fair Value Percent

U.S. Government agencies securities:Federal Home Loan Banks 612,816$ 4.9% -$ 0.0%Federal National Mortgage Association - 0.0% 540,962 4.0%

U.S. Government securities 3,106,254 24.8% 3,578,857 26.3%Investment in Oregon Local Government

Investment Pool 8,758,179 69.9% 9,456,490 69.4%Investments held by State of Oregon,

Department of Energy 47,700 0.4% 47,676 0.3%Other 1,360 0.0% 2,025 0.0%

Total investments 12,526,309$ 100.0% 13,626,010$ 100.0%

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.


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5 - CASH AND INVESTMENTS: (Contd)

Investments (Contd)

As of December 31, 2012, and 2011, maturities for the District’s other investments are as follows:

2012 2011Less than One to Two Less than One to TwoOne 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.


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6 - 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 $37,141,552


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6 - BONDS AND REVENUE OBLIGATIONS PAYABLE: (Contd)

Bond and revenue obligations principal and interest transactions for 2012 are as follows:

Outstanding 2012 2012 Outstanding

1/1/2012 Issues Retirements 12/31/2012Principal 45,170,000$ -$ 4,740,000$ 40,430,000$

Matured 2012 2012 Matured1/1/2012 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$ 1,994,313$ 2014 4,970,989 3,230,000 1,740,989 2015 4,973,351 3,365,000 1,608,351 2016 4,975,101 3,505,000 1,470,101 2017 4,970,239 3,675,000 1,295,239 2018-2022 23,307,388 19,665,000 3,642,388 2023-2026 3,180,180 2,860,000 320,180 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.


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6 - 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:

2012 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 1994. The proceeds were used to replace funds used for expansion of the plant during 1993. 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 2012 2012 Outstanding1/1/2012 Issues Retirements 12/31/2012

Principal 190,216$ -$ 84,497$ 105,719$

Matured 2012 2012 Matured1/1/2012 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$ 4,026$ 2014 16,348 16,217 131

Total 109,876$ 105,719$ 4,157$


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8 - 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:

Changes in Fair Value Fair Value at 12/31/12 Notional

Classification Amount Classification Amount Quantity

Cash flow hedges:

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:

Changes in Fair Value Fair Value at 12/31/11 Notional

Classification Amount Classification Amount Quantity

Cash flow hedges:

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.


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8 - 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.


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Objectives and Strategies (Contd)

Notional Effective Counterparty SettlementQuantity Date Maturity Credit Rating Price Received

3,720 MWh (HLH,LLH) 10/3/2012 January 2013 A-/A3 $30.25 / MWh3,360 MWh (HLH,LLH) 10/3/2012 February 2013 A-/A3 30.25 / MWh3,715 MWh (HLH,LLH) 10/3/2012 March 2013 A-/A3 30.25 / MWh2,080 MWh (HLH) 1/4/2012 April 2013 A-/A3 26.75 / MWh1,520 MWh (LLH) 1/4/2012 April 2013 A-/A3 14.25 / MWh3,600 MWh (HLH,LLH) 10/3/2012 April 2013 A-/A3 18.25 / MWh3,600 MWh (HLH,LLH) 6/6/2012 April 2013 Not rated/A3 15.75 / MWh2,080 MWh (HLH) 1/4/2012 May 2013 A-/A3 26.75 / MWh1,640 MWh (LLH) 1/4/2012 May 2013 A-/A3 14.25 / MWh3,720 MWh (HLH,LLH) 10/3/2012 May 2013 A-/A3 18.25 / MWh3,720 MWh (HLH,LLH) 6/6/2012 May 2013 Not rated/A3 15.75 / MWh3,720 MWh (HLH,LLH) 12/5/2012 May 2013 Not rated/A3 17.50 / MWh2,000 MWh (HLH) 1/4/2012 June 2013 A-/A3 26.75 / MWh1,600 MWh (LLH) 1/4/2012 June 2013 A-/A3 14.25 / MWh3,600 MWh (HLH,LLH) 10/3/2012 June 2013 A-/A3 18.25 / MWh3,600 MWh (HLH,LLH) 6/6/2012 June 2013 Not rated/A3 15.75 / MWh3,600 MWh (HLH,LLH) 12/5/2012 June 2013 Not rated/A3 17.50 / MWh3,720 MWh (HLH,LLH) 10/3/2012 July 2013 A-/A3 33.50 / MWh3,720 MWh (HLH,LLH) 9/6/2012 July 2013 Not rated/A3 26.25 / MWh3,720 MWh (HLH,LLH) 12/5/2012 July 2013 Not rated/A3 17.50 / MWh3,720 MWh (HLH,LLH) 10/3/2012 August 2013 A-/A3 33.50 / MWh3,600 MWh (HLH,LLH) 10/3/2012 September 2013 A-/A3 33.50 / MWh3,720 MWh (HLH,LLH) 10/3/2012 October 2013 A-/A3 35.50 / MWh3,605 MWh (HLH,LLH) 10/3/2012 November 2013 A-/A3 35.50 / MWh3,720 MWh (HLH,LLH) 10/3/2012 December 2013 A-/A3 35.50 / MWh2,080 MWh (HLH) 1/10/2012 April 2014 Not rated/A3 28.40 / MWh1,520 MWh (LLH) 1/10/2012 April 2014 Not rated/A3 14.50 / MWh3,600 MWh (HLH,LLH) 7/10/2012 April 2014 Not rated/A3 21.50 / MWh2,080 MWh (HLH) 1/10/2012 May 2014 Not rated/A3 28.40 / MWh1,640 MWh (LLH) 1/10/2012 May 2014 Not rated/A3 14.50 / MWh3,720 MWh (HLH,LLH) 7/10/2012 May 2014 Not rated/A3 21.50 / MWh2,000 MWh (HLH) 1/10/2012 June 2014 Not rated/A3 28.40 / MWh1,600 MWh (LLH) 1/10/2012 June 2014 Not rated/A3 14.50 / MWh3,600 MWh (HLH,LLH) 7/10/2012 June 2014 Not rated/A3 21.50 / MWh

HLH - Heavy Load HoursLLH - Light Load Hours


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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 SettlementQuantity Date Maturity Credit Rating Price Received

2,000 MWh (HLH) 5/25/2011 April 2012 A-/A3 26.60 / MWh1,600 MWh (LLH) 5/25/2011 April 2012 A-/A3 13.75 / MWh2,080 MWh (HLH) 5/25/2011 May 2012 A-/A3 26.60 / MWh1,640 MWh (LLH) 5/25/2011 May 2012 A-/A3 13.75 / MWh2,080 MWh (HLH) 10/13/2011 May 2012 A-/A3 21.90 / MWh1,640 MWh (LLH) 10/13/2011 May 2012 A-/A3 9.35 / MWh1,640 MWh (LLH) 11/15/2011 May 2012 Not rated/A3 8.75 / MWh2,080 MWh (HLH) 5/25/2011 June 2012 A-/A3 26.60 / MWh1,520 MWh (LLH) 5/25/2011 June 2012 A-/A3 13.75 / MWh2,080 MWh (HLH) 10/13/2011 June 2012 A-/A3 21.90 / MWh1,520 MWh (LLH) 10/13/2011 June 2012 A-/A3 9.35 / MWh1,520 MWh (LLH) 11/15/2011 June 2012 Not rated/A3 8.75 / MWh2,000 MWh (HLH) 10/13/2011 July 2012 A-/A3 21.90 / MWh1,720 MWh (LLH) 10/13/2011 July 2012 A-/A3 9.35 / MWh1,720 MWh (LLH) 11/15/2011 July 2012 Not rated/A3 8.75 / MWh

HLH - Heavy Load HoursLLH - 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


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Risks (Contd)

to A-/A3. These agreements contain provisions addressing credit exposure and provide for various remedies to assure financial performance, including the ability to call on additional collateral as conditions warrant, generally as determined by the exposed party. No such additional collateral was in place at December 31, 2012, or 2011. Based on the aggregate fair value of hedging derivative instruments in asset positions, the maximum amount of potential loss due to credit risk was $262,826 at December 31, 2012 and $34,932 at December 31, 2011.

Basis Risk - The District proactively works to eliminate or minimize basis risk on electricity transactions by entering into derivative transactions that settle pursuant to an index derived from market transactions at the point physical delivery is expected to take place. There are no derivative transactions outstanding that carry basis risk as of December 31, 2012, or 2011. All electricity transactions are to be settled on the relevant Mid-Columbia index. The District has ready access to electric transmission capacity at these trading points.

Termination Risk - As of December 31, 2012, and 2011, no termination events have occurred

and there are no outstanding transactions with material termination risk. None of the outstanding transactions have early termination provisions except in the event of default by either counterparty. Events of default are generally related to (i) failure to make payments when due, (ii) failure to provide and maintain suitable credit assurances as required, (iii) bankruptcy or other evidence of insolvency, or (iv) failure to perform under any material provision of the agreement. Failure to provide or receive electricity under physical commodity transactions generally does not fall under the events of default provisions unless the nonperforming party fails to pay the resulting liquidated damages as they become due.

There is no interest rate risk, rollover risk, market access risk or foreign currency risk for

these hedging derivative instruments as of December 31, 2012, and 2011. 9 - RETIREMENT PLAN:

The District provides pension benefits for all of its qualified employees through a defined contribution plan. The Emerald People’s Utility District Employees Pension Plan is administered by the District. In a defined contribution plan, benefits depend solely on amounts contributed to the plan plus investment earnings. All employees are eligible for the plan after completing one year of service with at least 1000 hours. The plan was authorized by the District's Board of Directors and requires the District to contribute 8.1 percent of salary (excluding overtime and bonuses) and employees to contribute 6 percent of salary. On June 1, 1999, the plan was amended to require the District to contribute 15% of salary for the General Manager. District contributions for each employee (and earnings allocated to the employee's account) are fully vested after five years of continuous service with at least 1000 hours. Contributions for, and earnings forfeited by, employees who leave employment before five years of service are used to reduce the District's current-period contribution requirement.


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9 - RETIREMENT PLAN: (Contd)

The total employer contribution was $484,013 in 2012, and $480,482 in 2011, equal to the required employer contribution. The total employee contribution was $338,681 in 2012, and $336,732 in 2011, equal to the required employee contribution.

10 - POST-EMPLOYMENT HEALTH CARE BENEFITS:

Plan Description

The District administers a single-employer defined benefit healthcare plan. The plan provides post-employment health care benefits for eligible retirees (until age 65) and their dependents through the District's healthcare plan, which covers both active and retired participants. Benefit provisions are established through District policy. The District’s post employment health care plan does not issue a publicly available financial report.

Funding Policy

Contribution requirements are established through District policy. In general, retirees are required to contribute 50% of the standard COBRA premium. Funding is on a pay-as-you-go basis. During 2012, the District contributed $151,139 and participants receiving benefits contributed $72,620 to the plan. During 2011, the District contributed $206,640 and participants receiving benefits contributed $57,078 to the plan.

Annual OPEB Cost and Net OPEB Obligation

The District's annual other post-employment benefit (OPEB) cost is calculated based on the annual required contribution of the employer (ARC), an amount actuarially determined in accordance with the parameters of GASB Statement No. 45. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost each year and amortize any unfunded actuarial liabilities over a 30 year period. The following table shows the components of the District’s annual OPEB cost for the year, amounts actually contributed to the plan, and changes in the District’s net OPEB obligation:

Annual required contribution 307,884$ Interest on net OPEB obligation 31,575 Adjustment to annual required contribution (42,654)

Annual OPEB cost 296,805 Contributions made (151,139)

Increase in net OPEB obligation 145,666

Net OPEB obligation - beginning of year 701,665

Net OPEB obligation - end of year 847,331$


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10 - POST-EMPLOYMENT HEALTH CARE BENEFITS: (Contd)

Annual OPEB Cost and Net OPEB Obligation (Contd)

The District's annual OPEB cost, the percentage of annual OPEB cost contributed to the plan, and the net OPEB obligation for 2012, 2011 and 2010 were as follows:

Year Annual Percentage of Annual Net OPEBEnded OPEB Cost OPEB Cost Contributed Obligation

12/31/2012 296,805$ 50.9% 847,331$ 12/31/2011 298,903$ 69.1% 701,665$ 12/31/2010 301,947$ 41.2% 609,402$

Funded Status and Funding Progress

As of January 1, 2010, the most recent actuarial valuation date, the plan was 0% funded. The actuarial accrued liability for benefits was $2,692,678 and the actuarial value of assets was $0, resulting in an unfunded actuarial accrued liability (UAAL) of $2,692,678. The covered payroll (annual payroll of active employees covered by the plan) was $5,700,089 for 2010 and the ratio of the UAAL to the covered payroll was 47% for 2010.

Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events into the future. Examples include assumptions about future employment, mortality and the healthcare cost trend. Amounts determined regarding the funded status of the plan and the annual required contributions of the employer are subject to continual revisions as actual results are compared with past expectations and new estimates are made about the future.

The schedule of funding progress, presented as required supplementary information following the notes to the financial statements, presents multiyear trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liability for benefits.

Actuarial Methods and Assumptions

Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the employer and the plan members) and include the types of benefits provided at the time of each valuation and historical pattern of sharing of benefit costs between the employer and the plan members to that point. The actuarial methods and assumptions used include techniques that are designed to reduce the effects of short-term volatility in actuarial accrued liabilities and the actuarial value of assets, consistent with the long-term perspective of the calculations.


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10 - POST-EMPLOYMENT HEALTH CARE BENEFITS: (Contd)

Actuarial Methods and Assumptions (Contd)

In the actuarial valuation conducted as of January 1, 2010, the frozen attained age actuarial cost method was used. Under this method the excess of the Actuarial Present Value of Projected Benefits of the group included in an actuarial valuation, over the sum of the Actuarial Value of Assets plus the Unfunded Frozen Actuarial Accrued Liability, is allocated on a level basis over the service of the group between the valuation date and assumed exit. This allocation is performed for the group as a whole, not as a sum of individual allocations. The portion of such Actuarial Present Value allocated to a valuation year is called the Normal Cost. Under this method, the Actuarial Gains and Losses are amortized in the same manner as future Normal Costs. Active employees were aggregated into five year age and service cells. Actuarial assumptions included a discount rate of 4.5% and an annual healthcare cost trend rate of 10% initially, reduced to an ultimate rate of 3.5% over a 5 year grading period. The District’s unfunded actuarial accrued liability is being amortized using the level-dollar method over a 30-year period on an open basis.

11 - RISK MANAGEMENT:

The District is exposed to various risks of loss related to torts; theft of, damage to, and destruction of assets; errors and omissions; and natural disasters. The District is a member of Special Districts Insurance Services (SDIS) and pays an annual premium to SDIS for risks of loss including general liability, automobile liability, public official liability and property coverage. Under the membership agreement with SDIS, SDIS is to be self-sustaining through member premiums and will reinsure through commercial companies for claims in excess of certain limits. Settled claims resulting from these risks have not exceeded insurance coverage in any of the past three years.

12 - INCOME TAX STATUS:

The District is a people's utility district organized under Oregon Revised Statutes Chapter 261. As a political subdivision of the State of Oregon, the District is exempt from taxation under the provisions of Section 115 of the Internal Revenue Code.

13 - COMMITMENTS:

Power Purchase Agreements

In December 2008, the District executed a Slice - Block Power Sales Agreement with the Bonneville Power Administration for the period October 1, 2011 through September 30, 2028. The Block product under this Power Sales Agreement provides a set amount of energy delivered in a flat block each hour, with the blocks of energy varying from month-to-month to correspond to seasonal variations in the District’s loads. The Slice product under this Power Sales Agreement represents a specified percentage of the output of the Federal Columbia River Power System (FCRPS), so that the District receives increased or decreased


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13 - COMMITMENTS: (Contd)

Power Purchase Agreements (Contd)

energy supply depending on the output of the FCRPS. The District is required to pay a corresponding percentage of the costs of the portion of the FCRPS allocated to the Slice product. BPA does not guarantee that the total amount of energy made available under the combined Slice and Block products will be sufficient to meet the District’s loads at all times, and the District may have to augment its power supply through its own generation or market purchases. At times the total amount of energy available under the combined Slice and Block products may be in excess of the District’s needs, and the excess Slice energy could be marketed by the District. The amounts payable by the District under this Power Sales Agreement are subject to periodic adjustment by the Bonneville Power Administration to recover the costs of the FCRPS.

In 2007, the District executed an Energy and Environmental Attributes Purchase Agreement with LL&P Wind Energy, Inc. for the period January 1, 2008 through December 31, 2027 for the purchase of 15 megawatts of capacity from the White Creek Wind Project. Wholesale power rates under this agreement are fixed and increase annually.

Resource Management Agreement

The District entered into a Resource Management Agreement with The Energy Authority (TEA) on May 1, 2010 to provide scheduling, dispatching and other power management services. The agreement expires in September 2028. The District has the right to terminate the agreement by providing two-year advance written notice. The agreement also provides for annual consulting task orders to provide additional power management services if requested by the District. Under the agreement, TEA is authorized to execute real time and pre-schedule transactions up to 72 hours in advance (to account for weekends and holidays). TEA may conduct transactions on behalf of the District beyond the pre-schedule time period only with specific District authorization. The District’s FRMT must formally approve any such transaction.

14 - RESTATEMENT:

Due to the implementation of Governmental Accounting Standards Board Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position and GASB Statement No. 65, Items Previously Reported as Assets and Liabilities, net position as of January 1, 2011 has been restated as follows:

Net position - January 1, 2011, as originally reported 37,822,609$ Unamortized debt issuance costs (805,570)

Net position - January 1, 2011, as restated 37,017,039$

REQUIRED SUPPLEMENTARY INFORMATION

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SCHEDULE 1


Schedule of Funding Progress for Retiree Health Plan

Actuarial Valuation Date

1-1-10 1-1-07

Actuarial value of assets (a) -$ -$ Actuarial accrued liability (b) 2,692,678 1,854,994

Unfunded actuarial accrued liability (b-a) 2,692,678$ 1,854,994$

Funded ratio (a/b) 0% 0%

Covered payroll (c) 5,700,089$ 5,332,715$

Unfunded actuarial accrued liability as apercentage of covered payroll ((b-a)/c) 47% 35%

OTHER SUPPLEMENTARY INFORMATION

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SCHEDULE 2


Schedule of Revenues, Operating Expenses and Net RevenuesAvailable for Debt Service

(1)


Debt Service Coverage as Defined in the Master SystemResolution for System Bonds:

Operating revenues:Sales of electricity 36,803,579$ 37,123,401$ Other operating revenues 669,697 1,870,161

Total operating revenues 37,473,276 38,993,562

Operating expenses:Purchased power 18,469,302 16,462,623 Transmission, operations, maintenance, administrative and general 9,394,883 9,242,247 Taxes 905,562 865,969

Total operating expenses, excludingdepreciation and amortization 28,769,747 26,570,839

Net operating revenues 8,703,529 12,422,723

Investment income 400,162 228,724 Patronage capital credits 14,630 41,681 Loss on sale of plant (42,293) (60,835) Miscellaneous income 149,236 148,627

Balance available for debt service, before rate stabilizationfund activity 9,225,264 12,780,920

Rate stabilization fund activity (2) - -

Balance available for debt service after ratestabilization fund activity 9,225,264$ 12,780,920$

Debt service (3) 6,119,404$ 5,770,642$

Coverage of debt service 150.8% 221.5%

Debt Service Coverage as Defined in the Master Second LienElectric Revenue Obligation Declaration:

Balance available for debt service after rate stabilization fund activity 9,225,264$ 12,780,920$

Debt service (4) 7,102,516$ 6,746,218$

Coverage of debt service 129.9% 189.5%

(1) Source: As defined in the Master System Resolution adopted in 1994 and the MasterSecond Lien Electric Revenue Obligation Declaration adopted in 2003.

(2) As permitted by the Master System Resolution, the District established a rate stabilizationfund during 1997. Transfers from the fund increase the balance available for debt serviceand transfers to the fund reduce the balance available for debt service.

(3) Includes principal and interest maturities for System Bonds and Obligations consisting of Series 2006 RevenueObligations, Series 2003A Bonds, Series 2003B Revenue Obligations and Series 1996 Bonds.

(4) Includes principal and interest maturities for System Bonds and Obligations described in (3) above, Series 2003CRevenue Obligations, Series 2003D Revenue Obligations and Small Scale Energy Loan Program (SELP) Loans.

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SCHEDULE 3


Schedule of Bond and Revenue Obligations Debt Service TransactionsYear Ended December 31, 2012

Principal TransactionsOutstanding 2012 2012 Outstanding

1/1/2012 Issues Retirements 12/31/2012

2006 Revenue Obligations 8,575,000$ -$ 410,000$ 8,165,000$ 2003A Bonds 25,545,000 - 615,000 24,930,000 2003B Revenue Obligations 5,035,000 - 375,000 4,660,000 2003C Revenue Obligations 630,000 - 630,000 - 2003D Revenue Obligations 220,000 - 220,000 - 1996 Bonds 5,165,000 - 2,490,000 2,675,000

Totals 45,170,000$ -$ 4,740,000$ 40,430,000$

Interest TransactionsMatured 2012 2012 Matured1/1/2012 Maturities Payments 12/31/2012

2006 Revenue Obligations -$ 384,645$ 384,645$ -$ 2003A Bonds - 1,260,138 1,260,138 - 2003B Revenue Obligations - 204,994 204,994 - 2003C Revenue Obligations (14,017) 28,034 14,017 - 2003D Revenue Obligations (5,775) 11,550 5,775 - 1996 Bonds - 379,627 379,627 -

Totals (19,792)$ 2,268,988$ 2,249,196$ -$

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SCHEDULE 4


Schedule of Future Bond and Revenue Obligations Debt Service RequirementsDecember 31, 2012

Total2006 Revenue Obligations 2003A Bonds 2003B Revenue Obligations 1996 Bonds Future

Year Principal Interest Principal Interest Principal Interest Principal Interest Requirements

2013 430,000$ 367,220$ 635,000$ 1,238,612$ 390,000$ 191,869$ 2,675,000$ 196,612$ 6,124,313$ 2014 445,000 348,945 2,380,000 1,214,800 405,000 177,244 - - 4,970,989 2015 470,000 326,695 2,475,000 1,119,600 420,000 162,056 - - 4,973,351 2016 495,000 303,195 2,575,000 1,020,600 435,000 146,306 - - 4,975,101 2017 515,000 280,920 2,710,000 885,413 450,000 128,906 - - 4,970,239 2018 540,000 257,745 2,655,000 743,137 470,000 110,906 - - 4,776,788 2019 565,000 233,445 2,795,000 603,750 490,000 91,519 - - 4,778,714 2020 590,000 208,020 2,945,000 457,013 510,000 70,694 - - 4,780,727 2021 615,000 181,470 2,805,000 302,400 535,000 48,381 - - 4,487,251 2022 640,000 153,795 2,955,000 155,138 555,000 24,975 - - 4,483,908 2023 670,000 124,995 - - - - - - 794,995 2024 700,000 96,185 - - - - - - 796,185 2025 730,000 65,560 - - - - - - 795,560 2026 760,000 33,440 - - - - - - 793,440

Totals 8,165,000$ 2,981,630$ 24,930,000$ 7,740,463$ 4,660,000$ 1,152,856$ 2,675,000$ 196,612$ 52,501,561$

INDEPENDENT AUDITOR'S COMMENTS REQUIRED BY OREGON STATE REGULATIONS

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