2012 financials web2 by Turlock Irrigation District

Turlock Irrigation District Consolidated Financial Statements and Required Supplemental Information December 31, 2012 and 2011

Turlock Irrigation District Index December 31, 2012 and 2011 Page(s) Report of Independent Auditors ............................................................................................................1-2 Management’s Discussion and Analysis (Unaudited) ..................................................................... 3–12 Consolidated Financial Statements Consolidated Statements of Net Position ............................................................................................ 13–14 Consolidated Statements of Revenues, Expenses and Changes in Net Position ..................................... 15 Consolidated Statements of Cash Flows ............................................................................................. 16–17 Notes to Consolidated Financial Statements ....................................................................................... 18–47 Supplemental Information Required Supplemental Information - Schedules of Funding Progress (Unaudited) ................................. 49

Report of Independent Auditors

To the Board of Directors of Turlock Irrigation District

We have audited the accompanying consolidated financial statements of Turlock Irrigation District and its component units ("TID" or the "District"), which comprise the consolidated statements of net position as of December 31, 2012 and December 31, 2011, and the related consolidated statements of revenues, expenses and changes in net position and of cash flows for the years then ended. Management's Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of the consolidated 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 consolidated 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 the consolidated financial statements based on our audits. We conducted our audits 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 consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the District's preparation and fair presentation of the consolidated 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 District'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 consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Turlock Irrigation District and its component units at December 31, 2012 and December 31, 2011, and their changes in financial position and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

PricewaterhouseCoopers LLP, 400 Capitol Mall, Suite 600, Sacramento, CA 95814 T: (916) 930 8100, F: (916) 930 8450, www.pwc.com/us

Other Matters Accounting principles generally accepted in the United States of America require that the managementâ&#x20AC;&#x2122;s discussion and analysis included on pages 3 through 12, and the schedules of funding progress included on page 49 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in the appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with managementâ&#x20AC;&#x2122;s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance.

Sacramento, California April 16, 2013

Turlock Irrigation District Management’s Discussion and Analysis (Unaudited) December 31, 2012 and 2011 The following management’s discussion and analysis of Turlock Irrigation District (“TID” or the "District") and its financial performance provides an overview of TID’s financial activities for the years ended December 31, 2012 and 2011. Management’s discussion and analysis should be read in conjunction with TID’s financial statements and accompanying notes, which follow this section. Background TID is an irrigation district organized under the provisions of the Wright Act and has the powers provided therein. Organized in 1887, TID was the first of 65 irrigation districts to be formed in the State of California. Its Board of Directors (the “Board”) governs TID. The five members of the Board are elected from geographic divisions of TID for staggered four-year terms. The Board appoints a general manager and certain other senior managers who are responsible for the operations of TID. Since 1923, TID has provided all the electric service within its 425 square-mile service area, which includes portions of Stanislaus, Merced and Tuolumne counties. TID’s service area includes the cities of Turlock, Ceres, Hughson and a part of Modesto and the unincorporated communities of Ballico, Keyes, Denair, Hickman, Delhi and Hilmar. Since 2003, TID has owned and operated the electric distribution facilities in a portion of the west side of Stanislaus County, including the City of Patterson, the community of Crows Landing and certain adjacent rural areas (collectively, the “Westside”). The Westside covers approximately 237 square miles. To provide electric service within its service area, TID owns and operates an electric system, which includes generation, transmission and distribution facilities. Its generating facilities include hydroelectric, wind, natural gas-fired and other facilities. TID also purchases power and transmission service from other sources and participates in other utility arrangements. TID also supplies water for irrigation use within 308 square miles of its service area, comprising approximately 5,800 parcels of land and 250 miles of gravity flow canals and laterals. TID’s electric and irrigation systems are operated and accounted for as a single entity; hence, revenues from both systems are available to pay the obligations of TID. Rates and Charges TID’s Board has full and independent authority to establish revenue levels and rate schedules for all electric service provided by TID. TID is not subject to retail rate regulation by any state or federal regulatory body, and is empowered to set retail rates effective at any time. TID has maintained rates for electric service that have been sufficient to provide for all operating and maintenance costs and expenses, debt service, repairs, replacements and renewals and to provide for base capital additions to the system. The Board fixes rates and charges of TID based on a cost of service methodology. TID increased electric rates by an average of 4.00% effective February 1, 2012. There were no other rate changes in the two years covered by this report. Subsequent to December 21, 2012, electric rates were increased by 4.00% effective January 1, 2013. TID has a credit requirement for all new service connections, which requires new customers to place a deposit with TID.

Turlock Irrigation District Management’s Discussion and Analysis (Unaudited) December 31, 2012 and 2011 Financial Reporting TID maintains its accounts in accordance with generally accepted accounting principles for proprietary funds as prescribed by the Governmental Accounting Standards Board (GASB). TID is accounted for as an enterprise fund and is financed and operated in a manner similar to that of a private business enterprise. TID uses the economic resources measurement focus and the accrual basis of accounting. Under this method, revenues are recorded when earned and expenses are recorded at the time liabilities are incurred. TID’s accounting records generally follow the Uniform System of Accounts for public utilities and licensees prescribed by the Federal Energy Regulatory Commission (FERC), except as it relates to the accounting for contributions in aid of construction (CIAC). In accordance with the GASB accounting rules which govern regulatory accounting, the Board has taken various regulatory actions for ratemaking purposes that result in the deferral of revenue or expense recognition. At December 31, 2012 and 2011 TID had total regulatory assets of $2.4 million and $0 million, respectively, and total regulatory credits of $61.2 million and $62.1 million, respectively. The regulatory credits are recognized in the statement of revenues, expenses and changes in net position when determined by the Board for ratemaking purposes. Investment Policies and Procedures The Board reviews TID's investment policy on an annual basis. TID has contracted with Public Financial Management, Inc. (PFM), a leading investment manager of public entity funds, to invest TID’s cash and investments. PFM only purchases investments on behalf of TID which are permitted by TID’s investment policy. The Bank of New York Mellon Trust Company holds these investments in custody. Debt Management Program TID regularly reviews its debt structure, which includes the issuance of refunding bonds to achieve debt service savings. Component Units The District has two component units, the Walnut Energy Center Authority (“WECA”) and the Tuolumne Wind Project Authority (“TWPA”), both of which were formed for the purposes of developing and operating generation facilities for the District’s use. WECA operates a 250 MW natural gas fueled generation facility located in TID’s service territory. TWPA has a membership interest in a 136.6 MW wind farm, consisting of 62-wind turbine generators located in Klickitat County, Washington. Although WECA and TWPA are separate legal entities from TID, they are reported as part of TID because of the extent of their operational and financial relationships with TID. Accordingly, all operations of these component units are consolidated into TID’s financial statements. Using This Financial Report This annual financial report consists of management’s discussion and analysis and the financial statements, including notes to the financial statements. The annual financial report reflects the activities of TID primarily funded through the sale of energy, transmission, and distribution services to its retail and wholesale customers, as well as irrigation services.

Turlock Irrigation District Managementâ&#x20AC;&#x2122;s Discussion and Analysis (Unaudited) December 31, 2012 and 2011 Statements of Net Position, Statements of Revenues, Expenses and Changes in Net Position, and Statements of Cash Flows The statements of net position include all of TIDâ&#x20AC;&#x2122;s assets, liabilities and deferred outflows using the accrual basis of accounting, as well as information about which assets can be utilized for general purposes, and which assets are restricted as a result of bond covenants and other commitments. The statements of revenues, expenses, and changes in net position report all of the revenues and expenses during the time periods indicated. The statements of cash flows report the cash provided and used by operating activities, as well as cash payments for debt service and capital expenditures and cash purchases and proceeds from investments during the time periods indicated. Summary of Financial Position and Changes in Net Position as of and for the Years Ended December 31, 2012, 2011 and 2010 (dollars in thousands)

2012

Assets and deferred outflows Utility plant, net Cash, cash equivalents and investments Other noncurrent assets Other current assets Deferred outflow of resources

Liabilities and net position Long-term debt Other noncurrent liabilities and deferred credits Other current liabilities

1,308,072 331,484 9,852 46,451 163

1,286,351 345,237 11,653 40,652 1,173

1,229,492 362,456 17,085 45,687 2,218

1,696,022

1,685,066

1,656,938

1,134,457 76,538 174,703

1,146,774 75,379 148,840

978,516 40,183 307,710

Net assets Net investment in capital assets Restricted Unrestricted Total net position $ $

Operating income Nonoperating expense, net Decrease in net position Net position Beginning of year

1,385,698

1,370,993

1,326,409

174,597 25,494 110,233

202,732 23,656 87,685

208,197 15,176 107,156

310,324

314,073

330,529

1,696,022 315,234 (275,111)

$ $

1,685,066 292,269 (271,583)

$ $

1,656,938 329,562 (319,142)

40,123

20,686

10,420

(43,872)

(37,142)

(31,696)

(3,749)

(16,456)

(21,276)

330,529

351,805

314,073

End of year

2010

Total liabilities

Revenue, expenses and changes in net position Operating revenues Operating expenses

2011

310,324

314,073

330,529

Turlock Irrigation District Management’s Discussion and Analysis (Unaudited) December 31, 2012 and 2011 Management’s Discussion and Analysis as of and for the Year Ended December 31, 2012 Assets Utility Plant TID invested approximately $1,308.1 million in utility plant assets, net of accumulated depreciation at December 31, 2012. TID transferred approximately $248.8 million of assets from construction in progress to utility plant in service in 2012 and had net disposals of $8.2 million. Net utility plant makes up 77% of TID’s assets at December 31, 2012, compared to 76% in the prior year. The following chart illustrates the breakdown of net utility plant by major plant category at December 31, 2012 - generation, transmission, distribution, natural gas supply, pipeline, unamortized future power rights, irrigation and other: Natural Gas Supply Irrigation 6% 4% Unamortized Future Power Rights 1%

PG&E Pipelines 2%

Other 3%

Distribution 15%

Generation 65%

Transmission 6%

During 2012, TID capitalized $83.1 million of additions to utility plant. TID invested $39.8 million in the Almond 2 Power Plant, which became operational in July 2012, $15.0 million to add/upgrade certain transmission and distribution (T&D) assets, $4.6 million for routine expansion which consists of transformers, T&D lines, meters, lights, and new services, $8.0 million investment in gas fields, $3.2 million in irrigation improvements, $1.4 million in transportation additions, $3.7 million in relicensing fees related to the Don Pedro dam hydroelectric facilities, $1.3 million in data processing equipment and the remaining $6.0 million in additions is made up of individually insignificant items. Cash, Cash Equivalents and Investments TID’s cash, cash equivalents and investments decreased $13.8 million during 2012. This was primarily due to cash used from capital activities primarily offset by cash inflows from current year operations. Other Noncurrent Assets Other noncurrent assets decreased $1.8 million during 2012. This decrease is the result of current year amortization of debt issue costs of $0.6 million and a decrease in other receivables in the amount of $1.0 million related to collections from other parties in 2012 for a domestic water project that was abandoned in 2011. The remaining decrease consists of individually insignificant items.

Turlock Irrigation District Management’s Discussion and Analysis (Unaudited) December 31, 2012 and 2011 Other Current Assets Other current assets increased $5.8 million during 2012. The increase was due to the establishment of a $2.4 million regulatory asset related to future rate recovery on a portion of the loss incurred in connection with a disposed fuel cell plant, an increase in retail accounts receivables of $1.7 million due primarily to an increase in rates, an increase in prepaid expenses of $1.2 million and other individually insignificant items. Deferred Outflow of Resources Deferred outflow of resources decreased $1.0 million due to a change in the value of hedging derivative instruments outstanding as of December 31, 2012 when compared to December 31, 2011. Liabilities and Changes in Net Position Long-term Debt Long-term debt decreased $12.3 million primarily due to scheduled principal payments of $11.1 million and the amortization of debt premiums of $1.2 million. The following table shows TID’s future debt service requirements from 2013 through 2017 at December 31, 2012 (dollars in thousands):

$90,000 $80,000 $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $0 2013 Principal

2014 Interest

2015

2016

2017

At December 31, 2012, TID’s bond ratings are A2 from Moody’s, A+ from Fitch and A from Standard and Poor’s. Other Noncurrent Liabilities and Deferred Credits Other noncurrent liabilities and deferred credits increased $1.2 million in 2012. The increase was primarily due to an increase of $1.8 million in TID’s PG&E Pipeline obligations, as a result of the new Almond 2 Power Plant becoming operational, offset by a decrease in regulatory credits of $0.9 million. The remaining change is due to individually insignificant items.

Turlock Irrigation District Managementâ&#x20AC;&#x2122;s Discussion and Analysis (Unaudited) December 31, 2012 and 2011 Other Current Liabilities Other current liabilities increased $25.9 million in 2012. This was primarily the result of an increase in commercial paper of $19.8 million related to expenditures incurred on capital projects, an increase in the current portion of TIDâ&#x20AC;&#x2122;s PG&E Pipeline obligations of $7.7 million, due to the Almond 2 Power Plant becoming operational, $3.0 million increase in customer deposits and advances, $0.9 million increase in accrued interest payable, offset by a decrease of $3.2 million in accounts payable, purchase power and fuel payables, a decrease of $1.2 million in accrued salaries, wages and benefits and $1.1 million decrease related to derivative financial instruments. Changes in Net Position Operating Revenues Operating revenues increased $23.0 million from $292.3 million in 2011 to $315.3 million in 2012. Wholesale electric revenues decreased $20.2 million to $49.1 million in 2012 from $69.3 million in 2011 as a result of a decrease in average sales price and volume sold. Average sales price decreased approximately 14% from an average of $35/megawatt hour (MWh) in 2011 to $30/MWh in 2012 and volumes decreased by approximately 22% when compared to 2011. Wholesale gas revenues decreased $8.8 million due to a decrease in sales volume. Electric retail power revenues were up $51.7 million primarily due to recognizing $0.4 million in revenues as a result of the power supply adjustment compared to a deferral of $36.5 million in 2011. The remaining increase is due to an increase in rates and consumption when compared to 2011. Operating Expenses Purchased power, generation and fuel expenses were $159.1 million in 2012 compared to $166.0 million in 2011. The decrease is due to decreased purchased power of $9.3 million which was offset by a $2.5 million increase in generation and fuel when compared to 2011 primarily due to the Almond 2 Power Plant, which became operational in July 2012 and hydro generation was down 58% when compared to 2011 resulting in higher internal plant operating costs from TIDâ&#x20AC;&#x2122;s gas fired power plants. Other electric, irrigation and administration and general expense collectively increased by $1.8 million. The increase is primarily due to an increase in pension expense, bad debt expense and water regulatory expenses. Depletion expense decreased $2.5 million due to a decrease in production from TID's gas field investments located in Wyoming and Texas. Depreciation expense increased $5.8 million primarily due to the Almond 2 Power Plant becoming operational in July 2012. Net Investment Income Net investment income in 2012 decreased $0.2 million when compared to 2011, primarily due to lower yields on investments. Other Income Other income remained flat when compared to 2011. Derivative Gain Net gain on derivatives decreased $2.4 million when compared to 2011, due to a change in the fair value of derivative instruments. Interest Expense Interest expense increased $4.1 million in 2012 as compared to 2011, primarily due to a full year of interest expense being incurred on the 2011 Revenue Refunding Bonds.

Turlock Irrigation District Management’s Discussion and Analysis (Unaudited) December 31, 2012 and 2011 Management’s Discussion and Analysis as of and for the Year Ended December 31, 2011 Assets Utility Plant TID invested approximately $1,286.4 million in utility plant assets, net of accumulated depreciation at December 31, 2011. TID transferred approximately $34.0 million of assets from construction in progress to utility plant in service in 2011. Net utility plant makes up 76% of TID’s assets at December 31, 2011, compared to 74% in the prior year. The following chart shows the breakdown of net utility plant by major plant category at December 31, 2011 - generation, transmission, distribution, natural gas supply, pipeline, unamortized future power rights, irrigation and other:

Natural Gas Supply 6% Irrigation 4%

PG&E Pipeline 1%

Other 3%

Unamortized Future Power Rights 1% Distribution 15%

Generation 65%

Transmission 4%

During 2011, TID capitalized $109.0 million of additions to utility plant. TID invested $61.6 million in the Almond 2 Power Plant, $19.8 million to add/upgrade certain T&D assets, $6.0 million for routine expansion which consists of transformers, T&D lines, meters, lights, and new services, $11.8 million investment in gas fields, $3.1 million in irrigation improvements, $1.6 million in transportation additions, $1.3 million in costs related to the Don Pedro dam hydroelectric facilities, $1.5 million in data processing equipment and the remaining $2.3 million in additions is made up of individually insignificant items. Cash, Cash Equivalents and Investments TID’s cash, cash equivalents and investments decreased $17.2 million during 2011. This was primarily a decrease in construction funds of $56.7 million due to the continued construction of the Almond 2 Power Plant expansion partially offset by an increase in debt reserve funds and interest payments due during construction of $24.0 million. These debt service funds were established in connection with the issuance of the TID First Priority Subordinated Revenue Refunding Bonds, Series 2011 in the amount of $206.9 million for the purposes of financing the Almond 2 Power Plant expansion. The remaining $15.5 million increase is primarily related to current year operations.

Turlock Irrigation District Management’s Discussion and Analysis (Unaudited) December 31, 2012 and 2011 Other Noncurrent Assets Other noncurrent assets decreased $5.4 million during 2011. This decrease is the result of TID receiving payment in the amount of $5.8 million on a receivable for the recovery of costs incurred to date on the construction of a domestic water project which was abandoned and billed during 2010 for which TID is entitled to cost recovery under the contract. Other Current Assets Other current assets decreased $5.0 million during 2011. The decrease was due to a decrease in wholesale account receivables of $7.0 million due to receipt of payment from the California Independent System Operator Corporation (ISO) on outstanding invoices as well as a decrease in wholesale power sales. The decrease in wholesale power sales was primarily due to decreases in wholesale prices. The decrease in wholesale account receivables was offset by an increase of $1.8 million in retail receivables due to increased volume sold of approximately 2% when compared to 2010. The remaining change is due to individually insignificant items. Deferred Outflow of Resources Deferred outflow of resources decreased $1.0 million due to the change in value of hedging derivative instruments outstanding as of December 31, 2011 when compared to December 31, 2010. Liabilities and Changes in Net Position Long-term Debt Long-term debt increased $168.3 million primarily due to the issuance of the TID First Priority Subordinated Revenue Refunding Bonds, Series 2011 in the amount of $206.9 million which was offset by scheduled principal payments and the redemption of outstanding variable rate debt totaling $35.1 million. The following table shows TID’s future debt service requirements from 2012 through 2016 at December 31, 2011 (dollars in thousands):

$90,000 $80,000 $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $0 2012

2013

Principal

Interest

2014

2015

2016

At December 31, 2011, TID’s bond ratings were A2 from Moody’s, A+ from Fitch and A from Standard and Poor’s.

Turlock Irrigation District Managementâ&#x20AC;&#x2122;s Discussion and Analysis (Unaudited) December 31, 2012 and 2011 Other Noncurrent Liabilities and Regulatory Credits Other noncurrent liabilities and deferred credits increased $35.2 million in 2011. The increase was primarily due to an increase of $37.1 million in regulatory credits offset by a decrease in TIDâ&#x20AC;&#x2122;s PG&E Pipeline obligation of $1.6 million and decrease in long-term derivative instruments of $0.4 million. The remaining change is due to individually insignificant items. Other Current Liabilities Other current liabilities decreased $158.9 million in 2011. This was primarily the result of a net decrease in short-term financings of $155.6 million due to the refinancing of a $190 million note with long-term debt offset by an increase in commercial paper of $35.4 million. Accounts payable, purchase power and fuel payables decreased $5.0 million and derivative financial instruments decreased $1.2 million offset by an increase in accrued interest payable of $2.4 million, due to the TID First Priority Subordinated Revenue Refunding Bonds, Series 2011 issued during 2011 and a combined increase of $0.5 million in customer deposits and accrued salaries, wages and related benefits. Changes in Net Position Operating Revenues Operating revenues decreased $37.3 million from $329.6 million in 2010 to $292.3 million in 2011. Wholesale revenues decreased $10.7 million to $69.3 million in 2011 from $80.0 million in 2010 as a result of a decrease in average sales price and slightly offset by an increase in volume sold. Average sales price decreased approximately 20% from an average of $44/megawatt hour (MWh) in 2010 to $35/MWh in 2011 and volumes increased by approximately 8.1% when compared to 2010. Wholesale gas revenues increased $2.9 million due to an increase in sales volume. Retail power revenues were down $29.5 million primarily due to a deferral of $36.5 million in revenues as a result of the power supply adjustment compared to a deferral of $10.9 million in 2010, which was slightly offset by an increase of 2.0% in consumption. Operating Expenses Purchased power, generation and fuel expenses were $166.0 million in 2011 compared to $214.6 million in 2010. The decrease is due to decreased purchased power of $22.6 million due to the recognition of $24.4 million of previously deferred public power supply adjustment during 2010 offset by an increase in power purchased under power purchase agreements. Generation and fuel decreased $26.0 million when compared to 2010 primarily due to a decrease in net fuel cost of $21.2 million due to lower volume and lower fuel prices and a decrease in operating expense at the WECA Plant of $2.0 million. Other electric, irrigation and administration and general expense were collectively down $1.7 million. The decrease was due to the recovery of a California ISO receivable resulting in a reduction in a previously recorded allowance for the receivable, a decrease in workers' compensation expense and legal expense for the year, resulting in a total decrease of $3.5 million in 2011, offset by an expense of $1.8 million due to the abandonment of a project previously included in utility plant and a slight increase in maintenance expense. Depletion expense increased $2.0 million due to increased production and depreciation expense increased $0.8 million due to several utility plant additions that were put into service during 2011. Net Investment Income Net investment income in 2011 slightly decreased when compared to 2010, primarily due to lower yields on investments.

Turlock Irrigation District Managementâ&#x20AC;&#x2122;s Discussion and Analysis (Unaudited) December 31, 2012 and 2011 Other Income Other income is up $0.5 million in 2011 when compared to 2010. This increase is primarily the result of a $0.6 million increase in contribution in aid of construction with the remaining decrease a result of individually insignificant items. Derivative Gain Net gain on derivatives remained flat when compared to 2010. Interest Expense Interest expense increased $5.9 million in 2011 as compared to 2010 primarily due to a full year of interest on the TID revenue refunding bonds, 2010 Series and the WECA revenue refunding bonds, 2010 series A & B issued during 2010.

Turlock Irrigation District Consolidated Statements of Net Position December 31, 2012 and 2011 (dollars in thousands)

2012

Assets Utility plant, net

Investments and other long-term assets Cash and cash equivalents, restricted for long-term purposes Short-term investments, restricted for long-term purposes Long-term investments, including restricted amounts Debt issuance costs and other assets Current assets Cash and cash equivalents, including restricted amounts Short-term investments, including restricted amounts Retail accounts receivable, net Wholesale accounts receivable, net Accrued interest and other receivables Materials and supplies, net Prepaid expenses and other current assets Regulatory assets Derivative financial instruments Total assets Deferred Outflow of Resources Deferred ouflow of resources on cash flow hedges

Total assets and deferred outflows of resources

2011

1,308,072

1,286,351

17,717 41,716 115,281 9,852

17,390 23,419 137,291 11,653

184,566

189,753

146,864 9,906 21,761 3,234 6,693 2,984 9,095 2,438 246

162,234 4,903 20,085 4,287 4,768 3,103 7,862 547

203,221

207,789

1,695,859

1,683,893

163

1,173

1,696,022

1,685,066

The accompanying notes are an integral part of these consolidated financial statements. 13

Turlock Irrigation District Consolidated Statements of Net Position (continued) December 31, 2012 and 2011 (dollars in thousands)

2012

Liabilities and Net Position Liabilities and deferred credits Long-term debt, net of current portion Regulatory credits Derivative financial instruments, net of current portion Asset retirement obligation Long-term lease obligations Affiliate obligation

1,112,387 61,235 372 3,119 7,994 3,818

2011

1,135,649 62,117 126 2,946 6,207 3,983

1,188,925

1,211,028

95,188 22,070 6,923 16,458 6,028 10,920 29,807 9,379 -

75,380 11,125 12,296 14,263 7,226 7,968 28,922 1,633 1,152

196,773

159,965

1,385,698

1,370,993

Net position Net investment in capital assets Restricted Unrestricted

174,597 25,494 110,233

202,732 23,656 87,685

Total net position

310,324

314,073

Current liabilities Commercial paper notes Current portion of long-term debt Power purchases and gas payables Accounts payable and accrued expenses Accrued salaries, wages and related benefits Customer deposits and advances Accrued interest payable Current portion of lease obligations Derivative financial instruments

Total liabilities

Total net position and liabilities

1,696,022

1,685,066

The accompanying notes are an integral part of these consolidated financial statements. 14

Turlock Irrigation District Consolidated Statements of Revenues, Expenses and Changes in Net Position Years Ended December 31, 2012 and 2011 (dollars in thousands)

2012

Operating revenues Electric Retail Wholesale Irrigation Wholesale gas Other

249,692 49,115 7,606 5,121 3,700

2011

198,011 69,334 7,445 13,941 3,538

315,234

292,269

64,158 94,948 24,573 11,943 20,703 5,634 53,152

73,466 92,539 24,346 11,161 19,962 50,109

275,111

271,583

Operating income

40,123

20,686

Nonoperating revenues and expenses Net investment income Other income, net Derivative gain Interest expense

2,375 8,267 173 (54,687)

2,600 8,187 2,618 (50,547)

(43,872)

(37,142)

(3,749)

(16,456)

Operating expenses Purchased power Generation and fuel Other electric Irrigation Administration and general Loss on disposal of utility plant Depreciation and amortization

Decrease in net position Net position Beginning of year

314,073

End of year

310,324

330,529 $

314,073

The accompanying notes are an integral part of these consolidated financial statements. 15

Turlock Irrigation District Consolidated Statements of Cash Flows Years Ended December 31, 2012 and 2011 (dollars in thousands)

2012

Cash flows from operating activities Receipts from electric customers Receipts from wholesale power sales Receipts from irrigation customers Receipts from sales of gas Payments to vendors for purchased power Payments to employees and vendors for generation and fuel and other electric Payments to employees and vendors for irrigation Payments to employees and vendors for administration and general Other receipts and payments, net

Net cash provided by operating activities Cash flows from capital and related financing activities Acquisition and construction of capital assets Proceeds from contributions in aid of construction Proceeds from issuance of long-term debt Repayment of long-term debt Repayment of long-term lease obligations Repayment of commercial paper and short-term borrowings Proceeds from issuance of commercial paper and short-term borrowings Interest payments on debt Interest payments on long-term lease obligations Build America Bond receipts Net cash used in capital and related financing activities Cash flows from investing activities Investment income Derivative gain Purchases of investments Sales of investments Net cash provided by (used in) investing activities Net decrease in cash and cash equivalents Cash and cash equivalents Beginning of year

248,151 50,168 7,698 5,442 (63,275)

2011

233,028 76,374 7,374 13,993 (74,553)

(116,048) (12,260)

(114,274) (11,308)

(20,616) 2,532

(18,172) 8,687

101,792

121,149

(74,898) 1,305 (11,125) (1,633) -

(111,352) 1,486 215,149 (47,895) (1,538) (190,950)

19,808 (54,167) (1,096) 3,671

35,415 (47,029) (521) 3,671

(118,135)

(143,564)

2,396 651 (108,294) 106,547

2,721 1,986 (98,063) 82,896

1,300

(10,460)

(15,043)

(32,875)

179,624

212,499

End of year

164,581

179,624

Reconciliation of cash and equivalents to balance sheet Cash and cash equivalents restricted for long-term purposes Cash and cash equivalents, including restricted amounts

17,717 146,864

17,390 162,234

164,581

179,624

The accompanying notes are an integral part of these consolidated financial statements. 16

Turlock Irrigation District Consolidated Statements of Cash Flows (continued) December 31, 2012 and 2011

(dollars in thousands)

2012

Adjustment to reconcile operating income to net cash provided by operations Operating income Adjustments to reconcile operating income to net cash provided by operating activities Depreciation and amortization Change in fair value of derivative financial instruments Other income Loss on disposal of utility plant Other changes in operating assets and liabilities Accounts receivable Materials and supplies Prepaid expenses and other current assets Regulatory assets and credits Power purchases payable Accounts payable and accrued expenses Accrued salaries, wages and related benefits Customer deposits and advances Affiliate obligation Net cash provided by operating activities Supplemental noncash investing and financing activities Accounts payable and other liabilities related to construction of capital assets Investment income from derivatives Refunding loss

40,123

2011

20,686

53,152 (73) 3,401 5,634

50,109 (805) 5,019 -

(2,568) 119 (69) (425) (5,373) 6,282 (1,198) 2,952 (165)

5,754 (30) 5,814 36,591 550 (3,038) 203 272 24

101,792

121,149

14,404 478 -

7,281 632 483

The accompanying notes are an integral part of these consolidated financial statements. 17

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2012 and 2011 (in thousands of dollars) 1.

Organization, Description of Business and Liquidity The Turlock Irrigation District (“TID” or the "District") was organized under the Wright Act in 1887 and operates under the provisions of the California Water Code as a special district of the State of California. As a public power utility, TID is not subject to regulation or oversight by the California Public Utilities Commission (CPUC). TID provides electric power and irrigation water to its customers. TID’s Board of Directors (the “Board”) determines its rates and charges for its commodities and services. TID levies ad valorem property taxes on property located in the counties of Stanislaus and Merced. TID may also incur indebtedness, including issuing bonds, and is exempt from payment of federal and state income taxes.

Summary of Significant Accounting Policies Method of Accounting TID maintains its accounts in accordance with generally accepted accounting principles for proprietary funds as prescribed by the Governmental Accounting Standards Board (GASB). TID is accounted for as an enterprise fund and is financed and operated in a manner similar to that of a private business enterprise. TID uses the economic resources measurement focus and the accrual basis of accounting. Under this method, revenues are recorded when earned and expenses are recorded at the time liabilities are incurred. TID’s accounting records generally follow the Uniform System of accounts for public utilities and licensees prescribed by the Federal Energy Regulatory Commission (FERC), except as it relates to the accounting for contributions in aid of construction (CIAC). Component Units The Walnut Energy Center Authority (“WECA”) owns and operates a 250 MW natural gas fueled generation facility, which commenced commercial operations in 2006. The Tuolumne Wind Project Authority (“TWPA”) owns a membership interest in a 136.6 MW wind farm, consisting of 62-wind turbine generators located in Klickitat County, Washington. WECA and TWPA have no employees and all the output from both facilities is sold to TID through power purchase agreements. Although WECA and TWPA are separate legal entities from TID, they are reported as part of TID because of the extent of their operational and financial relationship with TID which also includes oversight from the same Board as part of the WECA and TWPA Boards. Accordingly, all operations of WECA and TWPA are consolidated into TID’s financial statements. Internal transactions, including revenues and expenses between the District’s component units and the District, have been eliminated in the accompanying financial statements in accordance with accounting principles generally accepted in the United States of America. Use of Estimates 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. TID’s more significant estimates include fair value estimates for investments and derivative financial

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2012 and 2011 (in thousands of dollars) instruments; allowance for doubtful accounts; estimated useful lives of utility plant; health insurance reserves; and workersâ&#x20AC;&#x2122; compensation reserves. Long-term and Short-term Debt Long-term debt is recorded at the principal amounts of the obligations adjusted for original issue discounts and premiums. The premiums and discounts on bonds issued are amortized over the terms of the bonds using the effective interest method and recorded as a component of interest expense. Debt defeasance charges result from debt refunding transactions and comprise the difference between the reacquisition costs and the net outstanding debt balances including deferred costs of the defeased debt at the date of the defeasance transaction. Such charges are included as a component of long-term debt and amortized into interest expense over the shorter of the life of the refunded debt or the new debt, using the effective interest method. Utility Plant Utility plant is recorded at cost. The cost of additions, renewals and betterments are capitalized; repairs and minor replacements are charged to operating expenses as incurred. Interest and related financing costs are capitalized as a component of major utility plant development projects. TID incurred gross interest costs of $62,167 and $56,846 during the years ended December 31, 2012 and 2011, respectively, of which $7,480 and $6,299 were capitalized during 2012 and 2011, respectively. Depreciation is computed using the straight-line method over the estimated useful lives, which generally range from 20 to 40 years and 40 to 150 years for electric and irrigation related assets, respectively. The estimated useful lives of furniture, fixtures, equipment and other assets range from 5 to 25 years. Upon retirement of an asset that was previously in service, the cost of depreciable utility plant, plus removal costs, less salvage, is charged to accumulated depreciation. If a capital asset is disposed of prior to being put into service, the costs capitalized to date are expensed. During the year ended December 31, 2012, the District disposed of a fuel cell plant that was no longer economical to operate. As a result of the disposal of the fuel cell plant, the District incurred a loss of $8,072, of which $2,438 was deferred as a regulatory asset and $5,634 is recognized as an expense in the statement of revenues, expenses and changes in net position. In addition, during the years ended December 31, 2012 and 2011, TID had net expense totaling $111 and $1,989, respectively, from retirements and disposals that were previously classified as utility plant. Future power rights are costs incurred by TID in development of hydroelectric facilities owned by others who provide power to TID. Such costs are recorded as a component of utility plant and are being amortized on a straight-line basis over the 49-year periods to which these rights apply. Impairment of Long-Lived Assets TID accounts for potential impairments in accordance with GASB accounting rules, Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries, under which TID evaluates prominent events or changes in circumstances affecting capital assets to determine whether impairment of a capital asset has occurred. A capital asset is considered impaired when its service utility has declined significantly and unexpectedly and when full recovery through utility rates or other means is not considered probable.

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2012 and 2011 (in thousands of dollars) Intangible Assets TID accounts for intangible assets in accordance with GASB accounting rules, Accounting and Financial Reporting for Intangible Assets, which provides guidance regarding how to identify, account for and report intangible assets. Intangible assets are defined as assets that lack physical substance, are nonfinancial in nature, and have an initial useful life extending beyond a single reporting period. Accounting and Financial Reporting for Intangible Assets provides that intangible assets be classified as capital assets, except for items explicitly excluded from the scope of the standard. Included in utility plant are costs related to emission credits acquired that are necessary to operate gas fired facilities. Such credits have an indeterminate life and are therefore, not amortized. At December 31, 2012 and 2011, TID had emission credits totaling $20,187. Investments in Gas Properties TID owns non-operating ownership interests in gas producing properties in Wyoming and Texas. TID uses the successful efforts method of accounting for its investments in gas producing properties. Costs to drill and complete wells that access economically recoverable reserves are capitalized as a component of utility plant on the statement of net position. Costs to drill wells that do not find economically recoverable reserves are expensed. The capitalized costs of producing gas properties, after considering estimated residual salvage values, are depleted by the unit-ofproduction method based on the estimated future production of proved reserves for the properties. Gas production from TID’s share of these properties is sold to wholesale buyers as an economic hedge to offset the net cost of TID’s gas supply. Sales of gas in 2012 and 2011 totaled $5,121 and $13,702, respectively. Depletion expense, which is included as a component of depreciation and amortization expense in the accompanying statement of revenues, expenses and changes in net position, totaled $3,696 and $6,205, respectively, for the years ended 2012 and 2011. Cash, Cash Equivalents and Investments Cash equivalents include all debt instruments with original maturity dates of three months or less from the date of purchase and all investments in the California Asset Management Program (CAMP) and the Local Agency Investment Fund (LAIF). The debt instruments are reported at amortized cost which approximates fair value and the investments in CAMP and LAIF are reported at their net asset value, which approximates fair value. TID has a repurchase agreement where at the end of the business day funds are swept overnight to purchase a government sponsored enterprise from TID’s primary bank and the primary bank buys the investment back plus any interest earned. CAMP is a joint powers authority (JPA) and public agency whose investments are limited to those permitted by the California Government Code. Investments in CAMP shares are not insured by the Federal Deposit Insurance Corporation (FDIC) or any other governmental agency. LAIF has an equity interest in the State of California Pooled Money Investment Account (PMIA). PMIA funds are on deposit with the State’s Centralized Treasury System and are managed in compliance with the California Government Code, according to a statement of investment policy which sets forth permitted investment vehicles, liquidity parameters and maximum maturity of investments. The PMIA cash and investments are recorded at cost which approximates fair value. TID’s deposits with CAMP and LAIF are available for withdrawal generally on demand. Investments are carried at their fair market value, generally based on market prices quoted by dealers for those or similar investments.

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2012 and 2011 (in thousands of dollars) In accordance with provisions of the credit agreements relating to TID’s long-term debt obligations, restricted funds held by trustees have been established to provide for certain debt service and project funding requirements. The restricted funds held by trustees are invested primarily in United States (U.S.) government securities and related instruments with maturities no later than the expected date of the use of such funds. Participation in Joint Power Authorities TID’s ownership investments in JPAs are accounted for using the cost method except for the WECA and the TWPA as previously described. Debt Issuance Costs Costs incurred in connection with the issuance of debt obligations, principally underwriters’ and legal fees, are deferred on the statement of net position as debt issuance costs and are amortized into interest expense over the terms of the related obligations using the effective interest method. Accounts Receivable and Allowance for Doubtful Accounts Accounts receivable arise from billings to customers for the sale of power and water, and certain improvements made to customers’ properties. Accounts receivable also includes an estimate for unbilled retail and wholesale revenues related to power delivered between the last billing and the last day of the reporting period. TID recognizes an estimate of uncollectible accounts for its retail and wholesale receivables based upon its historical experience with collections, current market conditions and specific identification of known losses. At December 31, 2012 and 2011, the allowance for doubtful accounts totaled $420 and $450, respectively. TID records bad debt expense as administration and general in the statements of revenues, expenses and changes in net position. In 2012 and 2011, net bad debt expense was $1,066 and $635, respectively. Materials and Supplies Materials and supplies are used in TID’s operations and are recorded at average cost, net of reserves for obsolete items. Reserves for obsolete items totaled $628 and $301 at December 31, 2012 and 2011, respectively. Long-term Lease Obligations In connection with completing the Walnut Energy Center and the Almond 2 Power Plant, TID entered into long-term transmission arrangements with Pacific Gas and Electric (PG&E) which included PG&E constructing new, and reinforcing existing natural gas transmission facilities. The arrangements represent, in substance, capital leases wherein TID (lessee) is obligated to repay all costs associated with the construction and reinforcement of the transmission facilities to PG&E through billings on transmission usage. In accordance with GASB accounting rules governing lease accounting, TID records its obligations to PG&E as long-term lease obligations and the associated assets in utility plant. At inception, the contracts required up-front payments totaling $23,720 plus irrevocable payment obligations which totals $44,087 on a net present value basis to be paid over ten year periods. Amounts due within one year are classified as current. The lease obligations are included in TID’s statements of net position at December 31, 2012 and 2011 with a balance of $17,373 and $7,840, respectively, along with the related assets with a net book value of $34,859 and $6,448, respectively, in utility plant. Annual future lease payments will

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2012 and 2011 (in thousands of dollars) vary over the next 10 years based on the District’s use of the pipelines, but will total the remaining lease obligation over the next ten years. Regulatory Assets and Credits TID’s Board has the authority to establish the level of rates charged for all District services. As a regulated entity, TID’s financial statements are prepared in accordance with GASB accounting rules governing regulatory accounting, which requires the effects of the rate making process be recorded in the financial statements. Accordingly, certain expenses and revenues, normally reflected in operations as incurred, are recognized when included in rates and recovered from or refunded to customers as set forth in rate actions taken by the Board. Public Benefit TID’s Board has specified a component of its rates, 2.85%, to be committed to public benefit expenditures. Public benefit expenditures consist of noncapital and capital expenditures for energy efficiency programs and renewable energy resources. Differences between amounts collected, as a component of rates and amounts expended for public benefit are included in this regulatory account. No public benefit regulatory balance existed as of December 31, 2012 and 2011. Compensated Absences TID accrues vacation leave, sick leave and other compensated absences earned as liabilities when the employees earn the benefits. At December 31, 2012 and 2011, the total estimated liability for vacation, sick, and other compensated absences was $4,184 and $4,163, respectively, and is included in accrued salaries, wages and related benefits in the accompanying statements of net position. Self-Insurance Liability Substantially all of TID’s assets are insured against possible losses from fire and other risks. TID carries insurance coverage to cover general liability claims in excess of $1,000 per occurrence up to $35,000 and worker’s compensation claims in excess of $750 per occurrence. Excess insurance for medical claims is $200, per employee and covered retiree. TID records liabilities for unpaid claims when they are probable of occurrence and the amount can be reasonably estimated. TID purchases its excess workers' compensation insurance from the California State Association of Counties (CSAC) Excess Insurance Authority. The risk of loss in excess of $750 per occurrence is transferred to the insurance pool. The accompanying financial statements include accrued expenses for general liability, workers’ compensation and medical, dental and vision claims based on TID’s best estimates of the ultimate cost of settling outstanding claims and claims incurred, but not reported. At December 31, 2012 and 2011, TID’s estimated self-insurance liability for its worker’s compensation claims totaled $3,000 and $2,670, respectively, and is reported as a component of accounts payable and accrued expenses in the statements of net position. At December 31, 2012 and 2011, TID’s estimated selfinsurance liability for its medical claims totaled $0 and $880, respectively, and is reported as a component of accrued salaries, wages and related benefits in the consolidated statements of net position. Effective January 1, 2012, TID became a member of CSAC’s EIA Health program, which administers TID self-insurance for employee health. CSAC’s purpose is to pool the risk of its members to develop and fund programs of excess insurance for its members. Members fund the

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2012 and 2011 (in thousands of dollars) program through annual premiums developed by the CSAC Board with assistance from actuary and risk management consultants. Should actual losses among pool participants be greater than funds for the program, TID would be assessed its prorate share of the deficiency. No such losses have occurred and therefore no additional liability has been accrued by TID. Gas Price Swap and Option Agreements TID uses forward purchase agreements, swaps and option agreements to hedge the impact of market volatility on gas prices for its gas fueled power plants. Such agreements are treated as derivative financial instruments as defined below. Expenses under the contracts, net of the payments received, are reported as generation and fuel expense, in the period in which the underlying gas and power deliveries occur. Derivative Financial Instruments TID accounts for derivative instruments in accordance with GASB statement No. 53, Accounting and Financial Reporting for Derivative Instruments (GASB 53), which establishes accounting and financial reporting standards for the recognition, measurement, and disclosure of information regarding derivative instruments entered into by state and local governments (Note 9). TID records derivative financial instruments, consisting of gas price swap agreements, option agreements, and gas and electricity purchase and sales agreements that are not treated as normal purchases and normal sales, at fair value on its statement of net position. Normal purchases and normal sales are contracts that are for the purchase or sale of a commodity, such as natural gas or electricity, to be used in the normal course of operations, provided that it is probable TID will take or make delivery of the commodity specified in the derivative instrument. Changes in the fair value of derivatives that do not meet the requirements of an effective hedge transaction are included in non-operating revenues and expenses as a derivative gain (loss). Changes in the fair value of derivatives which are effective hedges are deferred on the statements of net position. The fair values of gas and electricity purchase and sales agreements are based on forward prices from both published indexes from applicable regions and discounted using established interest rate indexes, where applicable, and information obtained from a pricing service where a published index is not available. TID reports derivative financial instruments with remaining maturities of one year or less and the portion of long-term contracts with scheduled transactions over the next twelve months as current on the consolidated statement of net position. TID is exposed to risk of nonperformance if the counterparties default or if the agreements are terminated. TID monitors these risks and does not anticipate nonperformance. Net Position TID classifies its net position into three components â&#x20AC;&#x201C; net investment in capital assets; restricted; and unrestricted. These classifications are defined as follows: Net Investment in Capital Assets This component of net position consists of capital assets, net of accumulated depreciation reduced by the outstanding debt balances, net of unamortized debt expenses and unspent debt proceeds.

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2012 and 2011 (in thousands of dollars) Restricted This component consists of net position with external constraints placed on their use. Constraints include those imposed by debt indentures, grants or laws and regulations of other governments, by law through constitutional provisions or enabling legislation. Unrestricted This component of net position consists of net position that do not meet the definition of “restricted” or “net investment in capital assets". During 2012, an error was identified in the classification of net position as presented in the statement of net position (formerly labeled the statement of net assets) as of December 31, 2011. The error served to overstate the amount of net assets invested in capital assets and to understate the amount of net assets unrestricted by $7,840. No other financial statement line items were impacted by the 2011 error or its correction in the 2012 financial statements. Management does not believe the error is material to the financial statements of any period. Board Designated Net Position Net position includes amounts that TID’s Board designates as reserves for debt service, capital improvements and rate stabilization. The rate stabilization fund represents amounts reserved for the purpose of stabilizing electric utility rates in future periods. The Board determines the annual transfers into and out of these reserves. While the Board designates these funds as reserve funds, they are not restricted and the Board can utilize such funds for any purpose. The designated funds included in unrestricted net position were as follows at December 31: 2012 Rate stabilization Capital improvements

2011

34,076 7,791

41,867

Purchased Power Expenses A portion of TID’s power needs are provided by power purchase agreements. Expenses from such agreements, along with associated transmission costs paid to other utilities, are charged to purchased power expense in the period the power was received. Adjustments to prior billings are included in purchased power expense once the payments or adjustments can be reasonably estimated. Gains or losses on power purchase and sale transactions that are settled without physical delivery are recorded as net additions or reductions to purchased power expense. Additionally, any changes in the power supply adjustment (Note 8) balance, resulting in a regulatory asset increasing or decreasing are recorded as additions or reductions to purchased power expense and any changes resulting in a regulatory credit increasing or decreasing are recorded as additions or reductions to retail revenues. When the power supply adjustment balance changes from a regulatory credit to a regulatory asset or from a regulatory asset to a regulatory credit from one year to the next, a change to both purchased power expense and a change to retail revenues will be reflected in the statement of revenues, expenses and changes in net position. For the year ended December 31, 2012, the power supply adjustment balance increased resulting in an addition to retail revenues of $424, and for the year ended December 31, 2011, the power supply adjustment balance decreased resulting in a reduction to retail revenues of $36,591.

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2012 and 2011 (in thousands of dollars) CIAC and Grants TID receives CIAC for customer contributions relating to expansions to TIDâ&#x20AC;&#x2122;s distribution facilities. TID also receives grant proceeds from federal and state assisted programs for its river restoration programs and other programs. The contributions and grant proceeds are included in other income in the statement of revenues, expenses and changes in net position. When applicable, these programs may be subject to financial and compliance audits pursuant to regulatory requirements, although TID considers the possibility of any material grant disallowances to be remote. TWPA Service Agreements There are two service agreements with each of the manufacturers of the 62 turbines for TWPA. One service agreement is for 42 turbines and expires in May 2017. The other service agreement is for 20 turbines and expires in May 2014. Both service agreements are for standard operations and maintenance on the respective manufacturerâ&#x20AC;&#x2122;s turbines over the life of the agreement. In addition, the service agreement for the 42 turbines includes warranty provisions. TWPA also has two interconnection and transmission agreements with local utilities in the Pacific Northwest. The interconnection agreements allow for the delivery of the wind energy output from TWPA to various delivery points in the Pacific Northwest. The agreements have an initial term of 10 years and 20 years, one of which also includes a 10 year renewal option. Total expenses under the TWPA service, interconnection and transmission agreements amounted to $5,251 and $5,239 for the years ended December 31, 2012 and 2011, respectively, and have been recorded in generation and fuel expense within the statement of revenues, expenses and changes in net position. Asset Retirement Obligations The accounting for asset retirement obligations requires the recognition and measurement of liabilities for legal obligations associated with the retirement of tangible long-lived assets. Under these rules, an obligation is recorded only when legally binding retirement obligations exist under enacted laws, statutes, written contracts or oral contracts. Asset retirement obligations (AROs) are recognized at fair value as incurred and capitalized as a component of the cost of the related tangible long-lived assets with a corresponding amount recorded as a liability. TID has identified retirement obligations related to certain generation, transmission and distribution facilities located on properties that do not have perpetual leases. TIDâ&#x20AC;&#x2122;s nonperpetual leased land rights generally are renewed continuously because TID intends to utilize these facilities indefinitely. Since the timing and extent of any potential asset retirements are unknown, the fair value of any obligations associated with these facilities cannot be reasonably estimated and therefore no liability has been recorded at December 31, 2012 or 2011. In conjunction with the purchase of the Tuolumne Wind Project, TID recorded an ARO related to a decommissioning plan approved by Klickitat County. As the decommissioning plan represents a legal obligation to clean up the site at the retirement of the asset to comply with the approved contract with the Klickitat County, Washington, it meets the definition of an ARO. During the years ended December 31, 2012 and 2011 TID recorded $173 and $164 of accretion expense, respectively. As of December 31, 2012 the ARO liability is $3,119. California Greenhouse Gas Legislation California Assembly Bill 32 (AB-32) was passed by California lawmakers in 2006 and is an effort by the State of California to set a 2020 greenhouse gas emissions reduction goal into law. The goal is

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2012 and 2011 (in thousands of dollars) to reach a statewide emission limit of 427 million metric tons of carbon dioxide equivalent of greenhouse gases (GHG). Central to this initiative is the implementation of a cap and trade program, which covers major sources of GHG emissions in the State including power plants. The legislation directed the California Air Resources Board (ARB) to begin developing discrete early actions to reduce greenhouse gases while also preparing a scoping plan to identify how best to reach the 2020 limit. The program starts with an enforceable compliance obligation beginning with the 2013 GHG emissions. The cap and trade program includes an enforceable emissions cap that will decline over time. The State distributes allowances, which are tradable permits, equal to the emissions allowed under the cap. Sources under the cap will need to surrender allowances and offsets equal to their emissions at the end of each compliance period. The District is subject to AB32 and will be subject to the requirements under the cap and trade program beginning in 2013. The District continues to monitor legislation and proposed programs that would impact AB-32. Subsequent Events Subsequent events have been assessed through April 16, 2013. Recent Accounting Pronouncements In November 2010, the GASB issued Statement No. 61, The Financial Reporting Entity: Omnibus-an amendment of GASB Statements No. 14 and No. 34 (GASB 61). The objective of the statement is to update and improve existing standards regarding financial reporting and disclosure requirements of GASB No. 14, Financial Reporting Entity, and the related financial reporting requirements of GASB No. 34, Basic Financial Statements--and Management’s Discussion and Analysis--for State and Local Governments. The requirements of GASB 61 are effective for TID for the year ending December 31, 2013. Management of TID is currently evaluating the impact this statement will have on TID’s future financial statements. In December 2010, the GASB issued Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements (GASB 62). This statement incorporates into GASB’s authoritative literature certain accounting and financial reporting guidance that includes pronouncements issued on or before November 30, 1989, which do not conflict with or contradict GASB pronouncements. The requirements in this statement will improve financial reporting by contributing to the GASB’s efforts to codify all sources of generally accepted accounting principles for state and local governments so that they derive from a single source. The adoption of GASB 62 during the year ended December 31, 2012 did not have a material impact on the District’s financial statements. In June 2011, the GASB issued Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position (GASB 63). This statement provides financial reporting guidance for deferred outflows of resources and deferred inflows of resources. The adoption of GASB 63 during the year ended December 31, 2012 did not have a material impact on the District’s financial statements. In December 2010, the GASB issued Statement No. 65, Items Previously Reported as Assets and Liabilities (GASB 65). This Statement establishes accounting and financial reporting standards that reclassify, as deferred outflows of resources or deferred inflows of resources, certain items that were previously reported as assets and liabilities and recognizes, as outflows of resources or inflows of resources, certain items that were previously reported as assets and liabilities. The requirements of GASB 65 are effective for TID for the year ending December 31, 2013. Management of TID is currently evaluating the impact this statement will have on TID’s future financial statements.

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2012 and 2011 (in thousands of dollars) In June 2012, GASB issued Statement No. 68, Accounting and Financial Reporting for Pensions â&#x20AC;&#x201C; An Amendment of GASB Statement No. 27 (GASB 68). The primary objective of GASB 68 is to improve accounting and financial reporting by state and local governments for pensions. This statement establishes standards for measuring and recognizing liabilities, deferred outflows and deferred inflows of resources, and expenses. For defined benefit pensions, this statement identifies the methods and assumptions that should be used to project benefit payments, discount projected benefit payments to their actuarial present value, and attribute that present value to periods of employee service. Disclosure and required supplementary information requirements about pensions also are addressed. The requirements of GASB 68 are effective for TID for the year ending December 31, 2015. Management of TID is currently evaluating the impact this statement will have on TIDâ&#x20AC;&#x2122;s future financial statements. 3.

Utility Plant The summarized activity of TIDâ&#x20AC;&#x2122;s utility plant during 2012 is presented below: December 31, 2011 Nondepreciable utility plant Land Emission credits Construction in progress

Total nondepreciable utility plant Depreciable utility plant Generation Distribution Transmission General Future power rights Irrigation Investment in gas properties Total depreciable utility plant Less: Accumulated depreciation, amortization and depletion

83,056

Disposals

3,567

December 31, 2012

(248,800)

(175) $ -

31,218 20,187 6,079

(245,233)

(175)

57,484

83,056

797,635 300,416 95,041 75,780 26,565 59,775 112,464

164,518 9,804 54,689 4,052 118 4,066 7,986

(8,833) (1,056) (5,483) (14) -

953,320 309,164 149,730 74,349 26,683 63,827 120,450

1,467,676

245,233

(15,386)

1,697,523

1,066,515 $

Transfers

219,836

(401,161)

Depreciable utility plant, net Utility plant, net

27,826 20,187 171,823

Additions

1,286,351

(53,152)

245,233

29,904

7,378 $

(446,935)

(8,008)

1,250,588

(8,183) $

1,308,072

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2012 and 2011 (in thousands of dollars) The summarized activity of TID’s utility plant during 2011 is presented below: December 31, 2010 Nondepreciable utility plant Land Emission credits Construction in progress

108,957

Disposals

December 31, 2011

- $ (33,962)

- $ (1,871)

27,826 20,187 171,823

(33,962)

(1,871)

219,836

108,957

795,552 288,675 95,002 74,105 26,518 57,023 100,696

2,083 13,688 39 3,585 47 2,752 11,768

(1,947) (1,910) -

797,635 300,416 95,041 75,780 26,565 59,775 112,464

1,437,571

33,962

(3,857)

1,467,676

1,082,780 $

Transfers

146,712

(354,791)

Depreciable utility plant, net Utility plant, net

27,826 20,187 98,699

Additions

1,229,492

(50,109)

33,962

58,848

3,739 (118) $

(1,989) $

(401,161) 1,066,515 1,286,351

Participation in Joint Powers Agencies Transmission Agency of Northern California TID is a member of the Transmission Agency of Northern California (TANC), a JPA consisting of fifteen municipal utilities. TANC is a participant, with a 79.3% share of the California-Oregon Transmission Project (COTP) and other facilities for electric power transmission. TANC develops, operates and manages these projects. The COTP provides electric transmission between the Pacific Northwest and California. TID’s entitlement share of TANC’s portion of the COTP and other facilities is 15.1%, representing approximately 206 megawatts (MW) of transmission capacity. TID also has a 7.4% entitlement share of TANC’s transmission under the South of Tesla transmission agreements, which provides TID with 22 MW of transmission during normal operating conditions between Tesla and Midway. Under the TANC agreements, TID is responsible for TANC’s development, operating and debt service costs on a take-or-pay basis proportionate to its entitlement share. During 2012 and 2011, TID’s total expenses in connection with its TANC agreements, included in purchased power expense, totaled $8,534 and $9,131, respectively. At December 31, 2012 and 2011, TID has an affiliate obligation payable to TANC of $3,818 and $3,983, respectively.

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2012 and 2011 (in thousands of dollars) Northern California Power Agency TID is a participant of the Northern California Power Agency (NCPA), a JPA consisting of sixteen member agencies. NCPA develops and operates projects for the generation and transmission of electric power. Prior to 2011, TID was a member of NCPA and during 2010 TID provided notice to NCPA that it would be terminating its membership in the agency. The termination became effective during 2011. In connection with the termination of its membership, TID’s membership termination does not require TID to terminate its participation in the NCPA Geothermal Plants. TID plans to maintain its participation interest going forward and TID will remain obligated to pay its share of NCPA’s costs associated with the NCPA Geothermal Plants, including debt service on NCPA’s revenue bonds. TID has a 6.3% entitlement share in the capacity and energy from NCPA Geothermal Plants l and 2 (the “Geothermal Project”). TID is responsible for development, operating and debt service costs on a take-or-pay basis in proportion to its entitlement share. TID’s expenses relating to the Geothermal Project, included in purchased power expense, were $1,507 and $1,430 in 2012 and 2011, respectively. The long-term debt of TANC and NCPA is collateralized by a pledge and assignment of net revenues of each JPA, supported by the take-or-pay commitments of TID and other members. As such, TID is contingently obligated for its proportionate share of TANC’s liabilities of $438,985 and NCPA’s debt related to the Geothermal Project of $45,175 at December 31, 2012. Should other members of TANC or NCPA default on their obligations to these JPAs, TID would be required to make “step up” payments, up to 25% of its proportionate share, a maximum of $121,000, to cover a portion of the defaulted payments and would be entitled to the same proportion of additional power production or transmission. There have been no defaults by members of TANC nor NCPA. To obtain audited financial statements of NCPA contact NCPA at 651 Commerce Drive, Roseville, CA 95678 and for TANC audited financial statements contact TANC at 3100 Zinfandel Drive, Suite 600, Rancho Cordova, CA 95670.

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2012 and 2011 (in thousands of dollars) Walnut Energy Center Authority TID and Merced Irrigation District formed WECA for the principal purpose of owning and operating a 250 MW natural gas fueled generation facility that is blended into and reported as a component unit of TID. All operations of WECA are consolidated into TIDâ&#x20AC;&#x2122;s financial statements. WECAâ&#x20AC;&#x2122;s financial information is summarized as follows: 2012

Summarized statement of net position Current assets Noncurrent assets

2011

11,541 319,631

11,871 324,153

331,172

336,024

Current liabilities Long-term debt, net of current portion

55,073 276,099

55,061 280,963

Total liabilities

331,172

336,024

Total assets

2012 Summarized statements of revenues, expenses and changes in net position Operating revenues Operating expenses

Operating income Nonoperating revenues and expenses, net Changes in net position

2011

74,785 60,520

67,804 53,842

14,265

13,962

(14,265)

(13,962)

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2012 and 2011 (in thousands of dollars) Tuolumne Wind Project Authority TID and WECA formed TWPA for the principal purpose of acquiring and operating wind farm assets. TWPA is reported as a component unit of TID. All operations of TWPA are consolidated into TID’s financial statements. The TWPA’s statement of net position as of December 31, 2012 and 2011 and the results of its operations for the years ended December 31, 2012 and 2011 are summarized as follows: 2012 Summarized statement of net position Current assets Noncurrent assets

2011

24,579 420,745

15,363 431,789

445,324

447,152

Current liabilities Noncurrent liabilities Long-term debt, net of current portion

24,767 3,119 417,438

15,478 2,946 428,728

Total liabilities

445,324

447,152

Total assets

2012 Summarized statements of revenues, expenses and changes in net position Operating revenues Operating expenses

Operating income Nonoperating revenues and expenses, net Changes in net position

2011

34,364 13,229

32,720 11,870

21,135

20,850

(21,135)

(20,850)

Cash, Cash Equivalents and Investments TID’s investment policies are governed by the California Government Codes and its Bond Indenture, which restricts TID’s investment securities to obligations which are unconditionally guaranteed by the U.S. Government or its agencies; direct and general obligations of the State of California (State) or any local agency within the State; bankers’ acceptances; commercial paper; certificates of deposit; time certificates of deposit; repurchase agreements; medium-term corporate notes; shares of beneficial interest; mortgage pass-through securities; and deposits with the LAIF and CAMP. TID’s investment policy includes restrictions for investments relating to maximum amounts invested as a percentage of the total portfolio and with a single issuer, maximum maturities, and minimum credit ratings.

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2012 and 2011 (in thousands of dollars) Credit Risk To mitigate the risk that an issuer of an investment will not fulfill its obligation to the holder of the investment, TID limits investments to those rated, at a minimum, “A1” or equivalent for mediumterm notes and “A” for commercial paper by a nationally recognized rating agency. The following schedule presents the credit risk at December 31, 2012 and 2011. The credit ratings listed are from Standard and Poor’s. NR means not rated and TSY refers to U.S. Treasury securities. Credit Rating Cash and cash equivalents Deposits California Asset Management Program Repurchase agreements Local Agency Investment Fund

NR AAAm NR NR

Short-term investments Corporate notes Certificates of deposit Commercial paper Municipal notes U.S. Treasury Notes

A+, A A-1+ A-1+ SP-1 TSY

Cash and cash equivalents, restricted for long-term purposes Deposits California Asset Management Program

NR AAAm

Short-term investments, restricted for long-term purposes U.S. Treasury Bills U.S. Treasury Notes Government sponsored enterprises Long-term investments Government sponsored enterprises Certificates of deposit U.S. Treasury Notes Corporate notes Municipal notes Time certificate

2012

TSY TSY AA+

AA+ A-1+ TSY AA+, AA,AA-,A+,A AA NR $

59,263 36,305 13,148 38,148

2011

54,520 63,054 8,596 36,064

146,864

162,234

4,284 2,252 2,248 1,122 -

3,197 1,706

9,906

4,903

2,960 14,757

2,935 14,455

17,717

17,390

7,913 33,803

5,289 6,001 12,129

41,716

23,419

45,461 4,299 49,617 11,761 1,966 2,177

97,096 2,000 17,557 17,242 1,219 2,177

115,281

137,291

331,484

345,237

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2012 and 2011 (in thousands of dollars) The schedule below presents restricted and unrestricted balances of cash, cash equivalents and investments as of December 31: 2012 General operating funds Operating accounts Funds designated for rate stabilization Funds designated for capital improvements

Restricted funds Construction funds Reserve funds Debt service funds Water Studies Letter of credit deposit (time certificate) $

75,018 69,200 7,791

2011

66,892 69,200 7,791

152,009

143,883

32,219 90,266 52,218 2,595 2,177

58,977 89,800 50,400 2,177

179,475

201,354

331,484

345,237

Custodial Credit Risk This is the risk that in the event of the failure of a depository financial institution or counterparty to a transaction, TID’s deposits may not be returned or TID will not be able to recover the value of its deposits, investments or collateral securities that are in the possession of another party. TID does not have a deposit policy for custodial credit risk. At December 31, 2012 and 2011, TID had deposits totaling $3,851 and $4,090, respectively, which are insured by the FDIC. The remaining deposits of $58,372 and $53,365 are uncollateralized and uninsured at December 31, 2012 and 2011, respectively. TID’s repurchase agreement is collateralized with securities held by the pledging bank’s trust department in TID’s name. All investments are held in TID’s name. Investments in the LAIF and CAMP at December 31, 2012 and 2011, of $89,210 and $113,573 respectively, were uninsured and uncollateralized.

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2012 and 2011 (in thousands of dollars) Concentration of Credit Risk This is the risk of loss attributed to the magnitude of an entity’s investment in a single issuer. TID places no limit on the amounts invested in any one issuer for federal agency securities, except for mortgage pass through securities, which may not exceed 20% of TID’s portfolio. For disclosure purposes, investments issued or explicitly guaranteed by the U.S. government and investment in mutual funds and external investment pools are not required to be evaluated for concentration of credit risk. The following are the concentrations of risk representing 5% or greater in a single issuer in either year, all of which are government sponsored enterprises: 2012 Investment type Federal Home Loan Bank Federal National Mortgage Association (Fannie Mae) Federal Home Loan Mortgage Corporation (Freddie Mac)

2011

5% 17 % 7%

11 % 14 % 8%

Interest Rate Risk Although TID has restrictions as to the maturities of some of the investments, it does not have a formal policy that limits investment maturities as a means of managing its exposure to fair value losses arising from increases in interest rates. All of TID’s cash and cash equivalents have original maturities of 90 days or less. Investments maturing within one year are classified as current. At December 31, 2012 TID has the following investments with maturities of over one year, which are therefore subject to increased interest rate risk:

Fair Value Investment type Corporate notes Government sponsored enterprises Municipal notes Certificate of deposits Commercial paper U.S Treasury Notes Time deposit Total fair value Portfolio weighted average maturity

16,045 79,264 3,088 6,551 2,248 57,530 2,177

166,903

Weighted Average Maturity (Years)

1.57 1.74 1.44 0.81 0.38 2.41 3.00

1.91

In accordance with provisions of the credit agreements relating to certain of TID’s long-term debt obligations, restricted funds are maintained at levels set forth in the agreements to provide for debt service reserve and project funding requirements. These funds are held by trustees and have maturities no later than the expected date of the use of the funds.

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2012 and 2011 (in thousands of dollars) 6.

Long-term Debt Long-term debt consists of the following at December 31:

2012 Revenue bonds, fixed interest rates of 2.2% to 6.2%, maturing through 2041 TWPA revenue bonds, fixed interest rates of 3.0% to 6.9%, maturing through 2034 Certificates of participation, fixed interest rates of 4.5% to 5.0%, maturing through 2033

Total long-term debt outstanding Less Current portion Unamortized premiums and discounts, net Deferred losses on bond refundings, net Total long-term debt, net

660,260

2011

427,575

26,785

1,114,620

1,125,745

(22,070) 22,178 (2,341) $

671,385

1,112,387

(11,125) 23,728 (2,699) $

1,135,649

Debt Issuance and Refunding In August 2011, TID issued first priority subordinated revenue refunding bonds, series 2011 totaling $206,940, the proceeds of which were used to retire the TID First Priority Subordinated Revenue Notes, Series 2010 in the amount of $190,950 on the maturity date of August 12, 2011, to fund required reserves and pay for certain debt issue costs associated with the refunding. The TWPA sold a portion of their outstanding bonds as Build America Bonds under the American Recovery and Reinvestment Act passed in February 2009. The Build America Bonds were sold as a taxable issue and TID receives a federal subsidy of 35% of the interest paid on the bonds. For the years ended December 31, 2012 and 2011 TID received $3,671 and $3,671 in a federal subsidy which is included in other income on the statement of revenues, expenses, and changes in net position.

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2012 and 2011 (in thousands of dollars) The summarized activity of TID’s long-term debt during 2012 and 2011 is presented below: December 31, 2011 Revenue bonds Certificates of participation

Less Unamortized premiums and (discounts), net Deferred losses on bond refundings, net Total long-term debt, net

1,098,960 26,785

Additions $

Less Unamortized premiums and (discounts), net Deferred losses on bond refundings, net Total long-term debt, net

(11,125) $ -

1,087,835 26,785

22,070

(11,125)

1,114,620

23,728

(1,550)

22,178

1,146,774

907,415 59,285

358 $

206,940 -

(2,341)

(12,317) $

Payments and Amortization

Additions

1,134,457

(15,395) $ (32,500)

1,098,960 26,785

11,125 -

11,125

206,940

(47,895)

1,125,745

15,019

9,894

(1,185)

23,728

978,516

216,834

504 $

Amounts Due Within One Year

December 31, 2011

966,700

(3,203) $

Amounts Due Within One Year

December 31, 2012

1,125,745

December 31, 2010 Revenue bonds Certificates of participation

(2,699) $

Payments and Amortization

(48,576) $

(2,699) 1,146,774

General The COPs and revenue bonds are collateralized by a pledge of, and a lien on, the revenues of the entire electric and irrigation system after deducting maintenance and operation costs, as defined in the bond resolutions. The COPs and the 2011 Revenue Refunding Bonds are subordinate to the other revenue bonds and commercial paper. TID’s bond resolutions contain various covenants that include requirements to maintain minimum debt service coverage ratios, certain financial ratios, stipulated minimum funding of revenue bond reserves, and various other requirements. Certain of TID’s bonds are enhanced by bond insurance provided by two different counterparties. The credit quality of these two bond insurers has declined subsequent to the origination of the policies. However, the impact on TID’s current liquidity is mitigated because the bonds cannot be put to TID before their maturity dates. Fixed rate revenue bonds totaling $23,705, $128,500, $186,380, $204,990, and $176,400 may be subject to redemption during 2013, 2014, 2019, 2020 and 2021, respectively, by TID without a premium or discount. Fixed rate revenue bonds totaling $205,675 may be subject to redemption by TID at any interest date with a make whole premium. COPs totaling $26,785 may be subject to redemption by TID during 2013 without a premium or discount.

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2012 and 2011 (in thousands of dollars) TID’s scheduled future annual principal maturities and estimated interest are as follows at December 31, 2012: Estimated Interest

Principal 2013 2014 2015 2016 2017 2018-2022 2023-2027 2028-2032 2033-2037 2038-2041

Total

22,070 22,725 26,290 30,065 31,725 180,980 227,235 275,110 198,890 99,530

58,680 57,733 56,470 55,113 53,580 242,124 188,216 116,930 41,599 6,910

80,750 80,458 82,760 85,178 85,305 423,104 415,451 392,040 240,489 106,440

1,114,620

877,355

1,991,975

At December 31, 2012 and 2011, the estimated fair values of TID’s long-term debt, calculated by determining the net present value using appropriate maturity dates of future debt service payments discounted at the bond buyer’s revenue bond index rate, are as follows: 2012 Carrying amount Fair value

1,134,457 1,398,770

2011 $

1,146,774 1,302,661

Commercial Paper TID has two commercial paper programs, one for various financing needs up to $100,000, primarily for financing capital expenditures. At December 31, 2012 and 2011 the balance outstanding under this commercial paper program was $55,205 and $35,405 of which $0 and $35,405 was taxable, respectively. The effective interest rate for the notes outstanding at December 31, 2012 and 2011 was 0.20% and 0.25%, respectively, and the average term was 36 and 4 days, respectively. A letter of credit of $109,000 supports the sale of these outstanding notes and TID incurs an annual fee for this service. There has not been a term advance under the letter of credit, which expires in July 2014. The counterparty to the letter of credit is a national bank whose credit rating is ANegative (Standard & Poor’s). The other commercial paper program is used to finance capital expenditures up to $80,000. At December 31, 2012 and 2011, the balance outstanding under this commercial paper program was $39,983 and $39,975, respectively, of which $24,983 and $24,975 was taxable, respectively. The effective interest rate for the notes outstanding at December 31, 2012 and 2011 was 0.22% and 0.24%, respectively, and the average term was 98 and 72 days, respectively. A letter of credit of $87,200 supports the sale of these outstanding notes and TID incurs an annual fee for this service. There has not been a term advance under the letter of credit, which expires in September 2015.

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2012 and 2011 (in thousands of dollars) The counterparty to the letter of credit is a national bank whose credit rating is AA- Negative (Standard & Poor’s). The activity of TID’s commercial paper during 2012 and 2011 is presented below: 2012 Balances at beginning of year

Additions Payments

19,808 -

Balances at end of year

75,380

2011

95,188

39,965 35,415 -

75,380

Regulatory Deferrals TID’s Board has taken various regulatory actions that result in differences between recognition of revenues and expenses for rate-making purposes as reflected in these consolidated financial statements and as incurred. These actions result in regulatory assets and credits. Regulatory Assets The District’s regulatory asset relates to the remaining debt outstanding on the disposed fuel cell project. The balance is to be collected through retail rates and it is expected to be fully collected in 2013. Regulatory asset balances are as follows: 2012 Regulatory Asset

2,438

2011 $

Regulatory Credits Regulatory credits consist of the following at December 31: 2012 Electric rate stabilization Power supply adjustment Unrealized gain on investments

2011

35,124 25,103 1,008

35,124 25,527 1,466

61,235

62,117

Power Supply Adjustment TID’s rate schedule power supply adjustment (PSA) billing factor provides for an adjustment to the kilowatt-hour (KWh) portion of customer bills to reflect variations in the variable cost of power supply, which comprises purchased power, fuel used for generation of electric energy and gas field costs including related capital costs, reduced by revenue from wholesale sales of gas and energy to other entities. The PSA rate is reset semi-annually in June and December. The Board has limited reset amounts to ($0.005) to $0.01 per KWh. A balancing account is maintained in an amount by which the energy revenues collected from retail customers are less than (or more than) the actual cost of power supply. Excesses or (deficiencies) in the balancing account are managed by increasing (or decreasing) the PSA billing factor. During 2012, $424 was removed from the

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2012 and 2011 (in thousands of dollars) power supply regulatory account. During 2011, $36,591 was added to the deferred power supply regulatory credit account and the Board elected to transfer $22,000 out of the power supply adjustment regulatory account into the electric rate stabilization regulatory account. On December 31, 2012 and 2011, TID had an excess, or a regulatory credit of $25,103 and $25,527, respectively. Electric Rate Stabilization Historically, TID deferred interest earnings on net assets designated for electric rate stabilization. These amounts are recognized as increases in income in future periods based on a rate program approved by the Board which releases rate stabilization amounts under identified circumstances. Unrealized Gain on Investments TID defers unrealized holding gains and losses on its investments until such investments mature or are sold which is consistent with TIDâ&#x20AC;&#x2122;s rate setting process. 9.

Derivative Financial Instruments TID enters into contracts for the purchase of electricity to meet the expected needs of its retail customers and for the purchase, transportation and storage of natural gas to meet its generation needs. TID also enters into hedging transactions to reduce the price volatility of some of these agreements. Many of these contracts are considered derivative financial instruments under the provisions of GASB Statement No. 53, Accounting and Financial Reporting for Derivative Instruments (GASB 53). For those contracts, substantially all of the electricity contracts and most of the gas related contracts qualify as normal purchases or normal sales under GASB 53 because TID takes or makes delivery under the related contract, and as a result, the contracts are not required to be recorded at fair value. The fair values of TIDâ&#x20AC;&#x2122;s derivative instruments that are not considered normal purchases or normal sales are as follows: December 31, 2012 2011 Derivative financial instrument assets Gas related contracts Electric related contracts

Total derivative financial instruments Less: Current portion

Derivative financial instrument liabilities Gas related contracts Electric related contracts

547 108

246

655

(246)

(547)

108

163 209

1,278 -

Total derivative financial instruments Less: Current portion $

55 191

372

1,278

(372)

(1,152)

126

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2012 and 2011 (in thousands of dollars) The fair value balances and notional amounts of derivative instruments outstanding as of December 31, 2012 and 2011, classified by type, are as follows:

Classification Investment derivatives Gas related contracts Electric related contracts

Nonoperating revenues and expense Nonoperating revenues and expense

December 31, 2012 Fair Value

Net investment derivatives gain (loss) Cash flow hedges Gas related contracts

Deferred outflow

(163)

28,000-31,000 MMBtu

(163)

Total derivative contracts loss

Classification

Nonoperating revenues and expense Nonoperating revenues and expense

(126)

December 31, 2011 Fair Value

Net investment derivatives gain (loss) Cash flow hedges Gas related contracts

2,228-154,609 MMBtu 3,840-10,400 MWh

Net deferred outflow

Investment derivatives Gas related contracts Electric related contracts

55 (18)

Notional

442 108

Notional

2,852-310,000 MMBtu 3,840-4,160 MWh

550 Deferred outflow

(1,173)

Net deferred outflow

28,000-120,000 MMBtu

(1,173)

Total derivative contracts loss

(623)

The investment derivatives are gas and electric contracts that do not meet the definition of effective hedges as defined in GASB 53. Changes in the fair value of these contracts are recorded in the statement of revenues, expenses and changes in net position. For the years ending December 31, 2012 and 2011, TID recorded a gain on derivative contracts that did not meet the definition of effective hedges resulting in $173 and $2,618, respectively, and is included in the non-operating revenues and expenses section in the statement of revenues, expenses and changes in net position. The current deferred outflows relate to hedged derivative financial instruments are $163 and $1,173 at December 31, 2012 and 2011, respectively. All of the hedge contracts are designed to hedge against changes in cash flows due to market price fluctuations related to expected purchases of natural gas and were initiated in 2012 and 2011. Credit Risk TID is exposed to credit risk on hedging derivative instruments that are in asset positions. To minimize its exposure to loss related to credit risk, TIDâ&#x20AC;&#x2122;s policy is to establish a credit limit for each counterparty, with a maximum limit of $5,000 and no single counterparty can account for more than

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2012 and 2011 (in thousands of dollars) 15% of the total exposure to TID without approval from the Board. When a counterparty does not have a credit rating, a written guarantee is required from the counterparty’s parent company which must have an acceptable credit rating. TID’s agreements generally require netting whenever it has entered into more than one derivative instrument transaction with the counterparty. Under the terms of these agreements, should one party become insolvent or otherwise default on its obligations, close-out netting provisions permit the nondefaulting party to accelerate and terminate all outstanding transactions and net the transactions’ fair values so that a single sum will be owed by, or owed to, the nondefaulting party. The aggregate fair value of hedging derivative instruments in a net asset position at December 31, 2012 totaled $104. As of December 31, 2012 all of TID’s derivative contracts, for which it has counterparty risk, are held with a counterparty with a BBB rating or are held with the U.S. Department of Energy. Termination Risk TID or its counterparties may terminate a derivative instrument if the other party fails to perform under the terms of the contract. If, at the time of termination, a hedging derivative instrument is in a liability position, TID would be liable to the counterparty for a payment equal to the liability, subject to netting arrangements. 10.

Retirement Plans TID has a single-employer group defined benefit pension plan (the “Retirement Plan”) which provides retirement benefits covering substantially all of its employees who have completed one year of continuous service. Employees may retire after age 55 with benefits based on compensation and years of service to actual retirement date. The Retirement Plan also provides death benefits for those employees having reached age 55. TID, through the action of its Board, may amend or establish Retirement Plan provisions. The Board has appointed third parties to carry out substantially all administrative responsibilities, including custody of the Retirement Plan assets and as a result, excludes the pension trust funds from these financial statements. The Retirement Plan is a governmental plan under section 414(d) of the Internal Revenue Code (IRC). Copies of the Retirement Plan’s annual financial report may be obtained from TID’s executive office at 333 East Canal Drive, Turlock, California 95381. The Retirement Plan’s annual financial report is the responsibility of TID. Funding Policy To participate in the Retirement Plan, employees who are not members of a bargaining unit are required to contribute 2.25% of their earnings and employees who are members of a bargaining unit are required to contribute 3.25% of their earnings. Under the Retirement Plan provisions established by the Board, the Retirement Plan is to be funded in amounts equal to the normal costs of the Retirement Plan plus an amortization of the past service liability. Contributions made by the employees vest immediately. Contributions made by TID are fully vested after five years of participation. Annual Pension Cost The annual required contributions for 2012 and 2011 were determined by actuarial valuations using the frozen entry age actuarial cost method. The actuarial assumptions utilized for the January 1, 2012 and 2011 actuarial valuations were as follows:

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2012 and 2011 (in thousands of dollars) 

Investment rate of return applied to assets of 8.5% per year;



Discount rate applied to the pension benefit obligation of 8.5% per year;



Salary increases of 4.5% per year; and



Cost of living adjustment of 3.5% per year.

Realized and unrealized gains are phased in to the actuarial value of Retirement Plan assets over a three year period, and may be adjusted so that the actuarial value of Retirement Plan assets are not less than 80% or more than 120% of the fair market value of the Retirement Plan’s assets as of the current valuation date. The unfunded actuarial accrued liability (UAAL) is being amortized as a level percentage of projected payroll basis. TID’s annual pension cost and net pension obligation for 2012 and 2011, based on valuations as of December 31, 2012 and 2011, respectively, are as follows: 2012 Annual required contribution Interest on net pension obligation Adjustment to annual required contribution

Annual pension cost Contributions made Decrease in net pension obligation

2011

14,514 5 (7)

12,340 5 (7)

14,512

12,338

14,581

12,338

(69)

Net pension obligation balance at beginning of year

Net pension (prepaid) obligation balance at end of year

(9)

Summarized Historical Trend Information Three year trend information is presented below:

Annual Pension Cost (APC) Fiscal Years Ended December 31, 2012 2011 2010

14,512 12,338 10,777

Net Pension Obligation (Asset)

Percentage of APC Contributed

100% 100% 94%

(9) 60 60

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2012 and 2011 (in thousands of dollars) Deferred Compensation Plan TID offers its employees a deferred compensation plan (the “Deferred Plan”), which provides employees the option to defer part of their compensation until termination, retirement, death, or unforeseeable emergency. TID makes no contribution to the Deferred Plan. TID has the duty of reasonable care in the selection of investment alternatives, but neither TID nor its directors or officers have any liability for losses under the Deferred Plan. TID holds all deferred compensation assets in the name of the Deferred Plan, and accordingly, the Deferred Plan assets and corresponding liability are not recorded in the accounts of TID. 11.

Other Post-Employment Benefits TID provides post-retirement medical benefits in accordance with TID policy to qualified retirees and their spouses through TID’s Employee Health Care Plan ( the “Health Plan”) until the retiree and participating spouse reach age 65. The Health Plan is a single-employer group, for which TID is the administrator and through the action of its Board may amend or establish Health Plan provisions. The qualification requirements for these benefits are the same as those under TID’s Retirement Plan. The Board has appointed third parties to carry out certain administrative responsibilities. TID contributes the full cost of coverage for retirees; however, retirees contribute the estimated health care cost of dependents. However, at the time of retirement an employee may utilize the remaining balance of unused sick leave, at the rate defined in the employee’s applicable employee contract for one month’s medical coverage for an eligible dependent. Covered retirees are also responsible for personal deductibles and co-payments. Currently, 175 retirees and surviving dependents are receiving post-employment health care benefits. TID participates in the CALPERS Pre-funding OPEB Plan, which is an irrevocable multi-employer trust and plan consisting of an aggregation of single-employer plans, with pooled administrative and investment functions. To obtain a CALPERS Pre-funding Plan report contact CALPERS at Lincoln Plaza North 400 Q Street, Sacramento, CA 95811. TID follows GASB Statement No. 43 Financial Reporting for Post-employment Benefit Plans Other Than Pension Plans (GASB 43), and GASB Statement No. 45, Accounting and Financial Reporting by Employers for Post-employment Benefits other than Pensions (GASB 45), which establishes standards of accounting and financial reporting for OPEB expense and related OPEB liabilities or assets. OPEB arises from an exchange of salaries and benefits for employee services rendered. TID considers post-employment healthcare benefits to be OPEB costs. During 2012 and 2011, TID’s post-retirement health care benefit contributions were $1,061 and $2,366, respectively, net of premiums received from retirees for eligible dependents. Actuarial Methods and Assumptions Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far 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 revision as actual results are compared with past expectations and new estimates are made about the future. 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 the historical pattern of sharing of benefit costs between the employer and plan members to that point. The

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2012 and 2011 (in thousands of dollars) 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. In the most recent actuarial valuation the entry age actuarial cost method was used. The actuarial assumptions included a 7.75% investment rate of return and an annual healthcare cost trend rate of 8.0% initially, reduced by decrements to an ultimate rate of 5% after ten years. Assets of the Health Plan, as of the latest actuarial report, were valued on a market value basis. Future gains and losses may be averaged over five years subject to certain restrictions. The UAAL is being amortized as a level percentage of projected payroll basis. The remaining amortization period in the latest actuary report, was twenty-six years. Annual OPEB Cost and Net OPEB Obligation TID’s annual OPEB cost is calculated based on the annual required contribution (ARC) of the employer, an amount actuarially determined in accordance with the parameters of GASB 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 (or funding excess) over a period not to exceed thirty years. For the years ended December 31, 2012 and 2011, TID’s annual OPEB expense of $2,034 and $1,924, respectively, was equal to the ARC. The following table shows the components of TID’s annual OPEB cost for the year, the amount actually contributed to the plan, and changes in TID’s net OPEB prepaid cost: 2012 Annual required contribution

Annual OPEB cost Contributions made Decrease / (Increase) in net OPEB prepaid cost

2011

2,034

1,924

1,061

2,366

973

Net OPEB prepaid cost Beginning of year

(442)

(4,023)

End of year

1,924

(3,050)

(3,581) $

(4,023)

TID’s annual OPEB cost, the percentage of annual OPEB cost contributed to the plan, and the net OPEB prepaid cost for the years ended 2012, 2011 and 2010 is as follows:

Annual OPEB Cost (ARC) Fiscal Years Ended December 31, 2012 2011 2010

2,034 1,924 1,884

Net OPEB Prepaid Cost

Percentage of ARC Contributed

52% 123% 76%

(3,050) (4,023) (3,581)

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2012 and 2011 (in thousands of dollars) 12.

Commitments Power Sales Agreement TID previously supplied power and energy to Merced Irrigation District (MeID) under a full requirement power supply agreement that expired January 31, 2011. TID supplied all of MeID’s needs except for MeID’s share of the Central Valley Project marketed by Western Area Power Administration. TID received an energy payment in accordance with the formula defined in the agreement, based in part on the market price of energy in California. A new negotiated contract began on February 1, 2011, and continues through June 30, 2014. Under the agreement TID sells power on a full requirements basis to meet all the MeID energy and capacity requirements except as defined under the agreement. TID receives an energy payment in accordance with the formula defined in the agreement, based in part on the market price of energy in California. Under a separate interconnection agreement, TID is compensated for the use of its transmission system. Sales and services provided under the agreements totaled $18,807 and $19,349 in 2012 and 2011, respectively, and have been recorded in electric wholesale revenues within the statement of revenues, expenses and changes in net position. Power Exchange and Transmission Agreements TID has a power sales agreement with a counterparty where TID sells all of the output of the TWPA at day-ahead or hourly Mid-Columbia (MID-C) market prices. The counterparty sells at least the same amount of energy to TID at the California-Oregon Border (COB) at prices based on the COB indexes plus a service fee. TID is obligated to schedule and pay for transmission from TWPA to MID-C. TID has secured firm point to point transmission service for the majority of the MWh to be delivered from the Bonneville Power Administration. The agreement expires on December 31, 2013, but can be canceled by either party with six months’ notice. Total sales were $12,451 and $16,663 for the years ended December 31, 2012 and 2011, respectively. Purchases under the agreement were $19,366 and $18,593 for the years ended December 31, 2012 and 2011, respectively, and have been recorded in purchased power expense within the statement of revenues, expenses and changes in net position. Power Purchase Agreements TID has two long-term power purchase agreements with other power producers to purchase capacity and associated energy to meet its load requirements, which expire through December 2024. Capacity and certain energy is purchased on a take-or-pay basis. Power purchased under these agreements totaled $21,287 and $22,147 in 2012 and 2011, respectively, and have been recorded in purchased power expense within the statement of revenues, expenses and changes in net position. City and County of San Francisco TID and the City and County of San Francisco (CCSF) have a power sales agreement which allocates a share of excess Hetch Hetchy Project capacity and energy to TID through 2015. TID purchased $2,982 and $7,503 of power in 2012 and 2011, respectively, under the CCSF agreement which has been recorded in purchased power expense within the statement of revenues, expenses and changes in net position. Gas Purchase Agreements TID has three natural gas supply agreements with three counterparties to meet the consumption of its natural gas fired power plants. Each contract is with a different counterparty. The first contract obligates the fuel manager to supply all the natural gas required by TID’s existing Walnut and

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2012 and 2011 (in thousands of dollars) Almond power plants (excluding the Almond 2 power plant) up to 27,000 million British Thermal Units (MMBtu) per day. This contract automatically renews for a 1 year term unless terminated by either party. The second contract obligates the fuel manager to supply all the natural gas required by the Walnut Energy Center up to 55,000 MMBtu per day. This contract expires on January 1, 2016. The third contract obligates the fuel manager to supply all the natural gas required by the Almond 2 power plant up to 50,400 MMBtu per day. This contract expires on January 1, 2015. All contracts allow for TID to purchase gas from parties other than the fuel manager and obligate the fuel manager to purchase TIDâ&#x20AC;&#x2122;s excess gas. All contracts provide for pre-determined index-based prices or a mutually agreed upon price. Fuel purchased under the three agreements totaled $33,412 and $30,165 in 2012 and 2011, respectively, and has been recorded in general and fuel expense within the statement of revenues, expenses and changes in net position. Gas Transportation Capacity and Storage Agreements TID has nine long-term gas transportation capacity agreements and one long-term gas storage agreement with Canadian and U.S. companies to transport natural gas to TIDâ&#x20AC;&#x2122;s natural gas fired power plants from gas supply basins in Alberta, Canada. The gas transportation capacity agreements complement TIDâ&#x20AC;&#x2122;s gas purchase agreements, described above, but expire through 2033. Payments under these agreements totaled $4,066 and $3,975 in 2012 and 2011, respectively, and have been recorded in generation and fuel expense within the statement of revenues, expenses and changes in net position. The approximate future minimum obligations for the above described power purchase, gas supply, and gas transportation and storage contracts are as follows at December 31, 2012: Amount 2013 2014 2015 2016 2017 Thereafter

24,578 27,015 27,710 28,296 29,259 90,909

227,767

Land Leases The TWPA has leases with nine land owners on which the turbines are located. The land owners are paid a fixed price per kilowatt-hour based on the output of the respective turbines. Each agreement is for 20 years with two 10-year renewal options. Total expense for the years ended December 31, 2012 and 2011 was $1,043 and $1,190, respectively, and has been recorded in generation and fuel expense within the statement of revenues, expenses and changes in net

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2012 and 2011 (in thousands of dollars) position. The annual lease expense under the remaining initial term of the land leases (based on average wind data for the last 10 years) is estimated as follows: Amount 2013 2014 2015 2016 2017 Thereafter

13.

1,154 1,154 1,154 1,154 1,154 13,271

19,041

Contingencies California Energy Market Refund Proceedings In July 2001, FERC issued an order establishing evidentiary hearings for the purpose of determining the amount of refunds, if any, due to customers of the California ISO and PX organized spot markets from market participants selling into those markets for the period October 2, 2000 through June 20, 2001 (the refund period). During this time period, TID was both a seller and a buyer in the markets. On July 5, 2011, the Superior Court of Los Angeles approved TIDâ&#x20AC;&#x2122;s application for determination of a good faith settlement. On July 8, 2011, FERC issued a settlement order approving the Settlement Agreement. By its terms, the Settlement Agreement became effective upon FERC approval and, on July 27, 2011, TID received the disbursement of the specified portion of its receivable in the amount of $4,250. As a result of this settlement all material contingencies associated with the California energy market proceedings and related complaints have been resolved. General Contingencies In the normal course of operations, TID is party to various claims, legal actions and complaints, including possible liability for environmental matters. Although the ultimate outcome of these matters is not presently determinable, TIDâ&#x20AC;&#x2122;s management believes the resolution of all such pending matters will not have a material adverse effect on TIDâ&#x20AC;&#x2122;s financial position or results of operations.

Required Supplemental Information

Turlock Irrigation District Required Supplemental Information - Schedules of Funding Progress (Unaudited) December 31, 2012 and 2011 (in thousands of dollars) Schedules of Funding Progress Pension Plan As discussed in Note 10, the schedule of funding progress 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. The schedule of funding progress is presented below: Actuarial Value of Assets (a)

Actuarial Valuation Date December 31, 2012 December 31, 2011 December 31, 2010

$ $ $

147,522 131,591 128,816

Actuarial Accrued Liability (AAL) Entry Age (b) $ $ $

238,162 222,936 205,580

Unfunded AAL (UAAL) (b-a) $ $ $

90,640 91,345 76,764

Funded Ratio (a/b)

Covered Payroll (c)

61.9 % $ 59.0 % $ 62.7 % $

33,824 34,218 33,960

UAAL as a Percentage of Covered Payroll ([b-a]/c) 268.0 % 267.0 % 226.0 %

Other Post-Employment Benefits As discussed in Note 11, the schedule of funding progress presents trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liability for benefits. The schedule of funding progress is presented below:

Actuarial Valuation Date June 30, 2011 December 31, 2010 December 31, 2008

Actuarial Value of Assets (a) $ $ $

9,137 8,254 5,086

Actuarial Accrued Liability (AAL) Entry Age (b) $ $ $

24,328 23,577 19,869

Unfunded AAL (UAAL) (b-a) $ $ $

15,191 15,323 14,783

Funded Ratio (a/b) 37.6 % $ 35.0 % $ 25.6 % $

Covered Payroll (c) 36,022 35,829 35,009

UAAL as a Percentage of Covered Payroll ([b-a]/c) 42.2 % 42.8 % 42.2 %