Tid 2011 annual report by Turlock Irrigation District

Y X

Y X Y X

Y X

Y X Y X Y X

Y X

XY XY

Y X

Y X Y X Y X

Y X

X Y X

Y X

Y X XY

Turlock Irrigation District Consolidated Financial Statements December 31, 2011 and 2010

Turlock Irrigation District Index December 31, 2011 and 2010 Page(s) Report of Independent Auditors ............................................................................................................... 1 Management’s Discussion and Analysis (Unaudited) ..................................................................... 2–10 Consolidated Financial Statements Balance Sheets .................................................................................................................................... 11–12 Statements of Revenues, Expenses and Changes in Net Assets ............................................................. 13 Statements of Cash Flows ................................................................................................................... 14–15 Notes to Consolidated Financial Statements ....................................................................................... 16–46 Supplemental Schedules Required Supplemental Information - Schedules of Funding Progress (Unaudited) ................................. 48

Report of Independent Auditors

To the Board of Directors of Turlock Irrigation District

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of revenues, expenses and changes in net assets and of cash flows present fairly, in all material respects, the financial position of Turlock Irrigation District and its blended component units (“TID”) at December 31, 2011 and 2010, and its changes in financial position and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of TID’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The management’s discussion and analysis included on pages 2 through 10, and the schedules of funding progress of benefit plans included on page 48 are not required parts of the basic financial statements but are supplementary information required by the Governmental Accounting Standards Board. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it.

April 16, 2012

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

Turlock Irrigation District Management’s Discussion and Analysis (Unaudited) December 31, 2011 and 2010 The following management’s discussion and analysis of Turlock Irrigation District (“TID”) and its financial performance provides an overview of TID’s financial activities for the years ended December 31, 2011 and 2010. This 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. The 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. In December 2003, TID completed the acquisition of Pacific Gas and Electric’s (PG&E) 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 recently increased electric rates by an average of 4.00% effective February 1, 2012. TID has a credit requirement for all new service connections, which requires new customers to place a deposit with TID. 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), and where not in conflict with GASB pronouncements, accounting principles prescribed by the Financial Accounting Standards Board (FASB). 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 2

Turlock Irrigation District Management’s Discussion and Analysis (Unaudited) December 31, 2011 and 2010 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 FASB 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, 2011 and 2010 TID had no regulatory assets and total regulatory credits of $62.1 million and $25.0 million, respectively. The regulatory credits are recognized in the statement of revenues, expenses and changes in net assets when determined by the Board for ratemaking purposes. Investment Policies and Procedures The Board reviews the investment policy on an annual basis. TID also has an Investment Committee, comprised of the Treasurer, Deputy Treasurer, General Manager and two members of the Board. This committee meets on an as-needed basis to review issues related to TID’s investments. 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 Walnut Energy Center Authority (“WECA”) was formed in 2003 for the purposes of developing and operating a 250 MW natural gas fueled generation facility located in TID’s service territory. Although WECA is a separate legal entity from TID, it is blended into and reported as part of TID because of the extent of its operational and financial relationship with TID. Accordingly, all operations of WECA are consolidated into TID’s financial statements. The Tuolumne Wind Project Authority (“TWPA”) was formed in 2008 for the purpose of purchasing a wind farm in the State of Washington. In 2009, the TWPA completed the purchase of the membership interest in a 136.6 MW wind farm, consisting of 62-wind turbine generators located in Klickitat County, Washington. Although TWPA is a separate legal entity from TID, it is blended into and reported as part of TID because of the extent of its operational and financial relationship with TID. Accordingly, all operations of the TWPA are consolidated into TID’s financial statements since being acquired on July 14, 2009. 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, 2011 and 2010 Balance Sheets, Statements of Revenues, Expenses and Changes in Net Assets, and Statements of Cash Flows The balance sheets include all of TIDâ&#x20AC;&#x2122;s assets and liabilities, 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 assets 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. Summary of Financial Position and Changes in Net Assets as of and for the Years Ended December 31, 2011, 2010 and 2009 (dollars in thousands)

2011

Assets Utility plant, net Cash, cash equivalents and investments Other noncurrent assets Other current assets

Liabilities and Net Assets Long-term debt Other noncurrent liabilities and deferred credits Other current liabilities

1,286,351 345,237 11,779 41,699

1,229,492 362,456 17,528 47,462

1,200,225 183,908 32,158 50,131

1,685,066

1,656,938

1,466,422

1,146,774 75,379 148,840

978,516 40,183 307,710

743,205 35,980 335,432

Net assets Invested in capital assets, net of related debt Restricted Unrestricted Total net assets $ $

Operating income Nonoperating income (expense), net Increase (decrease) in net assets Net assets Beginning of year End of year

2009

Total liabilities

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

2010

1,370,993

1,326,409

1,114,617

202,732 23,656 87,685

208,197 15,176 107,156

254,332 15,066 82,407

314,073

330,529

351,805

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

$ $

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

$ $

1,466,422 314,120 (298,225)

20,686

10,420

15,895

(37,142)

(31,696)

(20,201)

(16,456)

(21,276)

(4,306)

330,529

351,805

314,073

330,529

356,111 $

351,805

Turlock Irrigation District Management’s Discussion and Analysis (Unaudited) December 31, 2011 and 2010 Management’s Discussion and Analysis as of and for the Year Ended December 31, 2011 Assets Utility Plant TID has 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 Irrigation 6% 4% Unamortized Future Power Rights 1%

PG&E Pipeline 1% Other 3%

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 power plant expansion, $19.8 million to add/upgrade certain transmission and distribution (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 relicensing of Don Pedro, $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 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 power plant expansion. The remaining $15.5 million increase is primarily related to current year operations. Other Noncurrent Assets Other noncurrent assets decreased $5.7 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.

Turlock Irrigation District Management’s Discussion and Analysis (Unaudited) December 31, 2011 and 2010 Other Current Assets Other current assets decreased $5.8 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 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. Liabilities and Changes in Net Assets 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 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 $35.2 million in 2011. The increase was primarily due to an increase of $37.1 million in deferred regulatory credits offset by a decrease in TID’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.

Turlock Irrigation District Managementâ&#x20AC;&#x2122;s Discussion and Analysis (Unaudited) December 31, 2011 and 2010 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 Assets 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 a 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 are collectively down $1.7 million. The decrease is due to the recovery of a Cal 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 CIP 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 CIP 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. 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 (Loss) 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 Management’s Discussion and Analysis (Unaudited) December 31, 2011 and 2010 Management’s Discussion and Analysis as of and for the Year Ended December 31, 2010 Assets Utility Plant TID has invested approximately $1,229.5 million in utility plant assets, net of accumulated depreciation at December 31, 2010. TID transferred approximately $30.6 million of assets from construction in progress to utility plant assets in 2010. Net utility plant makes up 74% of TID’s assets at December 31, 2010, compared to 82% in the prior year. The following chart shows the breakdown of net utility plant by major plant category at December 31, 2010 - 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 5%

During 2010, TID capitalized $86.1 million of additions to utility plant. TID invested $52.3 million in the Almond power plant expansion, $12.6 million to add/upgrade certain transmission and distribution assets, $7.4 million for routine expansion which consists of transformers, T&D lines, meters, lights, and new services, $6.9 million investment in gas fields, $2.0 million in Irrigation improvements, $1.8 million in vehicle additions and the remaining $3.1 million in additions is made up of individually insignificant items. Cash, Cash Equivalents and Investments TID’s cash, cash equivalents and investments increased $178.5 million during 2010. This was primarily due to the issuance of the TID First Priority Subordinated Revenue Bond Notes, Series 2010 in the amount of $191.0 million for the purposes of financing the Almond power plant expansion which was offset by capital financed from revenues totaling $11.8 million in 2010. Other Noncurrent Assets Other noncurrent assets decreased $14.6 million during 2010. This decrease was primarily due to a change in regulatory assets of $24.4 million offset by a net decrease in unamortized debt issue costs of $1.9 million related to the issuance of the TID revenue refunding bonds, 2010 series A, the WECA revenue refunding bonds, 2010 series A & B and TID first priority subordinated revenue bonds notes, series 2010 and normal amortization. This was offset by the recording of a receivable of $7.8 million for the recovery of costs incurred to date on the construction of a domestic water project which was abandoned during 2010, for which TID is entitled to cost recovery under the contract.

Turlock Irrigation District Management’s Discussion and Analysis (Unaudited) December 31, 2011 and 2010 Other Current Assets Other current assets decreased $2.7 million during 2010. The decrease was due to a decrease in gas inventories of $2.3 million, a decrease in derivative financial instruments of $1.6 million and a decrease in prepaid pension costs of $0.6 million. This decrease was offset by an increase in wholesale account receivables of $1.9 million due to an increase in wholesale power sales. Liabilities and Changes in Net Assets Long-term Debt Long-term debt increased $235.0 million primarily due to the issuance of the TID revenue refunding bonds, 2010 series A in the amount of $154.6 million and the WECA revenue refunding bonds, 2010 series A & B in the amount of $138.6 million which was offset by scheduled principal payments and the refunding of existing debt. The following table shows TID’s future debt service requirements from 2011 through 2015 at December 31, 2010 (dollars in thousands): $80,000 $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $0 2011

2012

Principal

Interest

2013

2014

2015

At December 31, 2010, TID’s bond ratings are A1 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 $4.2 million in 2010. The increase was primarily due to an increase of $6.9 million in deferred regulatory credits offset by a decrease in TID’s PG&E Pipeline obligation of $1.3 million and a $1.8 million decrease in TID’s share of the Transmission Agency of Northern California’s obligation. Other Current Liabilities Other current liabilities decreased $27.7 million in 2010. This was primarily the result of a net decrease in Commercial Paper and short-term financings of $27.2 million. Accounts payable and purchase power and fuel payables decreased $6.0 million and derivative financial instruments decreased $1.7 million offset by an increase in accrued interest payable of $6.6 million, due to 2010 bonds issued, an increase in customer deposits of $0.5 million and an increase in current portion of long-term debt of $0.4 million.

Turlock Irrigation District Managementâ&#x20AC;&#x2122;s Discussion and Analysis (Unaudited) December 31, 2011 and 2010 Changes in Net Assets Operating Revenues Operating revenues increased $15.4 million from $314.1 million in 2009 to $329.6 million in 2010. Wholesale revenues increased $28.0 million to $80.0 million in 2010 from $52.0 million in 2009 as a result of an increase in average sales price and increase in volume sold. Average sales price increased approximately 23.3% from an average of $38/megawatt hour (MWh) in 2009 to $44/MWh in 2010 and volumes increased by approximately 29.7% when compared to 2010. Wholesale gas revenues increased $0.6 million due to an increase in sales volume. Retail power revenues were down $14.0 million primarily due to a decrease of 3.7% in consumption and deferral of $10.9 million in revenues as a result of the Power Supply Adjustment. Operating Expenses Purchased power, generation and fuel expenses were $214.6 million in 2010 compared to $200.5 million in 2009. The increase is due to increased purchased power of $24.7 million due to the recognition of $24.4 million of previously deferred public power supply adjustment. The purchased power increase was offset by a decrease of $10.7 million in generation and fuel which was primarily due to a decrease in net fuel cost of $18.3 million offset by an increase in TWPA cost of $5.0 million, as a result of a full year of operations. Other Electric, Irrigation and Administration and General Expense are collectively up $1.0 million due to changes in maintenance expense. Depletion expense decreased $1.9 million due to decreased production and depreciation expense increased $8.9 million due primarily to a full year of depreciation on the 2009 addition of TWPA. Net Investment Income Net investment income in 2010 was $1.0 million lower than in 2009, primarily as a result of lower yields on investments. Derivative Gain (Loss) Net gain on derivatives increased $5.6 million, primarily due to lower gas and power prices at time of contract settlement compared to prices as of December 31, 2009. Other Income Other income is up $1.2 million in 2010 when compared to 2009. This increase is primarily the result of a $2.0 million increase in Federal subsidy from the issuance of Build America Bonds issued in 2009 offset by a $0.9 million decrease in contribution in aid of construction with the remaining decrease a result of individually insignificant items. Interest Expense Interest expense increased $17.3 million in 2010 as compared to 2009 primarily due to a full year of interest on the 2009 TWPA revenue bonds which resulted in an increase in interest expense of $13.4 million. The remaining increase is due to 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 Balance Sheets December 31, 2011 and 2010 (dollars in thousands)

2011

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 Derivative financial instruments Total assets

1,286,351

2010

1,229,492

17,390 23,419 137,291 11,779

12,410 3,570 124,664 17,528

189,879

158,172

162,234 4,903 20,085 4,287 4,768 3,103 8,909 547

200,089 21,723 18,239 11,327 5,449 3,073 8,612 762

208,836

269,274

1,685,066

1,656,938

(continued)

The accompanying notes are an integral part of these consolidated financial statements. 11

Turlock Irrigation District Consolidated Balance Sheets (continued) December 31, 2011 and 2010 (dollars in thousands)

2011

Capitalization and liabilities Capitalization Net assets Invested in capital assets, net of related debt Restricted Unrestricted

Total net assets Long-term debt, net of current portion Total capitalization Liabilities and deferred credits Deferred regulatory credits Derivative financial instruments, net of current portion Asset retirement obligation Long-term lease obligation Deferred inflow Affiliate obligation Current liabilities Commercial paper notes and short term financings 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 obligation Derivative financial instruments

202,732 23,656 87,685

2010

208,197 15,176 107,156

314,073

330,529

1,135,649

965,676

1,449,722

1,296,205

62,117 126 2,946 6,207 3,983

25,037 556 2,782 7,840 9 3,959

75,379

40,183

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

230,915 12,840 11,746 19,860 7,023 7,696 26,567 1,538 2,365

159,965

320,550

Commitments and contingencies Total capitalization and liabilities

1,685,066

1,656,938

The accompanying notes are an integral part of these consolidated financial statements. 12

Turlock Irrigation District Consolidated Statements of Revenues, Expenses and Changes in Net Assets Years Ended December 31, 2011 and 2010 (dollars in thousands)

2011

Operating revenues Electric Retail Wholesale Irrigation Wholesale gas Other

Operating expenses Purchased power Generation and fuel Other electric Irrigation Administration and general Depreciation and amortization Operating income Nonoperating revenues and expenses Net investment income Other income, net Derivative gain Interest expense Decrease in net assets Net assets Beginning of year End of year

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

2010

227,547 80,039 7,382 11,049 3,545

292,269

329,562

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

96,084 118,518 25,087 10,582 21,568 47,303

271,583

319,142

20,686

10,420

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

2,666 7,643 2,668 (44,673)

(37,142)

(31,696)

(16,456)

(21,276)

330,529

351,805

314,073

330,529

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

Turlock Irrigation District Consolidated Statements of Cash Flows Years Ended December 31, 2011 and 2010 2011

(dollars in thousands) 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

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

2010

234,877 78,177 7,358 10,567 (73,278)

(114,274) (11,308)

(138,672) (10,582)

(18,172) 8,687

(22,045) 2,918

121,149

89,320

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

(86,935) 874 298,423 (64,910) (1,449) (227,810)

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

200,236 (36,967) (610) 3,671

(143,564)

84,523

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

2,473 1,973 (179,948) 105,435

Net cash used in investing activities

(10,460)

(70,067)

Net (decrease) increase in cash and cash equivalents

(32,875)

103,776

212,499

108,723

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 obligation 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 obligation Build America Bond receipts Net cash (used in) provided by capital and related financing activities Cash flows from investing activities Investment income Derivative gain Purchases of investments Sales of investments

Cash and cash equivalents Beginning of year End of year

179,624

212,499

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

17,390 162,234

12,410 200,089

179,624

212,499

(continued)

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

Turlock Irrigation District Consolidated Statements of Cash Flows (continued) Years Ended December 31, 2011 and 2010 (dollars in thousands)

2011

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 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 related to construction of capital assets Domestic water receivable transfer from construction in progress Investment income from derivatives Refunding loss

20,686

2010

50,109 (805) 5,019

47,303 1,036 4,818

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

(1,953) 78 2,879 30,952 (3,997) (1,063) 190 535 (1,878)

121,149

89,320

7,381 632 483

9,703 7,847 695 526

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

10,420

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2011 and 2010 (dollars in thousands) 1.

Organization, Description of Business and Liquidity The Turlock Irrigation District (“TID”) 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), and where not in conflict with GASB pronouncements, accounting principles prescribed by the Financial Accounting Standards Board (FASB). 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”) was formed in 2008 for the purpose of purchasing a wind farm in the State of Washington. In 2009, TWPA completed the purchase of the 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 blended into and reported as part of TID because of the extent of their operational and financial relationship with TID. 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, 2011 and 2010 (dollars in thousands) 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 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 as a component of 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 $56,846 and $48,118 during the years ended December 31, 2011 and 2010, respectively, of which $6,299 and $3,445 were capitalized during 2011 and 2010, 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 years ended December 31, 2011 and 2010 TID had net expense totaling $1,989 and $1,702, 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. 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

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2011 and 2010 (dollars in thousands) 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, 2011 and 2010, TID had emission credits totaling $20,187. Investments in Gas Properties TID owns nonoperating 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 balance sheet. 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 2011 and 2010 totaled $13,702 and $13,572, 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 assets, totaled $6,205 and $4,177, respectively, for the years ended 2011 and 2010. 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 the value of their pool shares, which approximates fair value. 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 amortized cost which approximates fair value. TID’s deposits with CAMP and LAIF are generally available for withdrawal on demand. All investments are carried at their fair market value, generally based on market prices quoted by dealers for those or similar investments except for the CAMP and LAIF investments. The fair value of TID's shares in the CAMP investment pool is based upon the amortized cost of the pool's underlying investments which approximates fair value. The fair value of TID's shares in the LAIF investment pool is based upon the fair value of the pool's underlying investments which are generally derived from quoted market prices.

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2011 and 2010 (dollars in thousands) 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, all representing less than 20% ownership interests except for the WECA and TWPA, are accounted for using the cost method. Debt Issuance Costs Costs incurred in connection with the issuance of debt obligations, principally underwriters’ and legal fees, are deferred on the balance sheet as debt issuance costs and are amortized, as a component of 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, 2011 and 2010, the allowance for doubtful accounts relating to retail electric receivables totaled $450 and $469, respectively. At December 31, 2010, the allowance on the wholesale receivables was $3,820, which related to collectability issues resulting from the uncertain California wholesale energy markets. During the year ended December 31, 2011 the wholesale receivables were settled and the allowance was reduced to zero (Note 13). TID records bad debt expense related to electric service and wholesale activities as administration and general in the statements of revenues, expenses and changes in net assets. In 2011 and 2010, net bad debt expense relating to uncollectible accounts receivable was $635 and $550, respectively. Domestic Water Plant Receivable TID aligned itself in 2006 with the four municipalities to advance the construction of a Regional Surface Water Treatment Plant capable of producing up to 42.5 million gallons per day of clean drinking water for those who inhabit those communities. As set forth in the Drinking Water agreement, TID is responsible for development and construction of the facilities and would own the facility. In 2010 TID and the municipalities decided to suspend development of the project and, as a result TID billed the municipalities for $7,847, representing full reimbursement of TID’s incurred costs which had been accumulated in construction in progress. During 2011 TID received payments from all but one of the municipalities and has $2,011 outstanding as of December 31, 2011. Management believes this amount is fully realizable from the municipality based on the termination provisions within the prevailing agreements. As such the amount is included as a component of debt issuance costs and other assets in the balance sheet at December 31, 2011.

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2011 and 2010 (dollars in thousands) 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 $301 at December 31, 2011 and 2010. Long-term Lease Obligation In connection with completing the Walnut Energy Center, TID entered into a long-term transmission arrangement with Pacific Gas and Electric (PG&E) which included PG&E constructing new, and reinforcing existing natural gas transmission facilities. The arrangement represents, in substance, a capital lease 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. As such, TID records its obligation to PG&E as a long-term lease obligation and the associated assets in utility plant in accordance with FASB accounting rules governing lease accounting. At inception, the contract required an up-front payment of $1,600 plus an irrevocable payment obligation which totals $13,800 on a net present value basis to be paid over a ten year period with the amounts due within one year classified as current. The lease obligation is included in TID’s balance sheet at December 31, 2011 and 2010 with a balance of $7,840 and $9,378, respectively, along with the related assets with a net book value of $6,448 and $7,996, respectively, in utility plant. Future lease payments are approximately $1.5 million in each of the next five years. Deferred Regulatory Asset 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 FASB 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 regulatory balance existed as of December 31, 2011 and 2010. Compensated Absences TID accrues vacation leave, sick leave and other compensated absences earned as liabilities when the employees earn the benefits. At December 31, 2011 and 2010, the total estimated liability for vacation, sick, and other compensated absences was $4,163 and $4,161, respectively, and is included in accrued salaries, wages and related benefits in the accompanying balance sheets. 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.

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2011 and 2010 (dollars in thousands) TID purchases its excess worker’s 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, 2011 and 2010, TID’s estimated self-insurance liability for its worker’s compensation claims totaled $2,670 and $3,924, respectively, and is reported as a component of accounts payable and accrued expenses in the consolidated balance sheets. At both December 31, 2011 and 2010, TID’s estimated self-insurance liability for its medical claims totaled $880 and $780, respectively, and is reported as a component of accrued salaries, wages and related benefits in the consolidated balance sheets. Effective January 1, 2012, TID became a member of CSAC, a joint power authority, 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 include 93% of the counties in California and several other California public entities. 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. Expenses under the contracts, net of the payments received, are reported as a component of 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 accounting rules, Accounting and Financial Reporting for Derivative Instruments, 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 balance sheets. 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 nonoperating revenues and expenses as a derivative gain (loss). Changes in the fair value of derivatives which are effective hedges, are deferred on the balance sheet and included in prepaid expenses and other current assets and accounts payable for current derivative contracts and in debt issue costs and other assets for noncurrent derivative contracts. 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.

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2011 and 2010 (dollars in thousands) 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 balance sheets. 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 Assets TID classifies its net assets into three components – invested in capital assets, net of related debt; restricted; and unrestricted. These classifications are defined as follows: Invested in capital assets, net of related debt – This component of net assets consists of capital assets, net of accumulated depreciation reduced by the outstanding debt balances, net of unamortized debt expenses and unspent debt proceeds. Restricted – This component consists of net assets 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 assets consists of net assets that do not meet the definition of “restricted” or “invested in capital assets, net of related debt”. Board Designated Net Assets Net assets include 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. In 2011, the Board transferred $22,000 from the deferred power supply adjustment regulatory account to the rate stabilization fund, to stabilize electric utility rates in future periods. 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 assets were as follows at December 31: 2011 Rate stabilization Capital improvements

2010

56,076 7,791

34,076 7,791

63,867

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 deferred regulatory asset increasing or decreasing are recorded as additions or reductions to purchased power expense and any changes resulting in a deferred regulatory liability increasing or decreasing

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2011 and 2010 (dollars in thousands) are recorded as additions or reductions to retail revenues. For years when the Power Supply Adjustment balance changes from a deferred regulatory credit to a deferred regulatory asset or from a deferred regulatory asset to a deferred 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 Assets. For the year ended December 31, 2011, the Power Supply Adjustment balance decreased resulting in a reduction to retail revenues of $36,591, and for the year ended December 31, 2010, the Power Supply Adjustment balance decreased resulting in an increase to purchased power expense of $24,358 and a reduction in retail revenues of $10,936. 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 accompanying financial statements. 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 Northwest. The agreements have an initial term of 10 years and 20 years, one of which also includes a 10 year renewal option. Total expense under the TWPA service agreements amounted to $5,239 and $3,936 for the years ended December 31, 2011 and 2010, respectively. Asset Retirement Obligations TID accounts for potential asset retirement obligations in accordance with FASB accounting rules which require 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. Accordingly, no liability has been recorded at December 31, 2011 or 2010.

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2011 and 2010 (dollars in thousands) In conjunction with the purchase of the Tuolumne Wind Project, TID recorded an ARO of $2,553 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, 2011 and 2010 TID recorded $164 and $155 of accretion expense, respectively. Subsequent Events Subsequent events have been assessed through April 16, 2012. 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. 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 Statement No. 61 are effective for TID for the year ending December 31, 2013 although earlier application is permitted. 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. The objective of the Statement is to update and improve existing standards regarding financial reporting and disclosure requirements of certain financial instruments and external investment pools for which significant issues have been identified in practice. The requirements of Statement No. 62 are effective for TID for the year ending December 31, 2012 although earlier application is permitted. Management of TID is currently evaluating the impact this statement will have on TID’s future 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. This Statement provides financial reporting guidance for deferred outflows of resources and deferred inflows of resources. Concepts Statement No. 4, Elements of Financial Statements, introduced and defined those elements as a consumption of net assets by the government that is applicable to a future reporting period, and an acquisition of net assets by the government that is applicable to a future reporting period, respectively. Previous financial reporting standards do not include guidance for reporting those financial statement elements, which are distinct from assets and liabilities. The requirements of Statement No. 63 are effective for TID for the year ending December 31, 2012 although earlier application is permitted. 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. 65, Items Previously Reported as Assets and Liabilities. 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 Statement No. 65 are effective for TID for the year ending December 31, 2013 although earlier application is encouraged. 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, 2011 and 2010 (dollars in thousands) 3.

Utility Plant The summarized activity of TIDâ&#x20AC;&#x2122;s utility plant during 2011 is presented below: December 31, 2010 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

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

(401,161)

(118) $

1,066,515

(1,989) $

1,286,351

The summarized activity of TIDâ&#x20AC;&#x2122;s utility plant during 2010 is presented below: December 31, 2009 Nondepreciable utility plant Land Emission credits Construction in progress

1,378 84,759

Disposals

December 31, 2010

- $ (30,649)

- $ (9,528)

27,826 20,187 98,699

(30,649)

(9,528)

146,712

86,137

792,325 277,137 94,709 70,172 26,481 55,570 93,817

3,227 14,004 293 4,755 37 1,454 6,879

(2,466) (822) (1) -

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

1,410,211

30,649

(3,289)

1,437,571

1,099,473 $

Transfers

100,752

(310,738)

Depreciable utility plant, net Utility plant, net

26,448 20,187 54,117

Additions

1,200,225

(47,303)

30,649

38,834

3,250 $

(354,791)

(39)

1,082,780

(9,567) $

1,229,492

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2011 and 2010 (dollars in thousands) 4.

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 2011 and 2010, TID’s total expenses in connection with its TANC agreements, included in purchased power expense, totaled $9,131 and $7,145, respectively. At December 31, 2011 and 2010, TID has an affiliate obligation payable to TANC of $3,983 and $3,959, respectively, relating to certain noncash expenses and other cumulative differences between expenses recognized for accounting purposes and cash payments made to TANC. 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 $1,430 and $3,137 in 2011 and 2010, respectively. Prior to 2011, TID purchased natural gas and paid related transmission costs to NCPA for delivery of natural gas to some of TID’s natural gas fired power plants. Such natural gas purchases and transmission expenses amounted to $1,785 for 2010 and are included in generation and fuel expenses on the consolidated statements of revenues, expenses and changes in net assets. No purchases were made during 2011. 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 $451,810 and NCPA’s debt related to the Geothermal Project of $34,290 at December 31, 2011. Should other members of TANC or NCPA default on their obligations to these JPAs, TID would be required to

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2011 and 2010 (dollars in thousands) 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 please contact NCPA at 651 Commerce Drive, Roseville, CA 95678 and for TANC audited financial statements please contact TANC at 3100 Zinfandel Drive, Suite 600, Rancho Cordova, CA 95670. 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 TID’s financial statements. WECA’s financial information is summarized as follows: Summarized Balance Sheets

2011

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

11,871 324,153

10,723 328,304

336,024

339,027

55,061 280,963

54,401 284,626

336,024

339,027

Summarized Statements of Revenues, Expenses and Changes in Net Assets Operating revenues Operating expenses

2011 $

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

2010

67,804 53,842

92,539 80,774

13,962

11,765

(13,962)

(11,765)

Tuolumne Wind Project Authority TWPA was formed for the principal purpose of acquiring and operating wind farm assets. TWPA is blended into and reported as a component unit of TID. All operations of TWPA are consolidated into TID’s financial statements. The TWPA’s balance sheet as of December 31, 2011 and 2010 and the results of its operations for the years ended December 31, 2011 and 2010 are summarized as follows:

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2011 and 2010 (dollars in thousands) Summarized Balance Sheets

2011

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

15,363 431,789

16,669 429,405

447,152

446,074

15,478 2,946 428,728

14,484 2,782 428,808

447,152

446,074

Summarized Statements of Revenues, Expenses and Changes in Net Assets Operating revenues Operating expenses

2011 $

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

2010

32,720 11,870

30,656 9,849

20,850

20,807

(20,850)

(20,807)

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 or instrumentalities; 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. Investments in CAMP and LAIF are unregistered, pooled funds. 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, 2011 and 2010 (dollars in thousands) 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, 2011 and 2010. 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 Government sponsored enterprises U.S. Treasury Bills U.S. Treasury Notes

A-1+

TSY 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

2011

TSY TSY AA+

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

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

2010

42,296 20,070 13,340 124,383

162,234

200,089

3,197 1,706

2,590 2,004 1,899 825 5,285 9,120

4,903

21,723

2,935 14,455

12,190 220

17,390

12,410

5,289 6,001 12,129

3,570

23,419

3,570

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

73,535 2,000 31,418 17,711 -

137,291

124,664

345,237

362,456

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2011 and 2010 (dollars in thousands) The schedule below presents restricted and unrestricted balances of cash, cash equivalents and investments as of December 31: 2011 General operating funds Operating accounts Funds designated for rate stabilization Funds designated for capital improvements

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

66,892 69,200 7,791

2010

67,924 47,200 7,791

143,883

122,915

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

115,688 82,136 39,513 2,204

201,354

239,541

345,237

362,456

Custodial Credit Risk This is the risk that in the event of the failure of a depository financial institution or counterparty to a transaction, TIDâ&#x20AC;&#x2122;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, 2011 and 2010, TID had deposits totaling $4,090 and $6,186, respectively, which are insured by the FDIC. The remaining deposits of $50,430 and $36,110 are uncollateralized and uninsured at December 31, 2011 and 2010, 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, 2011 and 2010, of $113,573 and $144,673 respectively, were uninsured and uncollateralized. Currently the FDIC offers unlimited deposit insurance coverage for noninterest-bearing transaction accounts and $250 for interest bearing accounts. Under the Temporary Liquidity Guarantee Program (TLGP), announced in October 2008, the FDIC has agreed to guarantee new senior unsecured bank debt issued after April 1, 2009 and before October 31, 2009 and maturing on or before December 31, 2012. TID has a total of $4,090 and $3,388 in interest bearing and noninterest bearing accounts at December 31, 2011 and 2010, respectively, and $0 and $2,590 in investments at December 31, 2011 and 2010, respectively, which are guaranteed by the FDIC under the TLGP.

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2011 and 2010 (dollars in thousands) 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: Investment Type

2011

Federal Home Loan Bank Federal National Mortgage Association Federal Home Loan Mortgage Corporation

2010

11 % 14 % 8%

5% 13 % 6%

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 maturities of 90 days or less. Investments maturing within one year are classified as current. At December 31, 2011 TID has the following investments with maturities of over one year, which are therefore subject to increased interest rate risk:

Investment Type

Fair Value

Corporate notes Government sponsored enterprises Municipal notes Certificate of deposits U.S Treasury Notes Time deposit

17,242 109,225 1,219 5,197 30,552 2,177

Total fair value

165,612

Portfolio weighted average maturity

Weighted Average Maturity (Years) 1.90 1.71 3.09 1.08 1.34 4.00

1.68

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 are invested in U.S. Government securities and related instruments with maturities no later than the expected date of the use of the funds.

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2011 and 2010 (dollars in thousands) 6.

Long-term Debt Long-term debt consists of the following at December 31: 2011 Revenue bonds, fixed interest rates of 2.0% to 6.3%, maturing through 2041 Revenue bonds, variable interest rates, maturing through 2034 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 Certificates of participation, variable interest rates, maturing through 2031

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

2010

671,385

4,690

427,575

26,785

32,500

1,125,745

966,700

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

475,150

1,135,649

(12,840) 15,019 (3,203) $

965,676

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 (â&#x20AC;&#x153;TID Note 2â&#x20AC;?) in the amount of $190,950 (Note 8) on the maturity date of August 12, 2011, to fund required reserves and pay for certain debt issue costs associated with the refunding. This resulted in structuring a larger portion of the Districtâ&#x20AC;&#x2122;s debt portfolio from short term notes to long term debt. In May 2010, TID issued revenue refunding bonds, 2010 series A totaling $154,595, the proceeds of which were combined with $7,407 from a reserve fund, and used to refinance the 1998 Series A revenue refunding bonds of $52,430, fund the 1992 Series A revenue refunding bonds reserve and retire the TID first priority subordinated refunding revenue notes in the amount of $98,135 on the maturity date of June 8, 2010. This refunding resulted in a net deferred accounting loss of $526, which is being amortized over the life of the refunding issue. The refunding reduced aggregate debt service payments by $6,202 and resulted in a total economic gain of $3,617. Concurrent with the TID revenue refunding bonds, 2010 series A issue, TID issued WECA revenue refunding bonds, 2010 series A & B in the amount of $138,585. The proceeds from the issued WECA revenue refunding bonds, 2010 series A & B were used to retire the WECA revenue refunding bonds in the amount of $79,675 on the stated maturity date of June 8, 2010 and pay down a portion of the outstanding taxable commercial paper balance in the amount of $50,000.

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2011 and 2010 (dollars in thousands) 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, 2011 and 2010 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 Assets. The summarized activity of TID’s long-term debt during 2011 and 2010 is presented below:

December 31, 2010 Revenue bonds Certificates of participation

Less Unamortized premiums and (discounts), net Deferred losses on bond refundings, net

907,415 59,285

Additions $

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

(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

December 31, 2009 Revenue bonds Certificates of participation

Amounts Due Within One Year

966,700

(3,203)

Total long-term debt, net $

206,940 -

Payments and December 31, Amortization 2011

678,045 60,385

216,834

Additions $

293,180 -

504 $

(48,576)

(2,699) $ 1,146,774

Payments and December 31, Amortization 2010

Amounts Due Within One Year

907,415 59,285

11,740 1,100

12,840

(63,810) (1,100)

738,430

293,180

(64,910)

966,700

7,867

7,811

(659)

15,019

415

(3,203)

(3,092) 743,205

(526) $

300,465

(65,154)

978,516

Variable Rate Debt TID’s remaining variable rate bonds and certificates of participation (COP’s) totaling $35,055 were retired with the use of TID’s commercial paper program in July 2011. The retirement of the variable rate bonds and certificates of participation resulted in an accounting loss of $483 which is reflected as a component of interest expense on the Statement of Revenues, Expenses and Changes in Net Assets. General The COPs and TID 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 are subordinate to the TID 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 33

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2011 and 2010 (dollars in thousands) 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. TID’s scheduled future annual principal maturities and estimated interest are as follows at December 31, 2011: Estimated Interest

Principal 2012 2013 2014 2015 2016 2017–2021 2022–2026 2027–2031 2032–2036 2037–2041

Total

11,125 22,070 22,725 26,290 30,065 173,280 219,300 263,030 232,560 125,300

59,591 58,680 57,733 56,470 55,113 251,047 200,350 132,860 52,959 12,143

70,716 80,750 80,458 82,760 85,178 424,327 419,650 395,890 285,519 137,443

1,125,745

936,946

2,062,691

At December 31, 2011 and 2010, 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:

2011 Carrying amount Fair value

1,146,774 1,302,661

2010 $

978,516 1,008,750

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2011 and 2010 (dollars in thousands) 7.

Commercial Paper and Short-term Borrowings Commercial Paper TID has two commercial paper programs, one established in December 2006 for various financing needs up to $100,000, primarily for financing capital expenditures. At December 31, 2011 the balance outstanding under this commercial paper program was $35,405 of which the entire balance was taxable. There was no outstanding balance at December 31, 2010. The effective interest rate for the notes outstanding at December 31, 2011 was 0.25% and the average term was 4 days. 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 A- Negative (Standard & Poor’s). The other commercial paper program is used to finance capital expenditures up to $80,000. At December 31, 2011 and 2010, the balance outstanding under TID’s other commercial paper program was $39,975 and $39,965, respectively, of which $24,975 and $24,965 was taxable, respectively. The effective interest rate for the notes outstanding at December 31, 2011 and 2010 was 0.24% and 0.33%, respectively, and the average term was 72 and 85 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 2012. The counterparty to the letter of credit is a national bank whose credit rating is AA- Negative (Standard & Poor’s). Prior to expiration of the existing letter of credit facility, TID plans to extend the facility or solicit offers for alternative credit support. In the event that such extensions or alternatives are not available at acceptable terms, TID believes it has adequate liquidity to fulfill its commercial paper obligations. The consolidated activity of TID’s commercial paper during 2011 and 2010 is presented below: 2011 Balances at beginning of year

Additions Payments

39,965

2010 $

35,415 -

Balances at end of year

75,380

79,939 10,026 (50,000)

39,965

Short-term Borrowings In July 2010, TID issued First Priority Subordinated Revenue Notes, Series 2010 (“TID Note 2”) in the amount of $190,950, for the purpose of financing the construction of TID’s Almond Power Plant Expansion. In August 2011, TID used the proceeds from the first priority subordinated revenue refunding bonds, series 2011 (Note 6) to retire the TID Note 2 upon its maturity in August 2011. 8.

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. As of December 31, 2011 and 2010 TID had no regulatory assets.

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2011 and 2010 (dollars in thousands) Deferred Regulatory Credits Deferred regulatory credits consist of the following at December 31: 2011 Electric rate stabilization Deferred power supply adjustment Unrealized gain on investments

2010

35,124 25,527 1,466

13,124 10,936 977

62,117

25,037

Power Supply Adjustment TIDâ&#x20AC;&#x2122;s Rate Schedule PSA (Power Supply Adjustment) 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 2011, $36,591 was added to the power supply regulatory account and the Board of Directors elected to transfer $22,000 out of the power supply adjustment account into the electric rate stabilization deferred regulatory account. On December 31, 2011 and 2010 TID had an excess, or a deferred regulatory credit of $25,527 and $10,936, 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 of Directors 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 accounting rules, Accounting and Financial Reporting for Derivative Instruments. For those contracts, substantially all of the electricity contracts and most of the gas related contracts qualify as normal purchases or normal sales under the GASB accounting rules because TID takes or makes delivery under the related contract, and as a result, the contracts are

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2011 and 2010 (dollars in thousands) 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, 2011 2010 Derivative financial instrument assets Gas related contracts Electric related contracts

547 108

Total derivative financial instruments Less: Current portion Derivative financial instrument liabilities Gas related contracts Electric related contracts

80 691

655

771

(547)

(762)

108

1,278 -

2,572 349

Total derivative financial instruments Less: Current portion

1,278

2,921

(1,152)

(2,365)

126

556

The fair value balances and notional amounts of derivative instruments outstanding as of December 31, 2011 and 2010, 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, 2011 Fair Value

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

442 108

Notional

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

550 Deferred outflow

(1,173)

Net deferred outflow

(1,173)

Total derivative contracts loss

(623)

28,000-77,500 MMBtu

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2011 and 2010 (dollars in thousands)

Classification Investment derivatives Gas related contracts Electric related contracts Electric related contracts Gas related contracts

Nonoperating revenues and expense Nonoperating revenues and expense Nonoperating revenues and expense Nonoperating revenues and expense

December 31, 2010 Fair Value

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

45 690 (349) (355)

Notional

2,945-232,500 MMBtu 7,200-12,480 MWh 3,840-10,400 MWh 6,324-174,484 MMBtu

31 Deferred inflow Deferred outflow

35 (2,216)

Net deferred outflow

30,000-155,000 MMBtu 28,000-120,000 MMBtu

(2,181)

Total derivative contracts loss

(2,150)

The investment derivatives are gas and electric contracts that do not meet the definition of effective hedges as defined in GASB accounting rules, Accounting and Financial Reporting for Derivative Instruments. Changes in the fair value of these contracts are recorded in the statement of revenues, expenses and changes in net assets. For the years ending December 31, 2011 and 2010, TID recorded a gain on derivative contracts that did not meet the definition of effective hedges resulting in $2,618 and $2,668, respectively, and is included in the nonoperating revenues and expenses section on the Statement of Revenues, Expenses and Changes in Net Assets. The deferred outflows related to hedged derivative financial instruments of $0 and $35 is included in accounts payable and accrued expenses on the balance sheet at December 31, 2011 and 2010, respectively. The current deferred inflows related to hedged derivative financial instruments of $1,047 and $1,775 is included as a component of prepaid expenses and other current assets on the balance sheet at December 31, 2011 and 2010, respectively, and the remaining noncurrent deferred inflows of $126 and $443 is included as a component of debt issuance costs and other assets on the balance sheet at December 31, 2011 and 2010, 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 2011 and 2010. 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, TID’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 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. 38

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2011 and 2010 (dollars in thousands) The aggregate fair value of hedging derivative instruments in a net asset position at December 31, 2011 totaled $550. As of December 31, 2011 all of TID’s derivative contracts, for which it has counterparty risk, are held with counterparties with A- or better credit ratings or are with the U.S. Department of Energy. Basis Risk TID is exposed to basis risk on some of its commodity forward contracts because the expected commodity purchase being hedged will price based on a pricing point different than the pricing point at which the forward contract is expected to settle. The majority of these exposures relate to gas contracts that settle at NYMEX whereas the hedged gas purchase will be delivered at PG&E City Gate. At December 31, 2011, prices at those delivery points were $2.99 and $3.38, respectively. 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 2011 and 2010 were determined by actuarial valuations using the frozen entry age actuarial cost method. The actuarial assumptions utilized for the January 1, 2011 and 2010 actuarial valuations were as follows:

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2011 and 2010 (dollars in thousands) •

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 portion of annual pension cost. TID’s annual pension cost and net pension obligation for 2011 and 2010, based on valuations as of January 1, 2011 and 2010, respectively, are as follows: 2011 Annual required contribution Interest on net pension obligation Adjustment to annual required contribution

Annual pension cost Contributions made Decrease in net pension obligation Net pension obligation (prepaid) balance at beginning of year Net pension obligation balance at end of year

2010

12,340 5 (7)

12,338

10,777

12,338

10,081

696

60 $

10,756 (54) 75

(636) $

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

Annual Pension Cost (APC)

Fiscal Period Ending December 31, 2011 December 31, 2010 December 31, 2009

$ $ $

12,338 10,777 10,633

Net Pension Obligation (Asset)

Percentage of APC Contributed 100 % 94 % 100 %

$ $ $

60 60 (636)

Deferred Compensation Plan In addition, 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 40

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2011 and 2010 (dollars in thousands) 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 follows GASB accounting rules, Accounting and Financial Reporting by Employers for Post Employment Benefits other than Pensions (OPEB), 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. To obtain a CALPERS Pre-funding Plan report please contact CALPERS at Lincoln Plaza North 400 Q Street, Sacramento, CA 95811. 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. 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 actuarial methods and assumptions used include techniques that are designed to reduce the effects of short-term volatility in actuarial accrued liabilities and the actuarial value of assets, consistent with the long-term perspective of the calculations. 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.

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2011 and 2010 (dollars in thousands) Funding Policy 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. During 2011 and 2010, TID’s post-retirement health care benefit contributions were $2,366 and $1,439, respectively, net of premiums received from retirees for eligible dependents. Annual OPEB Cost and Net OPEB Obligation TID’s annual OPEB cost is calculated based on the annual required contribution of the employer (ARC), an amount actuarially determined in accordance with the parameters of GASB 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, 2011 and 2010, TID’s annual OPEB expense of $1,924 and $1,884, 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 obligation: 2011 Annual required contribution

Annual OPEB cost Contributions made (Increase) decrease in net OPEB prepaid

1,924

2010 $

1,924

1,884

2,366

1,439

(442)

Net OPEB prepaid Beginning of year

445

(3,581)

End of year

1,884

(4,023)

(4,026) $

(3,581)

TID’s annual OPEB cost, the percentage of annual OPEB cost contributed to the plan, and the net OPEB prepaid for the years ended 2011, 2010 and 2009 is as follows:

Annual OPEB Cost (AOC)

Fiscal Period Ending December 31, 2011 December 31, 2010 December 31, 2009

$ $ $

1,924 1,884 1,788

Net OPEB Obligation (Asset)

Percentage of AOC Contributed 123 % 76 % 117 %

$ $ $

(4,023) (3,581) (4,026)

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2011 and 2010 (dollars in thousands) 12.

Commitments Power Sales Agreement For the period from January 1, 2011 through January 31, 2011 and for the year ended December 31, 2010 TID 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 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 $19,349 and $20,483 in 2011 and 2010, respectively. 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 $16,663 and $23,942 for the years ended December 31, 2011 and 2010, respectively, and purchases under the agreement were $18,593 and $25,644 for the years ended December 31, 2011 and 2010, respectively. 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 $22,147 and $19,843 in 2011 and 2010, respectively. 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 $7,503 and $6,545 of power in 2011 and 2010, respectively, under the CCSF agreement.

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2011 and 2010 (dollars in thousands) Gas Purchase Agreements TID has two long-term natural gas supply agreements with two companies to meet the consumption of its natural gas fired power plants, which expire through January 2016. One contract supplies all the gas required by TIDâ&#x20AC;&#x2122;s existing Walnut and Almond plants up to 27,000 million British Thermal Units (MMBtu) per day from the fuel manager; the other contract is with another counterparty, which allows for the purchase of all required natural gas for the Walnut Energy Center not to exceed 55,000 MMBtu per day. Pricing for both contracts are indexed to certain natural gas indexes, or a mutually agreed upon price, as defined in the gas purchase agreements. Fuel purchased under both agreements totaled $30,165 and $28,697 in 2011 and 2010, respectively. 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 $3,975 and $4,001 in 2011 and 2010, respectively. 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, 2011: Amount 2012 2013 2014 2015 2016 Thereafter

26,958 25,345 27,246 27,805 28,213 120,089

255,656

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2011 and 2010 (dollars in thousands) Land Leases The TWPA has leases with 9 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, 2011 and 2010 was $1,190 and $1,099, respectively. 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 2012 2013 2014 2015 2016 Thereafter

13.

1,154 1,154 1,154 1,154 1,154 14,425

20,195

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. TID’s potential refund liability was approximately $3,600. On September 6, 2005 the Ninth Circuit Court of Appeals issued its decision regarding FERC’s authority regarding the imposing of refunds on nonpublic utilities. The Court concluded that FERC does not have authority over nonpublic authorities making sales in wholesale energy markets. California Parties vs. Government Entities Complaint for Damages for 2000 and 2001 Power Sales Following the Ninth Circuit Court of Appeals ruling that FERC could not order refunds in the California Refund proceeding, TID and other publicly owned utilities were sued by PG&E, California Edison Company and California Electricity Oversight Board and by San Diego Gas & Electric (collectively the “California Parties”). The claims are for damages arising from sales of wholesale power and ancillary services from May 1, 2000 through June 20, 2001. No actual dollar damage amounts were cited in the complaints. The complaints state they are based upon the same facts as were included in the FERC and Ninth Circuit Court cases. Consistent with the offsetting impacts of the receivables and potential liabilities described in the FERC-related proceeding described above, District management believed that any settlement would not involve cash outflows by TID. On July 5, 2011, the Superior Court of Los Angeles approved TID’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

Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2011 and 2010 (dollars in thousands) 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.

Supplemental Schedules

Turlock Irrigation District Required Supplemental Information - Schedules of Funding Progress (Unaudited) December 31, 2011 and 2010 (dollars in thousands) 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 and is required supplementary information: Actuarial Value of Assets (a)

Actuarial Valuation Date December 31, 2011 December 31, 2010 December 31, 2009

$ 131,591 $ 128,816 $ 126,070

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

222,936 205,580 189,518

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

91,345 76,764 63,448

Funded Ratio (a/b) 59.0 % 62.7 % 66.5 %

Covered Payroll (c) $ $

34,218 33,960 33,878

UAAL as a Percentage of Covered Payroll ([b-a]/c) 267.0 % 226.0 % 187.3 %

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 Value of Assets (a)

Actuarial Valuation Date December 31, 2010 December 31, 2008

$ $

8,254 5,086

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

23,577 19,869

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

15,323 14,783

Funded Ratio (a/b) 35.0 % 25.6 %

Covered Payroll (c) $ $

35,829 35,009

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

HISTORICAL OPERATING STATISTICS 2007-2011 (unaudited) 2011 AVERAGE CUSTOMERS AT END OF PERIOD: Residential Commercial Industrial Other (1) Total

2010

2009

2008

2007

71,829 6,968 780 20,355 99,932

71,559 6,907 781 20,361 99,608

71,333 6,915 787 20,418 99,453

70,594 6,923 792 20,239 98,548

70,981 6,851 784 19,807 98,423

MWh SALES: Residential Commercial Industrial Other (1) Total Retail Interdepartmental meters Wholesale Power Total

693,659 124,820 729,239 346,822 1,894,540 49,137 1,942,107 3,885,784

675,876 121,267 724,489 339,379 1,861,011 54,399 1,877,222 3,792,632

712,053 125,498 730,828 361,483 1,929,862 59,094 1,440,480 3,429,436

712,387 128,553 754,527 363,003 1,958,470 62,396 1,260,069 3,280,935

706,977 125,614 753,617 363,531 1,949,739 58,485 1,392,429 3,400,653

SOURCES OF MWh: Generated by district Purchased Subtotal System losses Total

2,369,260 1,618,465 3,987,725 101,941 3,885,784

2,541,574 1,345,918 3,887,492 94,860 3,792,632

2,157,278 1,346,677 3,503,955 74,519 3,429,436

1,924,982 1,445,451 3,370,433 89,498 3,280,935

1,748,714 1,706,265 3,454,979 54,326 3,400,653

ELECTRIC ENERGY REVENUES: (IN THOUSANDS) Residential Commercial Industrial Other (1) Power Supply Adjustment Deferral Total Retail Energy Electric Service Charges Other Electric Revenue Electric Energy Retail Wholesale Power Total

$100,655 15,998 75,891 41,571 (36,586) 197,529 408 74 198,011 69,334 $267,345

$99,806 15,545 74,618 47,922 (10,941) 226,950 385 212 227,547 80,039 $307,586

$102,662 15,893 74,812 47,632 240,999 322 179 241,500 52,047 $293,547

$91,826 14,807 66,688 41,100 214,421 344 190 214,955 97,385 $312,340

$86,561 13,587 62,058 38,534 200,740 373 270 201,383 86,408 $287,791

491

497

493

520

AVERAGE MWh SALES PER CUSTOMER FOR THE PERIOD Residential Commercial Industrial

9.657 17.913 934.922

9.445 17.557 927.643

9.982 18.149 928.625

10.091 18.569 952.686

9.960 18.335 961.246

AVERAGE REVENUE PER MWh FOR THE PERIOD Residential Commercial Industrial

$145.11 $128.17 $104.07

$147.67 $128.19 $102.99

$144.18 $126.64 $102.37

$128.90 $115.18 $88.38

$122.44 $108.16 $82.35

$0.067

$0.089

$0.087

$0.080

$0.069

SYSTEM PEAK DEMAND (MW)

AVERAGE COST OF POWER PER KWh FOR RETAIL LOAD (2)

(1) Includes agricultural and municipal water pumping and street lighting. (2) Includes depreciation, excludes debt service.

516

HISTORICAL RESULTS OF OPERATIONS 2007-2011 (unaudited) (IN THOUSANDS) OPERATING REVENUES: Electric energy - Retail Electric energy - Wholesale Irrigation Other Total Operating Revenue OPERATING EXPENSES: Power Supply: Purchased Power Generation and Fuel Total Power Supply Other Electric O&M Irrigation O&M Public Benefits Administration and General Depreciation and amortization Total Operating Expenses OPERATING INCOME (LOSS)

2011

2010

2009

2008

2007

$198,011 69,334 7,445 17,479 292,269

$227,547 80,039 7,382 14,594 329,562

$241,500 52,047 6,832 13,741 314,120

$214,955 97,385 6,570 17,653 336,563

$201,383 86,408 6,571 12,406 306,768

73,466 92,539 166,005 19,732 11,161 4,614 19,962 50,109 271,583

96,084 118,518 214,602 20,074 10,582 5,013 21,568 47,303 319,142

71,352 129,202 200,554 19,801 11,257 6,611 20,576 39,426 298,225

95,460 143,792 239,252 17,259 10,239 6,041 18,819 32,404 324,014

93,293 112,255 205,548 16,541 10,240 3,111 17,650 27,854 280,944

20,686

10,420

15,895

12,549

25,824

OTHER INCOME (EXPENSE): Interest/Deriative (loss)gain Unrealized (Loss) Gain on Investments Miscellaneous Total Other Income

5,218

5,334

697

14,262

8,187 13,405

7,643 12,977

6,446 7,143

5,808 20,070

6,634 12,678

INTEREST EXPENSE Long Term Debt

50,547

44,673

27,344

20,388

23,894

NET INCOME (LOSS)

(16,456)

(21,276)

(4,306)

12,231

14,608

RETAINED EARNINGS: BEGINNING OF YEAR

330,529

351,805

356,111

343,880

329,272

$314,073

$330,529

$351,805

$356,111

$343,880

END OF YEAR DEBT SERVICE COVERAGE (1) REVENUE BONDS/COP'S

2.82x

(1) Calculation as defined in Turlock Irrigation District Bond Resolution (2) Electric Rate Stabiliation transfer of $8,000

3.16x

1.67x

2.13x

(2)

6,044

1.91x