CONNEXUS ENERGY Financial statements as of and for the Years Ended December 31, 2010 and 2009, and Independent Auditors Report.
INDEPENDENT AUDITORS REPORT To the Board of Directors of Connexus Energy Ramsey, Minnesota We have audited the accompanying balance sheets of Connexus Energy (the Cooperative ) as of December 31, 2010 and 2009, and the related statements of margins, changes in patrons equity and comprehensive income, and cash flows for the years then ended. These financial statements are the responsibility of the Cooperative s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Cooperative s internal control over financial reporting. Accordingly, we express no such opinion. An audit also 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, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of the Cooperative as of December 31, 2010 and 2009, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. March 8, 2011
CONNEXUS ENERGY BALANCE SHEETS AS OF DECEMBER 31, 2010 AND 2009 ASSETS LIABILITIES UTILITY PLANT (Note 1): PATRONS EQUITY: Distribution system $ 248,100,713 $ 243,241,238 Patronage capital $ 139,014,900 $ 134,518,206 General plant 37,957,592 35,544,878 Appropriated margins 1,554,224 1,340,152 Construction work-in-progress 3,242,482 4,942,493 Total patrons equity 140,569,124 135,858,358 Utility plant 289,300,787 283,728,609 LONG-TERM DEBT Less current Less accumulated depreciation (95,940,145) (89,696,366) portion (Notes 4 and 9) 125,761,969 123,494,885 Total utility plant 193,360,642 194,032,243 OTHER LONG-TERM LIABILITIES (Primarily pension obligation and deferred credits) 11,857,717 12,897,266 OTHER ASSETS: Investment in associated organizations (Notes 3 and 9) 82,329,578 75,923,696 COMMITMENTS AND CONTINGENCIES (Note 6) Subordinated debt investments (Notes 2 and 9) 8,648,722 8,682,228 Other investments (Note 3) 1,137,420 1,057,142 CURRENT LIABILITIES: Notes receivable (Note 7) 270,218 547,345 Accounts payable 3,335,035 2,987,072 Other assets (Note 1) 11,475,021 10,480,894 Payable to associated organization (Note 3) 26,109,637 23,655,731 Customer deposits 865,319 705,616 Total other assets 103,860,959 96,691,305 Accrued compensation and related taxes 3,940,109 3,986,101 Accrued state and local taxes 5,127,683 4,851,416 CURRENT ASSETS: Accrued interest 1,137,695 1,146,765 Cash and cash equivalents 28,037 364,168 Patronage capital payable 2,868,641 2,637,844 Accounts receivable less allowance for doubtful Revolving term loans payable (Note 4) 5,337,000 7,084,100 accounts of $980,964 and $1,103,037, respectively 29,069,327 27,748,742 Current portion of long-term debt (Notes 4 and 9) 2,727,902 2,683,388 Materials and supplies inventory 2,531,005 2,272,194 Prepaid expenses 665,572 851,351 Total current liabilities 51,449,021 49,738,033 Interest receivable 122,289 28,539 Total current assets 32,416,230 31,264,994 TOTAL $ 329,637,831 $ 321,988,542 TOTAL $ 329,637,831 $ 321,988,542 See notes to financial statements. - 2 -
CONNEXUS ENERGY STATEMENTS OF MARGINS FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009 OPERATING REVENUE: Electric revenue $ 220,781,699 $ 210,687,198 Utility services revenue 2,252,310 2,404,155 Retail services revenue 237,126 234,894 Total operating revenue 223,271,135 213,326,247 OPERATING EXPENSES: Cost of power (Note 3) 165,990,162 154,352,680 Labor and related expenses 23,087,325 22,652,688 Electric operations expenses 2,986,185 3,131,097 Fees and services 2,992,187 3,176,558 Marketing 337,763 364,216 Operating supplies 3,745,917 3,630,426 Depreciation 9,976,016 9,424,967 Property taxes 4,072,686 3,770,518 Other 2,222,371 2,702,003 Total operating expenses 215,410,612 203,205,153 OPERATING INCOME 7,860,523 10,121,094 OTHER INCOME (EXPENSE): Interest expense (7,142,216) (6,550,929) Interest income 559,735 166,970 Allocation of Great River Energy income 5,944,328 6,206,793 Gain from equity investments 180,278 120,910 Other income 1,151,201 1,451,141 Total other income 693,326 1,394,885 NET MARGIN $ 8,553,849 $ 11,515,979 See notes to financial statements. - 3 -
CONNEXUS ENERGY STATEMENTS OF CHANGES IN PATRONS EQUITY AND COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009 Accumulated Other Patronage Appropriated Comprehensive Comprehensive Capital Margins Income Total Income Balance December 31, 2008 $ 126,807,717 $ 1,160,740 $ - $ 127,968,457 Net margin 11,515,979 11,515,979 $ 11,515,979 Other comprehensive income Appropriated margin 179,412 179,412 Capital credits retired (3,805,490) (3,805,490) Comprehensive income $ 11,515,979 Balance December 31, 2009 134,518,206 1,340,152-135,858,358 Net margin 8,553,849 8,553,849 $ 8,553,849 Other comprehensive income Appropriated margin 214,072 214,072 Capital credits retired (4,057,155) (4,057,155) Comprehensive income $ 8,553,849 Balance December 31, 2010 $ 139,014,900 $ 1,554,224 $ - $ 140,569,124 See notes to financial statements. - 4 -
CONNEXUS ENERGY STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009 CASH FLOWS FROM OPERATING ACTIVITIES: Net margin $ 8,553,849 $ 11,515,979 Adjustments to reconcile net margin to net cash provided by operating activities: Depreciation 9,976,016 9,424,967 Amortization of debt refinancing fees 83,026 129,973 Net gain on dispositions of property (61,537) (120,507) Patronage allocated to Connexus Energy (937,207) (696,439) Great River Energy patronage allocated to Connexus Energy (5,944,328) (6,206,793) Gain from equity investments (180,278) (120,910) (Increase) decrease in: Accounts receivable (1,320,586) (183,577) Materials and supplies inventory (258,811) 476,468 Other assets (1,039,276) 1,807,793 Increase (decrease) in: Accounts payable and customer deposits 507,666 (587,949) Payable to associated organization 2,453,906 (618,090) Accrued liabilities 221,205 (285,044) Other long-term liabilities (985,396) (4,542,885) Total adjustments 2,514,400 (1,522,993) Net cash provided by operating activities 11,068,249 9,992,986 CASH FLOWS FROM INVESTING ACTIVITIES: Additions to utility plant (net of contributions in aid of construction) (9,368,173) (10,559,720) Proceeds received from sale of plant 125,295 254,483 Issuance of notes receivable net of payments 277,127 (547,345) Purchase of member capital securities (5,000,000) Proceeds from capital term certificates, patronage capital, and equity investments 609,159 760,249 Net cash used in investing activities (8,356,592) (15,092,333) CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on debt (2,688,402) (14,976,077) Patronage capital payments to members (3,612,286) (3,665,742) Loan advances from National Rural Utilities Cooperative Finance Corporation 5,000,000 25,000,000 Repayments on revolving term loan agreement (1,747,100) (1,272,900) Net cash (used in) provided by financing activities (3,047,788) 5,085,281 DECREASE IN CASH AND CASH EQUIVALENTS (336,131) (14,066) CASH AND CASH EQUIVALENTS Beginning of year 364,168 378,234 CASH AND CASH EQUIVALENTS End of year $ 28,037 $ 364,168 NONCASH INVESTING AND FINANCING ACTIVITIES Utility plant purchases included in accounts payable $ 293,183 $ 554,075 See notes to financial statements. - 5 -
CONNEXUS ENERGY NOTES TO FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business Connexus Energy (the Cooperative ) is a customer-owned organization engaged principally in the distribution and sale of electricity to approximately 125,000 customers in seven counties in the north suburban area of Minneapolis and St. Paul, Minnesota. Use of Estimates In recording transactions and balances resulting from business operations, the Cooperative uses estimates based on the best information available. Estimates are used for such items as plant depreciable lives, uncollectible accounts, unbilled revenues, and actuarially determined benefit costs. As better information becomes available (or actual amounts are determinable), the recorded estimates are revised. Consequently, operating results can be affected by revisions to prior accounting estimates. Utility Plant Utility plant is recorded at cost, which includes labor, materials, contracted services, and allocable overhead, reduced by cash contributions in aid of construction received from patrons. Upon the sale or retirement of a utility plant asset, the cost (average cost for distribution system) of an item is removed from the utility plant account and the net of; cost plus disposal costs, less proceeds, is charged or credited to accumulated depreciation. Depreciation expense is computed by applying composite rates to the monthly balance for all classes of utility plant, except for transportation equipment and other general plant assets, which are depreciated on a unit basis. The depreciation rate as a percentage of the average balance of depreciable property was 3.6% and 3.4% in 2010 and 2009, respectively. Recoverability of Long-Lived Assets The Cooperative accounts for the impairment or disposal of long-lived assets in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 360-10, Accounting for the Impairment or Disposal of Long-Lived Assets, which requires long-lived assets, such as property and equipment, to be evaluated for impairment whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable. The Cooperative determines potential impairment by comparing the carrying value of its assets with the sum of the undiscounted cash flows expected to be provided by operating and eventually disposing of the asset. Should the sum of the expected future net cash flows be less than the carrying values, the Cooperative would determine whether an impairment loss should be recognized. An impairment loss would be quantified by comparing the amount by which the carrying value exceeds the fair value of the asset based on quoted market prices or the present value of the expected future cash flows to be generated by the asset. To date, management has determined that no impairment of these assets exists. The Cooperative accounts for the impairment of equity method investments in accordance with ASC 323-10-15-4, The Equity Method of Accounting for Investments in Common Stock, which requires equity investments to be evaluated for impairment whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable. A loss in value of an investment, which is other than a temporary decline, should be recognized. Evidence of a loss in value might include, but would not necessarily be limited to, absence of an ability to recover the carrying amount of the - 6 -
investment or inability of the investee to sustain an earnings capacity which would justify the carrying amount of the investment. A current fair value of an investment that is less than its carrying amount may indicate a loss in value of the investment. Cash and Cash Equivalents Cash and cash equivalents include cash on hand, amounts due from banks, and money market funds with original maturities of three months or less. Materials and Supplies Materials and supplies inventories are stated at the lower of average cost or market. Revenue Recognition The Cooperative records electric revenue based on a calendar month, but reads meters and bills customers on a cycle basis throughout each calendar month. Accordingly, at the end of each month, there is energy consumed, for which consumers have not been billed. The recorded estimate of the revenue and related accounts receivable associated with energy consumed and not billed at December 31, 2010 and 2009, was $11,528,241 and $10,956,680, respectively. Rates charged to consumers by the Cooperative are established solely by the Board of Directors. The Cooperative is not regulated for rates by the Minnesota Public Utilities Commission. Income Taxes The Internal Revenue Service has determined that the Cooperative is exempt from federal and state income taxes under Section 501(c)(12) of the Internal Revenue Code. Patronage Capital Margins realized from operations are assigned to patrons on a patronage basis. Patronage capital is retired on a percentage basis at the discretion of the Board of Directors. Non-Electric Operations The Cooperative currently provides utility billing to municipalities and refuse collectors, performs fleet repair services, and owns and maintains decentralized wastewater systems. The operating revenues associated with the utility billing and fleet repair businesses have been classified as utility services revenue. Operating revenues from the water treatment business are classified as retail services revenue. Other Investments The Cooperative has various investments that are accounted for using the equity method or cost method depending on the Cooperative s ownership percentage in the investee. Derivative Instruments and Hedging Activities The Cooperative s policy is to not use freestanding derivatives and to not enter into contracts with terms that cannot be designated as normal purchases or sales. Management has determined that the Cooperative has no freestanding or embedded derivatives. Other Assets Other assets consist principally of regulatory assets related to the pension plan, deferred wholesale power costs, and costs associated with the financing or refinancing of the Cooperative s debt, which are amortized over the shorter of the life of the debt or refinancing period. Other assets at December 31, 2010 and 2009, are as follows: Regulatory asset pension obligation (Note 5) $ 9,112,125 $ 9,342,555 Deferred wholesale power costs 1,165,859 Other assets 1,197,037 1,138,339 Total other assets $ 11,475,021 $ 10,480,894-7 -
Concentration of Risk As of December 31, 2010 and 2009, approximately 30% and 31%, respectively, of the Cooperative s labor force is covered by a collective bargaining agreement. During 2009, the Cooperative signed a new contract that extends through December 31, 2011. 2. CAPITAL TERM CERTIFICATES AND MEMBER CAPITAL SECURITIES Investments in Capital Term Certificates of the National Rural Utilities Cooperative Finance Corporation (NRUCFC) totaled $3,648,722 and $3,682,228 at December 31, 2010 and 2009, respectively. The Capital Term Certificates consist of 5% Capital Term Certificates that mature, based upon the year of acquisition, beginning October 1, 2070 through October 1, 2080; 3% Loan Capital Term Certificates that mature, based upon the year of acquisition, beginning October 1, 2020 through October 1, 2030; and no-interest Loan Capital Term Certificates, which are refunded to the Cooperative based on the outstanding principal loan balance over the term of the corresponding loans from February 1, 2011 through February 1, 2039. In 2009, the Cooperative invested $5,000,000 in Member Capital Securities with NRUCFC. These securities have a 7.5% interest rate and a maturity date of December 11, 2044, with a first call date of December 11, 2014. Based on the provisions of ASC 320-10, Accounting for Certain Investments in Debt and Equity Securities, the Capital Term Certificates and Member Capital Securities are classified as held-to-maturity securities, as the Cooperative has a positive intent and ability to hold the certificates to maturity and are accordingly carried at amortized cost. 3. ASSOCIATED ORGANIZATIONS The Cooperative is a member of Great River Energy (GRE), which is a generation and transmission cooperative. In 2006, the Cooperative entered into an amended and restated power purchase contract with GRE effective through December 31, 2045. Additionally, effective January 1, 2010, the Cooperative entered into an Amended and Restated Transmission Service contract with GRE, which expires on December 31, 2050. Under the terms of the agreements, the rates charged by GRE are subject to periodic change. Currently, the Cooperative purchases approximately 20% of GRE s total power output sold to members. The Cooperative s investment in GRE consists primarily of capital credits for the Cooperative s share of GRE s operating margins that have been allocated but not received. Operating margins and losses are recognized based on the Cooperative s percentage of GRE s total power output each year, which approximates the Cooperative s ownership in GRE. The Cooperative s investment in GRE, which is recorded on the equity method, was $78,823,201 and $72,878,872 at December 31, 2010 and 2009, respectively. During 2010 and 2009, the Cooperative recognized income of $5,944,328 and $6,206,793, respectively, related to its portion of GRE s margin. The Cooperative s power purchases from GRE were $166,325,498 and $151,542,088 during 2010 and 2009, respectively. Accounts payable to GRE were $26,109,637 and $23,655,731 at December 31, 2010 and 2009, respectively. - 8 -
A summary of the total assets, liabilities, and equity of GRE at December 31, 2010 and 2009, and the results of its operations are as follows (unaudited) (in thousands): Assets $ 3,349,947 $ 3,094,534 Liabilities (2,982,428) (2,754,750) Equity $ 367,519 $ 339,784 Revenues $ 847,156 $ 787,781 Expenses 717,023 677,142 Net margin 27,228 29,760 The Cooperative also maintains an investment in a tree trimming business totaling $1,137,420 and $1,057,142 at December 31, 2010 and 2009, respectively. This investment is recorded under the equity method and is included in other investments in the balance sheets. In 2009, the Cooperative sold its share of the electric metering equipment businesses for a net gain of $449,963. The Cooperative recognized net operating gains from equity investments totaling $180,278 and $120,910 in 2010 and 2009, respectively. The Cooperative has investments in other associated organizations, primarily NRUCFC capital credits, which are recorded on the cost method. Such investments totaled $3,506,378 and $3,044,824 at December 31, 2010 and 2009, respectively. 4. LONG-TERM DEBT AND LINE OF CREDIT AGREEMENTS Long-term debt at December 31, 2010 and 2009, is as follows: NRUCFC bearing interest at 3.5% to 7.15% (5.75% weighted average), due 2011 to 2044, due in quarterly installments, including interest $ 128,489,871 $ 126,178,273 Less current portion 2,727,902 2,683,388 $ 125,761,969 $ 123,494,885 Substantially all assets of the Cooperative are pledged as collateral for the Cooperative s long-term debt. The mortgage note agreement with NRUCFC requires, among other provisions, that the Cooperative maintain certain annual debt service coverage (DSC) levels, including but not limited to, the average DSC ratio. The Cooperative s average DSC ratio, the average of the two highest DSC ratios in the most recent three years, was 2.70 for the year ended December 31, 2010. The Cooperative is required to achieve a minimum of 1.25 average DSC for 2010. Cash payments for interest during 2010 and 2009 totaled approximately $7,217,930 and $6,661,144, respectively. - 9 -
On March 2, 2009, the Cooperative prepaid $11,389,775 of long-term debt utilizing the Cooperative s lines of credit with CoBank and NRUCFC. In September 2009, the Cooperative advanced $20,000,000 of new long-term debt from NRUCFC. Annual principal maturities of existing long-term debt at December 31, 2010, are as follows: Years Ending December 31 2011 $ 2,727,902 2012 2,927,543 2013 2,941,763 2014 2,309,052 2015 2,136,316 Thereafter 115,447,295 $ 128,489,871 The Cooperative has a line of credit agreement for short-term financing with NRUCFC at an interest rate determined by NRUCFC not to exceed the prime rate plus 1%, whereby the Cooperative may borrow up to $20,000,000. As of December 31, 2010, the rate was 4.25%. There were no outstanding borrowings on the line of credit at December 31, 2010 or 2009. The Cooperative has an additional line of credit agreement for short-term financing with NRUCFC at an interest rate currently determined by NRUCFC not to exceed the 7-day London InterBank Offered Rate (LIBOR), plus 2%, whereby the Cooperative may borrow up to $15,000,000. In 2010, this agreement was amended to allow borrowing up to $35,000,000 at a rate not to exceed the 7-day LIBOR plus 1.75%. As of December 31, 2010, the rate was 2%. Outstanding borrowings on the line of credit at December 31, 2010 were $5,337,000. There were no outstanding borrowings on the line of credit at December 31, 2009. The line of credit agreements include various non-financial restrictive covenants. The Cooperative was in compliance with all covenants as of December 31, 2010 and 2009. The Cooperative had a revolving term loan agreement for short-term financing with CoBank at an interest rate determined by CoBank not to exceed the 7 day LIBOR rate plus 1.4%, whereby the Cooperative may borrow up to $22,000,000. The Cooperative allowed this agreement to expire on May 1, 2010. Outstanding borrowings on the line at December 31, 2009 were $7,084,100. Outstanding balances on these short-term loans are classified as current liabilities due to the ability of the lender to subjectively accelerate repayment prior to the expiration date. 5. PENSION PLANS The Cooperative contributes to two benefit plans: a defined-benefit pension plan and a defined-contribution benefit plan. In September 2006, the FASB issued ASC 715-30 Defined Benefit Plans, which requires companies to fully recognize the funded status of each pension and other postretirement benefit plan as a liability or asset in their balance sheets with all unrecognized amounts to be recorded in other comprehensive income. The Cooperative applied regulatory accounting treatment, which allowed recognition of this item as a regulatory asset rather than as a charge to accumulated other comprehensive income, as future costs are to be included in rates. - 10 -
Defined Benefit Plan The Cooperative sponsors a qualified defined benefit pension plan (the Pension Plan ). Benefits under the Pension Plan are determined under a traditional percentage-of-final-pay formula or a cash-balance formula based on annual compensation credits and investment credits. Benefits for all employees hired after January 1, 2000, are determined under the cash-balance formula. The Pension Plan s assets are invested in common stock, bonds, and money market funds. Information for the Pension Plan as of and for the years ended December 31, 2010 and 2009, is as follows: Accumulated benefit obligation December 31 $ 31,602,372 $ 29,476,024 Change in benefit obligation: Projected benefit obligation beginning of year $ 32,060,410 $ 28,348,115 Service cost 1,056,129 994,399 Interest cost 1,732,106 1,837,152 Plan amendments 531,290 112,575 Actuarial losses 1,177,190 2,963,582 Benefits paid (2,689,642) (2,195,413) Projected benefit obligation end of year $ 33,867,483 $ 32,060,410 Change in plan assets: Fair value of plan assets beginning of year $ 25,152,088 $ 16,788,740 Actual return on assets 3,278,963 4,231,707 Employer contribution 1,697,717 6,327,054 Benefits paid (2,689,642) (2,195,413) Fair value of plan assets end of year $ 27,439,126 $ 25,152,088 Funded status of plan funded status of plan as of fiscal year end $ (6,428,357) $ (6,908,322) Weighted-average assumptions used to determine benefit obligations as of December 31: Discount rate 5.15 % 5.75 % Weighted-average rate of increase in future compensation levels 4.25 4.25 Amounts recognized in statements of financial position consists of noncurrent liabilities $ (6,428,357) $ (6,908,322) Net amount recognized as of fiscal year end $ (6,428,357) $ (6,908,322) Amounts not yet recognized as components of net periodic benefit cost: Amount disclosed at beginning of year $ 9,342,555 $ 9,689,609 Net actuarial (gain) (613,847) (327,296) Prior service cost 383,417 (19,758) Total (Note 1) $ 9,112,125 $ 9,342,555 The amount of actuarial net (gain) loss and prior service costs expected to be amortized in 2011 are $328,210 and $142,543, respectively. - 11 -
Components of net periodic pension costs for the Pension Plan for 2010 and 2009 are as follows: Service cost $ 1,056,129 $ 994,399 Interest cost 1,732,106 1,837,152 Expected return on plan assets (1,833,350) (1,385,342) Amortization of net loss 345,424 444,513 Amortization of prior service cost 147,873 132,333 Total net periodic pension cost $ 1,448,182 $ 2,023,055 The long-term rate of return on assets reflected in the 2010 and 2009 expense was 8%. The Cooperative s investment policy allows the money manager to invest up to 80% or as low as 50% of the plan s assets in equities. All assets in the Pension Plan are invested in Wells Fargo collective trust funds, which are classified as Level 2 investments within the fair value hierarchy. Annually, management reviews the actual long-term rate of return on assets and compares this return to the money manager s model of expected returns based on proprietary formulas as well as current market data, and adjusts accordingly. The weighted-average assumptions used to determine net periodic pension costs for the years ended December 31, 2010 and 2009, were as follows: Discount rate 5.75 % 6.70 % Expected long-term rate of return on plan assets 8.00 8.00 Rate of increase in future compensation levels 4.25 4.25 Estimated future benefit payments at December 31, 2010, are as follows: Years Ending December 31 2011 $ 1,993,940 2012 2,440,122 2013 2,707,888 2014 2,390,857 2015 2,480,935 2016 2020 14,150,226 Expected contributions during fiscal 2011 are $1,790,000. Percentage of fair value by category of plan assets: Equity securities 78 % 81 % Debt securities 18 16 Other 4 3 100 % 100 % - 12 -
The Cooperative s policy is to fund the minimum required contribution under applicable laws and regulations and any additional amounts deemed appropriate by management. Postretirement Health Benefits The Cooperative allows employees who retire to remain in the group health care plan if they contribute the full actuarially determined cost of the health insurance premium (between the ages of 55 and 65). Currently, 22 retired employees participate in the group health care plan. Defined Contribution Plan The Cooperative sponsors a qualified defined contribution plan with elective employee deferral and employer-matching provisions. The Cooperative contributes an amount equal to 1% of employee compensation, plus an additional matching contribution equal to 50% of the first 6% of the employee s contribution to the plan, which covers substantially all employees. Contributions to the plan were $681,908 and $674,402 for the years ended December 31, 2010 and 2009, respectively. Deferred Compensation The Cooperative has deferred compensation arrangements for certain employees, in which assets are invested in a variety of mutual funds at the discretion of the employees. The total value of the assets at December 31, 2010 and 2009, was $1,034,739 and $846,034, respectively, and is included in other assets and other long-term liabilities in the balance sheets. Effective January 1, 2011, the Cooperative modified the pension plan and the defined contribution plan so that new employees are no longer eligible to participate in the pension plan, but will instead participate in an enhanced defined contribution plan. 6. COMMITMENTS AND CONTINGENCIES The Cooperative is involved in various legal actions arising in the normal course of business. It is the opinion of management that the resolution of such actions will not have a material adverse effect on the financial position or future results of operations of the Cooperative. 7. NOTE RECEIVABLE On June 19, 2009, Connexus sold its stock in May Engineering and Two Sockets Two Meters to the remaining partner for cash proceeds and a $580,000 note receivable. The note is payable in equal monthly installments of principal and interest based on a seven-year amortization schedule with a balloon payment of all outstanding principal and interest due and payable on July 1, 2012. As allowed in the agreement, the buyer made a prepayment of principle of $200,000 on the note in June 2010. 8. WORKERS COMPENSATION The Cooperative is a member in the Minnesota Rural Electric Workers Compensation Trust, a self-insurance trust formed by some Minnesota electric cooperatives. During 2010 and 2009, the Cooperative contributed $190,087 and $137,217, respectively, to the trust for insurance coverage. 9. FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value at December 31, 2010 and 2009: Cash and Cash Equivalents The carrying amount approximates fair value because of the short-term maturity of these investments. - 13 -
Capital Term Certificates Due to the nature of these investments, the fair value is equal to cost. Member Capital Securities Due to the nature of these investments, the fair value is equal to cost. Associated Organizations As the investments are not actively traded and there is no market value available, the fair value is equal to cost. Long-Term Debt The fair value of the Cooperative s long-term debt is estimated based on the current rates available to the Cooperative for the issuance of debt. As of December 31, 2010, the carrying value and the fair value of the Cooperative s long-term debt were $128,489,871 and approximately $92,675,227, respectively. As of December 31, 2009, the carrying value and the fair value of the Cooperative s long-term debt were $126,178,273 and approximately $83,293,390, respectively. 10. SUBSEQUENT EVENTS The Cooperative has evaluated subsequent events through March 8, 2011, which is the date these financial statements were available for issuance. There are no events subsequent to December 31, 2010, that require disclosure. ****** - 14 -
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