Wa8hington-St. Tammany Electric Cooperative, Inc.

Fr a n kl in to n, Lo u i.s i a n a December 31,2007

Table of Contents

liidepeiuicnt Auditor's Report Page 3

Financial Slateinents Balance Sliects I'age 5 Slatemenls of Operations Page 6 Slatements of Chatiges in Patronage Capital Page 7 Statements of Cash Flows Page 8 Notes to Financial Statements Page 9

Report on inlernal Control Over Financial Reporting and on Compliance and Oilier Matters Based on an Audit of Financial Statements Performed in Accordance With Ciovernimnu AudiUng Slandank Page- 16

Report on Compliance With Requirements Applicable to Each Major Piogram and on Inlernal Control Over Compliance in Accordance With 0MB Circular A-133 Pago 18

Scheclule orHxpenditures of Federal Awards f^age 20 Schedule of Findings and Questioned Costs Pago 21 Schedule of Prior Year Findings and Questioned Costs Bage 23

HAWTHORN, WAYMOUTH £r CARROLL, L.L.P.

J.CHARLES PARKER. C.P.A. LOULS 0. MCKNIGHT, HI. C.P A. CHARLES R. PEVEY, JR.. C.P.A. DAVID J. 8R0USSAR0, C P A.

CERT!NED PUBLIC ACCOUNTANTS 8555 UNITED PLAZA BLVD., SUITE 200

BATON ROUGE, LOUISIANA 70809 (225) 923-3000 • FAX 1225) 923-3008

October 13, 2008

Independent Auditor',s Report

T"he Officers and Board of Directors Wasliiiigfon-St. Tammany Biectric Cooperative, ine. Franklinton, Louisiana

Officers and iMembers of the Board:

We liavc audited the accompanying balance sheets of

Washington-vSt, Tammany Electric Cooperative, Inc. (A Non-Profit Organization)

Franklinton, Louisiana

as of December 31, 2007 and 2006, and the related statements of operations, changes in patronage capital, and cash fiow-s for the- year.s 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 standard.s generally accepted in the United Stales of America and the standards applicable to financial audits contained in GovenimetU Auditing Slandards, issued by the Comptroller General oflhe United States. Those standard,? requii'e that we plan and perlbrm the audit to obtain reasonable assurance about whether the financial statements are free of material misstate-nient, An audit includes examining, on a test basis, evidence supporting (he amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimate,? made by management, as well a.s evaluating the overall financial statement presentation. We believe thai our audits provide a reasonable basis for our opinion.

in our opinion, the financial statements referred to above present fairly, in all material respecls, the financial position of Washington-,St. Tammany Electric Cooperative, Inc. as of f)eeeiriber 31,2007 and 2006, and the results ol'its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United .States of America.

In accordance with Gavernntcnl Auditing Standards, we have also issued our report dated October 13, 2008, on our con.sideralion of the Cooperative's internal control over financial reporting and our tests of its compliance with certain provisions of laws, regiilalion.s, contracts and grant agreements and other mat:tei-,s. The purpose of that report i,s to deseribe the scope of our testing of internal control over fmancial reporting and compliance and the results of that testing and not to provide an opinion on the internal control over financial reporting or on compliance. That report i.s an integral part ofan audit ijcrlbrmed in accordance with Government Auditing Standards and important for as.sessing the result.s of our audit.

Our audit was conducted for the purpose of forming an opinion on the ba,sic financial statements of Washington-St. Tammany Electric Cooperative, Inc. taken as a whole. The accompanying Schedule of E,N:penditure.s of Federal Award,s is pre.sented for purposes of additional analYsi.s as required by U.S. Office of iVIanagernent and Budget Circular A-133, "Audits olAState.s, l,oca! Government.s, and Non-Protlt Organizatioms", and is not a required part of the basic tlnancial statement.s. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, i,s fairly stated, in all material respects, in relation to the basic financial .statements taken a.s a whole,

A.S discu,ssed in Note 6 to the financial statements, Wasbington-St. 'I'ammany Electric C..'ooperative, Inc. is in violation of its debt covenants pertaining to their'ITER and DSC requirement,s,

Yours truly. loinsuuiy, i

Wnshingfon-8t. Tammany Electric Cooperative, Inc. Balance Sheets

December 31,2007 and 2()0t:>

A s s c t s 2007 2006

Utility riant Electric plant in service $1.62,124,442 .$140,065,197 Construction work in progress 1,0.706.909 12.532,854

162,831,351 152.598,05! Accuiniilatecl de|)rccialion f42.664.485i f40.225.47L

120.166.866 1 12.372,580 Investments and Olhei- Assets

A ssoci a ted orga n i za t i o ns 3.675.828 3.466.634

Current assets Cash and cash equivalents 4 18,277 296,650 Ikeslricled cash 10,000 Consumer accounts receivable, net oJ"allowance tor doubtiul

accounts or$133,5l7 in 2007 and $127,16d in 2006 4,267,564 4,801,661 Consumer accounts receivable - unbilled 2,607,252 2,374,373 FEiVIA receivable, net o( allowance for unallowed

costs of$91 in 2007 and 2006 1,274,844 14.308,229 Cther receivables 547,955 600,522 Materials and ,supplie.s 2,412,431 2,974,095 Prepaid expenses 578.887 456.529

12.107,210 25,822,059

Deferred Charges 1 1,997.450 16,9.50.972

•fotal assets 147.947.354 158.612.245

1, i a b i 1 i t i e s a n d E q u i 1 i e s Equities

Memberships 402,845 394,975 Patronage capital 13.705.461 14,642.059

14.1(38.306 15.037,034

l amg-Tcrm Debt, net of current matui itie.s 96.104,412 80.530.982

Current Liabiiitie.s Line of credit 11,000,000 32,270,000 Current portion of long-term debt 4,218,804 4,164,559 Accounts payable 6,300,682 6,159,525 Cirstomer deposit,s 4,345,619 4,058,736 Accrued interest 215,498 225,755 Other accruerl expenses 363,246 276,844

26.443.849 47,155,419 Deferred Credits

Vacation and sick pay 2,162,787 2,024,710 Accrued post-retirement benefits 9.128.000 13.864.100

11.290,7 87 15,888.810

'fotal liabilities and equities 147.947.354 158.612,245

The accompanying notes are an integral part of these statements,

5

Washingfon-St. Tammany Electric Cooperative, Inc. Statements of Operations

Years Ended December 31, 2007 and 2006

2007 2006

Operating Revenue

O p c ra t i n g E X p e n s es C^ost of power Distribution - operations Distribution - maintenance Consumer accounts Administrative and general Depreciation and amortization Taxes

Operating inarains before fixed charaes

Fixed Charges Interest on long-term debt Other interest

Operating margins (deficit) after fixed charges

Capital Credits

Not Operating Margins (Deficit)

iNon0perating Margins Interest income

Net Margins (Deficit)

$71.159.804 $68.841.25.5

46,214,090 5,889,853 4,491,664 2,561,344 1,977,407 4, .191,203 359.655

65.685.216

5.474.588

5,018,458 2.070.489 7.088,947

(1,614,359)

621.438

(992,921)

163.761

43,411,578 5,355,400 2,527,498 2,486,608 1,833,809 3,891,859 350.480

59.857.232

8.984.023

5,036,423 2.982.321 8.018.744

965,279

678.961

1,644,240

295.649

1.939.889

riie accompanying notes are an integral part of the.se statements.

6

Washington-St. Tammany Electric Cooperative, Inc. .Statements of Change.s in Patronage Capita!

Year-s Ended December 31, 2007 and 2006

2007 2006

Patronage Capital, beginning of year

Net margins (deficit)

Retirement of capital credits

Patronage Capital, end of year

$14,642,059 $12,816,443

(829,160) 1,939,889

(107.438) (114.273)

13,705.461 14,642,059

The accompanying notes are an integral part of these .statements.

7

Washington-St. Taniniany Electric Cooperative, Inc. Statements of Casii Flows

Years Ended December 31, 2007 and 2006

Casii Flows From Operating Activities Net margins (deficil) Adjustments to reconcile net margins to net casli

provided by operating activities Depreciation and amortization Amortization of deferred debits Capital credits received from associated organizations (Increase) decrease in consumer accounts receivable (Increase) decrease in other receivables (Increase) decrease iti materials and supplies (Increase) decrease in prejxtid expenses (Increase) decrease in deferred charges Increase (decrease) in accounts payable increase (decrease) in accrued interest Increase (decrease) in other accrued expenses increase in customer deposits Increase in vacation and sick pay

Net casii provided by operating aclivlties

Cash Flows From Investing Activities Additions to utility plant, net Change in restricted cash Proceeds received on capital credits

Net cash provided (used) by investina activities

Cash Flosvs From Financing Activities Net proceeds or payments on memberships Net change in line of credit Retirement of capital credits on deceased estates Payments on long-term debt Proceeds from long-term debt

Net cash provided (used) by financing activities

Net Increase in Cash and Cash Equivalents

Cash and Cash Equivalents, beginning of year

Cash and Cash Isquivalents, end of year

Supplemental Schedule ol'Noncash Investing and Financing Activities {Decrease in accrued post-retirement benefits,

deferred in accordance with SPAS #71

Supplemental Disclosure of Cash Flow Information Cash paid during the year for:

Interest Income taxes

2007 2006

($<S29,I60) $1,939,889

4,191,203 3,891,859 185,426 172,783

(621,438) (678,961) 301,218 412,472

13,085,952 49,701,904 561,664 615,584

(122,358) 26,026 31,996 (21,781) 141,157 (27,374,253) (10,257) (194,660) 86,402 (10,957)

286,883 ,395,727 138,077 168,359

17.426.765 29.044,001

(11,985,489) (12,048,639) 10,000 (10,000)

412.244 413.358 (11.563,245) (11.645.281)

7,870 10,165 (21,270,000) (13.730,000)

(107,438) (114,273) (3,983,325) (3,362,81.3) 19,61 1,000 (5.741,893) (17.196.921)

121,627 201,799

296,6,50 94.851

418.277 296.650

4.736,100 1.179.300

7,099.203 8.213.405

The accompanying itotes are an inlegral part of these statements,

8

Washington-S<, Tammany Electric Cooperative, Inc. Notes to Financial Statements

December 31, 2007

Note 1-Organization and Summai y of Significant Accounting Principles

A. Oraanizalion

Washington-.St. Tammany Electric Cooperative, Inc. is an eieclric distribution cooperative. Its principal business activity is providing electric power to approximately 41,000 member-consumers in Southeast I-ouisiana and part of Mississippi. The Cooperative is subject to the jurisdiction of the Louisiana Public Service Coinrnission (LPSC) regulations (or rate-making.

IT Accounting and Records

The Cooperative maintains its records in accordance with RLiS Bulletin 1767B-1, Uniform System of Accounts, pre,scribed for electric borrou-er.S'of the Rural Utilities Service.

C. Use of .Rslimales

'["be preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure ofconlingent assets and liabilities at the date of the financial statements and the i-eported amounts of revenue and expenses during the reporting period. Actual result.s could dilTci- from tliose estimates.

D. Cash and Ca.sh Ruuivalcnts

Per purposes of the statemenl of cash flows, the Cooperative considers all highly liquid debt instruments purchased with a maturity of three months or less to be casli equivalents.

E. Accounts Receivable

'["he Cooperative uses the re,scrve rnelhod to account for uncollectibte accounts. Accounts deemed uncollectible arc written off against the rc.serve.

If Utilitv Plant

Utility plant i.s stated at original cost, net of contributions. Such cost includes applicable supervision and overhead costs, lixpenditures for maintenance and repairs, which do not materially extend the life of assets, are included in operating expenses. Upon retirement or disposition, the recorded cost of depreciable plant and cost: of removal, net of salvage, are charged to accumulated depreciation.

Depreciation is computed using straight-line composite rates based uponlhce.slimatediisefullivesofi:hc various classes of assets.

(i. Investments in As.socialed Oriranizritions

Investments in capital term certificates and capital slock of associated organizations are stated at cost. Investments in patronage capital certificates of associated organizations are accounted for at cost plus allocated capital ci'edit.s which are assigned to the Cooperative based on its patronage of the associated organization.

Washington-St. Tammany Electric Coopej-ative, Inc. Notc.s to Financial Statements

December 31, 2007

Note 1-Organization and Summary of Significant Accounting Principle.s (Continued)

H. C-'onversion l-'ee

llie Cooperative i-cpriccd its debt with the National Rural Utilities Cooperative Finance Corporation (NRl JCdRy) in 2003 to lower its intere.st rates. The co.st to reprice the debt is being amortized to expense over the repricing period. The total amount atnoitized was $27,180 for 2007 and 2006.

I. Income Ta,\es

The Cooperative i.s exempt from income taxes under Section 501 (c)(l2) of the Internal Revenue Code, .since it receive.s more than 85% of its income from members.

.1, Revenue

rhe Cooperative accnie.s revenue related to energy consumed but not yet billed.

The Coopei ativc'.s rates include a power cost adjustment clause which enables the Cooperative to pass througli to consumers all fuel and nonfue! power cost as approved monthly by the Louisiana Public Service Commission (LPSC), Subsequent to September 1986 and prior to April 2000, the nonfuel coinponent of the cost of power was included in the Cooperative's base rate. Beginning in April 2000, a fixed portion of the nonfuel component of the cost of power is included in the base rate with the remainder of the nonfuel power cost and fuel cost being recovered through the power co,st adjustment.

K. Inventory

Inventory valuation is based on the average-cost method.

L. Reclassification

Certain reclassifications have been made to the 2006 financial statements to conform vs'illi cla.s,sifications used in 2007. These reclassifications had no effect on net margin,s or patronage capital.

M. Advertisina

.Advertising costs arc expensed as incurred. Advertising expense was $3 8,548 and $64,599 for the years ended December 3 1, 2007 and 2006, respectively.

N. Impairment. o{T.x),ng-l.aved A-s.sets and L.ong-Llved As.sets to be f)isposed of

'fhe Cooperative follows the provisions of Statement of Financial Accounting .Standards No. .121, ("SFAS No. 121") "Accounting for the Impairment of Long-laved A,ssets and l-ong-I ,ived Asset.s to be Disposed of", SFA.S No. 121 requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, Recoverabilily of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. I f such assets are considered to be impaired, the impairment to be l eeognized is measured by the amount by which the carrying amount of the assets e.xceccied the fair value of the assets. No such impairments were recognized during the years ended December 31, 2007 and 2006.

10

Washington-St. Tammany Electric Cooperative, Inc. Note,s to Financial Statements

December 31, 2007

Note 2-UtiIity Plant

Utility plant consisted of the following as of December 31, 2007 and 2006:

2007 2006

Distribution plant $133,241,170 $123,506,559 'I'ransmission plant 10,439,839 9,262,002 Ceneral plant 8.443,433 7.296.636

152,124,442 140,065,197 Construction work in progress 12,893.300 12.532.854

165.017.742 152.598.051

Annual average coniposile rales ofdepreciation used by the Cooperative during2007 and 2006, were j

2007 2006

Distribution plant 2% to 4,2% 2% to 4.2% •fran.smission plant 2.8% 2.8% Cieneral plant

.Structures and improvements 3% 3%> Power operated equipment 15% 15% Transportation equipment 17% 17% Other 5% to 7.2% 5% to 7.2%

Note 3-Investments in Associated Organizations

Investmenls in associated organizations consi.sted of the following as of December 31, 2007 and 2006:

2007 2006 Capital term certificates

National Rural Utilities Cooperative Finance Corporation $2,126,776 $2,132,735 Patronage capital certifcates

National Rural Utilities Cooperative Finance Corporation 973,075 850,782 Other 529,256 443,527

Capital investments 46.721 39.590

3.675.828 3.466.634

Note 4-Deferred Ciiarges

The following is a summary of amounts recorded as deferred charges a.s of December 31, 2007 and 2006:

2007 2006

Deferred interest $2,547,266 $2,705,512 Deferred post-retirement bcnefls 9,128,000 13,864,100 Unamortized conversion fee 289,918 317,098

32.266 64.262

11.997.450 16.95(.).972

The deferred interest and post-retirement benefits are being accounted for in accordance with .SFAS No. 71.

11

VVashingtoii-St. Tamuiany Electric Cooperative, Inc. Notes to Financial Statements

December 31, 2007

Note 5-Note Payable - Line of Credit

The Cooperative has $34,270,000 in three separate lines of credit with National Rural Utilities Cooperative Finance Corporation of which $I 1,000,000 was drawn as of December 31, 2007 and $32,270,000 was drawn as of December 3 1,2006. Interest is variable at 6.40% and 7.10% at December 31,2007 and 2006, respeelively. •fhere is a $5,000,000 line of credit secured by a collateral mortgage and security agreement on the utility plant, and $6,000,000 and $27,270,000 lines of credit which are unsecured.

Note 6-Long-Term Debt

l .ong-lerm debt as of December 3 i, 2007 and 2006 consisted of (he following:

2007 2006 Rural Ulililies Service (RIJS) 2% and 5% mortgage notes, due in monthly and c)uarlerly principal installments totaling approximately $1,600,000 per year. ' $50,499,729 $32,501,210

RliS (Cajun) mortgage note. In 1998, the note was refinanced with CFC at 5.9% for 20 years with quarterly principal payments of approximately $240,000. 14,259,009 15,213,741

National Rural Utilities Cooperative Finance Cooperation (CRC) with a variable interest rate. At December 31, 2007 and 2006, the rates ranged from 4.2% to 6.25%, respectively, with quarterly principal ins(allment.s of approximately $230,000, 19,772,890 20,689,402

CFC mortgage note with a variable rate of interest. At December 3 J, 2007 and 2006, interest was 7.3% and 6.25%, respectively, due in quarterly principal installments of approximately $35,000. 2,014,883 2,170,841

Federal Financing Bank loan with interest at 5.521%. Due in quarterly principal installments of approximately $67,000. 13,484,522 13,752,234

Conversion fees due to National Rural Utilities Cooperative Finance Corporation for repricing its debt in 2004, due in quarterly principal installments of approximately $6,795. 292,183 319,363

Contracted obligation to purcha.sc National Rural Utilitie.s Cooperative Finance Corporation capital term certificates due in quarlerly principal installments of approximately $24,375. 48.750

100,323,216 84,695,541 f.ess current maturities of long-term debt 4.218.804 4.164.559

f.ong-lcrm debt, net of current maturities 96.104.4.12 80,530.982

All of the above notes arc collateralized by the Cooperative's utility plant,

12

Washiiigton-St. Tammany Electric Cooperative, Inc. Notes to Financial Statements

December 31, 2007

Note 6-Long-Term Debt (Conlinued)

Annual nialiirilies of long-term debt for the next live yeans are as follows:

Year Ending December 31,

200<S $4,218,803 2009 4,316,677 2010 4,415,331 2011 4,515,801 20)2 4,621,019

RU.S and CFG l.oan Covenants require a 1.25 Times Interest Earned Ratio (TIER) and a 1,25 Debt Service Coverage (DSC), The Cooperative must meet these requirements two out of three year,s. The Cooperative did not meet its TIER or DSC covenant requirements for the year ended December 31, 2007. Under the terms of the agreement, if the violation continues for thirty days after receiving written notice from RUS, all unpaid principal and intere.st shall become due. As of the date of the audit repoil, no notice has been received.

Note 7-Fair Value of Financial Instruments

Statement of Financial Accounting Standard.s No. 107, "Disclosure.s about Fair Value of Financial Instruments" ("SFAS 107"), requires discio,sure of fair value information about certain financial in.strumcnts, whether or not recognized on the balance sheet. Where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those tcchniqiie.s arc significantly affected i>y the assiimplion.s irsed, including the discount rate and estimates of future cash flows. In addition, SFAS 107 excludes certain financial instruments and all non-financial inslrmnents ffoni its disclosure rcquii'ements, Therefore, the aggregate fair value ainounls pre.senfed do not purport to represent and should not be considered representative of the underlying "market" or franchise value of the Cooperative.

The methods and assumptions used to estimate the fair values of each class of tlie financial instruments are described as follows.

Casti and Cash Equivalents

The carrying amount reported in the balance sheet for cash and cash equivalents approximates fair value.

Investments in Associated Organizations

riie investments in associated organizations are accounted for at cost, 'f hese investments are in non-pubiicly tradcd companies vvhicii have no quoted market prices; therefore, a reasonable estimate of fair value could not be made.

[.onu-Term and .Short-Term Debt

'llie carrying amounts of the Cooperative's borrowings under its short-term debt ari-angetnents approximate their fair values. The fair values of the Cooperative's long-term debt have been based upon market quotations for similar debt iirstruinents or estimated using discounted cash novvanalyses based upon the Cooperative's current incremental borrowing rates for similar types of borrowing arrangements.

13

Washington-St. T-ammany Electric Cooperative, Inc. Notes to Financial Statements

December 31, 2007

Note V-F'air Value of Financial Instruments (Continued)

The estimated fair value of the Cooperative's financial instruments are as follows:

2007 2006 Carrying Fair Carrying Fair Amount Value A in mint Amount

Cash and cash equivalents $4I<S;277 $418,277 $306,650 $306,650 Investment in a.ssociated organizations 3,675,828 3,675,828 3,466,634 3,466,634 Long-term and short-term debt I 11,323,216 106,870,287 116,965,541 109,943,849

Note 8-Pension Plan

The Cooperative ha.s a Defined Contribution Plan available to all employees which provides for matcliing contribution.s at specified percentages ofcompensation, fimployer contributions to the Plan for the yeai's ended IDecember 3 1, 2007 and 2006 amounted to $413,841 and $428,393, respectively.

Note 9-Posl-Retiremeiit Benefits Other Than Pensions

'i'he Cooperative eontiniies to fund benefit co.sts principally on a pay-as-you-go basis. The bencfil provided by the Cooperative is certain health iirsurance coverage for retired employees. .Siib.stantially, all of the Cooperative's employees may become eligible for these benefits if they reach normal retirement age wliile working for the Cooperative. Such benefits are provided through an insurance company wltose premiums are based on the benefits paid during the year. The total premiums paid appro,ximated $ 151,344 and $ 179,600 for 2007 for 2006.

The discount rale used in determining the APBO was 5.75% for 2007 and 2006. The assumed health care cost trend rale used in measuring the accumulated post-retirement benefit obligation was 10% for medical, 12% foi' drugs, and 7.00% lor dental in 2007 and 2006, and coivliiuies at rates ranging from 9.5% to 5.0% per year thereafter. T'he accumulated post-retirement benefit obligation as of December 31, 2007 and 2006 was $9,128,000 and $13,864,100, respectively.

Benefits expected to be paid in each of the next five years, and in the aggregate for the next five years thereafter, are approximately as follows:

2008 $160,700 2009 194,900 2010 205,200 2011 245,700 2012 267,900

Aggregate for the five year.s Ihereafler 2,088,000

14

Washinglon-Sf. Tanimatiy Electric Cooperative, Inc. Notes to Financial Statements

December 31,2007

Note 10-PatJ-onage Capital

At December 3 1, 2007 and 2006, patronage capital consisted of:

2007 2006

Assignable $1,644,240 $965,279 Assigned to date 31,010,486 25,974,865 Non-assignable nonoperating d 8.949.265") (12.298,085)

13.705.461 14.642.059

Under the provisioit,s of the K4ortgage Agreement, uittil the equities and margins equal or exceed forty percent of the total a.s.sct.s of the Cooperative, the return to patrons of contributed capital i.s generally limited to twenty-five percent of the patronage capital or margins received by the Cooperative in the prior calendar year,

Note 11-Commitmenf

'i'he Cooperative is committed under a \vhole.sale power agreement to purchase all of its electric power and energy requirements from Louisiana Generating, L.1,.C., and Southvvcslei-n Power Administration tiirough Kdareh 31, 2014. The Cooperative has assigned its receivables to I.ouisiana Generating, !,.l,.C. as security for its contractual obligation.s.

Note 12-Concentration of Credit Risk

The Cooperative's futuie operating resull.s may be affected by a number of factors, riie Coopeiativc is dependent upon a ntnnber of major suppliers and contractors. If a supplier or contractor iiad operational problems or ceased making materials available or providing services to the Cooperative, operations could be adversely affected.

At various times during (be year, cash and cash equivalents on deposit with one banking imstitution exceeded the $100,000 imsured by the Federal Deposit Insurance Corporation, b'lanagement monitors the financial condition of the institution on a regular basis, along with its balances in cash and cash equivalent.s, to minimize potential risk,

'Fbe Cooperative has over $32,500,000 in debt at variable interest rates, A significant change in interest rates could adver.s'ety affect llie Cooperative,

Note 13-Contitigent Liabilities

The Cooperative is a litigate in several lawsuits, .Management, on the advice of legal counsel, believes that such proceedings and contingencies will not have a material effect on the Cooperative,

HAWTHORN, WAYMOUTH & CARROLL, L.L.P.

J.CHAHUS PARKER. C.P.A LOUIS c. MCKNIGHT, HI, C.P.A. CHARLES R PEVEY, JR., C.P.A. OAVID J. 8R0USSAR0, C P A.

CERTiFIED PUeLIC ACCOUNTANTS

8555 UNITED PLAZA BLVD., SUITE 200 BATON ROUGE, LOUISIANA 70809

(225! 923-3000 • FAX (225! 323-3008

October 13,2008

Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements

Performed In Accordance With Government AudUing Standards

Tiic Officers and Board of Directors Wasliington-St, Tammany Electric Cooperative, Inc. Frankl i nton, 1 ,o(i isia na

Officens and Members of the Board;

We have audited the financial statements of Washington-St, Tammany Electric Cooperative, Inc. a,s of and for the year ended December 31, 2007, and have i,s,sued our report thereon dated October 13, 2008, We condiieted our audit in accordance with auditing standard.s generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards., issued by the Comptroller General of the United States.

Internal Control Over Financial Repoi1ini>

In planning and performing our audit, we considered Washington-St, Tammany Electric Cooperative, Inc.'s internal control over financial repoiTing as a basis for designing our auditing procedures for the purpose of expressing our opinion on the financial stalement,s, but not for the purpose of expres.sing an opinion on the effectiveness of the entity's internal control over financial reporting. Accordingly, wedo not expre,ss an opinion on the effectiveness of the ent ity's internal control over financial reporting,

A control deficiency exists when the design or operation of a control does not allow management or employee.s, in the normal course of performing their assigned function,s, to prevent or detect misstatements on a timely basis, A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the entity's ability to initiate, authorize, record, process, or report financial data reliably in accordance with generally accepted accounting principles such that there is more than a remolc likelihood that a misstatement of the entity's financial statements that is more than inconsequential will not be prevented or dclectecl by the entity's internal conlrol,

A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatemenl of the financial statements will not be prevented or detected by the internal conlrol.

Our consicleratiou of internal control over Unancial reporting was foi' the limited purpose described in the preceding paragraph and would not necessarily ideittify all deficiencies in infernal control over financial reporting that might be significant deficiencies or material weaknesses. We did not identify any deficiencies in internal control over financial reporting that we consider to be material weakne,sses, as defined above.

Compliance and Other Matters

As part of obtaining reasonable assurance about whether Washington-.St. Tammany Electric Cooperative, Inc.'s financial statements arc free of materia! misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements, noncompliance with whicli could have a direct and material effect on the determination of financial .statement amounts. l-Jowever, providing an opinicm on compliance with those provi,sions was not an objective of our audit and, accordingly, we do not e.xpress such an opinion. The results of our test.s disclo,sed an instance- of noncompliance or other matters that are required to be reported under Government Auditing Standards and i.s described as item 2007-1 in the accompanying .schedule of flnding.s and questioned costs,

Washington-St. Tammany Electric Cooperative, Inc-.Ts re,spon.ses to the flnding.s identified in our tiudit are dc.scribed in (he acconnpanying .schedule of findings and questioned costs. We did not audit Wa,sliington-St, Tammany, Inc.'s response and, accordingly, we expres.s no opinion on it.

This report in intended solely for the information and use of Washington-St, Tammany Electric Cooperative, Inc.'s, management, federal awarding agencies and pass-through entitic.s and is not intended to be and should not be used by anyone other than these specified parlies.

Yours truly. louisuuiy, A

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HAWTHORN, WAYMOUTH & CARROLL, L.L.P,

J CHARLES PARKER, C.P.A. LOUIS c. MCKNIGHT, HI, G.P.A. CHARLES R. PEVEY, JR.. C.P.A. DAVID J. 8R0USSAR0, C.P.A

CERTlFiEO PUBLIC ACCOUNTANTS

8556 UNITED PLAZA BLVD., SUITE 200 BATON ROUGE, LOUISIANA 70803

(225) 923-3000 • TAX (225) 923-3008

October 13, 2008

Report on Compliance With Requirements Applicable to Each Major Program and on Internal Control Over Compliance in Accordance With OMB Circular A-133

The Officens and Boai'd of Directors Washington-,St, Taininany Electric Cooperative, inc. Eran k 1 into n, Lou isi an a

Officers and Members of the Board:

Coinpliance

We have audited the compliance of Washington-St, Tammany Electric Cooperative, Inc., with the types of compliance requirements described in the U.S. Office of Managenient and Bucigel (OMB) Circular A-133 Compliance Supplement that are applicable to each of it,s major federal programs for (he year ended December 3 1, 2007, Washington-St. Tammany Electric Cooperative, Inc.'s major federal programs are identified in the summary of auditor's results section of the accompanying .schedule of Undings and questioned costs. Compliance with the requirements of laws, regulations, contracts and grants applicable to each of its jriajor federal programs is the responsibility of Washington-St. Tammany Electric Cooperative, Inc.'s management, Ourresponsibility istoexpre,ss an opinion on Washington-St. Tarn many .Elleclric Cooperative, Inc.'s compliance based on our audit,

We conducted our audit of compliance in accordance with auditing standards generally accepted in the United Slates of America; liie standards applicable to financial audits contained in Goveninien! Auditing Standards, issued by the Comptroller General of the United States; and OMB Circular A-133, Audits of Slates, Locai Governments, and Nan-Profit Organizations. Those standards and OMB Circular A-133 require that we plan and perform the audit to obtain reasonable assurance about whether noneoinpliance with the types of eompliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about Washington-St, Tammany Electric Cooperative, Inc.'s compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a rea,sonablc basis for our opinion. Our audit does not provide a legal determination of Washington-St. Tammany Ellectric Cooperative, Inc.'s compliance with those requirements.

In our opinion, Washington-St. Tammany Electric Cooperative, inc. complied,, in ail material respects, with the requirements referred to above tiiat are applicable to each of its major federal programs for the year ciicied December 31, 2007,

Internal ('onliol Over Compliance

The managementofWa-shington-,St.Tammany Blectric Cooperative, Inc. is re,sponsible Cor estabiishingand maintaining effective internal control over compliance with requirements of laws, regulations, contracts aiul grants applicable to federal programs. In planning and performing our audit, we con.sicJered VVashington-St, Tammany Blecfric Cooperative, Ine.'s internal control over compliance with (he requirements (hat could have a direct and material effect on a major fedei'al program in order to determine our auditing procedures for tlie purpose of expre.ssing our opinion on compliance, but not for tiie purpo.se of cxpre,s.sing an opinion on tiie effectiveness of internal control over compliance. Accoidingly, we do not express an opinion on tiie effectiveness of Wa.shinglon-Sl. Tammany Electric Cooperative, Ine.'s internal control over compliance.

A conlrol deficiency in an entity's internal control over compliance exists when the design or operation of a control does not allow managemcnl or employees, in the normal course of performingtheir assigned functions, to prevent or detect noncompliance with a type of complianee requirement of a federal program on a timely basis. A significant deficiency i.s a control deficiency, oi' combination of control deficiencies, that adversely affeci.s the entity's ability to administer a federal program such tliat there is rnoretlian a remote likelihood that noncompliance witii a type of compliance requirement of a federal program that is more lhan inconsequential will not be prevented or detected by llie entity's internal control.

A material weakness is a signifieant defieioncy, or combination of significant deficiencies, tiiat re.sults in more than a remote likeliliood tiiat material noncompliance with a type of compliance reqiiii-ement of a federal program will not be prevented or detected by flie entity's internal control.

Our consideraiion of internal control over compliance was for tiie limited purjiosc described llie first paragraph of this section and would not necessarily ideniify all deficiencies in internal control that might be signincanl deficiencies or material weaknesses. We did nol identify any deficicncie.s in internal control over compliance lliat we consider to be material wcakne.s.scs, as defined above.

Til is report is intended solely fortlie information and use of VVashington-St.rammany Electric Cooperative, Inc., management, federal awarding agencies and pass-tlirough entities and i.s not inlendcti to be and should not Ire used by anyone otiier liian these specified partie.s.

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VViishin{jt(in-St. Tanimany Eleclric Cooperative, Inc. Schedule of Kxpendifurcs of ]'"ederal Award.s

Year Ended December 31, 2007

Federal Federal Program Title CFDA Kxpenditiircs

Federal Di.sa.stcr Public Assistance Proerain 97.036 $3.86d..576

iSote 1-Basis of Presentation

The schedule of expenditures of federal awards includes the federal granl aciivily of VVasiiinglon-St, ramrnany HIectric Cooi3crat ive, Inc., and is presented on the accrual basis of accounting. T'lie information in this schedule is pre.sented in accordance with the recjuiremenl.s ofOMB Circular A-133, "Audits ofSlatc.s, Local Govcrnincnts and Non-profit Organizalion.s". Therefore, some amounts presented in this sciiedule may differ from amounts presented in, or used in the preparation of, the basic Unancial statements.

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VVashiiigtoii-St. Tammany Eiectric Cooperative, Inc. Schedule of Findings and Questioned Costs

Year Ended December 31, 2()()7

Summary of Auditor's Results

1. 'I he auditor's report expresses an uiujualified opinion on the fniancial statenients of Wasliingi.on-Sf. Tammany Electric Coojrerative, inc.

2. No signincanl deficiencies are reported in fiie Report on Internal Control over Financial Reporting and on Compliance and Other hdattei's Based on an Audit orFiiiancial Statements Performed in Accordance with Gnvemmmt Auditing Stcmdanis.

3. No instances of noncompliance material to the financial statements ofWashington-St.Tammany Electric Ccroperative, Inc. were reported in accordance with Governineni Auditing S'landards.

A. No significant deficiencies relating to the audit of the major federal award programs arc reported in Ihe Report on Compliance with Reciuirements Applicable to Each Major Program and on Internal Control Over Compliance in Accordance With 0MB Circular A-133.

5. The auditor's report on compi iance for the major program (Federal Di.saster Public Assistance Program) expresses an unqualified opinion.

6. 'flic p'l'ograms tested as major programs include: Federal l..)isaster Public Assistance Piogram CFDA 97.036.

7. 'ITie threshold used for distinguishing between rype A atid B programs was $300,000.

8. Wa.shington-Sl, TarnmanV Electric Cooperative, Inc. qualified as a low-risk auditee.

Washington-vSt. Tammany Electric Cooperative, Inc. Scliecluie oC Current Year Fiiulings and (Questioned Costs

Year Ended December 31, 2007

Findings - Financial Statement Audit

2007-01 - Loan Covenant

(knidilion

riic Cooperative did not meets its TIER or DSC covenant requirement at December 3 1, 2007. Under the terms of the loan covenant , if (lie violat ion continues for tliirty days after receiving written notice from RI.IS, all unpaid pi'incipal and interest shall become due. As of the date of the audit report, no notice ha.s been received.

Recomnic-ndation

fhe Cooperative should manage it's finance-s to achieve the required TIER and DSC loan covenants,

Management's Re.spon.se

The (Cooperative obtained a .$3,550,000 rate increase from 1..PSC in June, 2008 and implemented the increa.se beginning .July, 2008.

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Wilshington-St. Tammany Electric Cooperative, Inc. Scheihilc of Prior Year Findings and Questioned Co.sts

Year Ended December 31, 2006

Finding,s - Financial Statement Audit

None,

Findings and Questioned Costs - Major Federal Award Programs Audit

2006-01 - Non-Comp/iance

Condition

Washiiiglon-Sl, 'l ammany Electric Cooperative, inc. did not bid contract.s related to the major program as rec|uired.

Recommendation

Bids should be solicited for all ntajor programs in order to be in compliance with the major program.

Management's Re.spon,se

Because the urgent need to remove potential life threatening hurricane related debris, the Cooperative obtained services vvitliout delay which deviated from Federal competitive bidding practices ('14CFR, Ch li3.36(i:))(4XI)).

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