MISSISSIPPI 30 JONES DIXIE ELECTRIC POWER ASSOCIATION LAUREL, MISSISSIPPI FINANCIAL STATEMENTS AS OF DECEMBER 31, 2017 AND 2016 AND AUDITORS' REPORT

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1 MISSISSIPPI 30 JONES DIXIE ELECTRIC POWER ASSOCIATION LAUREL, MISSISSIPPI FINANCIAL STATEMENTS AS OF DECEMBER 31, 2017 AND 2016 AND AUDITORS' REPORT

2 MISSISSIPPI 30 JONES DIXIE ELECTRIC POWER ASSOCIATION LAUREL, MISSISSIPPI FINANCIAL STATEMENTS CONTENTS INDEPENDENT AUDITORS REPORT FINANCIAL STATEMENTS: BALANCE SHEETS 4-5 STATEMENTS OF REVENUE AND PATRONAGE CAPITAL 6 STATEMENTS OF CASH FLOWS 7-8 NOTES TO FINANCIAL STATEMENTS 9-20 SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS 22 NOTES TO THE SUPPLEMENTARY INFORMATION 23 INDEPENDENT AUDITOR S 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 AUDITING STANDARDS INDEPENDENT AUDITOR S REPORT ON COMPLIANCE FOR EACH MAJOR FEDERAL PROGRAM AND REPORT ON INTERNAL CONTROL OVER COMPLIANCE REQUIRED BY THE UNIFORM GUIDANCE INDEPENDENT AUDITORS MANAGEMENT LETTER SCHEDULE OF FINDINGS AND QUESTIONED COSTS 30-31

3 W. David Dill, CPA H. I. Holt, CPA Julie M. Uher, CPA Founder ( ) Kari M. Blackledge, CPA To the Board of Directors Dixie Electric Power Association Laurel, Mississippi INDEPENDENT AUDITOR S REPORT Report on the Financial Statements We have audited the accompanying balance sheets of Dixie Electric Power Association as of December 31, 2017 and 2016, and the related consolidated statements of revenue and patronage capital and cash flows for the years then ended. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express an opinion on 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 involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness 2815 HIGHWAY 15 NORTH LAUREL, MISSISSIPPI BELLEGRASS BLVD. HATTIESBURG, MISSISSIPPI PHONE FAX

4 of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above, present fairly, in all material respects, the financial position of Dixie Electric Power Association as of December 31, 2017 and 2016, 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 Other matters The accompanying Schedule of Expenditures of Federal Awards, as required by Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards is the responsibility of management and was derived from and relate directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the accompanying supplementary information mentioned above is fairly stated in all material respects in relation to the basic financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated March 12, 2018, on our consideration of the Association s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Association s internal control over financial reporting and compliance. Holt & Associates, PLLC March 12, HIGHWAY 15 NORTH LAUREL, MISSISSIPPI BELLEGRASS BLVD. HATTIESBURG, MISSISSIPPI PHONE FAX

5 MISSISSIPPI 30 JONES DIXIE ELECTRIC POWER ASSOCIATION LAUREL, MISSISSIPPI FINANCIAL STATEMENTS DECEMBER 31, 2017 AND 2016

6 BALANCE SHEETS DECEMBER 31, 2017 AND 2016 ASSETS UTILITY PLANT Electric plant in service $ 188,962,715 $ 182,740,671 Construction work in process 5,758,357 6,003,310 Total utility plant 194,721, ,743,981 Accumulated provisions for depreciation (53,667,531) (51,218,986) Net utility plant 141,053, ,524,995 INVESTMENTS Investments in associated organizations 38,321,310 36,843,508 Total investments 38,321,310 36,843,508 CURRENT ASSETS Cash and cash equivalents 3,844,419 6,367,968 Special deposits Temporary Investments 4,311,029 6,079,491 Accounts receivable (less accumulated provision for uncollectible accounts of $226,007 in 2017 and $463,607 in 2016.) 4,301,134 3,412,271 Other receivables 1,276, ,643 Materials and supplies 2,324,505 2,329,630 Prepayments 343, ,829 Other current and accrued assets 6,040,592 5,350,005 Total current assets 22,442,218 23,944,224 DEFERRED CHARGES 1,545,139 1,781,554 TOTAL ASSETS $ 203,362,208 $ 200,094,281 The accompanying notes are an integral part of these statements. 4

7 BALANCE SHEETS DECEMBER 31, 2017 AND 2016 EQUITIES & LIABILITIES EQUITIES Memberships $ 1,529,734 $ 1,538,906 Patronage capital 89,602,030 86,182,512 Accumulated other comprehensive income (306,000) (719,100) Other equities 4,949,606 4,684,353 Total equities 95,775,370 91,686,671 LONG-TERM LIABILITIES RUS mortgage notes, less current portion 61,786,676 63,391,983 RUS cushion of credit (5,024,397) (8,079,955) CFC mortgage notes, less current portion 31,192,040 33,409,400 CoBank notes, less current portion 2,454,737 3,230,222 Post-retirement benefits 1,813,700 2,216,600 Total long-term liabilities 92,222,756 94,168,250 CURRENT LIABILITIES Current portion of long-term debt 4,528,793 4,906,187 Accounts payable - purchased power 6,019,883 5,536,892 Accounts payable - other 1,589, ,516 Consumer deposits 970, ,890 Other current and accrued liabilities 2,129,119 2,115,975 Post-retirement benefits 125, ,900 Total current liabilities 15,364,082 14,239,360 TOTAL EQUITIES AND LIABILITIES $ 203,362,208 $ 200,094,281 The accompanying notes are an integral part of these statements. 5

8 STATEMENTS OF REVENUE AND PATRONAGE CAPITAL YEARS ENDED DECEMBER 31, 2017 AND OPERATING REVENUES $ 90,739,344 $ 90,283,913 OPERATING EXPENSES Cost of power 64,466,479 65,761,185 Distribution operations 2,361,998 2,256,927 Distribution maintenance 6,066,667 5,258,416 Consumer accounts 1,630,606 2,145,064 Customer service and information 533, ,669 Administrative and general 3,712,684 4,125,295 Depreciation and amortization 5,797,072 5,774,426 Other 30,978 27,091 Total operating expenses 84,599,913 85,891,073 OPERATING MARGINS BEFORE FIXED CHARGES 6,139,431 4,392,840 INTEREST EXPENSE 3,579,698 3,271,955 OPERATING MARGINS AFTER FIXED CHARGES AND INTEREST 2,559,733 1,120,885 NONOPERATING MARGINS Interest income 741, ,837 Other nonoperating income (11,750) 35,462 Total nonoperating income 729, ,299 GENERATION AND TRANSMISSION COOPERATIVE CAPITAL CREDITS 2,094,415 2,394,444 NET OPERATING MARGINS 5,384,074 4,123,628 PATRONAGE CAPITAL -- January 1 86,182,512 85,430,927 Retirements of Capital Credits (1,964,556) (3,372,043) PATRONAGE CAPITAL -- December 31 $ 89,602,030 $ 86,182,512 COMPREHENSIVE INCOME -- January 1 $ (719,100) $ (636,700) Net actuarial gain/(loss) 407,400 (120,400) Amortization of actuarial (gain)/loss 5,700 38,000 COMPREHENSIVE INCOME -- December 31 $ (306,000) $ (719,100) The accompanying notes are an integral part of these statements. 6

9 STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2017 AND CASH FLOWS FROM OPERATING ACTIVITIES Cash received from consumers $ 88,680,405 $ 91,872,155 Cash paid to suppliers and employees (78,408,496) (79,824,760) Interest received 741, ,837 Interest paid (3,579,698) (3,271,955) Net cash provided by operating activities 7,433,887 9,348,277 CASH FLOWS FROM INVESTING ACTIVITIES Construction and acquisition of plant (21,658,972) (11,994,799) Plant removal costs 9,657,041 2,754,714 Materials salvaged from retirements 4,180,796 1,466,160 Change in material inventory 5, ,839 Change in deferred charges 236, ,108 Payment on temporary investment 1,768,462 (1,946,734) Net cash provided by (used in) investing activities (5,811,133) (9,211,712) CASH FLOWS FROM FINANCING ACTIVITIES Retirement of capital credits (1,699,303) (2,673,365) G & T and other capital credits 616, ,047 Proceeds from RUS notes - 6,579,000 Payments of RUS & CFC notes (3,747,573) (3,839,308) Payments toward RUS cushion of credit 3,055,558 2,797,262 Payments of CoBank notes (1,227,973) (1,314,880) Change in memberships issued (9,172) 40,145 Change in customer deposits 369,780 8,985 Change in post-retirement accrual 12,000 75,200 Net cash provided by (used in) financing activities (2,630,070) 2,599,086 Net increase (decrease) in cash and cash equivalents (1,007,316) 2,735,651 Cash and cash equivalents at beginning of year 6,367,968 3,632,317 Cash and cash equivalents at end of year $ 5,360,652 $ 6,367,968 The accompanying notes are an integral part of these statements. 7

10 STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2017 AND NET MARGINS $ 5,384,074 $ 4,123,628 Adjustments to reconcile net margins to net cash: Depreciation and amortization 5,797,072 5,774,426 Gain on the sale of property (57,600) (36,395) Loss on the sale of property 69, G & T and other capital credits (2,094,415) (2,394,444) (Increase) decrease in customer receivables (2,058,939) 1,588,242 (Increase) decrease in other current assets (690,587) 166,546 (Increase) decrease in prepayments (45,604) 2,416 Increase (decrease) in accounts payable 1,117,392 (193,863) Increase (decrease) in other liabilities 13, ,788 Net Cash Provided by Operating Activities $ 7,433,887 $ 9,348,277 The accompanying notes are an integral part of these statements. 8

11 NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2017 AND Summary of Significant Accounting Policies: Nature of Operations Dixie Electric Power Association is a non-profit cooperative organized to provide electrical power service to the rural area surrounding Laurel, Mississippi. Their purpose is to furnish electric power to approximately 36,000 rural accounts at the lowest possible rate. Power delivered at retail is purchased wholesale from South Mississippi Electric Power Association. Basis of Accounting The Association is subject to the accounting and reporting rules and regulations of the Rural Utilities Service (RUS). The Association follows the Federal Energy Regulatory Commission s Uniform System of Accounts prescribed for Class A and B Electric Utilities as modified by RUS. The accounting policies conform to generally accepted accounting principles as applied in the case of regulated electric utilities. Accounting Estimates The presentation 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 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. Fair Values Cash and cash equivalents: The carrying amounts reported in the balance sheets for cash and cash equivalents approximate those assets fair values. Short-term borrowings and notes payable: The carrying amounts of short-term borrowings and notes payable approximate their fair values. Credit Risk Financial instruments, which potentially subject the Association to concentrations of credit risk, consist principally of temporary cash investments. The Association places its temporary cash investments with high credit quality financial institutions and, by policy, generally limits the amount of credit exposure to any one financial institution. Concentrations of credit risk, with respect to trade receivables, are limited due to the Association s large number of customers. Electric Plant, Maintenance, and Depreciation Electric plant is stated at the original cost of construction which includes the cost of contracted services, direct labor, materials and overhead items. Contributions from others toward the construction of electric plant are credited to the applicable plant accounts. When property which represents a retirement, unit is replaced or removed, the average cost of such property as determined from the continuing property records is credited to electric plant and such cost, together with cost of removal less salvage is charged to the accumulated provision for depreciation. Maintenance and repairs, including the renewal of minor items of plant not comprising a retirement unit, are charged to the appropriate maintenance accounts, except that repairs of transportation and service equipment are charged to clearing accounts and redistributed to operating expense and other accounts. Depreciation of distribution plant in service is provided on the straight-line method using a range between 30 and 50 years. Depreciation of general plant is on the straight line and accelerated bases over 3 to 20 years. Intangibles are amortized equally over their life. 9

12 NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2017 AND Summary of Significant Accounting Policies: (cont.) Investments Investments are recorded at cost plus undistributed allocated equities from other cooperatives which approximate fair value. Cash and Cash Equivalents The Association considers all highly liquid debt instruments with a maturity of three months or less when purchased to be cash equivalents. Cash equivalents are stated at cost, which approximates market value. Cash for the purposes of the cash flows statement includes cash on hand, demand deposits, temporary investments with maturities of three months or less. Temporary Investments Temporary investments, is the amount that is a prepayment to Cooperative Energy, formerly known as SMEPA, to pay on future utility bills. The amount is an interest-bearing account. Accounts Receivable and Allowance for Doubtful Accounts Utility customer accounts receivable are stated net of an allowance for doubtful accounts. Customer accounts that are deemed to be uncollectible are written off when approved by the Board. Amounts approximating 0.18% for both 2017 and 2016, respectively, of net sales are added to the allowance account monthly. Unusual significant accounts that are deemed uncollectible are charged directly to uncollectible accounts expense. Inventories Inventories of material and supplies are priced at first in, first out moving average cost. Materials and Supplies Materials and supplies are recorded at average cost. Patronage Capital The Association operates on a nonprofit basis. Amounts received from the furnishing of electric energy in excess of operating costs and expenses are assigned to patrons on a patronage basis. All other amounts received by the Association from its operations in excess of costs and expenses are allocated to its patrons on a patronage basis to the extent they are not needed to offset current or prior deficits. Pension Plans Current pension plan payments are paid monthly. Past service costs, which are paid annually, are amortized equally over a twelve-month period in those years when a contribution is required. Advertising Costs The Association expenses advertising costs as they are incurred. Advertising expenses for the years ended December 31, 2017 and 2016 were $54,595 and $55,279, respectively. 10

13 NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2017 AND Summary of Significant Accounting Policies: (cont.) Accrued Absences Vacation pay is allowed to accumulate based on a formula determined by the number of years employed. Employees begin earning vacation when they are hired. Employees are allowed to carry over a limited number of vacation days from year to year as follows: 2. Assets Pledged: Number of Years Number of New Max. Number of Employed As of Vacation Days Days Allowed to January Per Year Bank per Year and over Substantially all assets are pledged as security for long- term debt. 3. Electric Plant and Depreciation Procedures: The major classes of the electric plant as of December 31, 2017 and 2016 are listed below: Intangible Plant $ 3,233 $ 3,233 Distribution Plant 173,570, ,629,695 Headquarters Plant 6,525,517 5,334,641 General Plant 8,863,471 8,773,102 Electric Plant in Service 188,962, ,740,671 Construction Work in Progress 5,758,357 6,003,310 $194,721,072 $188,743,981 Provision has been made for depreciation of distribution plant made at a straight-line rate from 3.0 to 6.6% with an average rate of and per annum for 2017 and 2016, respectively. General plant depreciation rates have been applied on a straight-line basis as follows: Years Structures and improvements Office furniture and equipment 5-15 Transportation equipment 3-12 Stores equipment 5-16 Tools, shop and garage equipment 5-20 Laboratory equipment 5-16 Power operated equipment 6-10 Communication equipment Miscellaneous equipment 5 16 New electronic meters were placed in service beginning in Per the guidance of the manufacturer, these meters are depreciated over useful lives of 20 years rather than 30 years as prior meters. Meters being replaced were being expensed over a 18 month period beginning August

14 NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2017 AND Detail of Investment in Associated Organizations: Investments in associated organizations consisted of the following at December 31, 2017 and 2016: SMEPA Patronage Capital $ 35,231,661 $ 33,861,864 CFC Patronage Capital 640, ,773 Arkansas Patronage Capital 127, ,671 NISC Patronage Capital 84,640 69,538 Gresco Patronage Capital 74,849 68,872 EPA of Mississippi Patronage Capital 226, ,300 NRTC Patronage Capital 1,301 1,301 CFC Capital Term Certificates 1,293,901 1,305,096 Federated Rural Electric 380, ,973 CoBank 231, ,639 Memberships 2,125 2,125 Cooperative Response 25,555 20,356 $ 38,321,310 $ 36,843, Cash and Cash Equivalents: The Association follows the practice of aggregating the cash assets to maximize cash management efficiency and returns. The carrying amount of the Association's deposits with financial institutions reported in the financial statements was $3,844,419. The bank balance was $3,730,673. Custodial Credit Risk - Deposits. Custodial credit risk is defined as the risk that, in the event of the failure of a financial institution, the Association will not be able to recover deposits or collateral securities that are in the possession of an outside party. The Association does not have a deposit policy for custodial credit risk. As of December 31, 2017, and 2016, the Association was exposed to custodial credit risk in the amount of $3,313,504 and $6,347,798, respectively. 6. Other Current and Accrued Assets: Following is a summary of the amounts recorded as other current and accrued assets as of December 31, 2017 and 2016: Accrued utility revenue $ 6,026,370 $ 5,335,783 Interest receivable 14,222 14,222 Total $ 6,040,592 $ 5,350,005 12

15 NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2017 AND Deferred Charges: Following is a summary of the amounts recorded as deferred charges as of December 31, 2017 and 2016: NRECA R&S Prepayment $ 1,430,543 $ 1,716,652 Preliminary surveys and investigations 114,596 64,902 Total $ 1,545,139 $ 1,781, Patronage Capital: At December 31, 2017 and 2016, patronage capital consisted of: Assignable $ 5,384,074 $ 4,123,628 Assignable to date 110,584, ,460, ,968, ,584,320 Less: retirements to date (26,366,364) (24,401,808) Balance $ 89,602,030 $ 86,182,512 Under the provisions of the Mortgage Agreement, prior written approval is not required for distributions if equities after the distributions are an amount equal or greater than 30% of the total assets of the Association. The equities and margins of the Cooperative represent and percent of the total assets at balance sheet dates 2017 and There were $1,964,556 in capital credit retirements paid in 2017 and $3,372,043 in capital credit retirements paid in Other Equities: At December 31, 2017 and 2016, other equities consisted of: Retired capital credits - gain $ 4,909,596 $ 4,644,343 Donated capital 40,010 40,010 $ 4,949,606 $ 4,684,353 13

16 NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2017 AND Long-Term Liabilities: A Rural Utilities Service (RUS) Long-term debt is primarily represented by mortgage notes payable ranging from 0.102% to 4.436%, payable to the United States of America During 2012, the Association obtained financing of $32,254,914 through the Federal Financing Bank related to the new construction plan established by the Association. The obligations and loans of the Association to the Federal Financing Bank have been guaranteed by the RUS. The following is a summary of outstanding long-term debt as of December 31, 2017 and % Notes due quarterly $ 16,790,062 $ 17,108, % Notes due quarterly 8,839,380 9,046, % Notes due quarterly 3,763,516 3,857, % Notes due quarterly 6,658,575 6,803, % Notes due quarterly 20,937,518 21,533, % Notes due quarterly 3,759,604 3,863, % Notes due quarterly 2,577,728 2,640,333 63,326,383 64,853,028 Less: Current maturities (1,539,707) (1,461,045) $ 61,786,676 $ 63,391,983 B National Rural Utilities Cooperative Finance Corporation (CFC) Long-term debt is primarily represented by mortgage notes payable ranging from 2.760% to 4.00%, payable to CFC. The Association has an $8,500,000 line of credit available for any purpose. No draws were made on the line of credit during Following is a summary of outstanding long-term debt as of December 31, 2017 and 2016: % Notes due quarterly $ 1,689,862 $ 1,802, % Notes due quarerly 1,257,957 1,341, % Notes due quarterly 214, , % Notes due quarterly 1,211,946 1,398, % Notes due quarterly - 20, % Notes due quarterly 28,920,425 30,621,626 33,294,321 35,489,794 Less: Current Maturities (2,187,228) (2,191,907) Total for Notes 31,107,093 33,297,887 Past Service Cost 111, ,775 Less: Current Maturities (26,372) (25,262) Total Current CFC 84, ,513 $ 31,192,040 $ 33,409,400 14

17 NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2017 AND 2016 C CoBank Dixie Electric Power Association maintains a line of credit with CoBank for $7,500,000 for any purpose. During 2017, the Association has outstanding long-term debt totaling $3,230,222. The interest rate on the long-term debt is a fixed 2.96% and matures July, A schedule of future maturities for each of the following five years and five-year increments thereafter is as follows: The following is a list of maturities for the CoBank long-term debt: Fiscal year ended December 31, Amount 2018 $ 775, , , , , $ 296,086 3,230,222 D Schedule of Annual Maturities As of December 31, 2017, annual maturities of all long-term debt outstanding, exclusive of Directors retirement and Directors and retired employees health insurance totaling $1,939,400 are as follows: Fiscal year ended December 31, Amount 2018 $ 4,528, ,486, ,311, ,277, ,406, ,567, ,786, ,724, ,563, ,307,764 Total 99,962,246 Less: RUS cushion of credit (5,024,397) Net long-term debt $ 94,937,849 15

18 11. Current Maturities of Long-Term Debt: DIXIE ELECTRIC POWER ASSOCIATION NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2017 AND 2016 Current maturities of long term debt account are composed of the following: Rural Utilities Service $ 1,539,707 $ 1,461,045 Cooperative Finance Corporation 2,213,601 2,217,169 CoBank 775,485 1,227, Other Current and Accrued Liabilities: $ 4,528,793 $ 4,906,187 Following is a summary of the amounts recorded as other current and accrued liabilities as of December 31, 2017 and 2016: Accrued compensated absences $ 550,215 $ 529,579 Accrued payroll 125, ,455 Accrued interest on long-term debt 247, ,702 Customer advance for construction 290, ,190 Patronage refunds payable 831, ,164 Payroll and sales taxes payable 83,317 80,885 $ 2,129,119 $ 2,115, Deferred Credits: There were no deferred credits as of December 31, 2017 and Post Retirement Benefit Plans: The Association provides postretirement life and medical insurance benefits to eligible retired directors and employees based on the policies of the Association. There have been no plan changes or amendments in the past year except for a change in the contribution maximum paid to employees as follows: Employees who retire at age 55 or later with at least 10 years of service will receive the cooperative contribution of the excess of the medical premium above the Medicare premium up to a maximum of $1,000 monthly without increase in the future. This contribution will begin at the retiree s age 62 and continue until the employee s normal Medicare eligible age or death, whichever occurs first, for employee and dependents. The annual measurement date is December 31 for the postretirement benefits. The following table provides information about changes in the benefit obligation and plan assets and the funded status of the Association s postretirement benefit plan: 16

19 NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2017 AND Benfit obligation as of Dec. 31 $ (2,340,500) $ (2,182,900) Actuarial Gain (Loss) 407,400 (120,400) Service Costs (66,300) (57,800) Interest (65,700) (83,500) Annual Required Contribution 125, ,100 Net funded (unfunded) status of plan $ (1,939,400) $ (2,340,500) Amounts recognized in the balance sheet consist of: Current Liabilities $ 110,800 $ 123,900 Noncurrent Liabilities 1,828,600 2,216,600 $ 1,939,400 $ 2,340,500 Amounts recognized in other comprehensive income consist of: Transition obligation $ 306,000 $ 719,100 Weighted-average assumption used in accounting for the postretirement benefit plans are: Discount rate 3.7% Health care cost trend Pre-65 Medical & Drug 7.5% Health care cost trend Post-65 Medical & Drug 6.15% Health care cost trend Admin Cost 4.00% The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid: FY 2018 $ 110,800 FY ,600 FY ,500 FY ,800 FY ,500 FY , NRECA RS Plan Information: The retirement Security Plan (RS Plan), sponsored by the National Rural Electric Cooperative Association (NRECA), is a defined benefit pension plan qualified under Section 401 and tax-exempt under Section 501(a) of the Internal Revenue Code. It is considered a multi-employer plan under the accounting standards. The plan sponsor s Employer Identification Number is and the Plan Number is 333. A unique characteristic of a multi-employer plan compared to a single employer plan is that all plan assets are available to pay benefits of any plan participant. Separate asset accounts are not maintained for participating employers. This means that assets contributed by one employer may be used to provide benefits to employees of other participating employers. 17

20 NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2017 AND 2016 Dixie Electric Power Association contributions to the RS Plan in 2017 and in 2016 represented less than 5 percent of the total contributions made to the RS Plan by all participating employers. Dixie Electric Power Association made contributions to the RS Plan of $1,118,230 in 2017 and $1,019,377 in For the RS Plan, a zone status determination is not required, and therefore not determined, under the Pension Protection Act (PPA) of In addition, the accumulated benefit obligations and plan assets are not determined or allocated separately by individual employer. In total, the RS Plan was over 80 percent funded on January 1, 2013 and between 65 percent and 80 percent funded on January 1, 2012 based on the PPA funding target and PPA actuarial value of assets on those dates. Because the provisions of the PPA do not apply to the RS Plan, funding improvement plans and surcharges are not applicable. Future contribution requirements are determined each year as part of the actuarial valuation of the plan and may change as a result of plan experience At the December, 2012 meeting of the I&FS Committee of the NRECA Board of Directors, the Committee approved an option to allow participating cooperatives in the RS Plan to make a contribution prepayment and reduce future required contributions. The prepayment amount is a cooperative s share, as of January 1, 2013, of future contributions required to fund the RS Plan s unfunded value of benefits earned to date using RS Plan actuarial valuation assumptions. The prepayment amount will typically equal approximately 2.5 times a cooperative s annual RS Plan required contribution as of January 1, After making the prepayment, for most cooperatives the billing rate is reduced by approximately 25%, retroactive to January 1, The 25% differential in billing rates is expected to continue for approximately 15 years. However, changes in interest rates, asset returns and other plan experience different from expected, plan assumption changes and other factors may have an impact on the differential in billing rates and the 15- year period. Two prepayment options were available to participating cooperatives: 1. Use current assets to make the prepayment over a period of not more than 4 years 2. Borrow funds sufficient to make the prepayment in a lump sum, with the repayment of the borrowed amount determined by the loan s amortization schedule. On February 14, 2013, RUS issued a memorandum to all of its borrowers regarding the proper accounting treatment of the RS Plan prepayment. RUS stipulated that the prepayment shall be recorded as a long-term prepayment in Account 186, Miscellaneous Deferred Debits. This prepaid expense shall be amortized to Account 926, Employee Pensions and Benefits, over a ten-year period. Alternatively, RUS borrowers may calculate the amortization period by subtracting the cooperative s average age of its workforce as provided by NRECA from the cooperative s normal retirement age under the RS Plan, up to a maximum period of 20 years. If the entity chooses to finance the prepayment, interest expense associated with the loan shall be recorded in the year incurred as is required under the RUS Uniform System of Accounts (USOA). Section 6.13(e) of the RUS Loan Contract limits the amount of unsecured debt that a borrower may incur to 15% on Net Utility Plant if the equity level of the borrower, after considering such unsecured debt, is below 30% of its Total Assets unless the borrower obtains RUS consent. RUS will consider any unsecured debt associated with the RS Plan prepayment to be Permitted Debt and accordingly it will be excluded from the application of Section 6.13(e). On January 1, 2013, Dixie Electric Power Association made a prepayment of $2,861,086 to the NRECA RS Plan. The Association is amortizing this amount over 10 years. Interest expense associated with the prepayment loan is being accounted for in accordance with the RUS USOA. 18

21 NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2017 AND Contingent Liabilities: The Association was not contingently liable in respect of loans, acceptances and endorsements at the close of business on December 31, 2017 and Litigation: The Association is a defendant in several lawsuits and claims. Council states that most of the claims and suits against the Association are covered by insurance and in his opinion the financial statement of the Association will not be affected. 18. Purchase Commitments: Under a wholesale power agreement, the Association is committed to purchase its electric power and energy requirements from Cooperative Energy, formerly known as South Mississippi Electric Power Association (S.M.E.P.A.), until December 31, The Association has also entered into an agreement complete with amendments for equalization of power costs whereas the cost of wholesale power to all members of Cooperative Energy shall be determined under rate schedules applicable to all members. 19. Asset Retirement Obligation ( ARO ): Dixie Electric Power Association has a retirement obligation related to a single underground storage tank. Liabilities for the removal of this asset has not been recorded because the range of time over which the Association may settle these obligations is unknown and cannot be reasonably estimated. 20. Excess Revenue: In accordance with MS Code the following calculation is used to determine excess revenue, if any, for the year ending December 31, Operating Revenues $ 90,739,344 Other Margins 2,824,341 Total revenue $ 93,563,685 Operating & Maintenance Expenses $ 78,806,902 Principal & Interest Payments for Current Year 8,555,243 Reserve for New Construction 7,625,481 Reserve for Depreciation 5,797,072 - Reserve for contingencies established by the board Total allowable amounts under $ 100,784,698 Excess (Deficit) Revenue Available for Rate Reductions $ (7,221,013) The Board of Directors has not established a Reserve for Contingencies amount as of the end of 2017 therefore no amount for this was used in the calculation. Dixie Electric would be required to increase revenues by 8% to obtain excess revenue. 19

22 NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2017 AND Subsequent Events: Events that occur after the Balance Sheet date but before the financial statements are available to be issued must be evaluated for recognition or disclosure. The effects of subsequent events that provide evidence about conditions that existed at the Balance Sheet date are recognized in the accompanying financial statements. Subsequent events which provide evidence about conditions that existed after the Balance Sheet date require disclosure in the accompanying notes. Management has evaluated subsequent events through March 12, 2018, the date the financial statements were issued and determined that no subsequent events have occurred that require disclosure in the notes to the financial statements. 21. Income Taxes: Dixie Electric Power Association is an organization exempt from income tax under IRS Code Section 501(c)(12). Unrelated business income, of which the Association had none for the years ended December 31, 2017 and 2016, would be subject to federal income taxes. Consequently, the accompanying financial statements do not reflect any provision for income taxes. The Association follows the provision of uncertain tax positions as addressed in FASB Accounting Standards Codification The Organization files income tax returns in the U.S. federal jurisdiction. The Association is no longer subject to U.S. federal income tax examinations by the tax authority for years before The Association recognizes interest accrued related to unrecognized tax benefits in interest and penalties in operating expenses. No such interest or penalties were recognized during the periods presented. The Association had no accruals for interest and penalties at December 31, 2017 and The Association has elected to defer the provisions of FASB ASC 740, Accounting for Income Taxes, under the provisions of ASC 740. The Association records a liability for uncertain tax positions when it is probable that a loss has been incurred and the amount can be reasonably estimated. The Association continually evaluates expiring statutes of limitations, audits, proposed settlements, changes in tax laws, and new authoritative rulings. 20

23 Supplemental Information 21

24 Dixie Electric Power Association Schedule of Expenditures of Federal Awards For the Year Ended December 31, 2017 Federal Grantor/Program or Cluster Title Federal CFDA Number Federal Expenditures($) Department of Homeland Security Disaster Grants - Public Assistance (Presidentially Declared Disasters) $ 782,328 Total Expenditures of Federal Awards $ 782,328 The accompanying notes are an integral part of this schedule 22

25 Dixie Electric Power Association Notes the Supplementary Information For the Year Ended December 31, 2017 Schedule of Expenditures of Federal Awards (1) Basis of Presentation The accompanying schedule of expenditures of federal awards (the Schedule ) includes the federal award activity of Dixie Electric Power Association under programs of the federal government for the year ended December 31, The information in this Schedule is presented in accordance with the requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Because the Schedule presents only a selected portion of the operations of Dixie Electric Power Association it is not intended to and does not present the financial position, changes in net assets, or cash flows of Dixie Electric Power Association. (2) Summary of Significant Accounting Policies Expenditures reported on the Schedule are reported on the accrual basis of accounting. Such expenditures are recognized following the cost principles contained in the Uniform Guidance, wherein certain types of expenditures are not allowable or are limited as to reimbursement. Negative amounts shown on the Schedule represent adjustments or credits made in the normal course of business to amounts reported as expenditures in prior years. (3) Indirect Cost Rate Dixie Electric Power Association has not elected to use the 10-percent de minimis indirect cost rate allowed under the Uniform Guidance. 23

26 W. David Dill, CPA H. I. Holt, CPA Julie M. Uher, CPA Founder ( ) Kari M. Blackledge, CPA INDEPENDENT AUDITOR S 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 AUDITING STANDARDS To the Board of Directors Dixie Electric Power Association We have audited, in accordance with the auditing standards 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, the financial statements of Dixie Electric Power Association as of and for the years ended December 31, 2017 and 2016, and the related notes to the financial statements, which collectively comprise Dixie Electric Power Association s basic financial statements, and have issued our report thereon dated March 12, Internal Control over Financial Reporting In planning and performing our audit of the financial statements, we considered Dixie Electric Power Association s internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of Dixie Electric Power Association s internal control. Accordingly, we do not express an opinion on the effectiveness of Dixie Electric Power Association s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity s financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or, significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified HIGHWAY 15 NORTH LAUREL, MISSISSIPPI BELLEGRASS BLVD. HATTIESBURG, MISSISSIPPI PHONE FAX

27 Compliance and Other Matters As part of obtaining reasonable assurance about whether Dixie Electric Power Association s financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the entity s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the entity s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. Holt & Associates, PLLC Laurel, MS March 12,

28 W. David Dill, CPA H. I. Holt, CPA Julie M. Uher, CPA Founder ( ) Kari M. Blackledge, CPA INDEPENDENT AUDITOR S REPORT ON COMPLIANCE FOR EACH MAJOR PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCE REQUIRED BY THE UNIFORM GUIDANCE To the Board of Directors Dixie Electric Power Association Report on Compliance for Each Major Federal Program We have audited Dixie Electric Power Association s compliance with the types of compliance requirements described in the OMB Compliance Supplement that could have a direct and material effect on each of the Dixie Electric Power Association s major federal programs for the year ended December 31, Dixie Electric Power Association s major federal programs are identified in the summary of auditor s results section of the accompanying schedule of findings and questioned costs. Management s Responsibility Management is responsible for compliance with federal statutes, regulations, and the terms and conditions of its federal awards applicable to its federal programs. Auditor s Responsibility Our responsibility is to express an opinion on compliance for each of Dixie Electric Power Association s major federal programs based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and the audit requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Those standards and the Uniform Guidance require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance 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 the Dixie Electric Power Association s compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion on compliance for each major federal program. However, our audit does not provide a legal determination of Dixie Electric Power Association s compliance. Opinion on Each Major Federal Program In our opinion, Dixie Electric Power Association complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on each of its major federal programs for the year ended December 31, HIGHWAY 15 NORTH LAUREL, MISSISSIPPI BELLEGRASS BLVD. HATTIESBURG, MISSISSIPPI PHONE FAX

29 Report on Internal Control over Compliance Management of Dixie Electric Power Association is responsible for establishing and maintaining effective internal control over compliance with the types of compliance requirements referred to above. In planning and performing our audit of compliance, we considered the Dixie Electric Power Association s internal control over compliance with the types of requirements that could have a direct and material effect on each major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for each major federal program and to test and report on internal control over compliance in accordance with the Uniform Guidance, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of the Dixie Electric Power Association s internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over compliance that might be material weaknesses or significant deficiencies. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of the Uniform Guidance. Accordingly, this report is not suitable for any other purpose. Holt & Associates, PLLC Laurel, MS March 12,

30 W. David Dill, CPA H. I. Holt, CPA Julie M. Uher, CPA Founder ( ) Kari M. Blackledge, CPA INDEPENDENT AUDITORS REPORT ON COMPLIANCE WITH ASPECTS OF CONTRACTUAL AGREEMENTS AND REGULATORY REQUIREMENTS FOR ELECTRIC BORROWERS Board of Directors Dixie Electric Power Association Laurel, Mississippi We have audited, in accordance with auditing standards 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, the financial statements of Dixie Electric Power Association which comprise the balance sheets as of December 31, 2017 and 2016, and the related statements of revenue and patronage capital, changes in cash flows for the years then ended, and the related notes to the financial statements, and have issued our report thereon dated March 1, In accordance with Government Auditing Standards, we have also issued our report dated March 1, 2018, on our consideration of Dixie Electric Power Association s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements and other matters. No reports other than the reports referred to above and our schedule of findings and recommendations related to our audit have been furnished to management. In connection with our audit, nothing came to our attention that caused us to believe that Dixie Electric Power Association failed to comply with the terms, covenants, provisions, or conditions of their loan, grant, and security instruments as set forth in 7 CFR Part 1773, Policy on Audits of Rural Utilities Service Borrowers, and clarified in the RUS policy memorandum dated February 7, 2016, insofar as they relate to accounting matters as enumerated below. However, our audit was not directed primarily toward obtaining knowledge of noncompliance. Accordingly, had we performed additional procedures, other matters may have come to our attention regarding Dixie Electric Power Association s noncompliance with the above-referenced terms, covenants, provisions, or conditions of the contractual agreements and regulatory requirements, insofar as they relate to accounting matters. In connection with our audit, we noted no matters regarding Dixie Electric Power Association's accounting and records to indicate that Dixie Electric Power Association did not: Maintain adequate and effective accounting procedures; 2815 HIGHWAY 15 NORTH LAUREL, MISSISSIPPI BELLEGRASS BLVD. HATTIESBURG, MISSISSIPPI PHONE FAX