LYON RURAL ELECTRIC COOPERATIVE FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2017 AND 2016

Transcription

1 FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2017 AND 2016

2

3 TABLE OF CONTENTS YEARS ENDED DECEMBER 31, 2017 AND 2016 DIRECTORS AND OFFICERS 1 INDEPENDENT AUDITORS REPORT 2 FINANCIAL STATEMENTS BALANCE SHEETS 4 STATEMENTS OF OPERATIONS 6 STATEMENTS OF CHANGES IN PATRONAGE CAPITAL AND OTHER EQUITIES 7 STATEMENTS OF CASH FLOWS 9 NOTES TO FINANCIAL STATEMENTS 10 INDEPENDENT AUDITORS REPORT ON LOAN FUND EXPENDITURES 20 SINGLE AUDIT AND OTHER REQUIRED REPORTS SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS 21 NOTES TO SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS 22 INDEPENDENT AUDITORS' 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 23 INDEPENDENT AUDITORS REPORT ON COMPLIANCE FOR EACH MAJOR FEDERAL PROGRAM AND REPORT ON INTERNAL CONTROL OVER COMPLINCE REQUIRED BY THE UNIFORM GUIDANCE 25 SCHEDULE OF FINDINGS AND QUESTIONED COSTS 27

4

5 DIRECTORS AND OFFICERS DECEMBER 31, 2017 Randy Roemen Mark Wibben Bruce Bonander Rodney Mogler Dale Klinkenborg Mark Dickmann David De Boer David Huff Vice President (Acting President) Secretary Treasurer Director Director Director Director Director * * * * * * * * * * * * * * * * * * * Ross Loomans General Manager (1)

6 (This page intentionally left blank)

7 CliftonLarsonAllen LLP CLAconnect.com INDEPENDENT AUDITORS REPORT Board of Directors Lyon Rural Electric Cooperative Rock Rapids, Iowa We have audited the accompanying financial statements of Lyon Rural Electric Cooperative (the Cooperative), which comprise the balance sheets as of December 31, 2017 and 2016, and the related statements of operations, changes in patronage capital and other equities, and cash flows for the years then ended, and the related notes to the financial statements. 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. Auditors 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 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 the Cooperative for the year ended December 31, 2016 were not audited in accordance with Government Auditing Standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from 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 auditors 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 Cooperative 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 Cooperative s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. (2)

8 (This page intentionally left blank)

9 Board of Directors Lyon Rural Electric Cooperative Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Cooperative as of December 31, 2017 and 2016, and the changes in its patronage capital and other equities and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Other Matters Other Information Our audit was conducted for the purpose of forming an opinion on the financial statements as a whole. The 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 also presented for purposes of additional analysis and is not a required part of the basic financial statements. The schedule of expenditures of federal awards is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. Such information has been subjected to the auditing procedures applied in the audit of the 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 information is fairly stated, in all material respects, in relation to the 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 April 11, 2018, on our consideration of the Cooperative s internal control over financial reporting and on our test of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is solely 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 the effectiveness of the Cooperative s 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 Cooperative s internal control over financial reporting and compliance. CliftonLarsonAllen LLP Austin, Minnesota April 11, 2018 (3)

10 BALANCE SHEETS DECEMBER 31, 2017 AND 2016 ASSETS UTILITY PLANT Electric Plant in Service $ 18,135,701 $ 17,860,894 Construction Work in Progress 8,310,809 7,076,671 Total 26,446,510 24,937,565 Less: Accumulated Provision for Depreciation (11,406,563) (10,741,554) Net Utility Plant 15,039,947 14,196,011 OTHER ASSETS AND INVESTMENTS Investments in Associated Organizations 5,202,504 4,764,569 Other Investments 31,503 42,295 Total Other Assets and Investments 5,234,007 4,806,864 CURRENT ASSETS Cash and Cash Equivalents 566, ,309 Accounts Receivable, Net 1,300,531 1,169,456 Materials and Supplies Inventory 389, ,397 Other Current and Accrued Assets 97,100 87,215 Total Current Assets 2,353,102 2,350,377 DEFERRED DEBITS - 20 Total Assets $ 22,627,056 $ 21,353,272 See accompanying Notes to Financial Statements. (4)

11 EQUITIES AND LIABILITIES EQUITIES Memberships $ 8,320 $ 8,335 Patronage Capital 4,432,079 4,232,069 Other Equities 6,282,095 5,887,934 Total Equities 10,722,494 10,128,338 LONG-TERM DEBT, LESS CURRENT MATURITIES CFC Mortgage Notes 9,997,334 8,980,281 Total Long-Term Debt 9,997,334 8,980,281 CURRENT LIABILITIES Current Maturities of Long-Term Debt 301, ,000 Notes Payable 425, ,000 Accounts Payable 769, ,123 Consumer Deposits 9,716 10,062 Other Current and Accrued Liabilities 238, ,320 Total Current Liabilities 1,743,321 2,052,505 DEFERRED CREDITS 163, ,148 Total Equities and Liabilities $ 22,627,056 $ 21,353,272 (5)

12 (This page intentionally left blank)

13 STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2017 AND OPERATING REVENUES $ 10,864,181 $ 10,430,635 OPERATING EXPENSES Cost of Power 7,546,682 7,174,763 Distribution Expense - Operations 281, ,377 Distribution Expense - Maintenance 413, ,774 Consumer Account Expense 137, ,685 Customer Service and Informational Expense 171, ,725 Sales Expense 17,656 16,497 Administrative and General Expense 806, ,021 Depreciation 571, ,813 Taxes 69,095 68,417 Other Deductions 3,496 7,624 Total Operating Expenses 10,018,445 9,680,696 OPERATING MARGINS BEFORE FIXED CHARGES 845, ,939 INTEREST ON LONG-TERM DEBT 538, ,795 OPERATING MARGINS AFTER FIXED CHARGES 306, ,144 GENERATION AND TRANSMISSION AND OTHER CAPITAL CREDITS 560, ,172 NET OPERATING MARGINS 867, ,316 NONOPERATING MARGINS Interest Income 31,091 31,986 Other Nonoperating Income (25,322) (21,860) Total Nonoperating Margins 5,769 10,126 NET MARGINS 872, ,442 Patronage Capital - Beginning of Year 4,232,069 3,976,740 Capital Credits Retired (286,251) (294,820) Transfer to Other Equities (386,706) (288,293) PATRONAGE CAPITAL - END OF YEAR $ 4,432,079 $ 4,232,069 See accompanying Notes to Financial Statements. (6)

14 STATEMENTS OF CHANGES IN PATRONAGE CAPITAL AND OTHER EQUITIES YEARS ENDED DECEMBER 31, 2017 AND 2016 Other Patronage Appropriated Memberships Capital Margins BALANCE - DECEMBER 31, 2015 $ 8,265 $ 3,976,740 $ 4,974,580 Margins Assigned - (288,293) 285,000 Net Margins for Year Ended December 31, ,442 - Member Education Membership Net Increase Retirement of Capital Credits - (294,820) - BALANCE - DECEMBER 31, ,335 4,232,069 5,259,580 Margins Assigned - (386,706) 384,000 Net Margins for Year Ended December 31, ,967 - Member Education Membership Net Decrease (15) - - Retirement of Capital Credits - (286,251) - BALANCE - DECEMBER 31, 2017 $ 8,320 $ 4,432,079 $ 5,643,580 See accompanying Notes to Financial Statements. (7)

15 Equities Donated Loan Fund Total Capital Interest Other Other Equities $ 430,000 $ 120,535 $ 67,734 $ 5,592,849-3, , ,440 4, ,352 2, , ,828 74,526 5,887,934-2, , ,850 2, ,605 4,605 $ 430,000 $ 126,534 $ 81,981 $ 6,282,095 (8)

16 STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2017 AND CASH FLOWS FROM OPERATING ACTIVITIES Net Margins $ 872,967 $ 838,442 Adjustments to Reconcile Net Margins to Net Cash Provided by Operating Activities: Depreciation 571, ,813 G & T and Other Capital Credits (560,255) (627,172) Decrease in Deferred Debits 20 23,042 Increase (Decrease) in Deferred Credits (28,241) 11,255 Changes in Assets and Liabilities - (Increase) Decrease in: Accounts Receivable (131,075) (287,022) Materials and Supplies Inventory (797) 54,501 Other Current and Accrued Assets (9,885) (1,057) Increase (Decrease) in: Accounts Payable 15, ,466 Customer Deposits (346) 1,885 Other Current and Accrued Liabilities (36,236) 7,560 Net Cash Provided by Operating Activities 692, ,713 CASH FLOWS FROM INVESTING ACTIVITIES Construction and Acquisition of Plant (1,415,235) (911,189) Proceeds from Retirement of Patronage Capital 120, ,469 Proceeds from Retirement from Economic Development Loans 10,902 9,322 Decrease in Other Assets and Investments 1,242 5,423 Net Cash Used by Investing Activities (1,282,123) (782,975) CASH FLOWS FROM FINANCING ACTIVITIES Net Increase (Decrease) in Memberships (15) 70 Retirement of Capital Credits (281,646) (292,468) Change in Other Equities 2,850 4,440 Advance on Line of Credit 1,895,000 1,275,000 Payment on Line of Credit (2,220,000) (525,000) Proceeds from Issuance of Long-Term Debt 1,325,000 - Principal Payments on Long-Term Debt (270,947) (307,927) Net Cash Provided by Financing Activities 450, ,115 NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (139,032) 93,853 Cash and Cash Equivalents - Beginning of Year 705, ,456 CASH AND CASH EQUIVALENTS - END OF YEAR $ 566,277 $ 705,309 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash Payments for Interest $ 542,925 $ 553,858 See accompanying Notes to Financial Statements. (9)

17 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2017 AND 2016 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization Lyon Rural Electric Cooperative (the Cooperative) is a cooperative association organized under Iowa laws and statutes. The primary purpose of the Cooperative is to purchase and distribute electric energy to its members. The cooperative serves members located primarily in Lyon County. Basis of Accounting The Cooperative presents its financial statements on the accrual basis and maintains its accounting records in accordance with the Federal Energy Regulatory Commission s Uniform System of Accounts prescribed for Class A and B Electric Utilities. The accounting policies conform to accounting principles generally accepted in the United States of America as applied in the case of regulated electric utilities. Recognition of Revenue and Power Costs Revenue is recognized in the accounts at the time of billings to the customers. The cost of power reflected in the accounts is the amount billed during the year. At the end of the year, all energy delivered had been billed. Electric Plant and Depreciation Procedures Utility plant is stated at cost, which includes cost of contracted work, direct labor, materials, and allocable overhead, less amounts contributed by others. Major expenditures for property and equipment and those which substantially increase useful lives are capitalized. Maintenance, repairs, and major renewals are expensed as incurred. Gains or losses incurred on disposals of distribution plant assets are recorded as adjustments to the related accumulated depreciation account. When general plant assets are retired or otherwise disposed of, their costs and related accumulated depreciation are removed from the account and the resulting gains or losses are included in current operations. There were no longterm construction projects requiring capitalization of interest for allowance of funds used during construction. Electric plant is depreciated using the straight-line method based on estimated useful lives of the various classes of property at the following rates: Distribution Plant 2.3% % General Plant Structures 2.4% Other General Plant 5.0% % Investments Investments in Associated Organizations: Investments in associated organizations include patronage capital, term certificates, and member capital securities. Investments in associated organizations are stated at cost plus undistributed allocated equities from other cooperatives. (10)

18 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2017 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Investments (Continued) Other Investments: Other investments include rural economic development loans and investments in other organizations. Other investments are stated at cost. Allowance for Loan Losses The allowance for loan losses (allowance) is an estimate of loan losses inherent in the Cooperative s loan portfolio, which consists of rural economic development loans included in other investments on the balance sheet. The allowance is established through a provision for loan losses which is charged to expense. Additions to the allowance are expected to maintain the adequacy of the total allowance after loan losses and loan growth. Loan losses are charged off against the allowance when the Cooperative determines the loan balance to be uncollectible. Cash received on previously charged off amounts is recorded as a recovery to the allowance. A loan is considered impaired when, based on current information and events, it is probable that the Cooperative will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Loans determined to be impaired are individually evaluated for impairment. When a loan is impaired, the Cooperative measures impairment based on the present value of the expected future cash flows discounted at the original contractual interest rate, except that as a practical expedient, it may measure impairment based on an observable market price, or the fair value of the collateral if collateral dependent. A loan is collateral dependent if the repayment is expected to be provided solely by the underlying collateral. Although management believes the allowance to be adequate, ultimate losses may vary from its estimates. At least annually, management reviews the adequacy of the allowance, including consideration of the relevant risks of the portfolio, current economic conditions, and other factors. If management determines that changes are warranted based on those reviews, the allowance is adjusted. Cash and Cash Equivalents For the purpose of the statement of cash flows, the Cooperative considers short-term investments with original maturities of three months or less and cash restricted for revolving loan funds to be cash equivalents Cash on Hand and in Banks $ (58,838) $ 93,541 Economic Development Loan Fund Deposits 625, ,768 Total $ 566,277 $ 705,309 The Cooperative maintains cash and investments in deposit accounts at financial institutions approved by the board of directors. Accumulated deposits at these financial institutions, at times, may exceed federally insured limits. (11)

19 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2017 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Cash and Cash Equivalents (Continued) The Economic Development Loan Fund Deposits are restricted for making economic development loans to businesses, which is provided by the Rural Economic Development Loan and Grant Program. Accounts Receivable The Cooperative provides an allowance for bad debts using the allowance method based on management s judgment. Services are sold on an unsecured basis. Payment is generally required within 20 days after the date of billing. Accounts past due are individually analyzed for collectibility. The Cooperative writes off accounts on an annual basis. At December 31, 2017 and 2016, the allowance for uncollectible accounts was $39,061 and $37,156, respectively. Materials and Supplies Inventory Materials and supplies inventory is valued at the lower of cost or net realizable value using the average unit cost method. Income Taxes The Cooperative is exempt from income taxes under Section 501(c)(12) of the Internal Revenue Code (IRC). Accordingly, no provision for income taxes has been recorded at December 31, 2017 and The Cooperative evaluated its tax positions and determined that it has no uncertain tax positions as of December 31, 2017 and Presentation of Sales Taxes The state of Iowa imposes a sales tax of 6% and Lyon County, Iowa imposes a local Optional Sales Tax of 1% on the Cooperative s sales to members that are not exempt from sales tax. The Cooperative collects sales and local option sales tax from members and remits the entire amount to the state. The Cooperative s accounting policy is to exclude the tax collected and remitted to the state from revenues and costs of sales. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates may also affect the reported amounts of revenues and expenses during the reported period. Accordingly, actual results could vary from those estimates. (12)

20 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2017 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Revenue from Contracts with Customers In May 2014, the Financial Accounting Standards Board (FASB) issued amended guidance to clarify the principles for recognizing revenue from contracts with customers. The guidance requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. The guidance also requires expanded disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required regarding customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. The guidance will initially be applied retrospectively using one of two methods. The standard will be effective for the entity for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual periods beginning after December 15, Management is evaluating the effect of the amended revenue recognition guidance on the Cooperative s financial statements. Subsequent Events In preparing these financial statements, the Cooperative has evaluated events and transactions for potential recognition or disclosure through April 11, 2018, the date the financial statements were available to be issued. NOTE 2 ELECTRIC PLANT IN SERVICE The following are the major classes of the electric plant in service as of December 31: Intangible Plant $ 7,180 $ 7,180 Distribution Plant 16,539,824 16,265,017 General Plant 1,588,697 1,588,697 Electric Plant in Service 18,135,701 17,860,894 Construction Work in Progress 8,310,809 7,076,671 Total Electric Plant in Service 26,446,510 24,937,565 Accumulated Depreciation and Amortization 11,406,563 10,741,554 Net Utility Plant $ 15,039,947 $ 14,196,011 NOTE 3 INVESTMENTS IN ASSOCIATED ORGANIZATIONS The Cooperative is a voting member of L & O Power Cooperative, a generation and transmission facility supplying power to distribution cooperatives. These voting members or owners share margins realized by L & O, on the Cooperative principle, based on power purchased. These investments or patronage capital earned by voting members are being returned annually as approved by their board of directors. (13)

21 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2017 NOTE 3 INVESTMENTS IN ASSOCIATED ORGANIZATIONS (CONTINUED) Investments in National Rural Utilities Cooperative Finance Corporation include patronage capital, capital term certificates, loan term certificates, zero term certificates, and member capital securities. Capital term certificates bear interest at 5% and begin maturing in the year Loan term certificates bear interest at 3% and begin maturing in the year Zero term certificates bear interest at 0% and begin maturing in the year Member capital securities bear interest at 5% and mature in The securities become callable on March 3, Investments in associated organizations as of December 31 are as follows: L and O Power Cooperative: Patronage Capital $ 4,106,544 $ 3,701,323 Membership National Rural Utilities Cooperative Finance Corporation: Term Certificates 315, ,746 Member Capital Securities 350, ,000 Patronage Capital 296, ,081 Membership 1,000 1,000 Federated Rural Electric Insurance Exchange Equity 47,594 45,449 Rural Electric Supply Cooperative (RESCO) Shares and Patronage: Patronage Capital 84,594 75,030 One Share Common Stock Other Total $ 5,202,504 $ 4,764,569 NOTE 4 OTHER INVESTMENTS Other investments at December 31 consist of the following: Rural Economic Development Loans, Interest Rate 5% Per Annum, Due in July of 2018 $ 11,081 $ 21,982 Other Investments 20,422 20,313 Total $ 31,503 $ 42,295 Investments in economic development are loans made to both Cooperative member and nonmember individuals and organizations in and outside of the service territory. No allowance for uncollectible loans has been established as all loans are current and borrowers are performing according to the loan terms. (14)

22 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2017 NOTE 5 DETAIL OF PATRONAGE CAPITAL The following is a summary of patronage capital assignable and assigned at December 31: Patronage Capital: Assigned $ 3,559,112 $ 3,393,627 Assignable 872, ,442 Total Patronage Capital $ 4,432,079 $ 4,232,069 The mortgage provisions restrict the retirement of patronage capital unless after retirement, the capital of the Cooperative equals at least 20% of total assets of the Cooperative; provided, however, that retirements can be made if such distributions do not exceed 30% of the preceding year s margins. No distribution can be made if there are unpaid, when due, any installments of principal and interest on the notes. Distributions to estates are made at the request of the estates on a discounted basis. Discounts are retained by the Cooperative and transferred to donated capital. As of December 31, 2017, capital credits through 2001 had been fully retired. NOTE 6 OTHER EQUITIES Other equities consist of retained margins not allocated to patrons as of December 31: Other Equities: Appropriated Margins: General Surplus $ 4,222,251 $ 3,838,251 Reserve for Obsolescence 209, ,667 Reserve for Contingent Losses 1,211,662 1,211,662 Donated Capital 430, ,000 Loan Fund Interest 126, ,827 Other 81,982 74,527 Total Other Equities $ 6,282,095 $ 5,887,934 The Cooperative s Articles of Incorporation require that at least 10% of Cooperative s net margins be allocated, after providing a reasonable reserve for depreciation, obsolescence, uncollectible accounts, and contingent losses or expenses, to general surplus until the general surplus equals 30% of an amount equal to the sum of memberships, patronage capital, certificates of indebtedness payable upon liquidation, earnings from nonmember business, and earnings arising from the earnings of other cooperative organizations of which the Cooperative is a member. The general surplus is limited to 50% of such amount. The Cooperative appropriated $384,000 and $285,000 of earnings to the general surplus in 2017 and 2016, respectively. (15)

23 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2017 NOTE 6 OTHER EQUITIES (CONTINUED) The Cooperative s Articles of Incorporation also allow for a transfer of earnings to a reserve for contingent losses and obsolescence to provide a reasonable reserve for maintenance, depreciation, obsolescence, bad debts, or contingent losses and expenses. Donated capital is provided by United States governmental Rural Economic Development grants. These grants established a revolving loan fund to provide local financing for projects that foster economic development in rural areas. The proceeds of these grants shall remain donated capital as long as the Cooperative satisfies all conditions, requirements, and terms of the agreement. NOTE 7 LONG-TERM DEBT The following is a summary of outstanding long-term debt as of December 31: Description Mortgage notes payable to National Rural Utilities Cooperative Finance Corporation (CFC); secured by all assets of the Cooperative; fixed rate notes 4.15% %, payable through 2047 $ 10,298,334 $ 9,244,281 Total Debt 10,298,334 9,244,281 Less: Current Maturities (301,000) (264,000) Total $ 9,997,334 $ 8,980,281 The loan agreements with NRUCFC impose certain restrictions upon the Cooperative relating to the purchase, sale, construction, and maintenance of distribution plant, as well as future financing and retirement of patronage capital. These notes are secured by all assets of the Cooperative. The Cooperative had unadvanced loan funds of $7,325,000 from NRUCFC at December 31, The aggregate five-year maturities of long-term debt are as follows: Year Ending December 31, Amount 2018 $ 301, , , , ,000 Thereafter 8,637,334 Total $ 10,298,334 (16)

24 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2017 NOTE 8 LINES OF CREDIT The Cooperative has a perpetual line of credit with the National Rural Utilities Cooperative Finance Corporation (NRUCFC) in the amount of $1,500,000. Interest is payable quarterly and will not exceed the prevailing bank prime rate as published in The Wall Street Journal plus 1% per annum. The interest rate was 2.35% and 2.10% at December 31, 2017 and 2016, respectively. As of December 31, 2017 and 2016 the outstanding balances were $-0- and $750,000, respectively. The Cooperative has established a FEMA Mitigation line of credit with NRUCFC in the amount of $4,500,000. Interest is payable quarterly and will not exceed the prevailing bank prime rate as published in The Wall Street Journal plus 1% per annum. The interest rate was 2.35% and 2.10% at December 31, 2017 and 2016, respectively. The line of credit matures on June 24, The Cooperative had outstanding balances on the line of credit of $425,000 and $-0- at December 31, 2017 and 2016, respectively. NOTE 9 DEFERRED CREDITS Gain on Reacquired Debt $ 17,868 $ 22,000 Energy Efficiency Adjustment Clause 146, ,148 Total Deferred Credits $ 163,907 $ 192,148 An agreement with the United States Department of Agriculture, Rural Utility Services (RUS) in a prior year provided for the prepayment of outstanding notes at a discounted present value. The amount of the discount is deferred and recognized over the life of the NRUCFC notes which mature in The Energy Efficiency Adjustment Clause (EEAC) will be used as part of the funding for energy efficient programs in NOTE 10 RETIREMENT PLAN Plan Disclosure Information for Lyon Rural Electric Cooperative Participation in the Hawkeye Pension Plan for 2016 The Hawkeye Pension Plan is a defined benefit pension plan intended to be qualified under Section 401 of the IRC. Its associated trust is intended to be tax-exempt under Section 501(a) of the IRC. All plan assets are available to pay benefits of any plan participant. Separate asset accounts are not maintained for individual participating coops. This means assets contributed by one coop may be used to provide benefits to employees of the participating coops. (17)

25 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2017 NOTE 10 RETIREMENT PLAN (CONTINUED) Plan Disclosure Information for Lyon Rural Electric Cooperative Participation in the Hawkeye Pension Plan for 2016 (Continued) Employees attaining the age of 21, and normally working over 1,000 hours a year, are eligible to participate in the Hawkeye Retirement Plan. This plan is administered by the Iowa Association of Electric Cooperatives and is underwritten by the Prudential Insurance Company of America. It is a defined benefit plan, which was approved by the Internal Revenue Service determination letter dated July 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. Special rules apply to a coop that withdraws from the Plan, requiring the coop to pay to the Plan an amount based on the underfunded status of the Plan. The plan sponsor s Employer Identification Number is (Hawkeye Insurance Association is the Plan Administrator for the Hawkeye Pension Plan) and the Plan Number is 001. A unique characteristic of a multi-employer plan compared to a single employer plan is that all plan assets are available to pay benefits for 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. Lyon Rural Electric Cooperative s contributions to the Plan in 2017 and in 2016 represented less than 5% of the total contributions made to the plan by all participating employers. Lyon Rural Electric Cooperative made contributions to the plan of $120,813 in 2017 and $129,966 in There have been no significant changes that affect the comparability of 2017 and 2016 contributions. No zone status determination is required for the Plan under the Pension Protection Act of 2006 (the PPA), and therefore no zone status determination has been made. As of July 1, 2016 and 2015, the Plan was at least 80% funded, using special funded status calculations applicable to the plan under PPA. Because the provisions of the PPA do not apply to the Hawkeye Pension 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. In addition to this plan, the Cooperative offers a plan qualified under Section 401(k) of the IRC. The 401(k) plan allows employees to defer a percentage of their income on a pre-tax basis through contributions to the plan. The Cooperative will match up to 2% of employee contributions. However, if the Cooperative s total contribution to the 401(k) plan and the defined benefit plan described above exceed 11%, the Cooperative is not required to contribute to 2% match to the 401(k) plan. As the defined benefit plan exceeded 11% in both 2017 and 2016, no contribution was required by the Cooperative to the 401(k) plan. (18)

26 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2017 NOTE 11 COMMITMENTS AND CONCENTRATIONS U.S. generally accepted accounting principles require disclosure of information about certain significant estimates and current vulnerabilities due to certain concentrations. These matters include the following: Concentration of Credit The Cooperative distributes electric power to its rural members located in and around Lyon County. The members are involved primarily in agricultural related industries. The accounts receivable consumers balance represents amounts due from these consumers. Credit is issued after payment of a deposit, and approval by the board of directors. Sources of Supply Under its wholesale power agreement, the Cooperative is committed to purchase its electric power and energy requirements from L & O Power Cooperative through December 31, The rates are subject to periodic review and are set so that they meet the costs of operation and maintenance of facilities owned and operated by L & O. Concentration of Accounts Receivable At December 31, 2017 and 2016, three customers comprised approximately 26% and 21% of accounts receivable and revenues, respectively. Federal and State Funding Amounts received or receivable from the U.S. Department of Homeland Security and Iowa Homeland Security and Emergency Management are subject to agency audit and adjustment. Any disallowed claims, including amounts already collected, may constitute a liability of the Association. The amount, if any, of funds which may be disallowed by the agencies cannot be determined at this time although the Association expects such amounts, if any, to be immaterial. The financial assistance received is subject to audits by the grantor agency. (19)

27 CliftonLarsonAllen LLP CLAconnect.com INDEPENDENT AUDITORS REPORT ON LOAN FUND EXPENDITURES Board of Directors Lyon Rural Electric Cooperative Rock Rapids, Iowa We have audited, in accordance with accounting principles generally accepted in the United States of America auditing standards, the balance sheet of Lyon Rural Electric Cooperative as of December 31, 2017 and the related statements of operations, changes in patronage capital and other equities, and cash flows for the year then ended, and have issued our report thereon dated April 11, During the year ended December 31, 2017, the Cooperative received $1,325,000 in advance from National Rural Utilities Cooperative Finance Corporation (NRUCFC) on loans controlled by the NRUCFC Loan Agreement and/or Mortgage or Security Agreements. In conducting our audit, nothing came to our attention that caused us to believe that the Cooperative was not in compliance with the intended purpose of the loan funds as contemplated in the Loan Agreement. However, our audit was not directed primarily toward obtaining knowledge of such noncompliance. This report is intended for the information and use of the board of directors, management, and the NRUCFC, and is not intended to be, and should not be, used by anyone other than these specified parties. CliftonLarsonAllen LLP Austin, Minnesota April 11, 2018 (20)

28 (This page intentionally left blank)

29 SINGLE AUDIT AND OTHER REQUIRED REPORTS

30 (This page intentionally left blank)

31 SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS YEAR ENDED DECEMBER 31, 2017 Agency or CFDA Pass-Through Federal Grantor/Program Number Number Expenditures U.S. Department of Homeland Security Passed Through Iowa Homeland Security and Emergency Management Public Assistance Grant Programs FEMA-4114-DR-IA $ 1,078,216 Total Federal Awards Expended $ 1,078,216 (21)

32 NOTES TO SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS YEAR ENDED DECEMBER 31, 2017 NOTE 1 GENERAL The accompanying schedule of expenditures of federal awards presents the activity of all federal award programs of Lyon Rural Electric Cooperative. The Lyon Rural Electric Cooperative reporting entity is defined in Note 1 to the Cooperative s financial statements. The information in this Schedule is presented in accordance with the requirements of 2 CFR Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). All federal awards directly from federal agencies as well as federal financial awards passed through other government agencies are included in the schedule. Lyon Rural Electric Cooperative has elected not to use the 10-percent de minimis indirect cost rate as allowed under the Uniform Guidance. NOTE 2 BASIS OF ACCOUNTING The accompanying schedule of expenditures of federal awards is presented using 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. NOTE 3 RELATIONSHIP TO FINANCIAL STATEMENTS Federal awards revenue was reflected in the financial statements as a contribution in aid of construction. (22)

33 CliftonLarsonAllen LLP CLAconnect.com INDEPENDENT AUDITORS 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 Board of Directors Lyon Rural Electric Cooperative Rock Rapids, Iowa 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 Lyon Rural Electric Cooperative (the Cooperative), which comprise the balance sheet as of December 31, 2017, and the related statements of operations, changes in patronage capital and other equities, and cash flows for the year then ended, and the related notes to the financial statements, and have issued our report thereon dated April 11, Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered the Cooperative 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 opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Cooperative s internal control. Accordingly, we do not express an opinion on the effectiveness of the Cooperative s internal control. 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 and therefore, material weaknesses or significant deficiencies may exist that have not been identified. However, we consider the deficiencies described in the accompanying schedule of findings and questioned costs, we identified certain deficiencies in internal control that we consider to be material weaknesses and significant deficiencies. 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 Cooperative s financial statements will not be prevented, or detected and corrected on a timely basis. We consider the deficiency described in the accompanying schedule of findings and questioned costs as item to be a material weakness. (23)

34 Board of Directors Lyon Rural Electric Cooperative 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. We consider the deficiency described in the accompanying schedule of findings and questioned costs as item to be a significant deficiency. Compliance and Other Matters As part of obtaining reasonable assurance about whether the Cooperative 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. Lyon Rural Electric Cooperative s Responses to Findings Lyon Rural Electric Cooperative s responses to the findings identified in our audit are described in the accompanying schedule of findings and questioned costs. Lyon Rural Electric Cooperative s responses were not subjected to the auditing procedures applied in the audit of the financial statements and, accordingly, we express no opinion on the responses. 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 result of that testing, and not to provide an opinion on the effectiveness of the Cooperative 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 Cooperative s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. CliftonLarsonAllen LLP Austin, Minnesota April 11, 2018 (24)

35 CliftonLarsonAllen LLP CLAconnect.com INDEPENDENT AUDITORS REPORT ON COMPLIANCE FOR EACH MAJOR FEDERAL PROGRAM AND REPORT ON INTERNAL CONTROL OVER COMPLIANCE REQUIRED BY THE UNIFORM GUIDANCE Board of Directors Lyon Rural Electric Cooperative Rock Rapids, Iowa Report on Compliance for Each Major Federal Program We have audited Lyon Rural Electric Cooperative s (the Cooperative) 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 Cooperative s major federal programs for the year ended December 31, The Cooperative s major federal programs are identified in the summary of auditors 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. Auditors Responsibility Our responsibility is to express an opinion on compliance for each of the Cooperative 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 Cooperative 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 the Cooperative s compliance. Opinion on Each Major Federal Program In our opinion, the Cooperative 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, (25)

36 Board of Directors Lyon Rural Electric Cooperative Report on Internal Control Over Compliance Management of the Cooperative 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 Cooperative 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 Cooperative 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 a 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 and therefore, material weaknesses or significant deficiencies may exist that have not been identified. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses. However, we identified a deficiency in internal control over compliance, as described in the accompanying schedule of findings and questioned costs as item , that we consider to be a significant deficiency. Lyon Rural Electric Cooperative s response to the internal control over compliance findings identified in our audit are described in the accompanying schedule of findings and questioned costs. Lyon Rural Electric Cooperative s response was not subjected to the auditing procedures applied in the audit of compliance and, accordingly, we express no opinion on the response.. 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. CliftonLarsonAllen LLP Austin, Minnesota April 11, 2018 (26)

37 SCHEDULE OF FINDINGS AND QUESTIONED COSTS YEAR ENDED DECEMBER 31, 2017 Section I Summary of Auditors Results Financial Statements 1. Type of auditors report issued: Unmodified 2. Internal control over financial reporting: Material weakness(es) identified? x yes no Significant deficiency(ies) identified? x yes none reported 3. Noncompliance material to financial statements noted? yes x no Federal Awards 1. Internal control over major federal programs: Material weakness(es) identified? yes x no Significant deficiency(ies) identified? x yes none reported 2. Type of auditors report issued on compliance for major federal programs: Unmodified 3. Any audit findings disclosed that are required to be reported in accordance with 2 CFR (a)? x yes no Identification of Major Federal Programs CFDA Number(s) Name of Federal Program or Cluster Public Assistance Grant Program Dollar threshold used to distinguish between Type A and Type B programs: $ 750,000 Auditee qualified as low-risk auditee? yes x no (27)

38 SCHEDULE OF FINDINGS AND QUESTIONED COSTS (CONTINUED) YEAR ENDED DECEMBER 31, 2017 Section II Financial Statement Findings Type of Finding: Material Weakness in Internal Control over Financial Reporting Condition: The Cooperative does not have a policy in place to provide reasonable assurance that financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP); therefore, the potential exists that a material misstatement of the annual financial statements could occur and not be prevented, or detected and corrected, by the Cooperative s internal controls. Criteria or specific requirement: Internal controls should be in place to provide reasonable assurance that financial statements are prepared in accordance with U.S. GAAP. Context: While performing audit procedures, it was noted that management does not have internal controls in place to provide reasonable assurance that financial statements are prepared in accordance with U.S. GAAP. Effect: The lack of controls in place over the financial reporting function increases the risk of misstatements, fraud, or errors occurring and not being detected and corrected. Cause: The Cooperative has not adopted a policy to provide reasonable assurance that financial statements are prepared in accordance with U.S. GAAP; however, management has reviewed and approved the annual financial statements and related notes, as prepared by the audit firm, and has accepted responsibility for those financial statements. Repeat Finding: The finding is a repeat of a finding in the immediately prior year. Prior year finding number was Recommendation: The Cooperative should evaluate their financial reporting processes and controls, including the expertise of its internal staff, to determine whether additional controls over the preparation of annual financial statements can be implemented to provide reasonable assurance that financial statements are prepared in accordance with U.S. GAAP. Views of responsible officials and planned corrective actions: Management will continue to rely on the audit firm to draft the financial statements and the related notes to the financial statements, and will review, approve, and accept responsibility for the annual financial statements prior to their issuance. (28)

39 SCHEDULE OF FINDINGS AND QUESTIONED COSTS (CONTINUED) YEAR ENDED DECEMBER 31, 2017 Section II Financial Statement Findings (Continued) Type of Finding: Significant Deficiency in Internal Control Over Timely Closing of Work Orders Condition: The Cooperative has approximately $8.2 million of open workorders in its accounting system, covering multiple years, for which construction activity has been completed, but have not been closed to electric plant in service. Criteria or specific requirement: Internal controls should be in place to provide reasonable assurance that completed workorders are closed to plant accounts in a timely manner. Context: While performing audit procedures, it was noted that management does not have internal controls in place to provide reasonable assurance that completed workorders are closed to plant accounts in a timely manner. Effect: The closing of completed work orders affects the classification of utility plant assets between the line items for electric plant in service and construction work in progress. The balance of these open workorders has been slowly increasing over time. Management has recorded depreciation on these workorders. Cause: The Cooperative has a relatively small number of office staff. As a result, work orders have not been closed due to time constraints and possibly a lack of resources. Recommendation: We recommend that Cooperative initiate closing workorders in 2018 and potentially hire or contract additional resources to assist with this task. In this manner the workorders can be categorized into their respective accounts for electric plant in service. Views of responsible officials and planned corrective actions: There is no disagreement with the finding. (29)

40 SCHEDULE OF FINDINGS AND QUESTIONED COSTS (CONTINUED) YEAR ENDED DECEMBER 31, 2017 Section III Findings and Questioned Costs Major Federal Programs Federal Agency: Department of Homeland Security Federal Program Title: Public Assistance CFDA Number: Pass Through Agency: Iowa Homeland Security and Emergency Management Department Type of Finding: Significant Deficiency in Internal Control over Cash Management Condition: The Cooperative does not have an internal control policy in place over completion and approval of cash requests and quarterly financial reports. Criteria or specific requirement: Internal controls should be in place to provide reasonable assurance that reports are free of material misstatements. Context: While performing audit procedures, it was noted that management does not have internal controls in place to provide reasonable assurance that the cash request and financial reports are free of material misstatements. Effect: The potential exists that a misstatement could occur in the reporting process that would not be prevented, or detected and corrected, by the Cooperative s internal controls. Cause: The Cooperative does not have an internal control policy in place over completion and approval of cash requests and quarterly financial reports. Recommendation: The Cooperative should implement a review process for the cash request and financial reports to ensure they are completed accurately. Views of responsible officials and planned corrective actions: Management agrees with the recommendation, and will work to implement a formal review process on the reports going forward. (30)

41 LYON RURAL ELECTRIC P.O. ROCK RAPIDS, IOWA PHONE: (712) COOPERATIVE LYON RURAL ELECTRIC COOPERATIVE SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS YEAR ENDED DECEMBER 31, 2017 Iowa Homeland Security and Emergency Management Department Lyon Rural Electric Cooperative respectfully submits the following summary schedule of prior audit findings for the year ended December 31, Audit period: January 1,2017 to December 31, The findings from the prior audit s schedule of findings and questioned costs are discussed below. The findings are numbered consistently with the numbers assigned in the prior year. FINDINGS FINANCIAL STATEMENT AUDIT Annual Financial Reporting Under Generally Accepted Accounting Principles (GAAP) Condition: The Cooperative does have an internal control policy in place for the review of the drafted financial statements. However, the Cooperative does not have the expertise to ensure all disclosures required by generally accepted accounting principles are included in the annual financial statements. Status: See current year finding Reason for finding s The Cooperative s personnel have not monitored recent accounting developments to the extent necessary to enable them to prepare the Cooperative s financial statements and related disclosures and the Cooperative will engage CliftonLarsonAllen LLP to draft the financial statements and related disclosures. The Cooperative will continue to review and approve the financial statements prior to issuance. recurrence: Corrective Action: The Cooperative will explore the options and cost-effective feasibility of training existing personnel, or hiring/contracting additional personnel, to adequately prepare financial statements for the prevention or detection of material misstatements in the annual statements of the Cooperative. FINDINGS FEDERAL AWARD PROGRAMS AUDITS A federal award program audit was not required in the prior year. If the Iowa Homeland Security and Emergency Management Department has questions regarding this schedule, please call Ross Loomans, GM, at Your Touchstone Energy Partner

42 L LYON RURAL ELECTRIC P.O. Box 629 ROCK RAPIDS, IOWA PHONE: (712) LYON RURAL ELECTRIC COOPERATIVE CORRECTIVE ACTION PLAN YEAR ENDED DECEMBER 31, 2017 COOPERATIVE Iowa Homeland Security and Emergency Management Department Lyon Rural Electric Cooperative respectfully submits the following corrective action plan for the year ended December 31, Audit period: January 1, 2017 December 31, 2017 The findings from the schedule of findings and questioned costs are discussed below. The findings are numbered consistently with the numbers assigned in the schedule. FINDINGS FINANCIAL STATEMENT AUDIT MATERIAL WEAKNESS Annual Financial Reporting Under Generally Accepted Accounting Principles (GAAP) SIGNIFICANT DEFICIENCY Recommendation: We recommend the Cooperative continue to evaluate their internal staff and expertise to determine if an internal control policy over the annual financial reporting is beneficial. Explanation of disagreement with audit finding: There is no disagreement with the audit finding. Action planned in response to finding: The Cooperative will explore the options and costeffective feasibility of training existing personnel, or hiring/contracting additional personnel, to adequately prepare financial statements for the prevention or detection of a material misstatement in the annual statements of the Cooperative. Name(s) of the contact person(s) responsible for corrective action: Ross Loomans, GM Planned completion date for corrective action plan: December Timely Closing of Work Orders Recommendation: We recommend that Cooperative initiate closing workorders in 2018 and potentially hire or contract additional resources to assist with this task. In this manner the workorders can be categorized into their respective accounts for electric plant in service. Explanation of disagreement with audit finding: There is no disagreement with the audit find ing. Action planned in response to finding: The Cooperative will explore the options and effective feasibility of training existing personnel, or hiring/contracting additional personnel, to close completed workorders. Name(s) of the contact person(s) responsible for corrective action: Ross Loomans, GM. Planned completion date for corrective action plan: December 2018 cost Your Touchstone Energy Partner

43 CORRECTIVE ACTION PLAN YEAR ENDED DECEMBER 31, 2017 FINDINGS FEDERAL AWARD PROGRAMS AUDITS Significant Deficiency Public Assistance Grant Programs CFDA Recommendation: The Cooperative should implement a review process for the cash request and financial reports to ensure they are completed accurately. Explanation of disagreement with audit finding: There is no disagreement with the audit finding. Action planned in response to finding: The Cooperative will work to implement a formal review process on the reports going forward. Name(s) of the contact person(s) responsible for corrective action: Ross Loomans, GM Planned completion date for corrective action plan: December 2018 If the Iowa Homeland Security and Emergency Management Department has questions regarding this plan, please call Ross Loomans, GM, at