BOLINGER, SEGARS, GILBERT & MOSS, L.L.P.

Transcription

1 BOLINGER, SEGARS, GILBERT & MOSS, L.L.P. certified public accountants PHONE: (806) FAX: (806) Nashville Avenue LUBBOCK, TEXAS March 6, 2014 Board of Directors Bandera Electric Cooperative, Inc. Bandera, Texas We have audited the financial statements of Bandera Electric Cooperative, Inc. for the year ended December 31, 2013, and have issued our report thereon dated March 6, Professional standards require that we provide you with the following information related to our audit. Our Responsibility under U.S. Generally Accepted Auditing Standards As stated in our engagement letter dated June 21, 2013, our responsibility, as described by professional standards, is to express an opinion about whether the financial statements prepared by management with your oversight are fairly presented, in all material respects, in conformity with accounting principles generally accepted in the United States of America. Our responsibility is to plan and perform the audit to obtain reasonable, but not absolute, assurance that the financial statements are free of material misstatement. As part of our audit, we considered the internal control of Bandera Electric Cooperative, Inc. Such considerations were solely for the purpose of determining our audit procedures and not to provide any assurance concerning such internal control. We are responsible for communicating significant matters related to the audit that are, in our professional judgment, relevant to your responsibilities in overseeing the financial reporting process. However, we are not required to design procedures specifically to identify such matters. Our audit of the financial statements does not relieve you or management of your responsibilities. Planned Scope and Timing of the Audit We performed the audit according to the planned scope and timing previously communicated to you in our engagement letter and meetings about planning matters. Significant Audit Findings Qualitative Aspects of Accounting Practices Management is responsible for the selection and use of appropriate accounting policies. In accordance with the terms of our engagement letter, we will advise management about the appropriateness of accounting policies and their application. The significant accounting policies used by Bandera Electric Cooperative, Inc. are described in the notes to the financial statements. No new accounting policies were implemented by the Cooperative during the year. We noted no transactions entered into by the Cooperative during the year for which there is a lack of authoritative guidance or consensus. There are no significant transactions that have been recognized in the financial statements in a different period than when the transaction occurred.

2 Board of Directors Bandera Electric Cooperative, Inc. March 6, 2014 Page 2 Accounting estimates are an integral part of the financial statements prepared by management and are based on management's knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ significantly from those expected. The most sensitive estimates affecting the financial statements are: Management s estimate of the allowance for doubtful accounts based on historical write-offs and expectations of future bad debts, accumulated post-retirement benefits and accrued unbilled revenue. We evaluated the key factors and assumptions used to develop these estimates in determining that they are reasonable in relation to the financial statements taken as a whole. The disclosures in the financial statements are neutral, consistent and clear. Difficulties Encountered in Performing the Audit We encountered no significant difficulties in dealing with management in performing and completing our audit. Corrected and Uncorrected Misstatements Professional standards require us to accumulate all known and likely misstatements identified during the audit, other than those that are trivial, and communicate them to the appropriate level of management. Management has corrected all such misstatements. In addition, none of the misstatements detected as a result of audit procedures and corrected by management were material, either individually or in the aggregate, to the financial statements taken as a whole. Disagreements with Management For purposes of this letter, professional standards define a disagreement with management as a financial accounting, reporting, or auditing matter, whether or not resolved to our satisfaction, that could be significant to the financial statements or the auditor's report. We are pleased to report that no such disagreements arose during the course of our audit. Management Representations We have requested certain representations from management that are included in the management representation letter dated March 6, Management Consultations with Other Independent Accountants In some cases, management may decide to consult with other accountants about auditing and accounting matters, similar to obtaining a "second opinion" on certain situations. If a consultation involves application of an accounting principle to the Cooperative's financial statements or a determination of the type of auditor's opinion that may be expressed on those statements, our professional standards require the consulting accountant to check with us to determine that the consultant has all the relevant facts. To our knowledge, there were no such consultations with other accountants.

3 Board of Directors Bandera Electric Cooperative, Inc. March 6, 2014 Page 3 Other Audit Findings or Issues We generally discuss a variety of matters, including the application of accounting principles and auditing standards, with management each year prior to retention as the Cooperative's auditors. However, these discussions occurred in the normal course of our professional relationship and our responses were not a condition to our retention. This information is intended solely for the use of Board of Directors and management of Bandera Electric Cooperative, Inc. and is not intended to be and should not be used by anyone other than these specified parties. Very truly yours, Certified Public Accountants

4 BANDERA, TEXAS FINANCIAL STATEMENTS WITH ACCOMPANYING INFORMATION FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 AND REPORT OF BOLINGER, SEGARS, GILBERT & MOSS, L.L.P. LUBBOCK, TEXAS

5 BANDERA, TEXAS FINANCIAL STATEMENTS WITH ACCOMPANYING INFORMATION FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 AND REPORT OF

6 BANDERA, TEXAS FINANCIAL STATEMENTS WITH ACCOMPANYING INFORMATION FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 TABLE OF CONTENTS Statement Identification Page No. Independent Auditor s Report 1 Financial Statements Balance Sheet Exhibit A 3 Statement of Income and Patronage Capital Exhibit B 4 Statement of Cash Flows Exhibit C 5 Notes to Financial Statements 6 Accompanying Information Independent Auditor s Report on Accompanying Information 17 Electric Plant Schedule 1 18 Schedule of Accumulated Provision for Depreciation Schedule 2 19 Other Property and Investments Schedule 3 20 Patronage Capital Schedule 4 21 CFC Mortgage Notes Schedule 5 22 Administrative and General Expenses Schedule 6 23 Compliance Section Letter to Board of Directors Regarding Policies Concerning Audits of CFC Borrowers 24

7 BOLINGER, SEGARS, GILBERT & MOSS, L.L.P. certified public accountants PHONE: (806) FAX: (806) Nashville Avenue LUBBOCK, TEXAS INDEPENDENT AUDITOR S REPORT Board of Directors Bandera Electric Cooperative, Inc. Bandera, Texas Report on the Financial Statements We have audited the accompanying financial statements of Bandera Electric Cooperative, Inc. (the Cooperative), which comprise the balance sheets as of December 31, 2013 and 2012, and the related statements of income and patronage capital 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. 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 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 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 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. -1-

8 -2- Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Bandera Electric Cooperative, Inc. as of December 31, 2013 and 2012, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Certified Public Accountants Lubbock, Texas March 6, 2014

9 -3- BALANCE SHEET DECEMBER 31, 2013 AND 2012 Exhibit A ASSETS December 31, UTILITY PLANT AT COST Electric Plant in Service $ 202,156,353 $ 196,109,515 Construction Work in Progress 597, ,008 $ 202,753,806 $ 197,012,523 Less: Accumulated Provision for Depreciation 49,330,201 44,183,617 $ 153,423,605 $ 152,828,906 OTHER PROPERTY AND INVESTMENTS - AT COST OR STATED VALUE Investments in Associated Organizations $ 4,629,985 $ 4,512,160 Other Investments 11,363 12,402 $ 4,641,348 $ 4,524,562 CURRENT ASSETS Cash - General $ 955,736 $ 576,564 Accounts Receivable (Less allowance for uncollectibles of $353,997 in 2013 and $223,176 in 2012) 2,779,339 1,924,687 Accrued Unbilled Revenue 1,258,307 1,253,109 Underbilled Fuel Cost Recovery 331, ,509 Materials and Supplies Inventory 79,259 86,225 Other Current and Accrued Assets 261, ,514 Total Current Assets $ 5,665,307 $ 4,364,608 DEFERRED CHARGES $ 2,438,981 $ 684,594 TOTAL ASSETS $ 166,169,241 $ 162,402,670 EQUITIES AND LIABILITIES EQUITIES Memberships $ 555,205 $ 546,795 Patronage Capital 49,162,469 49,574,928 Other Equities 1,120, ,850 Accumulated Other Comprehensive Loss (970,516) (1,054,806) $ 49,867,944 $ 50,056,767 LONG-TERM DEBT CFC Mortgage Notes Less Current Maturities $ 92,133,544 $ 88,255,159 ACCUMULATED PROVISION FOR PENSIONS AND BENEFITS $ 7,503,976 $ 7,033,123 CURRENT LIABILITIES Current Maturities of Long-Term Debt $ 4,377,833 $ 3,851,088 Line of Credit 1,135,000 Accounts Payable 4,512,975 4,087,443 Consumer Deposits and Prepayments 655, ,387 Other Current and Accrued Liabilities 1,051,594 1,161,418 Total Current Liabilities $ 10,598,376 $ 10,777,336 DEFERRED CREDITS $ 6,065,401 $ 6,280,285 TOTAL EQUITIES AND LIABILITIES $ 166,169,241 $ 162,402,670 See accompanying notes to financial statements.

10 -4- STATEMENT OF INCOME AND PATRONAGE CAPITAL FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 Exhibit B December 31, Increase Amount % Amount % (Decrease) OPERATING REVENUES Residential $ 42,573, $ 41,073, $ 1,500,575 Irrigation 113, , (3,379) Commercial and Industrial 14,973, ,826, ,403 Public Street and Highway Lighting 38, , ,004 Unbilled Revenue 5, (756,707) (1.3) 761,906 Other Operating Revenues 4,382, ,306, ,861 Total Operating Revenues $ 62,086, $ 59,602, $ 2,483,370 OPERATING EXPENSES Purchased Power $ 37,898, $ 36,442, $ 1,455,967 Transmission - Operation 600, , ,216 Distribution - Operation 3,638, ,698, (59,724) Distribution - Maintenance 2,384, ,104, ,397 Consumer Accounts 1,676, ,619, ,392 Customer Service and Information 262, , ,930 Administrative and General 4,801, ,978, ,915 Depreciation and Amortization 6,815, ,325, ,530 Other Interest 2, ,439 Miscellaneous Income Deductions 117, , (122,964) Total Operating Expenses $ 58,198, $ 55,077, $ 3,121,098 OPERATING MARGINS - Before Fixed Charges $ 3,888, $ 4,525, $ (637,728) FIXED CHARGES Interest on Long-Term Debt $ 3,613, $ 3,488, $ 125,587 Amortization of Gain on Reacquired Debt (232,584) (0.4) (241,997) (0.4) 9,413 $ 3,381, $ 3,246, $ 135,000 OPERATING MARGINS - After Fixed Charges $ 506, $ 1,279, $ (772,728) Capital Credits 593, , ,989 NET OPERATING MARGINS $ 1,100, $ 1,690, $ (589,739) NON-OPERATING MARGINS Interest Income $ 70, $ 70, $ (130) Other Non-operating Income 67, , ,127 $ 138, $ 91, $ 46,997 NET MARGINS $ 1,238, $ 1,781, $ (542,742) OTHER COMPREHENSIVE INCOME Current Year APBO Valuation Adjustment (868,106) Post-retirement Benefit Amortization 84,290 62,600 COMPREHENSIVE INCOME $ 1,322,977 $ 975,923 Post-retirement Benefit Adjustment (84,290) 805,506 NET MARGINS $ 1,238,687 $ 1,781,429 PATRONAGE CAPITAL - BEGINNING OF YEAR 49,574,928 49,875,518 Patronage Capital Retired (1,651,146) (2,082,019) PATRONAGE CAPITAL - END OF YEAR $ 49,162,469 $ 49,574,928 See accompanying notes to financial statements.

11 -5- STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 Exhibit C December 31, CASH FLOWS FROM OPERATING ACTIVITIES Net Margins $ 1,238,687 $ 1,781,429 Adjustments to Reconcile Net Margins to Net Cash Provided by Operating Activities Depreciation and Amortization 7,330,728 6,642,531 Amortized Gain on Retirement of RUS Debt (232,584) (241,997) Capital Credits - Non Cash (593,695) (410,706) Accumulated Provision for Pensions and Benefits Accrual 882, ,902 Deferred Charges (1,754,386) (367,841) Deferred Credits 17,700 (877,428) Accounts Receivable (859,850) 1,937,127 Power Cost Adjustments (151,757) 75,911 Inventories and Prepaid Expenses 90, ,735 Payables and Accrued Expenses 429,292 (1,556,776) Net Cash Provided by Operating Activities $ 6,397,062 $ 7,733,887 CASH FLOWS FROM INVESTING ACTIVITIES Additions to Utility Plant $ (7,429,729) $ (9,979,096) Plant Removal Costs (in Excess of) Salvage and Other Credits (495,697) (614,973) Other Property and Investments 476, ,843 Net Cash Used in Investing Activities $ (7,448,516) $ (10,333,226) CASH FLOWS FROM FINANCING ACTIVITIES Short-Term Lines of Credit Activity - Net $ (1,135,000) $ 1,012,988 Payments on Long-Term Debt to CFC (3,923,443) (3,330,735) Advances on CFC Long-Term Debt 8,328,573 7,500,000 Payments on Accumulated Provision for Pensions and Benefits (327,704) (365,984) Other Equities 130, ,406 Retirement of Patronage Capital (1,651,146) (2,082,019) Increase in Memberships - Net 8,410 10,875 Net Cash Provided by Financing Activities $ 1,430,626 $ 2,852,531 INCREASE IN CASH AND CASH EQUIVALENTS $ 379,172 $ 253,192 CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 576, ,372 CASH AND CASH EQUIVALENTS - END OF YEAR $ 955,736 $ 576,564 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash Paid During the Year for: Interest on Long-Term Debt $ 3,716,979 $ 3,629,261 Income Taxes $ 0 $ 0 The adjustment for the application of post-retirement benefit accounting increased (decreased) the accrued postretirement benefit liability by ($84,290) and $805,506, and changed equities by the same amount for 2013 and 2012, respectively. See accompanying notes to financial statements.

12 -6- NOTES TO FINANCIAL STATEMENTS 1. Nature of Operations and Summary of Significant Accounting Policies Nature of Operations Bandera Electric Cooperative, Inc. (the Cooperative) is a non-profit company organized to provide electric service at the retail level to primarily residential and commercial accounts in a designated service area. Power delivered at retail is purchased wholesale from the Lower Colorado River Authority and other suppliers. Any revenues earned in excess of costs incurred are allocated to members of the Cooperative and are reflected as patronage capital in the balance sheet. System of Accounts The accounting records of the Cooperative are maintained in accordance with the Uniform System of Accounts as prescribed by the Federal Energy Regulatory Commission for Class A and B electric utilities modified for electric borrowers of the National Rural Utilities Cooperative Finance Corporation (CFC). 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. Cash and Cash Equivalents For purposes of the statement of cash flows, cash and temporary cash investments are considered cash and cash equivalents. Accounts Receivable In the normal course of business the Cooperative recognizes accounts receivable for energy delivered and billed. The Cooperative allows 16 days from the date of the bill for payment to be received or the service is considered delinquent. Delinquent accounts receive a penalty of five percent. If no payment is received within 24 days or a deferred payment agreement is not in place, the account is subject to disconnect. The Cooperative provides an allowance for doubtful accounts to recognize the portion of receivables considered uncollectible. The Cooperative accrues amounts monthly to the allowance. The allowance is estimated based on historical trends, aging of receivables and review of potential bad debts. The Board of Directors reviews delinquent accounts annually and charges off accounts over two years old.

13 -7- NOTES TO FINANCIAL STATEMENTS Inventories Materials and supplies inventories are valued at average unit cost. Electric Revenues Certain aspects of the Cooperative s operations are under the jurisdiction of the Public Utility Commission of Texas; however, the Cooperative is no longer regulated for ratemaking purposes. The Cooperative records electric revenues as billed to customers on a monthly basis. Revenue is also accrued for power delivered but not billed at the end of each month. The Cooperative's tariffs for electric service include power cost adjustment clauses under which billings to customers are adjusted to reflect changes in the cost of purchased power. In order to match power cost and related revenues, underbilled power cost to be billed to consumers in subsequent periods is recognized as a current asset - "Underbilled Fuel Cost Adjustment" and as an increase of classified operating revenues on the statement of income and patronage capital. Also, overbilled power cost to be credited to consumers in subsequent periods is recognized as a current liability - "Overbilled Fuel Cost Adjustment" and as a reduction of classified operating revenues on the statement of income and patronage capital. The Cooperative had under collected power cost of $331,266 and $179,509 at December 31, 2013 and 2012, respectively. Income Tax Status The Cooperative is an exempt organization for federal income tax purposes under Section 501(c)(12) of the Internal Revenue Code. The Cooperative has adopted the uncertain tax positions provisions of accounting principles generally accepted in the United States of America. The primary tax position of the Cooperative is its filing status as a tax exempt entity. The Cooperative determined that it is more likely than not that their tax positions will be sustained upon examination by the Internal Revenue Service (IRS), or other State taxing authority and that all tax benefits are likely to be realized upon settlement with taxing authorities. The Cooperative files income tax returns in the U.S. federal jurisdiction. The Cooperative is no longer subject to U.S. federal and state income tax examinations by federal taxing authorities for years before The Cooperative recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. There were no penalties or interest recognized during the years ended December 31, 2013 and Group Concentration of Credit Risk The Cooperative's headquarters facility is located in Bandera, Texas. The service area includes members located in substantially all or parts of a seven county area surrounding the City of Bandera. The Cooperative records a receivable for electric revenues as billed on a monthly basis. The Cooperative may require a deposit from new members upon connection which is applied to unpaid bills and fees in the event of default. The deposit accrues interest annually and is returned along with accrued interest after one year of prompt payments. As of December 31, 2013 and 2012, deposits on hand totaled $655,974 and $542,387, respectively.

14 -8- NOTES TO FINANCIAL STATEMENTS The Cooperative maintains its cash balances in institutions insured by the Federal Deposit Insurance Corporation (FDIC). The cash balances exceeded applicable insurance coverage at times during the year. Patronage Capital Certificates Patronage capital from associated organizations is recorded at the stated amount of the certificate. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. Assets Pledged All assets are pledged as security for the long-term debt due the National Rural Utilities Cooperative Finance Corporation. 3. Electric Plant The major classes of electric plant are as follows: December 31, Transmission Plant $ 23,485,050 $ 23,388,427 Distribution Plant 154,958, ,850,989 General Plant 23,713,149 22,870,099 Total Electric Plant in Service $ 202,156,353 $ 196,109,515 Construction Work in Progress 597, ,008 Total Electric Plant $ 202,753,806 $ 197,012,523 Provision for depreciation of electric plant is computed using straight-line rates as follows: Transmission Plant 2.75% Distribution Plant 2.75% General Plant Structures and Improvements 2.00% % Office Furniture and Fixtures 7.00% % Transportation Equipment 6.70% % Store Equipment 20.00% Power Operated Equipment 5.00% % Communications Equipment 5.40% % Miscellaneous Equipment 6.00% % Tools, Shop, and Garage Equipment 6.00% % Laboratory Equipment 6.00% %

15 -9- NOTES TO FINANCIAL STATEMENTS Depreciation and amortization for the years ended December 31, 2013 and 2012, was $7,330,728 and $6,642,531, respectively, of which $6,815,693 and $6,625,163, was charged to depreciation expense and $515,035 and $317,368, was allocated to other accounts. 4. Investments in Associated Organizations Investments in associated organizations consisted of: December 31, CFC Capital Term Certificates $ 1,647,109 $ 1,675,858 Patronage Capital 1,615,839 1,456,817 Member Capital Securities 500, ,000 Hill Country Telephone Patronage Capital 82,267 73,553 Texas Electric Cooperatives, Inc. Patronage Capital 738, ,920 Other 45,823 45,012 Total $ 4,629,985 $ 4,512, Inventories Materials and supplies inventories consisted of: December 31, Construction Materials and Supplies $ 39,676 $ 39,676 Resale Material 39,583 46,549 Total $ 79,259 $ 86,225 Texas Electric Cooperative (TEC) sells material to the Cooperative as needed, thus reducing the need to carry large inventory balances. The Cooperative is also currently represented on the Board of TEC.

16 -10- NOTES TO FINANCIAL STATEMENTS 6. Deferred Charges Deferred charges included the following: December 31, RS Plan Prepayment $ 2,102,740 $ Work Plans 219, ,125 Automated Staking 37,335 78,065 Software Training 58,481 99,762 Other 21, ,642 Total $ 2,438,981 $ 684,594 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 the 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 25%, retroactive to January 1, The 25% differential in 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. In 2013, the Cooperative elected to participate in the NRECA RS Plan Prepayment. The Cooperative s original contribution was $2,328,573 and is being amortized over 10 years. Amortization expense for the year ended December 31, 2013 was $225, Return of Capital The mortgage agreements contain provisions that must be met for the Cooperative to make patronage capital retirements. These provisions include minimum equity, debt service, and earnings ratios. The Cooperative is in compliance with these provisions at December 31, 2013 and Patronage capital totaling $1,651,146 and $2,082,019 was retired during 2013 and 2012, respectively.

17 -11- NOTES TO FINANCIAL STATEMENTS 8. Patronage Capital December 31, Assigned $ 47,923,782 $ 47,793,499 Assignable 1,238,687 1,781,429 Total $ 49,162,469 $ 49,574, Other Equities December 31, Capital Credits Payable - Under $5 $ 21,730 $ 20,643 Retired Capital Credits - Gain - Estates 1,099, ,207 Total $ 1,120,786 $ 989, Mortgage Notes CFC and Notes Under CFC Management Following is a summary of long-term debt due CFC and those under CFC management but owned by Farmer Mac and maturing at various times from 2015 to 2043: December 31, Variable Rate Notes - Currently 1.27% $ 26,483,878 $ 21,831,890 Fixed Rate Notes % to 7.19% 70,027,499 70,274,357 $ 96,511,377 $ 92,106,247 Less: Current Maturities 4,377,833 3,851,088 Total $ 92,133,544 $ 88,255,159 Principal and interest installments on the above notes are due quarterly and semiannually. Annual maturities of long-term debt due CFC for the next five years are as follows: 2014 $ 4,377, ,505, ,662, ,802, ,848,059 The Cooperative has $20,080,126 available from unadvanced funds.

18 -12- NOTES TO FINANCIAL STATEMENTS 11. Short-Term Borrowing The Cooperative has a line of credit at a variable interest rate with CFC not to exceed $20,000,000 and with CoBank not to exceed $10,000,000. The balance outstanding at December 31, 2013 and 2012, was $0 and $1,135,000, respectively. Interest paid is capitalized as part of work order capitalization. The Cooperative capitalized $91,631 and $134,939 for 2013 and 2012, respectively. 12. Deferred Credits Deferred credits include the following: December 31, Refundable Aid to Construction $ 3,573,852 $ 3,899,099 Undeliverable Checks Returned 1,101, ,846 Scholarship Fund 52,000 39,433 Unamortized Gain on Reacquired Debt 1,223,930 1,456,513 Other 114, ,394 Total $ 6,065,401 $ 6,280,285 The Cooperative realized a gain in 1987 of $8,767,919 from the discount realized on the buyout of long-term debt to RUS. This amount is classified as a deferred credit and will be amortized over the remaining life of the prepaid RUS debt. Amortization for 2013 and 2012 was $232,583 and $241,997, respectively. 13. Litigation and Commitments There was no litigation pending against the Cooperative at December 31, 2013, that could have a material effect on the financial statements. 14. Pension Benefits Narrative Description The National Rural Electric Cooperative Association (NRECA) Retirement Security Plan (RS Plan) 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 multiemployer 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.

19 -13- NOTES TO FINANCIAL STATEMENTS Plan Information Bandera Electric Cooperative, Inc. contributions to the RS Plan in 2013 and 2012 represented less than 5 percent of the total contributions made to the plan by all participating employers. Bandera Electric Cooperative, Inc. made contributions to the plan of $3,004,829 in 2013 and $830,325 in Contributions in 2013 are significantly higher than those in 2012 due to the Cooperative electing to participate in the prepayment option offered to participating employers in Pension expense for the years ended December 31, 2013 and 2012, including amortization were $902,089 and $830,325, respectively 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 at 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. In addition, the Cooperative provides retirement benefits through a 401k plan that is administered by NRECA SelectRe Pension plan. The Cooperative provides matching funds up to six percent of an employee s salary. The cost of this plan for 2013 and 2012 was $259,790 and $244,269, respectively. 15. Post-retirement Benefits Other Than Pensions Accounting principles generally accepted in the United States of America require an employer that sponsors a defined benefit post-retirement plan to report the current economic status (the overfunded or underfunded status) of the plan in its balance sheet, to measure the plan assets and plan obligations as of the balance sheet date, and to include enhanced disclosures about the plan. Benefits are paid on behalf of retirees and are a function of medical insurance costs and number of retirees. Benefits paid for the years ended December 31, 2013 and 2012, were $337,561 and $364,783, respectively. The measurement date used for the current valuation is December 31, 2012.

20 -14- NOTES TO FINANCIAL STATEMENTS Amounts recognized in the Cooperative's financial statements and funded status of the plan are as follows: December 31, Accumulated Post-retirement Benefit Obligation (APBO) Balance at Beginning of Year $ 7,033,123 $ 5,943,700 Service Cost 533, ,510 Interest Cost 274, ,791 Adjustment to Net Loss/Gain 868,106 Less Premiums Paid (337,559) (365,984) Net Post-retirement Benefit Obligation at Year End $ 7,503,976 $ 7,033,123 Net Periodic Post-retirement Benefit Cost Includes: Service Cost $ 533,487 $ 310,510 Interest Cost 274, ,791 Amortization of Transition Obligation 84,290 62,600 Total $ 892,702 $ 649,901 Accumulated Other Comprehensive Loss Actuarial Loss - Beginning of Year $ (1,054,806) $ (249,300) Transition Obligation Amortization 84,290 62,600 Adjustment to Net Actuarial Loss/Gain (868,106) Other Comprehensive Loss $ (970,516) $ (1,054,806) A 10.00% annual increase for medical and a 5.00% annual increase for dental benefits in per capita costs was assumed for 2013, gradually decreasing to 5.00% by the year A weighted average discount rate of 4.00% was used to determine the APBO. The Cooperative has not funded any plan assets as of December 31, 2013 or Estimated future benefit payments for the next five years are as follows: 2014 $ 370, , , , , ,300,000

21 -15- NOTES TO FINANCIAL STATEMENTS 16. Disclosures About Fair Value of Financial Statements Many of the Cooperative s financial instruments lack an available market with similar terms, conditions, and maturities as those reflected in the carrying amount recorded. Accordingly, significant assumptions, estimations, and present value calculations were used for purposes of this disclosure. Estimated Fair Value has been determined by calculating the present value of financial instruments using the best data available. Fair Value for some amounts carried on the financial statements has not been calculated for the following reasons: Patronage Capital from Associated Organizations The right to receive cash is an inherent component of a financial instrument. The Cooperative holds no right to receive cash since any payments are at the discretion of the governing body for the associated organizations. As such, Patronage Capital from Associated Organizations are not considered financial instruments. CFC Capital Term Certificates and Member Capital Securities It is not practicable to estimate fair value for these financial instruments given the lack of a market and their long holding period. Relevant information with respect to these are as follows: Interest Amount Rate Maturity $ 86, % 2025 to , % , % , % , % , % 2014 to , % 2044 $ 2,147,109 Cash and Temporary Cash Investments The recorded book value approximates fair value given the short period to maturity.

22 -16- NOTES TO FINANCIAL STATEMENTS The estimated fair value of the Cooperative s financial instruments is as follows: Long-Term Debt Fixed Rate The fair value of the Cooperative s CFC Fixed Rate long-term debt is calculated by computing the present value of the individual notes to maturity. The discount rate used is the currently available CFC fixed interest rate available for long-term debt repricing at the same maturity as the current debt. Carrying Fair Value Value December 31, 2013: CFC $ 70,027,499 $ 62,910,410 Fair Value Hierarchy The Fair Value Measurements Topic of the FASB Accounting Standards Codification establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows: Level 1 - Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Cooperative has the ability to access at the measurement date. Level 2 - Inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 - Inputs are unobservable inputs for the asset or liability. Long-Term Debt valuations are considered Level Subsequent Events The Cooperative has evaluated subsequent events through March 6, 2014, the date which the financial statements were available to be issued.

23 ACCOMPANYING INFORMATION

24 BOLINGER, SEGARS, GILBERT & MOSS, L.L.P. certified public accountants PHONE: (806) FAX: (806) Nashville Avenue LUBBOCK, TEXAS INDEPENDENT AUDITOR S REPORT ON ACCOMPANYING INFORMATION We have audited the financial statements of Bandera Electric Cooperative, Inc., as of and for the years ended 2013 and 2012, and our report thereon dated March 6, 2014, which expressed an unmodified opinion on those financial statements, appears on page 1. Our audit was conducted for the purpose of forming an opinion on the financial statements taken as a whole. The schedule of electric plant, accumulated provision for depreciation, other property and investments, patronage capital, CFC mortgage notes, and administrative and general expenses, are presented for purposes of additional analysis and are not a required part of the financial statements. Such information 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. The 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. Certified Public Accountants Lubbock, Texas March 6,

25 -18- ELECTRIC PLANT FOR THE YEAR ENDED DECEMBER 31, 2013 Schedule 1 Balance Balance 1/1/2013 Additions Retirements 12/31/2013 CLASSIFIED ELECTRIC PLANT IN SERVICE Transmission Plant Land and Land Rights $ 51,024 $ $ $ 51,024 Structures and Improvements 172, ,820 Station Equipment 9,075,162 96,760 9,171,922 Poles, Towers, and Fixtures 6,502, ,502,486 Overhead Conductors and Devices 7,586,798 7,586,798 Total $ 23,388,427 $ 96,760 $ 137 $ 23,485,050 Distribution Plant Land and Land Rights $ 203,690 $ 1,340 $ $ 205,030 Structures and Improvements 916, ,416 Station Equipment 12,418,127 12,418,127 Poles, Towers, and Fixtures 47,478,413 1,766, ,940 49,104,011 Overhead Conductors and Devices 45,577,281 1,837, ,900 47,300,193 Underground Conductors and Devices 6,715, ,702 45,198 7,223,818 Line Transformers 27,973,780 1,602, ,747 29,109,540 Services 1,569,457 1,569,457 Meters 5,191, ,134 81,280 5,308,202 Installations on Consumer Premises 1,795,598 78,980 82,783 1,791,795 Street Lighting 11,565 11,565 Total $ 149,850,989 $ 6,039,013 $ 931,848 $ 154,958,154 General Plant Land and Land Rights $ 150,217 $ $ $ 150,217 Structures and Improvements 8,181, ,835 3,900 8,428,101 Office Furniture and Equipment 8,361, , ,491 8,653,422 Transportation Equipment 2,049, , ,885 2,193,864 Store Equipment 2,537 2,537 Tools, Shop, and Garage Equipment 137, ,619 Laboratory Equipment 233, ,258 Power Operated Equipment 2,034, ,523 40,625 2,232,557 Communications Equipment 1,236,686 62,134 1,174,552 Miscellaneous Equipment 482,351 25, ,022 Total $ 22,870,099 $ 1,599,512 $ 756,462 $ 23,713,149 Total Classified Electric Plant in Service $ 196,109,515 $ 7,735,285 $ 1,688,447 $ 202,156,353 Construction Work in Progress 903,008 (305,555) 597,453 Total Utility Plant $ 197,012,523 $ 7,429,730 $ 1,688,447 $ 202,753,806

26 -19- SCHEDULE OF ACCUMULATED PROVISION FOR DEPRECIATION FOR THE YEAR ENDED DECEMBER 31, 2013 Schedule 2 Balance Balance 1/1/2013 Accruals Retirements 12/31/2013 Transmission Plant $ 4,034,029 $ 643,282 $ 355 $ 4,676,956 Distribution Plant $ 32,556,573 $ 4,451,931 $ 1,433,959 $ 35,574,545 General Plant Structures and Improvements $ 1,626,551 $ 405,007 $ 3,900 $ 2,027,658 Office Furniture and Fixtures 3,195,054 1,135, ,568 3,950,160 Transportation Equipment 1,112, , ,885 1,158,100 Store Equipment 2,537 2,537 Tools, Shop, and Garage Equipment 125,219 3, ,681 Laboratory Equipment 185,768 13, ,235 Power Operated Equipment 1,012, ,130 19,184 1,194,581 Communication Equipment 109,580 57,394 61, ,169 Miscellaneous Equipment 159, , ,617 Outage Management Equipment 108,871 2, ,871 Total General Plant $ 7,637,863 $ 2,235,515 $ 733,769 $ 9,139,609 Total Classified Electric Plant in Service $ 44,228,465 $ 7,330,728 $ 2,168,083 $ 49,391,110 Retirement Work in Progress (44,848) 16,061 (60,909) Total $ 44,183,617 $ 7,330,728 $ 2,184,144 $ 49,330,201 (1) (2) (1) Depreciation Charged to Expense $ 6,815,693 Charged to Clearing 515,035 $ 7,330,728 (2) Net Loss on Retirement Original Cost $ 1,688,447 Cost of Removal 528,747 Less: Salvage and Other Credits 33,050 $ 2,184,144

27 -20- OTHER PROPERTY AND INVESTMENTS FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 Schedule 3 December 31, INVESTMENTS IN ASSOCIATED ORGANIZATIONS Memberships Associated Organizations $ 2,760 $ 2,760 Patronage Capital NRUCFC 1,615,839 1,456,817 NRTC 40,709 40,051 Texas Electric Cooperatives, Inc. 738, ,920 Guadalupe Valley 2,354 2,201 Hill Country Telephone 82,267 73,553 Capital Term Certificates CFC 1,647,109 1,675,858 Member Capital Securities CFC 500, ,000 Total $ 4,629,985 $ 4,512,160

28 -21- PATRONAGE CAPITAL FOR THE YEAR ENDED DECEMBER 31, 2013 Schedule 4 Patronage Reductions Non Cash Cash Capital Calendar 12/31/2012 Discounts on Payments on Credits 12/31/2013 Year Balance Assignable Estates Estates Retired Balance 1985 $ 1,246,168 $ $ 163 $ 3,103 $ 1,239,293 $ 3, ,223,972 1,131 10,182 1,212, ,277,779 1,549 9,513 1,266, ,146,540 1,712 7,798 1,137, ,116,217 2,049 7,265 1,106, ,707 1,918 5, , ,292,020 3,003 7,007 1,282, ,504,440 3,693 7,498 1,493, ,924,961 5,288 9,401 1,910, ,413,176 3,984 6,231 1,402, ,593,866 4,498 6,211 1,583, ,583,682 4,606 5,629 1,573, ,452,453 4,296 4,653 1,443, ,334,259 4,056 3,897 1,326, ,074,546 3,150 2,793 1,068, ,873 2,428 1, , ,087,799 12,545 9,464 4,065, ,053,197 9,591 6,665 3,036, ,912,127 8,782 5,615 2,897, ,088,299 12,348 7,252 4,068, ,172,867 6,664 3,588 2,162, ,097,766 6,019 3,430 2,088, ,151,525 6,467 2,905 2,142, ,604,167 4,664 1,905 1,597, ,334,308 3,618 1,338 1,329, ,348,785 8,648 2,883 3,337, ,781,429 2, ,790 1,640, ,238,687 1,238,687 $ 49,574,928 $ 1,238,687 $ 129,582 $ 144,481 $ 1,377,083 $ 49,162,469

29 Calendar Year Balance 2012 Expanded Shedule 4 from 2013 Audit Report 2013 Assignable Non Cash Discount on Estates & Trusts Cash Paid to Estates & Trusts Capital Credits Paid in 2014 Balance $1,246,168 $163 $3,103 $1,239,293 $3, ,223,972 1,131 10,182 1,212, ,277,779 1,549 9,513 1,266, ,146,540 1,712 7,798 1,137, ,116,217 2,049 7,265 1,106, ,707 1,918 5, , ,292,020 3,003 7,007 1,282, ,504,440 3,693 7,498 1,493, ,924,961 5,288 9,401 1,910, ,413,176 3,984 6,231 1,402, ,593,866 4,498 6,211 1,583, ,583,682 4,606 5,629 1,573, ,452,453 4,296 4,653 1,443, ,334,259 4,056 3,897 1,326, ,074,546 3,150 2,793 1,068, ,873 2,428 1, , ,087,799 12,545 9,464 4,065, ,053,197 9,591 6,665 3,036, ,912,127 8,782 5,615 2,897, ,088,299 12,348 7,252 4,068, ,172,867 6,664 3,588 2,162, ,097,766 6,019 3,430 2,088, ,151,525 6,467 2,905 2,142, ,604,167 4,664 1,905 1,597, ,334,308 3,618 1,338 1,329, ,348,785 8,648 2,883 3,337, ,781,429 2, ,788 1,640, ,238,684 1,238,684 Over/under Assigned 3 3 Total $49,574,928 $1,238,687 $129,582 $144,483 $1,377,081 $49,162,469

30 -22- CFC MORTGAGE NOTES DECEMBER 31, 2013 Schedule 5 DIRECT LOANS Note Maturity Interest Principal Amount Principal Net Number Date Rate Amount Unadvanced Repayments Obligation /1/ % $ 675,000 $ $ 617,577 $ 57, /1/ % 1,011, , , /1/ % 1,010, , , /1/ % 3,290,323 1,859,450 1,430, /30/ % 213, ,456 76, /30/ % 1,786,660 1,142, , /29/ % 3,000,000 1,236,485 1,763, /30/ % 3,000,000 1,989,529 1,010, /28/ % 3,000, ,257 2,045, /28/ % 3,000, ,257 2,045, /31/ % 3,000,000 1,521,248 1,478, /30/ % 3,000,000 1,165,574 1,834, /30/ % 1,986, ,579 1,222, /31/ % 1,013, , , /31/ % 1,756, ,745 1,148, /31/ % 1,243, , , /31/ % 1,939, ,501 1,256, /31/ % 1,060, , , /28/ % 1,171, , , /28/ % 1,285, , , /31/ % 543, , , /28/ % 1,240, ,373 1,031, /30/ % 1,249, , , /31/ % 509, , , /31/ % 1,106, , , /31/ % 1,893, ,181 1,543, /31/ % 2,165, ,023 1,836, /30/ % 835,000 86, , /30/ % 915,000 92, , /30/ % 1,750, ,001 1,580, /30/ % 1,750, ,941 1,598, /30/ % 1,750, ,941 1,598, /30/ % 2,000, ,114 1,837, /30/ % 3,000, ,540 2,764, /30/ % 3,000, ,662 2,766, /30/ % 2,338, ,641 2,164, /30/ % 2,283, ,664 2,137, /30/ % 1,213,234 80,936 1,132, /30/ % 528,448 35, , /30/ % 136,552 9, , /30/ % 3,000, ,891 2,789, /30/ % 3,000, ,127 2,772, /30/ % 122,431 8, , /30/ % 1,877, ,703 1,744, /30/ % 2,850,000 84,760 2,765, /30/ % 2,850,000 81,926 2,768, /30/2041 * 3.20% 380, , /30/2041 * 3.20% 919, , /30/ % 1,500,000 1,477, /30/ % 3,000,000 2,961, /30/ % 3,000,000 2,962, /17/ % 2,328, ,382 2,224, /21/2050 1,080,126 1,080, /16/ ,000,000 19,000,000 Total CFC - Direct $ 118,560,022 $ 20,080,126 $ 22,354,364 $ 70,027,499 LOANS UNDER MANAGEMENT Note Maturity Interest Principal Amount Principal Net Number Date Rate Amount Unadvanced Repayments Obligation FMD001 2/1/2025 * 1.27% $ 6,245,126 $ $ 1,348,252 $ 4,896,874 FMD001 9/1/2025 * 1.27% 11,250,000 11,250,000 FMD001 9/1/2025 * 1.27% 5,004, ,969 4,566,905 FMD001 9/1/2025 * 1.27% 2,812, ,434 2,439,066 FMD001 9/1/2025 * 1.27% 2,812, ,434 2,439,066 FMD001 9/1/2025 * 1.27% 2,812, ,434 2,439,066 FMD001 9/1/2025 * 1.27% 2,812, ,434 2,439,066 FMD001 3/1/2042 * 1.27% 1,300,000 36,165 1,263,835 FMD001 12/2/2043 * 1.27% 3,000,000 3,000,000 FMD001 12/2/2043 * 1.27% 3,000,000 3,000,000 Total CFC - Loans Under Management $ 41,050,000 $ 0 $ 14,566,122 $ 26,483,878 * Variable Interest Rate

31 -23- ADMINISTRATIVE AND GENERAL EXPENSES FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 Schedule 6 December 31, Administrative and General Salaries $ 1,507,974 $ 1,287,828 Office Supplies and Expenses 379, ,677 Outside Services Employed 724, ,850 Workmen's Compensation, General Liability, and Other Insurance 136, ,154 Employee Benefits 757, ,077 Directors' Fees and Expenses 186, ,367 Institutional and Goodwill Advertising 8,675 13,991 Dues to Associated Organizations 78,467 86,403 Annual Meeting Expense 90,047 86,681 Miscellaneous General Expenses 321, ,031 Regulatory Commission Expense 93,391 93,773 Maintenance of General Plant 516, ,616 Total $ 4,801,363 $ 3,978,448