BANDERA ELECTRIC COOPERATIVE, INC. BANDERA, TEXAS FINANCIAL STATEMENTS WITH ACCOMPANYING INFORMATION FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

Transcription

1 BANDERA, TEXAS FINANCIAL STATEMENTS WITH ACCOMPANYING INFORMATION FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013 AND REPORT OF BOLINGER, SEGARS, GILBERT & MOSS, L.L.P. LUBBOCK, TEXAS

2 BANDERA, TEXAS FINANCIAL STATEMENTS WITH ACCOMPANYING INFORMATION FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013 AND REPORT OF

3 BANDERA, TEXAS FINANCIAL STATEMENTS WITH ACCOMPANYING INFORMATION FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013 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

4 BOLINGER, SEGARS, GILBERT & MOSS, L.L.P. c e r t i f i e d p u b l i c a c c o u n t a n t s PHONE: (806) FAX: (806) Nashville Avenue LUBBOCK, TEXAS Independent Auditor s Report Board of Directors Bandera Electric Cooperative, Inc. Bandera, Texas We have audited the accompanying financial statements of Bandera Electric Cooperative, Inc. (the Cooperative), which comprise the balance sheets as of December 31, 2014 and 2013, 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-

5 -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, 2014 and 2013, 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 2, 2015

6 -3- BALANCE SHEET DECEMBER 31, 2014 AND 2013 Exhibit A ASSETS December 31, UTILITY PLANT AT COST Electric Plant in Service $ 204,550,337 $ 202,156,353 Construction Work in Progress 121, ,453 $ 204,672,277 $ 202,753,806 Less: Accumulated Provision for Depreciation 54,902,180 49,330,201 $ 149,770,097 $ 153,423,605 OTHER PROPERTY AND INVESTMENTS - AT COST OR STATED VALUE Investments in Associated Organizations $ 4,239,618 $ 4,629,985 Other Investments 7,757 11,363 $ 4,247,375 $ 4,641,348 CURRENT ASSETS Cash - General $ 2,330,994 $ 955,736 Accounts Receivable (Less allowance for uncollectibles of $430,661 in 2014 and $353,997 in 2013) 2,050,758 2,779,339 Accrued Unbilled Revenue 5,857,514 1,258,307 Underbilled Fuel Cost Recovery 998, ,266 Materials and Supplies Inventory 62,696 79,259 Other Current and Accrued Assets 645, ,400 Total Current Assets $ 11,945,911 $ 5,665,307 DEFERRED CHARGES $ 2,043,947 $ 2,438,981 TOTAL ASSETS $ 168,007,330 $ 166,169,241 EQUITIES AND LIABILITIES EQUITIES Memberships $ 562,785 $ 555,205 Patronage Capital 51,974,862 49,162,469 Other Equities 1,209,985 1,120,786 Accumulated Other Comprehensive Loss (886,222) (970,516) $ 52,861,410 $ 49,867,944 LONG-TERM DEBT CFC Mortgage Notes Less Current Maturities $ 86,139,982 $ 92,133,544 ACCUMULATED PROVISION FOR PENSIONS AND BENEFITS $ 7,548,271 $ 7,133,976 CURRENT LIABILITIES Current Maturities of Long-Term Debt $ 4,502,300 $ 4,377,833 Current Portion of APBO 410, ,000 Accounts Payable - General 983,909 1,001,036 Accounts Payable - Purchased Power 7,849,054 3,511,939 Consumer Deposits and Prepayments 723, ,974 Other Current and Accrued Liabilities 962,465 1,051,594 Total Current Liabilities $ 15,431,250 $ 10,968,376 DEFERRED CREDITS $ 6,026,417 $ 6,065,401 TOTAL EQUITIES AND LIABILITIES $ 168,007,330 $ 166,169,241 See accompanying notes to financial statements.

7 -4- STATEMENT OF INCOME AND PATRONAGE CAPITAL FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013 Exhibit B December 31, Increase Amount % Amount % (Decrease) OPERATING REVENUES Residential $ 48,044, $ 42,573, $ 5,470,839 Irrigation 122, , ,561 Commercial and Industrial 16,860, ,973, ,887,132 Public Street and Highway Lighting 32, , (6,007) Unbilled Revenue 4,599, , ,594,007 Other Operating Revenues 4,606, ,382, ,844 Total Operating Revenues $ 74,265, $ 62,086, $ 12,179,376 OPERATING EXPENSES Purchased Power $ 47,257, $ 37,898, $ 9,358,862 Transmission - Operation 473, , (127,310) Distribution - Operation 3,670, ,638, ,506 Distribution - Maintenance 1,189, ,384, (1,194,525) Consumer Accounts 1,581, ,676, (95,625) Customer Service and Information 226, , (36,418) Administrative and General 5,389, ,801, ,471 Depreciation and Amortization 7,006, ,815, ,125 Other Interest & Taxes 1, , (1,140) Miscellaneous Income Deductions 59, , (57,555) Total Operating Expenses $ 66,855, $ 58,198, $ 8,657,391 OPERATING MARGINS - Before Fixed Charges $ 7,409, $ 3,888, $ 3,521,985 FIXED CHARGES Interest on Long-Term Debt $ 3,430, $ 3,613, $ (183,181) Amortization of Gain on Reacquired Debt (230,701) (0.3) (232,584) (0.4) 1,883 $ 3,199, $ 3,381, $ (181,298) OPERATING MARGINS - After Fixed Charges $ 4,210, $ 506, $ 3,703,283 Capital Credits 552, , (41,689) NET OPERATING MARGINS $ 4,762, $ 1,100, $ 3,661,594 NON-OPERATING MARGINS Interest Income $ 42, $ 70, $ (27,430) Other Non-operating Income 9, , (58,358) $ 52,278 (0.0) $ 138, $ (85,788) NET MARGINS $ 4,814, $ 1,238, $ 3,575,806 OTHER COMPREHENSIVE INCOME Current Year APBO Valuation Adjustment Post-retirement Benefit Amortization 84,290 84,290 COMPREHENSIVE INCOME $ 4,898,783 $ 1,322,977 Post-retirement Benefit Adjustment (84,290) (84,290) NET MARGINS $ 4,814,493 $ 1,238,687 PATRONAGE CAPITAL - BEGINNING OF YEAR 49,162,469 49,574,928 Patronage Capital Retired (2,002,100) (1,651,146) PATRONAGE CAPITAL - END OF YEAR $ 51,974,862 $ 49,162,469 See accompanying notes to financial statements.

8 -5- STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013 Exhibit C December 31, CASH FLOWS FROM OPERATING ACTIVITIES Net Margins $ 4,814,493 $ 1,238,687 Adjustments to Reconcile Net Margins to Net Cash Provided by Operating Activities Depreciation and Amortization 7,532,218 7,330,728 Amortized Gain on Retirement of RUS Debt (230,701) (232,584) Capital Credits - Non Cash (552,006) (593,695) Accumulated Provision for Pensions and Benefits Accrual 892, ,847 Deferred Charges 395,034 (1,754,386) Deferred Credits 191,717 17,700 Accounts Receivable 847,444 (859,850) Power Cost Adjustments (5,385,204) (151,757) Inventories and Prepaid Expenses (367,586) 90,080 Payables and Accrued Expenses 4,298, ,292 Net Cash Provided by Operating Activities $ 12,436,520 $ 6,397,062 CASH FLOWS FROM INVESTING ACTIVITIES Additions to Utility Plant $ (3,603,970) $ (7,429,729) Plant Removal Costs (in Excess of) Salvage and Other Credits (274,740) (495,697) Other Property and Investments 945, ,910 Net Cash Used in Investing Activities $ (2,932,731) $ (7,448,516) CASH FLOWS FROM FINANCING ACTIVITIES Short-Term Lines of Credit Activity - Net $ $ (1,135,000) Payments on Long-Term Debt to CFC (5,869,095) (3,923,443) Advances on CFC Long-Term Debt 8,328,573 Payments on Accumulated Provision for Pensions and Benefits (354,115) (327,704) Other Equities 89, ,936 Retirement of Patronage Capital (2,002,100) (1,651,146) Increase in Memberships - Net 7,580 8,410 Net Cash Provided by (Used In) Financing Activities $ (8,128,531) $ 1,430,626 INCREASE IN CASH AND CASH EQUIVALENTS $ 1,375,258 $ 379,172 CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 955, ,564 CASH AND CASH EQUIVALENTS - END OF YEAR $ 2,330,994 $ 955,736 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash Paid During the Year for: Interest on Long-Term Debt $ 3,445,416 $ 3,716,979 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 changed equities by the same amount for 2014 and See accompanying notes to financial statements.

9 -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 Although the Cooperative is no longer an RUS borrower, its accounting records are maintained in accordance with the RUS Uniform System of Accounts (USOA) prescribed for RUS electric borrowers. 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. Inventories Materials and supplies inventories are valued at average unit cost.

10 -7- NOTES TO FINANCIAL STATEMENTS 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 $998,400 and $331,266 at December 31, 2014 and 2013, respectively. During 2014, the Cooperative received a corrected bill from its power supplier for approximately $7.2 million. This amount is being repaid over a 24 month period, and the unpaid portion of $4,718,070 is reflected in the balance sheet in accrued unbilled revenue and accounts payable purchased power. 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, 2014 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, 2014 and 2013, deposits on hand totaled $723,522 and $655,974, respectively.

11 -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 $ 23,495,716 $ 23,485,050 Distribution Plant 158,013, ,958,154 General Plant 23,040,933 23,713,149 Total Electric Plant in Service $ 204,550,337 $ 202,156,353 Construction Work in Progress 121, ,453 Total Electric Plant $ 204,672,277 $ 202,753,806 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% %

12 -9- NOTES TO FINANCIAL STATEMENTS Depreciation and amortization for the years ended December 31, 2014 and 2013, was $7,532,218 and $7,330,728, respectively, of which $7,006,818 and $6,815,693, was charged to depreciation expense and $525,400 and $515,035, was allocated to other accounts. 4. Investments in Associated Organizations Investments in associated organizations consisted of: December 31, CFC Capital Term Certificates $ 1,579,895 $ 1,647,109 Patronage Capital 1,761,467 1,615,839 Member Capital Securities 500,000 Hill Country Telephone Patronage Capital 90,849 82,267 Texas Electric Cooperatives, Inc. Patronage Capital 739, ,947 Other 68,044 45,823 Total $ 4,239,618 $ 4,629, Inventories Materials and supplies inventories consisted of: December 31, Construction Materials and Supplies $ 39,676 $ 39,676 Resale Material 23,020 39,583 Total $ 62,696 $ 79,259 Texas Electric Cooperative (TEC) sells material to the Cooperative as needed, thus reducing the need to carry large inventory balances.

13 -10- NOTES TO FINANCIAL STATEMENTS 6. Deferred Charges Deferred charges included the following: December 31, RS Plan Prepayment $ 1,886,740 $ 2,102,740 Work Plans 33, ,315 Automated Staking 37,335 Software Training 17,200 58,481 Other 106,198 21,110 Total $ 2,043,947 $ 2,438,981 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 2.5 times a cooperative s annual RS Plan required contribution as of January 1, After making the prepayment, for most cooperatives the billing rate is reduced by approximately 25%, retroactive to January 1, The 25% differential in billing rates is expected to continue for approximately 15 years. However, changes in interest rates, asset returns and other plan experience different from expected, plan assumption changes and other factors may have an impact on the differential in billing rates and the 15 year period. 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, 2014 and 2013 was $216,000 and $225,833, respectively. 7. 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, 2014 and Patronage capital totaling $2,002,100 and $1,651,146 was retired during 2014 and 2013, respectively. 8. Patronage Capital December 31, Assigned $ 47,160,369 $ 47,923,782 Assignable 4,814,493 1,238,687 Total $ 51,974,862 $ 49,162,469

14 -11- NOTES TO FINANCIAL STATEMENTS 9. Other Equities December 31, Capital Credits Payable - Under $5 $ 24,733 $ 21,730 Retired Capital Credits - Gain - Estates 1,185,252 1,099,056 Total $ 1,209,985 $ 1,120, 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 1.26% $ 25,033,242 $ 26,483,878 Fixed Rate Notes % to 7.19% 65,609,040 70,027,499 $ 90,642,282 $ 96,511,377 Less: Current Maturities 4,502,300 4,377,833 Total $ 86,139,982 $ 92,133,544 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: 2015 $ 4,502, ,655, ,791, ,931, ,657,210 The Cooperative has $20,080,126 available from unadvanced funds. 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, 2014 and 2013, was $0 and $0, respectively.

15 -12- NOTES TO FINANCIAL STATEMENTS 12. Deferred Credits Deferred credits include the following: December 31, Refundable Aid to Construction $ 3,279,514 $ 3,573,852 Undeliverable Checks Returned 1,642,000 1,101,612 Scholarship Fund 35,567 52,000 Unamortized Gain on Reacquired Debt 993,229 1,223,930 Other 76, ,007 Total $ 6,026,417 $ 6,065,401 The Cooperative realized a gain in 1987 of $8,767,919 from the discount realized on the buyout of longterm 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 2014 and 2013 was $230,701 and $232,583, respectively. 13. Litigation and Commitments There was no litigation pending against the Cooperative at December 31, 2014, 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. Plan Information Bandera Electric Cooperative, Inc. contributions to the RS Plan in 2014 and 2013 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 $622,393 in 2014 and $3,004,829 in Contributions in 2013 are significantly higher than those in 2014 due to the Cooperative electing to participate in the prepayment option offered to participating employers in Pension expense for the years ended December 31, 2014 and 2013, including amortization were $838,393 and $902,089, respectively.

16 -13- NOTES TO FINANCIAL STATEMENTS 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% funded at January 1, 2014 and over 80% funded at January 1, 2013 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 401(k) 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 2014 and 2013 was $256,811 and $259,790, 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, 2014 and 2013, were $354,115 and $337,561, respectively. The measurement date used for the current valuation is December 31, 2012.

17 -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 $ 7,503,976 $ 7,033,123 Service Cost 533, ,487 Interest Cost 274, ,925 Adjustment to Net Loss/Gain Less Premiums Paid (354,117) (337,559) Net Post-retirement Benefit Obligation at Year End $ 7,958,271 $ 7,503,976 Net Periodic Post-retirement Benefit Cost Includes: Service Cost $ 533,487 $ 533,487 Interest Cost 274, ,925 Amortization of Transition Obligation 84,294 84,290 Total $ 892,706 $ 892,702 Accumulated Other Comprehensive Loss Actuarial Loss - Beginning of Year $ (970,516) $ (1,054,806) Transition Obligation Amortization 84,294 84,290 Adjustment to Net Actuarial Loss/Gain Other Comprehensive Loss $ (886,222) $ (970,516) 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, 2014 or Estimated future benefit payments for the next five years are as follows: 2015 $ 410, , , , , ,830, 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.

18 -15- NOTES TO FINANCIAL STATEMENTS 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 is as follows: Interest Amount Rate Maturity $ 86, % 2025 to , % , % , % , % , % 2014 to 2044 $ 1,579,895 Cash and Temporary Cash Investments The recorded book value approximates fair value given the short period to maturity. 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, 2014: CFC $ 65,609,040 $ 63,363,416

19 -16- NOTES TO FINANCIAL STATEMENTS 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 2, 2015, the date which the financial statements were available to be issued.

20 ACCOMPANYING INFORMATION

21 BOLINGER, SEGARS, GILBERT & MOSS, L.L.P. c e r t i f i e d p u b l i c a c c o u n t a n t s 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 2014 and 2013, and our report thereon dated March 2, 2015, 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 2,

22 -18- ELECTRIC PLANT FOR THE YEAR ENDED DECEMBER 31, 2014 Schedule 1 Balance Balance 1/1/2014 Additions Retirements 12/31/2014 CLASSIFIED ELECTRIC PLANT IN SERVICE Transmission Plant Land and Land Rights $ 51,024 $ $ $ 51,024 Structures and Improvements 172, ,820 Station Equipment 9,171,922 9,171,922 Poles, Towers, and Fixtures 6,502,486 10, ,513,152 Overhead Conductors and Devices 7,586,798 7,586,798 Total $ 23,485,050 $ 10,754 $ 88 $ 23,495,716 Distribution Plant Land and Land Rights $ 205,030 $ 1,326 $ $ 206,356 Structures and Improvements 916, ,416 Station Equipment 12,418, ,215 12,905,342 Poles, Towers, and Fixtures 49,104, , ,260 49,956,382 Overhead Conductors and Devices 47,300, ,403 93,744 48,067,852 Underground Conductors and Devices 7,223, ,860 12,090 7,339,588 Line Transformers 29,109,540 1,313, ,553 29,936,192 Services 1,569,457 1,569,457 Meters 5,308,202 3,987 5,312,189 Installations on Consumer Premises 1,791,795 54,937 54,383 1,792,349 Street Lighting 11,565 11,565 Total $ 154,958,154 $ 3,814,564 $ 759,030 $ 158,013,688 General Plant Land and Land Rights $ 150,217 $ $ $ 150,217 Structures and Improvements 8,428,101 13,255 36,960 8,404,396 Office Furniture and Equipment 8,653, , ,665 8,283,663 Transportation Equipment 2,193,864 51, ,025 2,093,843 Store Equipment 2,537 2,537 Tools, Shop, and Garage Equipment 137, ,619 Laboratory Equipment 233, ,258 Power Operated Equipment 2,232, ,504 2,082,053 Communications Equipment 1,174,552 28,227 1,146,325 Miscellaneous Equipment 507, ,022 Total $ 23,713,149 $ 254,165 $ 926,381 $ 23,040,933 Total Classified Electric Plant in Service $ 202,156,353 $ 4,079,483 $ 1,685,499 $ 204,550,337 Construction Work in Progress 597,453 (475,513) 121,940 Total Utility Plant $ 202,753,806 $ 3,603,970 $ 1,685,499 $ 204,672,277

23 -19- SCHEDULE OF ACCUMULATED PROVISION FOR DEPRECIATION FOR THE YEAR ENDED DECEMBER 31, 2014 Schedule 2 Balance Balance 1/1/2014 Accruals Retirements 12/31/2014 Transmission Plant $ 4,676,956 $ 645,072 $ 1,364 $ 5,320,664 Distribution Plant $ 35,574,545 $ 4,571,064 $ 1,108,014 $ 39,037,595 General Plant Structures and Improvements $ 2,027,658 $ 405,636 $ 29,656 $ 2,403,638 Office Furniture and Fixtures 3,950,160 1,207, ,665 4,598,165 Transportation Equipment 1,158, , ,477 1,374,910 Store Equipment 2,537 2,537 Tools, Shop, and Garage Equipment 128,681 2, ,847 Laboratory Equipment 199,235 11, ,800 Power Operated Equipment 1,194, , ,000 1,259,695 Communication Equipment 105,169 72,916 25, ,239 Miscellaneous Equipment 262,617 88, ,345 Outage Management Equipment 110,871 2, ,871 Total General Plant $ 9,139,609 $ 2,316,082 $ 858,644 $ 10,597,047 Total Classified Electric Plant in Service $ 49,391,110 $ 7,532,218 $ 1,968,022 $ 54,955,306 Retirement Work in Progress (60,909) (7,783) (53,126) Total $ 49,330,201 $ 7,532,218 $ 1,960,239 $ 54,902,180 (1) (2) (1) Depreciation Charged to Expense $ 7,006,818 Charged to Clearing 525,400 $ 7,532,218 (2) Net Loss on Retirement Original Cost $ 1,685,499 Cost of Removal 376,549 Less: Salvage and Other Credits 101,809 $ 1,960,239

24 -20- OTHER PROPERTY AND INVESTMENTS DECEMBER 31, 2014 and 2013 Schedule 3 December 31, INVESTMENTS IN ASSOCIATED ORGANIZATIONS Memberships Associated Organizations $ 2,760 $ 2,760 Patronage Capital NRUCFC 1,761,467 1,615,839 NRTC 53,727 40,709 Texas Electric Cooperatives, Inc. 739, ,947 Guadalupe Valley 2,451 2,354 Hill Country Telephone 90,849 82,267 CoBank 9,106 Capital Term Certificates CFC 1,579,895 1,647,109 Member Capital Securities CFC 500,000 Total $ 4,239,618 $ 4,629,985

25 -21- PATRONAGE CAPITAL FOR THE YEAR ENDED DECEMBER 31, 2014 Schedule 4 Patronage Reductions Non Cash Cash Capital Calendar 12/31/2013 Discounts on Payments on Credits 12/31/2014 Year Balance Assignable Estates Estates Retired Balance 1985 $ 3,609 $ $ $ 4 $ 3,605 $ ,212, ,150 1,211, ,266, , , , ,137, ,554 1,130, ,106, ,266 1,100, ,330 1,024 4, , ,282,010 1,710 5,452 1,274, ,493,249 2,244 5,847 1,485, ,910,272 3,205 7,027 1,900, ,402,961 2,353 4,652 1,395, ,583,157 3,095 5,186 1,574, ,573,447 3,146 4,589 1,565, ,443,504 2,772 3,608 1,437, ,326,306 2,498 3,022 1,320, ,068,603 1,902 2,154 1,064, ,459 1,508 1, , ,065,790 8,043 6,882 4,050, ,036,941 6,026 4,910 3,026, ,897,730 6,003 4,427 2,887, ,068,699 8,446 5,689 4,054, ,162,615 4,295 2,692 2,155, ,088,317 4,041 2,317 2,081, ,142,153 4,130 2,209 2,135, ,597,598 2,921 1,472 1,593, ,329,352 2,629 1,168 1,325, ,337,254 6,571 2,592 3,328, ,640,117 3,131 1,111 1,635, ,238,687 1, ,647 1,054, ,814,493 4,814,493 $ 49,162,469 $ 4,814,493 $ 85,503 $ 100,129 $ 1,816,468 $ 51,974,862

26 -22- CFC MORTGAGE NOTES DECEMBER 31, 2014 Schedule 5 DIRECT LOANS Note Maturity Interest Principal Amount Principal Net Number Date Rate Amount Unadvanced Repayments Obligation /1/ % $ 675,000 $ $ 663,169 $ 11, /1/ % 1,011, , , /1/ % 1,010, , , /1/ % 3,290,323 2,007,641 1,282, /30/ % 213, ,004 63, /30/ % 1,786,660 1,255, , /29/ % 3,000,000 1,310,466 1,689, /30/ % 3,000,000 2,180, , /28/ % 3,000,000 1,023,456 1,976, /28/ % 3,000,000 1,023,456 1,976, /31/ % 3,000,000 1,689,191 1,310, /30/ % 3,000,000 1,309,373 1,690, /30/ % 1,986, ,446 1,127, /31/ % 1,013, , , /31/ % 1,756, ,096 1,064, /31/ % 1,243, , , /31/ % 1,939, ,840 1,162, /31/ % 1,060, , , /28/ % 1,171, , , /28/ % 1,285, , , /31/ % 543, , , /28/ % 1,240, ,461 1,006, /30/ % 1,249, , , /31/ % 509, , , /31/ % 1,106, , , /31/ % 1,893, ,854 1,488, /31/ % 2,165, ,477 1,795, /30/ % 835, , , /30/ % 915, , , /30/ % 1,750, ,789 1,539, /30/ % 1,750, ,134 1,568, /30/ % 2,000, ,639 1,803, /30/ % 3,000, ,020 2,713, /30/ % 3,000, ,819 2,716, /30/ % 2,338, ,479 2,117, /30/ % 2,283, ,115 2,101, /30/ % 1,213, ,074 1,110, /30/ % 528,448 44, , /30/ % 136,552 11, , /30/ % 3,000, ,949 2,728, /30/ % 3,000, ,233 2,703, /30/ % 122,431 11, , /30/ % 1,877, ,317 1,705, /30/ % 2,850, ,189 2,713, /30/ % 2,850, ,770 2,718, /30/2041 * 380, , /30/2041 * 919, , /30/ % 1,500,000 53,545 1,446, /30/ % 3,000,000 90,742 2,909, /30/ % 3,000,000 89,222 2,910, /17/ % 2,328, ,648 2,010, /21/2050 1,080,126 1,080, /16/ ,000,000 19,000,000 Total CFC - Direct $ 116,810,022 $ 20,080,126 $ 25,120,856 $ 65,609,040 LOANS UNDER MANAGEMENT Note Maturity Interest Principal Amount Principal Net Number Date Rate Amount Unadvanced Repayments Obligation FMD001 2/1/2025 * 1.26% $ 6,245,126 $ $ 1,745,086 $ 4,500,040 FMD001 9/1/2025 * 1.26% 11,250,000 11,250,000 FMD001 9/1/2025 * 1.26% 5,004, ,355 4,387,519 FMD001 9/1/2025 * 1.26% 2,812, ,800 2,250,700 FMD001 9/1/2025 * 1.26% 2,812, ,800 2,250,700 FMD001 9/1/2025 * 1.26% 2,812, ,800 2,250,700 FMD001 9/1/2025 * 1.26% 2,812, ,800 2,250,700 FMD001 3/1/2042 * 1.26% 1,300,000 72,819 1,227,181 FMD001 12/2/2043 * 1.26% 3,000,000 2,957,851 FMD001 12/2/2043 * 1.26% 3,000,000 2,957,851 Total CFC - Loans Under Management $ 41,050,000 $ 0 $ 15,932,460 $ 25,033,242 * Variable Interest Rate

27 -23- ADMINISTRATIVE AND GENERAL EXPENSES FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013 Schedule 6 December 31, Administrative and General Salaries $ 1,713,438 $ 1,507,974 Office Supplies and Expenses 424, ,541 Outside Services Employed 706, ,729 Workmen's Compensation, General Liability, and Other Insurance 162, ,332 Employee Benefits 863, ,702 Directors' Fees and Expenses 157, ,826 Institutional and Goodwill Advertising 3,864 8,675 Dues to Associated Organizations 72,038 78,467 Annual Meeting Expense 57,203 90,047 Miscellaneous General Expenses 402, ,205 Regulatory Commission Expense 110,524 93,391 Maintenance of General Plant 704, ,474 Total $ 5,379,594 $ 4,801,363

28 COMPLIANCE SECTION

29 BOLINGER, SEGARS, GILBERT & MOSS, L.L.P. c e r t i f i e d p u b l i c a c c o u n t a n t s PHONE: (806) FAX: (806) Nashville Avenue LUBBOCK, TEXAS LETTER TO BOARD OF DIRECTORS REGARDING POLICIES CONCERNING AUDITS OF CFC BORROWERS Board of Directors Bandera Electric Cooperative, Inc. Bandera, Texas We have audited, in accordance with auditing standards generally accepted in the United States of America, the balance sheet of Bandera Electric Cooperative, Inc. as of December 31, 2014, and the related statements of income and patronage capital and cash flows for the year then ended, and have issued our report thereon dated March 2, In connection with our audit, nothing came to our attention that caused us to believe that the Cooperative failed to comply with the terms of Article V of the National Rural Utilities Cooperative Finance Corporation Loan Agreement insofar as they relate to accounting matters. However, our audits were not directed primarily toward obtaining knowledge of such noncompliance. This report is intended solely for the information and use of the Boards of Directors and management of Bandera Electric Cooperative, Inc. and the National Rural Utilities Cooperative Finance Corporation and is not intended to be and should not be used by anyone other than these specified parties. Certified Public Accountants Lubbock, Texas March 2,